Risks and Opportunities Relating to Climate Change

In terms of climate change issues, financial institutions are responsible for not only the direct impacts arising from their own business activities, but also the indirect impacts stemming from investee and borrower companies and projects for which the responsibility is much greater.

For instance, medium- to long-term climate change could potentially have a negative impact on the Group’s earnings and financial situation owing to the risk of physical damage to, for example, the natural environment, social infrastructure, and client assets (physical risks), as well as the growing risk of a rapid transition to a low-carbon society owing mainly to policy changes, changes in social norms and financial market preferences regarding climate change, and technological innovation (transition risks). More specifically, the (physical) risk of natural disasters will impair the credit standing of obligors and the value of their pledged assets, while the (transition) risk of being unable to keep up with the rapid transition to a low-carbon society will trigger earnings deterioration, a decline in securities issued by companies that emit large amounts of CO₂, and fewer loans extended to such companies. These factors will negatively impact the Group’s credit portfolio and drag down the value of assets held by the Group.

On the other hand, the practice of incorporating the transition to a carbon-free society into business models is a key element in any corporate growth strategy.

Risks Related to Climate Change

Risk category^*	Summary of risks	Characteristics of risks related to climate change
Transition risks	Risk that stricter regulations and technological innovation could affect industries and companies, leading to value impairment in the Group’s loan assets and shareholdings. Risk that business models and corporate strategies could be affected by regulatory measures aimed at achieving the 2ºC target. Risk that carbon pricing could affect market economies and multilateral economic competitiveness. Risk that companies may face calls to consider climate change problems when procuring goods and services. Risk that the market’s shift to low carbon could lead to volatility in the balance of supply and demand for products and services, as well as corporate earnings. Reputational risk stemming from inadequate climate change-related initiatives and information disclosure.	High social expectations for lenders and investors to avert or mitigate risks from indirect impacts arising from the activities of investee and borrower companies or projects. Climate change risks affect entire supply chains, therefore risk management in the supply chains of investee and borrower companies is key. Establishing quantitative risk assessment methods is challenging.
Physical risks	Risk that natural disasters could damage social infrastructure and the Group’s assets and consequently pose difficulties for business continuity. Risk that natural disasters and other events could damage the assets of investee and borrower companies. Risk that climate change could affect land use, the procurement of resources, and the productivity of primary industries. Risk that unrelenting global warming could increase the likelihood of heat stroke and pandemics.

Business Opportunities Related to Climate Change

Opportunity category^*	Summary of opportunities	Characteristics of business opportunities related to climate change
Resource efficiency, energy sources, products & services, markets, and resilience	There may be more opportunities to provide advisory services and financing to projects and companies that are helping to slow or mitigate climate change. The transformation of social infrastructure, such as the uptake of renewable energy, may lead to earnings opportunities over the medium to long term. There may be more opportunities to provide financing for infrastructure and technological development that enhances the capacity to adapt to climate change. Positive social evaluations as a financial institution helping to address climate change may translate into more business opportunities. Greater social awareness of climate change may support sales of the Group’s financial products that factor in environmental considerations.	Climate change-related businesses driving change in energy, transportation, and other social systems will become the mainstream of the economy. The transformation of social infrastructure over the medium to long term, including the uptake of renewable energy, will contribute to growth in medium- to longterm stable earnings opportunities for the Group.

*Categories based on the recommendations of the TCFD

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