In the "Risk Management", the TCFD recommends disclosure on how the organizations identifies, assesses and manages climate-related risks. The Group is proceeding with disclosure of information in line with this.
Management of Climate Change Risks
Overview of Risk Management
he Group recognizes the importance of identifying, assessing, and effectively managing various risks, including those related to climate change. By appropriately managing risks that may manifest in the short and medium to long term, such as climate change risks, we aim to sustainably improve our corporate value while maintaining sound financial and revenue structures.
Each company within the Group monitors risks through the Risk Management Department and risk allocation departments based on the basic policy of risk management at the Group headquarters. The basic policy of risk management is deliberated and decided by the Board of Directors as the "Risk Management Regulations." In addition, risk issues, including climate-related issues, are reported to and deliberated and decided by the Group Risk Management Committee, a subcommittee of the Executive Committee.
Climate Change Risk in the Risk Appetite Framework
The Group has introduced a Risk Appetite Framework (RAF) to establish a policy of risk-taking that is consistent with our business strategy, and to strengthen risk governance as a global financial institution (see Figure 4-1). The RAF defines the types and amounts of risks that should be proactively accepted for the achievement of revenue goals and business strategies as the risk appetite, and it is a management framework that is used as a common language within the company for overall risk-taking policies. The RAF is documented as a "Risk Appetite Statement," which is reviewed and decided upon by the Board of Directors and revised twice a year. The "Risk Appetite Statement" covers climate change risks from the FY2021. As a result, we will appropriately identify, evaluate, and effectively manage climate-related risks according to their risk profiles.
Figure 4-1 Conceptual diagram of the Risk Appetite Framework
Climate Change Risk in Top Risk Management
The risk events that require special attention in light of the Group's business characteristics are selected and managed as top risks. The management of the Group "visualize" the risk events that are identified and sorted by relevant departments based on risk events collected from both inside and outside the Group as candidates for top risks, to enable the management to understand and discuss extensive risks when selecting the top risks. Moreover, the Group's Directors and Corporate Executive Officers identify and extract such candidates for top risks by making a forward-looking evaluation of the level of impact on the Group's performance and the possibility that such risk events will occur. The Group has selected climate change risk as a "top risk" considering the increasing importance of its impact on the stability of financial institution management and financial systems (Figure 4-2).
Figure 4-2 List of Top Risks
|Risk events||Specific examples|
|Intensifying international disputes and conflicts||Russia-Ukraine war, U.S.-China conflict (Taiwan emergency), etc.|
|Recurrence of the financial crises||-|
|Downgrading of JGBs and crash of yen assets caused by instability of Japan's financial situation||-|
|China's economic recession||-|
|Inadequate response to DX (digital transformation)||Decline in competitiveness due to inadequate response to DX|
|Inadequate response to operational resilience||If we are unable to provide the appropriate service to customers due to inadequate resilience to natural disasters, cyberattacks and system failure, etc. the Company's reputation will be damaged.|
|Climate change||Decline in the value of held assets and decrease in selling opportunities as a result of climate change|
|Large-scale earthquake, flood damage||Increase in costs associated with natural disaster|
|Deterioration of business performance of investees||-|
|Compliance risk||Inappropriate action by staff including money laundering, insider trading, etc.|
|Information leakage that has a significant impact||Serious information leaks, etc.|
Management of Climate Change Risks within the Group's Risk Management Framework
In our business, there are various types of risks. The Group utilizes proprietary trading to temporarily hold positions for sales purposes and provide products to our customers, which includes liquidity risks, market risks due to price fluctuations, credit risks to counterparties and issuers, operational risks that inevitably arise in executing business operations, model risks resulting from using models for decision-making, and risks that hedging does not function. Additionally, investment risks arise from executing growth investments through hybrid strategies, such as deteriorating performance or credit status of investment targets, changes in market environment, etc. Therefore, we conduct integrated risk management that measures the impact on capital and liquidity within the Group from a forward-looking perspective.
In our Risk Appetite Statement, climate change risks are defined in addition to market risks, credit risks and liquidity risks. Climate change risks are related to many factors, including not only climate phenomena but also political and social responses and economic structures, and they affect each other. For example, the impact on stocks and interest rates due to changes in the overall economy (market risk), the impact on corporate business and financial conditions due to climate change measures such as decarbonization (credit risk), and the impact on funding environment due to delays in the Group's response to climate change (liquidity risk). Therefore, climate change risks can cause existing risks to occur or amplify them. For this reason, we will continue to develop a system to consider the impact of climate change risks within the existing risk management framework.
Figure 4-3 Risk Management System
Response to Climate Change Risks in Investments and Loans Activities
The Group has demonstrated our approach to considering environmental and human rights concerns in our "Corporate Principles," "Basic Environmental Policies" and "Human Rights Policy" (Figure 4-4).
Further, as part of our efforts to enhance management of climate change risks related to financing*, we established and released the "Environmental and Social-related Policy Framework" in June 2021. This framework specifies the prohibited and restricted business, targeting new investments and lones. Additionally, in December of the same year, we expanded the scope of the framework to include the underwriting of bonds and stocks issuance, which is a major business of the Group, in order to further strengthen our risk management system for the same risks in addition to new investment and loans.
- *New investments and loans and the underwriting of bonds and stocks issuance.
This framework serves as a guideline for recognizing and managing risks associated with businesses that have the potential to cause significant negative impacts on the environment and society, such as the destruction of natural habitats and ecosystems. The framework prohibits four types of businesses, including those violating the Washington Convention, and identifies nine businesses that require careful consideration, such as new coal-fired power generation and businesses involving deforestation (see Figure 4-4).
For financing related to these businesses, an initial ESG due diligence is conducted on the relevant projects. If additional confirmation is necessary based on the results of the assessment, an enhanced ESG due diligence is conducted through an in-depth investigation to determine the appropriateness of financing. If there is a possibility that the implementation of the project may have a serious impact on the corporate value of the Group, additional discussions will be held among the executive management to make a final decision on financing.
In the most recent revision conducted in December 2022, a review was conducted, including the strict policy on coal mining. Going forward, we will regularly review the framework in light of global trends.
Figure 4-4 Environmental and Social Policy Framework
Figure 4-5 Overview of the Environmental and Social Policy Framework (Climate Change-related only)
|Applicable business||Target business Policy (underline part revised in December 2022)|
|New construction of coal-fired power generation||We prohibit any financing where the use of proceeds are directed toward this type of business.
Regarding the underwriting of bonds and stocks issuance, however, issuers that announce a target for net zero greenhouse gas (GHG) emissions by 2050, or businesses adopting new technology aligned with the goals of the Paris Agreement, may be considered on a case-by-case basis.
|Palm oil plantation development||When providing financing to a business, we will carry out ESG due diligence, carefully assessing whether the loss of wildlife habitat due to overdevelopment may lead to a loss of biodiversity, or land conflicts with indigenous residents, or human rights violations such as child labor/ forced labor, or whether appropriate measures are taken to prevent them. We will utilize these results in making decisions.
In addition, when providing financing to a business, we will confirm if RSPO (Roundtable on Sustainable Palm Oil), an international certification system for palm oil, has been acquired. Where this is not in place, we will encourage clients to obtain certification. We will encourage clients to make environmental and human rights policies such as NDPE (No Deforestation, No Peat and No Exploitation) or other compatible policies.
|Business involving deforestation||When providing financing to a business, we will carry out ESG due diligence, carefully assessing whether appropriate measures will be taken to prevent a negative impact on the environment caused by the destruction of ecosystems, and whether illegal logging is carried out. We will utilize these results in making decisions.
When providing financing to a business, we will encourage clients to obtain FSC (Forest Stewardship Council), an international forest certification system or other compatible certifications or to make environmental and human rights policies such as NDPE or other compatible policies.
|Coal mining||We prohibit any financing where the use of proceeds are directed toward businesses using the mountaintop removal (MTR) method and new thermal coal mining businesses.
When providing financing to a business, we will carry out ESG due diligence, carefully assessing whether appropriate measures are taken to ensure occupational safety and a sanitary environment to prevent cave-in accidents, flood accidents, gas explosions, and human rights violations such as illegal labor. We will utilize these results in making decisions.
|Oil and gas development||When providing financing to a business, we will carry out ESG due diligence, carefully assessing whether appropriate measures are taken against their impact on the environment, ecosystems and local communities. We will utilize these results in making decisions. In particular, we will make careful decisions when providing financing to development businesses in the Arctic, oil sands and shale oil and gas development businesses, pipeline businesses which may have significant negative impacts on the environment and society.|