Management of climate risks

Climate-related risks and opportunities

TCFD was established to develop clear recommendations on the disclosure by companies of the information sought by investors, lenders and insurers to properly assess and measure climate-related risks and opportunities. TCFD recommendations are structured around four thematic areas that represent core elements underlying an organisation’s operations: governance, strategy, risk management, as well as metrics and targets. The areas are interconnected and should operate in conjunction to provide an effective framework for managing the climate change risks.

Governance

Supervision and role of the Management Board and senior management in managing climate-related opportunities and risks

In 2022, the Grupa Azoty Group implemented an Environmental Policy mandating the application of a precautionary approach that involves identification and effective management of risks at every stage of its operations, and requiring that any improvement measures be preceded by comprehensive analysis of each risk and its relevance to the organisation's functioning and its external environment.

Overall supervision of the enterprise risk management system lies with the Management Board of Grupa Azoty S.A. At least once a year the Management Board assess the system for effectiveness, also in terms of how well it manages climate-related risks. All aspects related to climate change are overseen and monitored at the Group’s highest level, within areas identified as crucial in the Strategy development process. There is also a Development Committee at the Group whose role is to support the Strategy implementation, giving opinions on proposed investment projects and activities spanning research, development and innovation. All such planned activities are also assessed for alignment with the EU Taxonomy according to Regulation (EU) 2020/852 of the European Parliament and of the Council of June 18th 2020 on the establishment of a framework to facilitate sustainable investment.

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In 2022, the following persons were responsible for overseeing sustainability at the level of President of the Management Board as well as Members of the Management Board within their respective remits:

• Tomasz Hinc – President of the Management Board – compliance, legal support, representation of the Grupa Azoty Group before stakeholders, sponsorship and CSR; 
• Filip Grzegorczyk, PhD – Vice President of the Management Board – energy transition and ensuring compliance with requirements of the European Green Deal in the energy segment, regulatory area and enterprise risk management; 
• Dr Grzegorz Kądzielawski – Vice President of the Management Board – monitoring of investment project implementation at the Group, strategic planning and monitoring of the Strategy implementation, strategic project management (excluding energy transition), ensuring compliance with requirements of the European Green Deal, adaptation of the Group to the circular economy concept and social dialogue. 

Stakeholder dialogue is conducted by individual organisational units, while the feedback collected is examined and, if deemed necessary, communicated to the Management Board for ongoing scrutiny. As a next step, the Management Board may decide to implement the conclusions drawn from these analyses. 

In 2022, work was under way to establish environmental, social, and governance (ESG) management as a separate area within the Group’s organisational structure. In January 2023, the Management Board passed a resolution to assign the ESG remit to Marek Wadowski, Vice President of the Management Board. 

Enterprise risk management model of the Grupa Azoty Group

In addition, individuals responsible for managing and overseeing specific climate and environmental risks were appointed at each company. Based on the Enterprise Risk Management Policy, confirming compliance of the Group’s procedures with the ISO 31000:2018 standard, so-called ‘risk owners’, i.e. individuals authorised to manage specific risks, were appointed.

Climate risk owners

	Risk name	Risk owner
	Policy risk arising from the climate transition occurring through implementation of the European Green Deal reforms	Corporate Regulation and Public Affairs Department
	Risk of increased exposure to failures, accidents and stoppages of production facilities and technological constraints resulting from physical effects of climate change Risk of extreme weather and natural disasters resulting from the physical effects of climate change	Corporate Technology and Energy Department, auxiliary role: Company Crisis Management Team taking action in response to specific crisis events
	Risk associated with energy consumption and usage, and compliance with the ISO 50001:2018 standard	Corporate Technology and Energy Department, auxiliary role: ISO 50001:2018 Energy Management Team
	Risk of inability to conform to the requirements of a low-carbon economy and achieve decarbonisation targets within the set time frame	Corporate Strategy and Development Department, auxiliary role: Corporate Energy Transition Team and Carbon Footprint Team
	Risk related to the management of CO2 emission allowances Adverse impact of prices prevailing on the market of CO2 emission allowances within the EU ETS attributable to a limited amount of allowances put on the market, which are needed by Group companies to offset their CO2 emissions	Corporate Finance Department, auxiliary role: Corporate Committee for Hedging the Prices of Natural Gas and CO2 Emission Allowances, Natural Gas and CO2 Emission Allowance Price Analysis Team
	Risk related to the monitoring and management of direct and indirect emissions of greenhouse gases and other air pollutants Risk that the company will emit excessive volumes of greenhouse gases and other air pollutants, including the risk of exceeding the emission limits specified in environmental decisions. Risk of failure to take sufficient measures to reduce emissions	Corporate Technology and Energy Department
	Risk of a decline in fertilizer sales due to physical climate change	Corporate Agro Sales Department
	Risk of a decline in sales of chemicals due to market constraints and shifts in consumer behaviour as a result of more widespread adoption of pro-environmental attitudes	Corporate Agro Sales Department
	Risk of a decline in sales of certain plastic materials as a result of tighter requirements on plastic recycling and shifts in consumer behaviour as a result of more widespread adoption of pro-environmental attitudes	Plastics Business Segment
	Risk of adverse impacts on biodiversity and wild natural habitats	Corporate Technology and Energy Department
	Risk related to investor relations and compliance with disclosure requirements Risk that the company will not comply with its obligations resulting from stock market listing	Corporate Investor Relations Department
	Reputational risk related to ineffective communication of social initiatives and ESG projects Risk related to negative perception of the company by the public and downgrades of ESG ratings due to insufficient disclosures, incomplete reporting of ESG activities and insufficient preventive measures to counter the chemical sector’s stigmatisation	Corporate Communication and Marketing Department

Climate-related risks and opportunities prioritised by our Strategy

One of the key climate risk areas addressed by the Grupa Azoty Group Strategy for 2021−2030 centres on navigating the transition toward a low-carbon and climate-resilient economy. 

At the forefront of climate risks lie those associated with the regulatory regime, a key focus within the enterprise risk management (ERM) system, i.e. climate transition risks triggered by EU-wide reforms introduced under the European Green Deal. Such risks may arise from tightening legal requirements of the European Union’s climate policy, as exemplified by the Fit for 55 package. Potential amendments to EU directives and regulations applicable to the Group’s principal manufacturing and trading activities may give rise to policy risks of curtailing the use of the Group’s products by customers in EU countries. Such policy transition risks may have far-reaching implications, affecting the Group’s competitiveness, market position, demand for its products, and capital expenditures, driven by regulatory pressures to expedite the transition.

The climate-related policy risks may be compounded by other factors, notably geopolitical risks. The invasion of Ukraine by the Russian Federation has injected an additional layer of unpredictability into the markets, affecting the attainment of earlier targets for greenhouse gas emissions and transition plans.

Risk response

The Group maintains a vigilant stance, monitoring projects and proposals put forth by administrative bodies, encompassing amendments to existing laws and the formulation of new legislation. By engaging with European associations and collaborating with Polish institutions (e.g. the International Fertilizer Industry Association, Business & Science Poland), the Group is committed to proactively responding to any imminent legislation changes. The Group conducts analyses of the risks associated with emerging regulatory trends, draft amendments, or proposed new regulations. Each regulatory development is examined by the Group to gain an understanding of its potential impact on the Group’s operations and the products it brings to the market.

Climate-related opportunities

Opportunities we have identified in the context of climate change are embedded as a priority in the Grupa Azoty Group Strategy for 2021-2030, particularly within the ESG strategy for energy transition and sustainable products. The Group has identified climate-related opportunities in all areas outlined by the Task Force on Climate-Related Financial Disclosures (TCFD), encompassing resource efficiency, energy sources, products/services, and markets. 

Opportunities identified in the area of products and services relate mainly to: 

• innovation projects, 
• enhancement of the innovation system, 
• expansion of research infrastructure, 
• support for corporate projects, 
• innovation geared towards minimising the impact of policy risks.

The current Strategy is aligned with regulatory trends, leading to a diversified product portfolio and advancements in fertilizer services (e.g. in precision agriculture).Also the EU-wide reforms under the European Green Deal may be a source of opportunities, such as the growing demand for alternative transport fuels, particularly hydrogen, a market opportunity to be leveraged if the Group positions itself to capitalise on the emerging market of renewable and low-carbon gases.

Key product innovations involve fertilizers and plastics, precision agriculture services, fully biodegradable plastic materials and plastic products with significantly lower carbon footprints, as well as recycling of polymer plastics and alternative raw material sourcing. 

Resource efficiency opportunities are harnessed through the Group’s energy saving and recovery initiatives, reducing energy demand, and optimising the consumption of primary raw materials. 

In the area of energy sources, opportunities are captured by investing in renewable energy projects and exploring the potential of SMR power plants. Grupa Azoty Energia, a new company established in 2022, consolidates the Group’s green energy assets and engages in joint projects with external partners related to low-carbon energy generation technologies.

As regards access to new markets, the Grupa Azoty Group leverages its status as the largest producer of hydrogen in Poland and a significant processor in Europe within the strategic Green Azoty framework to actively contribute to the development of the European hydrogen market. Expansion opportunities for the Group are also seen in the new markets of electric mobility (development of fuel cells and cell production materials).

As the Strategy evolves, a key objective will be to reinforce the Group’s commitment to harnessing opportunities related to transitioning into a low-carbon economy.

For detailed information on climate-related opportunities identified and seized in innovative product initiatives, refer to section 12 of this report ‘Products addressing sustainability challenges’.

Management of climate risks

The Group has in place a three-lines risk management model. 

Within the first line of risk management, climate actions fall under the purview of risk owners with operational responsibility for the identification of risks, along with their qualitative and quantitative analysis, and for planning adequate risk handling strategies within defined risk tolerances and appetites. Where justified by the quantitative analysis, the respective risk owners are also required to implement an early warning system based on the key risk indicators (KRIs). The second line of risk management includes an Enterprise Risk Committee, comprising presidents responsible for risk management at individual companies. The role of the Committee is to initiate and consult the general directions of strategic changes to the risk management system, prepare recommendations with respect to the list of key risks, and assess risks in emergency situations. 

1. Processes for identifying and assessing climate-related risks

Risk identification at the Grupa Azoty Group is a continuous process, embedded throughout its organisational structure, aligned with its current plans and objectives, taking into account the internal and external contexts in which the companies operate. Responsibility for risk management lies with every employee, who are expected to identify risks and promptly report them to the relevant directors, managers, or area leaders. Risks are viewed from a dual perspective, both as threats – where their potential occurrence could negatively affect the achievement of the company’s goals, or as opportunities – where their occurrence could bring benefits, help the company achieve its goals or offset adverse effects.

2. The organisation’s processes for managing climate-related risks

The risk management process at the Grupa Azoty Group encompasses various stages beyond mere identification and classification, which include risk mapping and qualitative analysis, quantitative analysis and quantification, assessment of risk controls in place, planning and implementation of risk response measures, as well as measurement and reporting of specific risks. The risk owner is tasked with comprehensively managing a specific risk, which may include measures intended to enhance understanding of the risk’s causes and consequence, and implementation of appropriate safeguards and risk control improvements. The role also involves continuous monitoring of changes in both internal and external contexts affecting the likelihood or impact of the risk. The risk owner must promptly report any changes that emerge in the internal and external contexts of the supervised area and newly identified risks. 

3. How processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management system

Given the strategic significance of climate-related risks, the Grupa Azoty Group has integrated the management of those risks into its enterprise risk management (ERM) system to ensure its alignment with the organisation’s overall risk management model and established procedures.

Climate risks eligible for inclusion in the Grupa Azoty Group’s Enterprise Risk Register have been classified into all categories of the risk management framework developed at the Group. 

The materiality assessment and prioritisation of climate-related risks are performed at least annually, based on a five-step matrix that evaluates the impacts (including financial impacts) and probability of each risk. The outcome of the risk valuation process is documented in the relevant risk chart. Based on the valuation of a risk and the assessed control level, individual risk maps are drawn up for each company and then for the entire Group. As a result, the risks are prioritised and may be included in the list of key risks. The risk materiality assessment is also informed by conclusions from the monitoring of relevant risk indicators (e.g. to determine whether there have been risk materialisation incidents), an analysis of global reports and a benchmarking exercise. The data thus collected is used to draw up the list of key risks, which is presented by the Enterprise Risk Committee to the Management Board. 

Metrics and targets

In response to climate risks and mitigation plans, the Grupa Azoty Group, acting in conformity with its enterprise risk management system, defines relevant actions, targets and metrics. Within the climate and environment pillar of its ESG strategy, the Group has outlined specific targets to be achieved by 2030: 

Decarbonisation of production:

•  reduce CO₂ emissions from the Group’s energy generation sources by 34% relative to the base year 2020,
•  reduce emissions from purchased energy generation by 51% relative to the base year 2020,
•  reduce coal consumption by 65% relative to the base year 2020,
•  reduce the organisation’s carbon footprint.

Energy efficiency improvement: 

• reduce energy consumption per product unit,• step up efforts to recover waste energy from chemical processes,
• incorporate gas-fired sources into the energy mix in the transition period; ultimately grow the share of renewable energy sources in power generation to 40%,

Within the sustainable supply chain pillar, the Grupa Azoty Group has set the following targets to be achieved by 2030:

• put in place a product carbon footprint reduction programme, build or implement an emission data collection system, and reduce emissions.

Every year, the Group prepares a report with the calculated values of environmental indicators pertaining to greenhouse gas emissions or to the consumption of energy, water and materials. Through these indicators, the Group not only gauges its progress in meeting the self-imposed emission targets but also gains a robust foundation and context for assessing climate-related risks and opportunities, particularly transition risks.

In calculating GHG emissions the Group relies on the GHG Protocol, which covers all activities to be monitored within Scopes 1 and 2. Scope 1 stands for direct emissions from the company’s operations and generation of electricity and heat. Scope 2 emissions are linked to energy procured from external suppliers.

The existing Scope 1 and 2 calculations will be supplemented to cover Scope 3 emissions and expanded by ongoing assessments of the carbon footprint associated with the Group’s key products (based on the Life Cycle Assessment (LCA) approach).

Scope 1 and 2 emissions summary chart

² Detailed information on revaluation can be found in GRI indicator 2-4