RISK MANAGEMENT

TCFD 201-2

Moscow Exchange Group admits that climate change poses risks to business continuity that may have long-term economic, environmental, and social implications for many sectors of the global economy, society, and the companies of the Group.

As part of its risk management system, the Group regularly identifies and assesses business risks in terms of their likelihood and expected financial losses. Moscow Exchange continuously monitors the legal environment and introduces international best practices to identify and assess climate risks and incorporate climate-related disclosures in its reporting.

Under the business continuity management system, a list of climate risks is compiled and factored in to strategic and financial planning. Moscow Exchange regularly assesses the impact of climate risks on trade and investment portfolios.

Key processes of the climate risk management system:
  • compilation of a list of risks and opportunities, categorized and prioritized;
  • assessment of the likelihood and impact of the risks identified;
  • scenario analysis of risks and opportunities;
  • updating the heat map of risks;
  • monitoring the implementation of risk mitigation measures.

In line with the TCFD’s recommendations, Moscow Exchange distinguishes two main types of climate risks:
  • physical risks: risks of extreme weather events, natural and man-made disasters;
  • transition risks: risks associated with the transition to a lower-carbon economy.

Physical risks involve potentially significant damage to premises and infrastructure, and harm to employees of the Group, its customers and partners, disrupting their businesses and resulting in financial losses that may prove critical.

Transition risks are divided into policy and legal, technology, market, and reputation risks. Each type may have significant financial implications for the Group’s business.

Moscow Exchange has divided its climate risks into five types: market, policy and legal, reputational, physical, and technology, and estimates their probability and the expected losses (see the table below for a more detailed description).

Climate risks of Moscow Exchange Group

Climate risks

Impact

Probability of small-magnitude risk

Probability of large-magnitude risk

Response to risk or risk mitigation measures

Physical risks

Acute risks

Floods, snowfalls

Changes in precipitation and extreme variability in weather patterns, including floods with destruction of roads, bridges, power lines, buildings, and other infrastructure, resulting in loss of life or injuries and leading to business shutdown

Low

Low

Disaster recovery strategies include:
  • reconfiguration of systems using hardware that remains stable, enabling restoration of communications after a critical failure;
  • availability and configuration of hot backups to restore major infrastructure applications;
  • mirroring and cold backup of affected location and data recovery.

Freezing rain

Power failures (ice-covered power lines become extremely heavy, causing line supports, insulators, and lines to break). Traffic delays due to icy roads. Potential loss of life or injuries

Moderate

Low

Hurricanes, storms

Destruction of power lines, residential buildings, and other infrastructure, with loss of life or injuries and leading to business shutdown. Traffic delays

High

Low

Forest fires

Destruction of property. Release of hazardous chemicals due to wildfires has a significant adverse impact on human health

High

Low

Employee relocation plan will be rolled out in the event of forest fire emergencies

Chronic risks

Extremely hot weather

Adverse impact on employee health and operability of equipment.

Lower productivity

Moderate

Low

Providing a comfortable workplace environment: workplaces in air-conditioned offices will be offered to employees working from home without air-conditioning

Extremely cold weather

Adverse impact on employee health and operability of equipment, resulting in slowdown or shutdown of operations

Low

Low

Providing a comfortable workplace environment: employees working in the office will be permitted to stay at home.

Employee relocation plan will be rolled out if extremely cold weather is followed by a central heating shutdown

Transition risks

Policy and legal risks

High power costs

Energy prices rising faster than inflation as a result of abrupt transition to zero-carbon power generation

Moderate

Moderate

Wider use of energy-efficient equipment

Enhanced emissions-reporting obligations

Additional financial and labor costs to collect information and report greenhouse gas emissions and their reduction

Moderate

High

Establishing carbon reporting procedures, participating in national and international carbon reporting initiatives. Engaging consultants for carbon reporting

Inaccurate emissions disclosures

Fines and reputational damage: this is a developing area with new rules and disclosure standards, such as the TCFD’s Recommendations or the EU SFDR, including at the national level (Russia supports the implementation of new climate-related reporting rules along with requirements introduced this year)

Low

Low

Introduction of fines for non-compliance with requirements on greenhouse gas emissions

Increased operating costs (higher compliance costs, increased insurance premiums)

Low

Low

Higher exposure to litigation

Increased legal costs and expenses, including from court-imposed fines

Low

Low

New requirements for greenhouse gas emissions disclosures hindering placement of securities

Additional costs for maintaining a dedicated database of greenhouse gas emissions and preparing reports. Additional equity placement requirements

Low

Low

Establishing carbon reporting procedures, participating in national and international carbon-reporting initiatives. Engaging consultants for carbon reporting

Lack of clear regulatory targets for carbon emissions

Multiple possible interpretations of laws and regulations. Increased risk of non-compliance

Low

Low

Technology risks

Costs of transition to lower-emissions technology

Failed investments in new technologies.

Costs of setting up new business processes.

Increased costs for transitioning to lower-emissions technology

Low

Low

Options for hedging financial risks associated with depreciation of assets

Power outages and emergencies due to low system resilience

Temporary power outages due to insufficient power storage capacity and lack of upgraded power grid services (resulting from a rapid and widespread transition to renewable energy sources). Power outages are expected to become more common at some point during the transition to lower-carbon technologies

Low

Low

Recovery strategies for a prolonged power outage at a single location include:
  • reconfiguration of systems using hardware that remains stable, enabling restoration if communications after a critical failure;
  • availability and configuration of hot backups to restore major infrastructure applications;
  • mirroring and cold backup of affected location and data recovery.

Failed investments in new lower-carbon technologies

Reduced demand for products and services

Low

Low

Options for hedging financial risks related to investment in high-risk lower-carbon technologies

Market risks

Change in investor behavior (increased demand for ESG products and sustainable investment)

Shifts in consumer preferences. Reduced demand for services not meeting climate goals due to changes in investor behavior

Low

Low

Introduction of ESG requirements for issuers and control over their implementation

Lower energy prices as a result of energy transition

Reduced revenue of issuers due to lower demand for fossil fuels

Low

Low

Options for hedging financial risks associated with depreciation of assets

Reduced demand for raw materials

Higher bankruptcy rate among issuers

Low

Low

Increased tax expenses of issuers

Changes in the terms of carbon taxation, including increased tax rates, may lead to increased tax costs for issuers

Low

Low

Increased power and heating prices due to transition to zero-carbon energy sources

Increased office maintenance costs

Low

Low

Switching employees to remote working in winter

New regulations limiting greenhouse gas emissions

Increased costs due to the implementation of emissions purification technologies. Decreased production due to the introduction of emissions targets

Low

Low

Establishing carbon reporting procedures, participating in national and international carbon reporting initiatives. Engaging consultants for carbon reporting

Share of green energy in the total power costs of companies is not regulated

Lack of a clear vision on the share of green energy may hinder the growth of the carbon market

Low

Low

Partnership development with issuers

Reputational risks

Increased concerns or negative feedback of stakeholders regarding Moscow Exchange’s ESG policy

Lower demand for services and negative impact on workforce management and planning (hiring and retention), resulting in revenue decrease

Low

Low

Establishing carbon reporting procedures.

Participating in national and international initiatives, including carbon reporting initiatives.

Engaging consultants for carbon reporting

Reduced revenue from decreased demand for services

Increased stakeholder concerns over issuers’ compliance with emissions standards or negative stakeholder feedback. Reduced investor interest due to uncertain market signals

Low

Low

Lower investor interest

Reduction in capital availability for issuers

Low

Low

Options for hedging financial risks associated with depreciation of assets

Energy source

Resource efficiency

Products and services

Markets

Resilience

Reduction in power and heat consumption

Transition to environmentally friendly or lower-carbon energy sources

New technologies

Remote or hybrid work formats

Contributing to the development of a regulated carbon market in Russia

Use of more efficient modes of transport

Hybrid and remote work formats (work-from-home policy)

Recycling

Reduced water consumption

Development of new products (green bonds, ETFs)

Launch of new services (climate indices, training for financial market participants)

New technologies

Development and/or support of low-emission goods and services

Emergence and evolvement of new industries related to alternative energy sources

Development of a sustainable supply chain policy and a new environmental policy

Public sector incentives to increase market participation (tax exemptions or regulatory incentives)

Partnerships with other markets

Attracting international investment by meeting global disclosure standards

Launch of green certificates of the carbon market (NCE)

Government incentives (tax exemptions)

Attracting investment by meeting global environmental protection requirements

Market participant training and education

Participation in renewable energy programs and adoption of energy efficiency measures

Public recognition of contribution to environmental protection