Climate Change Adaptation
On November 12, 2021, the Glasgow Climate Pact was formulated during the COP26 climate conference, which was the first time a clear declaration was made to plan to reduce the use of coal and pledge to provide developing countries with more funding that can help them adapt to climate change. The goal is to maintain the temperature rise within 1.5 degrees Celsius, consistent with the global climate target of 1.5 degrees from the Paris Climate Agreement and to urge governments to propose a carbon reduction schedule as well as a positive path. In 2015, the Financial Stability Board established the Task Force on Climate-related Financial Disclosures (TCFD) work group, whose mission is to develop a unified set of recommendations for voluntary disclosure on climate related finance to help investors and decision makers understand the substantial risks of businesses and to assess climate risks and opportunities more accurately. Eurocharm follows the framework of TCFD’s Climate Related Financial Disclosure Proposal (CRFP): Governance, Strategy, Risk Management, Metrics and Targets.
TCFD’s Four Major Disclosure Structures
| Governance | Eurocharm’s governance regarding climate risks and opportunities. |
| Strategy | The actual and potential impacts of climate-related risks and opportunities on Eurocharm’s operation, strategy, and financial planning. |
| Risk Management | The processes used by Eurocharm to identify, assess, and manage climate-related risks. |
| Goals and Indicators | To effectively manage the impact of climate change-related risks and opportunities on Eurocharm, we are also progressively planning the goals and Indicators and plan to conduct greenhouse gas inventories as well as introduce energy management system. |
Governance
In June 2022, Eurocharm group established the Risk Committee to assess and provide strategic recommendations for various risks and opportunities. The committee members review the assessments and report to the board of directors, who then formulate an annual work plan. In recent years, due to global climate change, there have been potential losses from disasters such as typhoons, water shortages, floods, transportation disruptions, and communication interruptions. The Company requires its primary raw material suppliers to prepare contingency plans to minimize the impact of accidents that may lead to disruptions in the Company’s supply.
Strategy
Eurocharm mainly produce auto and motorcycle parts, with steel and aluminum as the main raw materials; products are exported to Japan, the United States, France, and other places. On July 14, 2021, the EU officially announced the Carbon Border Adjustment Mechanism (CBAM) plan, which regulates that carbon-intensive products can be imported into the EU only with purchase certificates (CBAM Cerificates). It is stipulated that businesses must declare carbon emissions of their cement, steel, aluminum, fertilizer, and power products to the importing country, starting from January 1, 2023, with a three-year transitional phase, and to be implemented in 2026. Therefore, Eurocharm has started to actively plan for the actual and potential impact of climate-related risks and opportunities on Eurocharm’s operations, strategies, and finances to face future challenges.
Risk Management
In response to the potential crisis of climate change and energy supply, we are actively implementing energy saving, carbon reduction, and water saving projects from a combined perspective of environmental, social, and economic/governance aspects. We are also identifying and reducing risks related to climate change, developing products and services, and strengthening climate resilience, and establishing a culture of sustainable development. In response to the impact of climate change on business operations and the disclosure of specific climate change information, since 2020, we have been collecting data, identifying, and evaluating the financial impact of climate change in accordance with the framework of the TCFD’s climate-related financial disclosure proposal, to reduce risks and grasp opportunities.
Goals and Indicators
To effectively manage the impact of climate change-related risks and opportunities, Eurocharm Group is gradually planning to conduct a greenhouse gas inventory, introduce an energy management system, and continue to substantialize climage change targets and metrics to improve the resilience of climate change, in the hope of driving industrial innovation.
Climate Change Risk Matrix Analysis Process
| Collection | Identification | Evaluation |
| Based on TCFD’s climate-related risks, opportunities, and benchmarking companies, 159 climate risks and opportunities were identified. | 159 climate risks and opportunities were inspected and screened to select 6 climate risks and 4 climate opportunities for in-depth climate scenario analysis. The management of climate-related risks and opportunities is internalized into the company’s management process. | The General Management Office is responsible for identifying climate risks and opportunities, and assessing them in three dimensions: Potential Impact, Potential Vulnerability, and Likelihood. |
Situational Hypothesis
| Scenario | Situation Description | At the End of the 21st Century | Emissions Control |
| RCP8.5 (The scenario with high level of greenhouse gas emission) | The risk of extreme weather damage to the factory building, including flooding disasters caused by typhoons or torrential rain, sloping land disasters and coastal disasters, has become the norm. | 4℃ (Global warming is maintained within 4°C increase since pre-industrialization) | Emissions have risen sharply. |
| RCP2.6 (The scenario of aliveating global warming) | Climate change causes uneven temperature distribution, which may increase supply instability, which in turn affects supply stability and quality. | 1.5℃ (Global warming is maintained within 1.5°C increase since pre-industrialization) | Emissions have dropped significantly. |
Impact of Climate Change Risks on Strategy, Operations and Financial Planning
| Risk Type | Risk Factor | Characteristic Description of the Impact on Eurocharm | Scope of Influence | Severity | Influence Duration | Scenario Description of the Financial Impact on Eurocharm |
| Transition | Increased pricing of GHG emissions | On December 13, 2022, the European Parliament and the Council of the EU reached a consensus on the Carbon Border Adjustment Mechanism (CBAM). The original implementation date of January 1, 2023, for the transitional period of the CBAM has been extended to October 1, 2023. During this transitional period, affected importers will only be required to declare the carbon emissions of relevant products instead of purchasing CBAM certificates from the EU to cover the costs of carbon emission for importing products. The scope of application will expand from steel, cement, aluminum, fertilizers, and electricity, originally proposed by the EU, to hydrogen, specific feedstocks, partial indirect emissions, and downstream products (such as screws, bolts, and similar steel products). The main raw materials of Eurocharm TW/ VPIC1 are steel and aluminum, and their main products are steel products which are mainly sold to the EU countries. On June 7, 2022, U.S. senators proposed the Clean Competition Act (CCA) to the Congress, aiming to reduce climate pollution and strengthen the competitiveness of U.S. manufacturing industry. The current price is set at $55 per metric ton, with a 5% annual increase to account for inflation. In the future, exports to Europe and the United States will be subject to carbon tariffs. | Upstream or Supplier | Medium | Long term (more than 5 years) | Currently, the components exported by Eurocharm TW and Vietnam VPIC1 to the EU have not been classified under the “CBAM certificate”. Therefore, they are not currently affected by the CBAM. Additionally, a portion of VPIC1’s components, classified under the international commodity code 73072110 for steel pipes and accessories, are exported to Mexico for casting accessories. The quantity is approximately 21,696 units, accounting for approximately 0.02% of the total parts sold, amd these may be affected by the United States’ CCA regulations. |
| Transition | Enhanced emissions reporting obligations | On June 29, 2022, the Environmental Protection Agency held a meeting to discuss the draft amendment on “Registration and Inventory of Greenhouse Gas Emissions Sources.” The first batch of greenhouse gas inventory includes 287 entities with direct emissions, while the second batch includes approximately 300 entities with indirect emissions, such as electricity usage, exceeding 25,000 metric tons of CO2e. These regulations took effect from January 1, 2023, and the greenhouse gas emissions inventory for the year 2022 should be completed by August 31, 2023. Subsequent inventories will need to be conducted within the specified period. Currently, Eurocharm TW is not included in the first or second batch of greenhouse gas inventory and does not need to report or comply with mandatory emission reduction requirements. VPIC1 in Vietnam is a major energy user locally, but there are no mandatory regulations in Vietnam that require reporting or overall emission control. However, VPIC1 complies with customer requirements by reducing 1% of emissions annually based on a 2013 baseline. Inventories of resource usage are conducted within the factory to understand carbon emissions of the business and make improvements, such as replacing old equipment and improving raw material usage. | The Company’s direct operation | Medium | Medium term (one to five years) | During 2022-2023, Eurocharm TW and VPIC1 in Vietnam introduced ISO 14064 and ISO 50001 energy management system, and the expenses for consulting and verification was about 1.8 million. The priority is to replace factory air compressors with inverter types; the estimated cost is about 0.5 million per unit. |
| Transition | Uncertainty of new laws | On April 21, 2022, Taiwan passed the amendment to the “Greenhouse Gas Reduction and Management Act” through the Executive Yuan. The name was changed to the “Climate Change Adaptation Act.” The amendment modified the country’s long-term carbon reduction goal to achieve “net-zero emissions by 2050.” It also included additional chapters on climate change adaptation, basic principles of climate governance, and major policies. Local governments were required to establish “Climate Change Adaptation Promotion Committees,” and carbon pricing implementation was also incorporated, along with the establishment of relevant mechanisms. | The Company’s direct operation | Low | Medium term (one to five years) | According to the 2021 statistics from CDP, 5,900 companies worldwide implemented an Internal Carbon Price in 2020. Carbon pricing mechanisms varied, with shadow pricing being the most prevalent, accounting for approximately 50.8% of cases. The highest shadow price reached US$459/metric ton of CO2e, while the average was US$28/metric ton of CO2e (note). In Eurocharm, scope one and scope two greenhouse gas emissions amounted to 49,259 metric tons of CO2e (note) in 2022, and the carbon emissions cost approximately NTD 41,377,560. |
| Physical | Rising mean temperatures | Climate change is causing a rise in average temperatures, potentially increasing the frequency and intensity of droughts. In 2022, a global record was set for high temperatures in summer, with Taiwan experiencing a higher rate of temperature increase than the global average. It is estimated that in recent years, Taiwan’s winter lasted only about 20 to 40 days, and it is projected to become shorter until it eventually disappears. In Hanoi, Vietnam, the wet season is characterized by heat, mugginess, and overcast skies, while the dry season is comfortable, humid, and mostly clear with occasional clouds. Throughout the year, temperatures generally range from 14°C to 34°C, rarely falling below 9°C or rising above 37°C. On June 19, 2022, the northern region experienced extremely hot weather, with temperatures ranging from 35°C to 37°C, and even exceeding 37°C at certain areas. From Thanh Hóa to Phổ Yên, temperatures reached as high as 35°C to 38°C, potentially leading to water shortages. Painting and electroplating production lines are water-intensive processes that require significant water usage, and the water shortage can subsequently impact the stability and quality of the supply. | Upstream or Supplier | Low | Short term (Within a year) | Changes in precipitation patterns leading to long-term drought will affect the stability of water supply in the factory area, resulting in operational disruptions (painting) and, in turm, a decrease in business revenue. The factory will need to purchase water from external sources, with a cost of approximately VND 14,400 (about TWD 18.72) per cubic meter. The daily water consumption is estimated to be around 796 cubic meters, resulting in increased operating costs. |
| Physical | Increased severity of extreme weather events such as cyclones and floods | Eurocharm TW factory area is located north of the Tropic of Cancer and thus has a subtropical monsoon climate. In 2022, the precipitation in the northern region was exceptionally, while the southern region experienced the lowest percipitation in nearly 30 years. The uneven distribution of rainfall is expected to become more frequent in the future. VPIC1 in Vietnam is in Vĩnh Phúc province, northern Hanoi. On September 29, 2022, heavy rain, thunderstorms, and severe downpours affected the northern plains, coastal areas, and regions north of the central part of Vietnam. Rainfall ranged from 60 to 266 millimeters in various locations. This extreme climate condition resulted in road flooding and inconvenience in employee commuting. | The Company’s direct operation | Low | Short term (Within a year) | Typhoons and intermittent heavy rain cause flooding, leading to waterlogging or water shortages in the factory area, resulting in production shutdowns and a delcline in production capacity. |
| Physical | Changes in precipitation patterns and extreme variability in weather patterns | According to a simulation map by the Climate Central, a US research organization, a temperature increase of 4 degrees Celsius would lead to the submergence of the surrounding areas of VPIC1 in Vietnam and Eurocharm TW due to rising sea levels. A temperature increase of 4 degrees Celsius would result in the flooding of the factory areas caused by the rising sea levels. | The Company’s direct operation | Low | Long term (more than 5 years) | Long-term intermittent heavy rain causes flooding or drought, leading to equipment failure due to water damage in the factory area. As a result, assets worth NT$2,129,237 thousand were prematurely written off (based on the fixed asset balance of real estate, factory buildings, and equipment on the 2022 balance sheet). |
Impact of Climate Change Opportunities on Strategic, Operational and Financial Planning
| Type of Opportunity | Characteristic Description of the Impact on Eurocharm | Scope of Influence | Type of Impact | Severity | Influence Duration | Scenario Description of the Financial Impact on Eurocharm |
| Use of more efficient production and distribution processes | Utilize automated production equipment, reduce human errors that lead to waste generation, and enhance product quality or shorten delivery times | The Company’s direct operation | Increase in production capacity | Medium | Long term (more than 5 years) | Upgraded the old machinery in the factory with IoT devices, costing around 50,000 per unit, which has improved production efficiency, capacity, and revenue. |
| Reduced water usage and consumption | Install additional wastewater treatment equipment for painting processes to recycle water resources and minimize consumption | The Company’s direct operation | Reduction of operation costs | Low | Short term (less than a year) | The wastewater recovery rate in the factory is approximately 7-14%. After collection, it is used as secondary water, reducing water consumption. In 2022, approximately 20,345 degrees of water was saved. |
| Explore funding sources | Secure financial resources, issue green bonds to fund solar power equipment, wind power, and energy storage equipment | The Company’s direct operation | Increase in the capital | High | Long term (more than 5 years) | Established solar power equipment, wind power and energy saving equipment to issue green bonds which can bring more capital |
| Explore funding sources | On December 28, 2022, the National Development Council announced the “Taiwan 2050 Net Zero Transition Stage Targets and Actions.” The plan sets a carbon reduction target of 24%±1% by 2030 and emphasizes five key actions: strengthening the establishment of renewable energy, energy conservation, electrification of transportation, carbon sinks and negative emission technologies, as well as international cooperation on carbon reduction. Vietnam has determined its own contribution plan, aiming to reduce greenhouse gas emissions by 9% by 2030, equivalent to 83.9 million metric tons of carbon dioxide. To achieve the voluntary carbon reduction targets set by the local government, Eurocharm needs to invest in the establishment of renewable energy equipment and replace outdated equipment. | The Company’s direct operation | Decrese in carbon pricing costs | Medium | Long term (more than 5 years) | Currently, the electricity market in Vietnam is not liberalized, and the state-owned power company, Vietnam Electricity Group (EVN), is responsible for the generation, transmission, distribution, and sale of electricity. Businesses are unable to purchase green electricity directly from renewable energy industry. Installation of solar panels were included in the design of the six factories, so Eurocharm can utilize the solar panels for self-consumption, reducing the cost of purchasing electricity. |