Strategic Shareholder Climate and Risk Financial Financial Barclays PLC 274 report information sustainability report Governance review review statements Annual Report 2022 Material existing and emerging risks (continued) production capacity, increase operating market expectations on a timely basis, may occur on a timely basis, the Group may fail costs, impair asset values and the have a material and adverse impact on the to achieve its climate-related ambitions and targets and this could have a material creditworthiness of customers leading to Group’s level of business growth, increased default rates, delinquencies, competitiveness, profitability, capital adverse effect on the Group’s business, write-offs and impairment charges in requirements, cost of funding, and results of operations, financial condition, Barclays' portfolios. In addition, the financial condition. prospects and reputation. Group’s premises and resilience may also In March 2020, the Group announced its For further details on the Group’s suffer physical damage due to weather approach to climate change, refer to the ambition to become a net zero bank by events leading to increased costs for the 2050 and its commitment to align all of its climate risk management section. Group. financing activities with the goals and ii) Credit risk As the economy transitions to a low- timelines of the Paris Agreement. In order Credit risk is the risk of loss to the Group carbon economy, financial institutions to reach these ambitions and targets or from the failure of clients, customers or such as the Group face significant and any other climate-related ambitions or counterparties, including sovereigns, to rapid developments in stakeholder targets the Group may commit to in fully honour their obligations to members expectations, policy, law and regulation future, the Group will need to continue to of the Group, including the whole and which could impact the lending activities incorporate climate considerations into its timely payment of principal, interest, the Group undertakes, as well as the risks strategy, business model, the products collateral and other receivables. Credit risk associated with its lending portfolios, and and services it provides to customers and is impacted by a number of factors outside the Group’s control, including wider the value of the Group’s assets. As new its financial and non-financial risk economic conditions. policies and regulations are enforced, management processes (including market sentiment and societal processes to measure and manage the a) Impairment preferences change and new various financial and non-financial risks the Impairment is calculated in line with the Group faces as a result of climate change). technologies emerge, this may result in requirements of IFRS9 which results in increased costs and reduced demand of The Group also needs to ensure that its recognition of loss allowances, based on product and services of a company, early strategy and business model adapt to ECLs, on a forward-looking basis using a retirement and impairment of assets, changing, and sometimes conflicting, broad scope of financial metrics. Measurement involves complex decreased revenue and profitability for national and international standards, judgement and impairment charges are industry and scientific practices, regulatory Barclays customers. This in turn may potentially volatile and may not impact creditworthiness of customers and requirements and market expectations successfully predict actual credit losses, their ability to repay loans. Additionally, the regarding climate change, which remain particularly under stressed conditions. Any Group may face greater scrutiny of the under continuous development and vary failure by the Group to accurately estimate type of business it conducts, adverse between regions, sometimes to a credit losses through ECLs could have a significant extent. There can be no media coverage and reputational damage, material adverse effect on the Group's which may in turn impact customer assurance that these standards, practices, business, results of operations, financial demand for the Group's products, returns requirements and expectations will not condition and prospects. on certain business activities and the value change in a manner that substantially of certain assets and trading positions increases the cost or effort for the Group For further details, refer to Note 8. + to achieve such ambitions and targets. In resulting in impairment charges. addition, the Group’s ambitions and b) Specific portfolios, sectors and Furthermore, the impacts of physical and targets may prove more challenging to concentrations transition climate risks can lead to second achieve due to changing circumstances order connected risks, which have the The Group is subject to risks arising from and potentially volatile external factors potential to affect the Group’s retail and changes in credit quality and recovery which are beyond our control, including wholesale portfolios. The impacts of rates for loans and advances due from geopolitical issues, energy security, energy climate change may increase losses for borrowers and counterparties and is poverty and other considerations such as those sectors sensitive to the effects of subject to a concentration of those risks just transition to a low carbon economy. physical and transition risks. Any where the Group has significant exposures This may be exacerbated if the Group subsequent increase in defaults and rising to borrowers and counterparties in specific chooses or is required to accelerate its unemployment could create recessionary sectors, or to particular types of borrowers climate-related ambitions or targets as a pressures, which may lead to wider and counterparties. Any deterioration in result of UK or international regulatory deterioration in the creditworthiness of the the credit quality of such borrowers and developments or stakeholder Group’s clients, higher expected credit counterparties could lead to lower expectations. losses (ECLs), and increased charge-offs recoverability from loans and advances Achieving the Group’s climate-related and defaults among retail customers. and higher impairment charges. ambitions and targets will also depend on a Accordingly, any of the following areas of From January 2022, climate risk became number of factors outside the Group’s uncertainty could have a material adverse one of the principal risks within the Group’s control, including reliable forecast of impact on the Group's business, results of ERMF. Failure to adequately embed the hazards from the physical climate models, operations, financial condition and financial and operational risks associated availability of data and models to measure prospects: with climate change into its risk framework and assess the climate impact of the to appropriately measure, manage and • Consumer affordability: remains a key Group’s customers, advancements of low- disclose the various financial and area of focus, particularly in unsecured carbon technologies and supportive public operational risks it faces as a result of lending, as the 'cost of living' pressures policies in the markets where the Group climate change or failure to adapt the grow. Macroeconomic factors, such as operates. If these external factors and Group's strategy and business model to unemployment, higher interest rates or other changes do not occur, or do not the changing regulatory requirements and broader inflationary pressures, that