2016–17 Environmental and Social Risk Management (ESRM) Report

© 2018 Wells Fargo Bank, N.A. All rights reserved.

A message from CEO Tim Sloan

As Wells Fargo continues to build trust with our many stakeholders, one of our goals is to become the financial services leader in corporate citizenship. To succeed, we recognize that we must go

above and beyond in just about everything we do, including the way we manage risk at every level of the company.

Managing risk is complex and challenging, and we understand that our business decisions and those of our customers have the potential to impact communities and the environment. Throughout 2016 and 2017, we strengthened Wells Fargo’s risk framework substantially, including the way in which we assess and manage environmental and social risk in our lending and investments.

Our Environmental and Social Risk Management (ESRM) policies and framework are informed by global best practices, and we regularly assess our policies to determine if we are adequately managing environmental and social risks in the projects and businesses that we finance. We see this as core to our long-held values, our commitment to building a better bank, and our culture of continuous improvement.

Our commitment to our customers and communities is unwavering, and we are determined to take all the necessary steps to understand our customers’ activities — and how they are managing the full spectrum of risk.

In this report, you will read about our ESRM accomplishments in 2016-17 — how we strengthened our ESRM policies and framework, broadened the scope and applicability of ESRM review, and expanded our ESRM team and its capacity so we could take on a greater volume of analysis and increase our levels of engagement with customers and other stakeholders.

Thank you for your interest in and support of Wells Fargo.

Timothy J. Sloan Chief Executive Officer and President Wells Fargo & Company

2016–17 Environmental and Social Risk Management (ESRM) Report 2

2016–17 Highlights

Environmental and Social Risk Management (ESRM) business value:

Although ESRM has been part of Wells Fargo’s approval processes for some time, it has become increasingly important to Wells Fargo’s overall approach to managing business risk, especially among our commercial businesses. Because of the growing importance of strong environmental and social performance to businesses, and because of the ESRM team’s deep expertise in their fields, requests for ESRM due diligence reviews within the energy sector doubled in 2017 over 2016 — in many cases on issues beyond the scope of ESRM policies (see KPI Index, page 10). Members of the ESRM team have become important internal stakeholders in the consideration of critical issues across all lines of business.

Client engagement:

In 2017, ESRM initiated training for our commercial clients on current best practice in ESRM and how Wells Fargo assesses environmental and social risk. Direct engagements enable Wells Fargo to leverage our position and help clients make progress on environmental, social, and governance issues. Furthermore, ESRM at Wells Fargo created a presentation for a leading oil and gas industry association that includes specific best practices, ranging from IFC Performance Standards to Free, Prior and Informed Consent (FPIC) and contractor safety. In 2017 alone, ESRM presented to more than 340 industry professionals

— including customers, non-governmental organizations (NGOs), other ESRM practitioners, and industry associations — on ESRM best practices.

Corporate ESRM Policy:

In December 2017, we expanded the scope of our Corporate ESRM policy. Applicable to all Wells Fargo businesses, inside and outside the U.S., Wells Fargo expanded the policy to capture a broader set of environmental and social risks, including all oil and gas operations, and deeper analysis of impacts to indigenous peoples and local communities. As emerging risks are identified and assessed, we will consider bringing new industries into ESRM scope.

Full-time ESRM team members:

6 ESRM FTEs (as of 1/20/2018)

WF employees trained

533

300

471

2015 2016 2017

Wells Fargo Environmental and Social Risk Framework

2016–17 Environmental and Social Risk Management (ESRM) Report 3

2016–17 Highlights

ESRM capacity:

To fully implement Wells Fargo’s ESRM policy and to improve Wells Fargo’s capacity to manage environmental and social risks, Wells Fargo doubled the size of its ESRM team and expanded its areas of expertise in 2017, bringing on board professionals from organizations including the World Bank, Ceres, and Business for Social Responsibility. In addition to expanding the ESRM team’s capacity, the team increased the number of customized trainings it provides to Wells Fargo team members in order to integrate ESRM considerations more deeply into our businesses. Throughout 2016–17, ESRM trained internal relationship management teams working with customers in specific industries on environmental and social best practices in those industries; credit policy officers received deeper training on how to apply the details of ESRM policies to the company’s credit policy review processes.

ESRM due diligence and escalation process:

Since our last report in 2015, Wells Fargo has expanded both the scope of our ESRM policy and the depth of our ESRM review. In 2017, ESRM engaged an external consultant to create a new, proprietary ESRM due diligence grid that allows for a more robust quantitative analysis to understand environmental, social, and reputation risk.

As part of our revamped ESRM due diligence process, once standard ESRM due diligence is complete (as well as additional due diligence, if required), an overall Environmental and Social Risk Rating (ESRR) — Low, Medium-Low, Medium, Medium-High, or High — is assigned by ESRM. Transactions with an overall ESRR rating of High automatically are escalated to senior management, including the Operating Committee, if necessary.

Within our new ESRM due diligence grid, we have included additional triggers that require deeper due diligence than Wells Fargo had previously required. This additional due diligence — with research and analysis that goes beyond our standard ESRM due diligence — almost always requires in-depth conversations with customers. Triggers for additional due diligence (and subsequent customer conversations) include, but are not limited to, when we find a lack of clarity on a customer’s community practices or capacity, or any potential adverse impacts by the customer on indigenous or vulnerable populations.

In 2017, out of the 226 transactions reviewed by ESRM, 23 required review for due diligence beyond the standard due diligence. Triggers include various environmental and social issues but primarily involve issues stipulated in our Indigenous Peoples Statement, Human Rights Statement, or our Vision, Values & Goals. Specifically, 65 percent of additional due diligence in 2017 was triggered by our Indigenous Peoples Statement, which was adopted in early 2017. Primarily for environmental and social reasons, three transactions elevated by ESRM were declined in 2017.

External audience presented to in 2017:

340 ESRM due diligence reviews

226208

124

2015 2016 2017

Increase in the number of due diligence reviews performed by ESRM from 2015-2017: 82% Increase in the number of due diligence reviews performed by ESRM from 2016-2017: 8% Transactions undergoing additional due diligence beyond standard ESRM process 2017: 23 Elevated transactions declined due to ESRM reasons in 2017: 3

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I. Issue Brief: Enhancing Climate Risk and Carbon Asset Risk Assessment

In 2017, Wells Fargo and other large North American banks entered into discussions regarding implementation of the recommendations of the Task-force on Climate-Related Financial Disclosures (TCFD). Beginning with the 2018 fiscal year, we will report on our progress toward implementing those recommendations as part of our commitment to transparency in sustainable financing and managing climate risk in our portfolio. As part of these evolving requirements, Wells Fargo continues to develop how we assess carbon risk in our credit underwriting. For example, in 2016–17, we initiated new modular carbon risk tools within both our Power and Utilities Group, which covers investor-owned utilities, and Government and Institutional Banking Group, which covers municipalities and rural electric cooperatives.

We are working to enhance the use of these tools for utility borrowers engaged in the production, generation, transmission, and distribution of electricity. The types of risk we evaluate include portfolio characteristics of power supply and generation fuel sources as well as other important considerations, such as state renewable standards, cost of carbon, and the customer’s overall carbon strategy.

As a part of core business process, regardless of the level of carbon risk involved, our carbon risk analysis is included in the primary underwriting memo for each client at least annually. Where we judge a client to generate a high level of carbon emissions, it is prioritized in the analysis. Presumptive mitigating factors include compliance with state and federal environmental standards, existing and planned efforts to diversify to lower-emitting carbon assets, new renewable purchase power agreements, and rate flexibility to absorb the related costs of environmental planning. Our carbon risk analysis enables senior managers to determine our customers’ carbon footprint trajectory and consider any associated risks, which is part of our underwriting decision.

Together with external stakeholders and consultants, we continue to refine our analysis of carbon-related risks and opportunities. The modularity of our new carbon tools permits us to customize our analysis for each customer and the many variables involved in the customer’s specific circumstances. We assist our customers in shifting to less carbon-intensive and more carbon-neutral technologies, understanding that the transition to a low-carbon economy is an ongoing effort that requires thoughtful planning and partnership.

Sample Carbon Risk Factors

Risk factor inputs can include:

n general portfolio emissions n power supply and generation

fuel sources n state renewable standards n customer carbon strategy n cost of carbon

Wells Fargo 2017 Corporate Social Responsibility Report

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II. Issue Brief: Indigenous Peoples Statement

In March 2017, we published an Indigenous Peoples Statement, developed in partnership with tribal leaders, indigenous stakeholders, and their representatives. The statement articulates our commitment to indigenous communities and helps guide our decision-making for transactions where indigenous stakeholders may be impacted. The statement also stipulates our approach to responsible finance. Specifically:

n While we recognize that governments have the central role to play in the approval of policies or projects that impact indigenous peoples, we encourage our customers to collaborate in a meaningful way to manage the impacts and risks of their activities on these communities.

n We conduct due diligence in sensitive industries covered by our ESRM policy to ensure that our customers engage meaningfully and effectively with critical stakeholders and demonstrate a commitment to protecting community health, safety, and security; the environment; cultural identity; and the sacred lands and heritage of affected indigenous peoples. We have supplemented this due diligence with a heightened focus on potentially impacted indigenous communities and whether they have been afforded the opportunity for informed consultation and participation. For certain transactions, escalated approval from senior leaders is required.

n If we do not believe a company can effectively manage elevated environmental and social risks in their operations, we will decline participation in the transaction.

n For projects where we can identify that the use of proceeds may potentially impact indigenous peoples, we expect our customers to demonstrate alignment with the objectives and requirements of International Finance Corporation Performance Standard 7 on Indigenous Peoples, including with respect to circumstances requiring Free, Prior and Informed Consent.

Wells Fargo has been serving American Indian, Alaska Native, and Native Hawaiian communities in the U.S. for more than 50 years. We have dedicated team members focused on serving these communities with products, services, and financial education programs tailored to help tribal governments, tribal enterprises, and tribal members succeed financially. In general, Wells Fargo respects the rights of indigenous peoples to determine their own way of life on their own lands, according to their time-honored cultures, traditions, and beliefs. We respect tribal sovereignty, and we recognize the rights of these communities to meaningful and appropriate consultation regarding issues affecting their sacred lands and natural resources — traditionally owned or otherwise occupied and used.

Transactions undergoing additional due diligence because of the Indigenous Peoples Statement in 2017:

15

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III. Issue Brief: Human Rights Update

In 2016 and 2017, we engaged a wide variety of stakeholders and experts — NGOs, internal networks, activists, community leaders, tribal leaders, human rights consultants, and others — to inform and strengthen our approach to managing human rights risks across our businesses. For example, we joined the Shift Project’s Business Learning program in 2016. Our updated ESRM Framework reflects our progress in addressing human rights in our lending and investing.

In late 2016, we also enhanced our due diligence in certain sectors to include more focused analysis involving human rights impacts, specifically to assess whether vulnerable and indigenous communities are impacted and properly consulted. With the implementation of our Indigenous Peoples Statement in 2017, we saw a significant increase in the number of transactions that required additional due diligence beyond the standard ESRM due diligence. In 2017, 23 transactions underwent additional due diligence triggered primarily by social risks, including impacts on indigenous peoples.

Wells Fargo primarily serves customers operating in the U.S. and Canada, countries with relatively robust legal systems and institutional capacity to protect human rights. Because there is no country that is free from human rights risk, ESRM conducts human rights due diligence on all customers within scope of the ESRM policy, regardless of the country of the customer’s headquarters.

In 2017, Wells Fargo published our first Modern Slavery Act statement in compliance with the United Kingdom’s Modern Slavery Act, reflecting the efforts the company has made to ensure that its operations and supply chain are free from modern slavery and human trafficking.

Transactions reviewed by region using headquarters of client in 2016-2017

US 86% Canada or UK 11% Other 3%

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IV. Case Study: Dakota Access Pipeline

In 2016, Wells Fargo became one of 17 banks that committed to funding the Dakota Access Pipeline (DAPL). The project was evaluated by an independent engineer and concluded to be compliant with the Equator Principles, a framework adopted by Wells Fargo in 2005 that is designed to determine, assess, and manage social and environmental risks and impacts of projects. Despite certain public opposition to the project, the courts and federal and state agencies cleared the way for construction.

During construction, lengthy protests were held onsite, across the U.S., and by indigenous peoples globally. As a result, the lenders engaged an independent human rights expert, Foley Hoag LLP, to assess the project history and advise lenders on improvements the pipeline owners could make to enhance their social policies and procedures.

The Foley Hoag report revealed that with regard to indigenous peoples, while compliant with the Equator Principles and U.S. law, the process for approval of the DAPL project did not meet international best practices, which would require Free, Prior and Informed Consent in accordance with the objectives and requirements of International Finance Corporation Performance Standard 7 on Indigenous People. The report also concluded that indigenous peoples, including indigenous Americans, expect developers to respect international standards, and that legal compliance does not guarantee a social license to operate. The report included a number of recommendations for more effective stakeholder engagement, with a particular focus on indigenous peoples.

Because of issues that arose during the construction of DAPL in 2016 and 2017, we enhanced our due diligence in sectors subject to our ESRM policies to include more focused research into whether indigenous communities are impacted. We also developed an Indigenous Peoples Statement, which requires FPIC when we determine that a potentional product may affect indigenous peoples. During 2017, ESRM team members directly engaged with a number of current and potential customers, sharing the Foley Hoag report findings, and informing them of our enhanced policies and expectations with re­gard to best practices in engagement with communities and indigenous peoples.

Related Stories

See the following links for more info on:

n Wells Fargo’s $50MM Native American Commitment

n Wells Fargo’s Responsible Energy Financing FAQs

n Wells Fargo’s $200B Sustainable Finance Commitment

n Wells Fargo’s involvement in funding the Dakota Access Pipeline

n Wells Fargo Indigenous Peoples Statement

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V. Issue Brief: Evolution in Project-Related Due Diligence

The Equator Principles (EPs) are a set of voluntary guidelines for the financial industry that set common global standards for financial institutions in managing environmental and social risks and impacts for projects. The EPs apply to all qualifying transactions within a set threshold in all geographies. Wells Fargo will only support those projects where borrowers can demonstrate their ability and willingness to comply with the EPs’ requirements for categorizing, assessing, and managing environmental and social risks. Despite the rigor of analysis with the EPs, in 2016 and 2017 Wells Fargo made important enhancements to its project-related due diligence process:

n In addition to due diligence conducted by an independent engineer (as required by the EPs) for a specific project, Wells Fargo may require the client to provide additional information on specific environmental or social issues that Wells Fargo deems important, such as stakeholder en­gagement, grievance mechanisms, and impacts to vulnerable communities, including indigenous peoples, landowners, and other communities.

n In addition to reviewing their Environmental Impact Statement reports and independent engineer reports, we encourage our clients to secure social license to operate, which refers to the ongoing acceptance of a company’s business practices by its employees, stakeholders and the general public, which sometimes requires going beyond compliance. We share ESRM best practices and provide examples of how going beyond compliance with regard to certain environmental and social considerations has been beneficial to customers over time. The ESRM team also works with the customer to identify gaps in the project’s adherence to best practices and suggests actions for closing those gaps.

n Wells Fargo assigns an internal Environmental and Social Risk Rating to each project, in addition to the independent engineer’s Project Catego­rization, and develops internal memos detailing findings, shortcomings, and recommendations to help the customer meet specific best practices.

n In the spirit of continuous improvement, Wells Fargo is currently engaged in the EPs update process, helping to design the next iteration of the EPs and their implementation. In particular, we are participating in the EPs Social Risk working group, and the EPs Steering Committee which aim to strengthen the way banks evaluate a company’s stakeholder engagement practices, including risks related to issues that affect indigenous peoples.

For more information on how Wells Fargo applies the EPs requirements, see the EPs section of our ESRM Framework.

Transactions requiring application of the Equator Principles during 2016

No. Sector

Host Country Name/ Project Location

1 Power USA 2 Power USA 3 Infrastructure USA 4 Infrastructure USA

Transactions requiring application of the Equator Principles during 2017

No. Sector

Host Country Name/ Project Location

1 Infrastructure USA 2 Oil & Gas USA 3 Infrastructure USA

2016–17 Environmental and Social Risk Management (ESRM) Report 9

533 471

300

2015 2016 2017

Full KPI Index

I. ESRM at Wells Fargo

Full-time ESRM team members:

6 ESRM FTEs (as of 1/20/2018)

WF employees trained

2015 300 2016 471 2017 533 Total 1304

External audience presented to in 2017:

340

Number of transactions requiring application of the Equator Principles during 2016

No. Sector

Host Country Name/ Project Location

1 Power USA 2 Power USA3 Infrastructure USA 4 Infrastructure USA

Number of transactions requiring application of the Equator Principles during 2017

No. Sector

Host Country Name/ Project Location

1 Power USA 2 Oil & Gas USA 3 Power USA

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-

Full KPI Index

II. About our ESRM Due Diligence Process

Transactions reviewed through the ESRM duediligence process

2015 124 2016 208 2017 226 Total 558

ESRM due diligence reviews

Increase in the number of due diligence reviews performed by ESRM from 2015-2017: 82%

Increase in the number of due diligence reviews performed by ESRM from 2016-2017: 8%

Transactions reviewed by region using headquarters of client in 2016-2017

US 86% Canada or UK 11% Other 3%

Transactions reviewed by region using headquarters of client in 2016-2017

Low 2% Medium-Low 31% Medium 45% Medium-High 17% High 5%

Transactions undergoing additional due diligence beyond standard ESRM process in 2017

23

Transactions undergoing addi tional due diligence because of the Indigenous Peoples Statement in 2017

15

Elevated transactions declined due to ESRM reasons in 2017

3

226208

124

2015 2016 2017

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Full KPI Index

III. Critical Industries and Activities

Oil and gas

Increase of oil and gas customers reviewed through ESRM due diligence process from 2016 to 2017: 90%

Oil and gas customers re­viewed through ESRM due diligence process

2015 15 2016 71 2017 135

Oil and gas customers reviewed by ESRM

135

15

71

2015 2016 2017

Coal and metal mining

Transactions reviewed

2015 15 2016 71 2017 135

Change in transactions reviewed from 2016 to 2017: -12%

Decrease of coal mining exposure since 2012-2017: -85%

Total Coal Mining Commitments ($MM)

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