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.
Overarched by the Sustainability Policy, we established the Action Guidelines for Mitigating Climate Change to contribute to efforts aimed at mitigating and adapting to climate change.
Also, in the policy of environmental and social considerations in the loan business, we committed not to provide financing for new coal fired power plans in principle.
Regarding the Equator Principles which is a guideline applied to large scale project finance, a climate change risk assessment was added to the items of due diligence in 2020.
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 probability, degree of impact, and severity.
From among the significant risks identified, the Executive Officer in charge of risk selects the top risks (risk that may have a major impact within a year and require the management’s attention) and emerging risks (risks that do not have a probability to cause a major impact within a year but could be significant in the medium to long term of over a year), 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.
As of September 30, 2021, we have raised “climate change-related risk” from emerging risks to top risks due to recent significant changes in public perception of climate change and the Group’s efforts to establish a full-fledged system in the second half of the year to uphold its Carbon Neutral Commitment and participate in the NZBA.
In fiscal year 2021, the relevant departments have been holding discussions about upgrading the credit risk management framework from the perspective of transition risk and physical risk.
They will identify and evaluate climate change-related risks, incorporate them into the investment and loan process, and apply them to monitoring during the term.
By the end of fiscal year 2021, we will also introduce comprehensive risk management guidelines, define a three lines of defense, and establish a reporting system, with the aim to manage climate change-related risks in each risk category of the existing risk management framework from a long-term perspective.
Climate Change Risk Management for Loans
Policies for Specific Sectors
1. Policies as a Responsible Trust Bank Group
SuMi TRUST Holdings has established the Environmental Policy to reduce the environmental load 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
SuMi TRUST Bank, in principle, does not engage in new projects for the construction of coal-fired power plants.
- Actual (as of March 31, 2021)
- 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
(4) Coal mining
There is a risk of negative impact on the environment and society, such as the impact of toxic waste discharged from coal mines on the ecosystem, casualties from coal mines caving in, and violation of human rights. In principle, we do not finance new coal mining projects (thermal coal) or new coal mining projects using the mountaintop removal mining (MTR) method because these projects may cause an increase in GHG emissions that affect climate change.
(5) Oil and gas
Oil and gas mining operations pose the risk of a negative impact on ecosystems, biodiversity, and the living and natural environments of local residents.We will take careful measures, such as giving due consideration to the impact on the environment and any problems that may exist with the original inhabitants and local communities. We will be particularly careful in considering oil sands mining, shale oil and gas projects, Arctic mining, and pipeline construction initiatives.
(6) Hydroelectric power generation
Large-scale hydroelectric power projects pose the risk of a negative impact on ecosystems, biodiversity, and the living and natural environments of local residents.
We will take careful measures, such as giving due consideration to the impact on the environment and any problems that may exist with the original inhabitants and local communities. We will be particularly careful in considering large-scale hydroelectric power generation initiatives (output of 25 MW or more) that involve the construction of dams.
(7) Large-scale plantations
Development of large-scale plantations pose the risk of deforestation and violation of human rights, as well as a negative impact on ecosystems, biodiversity, and the living and natural environments of local residents. We will take careful measures, such as giving due consideration to the impact on the environment and any problems that may exist with the original inhabitants and local communities. We will be particularly careful in considering initiatives that involve the development of forests and peatlands.
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
SuMi Trust Asset Management (SMTAM) views engagement activities as opportunities to seek best practices from companies, and communicates its opinions with the aim to contribute to the enhancement of corporate value over the medium to long term.
SMTAM has established 12 important ESG themes, such as climate change and governance improvement, for top-down activities while conducting bottom-up activities at the same time by linking these to the business strategies of individual companies.
Activities are undertaken jointly by relevant members of the Stewardship Development Department (experts in the field of ESG) and analysts of the Research Department (experts on industrial and corporate analysis).
SMTAM uses our networks in Tokyo, New York and London to engage with our own investee companies globally.
SMTAM also conducts various activities through a wide variety of initiatives, such as PRI and Climate Action 100+, and engage with stakeholders other than our investee companies.
ESG Engagement Policy of Nikko Asset Management
Nikko Asset Management (Nikko AM) encourages the sustainable creation of corporate value through active dialogue with investee companies on key issues, including ESG and climate change.
These dialogues enable us to deepen our understanding of the companies, including the quality of their management teams and their future direction, and include it in our evaluation of investments and adjust the scale of our investments as appropriate.
Through engagement, Nikko AM shares an accurate understanding of the situation of investee companies and the challenges they are facing, and encourage them to improve their corporate value over the medium to long term.
As part of this effort, Nikko AM places emphasis on dialogue on corporate management systems and initiatives related to risks and opportunities from climate change.
In March 2021, Nikko AM also published Nikko AM’s Key ESG Themes, including initiatives towards carbon-free society, on its website for Japanese companies, clearly indicating to investee companies the themes that Nikko AM considers to be the source of medium- to long-term corporate value enhancement and, ultimately, increased returns on investment.