Basic Guidelines forDisclosure and Evaluation of

Climate-related Opportunities
March, ����

Table of Contents
Preface��������������������������������������������������������������������������������� 2
Introduction ��������������������������������������������������������������������������� 4
Purpose (assumed readers) ���������������������������������������������������������� 5
Contents����������������������������������������������������������������������������� 5
Chapter 1

Climate-related Oppportunities������������������������������������������� 7

Section 1: Background ��������������������������������������������������������������� 8
Section 2: Definition of climate-related opportunities�������������������������������� 8

Section 3: Importance of climate-related opportunities and their relationship to risks �� 10
Section 4: Metrics to disclose and evaluate climate-related opportunities����������� 14

Chapter 2

Avoided Emissions -metrics to assess climate-related opportunities ���� 18

Section 1: Background �������������������������������������������������������������� 19
Section 2: Definition and Relation to climate-related opportunities ����������������� 21
Section 3: Concept and guidelines for target goods and services �������������������� 22
Section 4: Disclosure���������������������������������������������������������������� 24

Section 5: Evaluation ��������������������������������������������������������������� 26
Section 6: Prospects ���������������������������������������������������������������� 27

Conclusion���������������������������������������������������������������������������� 28
Appendix 1：Glossary����������������������������������������������������������������� 29

1

Preface
To achieve a decarbonized society by 2050, it will be important totransform the entire economic and social system while accelerating

existing efforts to reduce greenhouse gas (hereafter, “GHG” ) emissions.
To this end, companies’ efforts to reduce their own emissions alone isinsufficient and promoting efforts as solution (goods and services 1)

providers that contribute to the decarbonization of society is crucial.

To promote the widespread use of decarbonized goods andservices, it is important to create a business environment in whichthese efforts can be appropriately evaluated by capital markets.

However, conventional corporate evaluations of climate change focus
on risk aspects, where emissions associated with business activities

and efforts contributing to the reduction of companies’ own emissions.

Whilst there has been little discussion regarding the evaluationof opportunities, an evaluation of impact through provision of

decarbonization solutions and their positive effect on enterprise value,
appropriate evaluation of climate-related opportunities is essential as

it contributes to the decarbonization of society, supports the company

to capture new business opportunities, and encourages the creation of
innovation that contributes to the decarbonization of society. Financial
institutions may also benefit financially by adequately evaluatingcompanies that captures the opportunities rose by decarbonization.

The Working Group on Disclosure and Evaluation of Climate-

related Opportunities was established as part of the efforts in FY2022
GX League, with a wide range of stakeholders, including corporations
and financial institutions, as participants, in response to growing

awareness of the importance of evaluating opportunities for therealization of a decarbonized society. Aiming to establish a mechanism

Goods and services refer not only final products but also materials, intermediate products,
related technologies and systems and other various items.

12

f o r a p p r o p r i ate d i s c l o s u r e a n d e va l u at i o n o f c l i m ate - r e l ate dopportunities, the Working Group organized the basic concepts andcompiled them as basic guidelines.

T h i s d o c u m e n t d e f i n e d c l i m ate - re l ate d o p p o r t u n i t i e s a sfactors that contribute to the enhancement of enterprise value

brought about through the creation of societal impact, and identified

investment, number of patents, green revenue, avoided emissions,and percentage of recyclable materials as examples of metrics toassess climate-related opportunities. In particular, avoided emissions
has been specifically addressed in the latter part of this document
given the highest interest of the Working Group participants andinternational attention.

To ensure that climate-related opportunities are adequately

assessed, this document provides a set of premises as guidelines,

and lays the groundwork for future discussions on climate-related
opportunities and relevant metrics.

3

Introduction
The gravity of the effects of climate change and the need for action have been widely
recognized internationally, and efforts to achieve net-zero greenhouse gas emissions(hereafter, “Net Zero” ) by around the middle of this century are gaining momentum tolimit the global temperature increase to 1.5° C above pre-industrial levels.

To achieve Net Zero, companies are expected to reduce their own emissions andthose of their supply chains, as well as contribute to the expansion of green markets
and the reduction of emissions from the society through the supply of goods andservices. Efforts of societal decarbonization through the supply of goods and services

by companies include contributing to steady emissions reductions in the near termby supplying technologies with lower carbon emissions than others and striving to

implement innovative technologies in society that will enable significant emissions
reductions in the future.

Promoting such efforts will require the establishment of a mechanism inwhich companies disclose their efforts, financial institutions and others 2 utilize thisinformation for their evaluations and provide necessary funds to such companies andefforts.

When it comes to corporate climate-related disclosures, it is increasingly

common to base them on the final report of the Task Force on Climate-related Financial

Disclosures (hereafter, “TCFD” ). Moreover, since a framework for sustainability
information disclosure has been presented by various organizations in recent years,

the International Sustainability Standards Board (hereafter, “ISSB” ) has been working

on internationally uniform standards. The climate-related disclosure standards are
expected to be developed based on the final recommendations of the TCFD.

The TCFD’ s final recommendations and the Exposure Draft (IFRS S2) publishedin March 2022 by ISSB call for climate-related risks and opportunities to be listedside by side, and for both to be identified and disclosed with their financial effects.
However, there is no uniform interpretation of the definition of metrics for climate2

Includes various financial institutions (financiers) and rating agencies.
4

related opportunities 3. Although avoided emissions and green revenue are considered

as metrics of opportunities, interpretation are left to the disclosing party, partly due tolack of clear provision in the guidelines.

As climate-related disclosure advances, the use of disclosed information incorporate evaluations by financial institutions have increased, particularly in termsof risk. On the other hand, the evaluation of climate-related opportunities that will

increase future corporate profits, efforts such as contributions to emissions reduction
through the supply of corporate goods and services and initiatives to implement

innovative technologies in the future, is yet limited. Examples of current climate-related
opportunity evaluation are the evaluation of technological opportunities based on

patents on low/decarbonization technologies in the analysis of Climate Value at Risk
(CVaR) and the evaluation of avoided emissions.

Purpose (assumed readers)

The purpose of this document is to develop a mechanism in which the opportunities
of companies working on GX are appropriately evaluated. To this end, this document
summarizes the basic concepts that companies and financial institutions should have incommon when disclosing and evaluating climate-related opportunities, with the aim ofraising awareness of their importance, whilst this document does not aim to establish
detailed rules or standards for disclosure and evaluation methods.

Contents

This document is compiled by two chapters. Chapter 1 addresses the definition
and importance of climate-related opportunities and set out a common concept. It
also specifies examples of metrics that for climate-related opportunities which are

specified according to the definition. These metrics are then classified based on
their characteristics as each metrics represent companies’ activities from different

A yardstick by which risks and opportunities are measured or evaluated. The term indicator is generally used, but in thisdocument, it is defined as metrics from the perspective of including qualitative ones.
3

5

perspectives. In Chapter 2 “Avoided emissions” , an outcome metric with high market
interest, is discussed in detail as one of the examples of climate-related opportunities’
metrics4, and basic approach for disclosure and evaluation are summarized.

The terms used in this document are compiled in the glossary in Appendix 1.

In preparing this document, avoided emissions was discussed in detail as an example of metrics for climate-related
opportunities, however, avoided emissions is only an example, and it is advisable that the same discussion be held for othermetrics.
46

Chapter �

Climate-related
Opportunities
Section �: Background

Section �: Deﬁnition of climate-related opportunities

Section �: Importance of climate-related opportunities andtheir relationship to risks

Section �: Metrics to disclose and evaluate climate-related opportunities

Section 1: BackgroundWhilst various metrics are utilized in disclosure and assessment of climate-related

opportunities, there has been little or no common interpretation or systematic viewcompared to climate-related risks. As a result, same metric may be disclosed asopportunity in one company, whilst others disclosed them as metrics to express theireffort, making it unclear why these metrics are appropriate for the disclosure andevaluation of climate-related opportunities.

Therefore, this document defines climate-related opportunities and then divided

it into two categories based on how opportunities affect a company’ s finances. Basedon this definition, metrics that are assumed to represent climate-related opportunities

are identified, and considerations for disclosing these metrics are organized in light ofinternational discussions.

In addition, the relationship between climate-related risks and opportunities

is sorted out in conjunction with the above, and the requirements for companies that
disclose opportunities are compiled.

Section 2: Definition of climate-related opportunities
In this document, climate-related opportunities are defined as follows:“Climate-related opportunities are factors that contribute to the increase of enterprisevalue through creating impacts, such as contributions to climate change mitigation andadaptation.”

This definition in based on TCFD 5 and defined climate-related opportunities asfactors that have a positive financial effect through corporate efforts to mitigate andadapt to climate change.

To develop a mechanism for evaluating climate-related opportunities, thisdocument will further delve into this definitions and classified climate-related

opportunities into the following two categories (see figure 1) depending on how they
The TCFD defines climate-related risks as “Potential negative impacts of climate change on an organization” whereas climaterelated opportunities are defined as “Potential positive impacts related to climate change on an organization”

58

lead to increased enterprise value.

1) Risk reduction: Factors that contribute to the reduction of enterprise value
deduction hat would have otherwise occurred due to climate change.

It refers to efforts which reduces the expected adverse financial effect by taking
measures against the physical and transitional risks indicated in TCFD.

For example, manufacturers could switch their energy used from fossil fuels

to renewable energy and other sources, thereby curbing the expected cost increase

from carbon pricing and reducing the damage to enterprise value. The climate-related
opportunity in this example is a shift to renewable energy as an approach to increasing
costs from carbon pricing.

2) Genuine opportunities: Factors that contribute to additional enterprise value
relative to the inherent enterprise value.

It refers to factors that contribute to the improvement of enterprise value throughincreased sales, by contributing to the decarbonization of society, such as encouraging

others (users of goods and services) to reduce their emissions through the introductionof innovative technologies and the supply of goods and services for a decarbonizedsociety.

For example, developing and providing ways of electrifying manufacturing process

in a market where decarbonized products are preferred, are expected to increase
sales of such products, resulting in higher profits. In this example, the climate-relate

opportunity is to develop and provide electrified manufacturing process which expects
to increase future sales in a market where decarbonized products are preferred.

9Figure �
Improvement on Enterprise Value (EV)（-）

Genuine Opportunities（+）

Changes in EV

Changes in EV（+）

Risk Reduction

Actual damage
on EV

Expected damage
on EV

Risk reduction（-）

Improvement onenterprise value
throughgenuine opportunities(Figure 1: Categories of Climate-related opportunities6 )This document mainly focuses on “genuine opportunities,” efforts that contributeto the increase of enterprise value through gained sales by contributing to climatechange mitigation. This is because “risk reduction” has already seen progress inevaluation and disclosure in the context of measurements for climate-related risks.

Section 3: Importance of climate-related opportunities
and their relationship to risks

To realize a decarbonized society, it is important for each company to work toward
reducing its own emissions (Scopes 1–3) ( “Risk reduction” ) as shown in Figure 2, as

well as to implement and promote efforts on the development and provision of goods
and services for the decarbonization of society ( “Genuine opportunities” ).

On the other hand, as mentioned above, whilst international standards havebeen developed for risks, opportunities especially “Genuine opportunities,” is not aspervasive as the disclosure and evaluation of climate-related risks. Regarding GHG

emissions, which are considered to be indicators related to the transitional risks,
Scopes 1–3 emissions are calculated and disclosed based on GHG protocols, etc., and it

Figures in this document are produced based on discussions in the Working Group on Disclosure and Evaluation of
Climate-related Opportunities.

610

is common to disclose targets and strategies for reducing them. These are efforts that
contribute to “Risk reduction” as defined in Section 2.

However, under the existing evaluation framework centered on “Risk reduction,”companies that supply energy-saving goods and ser vices that lead to emissions

reductions for society are expected to see a temporary increase in their emissions in
production and use phase as a result of the further spread of these goods and services. As

a result, such companies could possibly be evaluated negatively in corporate evaluation

centered on the existing risk perspectives. In addition, research and development aimed

at social implementation of innovative technologies that contribute to the realization ofa decarbonized society may lead to a reduction in emissions across society in the future,but it is difficult to evaluate such research and development under existing frameworks
that focus on current emissions.

Encouraging disclosure and evaluation of climate-related opportunities that are

currently not well understood would contribute to reducing emissions across society andsupport efforts to increase enterprise value through increased sales. It is also expected

to lead to the expansion of goods and services that help reduce emissions and improve
the resilience of society and the early implementation of innovative technologies.

Since addressing climate-related opportunities in this way contributes to theimprovement of enterprise value, the evaluation of climate-related opportunities byfinancial institutions and others can be one of the investment approaches that lead tothe pursuit of targeted financial returns7.

Indeed, some have estimated that the $2.1 trillion in benefits associated with

capturing climate-related opportunities is greater than the $970 billion in financial

effects associated with climate-related risks 8. Disclosure and evaluation of climaterelated opportunities can be beneficial to both companies and financial institutions.

PRI, UN, generation, foundation, Freshfields Bruckhaus Deringer, “Legal Framework for Investments That Make an Impact”(May 2022)
8
CDP “Major risk or rosy opportunity Are companies ready for climate change?” (Last viewed in February 2023)
7

11

Figure �
Eﬀorts on
climate-related risks

Own emission reduction
through various measurements

Eﬀorts on climate-related
opportunities

Societal emission reduction
through goods and services

Realizationof adecarbonizedsociery(Figure 2: Two Aspects of Decarbonization)

As Figure 2 shows, it is not enough for companies to reduce their own emissions(initiatives related to climate-related risks) to realize a decarbonized society. At the sametime, it is essential to support companies’ efforts as solution providers (on climate-related

opportunities) that contribute to the decarbonization of society. However, it is not appropriate
to engage only in activities related to climate-related opportunities and neglect those related

to risks, since doing so could lead to delaying the realization of a decarbonized society anddamage enterprise value. Accordingly, companies must be committed to reducing their own

emissions9 for disclosing climate-related opportunities. Therefore, this document requires

companies to meet the following requirements 1–3 for their emissions reduction efforts as apremise for disclosing climate-related opportunities.

1) Setting science-based emissions reduction targets•

Set 2050 carbon neutrality target and at least 2030 target for scienced-based mid-termtarget (short- to medium-term target10).

*Science-based targets are GHG reduction targets required for achieving the goalsof the Paris Agreement, and it is assumed that reference will be made to scenarios
developed by countries and international organizations to establish such targets.

*Targets scope basically refers to Scopes 1–3. Scope 3 targets should be set on best
effort basis at the time or target setting and is required when it is material for thecompany.

Companies committed to reducing own emissions are not only those currently aligned with 1.5 degrees targets but also those
set targets aimed for carbon neutrality, formulate a strategy and are in progress to be aligned.
10
Referring to the Financial Services Agency, the Ministry of Economy, Trade and Industry and the Ministry of the Environment“Basic Guidelines on Climate Transition Finance” (May 2021), the short- to medium-term targets refers to 3 to 15 years.
9

12

•

[References]» Science-based plans set by governments or industrial organizations that are alignedwith the Paris Agreement (e.g., the Ministry of Economy, Trade and Industry’ s
Sectoral Technology Roadmap)» Nationally Determined Contributions (NDC)» Internationally recognized scenarios (such as the International Energy Agency’ s (IEA)

Sustainable Development Scenario (SDS) and the Net Zero Scenario (NZE))» Science Based Target initiatives (SBTi), etc.

2) Developing a transition strategy to achieve targets and ensuring its viability•

Develop a transition strategy 11 to achieve set targets and develop a governancestructure to ensure its viability*It is also advisable to formulate an investment plan, etc. to ensure its effectiveness.

*When developing a transition strategy, it is advisable to incorporate and demonstrateconsideration for a “Just transition.”

3) Disclosure of targets/strategies and their results••

Companies should develop targets and strategies and disclose them externally
Disclose progress and results against various targets and strategies*Scope 3 12 should be disclosed when it is material to the company. However,considering the methodologies are still in progress, companies may estimate using
the best available information.

*Progress and results are not necessarily limited to quantitative figures but include

qualitative information such as explanations on the implementation of demonstration
experiments.

Transition strategy includes the target year for achieving carbon neutrality, short-, medium- and long-term targets, andspecific measures with timelines. Scenarios should be referenced when developing a transition strategy, and it is important toconsider the characteristics of the industry and the region in which the business is conducted. For details, refer to the Financial
Services Agency, the Ministry of Economy, Trade and Industry and the Ministry of the Environment “Basic Guidelines on
Climate Transition Finance” (May 2021).
12
Exposure Draft (IFRS S2) by ISSB requires disclosure of Scope 3. However, acknowledging issues on data availability andmethodologies, Scope 3 calculation and disclosure should be done using most recent data available without undue cost oreffort. For details refer to Staff Paper (3C & 4D) published in January 2023.
11

13

Section 4: Metrics to disclose and evaluate
climate-related opportunities

This section identifies examples of metrics for climate-related opportunities

based on Section 2. These metrics represent the extent to which efforts contribute to
the future enhancement of enterprise value through an increase in sales when economic
and social changes occur through decarbonization. Although qualitative metrics are notexcluded as those representing climate-related opportunities, this document focused on
quantitative metrics from the perspective of comparability.

The climate-related opportunities metrics illustrated in this document are related

to business activities that lead to climate change mitigation and is classified into either

input, output, or outcome. Figure 3 shows the classification of each metric. Input refers toresources (financial, human, and material resources) put into a project or business activity,

and the direct result to the stakeholders is defined as output. Short-term effects achieved

through output is defined as outcome, and long-term change on the environment,
society and economy are defined as impact 13. Input includes investment related todecarbonization, output includes the number of patents and green revenues, and outcome

includes avoided emissions and the percentage of recyclable materials used. For example,
when disclosing and evaluating the amount of investment, an input, they are disclosing

and evaluating the amount of money invested to implement initiatives that contribute toclimate change mitigation. In addition, when disclosing and evaluating avoided emissions,an outcome, it means they are disclosing and evaluating the results of companies’

intervention on climate change mitigation.

Based on the logic model, impact is defined as a change to the environment, society and economy. However, in the context
and practice of impact finance, the word outcome and impact may be treated the same.

13

14

Figure �
Intervention�Deﬁnition

�

�

INPUT

OUTPUTOUTCOME

Financial, human,and material
resources

The products, capital
goods and services
results from interventions

Short and mid term
eﬀects on theinterventions’ outputs

Opportunity ・Investments
metrics
related todecarbonization

・Number of patents
・Green revenue※recyclable materials are an example of improvement in resource eﬃciency

・Avoided emissions
・Percentage ofrecyclable material

Environment
Society
EconomyIMPACT

Change inenvironment, society
and economy

・Climate change
mitigation

・Climate change
adaptation

・Improvement on
resilience(Figure 3: Examples of metrics for climate-related opportunities)

When companies disclose metrics to assess climate-related opportunities, it isimportant to be aware of disclosure considering existing climate-related disclosure

frameworks and standards. Based on TCFD final report or the Exposure Draft (IFRS S2)

which ISSB published in March 2022, this document summarizes the key points forclimate-related opportunities disclosure as follows:

1) Disclose targets, strategies, and own emission reduction efforts

As indicated in Section 2 of Chapter 1, emission reduction efforts and those forsocietal decarbonization should both be encouraged. Therefore, companies are required

to disclose their own emission reduction efforts when disclosing climate-related
opportunities14.

2) Explain the relationship between climate-related opportunities and finance

Based on disclosed metrics to assess climate-related opportunities, companies are

required to explain how efforts are expected to affect their finances. When explaining
this, it is important to consider the companies’ businesses (activities) and the changes

in external environment. Companies’ businesses (activities) refer to businesses activities
that lead to an increase in enterprise value through environmental impact, such as
the manufacture of products or research and development. Changes in the external
14

See Section 3 of Chapter 1 for specific disclosure details.
15environment refer to physical events indicated by the TCFD, as well as events related

to policy, technology, market, and reputation associated with transition. For example,

the following explanation can be used to disclose the amount of investment that willcontribute to decarbonization, with business activities being the development of CO2
separation and sequestration technologies and the external environment being theregulation on CO2 emissions.

Example: As a manufacturer of materials manufacturing equipment, theCompany is investing in the development of technology to separate andsequester CO2 emitted during the production of materials. Given the highdemand for such technologies with requirements to reduce CO2 emissions, thefuture implementation of such technologies is expected to increase demand
for machinery of the Company.

3) Disclose financial effectIndicate the degree of financial effect expected due to identified businessactivities and efforts. However, in cases where it is difficult to provide quantitative
figures (e.g., when calculations are based on assumptions such as future sales growth),companies may disclose qualitative information.
4) Consider negative impacts

Consideration should be given to how efforts for climate-related opportunities

may affect the environment and society beyond climate change. It is also important

to disclose measures against negative impacts when such are expected. Examples ofnegative impacts include the depletion of resources and the reduction of employment
due to the supply of goods and services.
5) Disclose with transparency

Disclosure that can effectively communicate with financial institutions is adisclosure that satisfies the four elements set out in TCFD; consistency, comparability,

re l i a b i l i t y, a n d c l a r i t y. S p e c i f i ca l l y, i t m ea n s d i s c l os i n g t h e s a m e i te m s o n acontinuous basis (consistency), using internationally accepted measurement methods(comparability) and objective data (reliability), along with methodologies anddefinitions (clarity).

However, given that international discussions on climate-related opportunities

are still in progress, with standards and frameworks for disclosure and methodologies
16may not necessarily be established, these should be met on a best-effort basis. It should
be noted that small efforts, such as keeping the same disclosure locations, contribute
greatly to the ease of evaluation by financial institutions.

Chapter 1 addressed the concept of climate-related opportunities. While thisdocument deals with a wide range of climate-related opportunities, Chapter 2 focuses
and addressed definitions and approaches on avoided emissions, an outcome metricwith direct impact on climate change mitigation.

17

Chapter �

Avoided Emissions-metrics to assess climate-related opportunities
Section �: Background

Section �: Deﬁnition and Relation to climate-related opportunities
Section �: Concept and guidelines for target goods and services
Section �: Disclosure

Section �: Evaluation
Section �: Prospects

Section 1: Background
Avoided emissions is a metric that illustrates the extent to which the use of goods andservices contributed to the reduction of society’ s emissions15.

The definition, methodologies and disclosure methods for avoided emissions havebeen discussed both domestically and internationally, resulting in the development ofmultiple guidance. For example, the World Business Council for Sustainable Development(hereafter, the “WBCSD” ) and the International Council of Chemical Associations (hereafter,

the “ICCA") presented ideas and methodologies for avoided emissions for the chemicalindustry in 2013. In addition, the World Resources Institute (hereafter, the “WRI” ) publishedits views on avoided emissions in 2019.

In Japan, the Ministry of Economy, Trade and Industry published the “Guidelines for

Quantifying GHG emission reductions of goods or services through Global Value Chain” in
2018, which presented a pan sectoral framework and fundamental principles for quantifying
avoided emissions for all industries.

Although, avoided emissions has been discussed, there has not yet been a common

international interpretation of its significance, definition, utilization, and detailed sector

specific methodologies. Thus variations are observed in the market for its assessment. As aresult, the use of avoided emissions is yet in its infancy.

However, in recent years, there has been a growing demand for companies to discloseand highlight the impact of their efforts. Financial institutions have also begun incorporatingsuch information into corporate evaluations. These led to renewed discussions on avoided
emissions as an metric to assess corporate efforts that lead to creating impacts (climatechange mitigation). WBCSD has established a working group on avoided emissions and16
publish a guidance .

Encouraging common usage of avoided emissions cannot be done instantly, however,requires simultaneous efforts and multiple stages, as shown in Figure 4. First it is crucial toraise awareness of the importance of avoided emissions and then for companies to increase
disclosure of avoided emissions and for financial institutions to incorporate them into their

Avoided emissions in this document includes both observed and potential (estimated future avoided emissions through the
supply of goods and services not yet implemented) avoided emissions.
16
WBCSD “Guidance on Avoided Emissions” (March 2023)
15

19

corporate evaluations, as well as the development for standardized methodologies. Thesedevelopments will allow for sophisticated and transparent corporate disclosures, hence more

inclusion in corporate evaluations by financial institutions. In the process, it is also expectedthat information disclosure platforms and other market necessary platforms to be developed
to facilitate the acquisition of corporate disclosure information on avoided emissions.

Based on the roadmap, this document focuses to raise awareness of its importance byaddressing avoided emissions as metrics to assess climate-related opportunities and laying
fundamentals on definition, methodologies and disclosure and evaluation.

Figure �� Evaluation anddisclosure byportion of companies

BASIC GUIDELINES

� Evaluation anddisclosure bypioneers

� General
perception

RAISING AWARENESSInternationalorganizations
Initiatives

Deep-dive the concept of
avoided emissions

STANDARDIZATIONInternationally accepted methodology
Framework for disclosure

MARKET DEVELOPMENT
Disclosure platform, etc.

Financial
Institutions

POLICY

Conceptualizing avoided emissions,
integration to corporate policies

EVALUATIONESG Ratings

Companies

Utilization of avoided emissions
Data providing, utilization

CALCULATION & DISCLOSURE

Calculation and disclosure based on guidelines and existing concepts(Figure 4: Avoided Emissions Roadmap)

This document does not set forth rules and standards on methodologies, disclosureand evaluation. For practical use, refer to various guidance, including existing publications

on disclosures and methodologies, where consideration for industrial characteristics areimportant.

20

Section 2: Definition and Relation toclimate-related opportunities
Avoided emissions is defined as follows, based on the definitions of climate-related

opportunities in this guidance and definition of avoided emissions in existing guidance17.

Avoided emissions refers to the quantified contribution on climate change
mitigation18 ( “positive impact” ) and is the difference between GHG emissions ofconventional goods and services (baseline) and those of new ones.

As a characteristic of avoided emissions, the greater the difference in the intensity fromconventional goods and services, the greater the value. For instance, the larger the differencein the intensity of goods and services, the lower the energy consumption required when using
them. Thus, leading to energy-related cost savings for consumers. In addition, goods and services

that can curb emissions and energy consumption above a certain level may reduce regulatory

cost increases or receive more subsidies where regulations encourage emissions reductions.

When these benefits are recognized and substitution or new demand for the goods

and services arose, the supplier of the products or services is expected to see an increasein sales. Which results in greater avoided emissions in total, as well as an increase in salesof the goods and services and ultimately an increase in revenue. Thus, avoided emissions
can be regarded as an metrics that indicates the degree of contribution to climate change

mitigation, as well as indirectly indicating the demand through replacement from othercompanies’ products and the creation of new demand.

Moreover, in terms of the relationship between avoided emissions and enterprisevalue, companies with higher avoided emissions saw growth in revenues at an annual rate of
7%, approximately 20% higher than that of the average companies19.

Avoided emissions is expressed as the amount of GHG as GHG inventories, however,their concepts and subjects of measurement differ and must be clearly distinguished.

See ICCA, WBCSD “Addressing the Avoided Emissions Challenge” (October 2013), the Ministry of Economy, Trade andIndustry “Guidelines for Quantifying GHG Emission Reductions of Goods or Services” (March 2018), and WRI “Estimating andReporting the Comparative Emission Impacts of Products” (January 2019).
18
While some of those subject to the calculation of avoided emissions may overlap with Scopes 1–3, the “Estimating andReporting the Comparative Emission Impacts of Products” (January 2019) published by the WRI clearly states that GHG
inventories and avoided emissions evaluate a company’ s efforts from different perspectives and that overlapping claims
will not be an issue. This document also assumes that GHG inventories measured and disclosed in Scopes 1–3 and avoided
emissions are separately disclosed and does not identify overlaps as an issue.
19
GIC and Schroders, “A framework for Avoided Emissions analysis” (November 2021)
17

21

GHG inventories are a list of emission sources and the associated emission quantified

for a certain period 20 . In other words, GHG inventories reflect companies’ efforts to

reduce their own emissions, including conversion to renewable energy from fossil fuels in
manufacturing or installation of highly efficient manufacturing facilities.

On the other hand, avoided emissions is the difference between GHG emissions fromthe supply of goods and services and GHG emissions that would otherwise have been emitted(reference scenario)21. In other words, it measures the difference of societal GHG emissions

compared to the reference scenario.

The reduction of own emissions by the company is reflected in GHG inventories andthe reduction of emissions by society is reflected in avoided emissions are both essential
in achieving carbon neutrality. Though, since these two measure emissions from different
aspects, GHG inventories and avoided emissions must be reported separately.

Additionally, avoided emissions must not be used as a means for companies to achievecarbon neutrality. Although current methodologies and disclosure for GHG inventories may
not adequately reflect corporate efforts to emission reduction 22, avoided emissions mustnot be used as a offset. Distinguishing these two in the disclosure are essential to avoid
misunderstanding from stakeholders.

Section 3: Concept and guidelines fortarget goods and services
To ensure the credibility of avoided emissions, this document lays the following eligibility
criteria of goods and services for which avoided emissions may be calculated and disclosed.
When calculating avoided emissions, goods and services must meet the following criteria:1) Alignment to the achievement of carbon neutrality• The goods and services must be in line with the targets of the Paris Agreement or latest
climate science. Referring that company should demonstrate that the goods and services

are aligned with the societal transition to carbon neutrality and does will not become

Ministry of the Environment, “Overview of Greenhouse Gas Inventories” (Last viewed in February 2023)
Ministry of Economy, Trade and Industry, “Guidelines for Quantifying GHG emission reductions of goods or services
through Global Value Chain” (March 2018)22
Scope 1–3 measurements based on the GHG protocol may increase Scope 3 due to the sale of low-carbon and decarbonizedproducts, which alone does not adequately evaluate the efforts of companies contributions to societal decarbonization.
20

21

22

stranded assets in the future.

*As decarbonization pathway vary by industry, region, and companies, goods and services

should be optimal at the time (rational and scientific-based), and consider these characteristics.
*Those contribute to further decarbonization in comparison with conventional goods andservices are eligible if they contribute to the current reduction of emissions and are basedon the assumption of future decarbonization.

The following are examples of references to demonstrate the alignment with science-basedcarbon neutrality:[References]» Sectoral Technology Roadmaps by the Ministry of Economy, Trade and Industry» EU Taxonomy» Certification standards for energy consumption efficiency and decarbonization
performance, etc.

2) Goods and services have legitimacy in the reduction• There should be a clear indication that the goods and services are related to reduction
factors of emissions. Avoided emissions not only cover final products, but also thecomponents. These components may calculate avoided emissions through a comparison of
the performance of final products and services.

* Avoided emissions may not be disclosed for all components and technologies thatconsists of final goods and services, but only be calculated and disclosed for those directly
contribute to the reduction that final products bring.

For example, if the energy-saving performance of Product X is improved by reducing theweight of Component α (component of Product X), the manufacturer of Component α may

calculate and disclose avoided emissions. On the other hand, if Component β (anothercomponent of Product X) has the same performance as before and does not contribute to
the emission reduction, the manufacturer of Component β cannot calculate or disclose
avoided emissions for Product X.

Disclosing climate-related opportunities, requires companies to commit to emissions
reduction efforts23.
23

See Section 3 of Chapter 1 for details.
23Section 4: DisclosureThis section addresses “Principles” and “Recommended disclosure” from theperspective of corporate evaluation by financial institutions. As companies’ efforts to beevaluated appropriately, it is important that financial institutions establish an frameworkand that disclosures of companies’ avoided emissions provide effective information. Since
they lack concrete rules or international consensus on disclosure framework, this document

does not aim to provide set of rules or standards, but instead provide underlying “Principles”
and metrics that should be disclosed from an evaluation perspective in “Recommended
disclosure.”

At this point, as international discussions are still developing, the difficulty ofsatisfying all examples of items should be noted. Therefore, it is important 24 to continually

disclose what can be disclosed through best efforts at the time of disclosure, and continuing

and further improving disclosure without hesitation, even if all the points presented in this
Chapter are not met, could also promote evaluation.

Principles● 01

Clear distinction from GHG inventories

Avoided emissions should not be deducted from GHG inventories to achieve carbon
neutrality, and should be disclosed separately● 02

Meeting eligibility

Goods and services, for which avoided emissions are calculated, should meet
eligibility, with companies commitment to their own emissions reduction● 03

Consideration of negative impacts due to the supply of such goods andservices

The supply of such goods and services may also have impacts on the environmentand society other than climate change. When disclosing avoided emissions, it isdesirable to consider whether there be an impact on environment and society otherthan climate change (especially negative impacts), and to take measures if negative
However, from the perspective of evaluation, it is advisable to explain the reasons and background for those that are difficult
to disclose. As reasons for the difficulty of disclosure may include the lack of industry-specific calculation methods andcommon international interpretations.

24

24

impacts are expected.

Examples of negative impacts: Noise pollution to locals due to the supply of suchproducts, significant ecological changes, etc.

● 04

Transparent disclosure

F o r e a s i e r e va l u a t i o n f o r f i n a n c i a l i n st i t u t i o n s i t i s r e co m m e n d e d t h a t

m et h o d o l o g i e s , d i s c l o s u re l o cat i o n s b e ke pt co n s i ste n t . H o w e v e r, s i n ce
methodologies and other frameworks are under development, any changes overtime are recommended to be disclosed.

*For instance effective disclosures include, clearly stating “avoided emissions” andkeeping the disclosure location consistent.

Recommended disclosure

Figure 5 shows the contents to be satisfied when disclosing avoided emissions. These
details of disclosure are necessary ensure credibility of avoided emissions.

While each company is required to meet the following disclosure contents,

disclosure examples are illustrative only, and this document does not required all theseexamples to be provided at the moment. Particularly at the stage of disseminating

avoided emissions, it is more crucial for companies to disclose them rather thanhindering the disclosure by tr ying to meet all the examples set below. Instead,companies may respond by explaining the reasons for the difficulty25.

Disclosure difficulty is expected in cases when standards are unavailable or information including commercially sensitive
information which anticipates in leading to competitive disadvantage.
25

25

Figure �
CONTENTSDISCLOSURE EXAMPLE

EXPLANATIONGOODS &SERVICES・ Details of eligible goods and services (its functions etc.)

ELIGIBILITY

・ Explanation of how goods and services
meet the eligibility criteria.

METHODOLOGYRESULTS・ Methodological explanation to ensure transparency
and credibility of the results and disclosure.
・ Since methodologies are not yet standardized (such as
contribution ratio) is still being developed, calculation is to be
based on currently available information and uncertainties or
estimates are to be explained.
・ Calculated results based on the methodologies.

・Goods and services
・% of the total revenue (entity level only)・Explanation on what level in VC the goods and services
contribute to the decarbonization（if possible, the entity may
disclose contribution ratio）
・Alignment with the eligibility criteria
・Reference scenario and rationale
・Time period for calculation
・Methodologies and referred guidelines（explain if any modiﬁcations are made to methodologies
based on individual circumstances）
・Calculated results

・Whether negative impacts have been considerede.g.) It is conﬁrmed that product A does not result in any
negative impacts
・Measurements to mitigate negative impact (if applicable)

NAGATIVE
IMPACTS・ Explanation on whether negative impacts are considered.
If an are expected, an explanation of measurements

OTHERS・ Whether or not a company received third party veriﬁcation and ・Third party veriﬁcatione.g.) since veriﬁcation methods are yet to be established for
explanation on anything to be noted by third parties.
・ Third party veriﬁcation is currently not a requirement as methodo- avoided emissions, we do not consider third party veriﬁcation
for now and instead provide calculations and estimateslogies or veriﬁcations are not yet conﬁrmed, however, clarifying(see URL) for transparency.
whether veriﬁcation is received by the entity is recommended.

(Figure 5: Recommended Disclosure)

Section 5: Evaluation

There are variety of ways in which the avoided emissions can be used by financial

institutions. How financial institutions incorporate them in their own evaluation
framework should be entirely left to the decisions of each financial institutions inaccordance with their policies and objectives. For example, financial institutions may
use avoided emissions to evaluate the impact of their investments and loans (such as
climate change mitigation), or to evaluate enterprise value of fundraisers.

26

Section 6: Prospects

This document sorts out the underlying principles in consideration to corporate

evaluation. Scope of this document for avoided emissions excludes methodologies

and perspectives of industrial characteristics. When disclosing avoided emissions, it
is expected that multiple references will be made to other guidelines along with thisdocument, and it is expected that detailed methodologies rules and case studies befurther discussed in the future.

27

Conclusion
To realize a decarbonized society, it is essential for companies to reduce their own

emissions and also to develop new businesses and facilitate innovation. The disclosureand evaluation of climate-related opportunities are precisely the efforts to focus on suchpotential of companies, and encourage both decarbonization and economic growth.

In recognition of the above, the Working Group on Disclosure and Evaluation of

Climate-related Opportunities has been conducting its deliberations with a view toencouraging appropriate evaluation and disclosure of climate-related opportunities.

To develop a common international understanding of disclosure and evaluation ofclimate-related opportunities, which is still in the process of development, it is crucial

to build up examples of companies’ calculation methodologies and disclosure as wellas financial institutions’ use of such information and hold a series of discussions basedon these examples. In preparing this document, we valued practical point of view andhave laid out definitions, concepts and underlying principles. It is expected that thesedetails will be updated as necessary as examples of disclosure and evaluation continue
to accumulate.

This document is hoped to be the impetus for further international discussions on

climate-related risk mitigation and creation of opportunities and encourage corporate
efforts through related disclosure and evaluation.

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Appendix 1: Glossary
Outcome

Input refers to resources (financial, human, and material resources)

OutputOutput refers to the direct result to the stakeholders through projects

ImpactImpact refers to long-term change on the environment, society andput into a project or business activity.

or business activities.

economy. This includes climate change mitigation and adaptation or

increased resilience, but focus of this document is placed on climatechange mitigation.
Input

Resources (people, goods and money) put into a project or businessEnterprise valueEnterprise value refers to the total value of a company, the sum of the

Climate-related

Climate-related risks are factors that cause enterprise value to decline

risks

activity.

value of its equity (market capitalization) and net debt.

due to changes in policies, laws, and technologies (transitional),

acute weather events and changes in climate patterns (physical). (Thedefinitions of transitional and physical risk refer to the TCFD report.)

Climate-related
opportunities

Just transition

Climate-related opportunities are factors that contribute to theincrease of enterprise value through creating impacts, such as
contributions to climate change mitigation and adaptation.

Just transition is an attempt to ensure the wide sharing of virtual
profits created through a transition to a green economy, as well as tosupport any party who will experience an adverse economic impact
29

(be it a country, a region, an industry, a community, a worker, or aconsumer).
Metrics

Metrics is a standard for measuring or evaluating climate-relatedrisks and opportunities. (In this document metrics include bothquantitative and qualitative metrics)

Avoidedemissions

Avoided emissions refers to the quantified contribution on climatechange mitigation ( “positive impact” ) and is the difference between

GHG emissions of conventional goods and services (baseline) andthose of new ones.

GenuineGenuine opportunities refers to factors that contribute to additional

Risk reduction

Risk reduction refers to factors that contribute to the reduction ofopportunities

enterprise value relative to the inherent enterprise value.

enterprise value deduction hat would have otherwise occurred due toclimate change.

30

Acknowledgements

This document is based on the discussion of the Working Group on Disclosure and Evaluation of
Climate-related Opportunities, which was established as part of the FY2022 GX League*, a public private
partnership effort aiming for both decarbonization and economic growth.

Working Group on Disclosure and Evaluation of Climate-related Opportunities

Nomura Holdings, Inc., DAIKIN INDUSTRIES, LTD., Tokio Marine & Nichido Fire Insurance Co.,Ltd.,

Development Bank of Japan Inc., Panasonic Holdings Corporation, SUMITOMO MITSUI TRUST BANK, LIMITED,
Asahi Kasei Corporation, AstraZeneca K.K., Azbil Corporation, EY Strategy and Consulting Co., Ltd.,

Iwatani Corporation, AGC Inc., NTN Corporation, ENEOS Corporation, MS&AD Insurance Group Holdings, Inc.,OSAKA GAS CO.,LTD., ALL NEED Inc., OMRON Corporation, Owaririkuun.Co.Ltd, Carbon Free Consulting Corporation,
Rating and Investment Information, Inc., Green Carbon Inc., Kurita Water Industries Ltd., Globe-ing Inc.,
Sustech Inc., Shimadzu Corporation, SUZUKI MOTOR CORPORATION, Sumitomo Corporation,

Sumitomo Forestry Co., Ltd., Sompo Japan Insurance Inc, Taisei Corporation, Daiseki Co., Ltd.,TAKEEI CORPORATION, CHUBU STEEL PLATE CO.,LTD., Chubu Electric Power Company, Incorporated,

TEIJIN LIMITED, TEIJIN FRONTIER CO.,LTD., Deloitte Tohmatsu Group, DENTSU INC., TOKYO GAS CO.,LTD.,Tokyo Electric Power Company Holdings, Inc., Toray Industries, Inc., TOZAKI

INDUSTRYCORPORATION,

West Japan Railway Company, Nikko Asset Management Co., Ltd., NIPPON SHOKUBAI CO., LTD., NYK Line,
Association of Management Consultants In Japan, PIONEER CORPORATION, HARITA METAL Co.,Ltd,BASF Japan Ltd., Hitachi, Ltd., People,Dreams&Technologies Group Co.,Ltd., FUKUSHIMA GALILEI CO. LTD.,
Fujikura Ltd., Future Corporation, Mizuho Financial Group, Inc., Mitsui Chemicals, Inc.,

Mitsubishi Chemical Group Corporation, Mitsubishi Heavy Industries, Ltd., Hair Clinic Reve-21 Co.,Ltd.,YASKAWA Electric Corporation, LIXIL Corporation, Resonac Holdings Corporation.
* GX is an abbreviation for Green Transformation. It refers to the transformation of thewhole socio-economic system as a country to realize both 2030 GHG emission reduction

targets and industrial growth by perceiving related efforts as an opportunity for economic
growth. GX League was launched as a mechanism for a group of ambitious companies

that actively engage in GX, together with government, academics, and finance, to discuss
the transformation of the entire economic and social system and to put into practice thecreation of new markets at the same time.