The Group conducts qualitative analysis based on climate change scenarios and categorizes examples of risks that could have a negative impact on the Group's businesses, financial performance and position (refer to Figure 3-1). After discussions in the Sustainability Promotion Committee, reports and deliberations are conducted in the Executive Committee and Board of Directors. Please see "Recognition of climate-related opportunities" (Figure 3-2) for examples of opportunities that could have a positive impact, and please see "Resilience assessment of our strategy based on climate-related risks" for the envisioned scenarios used in the analysis.

Climate-related risks can be broadly divided into risks accompanying the transition to a carbon-neutral society (transition risk) and risks stemming from physical damage (physical risk). The former includes the introduction of and changes to laws and regulations such as carbon pricing and energy policy (policy and legal), changes in society and industry due to rapid technological innovation (technology), changes in the corporate business environments and price fluctuations of products and assets, etc. (market), and deterioration in reputation of companies and organizations related to measures to address climate change (reputation). The latter includes health damage caused by abnormally high temperatures (chronic) and natural disasters such as heavy rains and large typhoons (acute).

Examples of the Group's major transition risks include a decrease in various earning opportunities from the deterioration in the economy and corporate performance associated with measures such as increased carbon pricing to climate change measures (policy and legal), decrease in the value of held assets due to the decline in the performance of invested companies resulting from energy-related technological innovation (technology), a decline in underwriting business from various industry sectors as significantly affected during the transition period, a decline in the value of assets held by the Group due to delays in response to structural change in industries (market), deterioration in the Group’s reputation associated with a lack of initiatives to deal with climate change and investment and underwriting related to businesses with a heavy environmental load and a decrease in extensive business opportunities (reputation).

Examples of the Group's main physical risks include constraints on employment and business execution of employees subject to health hazards due to abnormally high temperatures (chronic) and deterioration in power generation efficiency of solar and wind generation facilities due to an increase in torrential rain and powerful typhoons as well as each office being struck by disaster (acute).

Note that the time frames for risks and opportunities is defined with consideration to the alignment with the Group's management plan. Specifically, the short-term refers to the fact that the medium-term management plan is three years, the medium-term refers to 2030, which is the target year for "Vision 2030" and aims for the company's net zero GHG emissions, and the long-term considers aiming for net zero GHG emissions in the investment and loan portfolio by 2050, taking into account that the short-term is assumed to be 3-5 years, the medium-term is 5-10 years, and the long-term is 10-30 years.

As a countermeasure to the climate-related risks (particularly the transition risk) and opportunities identified in each business division, we will advance the following initiatives (see Figure 3-3). Furthermore, in terms of our response to physical risks, we have formulated a business continuity plan (BCP), to prioritize the resumption and continuation of important operations from the perspective of maintaining the functioning of the securities market and our customers' economic activities in the event that our headquarters, branches, or data centers are halted due to a shutdown in social infrastructure caused by abnormal weather or natural disasters. This allows us to build a system that can continue important operations even if our headquarters functions are disrupted. In response to transition risks, there are various initiatives depending on the characteristics, and the relevant departments will change accordingly. However, executing these initiatives steadily is expected to enhance our reputation as a company that is proactive in addressing climate change and have positive effects on a wide range of businesses

Based on opportunities presented in the retail and asset management divisions, such as climate-conscious investment trusts, the Group will further strengthen our development and provision of products and services that contribute to the realization of a carbon-neutral society. Furthermore, as part of such strategy, we will focus on expanding funds and ETFs related to solving social issues, including funds that invest into companies that provide solutions to realize a carbon-neutral society. These initiatives are consistent with the key issue of "development and provision of new financial products and services that contribute to the realization of a sustainable society" in the "Green & Social" priority area of "Vision 2030".

Based on opportunities in the wholesale division such as underwriting for green projects and transition, the Group will continue to promote and enhance sustainable finance. This initiative is in line with the key issue "Promotion of green finance to support the realization of a carbon-Neutral Society" in the priority area "Green & Social" of "Vision 2030," as well as the "the Daiwa Securities Group Net Zero Carbon Declaration" in the transition plan, which aims to support the smooth transition to a carbon-neutral society through financial businesses ("Transition Plan for Achieving Carbon Neutrality"). Additionally, at ESG Research, Equity Research Department, we conduct ESG-related surveys and analyses for institutional investors and will continue to focus on providing a broad scope of information.

In addition, DC Advisory, which provides M&A advisory services in the Group, conducts engagements such as those listed below.

The Group is further enhancing our M&A advisory in the sustainability field, particularly in opportunities such as M&A in the renewable energy sector within our wholesale division.

In October 2019, the Group took a 50% investment stake in Green Giraffe Advisory B.V., the Dutch renewable energy business advisory. In February 2021, the Group also established the joint venture DC Advisory (Thailand) Co., Ltd., through joint venture with 9 Basil Co., Ltd. and others in Thailand to strengthen our global M&A network (see figure 3-5). Going forward, we will contribute to the realization of a carbon-neutral society by providing M&A support to our clients in this field.

Figure 3-5 Strengthening the global M&A network

Taking into account risks (such as market downturn due to macroeconomic deterioration and decreased opportunities for sales) and opportunities (such as investment in renewable energy) primarily in the investment sector, the Group will further promote investment in the sustainability field, particularly in the renewable energy field.

We are further strengthening sustainability-related solutions in the research and consulting services provided by Daiwa Institute of Research, building on the opportunities available in the department (expansion of transition support solution business). Specifically, we will issue information and provide policy proposals on the impact of climate change on the economy and society and strengthen our consulting to establish management strategies and support projects to address climate-related risks, staring with responding to TCFD, as we connect our efforts to enhancing our customers' corporate value.

Considering the reputational risk of the Group, we are promoting the realization of net zero GHG emissions. For details, please refer to "Transition Plan to Realize Carbon-Neutrality".

At the Group, to provide financing support for our customers' transition to carbon-neutrality, we are strengthening engagement (constructive dialogue) with all of our stakeholders starting with issuers and investors. For example, based on our "Environmental and Social Policy Framework", in recognition of risks relating to our businesses that could have a significant negative impact on the environment or society, we are advancing the appropriate policies through engagement with the recipients of our investments and loans.

The flow of scenario analysis conducted by the Group is based on multiple climate change scenarios (envisioning diverse climate-change phenomomena and other extensive changes) and (a) qualitatively assesses the impact on business activities and (b) calculates the impairment losses of assets classified as carbon-related industries. Based on these assessment and calculations, we are evaluating the Company’s strategies and response policies.

Figure 3-12 Scenario Analysis Image

Based on the scientific relationship of the positive correlation between the cumulative CO₂ emissions and the rise in global temperatures, we believe that the path of CO₂ emissions reductions holds a major key in future climate change. In addition to the rate of progress and effectiveness of reducing emissions, there are a wide range of factors to consider including natural phenomena such as natural disasters, climate events and their social changes, and other wide-ranging economic conditions, meaning the future will not be decided by a single factor. In the current scenario analysis, we performed various paths based on the scenarios of NGFS, which is a financial system impact assessment scenario formulated by NGFS (Network for Greening the Financial System) consisting of central banks, financial supervisory authorities, and others. Please refer to Figure 3-13 for an overview of the envisioned scenario.

• *NGFS is a network of financial authorities involved in the assessment of climate change risk etc.

Shutdowns or slowdowns in the economy or industry, volatility in the financial markets (falling stock prices, increased credit risk, etc.), damage from heavy rains or flooding and health problems caused by abnormally high temperatures were all listed as factors of relative concern. To apply these analysis results to scenarios, there is a relative risk of economic shutdowns or market volatility appearing in cases where CO₂ emission reductions lead to economic or social turmoil (disorderly transition) and of damage from heavy rains or flooding or of abnormally high temperature occurring in cases where CO₂ emission reductions are delayed (Hot House World).

On the other hand, regarding the impact of the energy transition on business, there is a negative impact on existing businesses from the reduction of fossil fuel resources and a positive impact on new business opportunities with the increase in new forms of energy such as renewable energy, meaning that overall, the energy transition is positioned as a near neutral factor. Furthermore, there is the possibility of climate change initiatives such as CO₂ emission reductions affecting corporate evaluations (reputation), and we expect an indirect impact on the Group’s business.

Thus, it is considered that the Group has a certain degree of adaptability to social and economic elements strongly related to climate events, such as energy transition. By preparing for disaster reduction measures and BCPs against direct risks such as heavy rain and floods, and steadily implementing climate measures to maintain reputation, it is possible to mitigate the negative impact even in cases of macroeconomic stagnation.

In the process of reducing CO₂ emissions, a scenario of "disorderly transition" accompanied by confusion resulted in losses of approximately 55 billion yen (cumulative from 2023 to 2050), compared to a scenario assuming no impact from climate change and with significant economic headwinds. It is believed that the key to progress in reduction lies not only in the progress itself, but also in the overall response of society.

In the current scenario analysis, we have formulated hypotheses based on the information and data presently available and performed our evaluation after narrowing down the targets of analysis.

There are a wide range of topics for consideration regarding climate-related risks, and we envision a wide range of patterns in terms of the time of occurrence and scale of these risks. While conservatively interpreting the interpretation and results obtained from this round of scenario analysis, the Group plans to acquire a broader range of information and related data and improve our analysis methods in the future. We will also refine the identification of risks through our scenario analysis and work to appropriately reflect these risks in the Group's disclosure.