We identify climate change to be a priority issue (materiality) that has implications for both the Group’s corporate value and the building of a sustainable society. It is therefore a key point of focus for our risk management.
Under the framework of our Sustainability Policy, we established a policy concerning the environment and in addition to contributing to efforts aimed at mitigating and adapting to climate change pursuant to our Action Guidelines for Mitigating Climate Change, our basic policy is not to provide financing for any new coal-fired power plants as part of our policy concerning environmental and social considerations for loans. Furthermore, owing to revisions made in fiscal 2019, a climate change risk assessment was added to the items of due diligence in the Equator Principles, guidelines that we apply to largescale project finance.
Within the framework of Group-wide risk management resolved by the Board of Directors, every quarter we exhaustively bring to light risks and identify and evaluate those considered to be significant risks in terms of frequency, degree of impact, and severity. From among the significant risks identified, the officer in charge of risk selects the top risks and emerging risks and monitors and manages them within our existing risk appetite framework (RAF) by submitting a risk management status report to the Board of Directors on a quarterly basis. The former are risks that have the potential to significantly impact the Group within the space of one year and warrant the attention of management, while the latter are risks that are unlikely to significantly impact the Group within one year, but have the potential to do so over the medium to long term (more than one year). As of the end of March 2020, "climate change" has been added to our list of emerging risks because it poses a considerable risk over the medium to long term and we have started monitoring carbonrelated exposure within the RAF as a reference indicator.
In fiscal 2019 and 2020 we performed scenario analyses of both transition risks and physical risks. We intend to inject the knowledge we acquired from these analyses into our management of credit, market, and operational risks, and subsequently have relevant departments discuss this information and utilize it when engaging in dialogue with clients. Furthermore, we have started thinking about assessing climate change risks and making active use of such assessments in fiscal 2021.
Going forward, our TCFD Project Team and relevant departments plan to discuss and examine revisions to various rules and policies incorporating frameworks and practical operations that are in line with the risk governance framework in the ECB’s guide outlined below.
ECB guide on climate-related and environmental risk management for financial institutions
4. Business models and strategy
|4.1||Business environment||Institutions are expected to understand the impact of climate-related and environmental risks on the business environment in which they operate, in the short, medium and long term, in order to be able to make informed strategic and business decisions.|
|4.2||Business strategy||When determining and implementing their business strategy, institutions are expected to integrate climate-related and environmental risks that impact their business environment in the short, medium or long term.|
5. Risk governance and risk appetite
|5.1||Management body||The management body is expected to consider climate-related and environmental risks when developing the institution’s overall business strategy, business objectives and risk management framework and to exercise effective oversight of climate-related and environmental risks.|
|5.2||Risk appetite||Institutions are expected to explicitly include climate-related and environmental risks in their risk appetite framework.|
|5.3||Organizational structure||Institutions are expected to assign responsibility for the management of climate-related and environmental risks within the organizational structure in accordance with the three lines of defence model.|
|5.4||Reporting||For the purposes of internal reporting, institutions are expected to report aggregated risk data that reflect their exposures to climaterelated and environmental risks with a view to enabling the management body and relevant sub-committees to make informed decisions.|
6. Risk management
|6.1||Risk management framework||Institutions are expected to incorporate climate-related and environmental risks as drivers of existing risk categories into their risk management framework, with a view to managing, monitoring and mitigating these over a sufficiently long-term horizon, and to review their arrangements on a regular basis. Institutions are expected to identify and quantify these risks within their overall process of ensuring capital adequacy.|
|6.2||Credit risk management||In their credit risk management, institutions are expected to consider climate-related and environmental risks at all relevant stages of the credit-granting process and to monitor the risks in their portfolios.|
|6.3||Operational risk management||Institutions are expected to consider how climate-related and environmental events could have an adverse impact on business continuity and the extent to which the nature of their activities could increase reputational and/or liability risks.|
|6.4||Market risk management||Institutions are expected to monitor on an ongoing basis the effect of climate-related and environmental factors on their current market risk positions and future investments, and to develop stress tests that incorporate climate-related and environmental risks.|
|6.5||Scenario analysis and stress testing||Institutions with material climate-related and environmental risks are expected to evaluate the appropriateness of their stress testing, with a view to incorporating them into their baseline and adverse scenarios.|
|6.6||Liquidity risk management||Institutions are expected to assess whether material climate-related and environmental risks could cause net cash outflows or depletion of liquidity buffers and, if so, incorporate these factors into their liquidity risk management and liquidity buffer calibration.|
Climate Change Risk Management for Loans
(1) Policies for Specific Sectors
1. Policies as a Responsible Trust Bank Group
SuMi TRUST Holdings has established the "Environmental Policy" to reduce the environmental burden arising from its business activities. We also have in place Action Guidelines for Mitigating Climate Change and Action Guidelines for Preserving Biodiversity to address particularly serious environmental issues. We are endeavoring to tackle those issues through dialogue and collaboration with various stakeholders.
2. Transactions Warranting Special Attention (Related to Climate Change Only)
(1) Coal-fired power generation (recently revised)
SuMi TRUST Bank, in principle, does not engage in new projects for the construction of coal-fired power plants.
- Balance of project finance loans for coal-fired power generation End-March 2020
- Targeting a 50% reduction in balance of loans vs. end-March 2020
- Targeting a loan balance of zero
The rapidly developing global deforestation is creating various problems such as reduction in biodiversity, decline in the stability of ecosystems, lower watershed protection, lower fixation of carbon dioxide and other items. SuMi TRUST Bank engages with timber manufacturers and manufacturers using timbers as raw materials only after careful consideration such as checking their international forest certification status*1 as well as fully taking into account whether or not there are existing problems with original inhabitants and local communities.
*1FMC (Forest Management Certification) issued by FSC (the Forest Stewardship Council) for forestry management and forestry business operations; CoC (Chain of Custody Certification) for processing and distribution management of certified forest products, and others.
(3) Palm oil
Palm oil is derived from "oil palms" grown on plantations. While palm oil demand is rapidly growing owing to its convenience and rising preference for wholesome foods, environmentally destructive developments are the main causes for the devastation of tropical rainforests and the decline in biodiversity. SuMi TRUST Bank engages with producers of palm oil and manufacturers using palm oil as a raw material only after careful consideration such as checking their international/local sustainable palm oil certification status*2 as well as fully taking into account whether or not there are existing problems with original inhabitants and local communities.
*2RSPO (Roundtable on Sustainable Palm Oil) and others that aim to observe NDPE (No-deforestation, No-peat and No-exploitation) and the preservation of HCS (High Carbon Stock) forests
3. Review of Sector Policies
SuMi TRUST Bank regularly reviews the suitability of established sector policies and the status of how transactions are being addressed at Sustainability Promotion Committee in our Executive Committee, etc., to reconsider the policies as well as make improvements to our operations as necessary.
4. Education and Training
As a member of a responsible trust bank group, to ensure that SuMi TRUST Bank’s directors and employees deepen their understanding of ways to reduce environmental impact, policies for human rights, and sector policies, the Bank continually conducts educational training. The company also spares no effort to ensure that directors and employees comply with all relevant regulations and procedures.
5. Communication with Stakeholders
SuMi TRUST Bank continues to engage in dialogues and collaborations with various stakeholders on themes that are relevant to the sector policies that it has established. The Bank trusts that dialogues and collaborations with these stakeholders will prove useful when considering reviews to improve the sector policies to stay in line with the changing social environment and to continue improving their effectiveness.
Climate Change Risk Management for Portfolio Investments
The engagement policies of Sumitomo Mitsui Trust Asset Management and Nikko Asset Management are as follows.
ESG Engagement Policy of Sumitomo Mitsui Trust Asset Management
SMTAM sees engagement as a chance to seek best practices from companies and engage in dialogue so as to contribute to the enhancement of corporate value over the medium to long term by solving the ESG issues of investee companies. Activities are undertaken jointly by the Stewardship Development Department (experts in the field of ESG) and the Investment Research Department (experts on industrial and corporate affairs) based on 12 items of ESG materiality (e.g., climate change, human capital, governance improvement) likely to affect corporate value.
And in addition to its own engagement activities, SMTAM also conducts activities through collaborative engagements by participating in global initiatives that aim to address numerous agenda items, such as greenhouse gas emissions, palm oil, forest conservation, access to medical care, and diversity (appointment of women to management positions).
ESG Engagement Policy of Nikko Asset Management
Engagement activities at Nikko AM involve the exchanging of opinions in line with an investee company’s growth phase from a long-term perspective with regard to not only earnings and financial strategies, but also the management policies, business strategies, shareholder return policies, and ESG issues mentioned in non-financial information already disclosed. Nikko AM engages with a broad range of parties, from the management teams of investee companies, through to their finance departments, business planning departments, and even officers in charge of business operations. Particularly with regard to companies that are reluctant to disclose information, Nikko AM endeavors to reinforce the benefits of engagement by proposing meetings with management.
With the goal of supporting the creation of medium- to long-term corporate value, Nikko AM seeks to realize closer engagements with investee companies so that they might share accurate information about their situation.
(1) Participation in Global Initiatives
Activities through Climate Action 100+
SMTAM: Participation in steering committee (April 2020)
Over 500 asset management firms around the world participate in Climate Action 100+ (CA100+) to conduct joint engagement activities targeting more than 160 of the world’s biggest greenhouse gas-emitting corporations. As a lead manager of nine firms in the Asian region, SMTAM directly engages in dialogue with investee companies and in April 2020 it became a new member of the CA100+ steering committee as the investor representative for Asia.
The work of CA100+ is conducted through partnerships based in each region, but the formulation of engagement policies for each region, the formulation of government-level engagement plans, and the administrative control of communicating information are mainly handled by a steering committee comprising 10 members (as of end-June 2020) representing each global region. While it is an honor for SMTAM to be part of the steering committee and represent the Asian region in the world’s largest joint engagement initiative, it also means it carries a great responsibility to drive change in Asia and around the world.
SMTAM, Nikko AM: Announcement of new benchmark and letter to company CEOs (September 2020)
As a new initiative, the CA100+ steering committee wrote to the representatives of applicable listed companies in September 2020, calling on them to adopt a net-zero company benchmark. The letter not only requested companies to take ambitious action towards achieving netzero greenhouse gas emissions, but also notified them that the evaluation results based on such a benchmark (still under development) for measuring each company’s consistency and feasibility of a net-zero transition pathway will be made public in spring 2021. Despite the fact that decarbonization by around 2050 is required in order to achieve the so-called 1.5°C scenario set out under the Paris Agreement, or in other words, net-zero greenhouse gas emissions for the entire planet, this letter reflects the assumption that such a target is still out of reach even when factoring in the independent targets initiated by governments and corporations. Both SMTAM and Nikko AM will participate in the design and promotion of this project for the Asian region and seek the positive commitment of companies through separate dialogue as lead managers.
Dialogue with Brazilian government and central bank regarding development management of tropical rainforest in Amazon basin
Sumitomo Mitsui Trust Asset Management
SMTAM is a signatory to both the PRI and Ceres initiatives, which jointly run a working group on forest conservation engagement, known as the Investor Initiative for Sustainable Forests. As part of the group’s activities, in June 2020 SMTAM started engaging with the Brazilian government after sending an open letter requesting that the responsible government agency discloses information about effective forest protection and management practices for the Amazon, as well as the state of developments in the region. SMTAM is the only Japanese asset manager to support this initiative from the outset and currently participates in the project as one of its lead managers. On four occasions in July 2020, the initiative engaged in dialogue with the vice president of Brazil and the governor of the Central Bank of Brazil.
In addition to the working group’s discussions, SMTAM has also engaged in stand-alone dialogue with Brazil’s central bank governor and the Brazilian ambassador to Japan. Unlike the European financial institutions, which hinted at the possibility of suspending investments and loans to Brazil, the president and CEO of SMTAM, Yoshio Hishida, communicated SMTAM’s unique views and participated in a meaningful exchange of opinions with reference to the history of economic relations between Japan and Brazil.
The Amazon and the area referred to as the Amazon biome is a region of mostly tropical rainforest that covers 60% of Brazil’s land. Environmental conservation in this area is needed in order to keep climate change in check and maintain biodiversity. The current administration has announced a policy of pursuing more liberal development of the Amazon basin and concern is growing among investors about rapid deforestation owing to the regular occurrence of forest fires and the government’s advocation for the liberalization and deregulation of agricultural development.
As it continues to engage in dialogue with the Brazilian authorities and the embassy of Brazil in Japan, SMTAM’s policy up ahead will be to steadily respond to the administration’s initiatives, monitor the situation, and throw its support behind a balanced approach to environmental conservation and economic development in the Amazon basin.