Measures against global warming and climate change（TCFD）

The Group recognizes that global warming and climate change is an important issue whose solution must be given a priority. Since endorsing the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD)^(*) in December 2019, we have disclosed information in accordance with its disclosure framework.

“Measures against Global Warming and Climate Change comprise one of the Concordia Financial Group’s materialities (priority issues to be resolved). Climate change refers to a change in the global environment itself, which is the foundation of people’s lives and business activities. The world is rapidly transitioning to a decarbonized society as various impacts that threaten the sustainable development of regions and companies have arisen, including more severe natural disasters and extreme weather.

In the process of transitioning to a decarbonized society, there are expected to be significant changes in the economy and society, such as stricter policies and regulations in countries throughout the world to achieve carbon neutrality, technological innovation to mitigate climate change, and changes in the values of consumers and investors as a result of greater interest in climate change. We recognize that these changes will lead to both risks and opportunities for the Group, and for both, we are examining the impact that the climate-change-driven transition to a decarbonized society will have on our business and we are formulating and implementing strategies for responding to climate change in order to handle these risks and opportunities.

The Group is working to identify and assess two types of risks related to climate change in line with TCFD recommendations — that is, risks associated with the transition to a decarbonized society (transition risks) and risks associated with severe natural disasters and extreme weather events (physical risks). Transition risks and physical risks for each of the risks that the Group categorizes and manages (credit risk, market risk, liquidity risk, operational risk, and reputational risk) are as follows.

Scenario analysis was conducted for transition and physical risks under certain scenarios based on TCFD recommendations. The results of the analysis conducted in FY2023 are as follows.

For transition risks, in addition to the electricity and automotive sectors analyzed last fiscal year, we analyzed the oil and gas, iron and steel, and automobile-related sectors ^(*1), which are thought to be easily impacted by transition risks as they have relatively large GHG emissions. Risk events for the scenario analysis include the introduction of a carbon tax due to climate change, increased energy costs due to changes in the energy mix ^(*2), and increased costs due to GHG emission regulations. We also considered the mutual impact between related sectors, such as the impact of fluctuations in the price of electricity on each sector’s cost of sales. We will continue to increase the sophistication of our analytical methods and to refine them.

Considering the impact of recent river flooding and other disasters in our operating areas, we included flood disasters in the physical risk analysis. We also expanded the scope of the analysis from domestic business corporations to also include individual business owners and changed the analysis period from “through 2050” to “through 2100” in order to check the impact of higher temperatures over the long term. Furthermore, we increased the sophistication of our analysis through such changes as expanding the scope of analysis from collateral properties and headquarters to production bases in some manufacturing industries and measuring how the damage impact changes with the number of floors in a building.

For transition risks, credit costs increased ¥75.4 billion for the Net Zero 2050 scenario and ¥10.3 billion for the Below 2°C scenario compared to the Current Policies scenario, which assumes the continuation of current policies. Credit costs for physical risks are ¥18.2 billion to ¥40.9 billion.

Credit costs increased compared to the results for the previous analysis because the target of analysis for both transition and physical risks was expanded, and particularly for physical risk, there is a greater probability of flooding and heavy rainfall due to the change in the period of analysis. Under both both scenarios, there could be a relatively large financial impact on the Group in the medium to long term, but the short-term financial impact will be limited.

We will continue to expand the target sectors and increase the sophistication of our scenario analysis, and we will work to reduce these risks with decarbonization initiatives through engagement with our customers.

We recognize that if in the process of transitioning to a decarbonized society due to climate change, the value of our customers’ business is damaged as a result of tighter policies and regulations, technological innovation, or changes in consumer values (transition risks), or the impact of more severe natural disasters and extreme weather business (physical risks), through our business relationships with such customers, this would also affect the Group’s business as well. Therefore, the Concordia Financial Group thinks that proactively helping customers address climate change by engaging with them on this as part of our efforts to support their core businesses will strengthen their business foundation, thereby leading to greater growth opportunities and business stability for our Group itself.

Japan has set a goal of achieving carbon neutrality by 2050 and is promoting the decarbonization of companies and industry. As a financial institution, we recognize that we can contribute to achieving this goal through initiatives to achieve net zero GHG emissions in our investment and loan portfolio and our own net zero GHG emissions. The main initiatives based on this recognition are as follows.

In FY2022, we joined the Partnership for Carbon Accounting Financials (PCAF), an international initiative to promote the measurement and disclosure of GHG emissions from investment and loan portfolios. For the first time, we calculated the GHG emissions (financed emissions) for domestic corporate loans (of the ¥7.5 trillion total, a total of approximately ¥6.8 trillion, which excludes loans such as those for which there was insufficient data) in accordance with standards established by the PCAF.

(Preconditions etc.)

Based on the results of the GHG emissions calculations for our investment and loan portfolio, we developed an action plan to help our customers reduce their GHG emissions toward net zero emissions Concrete details are as follows.

The power, coal, and oil & gas sectors are designated as carbon-intensive sectors ^(*2) by the NZBA ^(*1) and are sectors with high carbon intensity in the Group’s portfolio, so these three sectors were selected as “sectors for GHG emission reduction targets”. We will provide support for visualizing and reducing GHG emissions through detailed engagement with individual companies.

We selected the automotive and auto parts sector, one of the first sectors we engaged with in transitional risk scenario analysis and industry outlook, as a priority sector for engagement because of its broad supply chain and the long time required for decarbonization efforts. We expect these efforts to spread throughout the whole supply chain and we promote engagement from upstream customers and provide support for activities such as visualizing GHG emissions and setting reduction goals.

We selected the automotive and auto parts sector, one of the first sectors we engaged with in transitional risk scenario analysis and industry outlook, as a priority sector for engagement because of its broad supply chain and the long time required for decarbonization efforts. We expect these efforts to spread throughout the whole supply chain and we promote engagement from upstream customers and provide support for activities such as visualizing GHG emissions and setting reduction goals.

The executive in charge of the Bank of Yokohama’s Sales Division engaged with the management of several primary subcontractors that manufacture internal combustion engines and non-internal combustion engines in the automobile industry regarding their awareness of the shift to EVs, the challenges involved, demand for visualizing GHG emissions, and the status of their response to that demand.

Through this engagement, we shared with customers in the automotive industry that for both internal combustion and non-internal combustion engines, in addition to CASE(*) and other transition responses, visualizing GHG emissions is a major issue for the entire supply chain.

Although the depth and speed of the demand on the entire supply chain for visualizing GHG emissions depends on the OEM (completed vehicle manufacturer), it is expected that demands for such visualization will grow stronger in the future, and that the impact will spread throughout the entire automotive industry.

We will work to ascertain and share our customers’ challenges and work to mitigate the impact of climate change and support their transition by continuing this type of engagement.

The Concordia Financial Group conducts business with a wide range of customers, including SMEs, listed companies located upstream in the supply chain, and regional core companies. Through engagement with these customers, we share information on issues related to mitigating transition risks and physical risks and to expanding growth opportunities, we work to expand our lineup of solutions that help customers resolve their problems, and we recognize the importance of providing optimal solutions tailored to each customer’s phase of initiatives. The support system and lineup of our main solutions for the particular phase of the customer’s initiatives are as follows.

(Customer case study)

As a member of the local community, we have set “achieving carbon neutrality (Scopes 1 and 2) by FY2030” as a long-term sustainability KPIs in order to actively promote local decarbonization. We are working to achieve this goal through energy conservation, through switching to virtual renewable energy for power we contract for our own use, and through other initiatives. By April 2023, we converted all of the Group’s own electricity contracts to virtual renewable energy

For risk events that may have a significant impact on the Group’s management, the importance of the risk event is determined based on its impact and probability, and risk events recognized as requiring the most attention are selected by the Board of Directors as “top risks”. For “top risks,” we set key risk indicators (KRIs), work to identify warning signs through continuous monitoring, and have a system in place so that we can respond flexibly if a risk materializes. We recognize “transition to a decarbonized society” (transition risk) and “occurrence of large-scale natural disasters” (physical risk) as the top risks related to climate change.

In addition, the Basic Risk Management Rules approved by the Board of Directors stipulate not only the basic policy regarding credit risk but also a prohibition on loans that exacerbate significant risks or negative impacts on the environment and society.

We will continue to work to build a system that makes its possible to manage those risks within the framework of comprehensive risk management.

The Concordia Financial Group has established a Sector Policy regarding investments and loans likely to exacerbate the negative impact on the environment and society so that decisions about them are carefully made so as to reduce or avoid environmental and social impacts.

The Group manages these sustainability-related risks regarding investments and loans within the Sector Policy. Sustainability-related risks in investments and loans based on the Sector Policy are deliberated and reported by the ALM/Risk Management Committee, and supervised by the Board of Directors. The Group will continue to regularly review this Sector Policy to see if revisions are necessary and make revisions when changes in the our business activities or in external environment call for them.

The Group has set targets for Sustainable Finance, Environmental Field Finance, and GHG emission reductions as long-term sustainability KPIs related to Measures against Global Warming and Climate Change.

In order to strengthen solutions to the environmental and social issues faced by our customers, including solutions for addressing climate change, and to contribute to the sustainable growth of our local customers, we have set targets for the cumulative amount of Sustainable Finance and Environmental Field Finance as long-term sustainability KPIs.

Since the Group reached its target for the cumulative amount of Sustainable Finance (¥2 trillion by FY2030) by the end of FY2022, we raised the target to ¥4 trillion (¥2 trillion more) in Sustainable Finance by FY2030, including ¥2 trillion (¥1 trillion more) in finance to the Environmental Field.

As a member of the local community, we have set “achieving carbon neutrality (Scopes 1 and 2) by FY2030” as a long-term sustainability KPI in order to actively promote local decarbonization. As a result of the switch to virtual renewable energy for all of the Group’s own electricity contracts, our FY2022 GHG emissions were 72.9% less than in FY2013.

For calculating the Group’s FY2022 GHG emissions, Scope 1 and Scope 2 were expanded from the Bank of Yokohama and HigashiNippon Bank to the Concordia Financial Group and its consolidated subsidiaries. Scope 3 covers the Bank of Yokohama and HigashiNippon Bank and is calculated for Categories 1–15. In addition, since FY2021, the Bank of Yokohama and Higashi-Nippon Bank have received third-party verification of their GHG emissions by the Japan Quality Assurance Organization (JQA). In FY2022, energy consumption was added to the scope of verification, and the scope of organizations subject to verification was expanded to include the entire Concordia Financial Group and its consolidated subsidiaries. We will continue to improve the reliability of our calculations.