Banco Santander S A : Climate Finance Report 2023

Climate Finance Report

2023

Table of contents

The transition to net zero is a journey, not a moment in time. This report sets out the progress we made in 2023 - a year in which the transition was buffeted by war, new geopolitical risks, and the impact of higher interest rates. Despite these pressures, Santander made further progress.

We stepped up activities in green finance. We've mobilized EUR 115.3 billion in green finance since 2019, taking us towards our 6-year target of EUR 120 billion by 2025. We strengthened our position as a global leader in renewables: the greenfield renewable energy projects Santander participated as financier or advisor in 2023 will have enough installed capacity to power 10.1 million homes a year. At the end of the year, we had a stock of EUR 22.6 billion in mortgages aligned with the EU Taxonomy. In Europe we financed more than 208,000 new electric vehicles, with volume of EUR 6.5 billion. This equals a market share of EV sales in Europe of over 10%.

Meanwhile, we set 2 new decarbonization targets, both in the auto sector - bringing to 7 the number of targets we've now set. We disclosed financed emissions for the sectors on which we have financed emissions targets (power, energy - oil & gas, aviation, steel and auto) and for material portfolios in mortgages and agriculture. We also set risk appetite limits on the sectors with decarbonization targets, tiering our customers according to the degree of alignment with our ambition and the quality of their transition plans.

In these sectors, as well as in relevant portfolios within real estate and agriculture, we are analysing, measuring and acting to help our customers cut emissions. However, the climate performance dynamics of real estate and agriculture sectors are heavily dependent on their regulatory landscape.

We have taken further steps to stop illegal deforestation in the Brazilian Amazon. We adopted Brazil's Banking Federation (Febraban) protocol to financing the cattle sector, which includes standards for managing the risk of illegal deforestation. This is a major step forward as it is the first sector-wide environmental protocol for financing beef processing. Since it will apply to every major bank in Brazil, it is considered a highly effective way of sustainable change and addressing deforestation.

We also continue to make progress on our own footprint. We are now close to achieving our 2025 target to get 100% electricity for our own operations from renewable sources.

These are all critical steps to our ambition of being a net zero carbon organization by 2050. As we progress, and work with our customers and global institutions to support the transition, it is clear that we all need to shape and adjust our approach, learning from experience while remembering some basic points.

First, banks are enablers of transition: we have a major role to play, but financial institutions are one partner among a number of others - governments, regulators, companies and individuals. We need to distinguish between the roles and responsibilities of authorities and businesses. There is a danger that, in a number of jurisdictions, politicians are outsourcing their role regarding creating the rules around environmental and social issues, expecting banks to become the police on these issues. At the same time too few governments are providing coherent and stable public policy frameworks aligned with the net zero ambition, which are critical to give individuals, companies and investor the confidence to invest in the transition.

Second, we must "green" what is currently "brown". We cannot simply stop financing "brown" companies: doing so would destabilise economies and the transition. Instead, we must support "brown" companies, helping them financing their transition plans. And flowing from this, we need to recognise that companies and countries are at different stages in the transition. This is particularly true for developing economies, many of which rely on fossil fuels to drive growth, which alleviates poverty. If we are to make progress on climate change, we cannot leave these companies behind by demanding they stop using fossil fuels without having reliable sources of affordable energy to fall back on.

And that brings me to my third point: "green" policy and regulation needs to strike the right balance between cutting emissions, supporting growth and ensuring financial stability. Growth is critical, both in terms of improving people's lives and in financing the green transition. Growth will underpin the fair, secure, and affordable transition to the low- carbon economy. Growth relies on energy that is both affordable and reliable. According to the Energy Institute, in 2022 more than 80% of total energy consumption globally was powered by fossil fuels, despite record investment in renewables, and energy demand continued to increase by 1.1% that year. Fossil fuel demand is expected to continue growing and peak in 2030. Natural gas demand is expected to peak by 2040. So, while we want to see more renewable energy, if we unplug from existing energy sources too fast, we risk increasing energy insecurity and the cost of energy - hindering growth and risking an unjust, unstable transition. This is even more salient in developing economies. Santander is very active in Latin America, for example, where many people lack access to basic infrastructure and goods. We have to strike the right balance between supporting growth, lifting people out of poverty, and supporting the transition.

These three points all need to be reflected in climate related regulation. Disclosing data that is material and comparable is essential to help investors make informed decisions about where to invest. But banks - especially in the EU - now face a tsunami of ESG-related disclosures.

The data that banks need to provide is not always material or comparable. The EU's green asset ratio (GAR) is based on the EU's taxonomy, which does not capture certain activities that contribute to the transition as environmentally sustainable. This, together with other design flaws (such as not including SMEs) impairs the GAR as a means of reflecting how credit is "greening" the economy. This may end up harming the transition. It incentivises European banks to finance only what is "green" in Europe, and not finance "brown" assets' transition to green; and, furthermore, it incentivises banks not to finance typical mortgages in developing economies, as this does not meet the taxonomy's criteria. The European Union needs to invest in higher growth economies and in these economies' transitions. Currently these disclosures disincentivises us from doing so.

To make these points is not to argue we should somehow slow down the transition. The reverse is the case. We need to do more, but governments and regulators need to remember these three points so companies, individuals and banks can do more.

We need to remember a basic truth: an orderly, just transition depends on concerted action, supporting transition and growth. Without growth, we cannot afford the investment required.

Ana Botín, Executive Chair

2023 HIGHLIGHTS

Supporting our customers

in the transition

Embedding climate in

risk management

• We raised or facilitated EUR 20.9 billion (EUR 115.3 billion since 2019) and took advantage of climate finance opportunities to make progress with our green1 finance target.
• We continued to embed environmental and climate factors in policies, risk appetite and risk management. We strengthened our risk management cycle with initiatives such as "The Climate Race", a target operating model to embed environmental and climate change (E&CC) factors in all stages of credit approval.

• We developed several business opportunities to help customers to transition to a lower carbon economy. We also strengthened our green proposition with new solutions for customers.
• We conducted an internal assessment of dependencies and impacts with the available data and methodologies regarding nature and biodiversity.

Aligning our portfolio

with the Paris Agreement

goals

• Santander has set decarbonization targets as part of its net zero ambition. It details related action plans, which involve customer engagement on climate goals, planning, and risk appetite limits.
• To help fulfil our ambition to be net zero by 2050, in 2023 we have set two new decarbonization targets for 2030 in the transport sector: auto lending in Europe and auto manufacturing. This way, we now have seven targets in our highest emitting sectors.

• Additionally, we continue calculating financed emissions for alignment for other significant portfolios like agro in Brazil and mortgages in the UK.
• Our climate customer engagement approach is designed to help us achieve our emissions targets for the power generation, oil and gas, aviation and steel sectors. It is based on customers' greenhouse gas emissions profiles and quality assessments of their transition plans.

Retail &

Commercial Bank

• Our main solutions are green mortgages, electric vehicles and financing of solar panel installations (11 partnerships for solar panel solutions across our three regions).
• At the end of the year, we had a stock of EUR 22.6 billion in mortgages aligned with the EU Taxonomy.
• We reached EUR 1.4 billion in new financing agreements with multilateral development banks to finance the investment and liquidity needs of our customers in Europe and Latin America. The EIB granted EUR 300 million to Banco Santander Brasil for small-scale solar energy investments.

Wealth Management

& Insurance

• Socially Responsible Investment (SRI) Assets Under Management (AUM) amounted to EUR 67.7 billion, of which EUR 48.1 billion are from Santander Asset Management (SAM) and EUR 19.6 billion from our Private Banking business associated with third party funds.

• 70.8% of financed emissions from SAM's portfolio were either aligned to net zero or under either individual or collective engagement in which SAM is involved.

• SAM Spain was the first asset manager to adhere to and report on the CNMV (Comisión Nacional del Mercado de Valores) stewardship code.

Digital Consumer Bank

• In Digital Consumer Bank in Europe we financed more than 208,000 new electric vehicles, with volume of EUR 6.5 billion. This equals a market share of EV sales in Europe of over 10%.

Payments

• In Cards we acquired 37 million cards, 72% of the year's total, made of sustainable materials (recycled PVC or PLA)1.

2. Strategy

Our ambition

Santander aims to be net zero in carbon emissions by 2050. This applies to the Group's operations and emissions from our lending, advisory and investment services.

Tackling climate change is a key priority at Santander. Our ambition is to achieve net zero carbon emissions by 2050. We intend to do this and support the green transition in four ways:

Throughout this report, we show how our strategic climate ambition is embedded in our business model and is helping us to build our transition plan. Some specific examples are:

Net Zero Banking Alliance (NZBA)

We are a founding member of the Net Zero Banking Alliance (NZBA, under the United Nations Environment Programme Finance Initiative), committing the Group to:

Support the transition of

operational and attributable

greenhouse gas (GHG) emissions

Supporting our customers

in the transition

Help our customers transition to a sustainable economy, with the target to raise or facilitate EUR 120 billion in green finance between 2019 and 2025 and EUR 220 billion by 2030; offer our customers guidance, advice and specific business solutions; and enable them to invest in a wide-range of products according to their sustainability preferences, with the target of reaching EUR 100 billion AUM in Socially Responsible Investment by 2025.

Key partnerships with leading public and private organizations

Multi-stakeholders engagement approach

New strategic positions and teams created to better embed ESG into decision-making processes

From senior management internal training to

from lending and investment portfolios towards pathways to net zero by mid-century;

Set intermediate targets for

priority GHG emitting sectors for

2030 (or sooner); and

Prioritize customer engagement with products and services that facilitate transition in the real economy

Our progress towards targets we set on NZBA high emitting sectors is detailed in section 4. Metrics & Targets.

Embedding climate in

risk management

Aligning our portfolio

with the Paris Agreement

goals

Reducing our

environmental impact

Embed climate in risk management; understand and manage the sources of climate change risks in our portfolios.

Align our portfolio with the Paris Agreement goals to help limit warming to a 1.5ºC rise above preindustrial levels; and set sector- portfolio alignment targets in line with the NZBA and with Net Zero Asset Management initiative (NZAMi).

Reduce our impact on the environment, implementing efficiency measures, sourcing all our electricity from renewable sources by 20251.

stakeholders external awareness

Target Operating Model - "The Climate Race"- including E&CC risks in all stages of credit granting and monitoring processes

Financed emissions for new sectors

New decarbonization targets

Climate targets and action plans progress

2022-2025 Energy efficiency and sustainability plan

From…To

Cumulative target

In order to be aligned with the Paris Agreement and with the aim of limiting global temperature increase to 1.5°C, we have committed to be net zero in carbon emissions by 2050 also as part of the Net Zero Banking Alliance (NZBA).

SAM target to halve net emissions for 50% of in-scope AUM3

Decarbonization targets for power generation, energy (oil & gas), steel, aviation auto manufacturing and auto lending portfolios

Ending financial services to power generation customers if over 10% of their revenues depend on coal

1. Scope 1 and 2 emissions and scope 3 emissions from employee commuting and business travel. It considers wholly owned companies in Argentina, Brazil, Chile, Germany, Mexico, Poland, Portugal, Spain, the United Kingdom and the United States.
2. In countries where we can verify electricity from renewable sources at Banco Santander properties. It considers the 10 main countries in which we operate.
3. Assets in scope are 54% of SAM total assets, which currently have a defined Net Zero methodology. This objective might be reviewed upwards depending on data availability at least every five years.

Cutting our exposure to thermal coal mining to zero

Our approach

Our approach to supporting the transition is to focus on the most material, high-emitting sector portfolios. The methodologies we have developed inform our plans to decarbonize our credit portfolios, especially the ones directly related to fossil fuels.

To support our alignment the Group's climate risk management function performs a climate transition assessment for wholesale corporate customers in the oil and gas, power generation, metals and mining, auto manufacturing, aviation and cement sectors. This goes beyond sectors for which we have targets and covers others that are highly prone to transition risk.

Our key governance bodies regularly review progress with our main climate-related projects, which consist of portfolio alignment, sustainable finance classification and climate risk management.

Disclosing our approach is key to helping markets and other stakeholders assess how we embed climate-related initiatives in our processes and policies, and report on our climate-related performance. We use the Taskforce on Climate-related Financial Disclosures (TCFD) and GFANZ1

• Financial Institutions Net Zero Transition Plans as the frameworks to disclose our approach to integrating climate in our investment strategy and help us draw up our transition plan.

Santander Asset Management's (SAM) strategy and approach:

In March 2021, SAM joined the global Net Zero Asset Managers initiative as part of its commitment to fight climate change, becoming the first asset manager in Spain and Latin America (excluding Brazil) to do so. SAM aims to achieve net zero greenhouse gas emissions with its assets under management by 2050 and has set a 2030 interim target to halve net emissions for 50% of its AUM in scope2. Our target represents 27% of SAM´s total AUM.

During 2022, SAM worked on developing our Net Zero Engagement Strategy. This strategy aims to deliver our Net Zero plan in our core markets by fostering company engagement through dialogue and voting policies. That in turn, encourages and supports companies' decarbonization plans and an adequate reporting to create credible track records.

In 2023 SAM joined the Net Zero Engagement Initiative led by the International Investors Group on Climate Change, complementing engagement actions on climate transition from Climate Action 100+, in which SAM is a signatory as well.