Risk
Management

Integral
GRI 2-12, 2-13, TCFD GDR-C
At El Puerto de Liverpool, we are aware of the risks that could affect our activities, including ESG risks (focused on environmental, social, and corporate governance aspects). Our objective is to address them in a preventive manner with precaution and mitigation plans.

Risk identification is carried out by different specialized teams depending on the type of risk, which also propose prevention and mitigation measures.

At the Group level, we delimit corporate governance and regulatory compliance risks; in the operation, by store, we integrated compliance and environmental performance risks. This year at the company level, we added the analysis of possible risks and obstacles to the progress of our Sustainability Strategy, as well as those related to climate change (read the following section). In addition, we have a matrix of the main financial and ESG risks.

The compliance team is responsible for the identification of regulatory risks and participates in the implementation of controls.

Regarding climate change risks, as of 2023, they will be reported to the compliance team given their recent identification.

We also promote a culture of risk prevention among our employees. This is especially true for environmental risks, in which we instruct those positions mostly related (e.g., maintenance managers, store managers, etc.). Additionally, our staff is trained in health and safety, to prevent accidents and promote self-care.

In terms of labor issues, we also encourage our employees to be alert to any risks they identify and report them to their immediate supervisor. Moreover, the human capital team of every location works closely with the corporate team to respond and prevent these risks.

In environmental matters, we have an experienced team that analyzes the operation of our locations, identifying critical points from which internal audits are carried out, risks are identified, and a response is given; this is aligned with our environmental management standard, based on the ISO 14001 standard.

Physical risks involving infrastructure damages, are communicated, and handled by our internal personnel under the policies and protocols for the mitigation of incidents. In this way, with the commitment and support of all our collaborators, we advance towards a stronger management.

The following table shows a classification of risks by potential impact; each risk can have multiple causes (e.g., climate change incidence).

MAJOR RISKS – EL PUERTO DE LIVERPOOL
Risk Description
Market
Consumer spending Customer spending may be affected by many factors beyond our control, including the economic conditions, the disposable income levels of Customers, consumer confidence levels, the cost of basic needs, among others. It also considers the seasonality of Customer spending.
Competition in the
retail industry		 There are several competitors at both the national and local levels in Mexico, including omni-channel retailers, traditional department stores, e-commerce and mail order retailers, and informal retailers which may sell products like those we commercialize.
Consumer preferences Given that Customer preferences change rapidly, we need to be aware to anticipate significant patterns, manage inventories and avoid the need to sacrifice profit margins.
Sales channel strategy The evolution of the omnichannel strategy, through the combination of the network of physical stores and stores with the development of digital channels, to create an integrated experience for the Customer.
Real estate sector dynamics There may be a negative impact by the evolution of land prices, the availability of land, the evolution of leasing costs, the competitiveness of our rates and the tenants’ ability to pay.
Regulatory
Regulations related to marketing and product information Evolution of regulatory and normative provisions, involved in the relationship with the Customer/potential Customer, especially regarding information on promotions, discounts, payment terms, and other sensitive aspects.
Information privacy regulations Evolution of regulatory and normative provisions on managing Customer information, preventing it from being used without their consent. This is complemented by the mitigation of cybersecurity risks.
Environmental, labor and health and safety laws Evolution of the regulatory and normative provisions linked to water discharges and waste treatment, as well as those for the promotion of the circular economy that involve the Customer. Additionally, the provisions on labor relations, specialized services and occupational health and safety measures.
Operational
Supply chain disruptions Ability to find qualified suppliers and access products in a timely and efficient manner, especially outside of Mexico. Likewise, product availability, given the difficulties experienced in global trade.
ESG practices in supply chains Implementation of quality standards and practices in environmental, social (labor practices) and governance (and ethics) issues with our suppliers. For this purpose, an analysis is available within the Responsible Purchasing Program framework, in line with El Puerto de Liverpool’s strict guidelines.
Talent acquisition and retention Includes the availability and commitment of management teams and strategic personnel, as well as the availability of collaborators in the workforce, in the face of other employment alternatives, especially in the most innovative positions, such as those linked to technology.
Interference and/or interruptions in the systems Includes possible damage to the computer systems’ infrastructure, and possible attempted attacks through the network, which could compromise the operation of the systems and the safeguarded information.
Financial
Capital availability Potential capital requirements, especially in capex, used to upgrade the network of shopping centers, stores, and department stores, as well as the logistics infrastructure for distribution. There may be difficulties on accessing additional capital.
Customer’s ability to pay Possible difficulties from Clients in the credit segment, to meet their payment obligations, due to the volatile economic and social environment.
Evolution of product prices Conditions that cause the price of the products to increase, in a generalized manner and/or particularly, for certain types and/or source. For example, the impact that the volatile price of fuels may have.
Operating input and utility price evolution Conditions that cause our operating costs to rise, such as the cost of fuel used for our distribution.
Exchange rate volatility Given the acquisition of products in USD, related to commercializing imports from abroad, when the merchandise is sold in Mexico in local currency.
Physical
Locations’ remodeling or repair Damage to infrastructure, products and/or merchandise due to natural phenomena, such as heavy rain, floods, lightning, tornadoes, or hurricanes, among others.
Consequential losses From the closure of locations due to direct damage or from closure during an event and/or collateral damage.
Failure in merchandise delivery From damage occurring in distribution centers or stores that prevent the delivery of sold merchandise or inventory assortment, as well as from the obstruction of communication routes that obstruct logistic traffic.

Climate change is one of the causes and/or accelerator of part of the risks presented in the previous section. In the following section, we detail this connection and the implications for our Company.

Related to emerging risks, there are three, that we consider to be directly related to people:

  • Change in consumer expenditure patterns, related to the type of product they want and the channels through which they are acquired. The connection is as follows:
    1) lthe evolution of digital media, e-commerce, and omni-channel.
    2) the trend to “use over acquisition”, in an economic practice that promotes collaborative/sharing models.
  • Impact of climate change on two aspects, especially on the textile portfolio:
    1) product and sale seasonality
    2) raw material availability for suppliers.
  • Labor market evolutionl, the requirements of the next generations to join the workforce, talent availability in emerging professions and the competition for operational talent with other sectors in the evolution of Mexico’s economic activities.

Climate change risks and opportunities
GRI 3-3, TCFD EST-A, EST-B, EST-C, GDR-A, GDR-B, GOB-B
At El Puerto de Liverpool, we are aware of the wide range of risks and opportunities to which we are exposed, particularly the major challenge that climate change represents for our industry worldwide. Therefore, in 2022 we began our risk and opportunity analysis related to climate change, to ensure we are aligned with the recommendations of the Climate-Related Financial Disclosures (TCFD) task force.

We develop the process through the following activities:

  1. We identified our sector’s potential risks and opportunities, integrating Mexico’s background, into the analysis.
  1. The potential risks and opportunities identified were presented in workshops with strategic teams to integrate every perspective on the impact our business strategy could suffer. During these workshops, we evaluated the following: severeness, probability of happening and mitigation/exploitation potential; as a result, the 10 main risks and opportunities for El Puerto de Liverpool were obtained.
  1. For our main risks, based on the above, a scenario analysis was performed under two term horizons, 2030 and 2050. The scenarios are the following:
    For physical risks:
    • RCP1 8.5: High-emissions scenario with no changes in mitigation policies. This is the worst scenario in terms of potential impacts, since it considers an increase in temperatures of between 2.6 and 4.8°C above pre-industrial levels, by 2100.
    • RCP 4.5: This scenario contemplates relatively ambitious mitigation actions, where GHG emissions increase slightly, before decreasing around 2040. This scenario considers a temperature increase of between +1.1 and 2.6°C above pre-industrial levels.
    For transition risks, two International Energy Agency (IEA) scenarios were addressed:
    • Business as-usual (BAU): STEPS2-based scenario, which performs a business-as-usual trajectory including existing and announced government policies and plans. This scenario contemplates a temperature increase of 2.5°C above pre-industrial levels.
    • APS3: This higher mitigation scenario considers the full implementation of announced plans and policies, as well as stricter climate targets. The temperature reduction achieved under this scenario would be 1.7°C, by the end of the century.
  1. Based on the scenario projections, risks and opportunities were rated as high, moderate, low, or uncertain, subject to the projected significance each risk and opportunity reports, compared to the current situation.

    The identification of these risks and opportunities will allow us to:
    • Develop and implement initiatives to enhance our operations’ resilience.
    • Identify and prevent related financial impacts.
    • Integrate identified climate opportunities into our business strategy.
    The following tables show the risks and opportunities identified, as well as the classification assigned under each scenario and time horizon.

    We present the result, according to TCFD’s proposed nomenclature:

    Transition risks:
    Those associated with changes towards a low-carbon economy (e.g., in legislation to mitigate and address climate change).
    Physical hazards:
    Those associated with higher intensity events and/or long-term changes in weather patterns (e.g., temperature). They can cause damage to infrastructure, affect operational stability, etc.

1 RCP: Representative Concentration Pathway provided by the IPCC.
2 STEPS: Stated Policies Scenario
3 APS: Announced Pledges Scenario

A: High; M: Moderate; B: Low; I: Uncertain

RISKS
Type and Subtype Designation Description
(causes and effects)		 Scenario implications Risk rating
  2030 2050
Transition: Market and politics Climate policies that increase prices and manufacturing costs within the supply chain Increased manufacturing costs in the value chain due to:
  1. Expansion and increase in carbon pricing under existing instruments or new carbon pricing instruments that may affect suppliers.
  2. Public policies’ implementation requiring biofuels adoption in the transportation sector, which could increase fuel costs in the short and medium term.
  3. The development of energy efficiency policies to reduce emissions in the buildings sector.
 In a BAU scenario:
  • Moderate increases in carbon prices where the main international LPE suppliers are located.
  • Lack of government incentives to promote biofuel production, which could lead to high price volatility and low economic viability.
  • Implementation of minimum energy efficiency standards.
In a below 2°C scenario:
  • Significant increase in carbon prices and inclusion of new sectors in current mechanisms.
  • Political momentum for increasing biofuels production.
  • Development of new sustainable building metrics and new refurbishing requirements for buildings.
 M M
M H
Transition: Politics Policies to promote the circular economy Impacts on EPL’s procurement strategy, Customer relationship and waste management, due to:
  1. Increase in plastic containers’ prices due to changes in suppliers’ raw materials.
  2. Creation of public policies that integrate consumers in economic requirements or in the use of plastic containers.
 In a BAU scenario:
  • Circular economy policies focused on the recycling of aluminum, steel, paper, and plastics.
  • More stringent policies on the prohibition of single-use plastics.
In a below 2°C scenario:
  • Defining national recycling targets or implementing taxes on plastic waste generation.
  • Stricter circular economy policies to reduce oil demand in plastic production.
 L M
M H
Transition: Politics Introduction and expansion of mechanisms to fix carbon prices, such as carbon taxes and emissions trading systems Mexico’s Emissions Trading System (ETS) is being implemented and its final application could raise fuel prices (currently in pilot stage). In addition, prices could be affected by decisions on national and subnational carbon taxes. The impact could further impact domestic supplier costs and direct transport of EPL. In a BAU scenario:
  • No significant change in carbon prices in Mexico; however, we expected carbon taxes to continue increasing at the federal level and that subnational instruments will continue expanding.
In a below 2°C scenario:
  • No significant change by 2030 in carbon prices.
  • High probability that existing instruments will expand to other sectors, as well as developed in new states.
  • In the medium term there is a high probability that Mexico’s ETS begins operations.
  • In the long term, a substantial increase in carbon prices is expected.
 L L
L H
L H
Physical: Acute Increase in the intensity and frequency of tropical cyclones Due to the heavy rainfall associated with cyclones, the following are foreseen: 1) Impact on the arrival of products (supply chain), 2) Closure or interruptions in stores or distribution centers, 3) Loss due to inventory damage, 4) Difficulty in the transportation of Customers to stores, 5) Impact in product distribution, 6) Deterioration of Customers’ financial wellbeing and purchasing power, 7) Increase in insurance costs for EPL. By 2030, we expect high uncertainty surrounding the tropical climate projections for the two scenarios presented.

In both scenarios, by 2050, an increase in the number of very intense tropical cyclones is expected, especially those originating in the Pacific Ocean.		 U M
Physical: Acute Increased frequency, intensity, and duration of extreme precipitation events Same impacts as in the previous risk. RCP 4.5:
A moderate change in the intensity and duration of extreme precipitation events will be observed for both time horizons.

RCP 8.5:
Significant increases in the intensity of both events are projected for 2050.		 M M
M H
Physical: Acute Increased frequency and intensity of river floods Same impacts as in the previous risk. Increase in the intensity of river
flooding in both scenarios,
most remarkable for 2030.		 H M
Physical: Chronic Sea level rise and coastal flooding
  • Possible impact on distribution routes in coastal areas.
  • Possible loss of property value in these areas.
  • Low feasibility for the development of new infrastructure.
 EPL is somewhat located in coastal areas, however, its exposure to coastal flooding in the medium and long term is very low.

Projected increases in Mexico’s sea levels could affect the mobility and distribution of products in coastal areas.		 L L
Physical: Chronic Increased frequency, intensity, and duration of droughts
  • Low availability of raw materials.
  • Possible increases in product prices and impact on product availability.
  • Constrained store coverage due to population displacement because of water scarcity.
  • Operational disruptions and increase in service costs due to constrained water supply.
  • Low availability of raw materials.
  • Possible increases in product prices and impact on product availability.
  • Constrained store coverage due to population displacement because of water scarcity.
  • Operational disruptions and increase in service costs due to constrained water supply.
 M M
H H
OPPORTUNITIES
Type and Subtype Designation Description
(causes and effects)		 Scenario implications Scenario
implications
  2030 2050
Transition: Technology
 Technologic progress focused on an efficient, low-carbon and non-polluting transportation and distribution system Possibility of replacing the company’s fleet of internal combustion vehicles with hybrids and/or electric vehicles that reduce emissions.
Progressive reduction in acquisition costs of hybrid and/or electric vehicles through the standardization of technologies.		 In a BAU scenario:
  • Low economic feasibility of existing technologies (e.g., hydrogen) for freight transportation.
  • Few technological advances to increase sales of electric charging vehicles in the medium to long term.
In a below 2°C scenario:
  • The use of electric vehicles is promoted through incentives and electromobility pilot programs.
  • Higher probability of governments setting carbon neutrality targets for the transportation sector.
  • Decrease in the cost of electric vehicles.
  • Increased feasibility of new green technologies for freight transportation.
 L M
M H
Transition: Resource efficiency Use of technologies to improve energy efficiency and resource consumption in sustainable buildings
  • Progress in the incorporation of lower energy consumption devices: LED lighting in stores, and warehouses.
  • Decrease in operating costs.
  • Improvement in the implementation of energy efficiency standards for equipment
  • and building metrics (heating, cooling, ventilation, insulation, among others).
  • Increase in short-term capital expenditures to install new and efficient equipment.
  • Reduced operating costs in the medium and long term due to energy efficiency savings.
 In a BAU scenario:
  • Voluntary programs increase by 2030
In a below 2°C scenario:
  • Focus on the development of zero-emission buildings.
  • Considerable progress in equipment’s energy efficiency (e.g., air conditioning).
  • Use of renewable energy sources.
  • Decrease in capital expenditures for the refurbishment of existing buildings.
 L M
M H