TACKLING CLIMATE CHANGE

CLIMATE RISK AND GHG EMISSION MANAGEMENT

Climate change governance

The metallurgical and mining industries are energy intensive and responsible for a large amount of greenhouse gas emissions. EVRAZ sees reducing the negative impact on climate change as an essential task and takes various measures to mitigate the adverse consequences. The Group believes that businesses should pay more attention to climate issues.

The Board of Directors deals with climate change issues and controls the climate change risk management process. Climate-related issues are also considered by the Sustainability Committee of the Board of Directors.

The key achievement of the reporting year pertaining to increasing energy efficiency and managing climate-related risks is the establishment of the Sustainability Management Committee. Its function is to consider issues related to sustainable development, including climate agenda and carbon footprint reduction, setting GHG emissions targets, and management of climate risks.

Climate-related risks and opportunities

The Group’s management gives a high priority to climate risks. The Group determines relevant physical and transition climate-related risks according to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). EVRAZ annually evaluates climate-related risks to make the business more sustainable through the development and implementation of solutions aimed at mitigating material risks. The assessment of climate risk materiality is based on the Group’s approach, which includes a five-point scale of the impact and a five-point scale of the likelihood of the risks. To identify significant climate risks, the Group uses three scenarios:

EVRAZ considers the Paris-compliant scenario (corresponds to 2°C increase in the global average temperatures) as the primary scenario for assessing risk materiality and strategic planning. The Group identifies climate risks within short-, medium-, and long-term time horizons:

Transition risks are the most relevant for EVRAZ for the short- and medium-term time horizons. Regulatory risks were identified as the most critical ones for the short-term – they have very high or high materiality for all the scenarios used and a growing trend of risk exposure for the Group.

The Group has plans for 2022 to conduct a quantitative risk assessment that will provide a better understanding of the financial impact of climate-related risks on EVRAZ’s financial stability and performance.

In addition to climate risks, the Group analyses the opportunities emerging because of climate change. EVRAZ considers the following directions as the most relevant opportunities:

EVRAZ seeks to fulfil these opportunities and takes them into account while developing the decarbonisation pathway.

Decarbonisation pathway

In 2021, EVRAZ updated its decarbonisation target in keeping greenhouse gas emissions at the level not higher than 2 tonnes of CO₂ equivalent per ton of crude steel, which was initially set in 2017, due to achieving it well in advance. The new target is to reach a 20% reduction in specific GHG emissions from steelmaking operations (Scope 1, 2) by 2030 compared to 2019. This value will allow the Group to make its contribution to the Paris Agreement (PA) pledges sounded by the parties.

EVRAZ is developing a decarbonisation roadmap, as well as a preliminary decarbonisation plan for EVRAZ ZSMK and EVRAZ NTMK to be achieved by 2060. The decarbonisation pathway will be integrated into daily operations of EVRAZ to achieve the established emission reduction goals, to mitigate climate-related risks and avoid the negative consequences.

The Group identified the following key areas of focus for three periods by implementing activities that will help EVRAZ to supply steel with reduced CO₂ level:

In short-term horizon, the Group gives priority to minimising greenhouse gas emissions through increasing energy efficiency. Specialists are preparing additional measures to modernise technological processes for reducing our carbon footprint in the medium- and long-term horizons. The most aspiring courses of action are technologies for capturing and storing carbon dioxide and the application of recycling blast furnace gases.

EVRAZ joins with customers and other large companies to pursue decarbonisation goals. For instance, the Group signed a memorandum with Russia's largest carrier for the production and use of rail products made of steel with a reduced carbon footprint. During the production of this steel, CO₂ emissions per ton of steel will be 75% lower compared to conventional route. According to the agreement, the delivery of new rail products may begin in 2023.

In collaboration with a major oil company, EVRAZ will evaluate the possibilities of using technologies for capturing and subsequent utilisation or storage of CO₂, as well as assess the potential of converting the Group's metallurgical plants from hydrocarbon fuel to methane-hydrogen mixtures. Hydrogen is considered as a promising source of energy.

Some projects in area of climate-related goals achievement have already been started. These initiatives are integrated into the business strategy and daily operations of EVRAZ:

• Setting internal carbon prices. In 2021, the Group made a forecast of an average carbon price based on the prices in the EU to use this value in a decision-making process on internal investment projects as an additional criterion. It allows to look at all projects from different angle and plan budget and operations more accurately, considering all pros and cons. EVRAZ has plans to disclose information upon this metric in future disclosures
• Energy efficiency. The Group implements projects both in generation of own energy and in effective consumption of energy resources
• Renewable energy use. EVRAZ considers entering contracts with low-carbon suppliers (Nuclear power plants, Hydroelectric power plants (HPPs)), the development of its own generation using renewable energy sources (Solar/wind power plants, Micro HPPs). In addition, the possibility of using alternative fuel with a lower carbon footprint at the existing EVRAZ combined heat and power plants (CHPPs) is being studied. Currently, the Group's efforts are focused on concluding long-term contracts. In 2021, EVRAZ signed a contract with Rosatom for the supply of low-carbon energy from nuclear power station for EVRAZ NTMK and EVRAZ KGOK, making it possible to reduce CO₂ emissions from purchased electricity of these enterprises
• Circularity of resources. The Group is in search of ways to prolong the lifecycle of raw materials and recycle waste from the own production, for example, by involvement of carbon-containing industrial and domestic waste in the coking charge

GHG emission reduction performance

The Group discloses data about its greenhouse gas emissions in tCO₂e (tonnes of carbon dioxide equivalent). In 2021 there was an upgrade in the methodology regarding Global warming potentials used – they were taken from IPCC Fifth assessment report (AR5), instead of potentials from the Fourth assessment report (AR4). The quality of data used for calculations in the reporting year was improved in terms of excluding double-counting and uncertainties in material flows values.

EVRAZ uses methodology for Scope 1 and 2 GHG emissions calculation in compliance with the GHG Protocol Corporate Accounting and Reporting Standard requirements and the 2006 IPCC Guidelines for National greenhouse gas inventories.

Scope 2 GHG emissions were calculated using location-based method and emission factors specifically developed for the country, if available, or otherwise factors provided by UK Defra or given in National Inventory Reports. For enterprises in the Russian Federation the values of Scope 2 emissions factors were taken from official source of Russian energy exchange as the most relevant for this region than the information from the study report “Development of the electricity carbon emission factors for Russia” by EBRD & Lahmeyer, which was used before.

The Group has calculated Scope 3 GHG emissions for 2020. The calculations were performed using the methodology of Corporate Value Chain (Scope 3) Standard, GHG Protocol Technical Guidance for Calculating Scope 3 Emissions (Supplement to the Corporate Value Chain (Scope 3) Accounting and Reporting Standard).

In 2021, the Group managed to reduce GHG emissions by 3.1% due to lower steel production at EVRAZ ZSMK, decrease of methane emissions at some coal mines, equipment modernisation and a successful energy efficiency policy. The steel segment (Steel segment and Steel, North America segment) accounted for the largest GHG emissions (68% of EVRAZ's total GHG emissions). Because of methane utilisation, low-carbon energy purchase, increase in energy efficiency, the Group reduced Scope 1&2 GHG emissions by 1.35 million tCO₂e in 2021 compared to 2020.

One of the prospective lines of work for the Group is the reduction of methane emissions released into the environment during coal mining operations. As part of its Environmental Strategy until 2030, EVRAZ has set a goal of utilising 75% of methane emitted in the process of degassing by 2030 with 2019 as a baseline year. Due to the high flammability and explosiveness of methane the Group carries out the degassing for the purpose of safety. In this respect, EVRAZ strives to implement promising new technologies to reduce emitted methane’s impact on the climate and to make the mining process safer and more environmentally friendly.

EVRAZ’ Scope 3 GHG emissions for 2020 were 22.8 million tCO₂e. The largest share belongs to categories «10. Processing of sold products» and «1. Purchased goods and services».

This year it was decided to disclose one more intensity figure that better reflects performance of the steel segment and takes into account volumes of pig iron produced by steel mills and sold to 3rd parties.