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Integrated Report of KGHM Polska Miedź S.A.
and the KGHM Polska Miedź S.A. Group
for 2020

Risks and opportunities related to climate change

GRI[ ]

The process of corporate risk management in the KGHM Polska Miedź S.A. Group is consistently performed on the basis of the Corporate Risk Management Policy and Procedure and the applicable Rules of the Corporate Risk and Compliance Committee.

  • 201-2

The goals of Corporate Risk Management in the KGHM Polska Miedź S.A. Group are consistent with the adopted Strategy of the KGHM Polska Miedź S.A. Group. They are shaped by global megatrends and determine the environmental challenges to be met by the KGHM Polska Miedź S.A. Group. The strategic goals and initiatives have been grouped into strategic areas each of which reflects the global megatrends, including Ecology, Safety and Sustainable Development. The care for the natural environment and protection of the employees’ life and health are the foundation of an organisation which is aware of the assumed risk and which strives for continuous improvement.

As part of the system, the current and future, actual and potential impact of risk on the KGHM Polska Miedź S.A. Group’s activities is assessed. Based on the assessment, management practices are verified and adapted in response to risks. According to the risk assessment matrix, environmental impact is one of 7 categories used to assess each identified risk. Hence, each identified risk is considered on a multi-level scale from events which do not have an adverse impact on climate and natural environment to ones which might have a serious adverse impact on climate, natural environment (also outside the KGHM Polska Miedź S.A. Group’s areas) and cause major disruptions of the functioning of the ecosystem.

Impact of climate change on the KGHM Polska Miedź S.A. Group

The identified key risks related to the adverse impact of climate change. Following is the description of key risks and risk factors inherent in the activity of the KGHM Polska Miedź S.A. Group in 2020, broken down into individual categories along with means for their mitigation.

Physical risk is a risk for the KGHM Group’s activity arising from the physical effects of climate change

Certain events, in particular ones related to weather, such as storms, floods, fires, gales, which might destroy the infrastructure and disrupt the supply chain (severe physical risk).

(Corporate risk category: Value Chain, External, Internal)

Threats

A consequence of the increased frequency of extreme weather events can be an infrastructure breakdown disrupting the Core Production Business.

KGHM Polska Miedź S.A. is exposed to a specific risk related to the underground climate, limiting activities or increasing costs, involving geological conditions, the temperature of the air sent into the mines and underground mining conditions.

A possible disruption of the supply chain and logistics as a result of extreme weather events onshore and offshore

Mitigation:

Preventive management of key infrastructure elements affecting production continuity. Appointment of a task and expert teams in the area of counteracting infrastructure breakdowns.

The use of solutions to counteract underground climate risk using neutral means (e.g. the use of short airways and directing air from the lowest temperature rockmass, high-speed air) and through the use of central, workplace and personal air conditioning. Ongoing monitoring of the microclimate parameters and introduction of remote control and visualisation and surveillance systems (CCTV cameras) in workplaces with particularly adverse climate parameters. Reduction of external and internal losses and relative humidity and increase in airing intensity. The use of shortened working time.

Constant contact with suppliers is maintained to enable a quick reaction to delays through the supplier and supply direction diversification strategy employed in the KGHM Group and application of alternative solutions, e.g. substitutes, changes in production/assembly schedules.

Certain events, in particular ones related to the long-term climate change, such as temperature change and limited availability of water, might disrupt the continuity of the Core Production Business and lead to changes in the conditions of pursuing business activities (long-term physical risk).

(Corporate risk category: Value Chain, External)

Threats and opportunities

The KGHM Group is exposed to climate risk related to the adverse impact on the enterprise. The risk exposure is associated with factors arising from certain events, in particular ones related to the long-term climate change which may disrupt the value chain, continuity of the Core Production Business. The risk is associated with the changes in the conditions of running business activity due to environmental or climate changes.

The KGHM Group is exposed to the risk of unavailability of power sources necessary for its operations. This risk entails, among others, the possibility of power supply being suspended as a result of prolonged droughts. Global climate changes may result in, among other things, lower rainfall, resulting in temporary reduction of water levels in rivers, which in turn may restrict the operations of power plants supplying KGHM if cooling water is not available or if the permitted temperature of water released back into rivers is exceeded.

The opportunity coming from investments in our own renewable energy sources, which result in reducing production costs and ensuring continuity of operation with the simultaneous reduction of greenhouse gases (photovoltaics / wind farms).

Mitigation:

Systematic limitation of energy consumption under the implemented, PN-EN ISO50001:2018-compliant Energy Management System and Energy Savings Program (POE). Planned increase in the efficiency and flexibility of the KGHM Group in terms of its Polish and international assets, among others by partially satisfying the needs for electricity from its own sources as well as from renewable energy sources (“RES”) by the end of 2030.

Commencement of work to prepare a climate policy which will be a systemic solution for implementing the Communication of the European Commission being Guidelines on non-financial reporting: Supplement on reporting climate-related information (2019/C 209/01), including an Annex on the Task Force on Climate-related Financial Disclosures (TCFD), in the part applicable to the Metals and Mining sector. It will also include medium-term (2030) and long-term (2050) quantitative goals aimed at minimizing activities in regions exposed to a long-term or severe physical risk.

The KGHM Group Strategy takes into account the global trends that define the environmental challenges. Efficient risk management system encompassing also climate risk management allowing for risk categorisation, identification, assessment and management as well as plans for its mitigation (also at the long-term, strategic level).

Transition risk is the enterprise’s risk arising from transitioning to a low-carbon and climate change resilient economy.

The risk of non-compliance, which might result in sanctions, legal disputes and claims in respect of failure to avoid or reduce the adverse impact on climate or to adapt to climate change.

(Corporate risk category: External)

Threats

The risk involved in the increasing legal requirements regarding climate, potential wrong interpretation of new laws and regulations or non-compliance with legal requirements.

Mitigation:

As part of the Corporate Risk Management process in the KGHM Group, each identified risk is assessed in terms of impact on Laws and Regulations – assessment of the compliance of occurrences with the applicable laws, the necessity to participate in proceedings before public administration authorities responsible for supervision and regulation and potential sanctions resulting from such proceedings. In order to standardize the approach to ensuring compliance defined as observance of the requirements arising from the applicable legal (external and internal) regulations or voluntarily assumed legal obligations and standards (including ethical standards), the Management Board of KGHM Polska Miedź S.A. adopted the Compliance Management Policy in the KGHM Polska Miedź S.A. Group and the Compliance Management Procedure and Methodology in KGHM Polska Miedź S.A. in 2020. A consistent compliance system in the KGHM Polska Miedź S.A. Group is an element of effective management as part of corporate governance through e.g. a more efficient response and readiness for regulatory changes, care for reputation and ethical culture building in the organisation as well as awareness raising and enhancement of the sense of responsibility for compliance among employees.

The risk of change in the conditions of pursuing a business activity arising from energy efficiency requirements, mechanisms of setting greenhouse gas emission fees or policy supporting sustainable economy.

(Corporate risk category: External)

Threats and opportunities

The KGHM Group is exposed to the risk of non-compliance with future legal requirements. The risk of interruptions to operations or the need to reorganize work due to new legislation may have a substantial impact on the operations of the KGHM Group (such as the risk of transitioning to the low-carbon economy, circular economy).

The opportunity coming from increased consumption and capability to process a volume of copper scrap and copper-bearing materials by KGHM’s smelters and refineries, which results in improved efficiency of waste management in global terms in the context of resource use and longer copper life cycle – a change in the customer’s and the Regulator’s approach in favour of circular economy and low-carbon economy.

Mitigation

Active cooperation with the academic environment, which issues opinions on changes to legal acts, and the on-going providing of positions and opinions with respect to numerous areas subject to legislative change (including as part of membership of national and international organisations). Taking preventive actions aimed at adapting to organisational, infrastructural and technological changes

The risk involved in the awareness about climate change and choices of business consumers leading to shifting interest to products and services which are less harmful to the environment.

(Corporate risk category: Internal)

Threats and opportunities

A threat of raised expectations and awareness of stakeholders as regards climate and environmental issues, which could lead to increased operating and investment costs and, in extreme cases, to limitation of the business activity. The changing consumer requirements involve also a focus on the production method rather than merely the quality and price of the final good.

The opportunity coming from increased demand for copper arising from the necessity to supply it to meet the needs of the low-carbon economy as a result of a higher level of electrification (e.g. increased copper consumption for purposes related to manufacturing components for electrical vehicles and development of electromobility). A stable growth of the global demand for copper is expected until 2030. The forecast growth will be an effect of, among others, the dynamically increasing demand from industries associated with renewable energy sources.

Mitigation:

Care and due diligence in identification of expectations and requirements of the external stakeholders concerning the climate and environmental issues and consideration given to these issues in the long-term, strategic perspective. Establishment of trade and business relationships with entities that declare care about environmental protection and comply with the regulations applicable in this regard.

Potential difficulties in attracting customers, employees, business partners and investors if the KGHM Polska Miedź S.A. Group activity is found harmful to the climate

(Corporate risk category: External, Internal)

Threats and opportunities

The KGHM Group is exposed to the risk of exposure to external factors involving the environment in which it operates and consequently, it is exposed to changes in the image of the organisation and its products or services. Risk of ineffective management of relations with stakeholders, which affects the willingness of the environment and the taking of actions towards the KGHM Group. In extreme cases, the materialisation of this risk may lead to the blocking of development plans.

The opportunity (positive risk) arising from investments in renewable energy, which support combating greenhouse gas emissions – an image- and market-related opportunity with respect to the industry, i.e. the image of a company caring for the natural environment and striving for limiting the global climate change (green energy / green copper / green KGHM); a change in the customer’s approach but also legislative changes in favour of the KGHM Polska Miedź S.A.’s attitude.

Mitigation

Care and due diligence in identification of expectations and requirements of the external stakeholders concerning the climate and environmental issues. Establishment of trade and business relationships with entities that declare care about environmental protection and comply with the regulations applicable in this regard.

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