The Group recognizes that climate change issues must be addressed with urgency, but at the same time, sees them as business opportunities. We identify examples of climate-related risks that could be expected to affect business (transition risk/physical risk), while also identifying examples of opportunities available through the development and provision of core financial products and services to realize a carbon-neutral society. We set strategies in response to such risks and opportunities, and promote strategic initiatives to enhance climate resilience.

The Group carries out qualitative analysis based on climate-related scenarios and identifies examples of risks that could be expected to affect businesses.

Examples of the main transition risks include the deterioration in clients' earnings due to carbon pricing, etc., and the consequent deterioration in profits (policy/legal), the decline in value of assets under management due to the delayed response to energy-related technologies (technology), lower value and decreased balance of assets held in the fund (market), and deterioration in the Group's reputation associated with a lack of efforts to deal with climate change and investment and underwriting related to businesses with a heavy environmental load (reputation).

Examples of the main physical risks include each of the Group's offices and data centers being struck by disasters and the increased costs of restoration and repairs (acute/chronic) as well as damage to and loss of solar and wind generation facilities due to an increase in torrential rain and powerful typhoons (acute/chronic). While recognizing these climate-related risks, we consider the responses in light of effects on business and frequency of occurrence, and promote strategies.

The Group recognizes effects arising from climate-related risks, and carries out a scenario analysis in reference to the TCFD^*1 and IFRS S2^*2 to assess its resilience to future climate-related changes, progress, and uncertainty.

For transition risk, we estimate the loss of climate-related exposures to carbon-intensive industries using the NGFS climate scenarios^*3.

For physical risk, we estimate costs arising from damage to our real estate from wind and water hazards using the IPCC climate scenarios^*4.

These results and our strategies are reported to the Executive Management Committee after discussions at the Sustainability Promotion Committee. The following are the details of the scenarios and the assumptions used in analysis.

• *1TCFD Recommendations Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-related Risks and Opportunities (2017)
• *2IFRS S2 Paragraph 22 and Appendix B1 to B18 (2023)
• *3Scenarios for assessing the impact on the financial system of climate risks issued by the Network for Greening the Financial System (NGFS).
• *4GHG emission scenario issued by the Intergovernmental Panel on Climate Change

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.

When applied to scenarios, transition risks could appear as (ii) Disorderly and (iii) Too Little, Too Late in cases where CO₂ emission reductions lead to economic or social turmoil, and physical risks could appear as (iv) Hot House World in cases where CO₂ emission reductions are delayed.

On the other hand, the energy transition has a negative effect on existing businesses from the reduction of fossil fuel resources and a positive effect on new business opportunities with the increase in new forms of energy, such as renewable energy. This means that, overall, the energy transition is positioned as a near neutral factor. We forecast change in the impact corresponding to burdens such as the costs associated with transition and taxes. Furthermore, climate change initiatives such as CO₂ emission reductions could affect corporate reputation, which in turn affect the business indirectly.

In this way, the Group is thought to have the capacity to adjust to climate phenomena, such as the energy transition. Furthermore, to mitigate the negative effect, we have formulated disaster mitigation measures against the risks of direct damage from heavy rains or flooding and a business continuity plan (BCP) while we believe it is possible to curb the negative effect even if the macro economy stagnates by steadily implementing climate change initiatives and maintaining our reputation.

Compared to (iv) Hot House World, the long-term analysis resulted in a loss of approximately 6 billion yen in (iii) Too Little, Too Late, while the short-term analysis resulted in a loss of approximately 200 million yen in (ii) Disorderly.

Based on this analysis, we believe that the effects of climate-related risks and opportunities on financial soundness over the short-term, including the current and next fiscal years, are limited. We will review these results and work towards reducing carbon-related assets, particularly those with high risk, over the medium to long term.

We also believe that societal transition to a carbon-neutral society is necessary. In response, we are actively engaged in various discussions and initiatives both domestically and internationally.

Due to the increase in weather events arise from climate change, the real estate-related exposures and our non-operational real estate, which constitute a significant portion of our strategy, are likely to be affected.

Scenario analysis indicates that under the RCP8.5 scenario, which assumes the highest temperature increase, the average annual estimated damage from wind and flood disasters is approximately 40 million yen in 2030 and 50 million yen in 2050. Our real estate is largely located in areas less susceptible to wind and flood damage and consists mainly of robust structures and high-rise properties. Therefore, the effects on the Group are likely to be limited.

In the current scenario analysis, we have formulated hypotheses based on the information and data presently available and narrowed down the scope 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 timing and magnitude of these risks. We will acquire a broader range of information and related data and improve the method of analysis to assess the medium and long-term effects on the financial position, financial performance, and cash flows, thereby increasing our climate resilience.

In addition to carrying out scenario analyses, we will enhance stakeholder engagement regarding risks associated with policy and regulatory changes, market shifts, and technological advancements due to climate change. We will also promote sustainable finance and BCP to mitigate physical risks, thereby strengthening our resilience. For details, please refer to 3. Strategy (5) Climate-related Strategies.

Taking account of the effects assessed through scenario analysis after consultation with Group companies and various headquarters, the Group identifies climate-related risks and opportunities and assesses their importance.

Examples of main opportunities include increase in opportunities to provide new financial products and increase in opportunities to profit from market changes (Wealth Management Division), expansion in opportunities for investing in new industries and companies that contribute to the transition to a carbon-neutral society (Asset Management Division), increase in underwriting to raise funds needed for green projects and the transition to a carbon-neutral society (Global Markets & Investment Banking Division), and stimulation of the entire market through participation in sustainability-related rulemaking (the entire Group).

The Group promotes strategies in response to climate-related risks and opportunities identified in each division.

We will promote the following strategies from ① to ⑧ to respond to transition risks and opportunities. To respond to physical risk, we have formulated a BCP in anticipation of the case where the head office (the Group's headquarters functions), branches, and data centers are unable to function due to damage caused when social infrastructure is shut down because of abnormal weather or wind and flood damage.

We are also promoting human resource development such as the implementation of training to improve expertise related to sustainability including climate change for Directors and employees. Specifically, since 2022, we have conducted annual Vision training for all Directors and employees aimed at improving their sustainability-related knowledge and awareness, and further enhancing the "Take it as your own matter" mindset.

The Group will strengthen our development and provision of products and services that contribute to the realization of a carbon-neutral society. Daiwa Asset Management provides investment trusts comprised of companies with initiatives to achieve ESG and SDG goals toward the transition to sustainable society.

One of these is the Decarbonization Technology Fund (referred to as Carbon ZERO), which has total net assets of 41.8 billion yen^*.

For the initiatives taken with this fund, the company won the Green Finance Governor's Special Award in the ESG Investment subcategory at the Tokyo Financial Award 2021, as well as the Chairman's Award (Bronze) at the 5th ESG Finance Awards Japan. In addition, Candriam, which provided the company with investment advice, was ranked No.1 out of approximately 600 asset management companies around the world in Switzerland's Herschel & Kramer Responsible Investment Brand Index 2023.

This fund has three clear investment objectives.

• *As of the end of March 2024

The Group promotes sourcing and investment focused on sustainability, particularly in the renewable energy field.

Daiwa Energy & Infrastructure was established in July 2018 and took over the control of the energy investment function that had been undertaken by Daiwa PI Partners. Investments were previously made into the domestic renewable energy sector focused on solar power generation, but now the investment fields have been expanded to overseas renewable energy and infrastructure.

FY2019, the company decided to invest in Electricity North West Limited, which conducts a power distribution business in the UK, and to enter into a strategic partnership with Germany's Aquila Capital Holding GmbH, which develops and manages renewable energy businesses. In FY2023, the company acquired a stake in Aurora Infrastructure, which operates a power distribution business for the industrial sector in Finland, and invested in the UK's Hornsea One offshore wind farm, one of the largest in operation in the world.

Furthermore, Daiwa Real Estate Asset Management provides alternative assets and opportunities to invest in those assets such as ESG-friendly real estate. Daiwa Office Investment Corporation and Daiwa Securities Living Investment Corporation, to which Daiwa Real Estate Asset Management has entrusted asset management, are working to expand the supply of high environmental performance office buildings and superior, high-quality healthcare facilities by investing with funds raised from sustainable finance. It has also been entrusted with the management of solar power plants and biomass power plants, and has commenced management operations of the DSREF Amaterasu Core Fund, Investment Limited Partnership, a private placement fund established in September 2021 with the intent of investing in solar power projects by soliciting funding from institutional investors in Japan.

The Group is actively engaged in sustainable finance as a core business to support initiatives for global decarbonization. While support for fundraising had previously been the core business, by adding SDGs elements, we also see opportunities for new business and an increase in added value that we can provide to customers.

In FY2023, we expanded product diversification by serving as lead manager for Kao's coupon step-up sustainability- linked bond and the Republic of Indonesia's samurai bond, the world's first samurai blue bond. We also provided advice and support on creating a draft framework and obtaining a second party opinion for the issuance of the Japanese government's climate transition interest-bearing bonds.

In addition, we participate in the bidding for these bonds as a primary dealer and help ensure the stable absorption and liquidity of the bond market.

The Group is also strengthening M&A advisory services in the renewable energy sector through tie-ups with major European companies that are leading in this field. Specifically, we are accelerating business development through a 50% stake in Green Giraffe, which conducts a financial advisory business in this field, and a capital/business alliance with Aquila Group, an investment management company in the same field.

The Group's overseas M&A business is steadily increasing its top line, and in FY2023 M&A-related revenue reached 48.9 billion yen. Looking ahead to FY2030, we are aiming for revenue of more than 70 billion yen while strengthening personnel. At the present time, we employ 650 personnel globally, including in Japan, but will have increased that number to 900 by FY2030.

In the research and consulting business of Daiwa Institute of Research, we are strengthening sustainability-related solutions. We offer information and policy proposals on the effects of climate change on the economy and society and strengthen our consulting to establish management strategies and support projects to address climate-related risks, as we connect our efforts to enhancing our customers' corporate value.

We formulated the Daiwa Securities Group Net Zero Carbon Declaration and are advancing efforts to realize carbon neutrality. For details, please refer to 3. Strategy (6) Transition Plan to Realize Carbon Neutrality.

The Group strengthens engagement with all of our shareholders including issuers and investors to help our customers' transition.

For example, based on the Environmental and Social Policy Framework, in recognition of risks relating to our businesses that could have a significant negative impacts on the environment or society, we are advancing the appropriate policies through engagement with investees and lenders.

In addition, Daiwa Asset Management positions climate change as one issue of materiality and we conduct engagement activities with investee companies. The company defined an anticipated vision of management (best practices) to realize sustainable growth of corporate value, and encourages them to adopt these efforts through engagements. From January to December 2023, the company implemented 1,377 engagements, with 27.9% focused on ESG themes^*.

• *Discussing multiple themes in a single meeting

The Group actively participates in various discussion forums and initiatives, both domestically and overseas in order to contribute to the realization of a sustainable society.

In recent years, amid progress in initiatives towards the formulation of sustainability disclosure standards, the Group's Directors and employees have taken on active roles as a trustee of the IFRS Foundation, which includes the ISSB in its umbrella, and as a member of the Sustainability Standards Board of Japan (SSBJ), which formulates domestic sustainability disclosure standards.

In addition, we contribute to various rulemaking through participation in the Partnership for Carbon Accounting Financials, which develops methods for measuring and disclosing GHG emissions through investment and loans and the GX League.

Furthermore, Daiwa Securities served as a market maker in the carbon credit market established by the Tokyo Stock Exchange. By meeting criteria for order display time and sales quantity in the renewable energy (electricity) category, and contributing to market liquidity and fair price formation, we earned the Good Market Maker Award in FY2023.

We promote net zero GHG emissions within our own operations (Scope1 and Scope2) towards becoming carbon neutral by FY2030.

The trend in Scope1 and Scope2 is as follows. In terms of our specific initiatives, we will promote continuing our energy saving activities as well as shifting to renewable energy for electricity consumption.

Toward the realization of a carbon-neutral society, companies are required to manage and reduce GHG emissions emitted not only from their own companies but also their entire supply chains. Financial institutions in particular are required to manage Scope3 Category15 emissions, which include emissions from their investment and loan portfolios (Financed Emissions) and those related to capital market activities such as underwriting (Facilitated Emissions).

For the specific process to reduce Financed Emissions, we start with the selection of preferred asset classes and sectors, analysis of sector characteristics and collection of analytical data, examination of methods for measuring and managing emissions within the Group, and the establishment and disclosure of intermediate targets using Science Based Targets (SBT), etc., then set strategies and promote engagement to achieve these targets.

We are closely monitoring discussions on GHG emissions related to capital market activities, such as underwriting, which are core businesses of the Group. In 2023, PCAF issued guidance on the relevant methods for measurement.

The Group will collaborate with related departments to estimate actual values. Daiwa Securities focuses on capital market activities such as promoting transition finance, and will continue to strengthen these efforts.

As an integrated securities group, through our financial business, we will continue to support our customers' efforts toward decarbonization.

Please refer to 3. Strategy (5) Climate-related Strategies for details.