Response to climate change(Working on TCFD Recommendations)
Climate change is one of the primary global issues to be addressed in the 21st century. Based on this recognition, the Paris Agreement was adopted and came into force in 2016. In order to attain the long-term goals set under this agreement, including restricting the rise in average global temperature to within two degrees Celsius above preindustrial levels, countries have presented their greenhouse gas emission reduction targets to the United Nations and are implementing relevant measures. Developed countries are pressing forward with measures to create a decarbonized society while according to the report by International Energy Agency (IEA), constructions of new coal-fired power plants are still underway in some Asian countries. In addition, the Japanese government has set the target of reducing the country's greenhouse gas emissions by 80% by 2050.
We have announced our support of the TCFD (*1) at the "One Planet Summit" held in Paris in December 2017. Simultaneously, we will continuously support our customers in their efforts to reduce greenhouse gas emissions by such measures as promoting the introduction of environment-friendly technologies through their business operations. Being committed to reducing greenhouse gas emissions, we will conduct business in a manner that contributes to the growth of both our customers and society, and will further enhance our actions towards climate change.
(*1) The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board(FSB) in April 2015 to urge individual companies to disclose their impact on climate change in their financial reports.
Working on the Task Force on Climate-Related Financial Disclosures (TCFD) Recommendations▼
We have summarized our thinking on climate change, which has also been categorized into the four thematic areas of disclosure set out by the TCFD (Governance, Strategy, Risk Management, and Metrics and Targets).
Content and Location of Disclosure Consistent with TCFD Recommendations
|Overview of TCFD Recommendations||References (click on link to relevant page)|
|Disclose the organization's governance regarding climate change-related risks and opportunities.|
|Describe the board's oversight of climate change-related risks and opportunities.|
|Describe management's role in assessing and managing climate change-related risks and opportunities.|
|Disclose the actual and potential impacts of climate-related risks and opportunities on the organization's business, strategy, and financial planning where such information is material.|
|Describe the climate-related risks and opportunities that the organization has identified over the short, medium, and long term.|
|Describe the impact of climate-related risks and opportunities on the organization's businesses, strategy, and financial planning.|
|Describe the resilience of the organization's strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.|
|Disclose how the organization identifies, assesses, and manages climate-related risks.|
|Describe the organization's processes for identifying and assessing climate-related risks.|
|Describe the organization's processes for managing climate-related risks.|
|Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization's overall risk management.|
|Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.|
|Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process.|
|Disclose greenhouse gas emissions and the related risks of Scope1, Scope 2, and Scope 3 if appropriate.|
|Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets.|
Governance on Climate Change
Our Group Environmental Policy recognizes the importance of realizing a sustainable society. To this end, the SMBC Group is making continuous efforts to harmonize environmental preservation and pollution prevention with corporate activities.
Our policies on climate change are reflected in our business strategy based on discussions of the Corporate Sustainability Committee and Management Committee, while details of our sustainability initiatives are regularly reported to the Board of Directors. Under this structure, we capture business opportunities and control the risks presented by climate change.
Impact of Climate-Related Risks and Opportunities on the Organization's Businesses
There is a risk that the increase in extreme weather associated with climate change will negatively affect our customers' business. In light of frequent climate change-related natural disasters in Japan in recent years, SMBC performed a climate change scenario analysis for physical risks to assess impacts through 2050.
Our analysis specifies as the risk event water disasters such as storms and flooding, which account for the majority of climate change-related natural disasters. We apply the RCP (*2) 2.6 (2°C scenario) and RCP8.5 (4°C scenario) scenarios used by the Intergovernmental Panel on Climate Change (IPCC) as greenhouse gas concentration pathways used as the basis for research. SMBC uses this analysis to calculate the estimated increase in credit-related costs for its corporate customers associated with water disasters in Japan through 2050, taking into consideration the effects on collateral held by SMBC and customers' financial condition as well as the probability of a water disaster occurring (*3) in each climate change scenario. Based on our analysis, the estimated increase in credit-related costs through 2050 was 30-40 billion yen, or a simple annual average of approximately 1.0 billion yen. We thus conclude that at this stage, climate change-related water disasters will have a limited impact on SMBC's financial condition in a particular year.
The results of the above calculations are tentative, based on certain assumptions for natural disasters and analysis targets. Going forward we intend to analyze risk volume in greater detail while expanding the scope of analysis.
(*2) Representative Concentration Pathways Scenario
For example, RCP2.6 assumes radioactive forcing (the difference between energy absorbed by the earth and radiated back into space, which influences changes to the earth's climate system) is 2.6w/m2.
(*3) Based on data from the paper below
"Hirabayashi Y, Mahendran R, Koirala S, Konoshima L, Yamazaki D, Watanabe S, Kim H and Kanae S (2013) Global flood risk under climate change. Nat Clim Chang., 3(9), 816-821. doi:10.1038/nclimate1911.
＜ Process of Analyzing Physical Risks ＞
In the process of transition to a low-carbon society, we anticipate risks of a decline in the value of affected assets (asset stranding). SMBC conducted a climate change scenario analysis for transition risks based on Carbon-related assets(*4), which account for 6.9% of all loans by SMBC. In this analysis, We apply Stated Policies Scenario (*5) and 2℃ Scenario (*6), which are stated by the International Energy Agency (IEA).
In addition, by estimating the impact on credit risk of each sector from the expected changes in resource prices and demands including crude oil and natural gas, and power generation costs (*7) in each scenario, total credit costs expected by 2050 is estimated. Under the 2℃ scenario, estimated credit costs are expected to increase approximately 2~10bln yen per fiscal year on or before 2050, compared with stated policy scenarios. This is first step in the scenario analysis, and SMBC Group will continue to strive to enhance it.
In the future, we will support for the customers' efforts to their climate change resilience in the period of transition to a low-carbon society.
(*4) TCFD: The Task Force on Climate-related Financial Disclosures defines carbon-related assets as those of the energy and utilities industries (excluding water companies, independent power producers, and renewable energy companies) in the Global Industry Classification Standard (GICS).
(*5) A scenario assuming that energy plans currently stated by governments will be implemented
(*6) A scenario in which the global average temperature increase from before the Industrial Revolution to 2100 is held to 2℃ with a probability of at least 50%
(*7) In Japan, the restarting of nuclear power plant is considered in align with the IEA scenario.
＜ Process of Analyzing Transition Risks ＞
[Opportunities of climate change]
Under SMBC Group GREEN X GLOBE 2030 , announced in 2020, the Group established initiatives for achieving sustainability based on the concept of “create the future of the earth and humanity with our customers.” As part of this plan, the Group set a JPY 10 trillion target for green finance initiatives for the 10 years from FY2020 to FY2029 and, in order to achieve this target, will work with customers to tackle climate change.
To promote finance initiatives, the Group has established the Sustainable Business Promotion Department within the Wholesale Business Unit, and together with other business units, this new department provides advisory services of business strategies for customers. The department is also in charge of gathering up-to-date sustainability knowledge and network on a global scale, and it serves as a hub where the Group members can bring and learn approaches and related products for addressing management issues faced by customers. As part of its efforts to realize a low-carbon society, the Group supports projects that contribute to mitigation of climate change, such as renewable energy and green buildings, as well as development of cities and communities with strong infrastructure that are resilient to natural disasters, and promotion of sustainable lifestyles in response and adaptation to climate change.
Additionally, SMBC Nikko Securities established the SDG Financing Department in September 2018, which provides advice and proposals for customers to raise finance through SDG bonds and green bonds. The SDG Financing Department also contributes to enhancing customer understanding of SDGs and ESG, and leading new markets by, for example, holding information sessions and seminars related to SDG bonds and ESG investing, and participating in working groups on International Capital Market Association (ICMA) Green Bond Principles and Social Bond Principles. Further, SMBC Nikko Securities participates in the Ministry of Economy, Trade and Industry’s TCFD Consortium as secretariat and assists other Japanese companies with the financial aspects of making climate-related financial disclosures by providing green investment guidance, amongst other measures. SMBC Nikko Securities is proactively engaged in sustainable and green finance as a securities company that is contributing to the realization of a sustainable society through its core business activities.
Management of Climate-Related Risks
As a framework for risk management, SMBC Group follows the procedures of PDCA (Plan, Do, Check, Act) to identify external environmental and risk events, analyze their impact, and establish a system to undertake necessary management.
Recently, events related to climate change, such as the occurrence of large-scale disasters due to extreme weather and the deterioration of carbon-related assets in accordance with transition to a low-carbon society, have been newly selected as top risks. Under this framework, efforts to strengthen scenario analysis and consider countermeasures at the management level have begun. These measures are reported to the Management Committee and the Risk Committee and reviewed by external directors at Board of Directors meetings.
Going forward we remain aware of the increasing emergence of the effects of climate change, strive to understand the external environment and the risks on our business, and take action as appropriate.