Response as an Asset Manager

Our asset management division includes Daiwa Asset Management, which is responsible for securities asset management, and Daiwa Real Estate Asset Management, which is responsible for real estate asset management (including Daiwa Office Investment Corporation, which it operates). The former expressed its support for TCFD recommendations in December 2020, and the latter did so in December 2021. Both companies aim to achieve a carbon-neutral society through their asset management operations.

Daiwa Asset Management

Daiwa Asset Management (hereinafter referred to as the Company) uses the total GHG emissions, carbon footprint^*1 and carbon intensity^*2 of its portfolios as GHG emission related indicators for individual funds and asset classes, and performs monitoring and analysis of them. Based on this data and its own original research, the Company undertakes engagement activities with companies to encourage them to decarbonize, and aims to achieve net zero CO₂ emissions by 2050.

*1Carbon footprint is an indicator that measures the emissions per investment amount in millions of USD for the portfolio size.
*2Carbon intensity is an indicator that measures the emissions per revenue amount in millions of USD for the investee company.

Carbon footprint and weighted average carbon intensity of japanese corporate bonds were found to exceed the benchmark values. This was, however, attributable to the inclusion in the portfolio of corporate bonds of electric power companies, at a weight higher than the benchmark.

In addition, as recommended by the TCFD, these were categorized as upstream or downstream, as illustrated in the below table for Scope 3, with the relevant emissions for each calculated and listed here for the first time. The Company intends to actively promote the decarbonization of its entire supply chain, by establishing a detailed understanding of total carbon emissions of our investee companies in Scope 1, Scope 2, and Scope 3, and with a particular emphasis on Scope 3. The Company will subsequently deploy this data in engagement activities with these companies, including our investee electric power companies. Please refer to the company's "Sustainability Report 2022" for more details.

Figure 6-1 Portfolios' total carbon dioxide emissions

(tons of CO₂ equivalent)
Scope1、2
	Daiwa AM	Benchmark	Disparity
Domestic stocks	5,494,325	6,367,039	-14%
Overseas stocks	355,353	360,370	-1%
Domestic corporate bonds	441,007	182,496	142%
Overseas corporate bonds	70,686	186,784	-62%
Total	6,361,371	7,096,689	-10%

Total greenhouse gas emissions (Total of Scope1, 2, and 3)

(tons of CO₂ equivalent)
Scope3 Upstream
	Daiwa AM	Benchmark	Disparity
Domestic stocks	16,535,670	17,761,710	-7%
Overseas stocks	499,761	537,468	-7%
Domestic corporate bonds	421,074	334,030	26%
Overseas corporate bonds	131,768	294,762	-55%
Total	17,588,273	18,927,970	-7%

(tons of CO₂ equivalent)
Scope3 Downstream
	Daiwa AM	Benchmark	Disparity
Domestic stocks	28,869,507	33,262,327	-13%
Overseas stocks	1,487,004	1,608,504	-8%
Domestic corporate bonds	479,146	560,670	-15%
Overseas corporate bonds	421,495	732,747	-42%
Total	31,257,152	36,164,248	-14%

Note: Benchmarks:
Domestic stocks: TOPIX (with dividends included)
Overseas stocks: MSCI ACWI ex Japan Index
Domestic corporate bonds: Bloomberg Asian-Pacific Japan Corporate TR Index Value Unhedged JPY
Overseas corporate bonds: Bloomberg Global Aggregate ex-JPY-Corporate TR Index Unhedged USD
Source: Some information is derived from ©2023 MSCI ESG Research LLC. Reproduced by permission.

Source：Daiwa Asset Management, "Sustainability Report 2022"

Figure 6-2 Carbon footprint of portfolio (Scope 1, Scope 2)

Note:The benchmarks used were the same as those used in the previous section for portfolio’s total carbon dioxide emissions. Source: Some information is derived from ©2023 MSCI ESG Research LLC. Reproduced by permission.

Source：Daiwa Asset Management, "Sustainability Report 2022"

Figure 6-3 Weighted average carbon intensity of portfolio (Scope 1, Scope 2)

Note:The benchmarks used were the same as those used in the previous section for portfolio’s total carbon dioxide emissions. Source: Some information is derived from ©2023 MSCI ESG Research LLC. Reproduced by permission.

Source：Daiwa Asset Management, "Sustainability Report 2022"

Product Offering

The company offers various investment funds aimed at achieving a carbon-neutral society. For example, in the "Carbon Neutral Equity Fund", which aims for carbon neutrality as a fund, we donate a portion of the trust fee to the Certified NPO Environmental Relations Research Institute and plant trees through the "Present Tree" project.

Engagement

The company has been disclosing key ESG issues that we seek from investee companies, including climate change. Specific points for climate change include GHG emissions, responding to climate change risk, and energy transition. We have also announced our policy for constructive dialogue with companies and the ideal management practices that we require from investee companies.

As part of our engagement activities with investee companies, we hold discussions on solutions such as sharing of issues, promotion of environmental management, and improvement of information disclosure for companies that face the challenge of reducing their environmental impact, aiming to reduce risks. We utilize the analysis of major indicators such as GHG emissions and scenario analysis of investee companies to understand climate-related risks and opportunities and use them in our engagement activities. In 2022, we conducted engagement with 1,138 companies, and about 35% of them were related to ESG.

Figure 6-4 The Company’s Vision for Investee Company Best Practice (excerpt)

Critical issue	Best Practices
Climate change	By assuming and analyzing various climate change scenarios along the framework of TCFD, transition risks, physical risks, and business opportunities are identified. Quantitatively grasp the reality of GHG emissions and the original unit, as well as the assumed risks and opportunities. Establish a specific roadmap and milestones for achieving carbon neutrality by 2050, and explain the progress status annually. It is desirable to aim for a reduction of 50% or more that is consistent with our NZAMI interim goals as a target for 2030. Develop and execute a business strategy that incorporates both risks and opportunities, and conduct an overview and evaluation of activities.

Critical issue

Best Practices

Climate change

By assuming and analyzing various climate change scenarios along the framework of TCFD, transition risks, physical risks, and business opportunities are identified.
Quantitatively grasp the reality of GHG emissions and the original unit, as well as the assumed risks and opportunities.
Establish a specific roadmap and milestones for achieving carbon neutrality by 2050, and explain the progress status annually. It is desirable to aim for a reduction of 50% or more that is consistent with our NZAMI interim goals as a target for 2030.
Develop and execute a business strategy that incorporates both risks and opportunities, and conduct an overview and evaluation of activities.

Figure 6-5 Examples of Engagement Case Study by the Company

Engagement case study Climate change (Company A)
Issue	The amount of CO₂ emissions generated when producing aluminum ingots using recycled aluminum is only around 3% of the amount generating when producing aluminum from virgin ore; this represents a dramatic improvement in emissions performance. Due to the special characteristics of recycling, there is a need to maximize the effective utilization of scrap aluminum through collaboration with various different partners within the supply chain. The company in question had announced that it would be strengthening its initiatives in this area, with FY2030 as the target year, but the company had not disclosed its current recycling rate or set a specific target for the future.
Background	A significant point was that, when supplying aluminum ingots (mainly for use in can manufacturing), the company was using a distinctive business model whereby, within Japan, it was contractually required to use material supplied by the can manufacturers, making it difficult for the company to make progress in this area on its own. Recycling was difficult because different alloys were used for the body of the can and for the lid, and there were limits on how much scrap material could be procured.
Measures required to address the issue	The company needed to transition from contracts whereby material was supplied by the can manufacturers, to a new type of contract that would allow the company to purchase its own raw materials. In addition, in order to strengthen procurement of recycled aluminum, there was a need for the company to strengthen its relationships with producers of secondary aluminum alloys, and to proceed with related R&D.
Situation after resolution	After changing the type of contract used, the company would be able to secure enhanced valueadded in relation to raw materials procurement, and the profitability of its domestic business would improve. Besides increasing the recycling ratio, the environmental performance of the company's products would also improve relative to other materials. With the shift away from PET bottles toward the use of aluminum containers, it can be anticipated that a "virtuous circle" would develop in which the company's production volume and sales volume would continue to grow.
Response from the company in question	Our policy is to disclose our current recycling rate, and to set and disclose our target for the future at the earliest possible date. Moving away from contracts that involved the use of materials supplied by the customer offers great benefits in terms of revenue, and we will be proceeding with negotiations with our customers in this regard.

Source：Daiwa Asset Management, "Sustainability Report 2022"

Daiwa Real Estate Asset Management

Daiwa Real Estate Asset Management engages in real estate operations for listed REITs, including Daiwa Office Investment Corporation (DOI), Daiwa Living Investment Corporation (DLI), and private REITs. The following is an excerpt from the company's "Sustainability Report 2023" (July 2023).

Governance

The Asset Manager has established the Climate Change and Resilience Policy, the policy for responding to risks and opportunities related to climate change and working to make business and strategy resilient to climate-related issues.
In accordance with the policy, Chief Climate-Related Issues Officers (general managers of departments engaged in sustainability promotion) make regular reports to the Chief Executive Officer for Climate-Related Issues (President and Representative Director) at Sustainability Promotion Committee meetings. The reports cover matters related to responses to climate change, including identification and evaluation of impacts of climate change, management of risks and opportunities, progress of initiatives for adaptation and mitigation, and indicator and target setting. The Sustainability Promotion Committee deliberates and discusses issues related to climate change, after which the Chief Executive Officer for Climate-Related Issues makes final decisions. Under this system, climate-related issues are supervised by the President and Representative Director.

Strategy

To factor climate-related risks and opportunities into the Investment Corporation's real estate management business, the Asset Manager conducted a scenario analysis of the Investment Corporation's portfolio. The Asset Manager referred to climate outlooks published by international organizations and other entities, in order to identify risks and opportunities of climate change brought to the Investment Corporation and assess financial impacts on the Investment Corporation's business. Using a 1.5℃/2℃ scenario and a 4℃ scenario, a qualitative analysis was conducted.
For each scenario, the Asset Manager classified the financial impacts of identified risks and opportunities into short-term, medium-term and long-term impacts and examined relative scales of impacts on the Investment Corporation. Shown below are medium-term and long-term risks from climate change that have a certain degree of financial impacts.

Figure 6-6 Financial Impacts in the Scenario Analysis (DOI)

Cficalassition		Risk and Opportunity Factors in Real Estate Management	Potential Financial Impacts	Category	Financial Impacts				Countermeasures
					4℃		1.5℃/2℃
					Mid Term	Long Term	Mid Term	Long Term
Transition Risks and Opportunities	Policy and Legal	Stricter regulations against GHGemissions due to an introduction of carbon tax	Increased tax burden due to the introduction of carbon tax, depending on the volume of GHGemissions from properties	Risk	Small	Small	Medium	Large	Introduction of energy management systems and renewable energy Planned reduction of energy consumption/GHGemissions at portfolio properties Improvement in GHGemissions through strategic replacement/renovation of properties Increase in environmental certification acquisition rates
		Stricter energy-saving standards, obligation to report emissions	Increased renovation costs due to raised energy-saving standards Increased business expenses related to emissions reporting	Risk	Small	Small	Large	Large
		Enhanced competitiveness of properties that comply with legal regulations	Increased rent income from portfolio properties with high environmental performance Decreased utility bills thanks to improved energy efficiency	Opportunity	Small	Small	Medium	Medium
	Technology	Advancement and spread of energy-saving and renewable energy technologies	Increased renovation costs due to the introduction of new technologies	Risk	Small	Small	Large	Large	Introduction of cutting-edge technologies Planned renovation works Promotion of transition to power derivedfrom renewable energy
	Technology		Decreased utility bills thanks to better energy-saving performance	Opportunity	Small	Small	Medium	Medium
	Market	Fluctuations in properties' asset value depending on environmental performance	Fluctuations in portfolio properties' asset value depending on environmental certification acquisition rates Fluctuations in rent income depending on the proportion of portfolio properties with high environmental performance	Risk	Small	Small	Large	Large	Increase in environmental certification acquisition rates Promotion of transition to power derived from renewable energy Sufficient information disclosure about portfolio properties' environmental performance
			Decreased utility bills thanks to better energy-saving performance	Opportunity	Small	Small	Medium	Medium
		Changes in the stances of investors/lenders/tenants on investment and lending	Fluctuations in reputation from ESG-conscious investors and lenders Fluctuations in ESG-conscious tenants' demand for moving in and out Better/Worse terms and conditions in financing from financial institutions, etc.	Risk	Small	Small	Large	Large	Appropriate disclosure of ESG-related information, including that on climate change Higher ratings in ESGassessments by external institution Reduction of financing costs through the use of sustainability finance
				Opportunity	Small	Small	Medium	Medium
	Reputation	Decline in reputation from investors and customers	Decreased investment unit prices/Lower ESG ratings Decreased profitability of properties with low environmental performance/resilience	Risk	Small	Small	Medium	Large	Appropriate disclosure of ESG-related information, including that on climate change Stronger stakeholder engagement in the ESGarea Continuous improvement of environmental performance/ Continuous acquisition of environmental certifications
Physical Risks	Acute	Increased loss due to intensifying storm and flood damage	Increased repair costs and insurance premiums Decreased rent income due to lower occupancy rates Loss of business opportunities/Increased business continuity risks Increased renovation costs to protect portfolio properties from water intrusion, damage, destruction, etc.	Risk	Small	Medium	Small	Small	Risk comprehension using hazard maps, etc. Portfolio of highly resilient properties Upgrading of facilities to install high-efficiency air conditioning systems, introduction of energy management systems Implement energy saving initiatives in corporation with tenants, including green leases Enhancement of BCPmeasures Promotion of greening at portfolio properties
Physical Risks	Chronic	Increased damage from rise in average temperature/sea level		Risk	Small	Small	Small	Small

Figure 6-7 Financial Impacts in the Scenario Analysis (DLI)

Cficalassition		Risk and Opportunity Factors in Real Estate Management	Potential Financial Impacts	Category	Financial Impacts				Countermeasures
					4℃		1.5℃/2℃
					Mid Term	Long Term	Mid Term	Long Term
Transition Risks and Opportunities	Policy and Legal	Stricter regulations against GHGemissions due to an introduction of carbon tax	Increased tax burden due to the introduction of carbon tax, depending on the volume of GHGemissions from properties	Risk	Small	Small	Medium	Medium	Introduction of energy management systems and renewable energy Planned reduction of energy consumption/GHGemissions at portfolio properties Improvement in GHGemissions through strategic replacement/renovation of properties Increase in environmental certification acquisition rates
		Stricter energy-saving standards, obligation to report emissions	Increased renovation costs due to raised energy-saving standards Increased business expenses related to emissions reporting	Risk	Small	Small	Medium	Medium
		Enhanced competitiveness of properties that comply with legal regulations	Increased rent income from portfolio properties with high environmental performance Decreased utility bills thanks to improved energy efficiency	Opportunity	Small	Small	Small	Medium
	Technology	Advancement and spread of energy-saving and renewable energy technologies	Increased renovation costs due to the introduction of new technologies	Risk	Small	Small	Medium	Medium	Introduction of cutting-edge technologies Planned renovation works Promotion of transition to power derivedfrom renewable energy
	Technology		Decreased utility bills thanks to better energy-saving performance	Opportunity	Small	Small	Medium	Medium
	Market	Fluctuations in properties' asset value depending on environmental performance	Fluctuations in portfolio properties' asset value depending on environmental certification acquisition rates Fluctuations in rent income depending on the proportion of portfolio properties with high environmental performance	Risk	Small	Small	Medium	Medium	Increase in environmental certification acquisition rates Promotion of transition to power derivedfrom renewable energy Sufficient information disclosure about portfolio properties' environmental performance
			Decreased utility bills thanks to better energy-saving performance	Opportunity	Small	Small	Small	Medium
		Changes in the stances of investors/lenders/tenants on investmentand lending	Fluctuations in reputation from ESGconscious investors and lenders Fluctuations in ESGconscious tenants' demand for moving in and out Better/Worse terms and conditions in financing from financial institutions, etc.	Risk	Small	Small	Medium	Medium	Appropriate disclosure of ESGrelated information, including that on climate change Higher ratings in ESG assessments by external institution Reduction of financing costs through the use of sustainability finance
				Opportunity	Small	Small	Small	Medium
	Reputation	Decline in reputation from investors and customers	Decreased investment unit prices/Lower ESG ratings Decreased profitability of properties with low environmental performance/resilience	Risk	Small	Small	Medium	Medium	Appropriate disclosure of ESGrelated information, including that on climate change Stronger stakeholder engagement in the ESG area Continuous improvement of environmental performance/ Continuous acquisition of environmental certifications
Physical Risks	Acute	Increased loss due tointensifying storm and flood damage	Increased repair costs and insurance premiums Decreased rent income due to lower occupancy rates Loss of business opportunities/Increased business continuity risks Increased renovation costs to protect portfolio properties from water intrusion, damage, destruction, etc.	Risk	Medium	Medium	Small	Small	Risk comprehension using hazard maps, etc. Portfolio of highly resilient properties Upgrading of facilities to install high-efficiency air conditioning systems, introduction of energy management systems Implement energy saving initiatives in corporation with tenants, including green leases Enhancement of BCP measures Promotion of greening at portfolio properties
Physical Risks	Chronic	Increased damage from rise in average temperature/sea level		Risk	Small	Small	Small	Small

Risk Management

The Investment Corporation's Climate Change and Resilience Policy sets out processes to identify, assess, and manage the impacts of climate change risks and opportunities on the corporation's management activities, strategies, financial plans, etc.

Chief Climate-Related Issues Officers summarize climate-related risks and opportunities and report the progress to the Sustainability Promotion Committee, in principle, once a year.

The Sustainability Promotion Committee continuously identifies, assesses, and manages climate change risks and opportunities that are important to the business and financial plans and affect the asset management operations of the Investment Corporation. Based on the above reports, the committee prioritizes issues of strategic importance to the business.

The Chief Executive Officer for Climate-Related Issues instructs to factor important climate-related risks with high priority, which have been deliberated by the Sustainability Promotion Committee, into the existing company-wide risk management program. The risk identification, assessment, and management processes are thus integrated.

Metrics and Targets

Each Investment Corporations sees the transition to a carbon-neutral society as an opportunity. The following target KPIs (Key Performance Indicators) have been established as key monitoring indicators in the process of managing climate change risks and opportunities.

Figure 6-8 Metrics and Targets (DOI)

KPI
Reductionof CO₂ emissions	Mid-term target (FY2030) : Reduction of 46% in CO₂ emissions on an intensity basis across the portfolio by FY2030 (compared with FY2013)
Reductionof CO₂ emissions	Long-term target (FY2050) : Achieved carbon neutrality in CO₂ emissions on an intensity basis across the portfolio by FY 2050.

Figure 6-9 Metrics and Targets (DLI)

KPI
Percentage of environmental certifications acquired	Mid-term target Achieve an environmental certification ratio of at least 20.0% for the entire portfolio

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