Management and follow up of main risks, opportunities and environmental impacts

In a context of significant changes in the regulatory, economic and industrial sectors, caused by the transition towards a decarbonised economic model, pressure is growing from investors, public bodies and society for organisations to report transparently on how they manage risks and opportunities arising from climate change in the short, medium and long term.

Within this transitional framework, in December 2015, the Financial Stability Board (FSB) established the Task Force on Climate-related Financial Disclosures (TCFD) to develop climate-related disclosures that “could promote more informed decisions on investment, credit and insurance underwriting” and, in turn, “would allow stakeholders to better understand the concentrations of carbon-related assets in the financial sector and the exposures of the financial system to climate-related risks”. The TCFD frames climate-related information in the business context under four pillars (governance, strategy, risk management, and metrics and objectives) and recommends disclosure in each pillar.

With its firm commitment to climate change and to making GHG emissions one of the focal points in decision-making, Cellnex takes into account the risks and opportunities presented by climate change, incorporating them into the organisation's vision and objectives for the coming years. As such, using four core elements, as recommended by the TCFD, Cellnex demonstrates how it takes account of climate-related risks and opportunities, as well as strategies to mitigate risks and take advantage of opportunities.

Governance

Cellnex's climate risk and opportunity analysis is part of the risk management process, following a bottom-up methodology, which reaches from every user in every business unit to Senior Management, and all the way to the Cellnex Board of Directors, the body responsible for supervising and guiding the Group in this matter. To this end, Cellnex has a global risk management policy, through which a framework is established which implements, evaluates and improves risk management throughout the company's processes and activities.

There is a Global Risk Management department within the company that provides the common risk management framework (templates, impact and probability scales, etc.) and support in risk management issues to the people responsible, since all Cellnex's departments are liable for risk management in their area of responsibility.

As explained in the "Global Management System and Risk Management" section of this report, Cellnex has a risk management methodology with three lines of defence, and a risk management model. Within the risk management governance framework, the Board of Directors supervises the process establishing the organisation's tolerance for risk, gathers information about the most significant risks for the organisation and assesses whether Senior Management is responding appropriately. Additionally, the Audit and Risk Management Committee (ARMC) has the most senior role in the deployment of the audit and internal control plan established at Cellnex, providing independent assurance to the Board of Directors. Its functions include monitoring risk management systems, as well as monitoring key risks at least every six months. Lastly, the CEO has ultimate responsibility for ownership of the organisation's risk management and control framework, as it ensures a positive internal environment and a culture of risk; he also provides leadership and direction to operational management and supervises general risk activities.

The risk management process is based on the identification and subsequent, evaluation, reactions and control of risks, and is carried out on a quarterly basis or ad-hoc when necessary due to a new emerging risk and/or significant commercial or organisational changes in the company. In this regard, Cellnex plans to carry out a risk assessment annually.

Risk management

In parallel to the Global Risk Management explained in the section on “Global Management System and Risk Management” of this report, the Cellnex Sustainability Department worked in 2021 to assess the risks and opportunities arising from climate change, following the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). These risks and opportunities will be included in the Environmental functional unit so that they form part of the company's general risk management.

As such, the potential impact of a risk and the probability of its occurrence are evaluated, taking the substantial impacts into consideration, based on the following areas:

• Economic: in the income statement and/or investments.
• Organisational: level of involvement in the organisation for monitoring and resolution.
• Reputation: media impact and possible liability actions.

In addition,f the impact is classified as low, medium, important and critical. After the impact assessment, the likelihood of the risk occurring must be evaluated to establish the probability that an event that has an impact will actually occur:

• Critical: Almost certain to occur.
• Important: Likely to occur.
• Medium: May occur.
• Low: Unlikely to occur.

Based on these two aspects, impact and probability, the risks are prioritised as high, medium or low.

In this regard, Cellnex has identified and evaluated nine risks arising from climate change, where the three risks with the highest priority are "changes in consumer (customer) preferences" (reputational risk), "increased concern or negative feedback from interest groups ”(reputational risk), and "increase in average temperatures”(chronic risk).

In addition, Cellnex has identified and evaluated nine opportunities arising from climate change, the three opportunities with the highest priority are "change in investor preferences" (opportunity in products and services), "development and/or expansion of low-carbon goods and services ”(opportunity in products and services), and “use of more efficient production and distribution processes” (opportunity in resource efficiency).

Strategy

Cellnex is aware of the new risks and the demands arising from the environmental and social phenomena that predominate the international context, which is evidenced by the preparation and implementation of the ESG Plan 2021-2025, where climate change is a key pillar of the strategy due to its connection with the environment, which includes carbon emissions, toxic emissions and waste.

Cellnex has carried out a climate scenario analysis, as recommended by the TCFD, which allows the company to understand and define the level of resilience with regard to a number of future states relating to climate change. This enables Cellnex to explore and develop an understanding of how physical and transition risks, as well as opportunities, could plausibly impact the business over time.

Climate Scenarios analysis therefore evaluates a range of hypothetical outcomes by considering a variety of alternative plausible future states (scenarios) under a given set of assumptions and constraints. According to the TCFD methodology, there are two main types of scenarios to analyse: physical and transition.

• Physical scenarios take into account the concentrations of greenhouse gases (GHG) in the atmosphere and the physical characteristics of the climate to assess the possible risks that climate change may cause.
• Transition scenarios analyse trends in politics, energy and economics related to climate change, to determine the possible risks that they may pose to the activity of an organisation.

In this context, Cellnex has selected a physical climate scenario and two transitional climate scenarios to assess the possible impacts that the Company would have to face in the future.

Physical Climate Scenario

This scenario makes it possible to evaluate future climate projections in  all the countries where Cellnex conducts its business, to be appraised of forecasts and be able to anticipate the impacts they may cause. To do this, the report was drawn up using the scenario developed by the Intergovernmental Group of Experts on Climate Change (IPCC) in its fifth assessment report (AR5) (the latest report available at the time of writing, an analysis that relied on representative concentration trajectories (RCPs) to define a series of climate scenarios. Such as, RCPs cumulatively measure human emissions from all sources of Greenhouse Gases (GHG) up to 2100.

In the analysis of the physical climate scenarios, the worst possible scenario was taken into consideration, (the RCP 8.5 scenario), since it considers that GHG emissions would continue to increase at the current rate and is therefore the worst possible scenario of higher emissions. of GHG in the atmosphere and increased global warming. In addition, when analysing physical climate scenarios, it is important to take into account the differences between the countries under study, in terms of the availability and publication of information.

The following is a brief summary of the main physical impacts by country in this scenario:

Climate Transition Scenarios

Two scenarios were selected for the transition scenarios:

Current Policy Scenario

Current policy scenario (Stated Policies Scenario or SPS), in order to study the existing trajectory and see what future risks and opportunities would arise from the non-implementation of measures. This analysis was carried out for Spain, Italy, France, the Netherlands, Switzerland, the United Kingdom, Ireland, Portugal and Finland.

In this scenario, policies that have been formally adopted by governments and are currently included in their legislation have been considered. Therefore, this scenario is built on the basis of what has already been defined and the objectives set by the countries with a 2030 and 2050 horizon.

Below is a summary map of the regional, national and sub-national carbon pricing initiatives in place, scheduled for implementation, and under consideration (ETS and carbon tax).

Future Sustainable Development Policy Scenario

Scenario of future sustainable development policies. This scenario goes beyond currently established policies. A more ambitious reduction scenario than the Paris Agreement, is considered that is, one in which it is possible to keep the global temperature below 2ºC. This analysis is carried out from a global perspective since it is based on generic hypotheses, with a certain degree of uncertainty.

The main sources used to produce this scenario were the scenario developed by the International Energy Agency (IEA) called Sustainable Development Scenario (SDS) and the Deep Decarbonization Pathways Project (DDPP), a global research project,that aims to analyse how countries can transition to a low carbon economy in line with the Paris Agreement goal of limiting global warming from anthropogenic sources to below 2°C.

Based on these scenarios, Cellnex has defined a series of time horizons, which are determined by the probabilities and reaction time on the part of Cellnex (short, medium and long term). The results obtained from the analysis allow Cellnex to envisage possible impacts and inform and influence its strategy and commercial objectives, so it can further increase its resilience and have the necessary tools in place to face possible future climate risks.

Metrics and objectives

The objectives set by Cellnex Telecom demonstrate to its stakeholders that it is committed to reducing environmental impact, while reducing exposure to the price of carbon. As explained in the "Carbon footprint and climate change" section of this report, in 2021 Cellnex strengthened its commitment to combating climate change by setting specific targets and milestones for reducing emissions validated by the Science Based Targets initiative (SBTi) aligned with a 1.5ºC scenario.

Cellnex used a series of reference metrics to assess climate risks and opportunities, estimate their financial impact and management cost, and to define monitoring indicators. In this regard, metrics related to climate, metrics related to GHG emissions, and objectives related to climate were defined.

Cellnex will continue to measure and disclose its performance in relation to these objectives, many of which are already being monitored due to their connection with the 2021-2025 ESG Plan as well as the company's Strategic Sustainability Plan.

Cellnex Spain response to storms and major fires

Weather storms and major forest fires pose a significant risk to Cellnex in relation to the continuity of service provision. An example of this was the Filomena storm that affected the Iberian Peninsula in early January 2021. The various COLs (Cut off lows) gave rise to major storms that brought the country to a standstill: strong wind, rain, flooding, and even snowfall at low altitudes.

To mitigate risks and provide continuity of service, Cellnex España has been working in recent years and, especially in 2021, on preventive and contingency measures with the aim of minimising the impacts caused by these situations. To this end, towers have been reinforced, the continuous power supply systems of the centres with greater autonomy have been strengthened, auxiliary equipment has been renewed (generators, Uninterruptible Power Supply Systems - UPSs), the Scada remote control system has been replaced by new, more effective and powerful software, etc.

An example of the effectiveness of this type of measures was the experience of the Sierra Bermeja forest fire in Malaga, where Cellnex España has a major communications node. The fire devastated the area around the site, but the measures taken to clean up the site, increase the centre's autonomy by up to 20 hours (the company's power supply failed due to the fire) and the remote control systems for the equipment allowed 100% of services to be maintained without impact.