Practical Guide For Scenario Analysis In Line With TCFD Recommendations

[Objectives of the TCFD recommendations and Widespread Adoption]The TCFD recommendations expect companies to gradually adopt the recommendations. Agrowing number of countries are putting them into their official frameworksBroad understanding of the concentrationof carbon-related assets in the financialsystem and the financial system’s exposureto climate-related risksEU to revise its directive to comply with the TCFDrecommendationsEU The European Commission held a stakeholder meeting to revise the guidelines ofthe Non-Financial Reporting Directive (by 2Q 2019). It will publish the final reportwithin 2018.United KingdomAdoption VolumeGreater adaptation, further developmentof information provided (e.g., metrics andscenario analysis), and greater maturityin using informationOrganizations begin todisclose in financial filingsFinal TCFD ReportReleased (July2017)More complete, consistent,and comparable informationfor market participants,increased transparency, andappropriate pricing ofclimate-related risks andopportunitiesClimate-related issues viewedas mainstream business andinvestment considerations byboth users and preparersCompanies already reporting under otherframeworks implement the Task Force’srecommendationsFive Year Time Frame(Resources) Task Force on Climate-related Financial Disclosures, 201710UK requests its regulators to support the TFrecommendations The UK Green Finance Taskforce, established by the government to transition toa low-carbon economy. Recommends that relevant financial regulators should support TCFDrecommendations (Mar 2018).CanadaCanada considers institutionalizing the TCFDrecommendations The Minister of Environment and Climate Change and the Minister of Financelaunched an Expert Panel on Sustainable Finance, which discussed andpublished an interim report on institutionalization of the recommendations (Oct2018).France to make the TCFD recommendation mandatoryFrance Secretary of State Brune Poirson stated that the government would push for therecommendations to be made mandatory (Jun 2017).Government support to integrate the recommendations inofficial frameworkGovernment SupportObjectives of the TCFDChina to revise the guidelines for environment reportingChina The government established a pilot project jointly with the UK government,examining the possibility of incorporating the TCFD recommendations in itsguidelines for environmental reporting (Jan 2018)NetherlandsThe central bank requests companies to support the TCFDrecommendations A working group on climate risks was established by the central bank, requestingcompanies to support the recommendations (Apr 2018).Sources: TCFD, “2018 Status Report”, websites of the Ministry of Environment of Japan, theEuropean Commission, and other governmental organizations, and publicly available information

1. What are the TCFD recommendations?1-1. Summary of the TCFD recommendations1-2. Requirements of the TCFD recommendationsand meaning of scenario analysisChapter 1. Summary of the TCFD RecommendationsThe chapter explains why the TCFD was established and what the TCFD recommends,and what kind of climate-related disclosures are recommended.11

[Requirements of the TCFD Recommendations]The TCFD recommends disclosure of information related to climate change that posesfinancial risks and portunitiesIncorporating them in businessstrategies and risk managementUnderstanding financial impactDisclosing information in financialreportingThe TCFD recommendations request all companies to (i) use different climate-related scenarios,including a 2 C or lower scenario to (ii) assess their climate-related risks and opportunities, (iii)incorporate such risks and opportunities in their business strategies and risk management, and (iv)understand and disclose their financial impacts.Sources: prepared by the Ministry of Environment based on the page 9 of Financial Services Agency’s document, “On Reports of the Task Force on Climaterelated Financial Disclosures (TCFD)” for briefings on “Final Report - Recommendations of the Task Force on Climate-related Financial Disclosures” ofthe Financial Stability Board (FSB)12

[Financial Impact]The TCFD recommendations present the scope of climate-related risks and opportunities,and financial impacts to be disclosedClimate-Related Risks, Opportunities, and Financial ImpactsTransition RisksOpportunitiesPolicy and LegalResource EfficiencyRisksTechnologyMarketOpportunitiesEnergy SourceProducts / ServicesReputationStrategic PlanningRisk ManagementPhysical RisksFinancial ImpactResilienceMarketsAcuteFinancial sh FlowStatementBalance SheetAssets &LiabilitiesCapital &FinancingSource: prepared by the Ministry of Environment based on the Task Force on Climate-related Financial Disclosures, “Final Report - Recommendations of the Task Force onClimate-related Financial Disclosures”, 2017. p.813

[Climate-related Risks]The TCFD Recommendations divided climate-related risks into two major categories: (1) risksrelated to the transition to a lower-carbon economy and (2) risks related to the physical impacts ofclimate changeCategoryDefinitionTypePolicy andLegalRisks related to theTransitiontransition to a lowerRiskscarbon economyPhysicalRisksRisks related to thephysical impacts ofclimate changeMajor aspects and policy actionsEnhancing regulations on GHG emissions, imposinggreater obligations on information disclosureReplacing existing products with those based on lowTechnology carbon technologies, investing in new technologiesthat eventually turn out to be a failureMarketChanges in consumer behaviors, market signals withgreater uncertainty, a rise in materials and costsReputationChanges in customer or community perceptions,criticism against certain industries, increased concernamong stakeholdersAcuteChronicEvent-driven risks, including severity of extremeevents such as cyclones or floodsLonger-term shifts in climate patterns, includingsustained higher temperatures, which may cause sealevel rise or chronic heat wavesSource: prepared by the Ministry of Environment based on the Task Force on Climate-related Financial Disclosures, “Final Report - Recommendations of the Task Force onClimate-related Financial Disclosures”, 2017. p.1014

[Climate-related Opportunities]The TCFD recommendations identified the following five areas of climate-related opportunitiesthat organizations can produce in the course of their efforts to mitigate and adapt to climatechangeAreaPolicy actionsFinancial impactUse of more efficient models of transportUse of more efficient production anddistribution processesUse of RecyclingMove to more efficient buildingsReduced water usage and consumptionReduced operating costs (e.g., through efficiency gains and costreductions)Increased production capacity, resulting in increased revenuesIncreased value of fixed assets (e.g., highly rated energy-efficientbuildings)Benefits to workforce management and planning (e.g., improved healthand safety, employee satisfaction) resulting in lower costsUse of lower-emission sources of energyUse of supportive policy incentivesUse of new technologiesParticipation in carbon marketShift toward decentralized energy generationReduced operational costs (e.g., through use of lowest cost abatement)Reduced exposure to future fossil fuel price increasesReduced exposure to GHG emissions and therefore less sensitivity tochanges in cost of carbonReturns on investment in low-emissions technologyIncreased capital availability (e.g., as more investors favor loweremissions producers)Reputational benefits resulting in increased demand for goods/servicesProductsandServicesDevelopment and/or expansion of lowemission goods and servicesDevelopment of climate adaptation andinsurance risk solutionsDevelopment of new products or servicesthrough R&D and innovationAbility to diversify business activitiesIncreased revenue through demand for lower emissions products andservicesIncreased revenue through new solutions to adaptation needs (e.g.,insurance risk transfer products and services)Better competitive position to reflect shifting consumer preferences,resulting in increased revenuesMarketsAccess to new marketsUse of public-sector incentivesAccess to new assets and locations needinginsurance coverageIncreased revenues through access to new and emerging markets (e.g.,partnerships with governments, development banks)Increased diversification of financial assets (e.g., green bonds andinfrastructure)ResilienceParticipation in renewable energy programsand adaptation of energy-efficiency measuresResource substitutes/diversificationIncreased market valuation through resilience planningIncreased reliability of supply chain and ability to operate under variousconditionsIncreased revenue through new products and sSource: prepared by the Ministry of Environment based on the Task Force on Climate-related Financial Disclosures, “Final Report - Recommendations of the Task Force onClimate-related Financial Disclosures”, 2017. p.1115

[Guidance for Specific Sectors]The TCFD supplemental guidance provides additional context and suggestions forimplementing the recommended disclosures for four non-financial sectors (Energy; Materialsand Buildings; Transportation; and Agriculture, Food, and Forest Products) potentially mostaffected by climate changeSectorEnergyTransportationMaterials andBuildingsAgriculture,Food, andForestProductsIndustryOil and GasCoalElectric UtilitiesAir Transport, MaritimeTransportationLand Transportation (RailTransportation, TrackingServices)AutomobilesMetals and MiningChemicalsConstruction Materials,Capital GoodsReal Estate Managementand DevelopmentBeverages, FoodsAgriculturePaper and ForestProductsRecommended disclosureAssessment and potential impacts of legal compliance, operating costs,changes in risks and opportunities; changes in regulations and shift inconsumer and investor preferences; and changes in investmentstrategyAssessment and potential impacts of financial risks of enhancedregulations and new technology on existing factories and equipment;R&D investment in new technologies; opportunities for use of newtechnologies to lower emissions standards and regulations on higherfuel efficiencyAssessment and potential impacts of enhanced regulations on GHGemissions and carbon pricing; risk assessment of increased severity ofextreme weather events on construction materials and property; andopportunities for products to improve energy efficiency or reduceenergy consumptionAssessment and potential impacts of GHG emissions reductions;recycling and waste management; business of food and textileproducts with lower GHG emissions, and shifts in consumerpreferencesSource: prepared by the Ministry of Environment based on the Task Force on Climate-related Financial Disclosures, “Final Report - Recommendations of the Task Force onClimate-related Financial Disclosures”, 2017. p.52-6516

[TCFD recommendations]The TCFD recommendations are structured around four thematic areas: Governance,strategy, risk management, and metrics and close the organization’sDisclose the actual andDisclose how the organizationgovernance around climatepotential impacts of climateidentifies, assesses, andrelated risks and opportunities related risks and opportunities manages climate-related riskson the organization’sAreas in detailbusinesses, strategy, andfinancial planning where suchinformation is materiala) Describe the board’soversight of climate-relatedrisks and opportunitiesb) Describe management’srole in assessing andRecommended managing climate-related risksDisclosures and opportunitiesMetrics and指標と目標TargetsDisclose the metrics andtargets used to assess andmanage relevant climaterelated risks and opportunitieswhere such information ismateriala) Describe the climaterelated risks and opportunitiesthe organization has identifiedover the short, medium, andlong terma) Describe the organization’sprocesses for identifying andassessing climate-relatedrisksa) Disclose the metrics usedby the organization to assessclimate-related risks andopportunities in line with itsstrategy and risk managementprocessb) Describe the impact ofclimate-related risks andopportunities on theorganization’s businesses,strategy, and financialplanningb) Describe the organization’s b) Disclose Scope 1, Scope 2,processes for managingand if appropriate, Scope 3climate-related risksgreenhouse gas (GHG)emissions, and the relatedrisksc) Describe the resilience ofthe organization’s strategy,taking into considerationdifferent climate-relatedscenarios, including a 2 C orlower scenarioc) Describe how processes foridentifying, assessing, andmanaging climate-related risksare integrated into theorganization’s overall riskmanagementc) Describe the targets usedby the organization to manageclimate-related risks andopportunities, andperformance against targetsSource: prepared by the Ministry of Environment based on the Task Force on Climate-related Financial Disclosures, “Final Report - Recommendations of the Task Force onClimate-related Financial Disclosures”, 2017. p.1417

[Governance Involvement of Management]To incorporate climate-related risks and opportunities in business strategy, an organizationshould establish a system involving management. The TCFD recommendations require anorganization to describe the board’s oversight of climate-related risks and opportunities, andmanagement’s role in assessing and managing such risks and opportunitiesThe board’s oversight of climate-related risks and opportunitiesProcesses and frequency by which the board and/or board committees are informedabout climate-related issuesThe organization’sgovernancearound climaterelated risks andopportunitiesWhether the board and/or board committees consider climate-related issues whenreviewing and guiding strategy, major plans of action, risk management policies,annual budgets, and business plans as setting the organization’s performanceobjectives, monitoring implementation and performance, and overseeing majorcapital expenditures, acquisitions, and divestituresHow the board monitors and oversees progress against goals and targets foraddressing climate-related issuesManagement role in assessing and managing climate-related risks andopportunitiesWhether the organization has assigned climate-related responsibilities tomanagement-level positions or committees; and, if so, whether such managementpositions or committees report to the board or a committee of the board and whetherthose responsibilities include assessing and/or managing climate-related issuesA description of the associated organizational structure(s)How management (through specific positions and/or management committees)monitors climate-related issuesSource: prepared by the Ministry of Environment based on the Task Force on Climate-related Financial Disclosures, “Final Report - Recommendations of the Task Force onClimate-related Financial Disclosures”, 2017. p.1918

[Strategy]The TCFD recommendations require an organization to describe the climate-related risks andopportunities over the short, medium, and long term; their impacts on the organization’sbusinesses, strategy, and financial planning; and the resilience of the organization’s strategy,taking into consideration different climate-related scenarios, including a 2 C or lower scenarioThe climate-related risks and opportunities the organization has identified over theshort, medium, and long termImpact on theorganization’sbusinesses,strategy, andfinancialplanning (whererelevantinformation iscritical) A description of what they consider to be the relevant short, medium, and long-term timehorizons The specific climate-related issues for each time horizon that could have a material financialimpact on the organization The process(es) used to determine which risks and opportunities could have a material financialimpact on the organizationThe impact of climate-related risks and opportunities on the organization’sbusinesses, strategy, and financial planning How identified climate-related issues have affected their businesses, strategy, and financialplanning The impact on their businesses and strategy in the areas of products and services; supply chainand/or value chain; adaptation and mitigation activities; investment in research anddevelopment; and operations The impact of climate-related issues on operating costs and revenues; capital expenditures andcapital allocation; acquisitions or divestments; and access to capitalThe resilience of the organization’s strategy, taking into consideration differentclimate-related scenarios, including a 2 C or lower scenario How resilient their strategies are to climate-related risks and opportunities Where they believe their strategies may be affected by climate-related risks and opportunities;how their strategies might change to address such potential risks and opportunities; and theclimate-related scenarios and associated time horizon(s)Source: prepared by the Ministry of Environment based on the Task Force on Climate-related Financial Disclosures, “Final Report - Recommendations of the Task Force onClimate-related Financial Disclosures”, 2017. p.20-2119

[Risk Management]The TCFD recommendations require an organization to describe the organization’s processesfor identifying, assessing, and managing climate-related risks, as well as how theseprocesses are integrated into the organization’s overall risk managementThe Organization’s processes for identifying and assessing climate-relatedrisks How theorganizationidentifies,assesses,and managesclimaterelated risks Their risk management processes for identifying and assessing climate-related risks(An important aspect is how the organization determines the relative significance ofclimate-related risks in relation to other risks)Whether they consider existing and emerging regulatory requirements related to climatechangeTheir processes for assessing the potential size and scope of identified climate-relatedrisks; and definitions of risk terminology used or references to existing risk classificationframeworks usedThe organization’s processes for managing climate-related risks Their processes for managing climate-related risks, (including how they make decisionsto mitigate, transfer, accept, or control those risks)Their processes for prioritizing climate-related risks, (including how materialitydeterminations are made)How processes for identifying, assessing, and managing climate-related risksare integrated into the organization’s overall risks management How their processes for identifying, assessing, and managing climaterelated risks are integrated into their overall risk managementSource: prepared by the Ministry of Environment based on the Task Force on Climate-related Financial Disclosures, “Final Report - Recommendations of the Task Force onClimate-related Financial Disclosures”, 2017. p.21-2220

[Metrics and Targets]The TCFD recommendations require an organization to describe the metrics used to assessclimate-related risks and opportunities in line with its strategy and risk management process;GHG emissions; the targets to manage climate-related risks and opportunities, andperformance against targetsThe metrics used by the organization to assess climate-related risks and opportunities inline with its strategy and risk management processThe metrics andtargets used toassess andmanage relevantclimate-relatedrisks andopportunitieswhere suchinformation ismaterial The key metrics used to measure and manage climate-related risks and opportunities (organizationsshould consider including metrics associated with water, energy, land use, and waste management) Whether and how related performance metrics are incorporated into remuneration policies (whereclimate-related issues are material) Their internal carbon prices as well as climate-related opportunity metrics such as revenue fromproducts and services designed for a lower-carbon economy Metrics should be provided for historical periods to allow for trend analysis. The methodologies usedto calculate

Trust Holdings, Inc. / Sumitomo Mitsui Financial Group / Mitsubishi UFJ Financial Group, Inc. / Meiji Yasuda Life Insurance Company / Resona Holdings, Inc. Non-Financial (32) E-Square Inc. / NEC Corporation / OMRON Corporation / Kao Corporation / Kawasaki Kisen Kaisha, Ltd. / Kirin Holdings Company, Limited.