2. Scenario Analysis – Key Points of Practice
Scenario Analysis Guide – Key Points ofPractice
2-1. For beginning scenario analysis
2-2. STEP2. Assess materiality ofclimate-related risks
2-3. STEP3. Identify and define range of
scenarios
2-4. STEP4. Evaluate business impacts
2-5. STEP5. Identify potential responses
2-6. STEP6. Document and disclose information

Chapter 2. Scenario Analysis - Key Points of PracticeThis chapter explains how to practically undertake scenario analysis
and describes key points of its practice, based on use cases
performed by companies under the support program of the Ministryof the Environment.

Scenario Analysis Key Points of Practice Guide

Scenario Analysis Guide – Key Points of Practice
2. Scenario Analysis – Key Points of Practice

2-ii

2-1.

For beginning scenario analysis

2-iii

2-2.

STEP2. Assess materiality of climate-related risks

2-viiii

2-3.

STEP3. Identify and define range of scenarios

2-xi

2-4.

STEP4.

Evaluate business impacts

2-xv

2-5.

STEP5. Identify potential responses

2-xviii

2-6.

STEP6.

2-xxiiDocument and disclose information

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Scenario Analysis Key Points of Practice Guide

2. Scenario Analysis – Key Points of Practice
The momentum for decarbonization among various countries and institutional
investors is growing1 and climate change has now become a clear risk and opportunity
for corporate management. In Japan, “carbon neutrality by 2050” was declared in
October 2020, and with the revision of the Corporate Governance Code2 in June 2021,
companies listed on the prime market are required to disclose their response in linewith the TCFD recommendations. Furthermore, with the amendments regarding the“Cabinet Office Ordinance on Disclosure of Corporate Affairs announced in January2023, a section on sustainability has been added to the securities reports.3 The
importance of responding to climate change, including addressing the TCFD
recommendations that require disclosure of climate-related information, is increasing.
In the TCFD recommendations' recommended disclosure items, the strategy
section encourages the implementation of climate change scenario analysis in thefollowing passage: "Describe the resilience of the organization's strategy based on areview of various climate-related scenarios, including scenarios for under 2°C"4.
In response, we will use this section to explain the practical process for undertaking
scenario analysis and to describe key points in its implementation based on use casesof companies under the support program of the Ministry of the Environment.
Furthermore, in each initiative "STEP", we will describe a step-by-step direction for
initiatives in line with the actual situation of the company as shown below.

・For companies that are conducting scenario analysis for the "first time," such ascompanies in their first year of scenario analysis (companies in their "first round" ofscenario analysis): these companies should conduct scenario analysis in a sure andsteady manner while keeping in mind the key points of practice in this guide. They
should also work on implementing the "points for continuing companies" as much as
possible.
1

Refer to Chapter 1 for information on the materiality of responding to TCFD recommendations, such as
decarbonization trends for various nations and institutional investors.
2

For details on the revision of the Corporate Governance Code, refer to Chapter 1, p.1-29

3

For details on the enforcement of the amendments to the Cabinet Office Order on Disclosure, refer to
Chapter 1 p.1-30

4Refer to Chapter 1, p.1-25

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・For companies that are conducting scenario analysis for the "first time", but which
are already working on initiatives related to climate change to some degree, orcompanies that have already implemented scenario analysis (companies in their"second round" of scenario analysis): these companies should move on to the next
step of "points for continuing companies" and use this to increase the sophistication ofclimate change-related management. Additionally, they should use disclosures anddialogue with investors to enhance analysis and the presentation of evidence.

2-1.

For beginning scenario analysis

When beginning scenario analysis, the first step in preparation is to involve internal
stakeholders and establish a target scope for scenario analysis. Specifically, thefollowing must be done: 1) Having management understand the materiality of
responding to TCFD recommendations (having management be aware of therecommendations and instruct that they be complied with); 2) Establishing an execution
team; 3) Choosing a target scope for scenario analysis; and 4) Selecting a time frameof "X" years in the future to look at when conducting the scenario analysis. In thispreparation stage, the key is in how to input climate change initiatives into
management.
or companies undertaking scenario analysis for the first time, the following areimportant measures for beginning the analysis: establishing internal consensus for
conducting scenario analysis (management has agreed); asking for cooperation fromoperation divisions; and deciding on the target scope/parties responsible (structure) for
scenario analysis.
Meanwhile, companies that are continuing to conduct scenario analysis should aim
for the following: having management/responsible departments understand the resultsof the previous scenario analysis and having operation divisions take the lead in
conducting the analysis; and expanding the target scope/responsible parties (structure)beyond what it was for the initial analysis.

① Gain management`s understanding
As the first step in preparation, it is necessary to obtain the understanding of the
management team concerning the materiality of conducting scenario analysis.
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Scenario Analysis Key Points of Practice Guide

Conscientious communication with the management team facilitates internal
involvement in scenario analysis through helping management recognize what TCFD
recommendations are and having them advance the initiatives necessary for scenario
analysis in a top-down approach.

First of all, it is crucial for management to understand that investors expect that the
scenario analysis the company performs in the course of its operations (i.e., recognitionof a broad range of risks and identification of potential responses should the risk
actually occur) should also include climate change. For example, if the company only
envisions a foreseeable future with a reasonable degree of probability, it will only
formulate linear PDCA cycles toward goals. This may result in business strategies thatcannot respond immediately to future changes and lack of consensus regarding thecompany's future, which may result in risks such as investors questioning the resilienceof the business. On the other hand, formulating hypotheses based on an uncertain
future (and therefore one that also holds possibilities) allows business managementthat responds flexibly to future changes, enables discussion to take place without
subjective viewpoints regarding the future, and allows management to assert theresilience of the business.

When gaining the understanding of the management team, it is also effective to havestudy groups with experts provide input on the potential impact of climate change
responses on corporate value. There are increasingly frequent requests from multistakeholders for responses to climate change, so there may also be cases whenmanagement hears about these trends directly. However, it is still common that thosemessages do not reach management. In these cases, it is important to compile the"status of requests from multi-stakeholders" and provide input to management throughstudy groups with experts and other means on the possible impact of climate change
responses on corporate value.
Even for companies in their second round of scenario analysis, continuing to provide
input to management from the results of climate change-related scenario analysis willfurther deepen management's understanding of the specific opportunities and risks
climate change holds for the company, and may lead to increased integration of climatechange initiatives and business management within the company.
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Scenario Analysis Key Points of Practice Guide② Create an execution team for scenario analysis
The second step for preparation is creating an execution team for scenario analysis.
Internal involvement is essential for conducting scenario analysis. Because of this, ateam should be formed where operation divisions are involved from the very beginning.
Having the responsible parties in operation divisions understand the scenario analysis
processes enables the divisions to think of climate change initiatives as something thatinvolves them directly.
There are two separate patterns hypothesized for the structure of scenario analysis
execution teams. The first is a pattern where relevant divisions and departments are
involved as needed during the course of the scenario analysis. The second pattern isfor the internal teams to be formed prior to beginning the analysis. The first pattern has
the advantages of making the scenario analysis easy to begin, and of placing a minimalburden on each division/department. On the other hand, its disadvantages include theneed for internal coordination in the scenario analysis process and the long reporting
process from the environment/CSR division to management. For the second pattern,
the advantages are that divisions are better able to cooperate due to internal
coordination being completed in advance, and that reports reach management swiftly
due to the analysis being conducted by a well-coordinated team. However, its
disadvantages are that it takes time to start the analysis, and that there is a large
burden on each division/department.
For use cases of involving operational divisions for companies that have
implemented scenario analysis, the following examples have been cited as being
effective: 1) using narratives suited to each division (e.g., how reductions in CO2emissions over the entire company can be promoted through contributions by various
areas such as products and procurement), and 2) leveraging management's
commitment. Furthermore, regular communication of information related to TCFD
recommendations and scenario analysis can facilitate understanding and make iteasier to receive cooperation when moving ahead with the scenario analysis.

③ Choose target for analysis
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The third step for preparation is selecting a target scope for scenario analysis.
When considering a target scope, the following should be determined: the region (e.g.,
only domestic sites, or including overseas sites), the scope of operations (only somebusinesses or all businesses), and the corporate scope (only for the scope of theconsolidated financial statements or including subsidiaries).
By defining the scope of operations covered in the scenario analysis in terms of"sales composition", "relation to climate change", and "difficulty of data collection",companies can conduct scenario analysis in accordance with their business model. For
example, companies might consider covering operations with particularly high sales inthe scope defined as "sales composition", or they might cover operations with highCO2 emissions by using the scope "relation to climate change". Operations that areeasy to collect data for may be covered in the scope defined as "difficulty of datacollection", and so on.
In scenario analysis support, it is common to first select certain operations to cover in
the analysis, and then gradually lead up to a scenario analysis for the company as awhole.

④ Choose time horizon to conduct scenario analysis
Select which year in the future to look at when conducting the scenario analysis.
Since the worldviews showing the impacts of climate change vary depending on theyear that the analysis is based on, companies should select a time horizon with the
maximum benefit for the company after comparing advantages and disadvantages inlight of factors such as project length, the amount of internal involvement, and effectfrom physical risks on the company.
Considering decarbonization trends such as carbon neutrality in 2050, it is assumed
that scenario analysis for 2050 will be useful in the current situation. Other advantagesof selecting 2050 are that physical risks due to temperature rise and transition risks
such as carbon taxes are emerging, and the results of the impact of risks andopportunities will be clearly apparent. On the other hand, the disadvantage is that the
distance from the time axis of the business plan makes it difficult to imagine the project
realistically, which makes internal involvement difficult and sometimes makes
collaboration difficult.
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For other sectors where climate change is material, it is possible to consider mid- tolong-term appropriate "transition to decarbonization"5 toward carbon neutrality by
2050, by conducting scenario analysis for the year 2030 in addition to 2050. The
advantages of selecting 2030 additionally are that it is easy to involve the management
and the company, since there is abundant data available for reference and it isrelatively easy to link with business plans.

5

For details on the consideration of transitions, refer to Chapter 2. P.2-15-16

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2-2.

STEP2.

Assess materiality of climate-related risks

After finishing the preparations for scenario analysis, it is time to assess the risks
and opportunities the company will face from the effects of climate change. The
company should assess the materiality of these from the perspectives of whether or not
the risks and opportunities hold the potential for significant impact in the future or if they
are of concern to stakeholders.
Specifically, risk materiality should be determined through the following process: 1)
list risks/opportunities for the targeted operation; 2) express the potential impact on
operations from each listed risk/opportunity using qualitative terms; 3) determine themateriality of the risk based on how serious the impact on operations will be if the risk
actually occurs. The key is to select risks from an industry/company perspective, and to
consider the level of granularity to be used in assessing risk materiality.
For companies undertaking scenario analysis for the first time, the following areimportant when assessing the materiality of risks: climate-related risks material to thesector and company have been identified, and the specific impacts of these risks havebeen hypothesized.
Meanwhile, companies who are continuing to conduct scenario analysis should aim
for greater fleshing out of climate-related risks that are material to the sector andcompany, and of the specific impact of risks. They should do this by involving operation
divisions and outside experts, and while considering dialogue with investors on the
results of prior scenario analysis.

① List risk items
For Phase 1, the company should list out risk and opportunity items for the operation
division it chose to target in the preparation stage. The company should make a list ofrisk and opportunity items based on the examples of risks and opportunities listed in
the TCFD recommendations and in consideration of external reports6 such as industry-

6 Examples of external reports include the SASB Standards (https://www.sasb.org/standards/download/?lang=ja-jp),which identified environmental, social and governance issues in 77 sectors, and scenario analysis reports issued by the
WBCSD on sectors such as utilities, oil and gas, construction, mining, chemicals, food, agriculture and forestry products(https://climatescenariocatalogue.org/）

2-viiiScenario Analysis Key Points of Practice Guide

specific reports and other external information such as competitors' CDP responses.
When doing this, it is important that the company consider and list a wide range ofpossible risks and opportunities to eliminate the unexpected, rather than attempting tokeep the number of risk items listed to a minimum.

The listed risks and opportunities should be divided into two broad categories:
transition risks, which are related to the transition to a low-carbon economy, andphysical risks, which are related to physical changes caused by climate change.
Examples of transition risks include risks from policies and regulations; market risks;technology risks; and reputational risks (changes in reputation with customers orinvestors). Meanwhile, physical risks include risks that occur on a chronic basis (e.g.,increase in average temperature, changes in rainfall and weather patterns, rising sea
level) and risks that occur on an acute basis (e.g., increasing severity of extreme
weather conditions). When considering risk items, companies may wish to refer toexamples of risk items used by support project companies.7② Identify potential impacts on business
The company will qualitatively identify the impact on business, and use qualitative
terms to describe the potential impact on business from the risks and opportunities
listed in Phase 1. When doing this, it is important that the company separates risks andopportunities and evaluates opportunities as well as risks.
The company should use the results of discussions with internal stakeholders as
input when making qualitative descriptions, while also referring to external informationsuch as external reports and CDP responses from competitors. For discussions withinternal stakeholders, in particular: the important thing is that the company match its
awareness with stakeholders and use a narrative (story-like) format to describe
potential impacts based on the company's business model. These discussions on
qualitatively describing impact can further deepen mutual understanding of scenario
analysis within the company or its divisions/departments. Furthermore, discussions
with each individual operation division often reveal unanticipated risks and7

Refer to Chapter 3 for support project company examples

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opportunities. Companies continuing to conduct scenario analysis may also consider
holding discussions that include external stakeholders.

③ Assess materiality of climate-related risks
In Phase 3, the company will determine the materiality of risks based on the scale ofimpact on business if the risk/opportunity occurs. The company will go on to assess theimpact on business for each of the risks/opportunities evaluated in Phase 1 and Phase
2 based on a scale of "Large", "Medium", "Small" and so on.
When assessing materiality, the company should compare each of the risks andopportunities from the perspective of the "scale of impact on the company's business".
For example, the company may consider classifying risks/opportunities with a broad
range of impact or that affect important products as "Large"; risks/opportunities with no
impact on the company as "Small"; and using "Medium" for others. A specific example
would be classifying the risk "increases or decreases in important products" as having
a "Large" impact on the company's business, as it affects the cost toward raw
materials, which occupy a large percentage of the company's sales costs.
It is also key to consider the level of granularity to use when assessing riskmateriality. The same risk/opportunity can be evaluated by subcategorizing it by"differences in product (by sector)" or "affected supply chains (by supply chain)" toenable analysis that is adapted to the company's operations. For example, when
performing assessment by supply chain, the impact from the same risk may be
categorized as "Large" for the procurement stage, but "Small" for the sales stage.

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2-3.

STEP3.

Identify and define range of scenarios

For identifying and defining the range of scenarios in STEP3, the company should
define multiple scenarios that encompass the transitional and physical risks related tothe organization. The company should examine scenario hypotheses and analysis
methods along with perspectives on what scenarios (and narratives) are appropriate forthe organization, and which scenarios out of existing scenario groups should be used
as references.
The following process will be used to identify and define the range of scenarios: 1)choose scenarios; 2) obtain forecast information on relevant parameters; and 3) shape
the worldview in consideration of stakeholders. The key is in selecting the type of
scenario while considering the amount of available information and versatility, as wellas use cases from competitors. Companies should also consider how they will alignworldviews with their relevant divisions/departments.
Companies undertaking scenario analysis for the first time should use reliable
external scenarios and select several scenarios (1.5°C/2.6°C-4°C) that include a
scenario for 2°C or lower (1.5°C for the current situation). The company should aim
toward building internal consensus after detailing the worldview listed in each scenario.
On the other hand, companies that are continuing scenario analysis should aim forthe following: using reliable external scenarios and based on dialogue with investors on
the results of the previous scenario analysis, supplementing them with additional data
for material risks; having selected multiple scenarios, including one for 1.5°C (1.5°C,
2°C, 2.6°C-4°C); and detailing the worldview in each scenario and holding discussions
that include outside experts.

① Choose scenarios
In Phase 1, the company will go on to choose scenarios from multiple temperature
ranges, including the below-2°C (1.5°C) scenario, to respond to an uncertain future.
Types of scenarios include the IEA (International Energy Agency) `s WEO (World
Energy Outlook)8, which is the most versatile and data-rich, SSP (Shared
8

Medium- to long-term energy market forecasts. Lists future information on energy(qualitative/quantitative).

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Socioeconomic Pathways)9, PRI (Principles for Responsible Investment)`s IPR(Inevitable Policy Response)10, and the NGFS (Network for Greening the Financial
System).11
The TCFD recommendations encourage companies to perform scenario analysis byselecting scenarios for multiple temperature ranges, including the 2°C or lower
scenario. It is important that scenarios be chosen based on their characteristics andparameters, and that scenarios match the company's industry and situation, investor
trends, and trends for domestic and international policies. At present, based on the
decarbonization trend, the selection of multiple scenarios including the 1.5°C scenario
is effective.
The Sixth Assessment Report (AR6) WG1 Report (Natural Science Basis)12
released by IPCC in 2021 sets multiple temperature ranges. For example, the SSP11.9 scenario assumes net zero CO2 emissions in the mid-21st century by adopting
climate policies that limit temperature increase to about 1.5°C or less, and limit
temperature increase to 1.0-1.8°C (average 1.4°C) relative to the industrial revolution.
The SSP1-2.6 scenario is a scenario with zero net CO2 emissions in the second half ofthe 21st century, limiting temperature increase to 1.3-2.4°C (about 1.8°C). The SSP24.5 scenario is at the upper end of the emissions range based on the aggregated
Nationally Determined Contributions (NDCs) of each country through 2030, with atemperature increase of 2.1-3.5°C (about 2.7°C), and the SSP3-7.9 Scenario is a
scenario where no climate policy is introduced under regional conflictual development
and the temperature rise is 2.8-4.6°C (about 3.6°C).13
Selecting scenarios in this manner, with different temperature ranges and worldviews

9

Socioeconomic scenario based on recent policies and the socioeconomic environment. Lists themacroeconomic information scenarios that are based on for each scenario.
10

Scenario for climate-related policies that are likely to be implemented in the short-term. Lists qualitativeand quantitative forecasts for climate-related policies.
11

Common climate scenario for central banks and financial regulators. Scenario bifurcated bytemperature zones, technological development and policy response speed.
12

For the IPCC's Sixth Assessment Report, refer the IPCC website: https://www.ipcc.ch/report/sixthassessment-report-working-group-i/(Japanese translation by JMA: https://www.data.jma.go.jp/cpdinfo/ipcc/ar6/index.html)
13

For a summary of each scenario, refer Ministry of the Environment, "Publication of the Report ofWorking Group I of the Sixth Assessment Report of the Intergovernmental Panel on Climate Change(IPCC) (Natural Science Basis)," https://www.env.go.jp/press/109850.html
The attached document "Reference Materials (Overview of the IPCC and Wording Used in the Report)" of
the Ministry of the Environment, https://www.env.go.jp/press/109850/116630.pdf

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whenever possible, may help eliminate the unexpected. When selecting each scenario,
it is important to draw an appropriate transition path focusing on decarbonization in
2050 based on the time horizon for scenario analysis that was chosen in the
preparation stage.

② Obtain information on parameters (variables)
For Phase 2, the company will obtain objective forecast information on parameters
related to risks/opportunities to enable it to address an uncertain future. The company
will also identify the effects of these on the company in further detail. For example, if
the popularization of EVs is listed as an opportunity item, the task would be to obtain
information on the EV penetration rate for the relevant year of the analysis timeframe.
When obtaining information, the company may use external sources such as IEA,
PRI and SSP reports to obtain objective forecast information on parameters fortransition risks. For physical risks, it may use climate change impact assessment tools
such as physical risk maps and hazard maps.14
The point to keep in mind here is that the company may not be able to find all
forecast information for the target year set as the analysis time horizon, so it will needto consider using other methods such as estimates and collecting qualitative
information. For example, if the analysis timeframe is 2050, but data are only available
up to 2040, the company may use estimation to calculate forecast information for 2050.
(The company will need to consider which estimation method to use, such as linear or
cumulative, according to the type of data). In cases where quantitative information is
not available, it may also be useful to use qualitative information to draw a picture of
the future world. At this stage, the key is that the company gather a wide range of
forecast information on risk/opportunity items without getting too caught up in trying toobtain quantitative information.

③ Shape the worldview in consideration of stakeholders

14

Refer to Chapter 5 for examples of transition risk and physical risk parameters2-xiiiScenario Analysis Key Points of Practice Guide

In Phase 3, the company should, if necessary, use forecast information to clarify theworldview surrounding the company, including the behavior of future stakeholders(including investors), and build consensus on the worldview within the company.
In the process of coordinating worldviews with the related divisions/departments, thekey is to use dialogue to build a worldview that is convincing to thesedepartments/divisions (including operation divisions). When staging dialogues, thecompany may consider preparing materials that facilitate discussion to move
discussions with operation divisions forward. It can do this by organizing the worldview
by factors such as newcomers/sellers/buyers/substitute products/the industry centeredon the company, which is a method that uses 5forces analysis (a framework forbusiness environment analysis). The company may also use narrative descriptions orillustrations in these discussion materials to give visible form to the worldview.
It may be useful to aim to build internal consensus after establishing acomprehensive worldview that also incorporates perspectives from outside of thecompany.

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2-4.

STEP4.

Evaluate business impacts

When evaluating business impacts, we will evaluate the potential effects from eachof the scenarios defined in STEP3 on the organization's strategic and financial position,and then perform a sensitivity analysis.
Business impact evaluation is performed by using the following process: 1) identify
potential financial indicators affected by risks and opportunities; 2) consider acalculation formula and estimate financial impact; and 3) be aware of the gap between
financial indicators in the estimated impact and in the business as usual. The key
points are in deciding what kind of internal data can be used for estimation, and how
the company treats data that cannot be quantitatively estimated. The company should
also take care not to focus excessively on pursuing numerical accuracy.
Companies undertaking scenario analysis for the first time should aim toquantitatively (or qualitatively, if this is difficult) calculate the estimated impact on
business for "significant risks" and have a rough understanding of the gap between theestimated impact on business and business as usual. The company will also need to
involve operation divisions to obtain their consensus regarding the method of
calculating the impact on business and the resulting figures.
Continuing companies should aim for the following: performing trial estimates forquantitative calculation of the impact on business from significant risks, even for impactthat was initially calculated qualitatively (though qualitative calculation may still be used
where this is difficult); understanding the gap between the impact on business andbusiness as usual; and promoting discussion to obtain consensus from managers andoutside experts regarding the method of calculating the impact on business and theresulting figures.
In addition, for sectors where climate change is material, it is useful to conductbusiness impact evaluation in the target year of 2030 in addition to 2050 from theperspective of decarbonization transitions for both companies undertaking scenario
analysis for the first time and continuing companies.

① Identify potential financial indicators affected by risks and opportunities

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In Phase 1, the company should identify which financial indicators from its financial
statements (P/L and B/S) are affected by impact on business brought on by climatechange.
When identifying the affected financial indicators, the key is in first roughly sorting out
whether the business impact falls under "sales" or "expenses" in the P/L. This isbecause, while changes in expenses may be recorded as-is without any problems,changes in sales become changes in profit (as sales x profit ratio = profit), resulting in amuch greater impact. For example, companies may consider organizing impact itemsin the following manner: having sales be affected by changes in operating revenues
due to the effects of climate change, and having expenses be affected by changes in
raw material procurement costs, carbon tax fluctuations, and damage from increased
physical risk.
By using data that is commonly used by operation divisions (e.g., sales information
by business/product, operational costs, cost structure, greenhouse gas emissions), it ispossible to create estimates that are closer to actual company conditions. Since thecompany will need to gather information by making requests of/receiving cooperationfrom each operation division, it would be ideal to have each operation division develop
an understanding of the TCFD recommendations scenario analysis through the
preparation phase and the risk materiality assessment.

② Consider calculation formula and estimate financial impact
In Phase 2, the company will consider a calculation formula for financial indicators,
and then estimate the financial impact based on internal information. Since performing
calculation for all financial indicators would be too difficult, the key is in starting withfinancial indicators that are possible to estimate. When estimating financial impacts, forsectors where climate change is material, it is also useful to analyze the year of 2030 inaddition to 2050 from the perspective of decarbonization transitions.
The company should consider a calculation formula by combining the data collected
when obtaining the forecast information for related parameters in STEP3 with theinternal data obtained in Phase 1. A hypothetical example would be taking the financial
parameter "carbon tax fluctuations" and using the formula: "the company's 2050 Scope
1 and 2 CO2 emissions amounts (estimated based on internal data) x carbon tax per
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tCO2 for Scope 1 and 2 emissions amounts (obtained from forecast information)".15
Interviews with outside experts and continuous monitoring may be effective methods
for risk/opportunity items that cannot be quantitatively estimated due to the information
being qualitative or having little scientific basis. The key is in classifying risks by review
status (evaluated/not yet evaluated) and clarifying what the next action should be. Forinterviews with external sources, the company could conduct interviews toward outside
experts such as research institutes and specialists regarding risks/opportunities thatcannot be calculated and store the interview results as qualitative information. For
continuous internal monitoring, the company could perform continuous monitoring toobtain up-to-date information on risks/opportunities.

③ Be aware of the gap between future outlook and financial indicators in thebusiness as usual
In Phase 3, the company will develop awareness of the degree of impact on the
future business outlook based on the estimate results it calculated in Phase 2. By
giving visible form to the degree of impact climate change will have on businessoutlook as it currently stands (future business targets/plans), the company will be able
to grasp which risks/opportunities have a significant impact on business, as well as
how great of a threat climate change is to business outlook for future
operations/targets.
When giving visible form to impact, the company should not simply make a list offinancial figures from impact, but rather use waterfall graphs (for example) to illustrate
this by adding/subtracting the estimated financial impact from the predicted operating
income for the target year in the scenario analysis time horizon. This will show the final
profit figures and make it easier for viewers to visualize the impact.

15

For examples of calculation formulas, refer to Chapter 2, p.2-44~2-57

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2-5.

STEP5.

Identify potential response

In identifying potential responses for STEP5, the company should identify applicable,
realistic choices for managing the identified risks and opportunities. The following
responses are indicated here: "changes to the business model", "changes to theportfolio mix", and "investments in capabilities and technologies".
Specifically, the following process will be used: 1) understanding current in-house
responses to risks/opportunities; 2) considering future actions for responding to risks
and acquiring opportunities; 3) establishing an organizational structure and reviewing
specific actions and procedures for the scenario analysis. The company will need toconsider whether any modifications should be made to strategic/financial plans. The
key is that the company be prepared for multiple scenarios and that it discloses
information from the perspective of the reader.
On premise, when considering business strategies, the actions of each operation
division are determined in the process of creating the corporate vision, formulating the
medium-term business plan, and incorporating the business strategies into theoperation division's activities plan. It is possible that, in the course of this process, there
may be a difference in the direction taken by operation divisions versus responses
based on corporate visions and medium-term business plans that do not take climatechange into account. Consequently, it is important that, on principle, the company
include climate change in medium-term business plans. If this is not possible,
approaches should be made based on management's approval (top-down). The
company should take care in such cases, however, as this may vary according to thecorporate culture.
Meanwhile, the TCFD recommendations require specific responses, such as portfoliochanges, business model changes, and low-carbon investment. However, these are
not possible to implement all at once. Consequently, in this Practical Guide, we
describe a process that starts with having the company consider responses according
to the "limited personnel and time period" of the scenario analysis as an extension of
the TCFD recommendations. Based on this, the company will then go on to implement
responses for the company as a whole and in a manner that facilitates incorporation
into the medium-term business plan and implementation by the related
divisions/departments (applicable and realistic options, as stated in the TCFD
recommendations).
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Scenario Analysis Key Points of Practice Guide

Companies undertaking scenario analysis for the first time should proceed in thefollowing direction: 1) identify significant risks requiring responses, and understand thecompany's current response status to significant risks; 2) establish a direction for future
responses to significant risks; and 3) create a rough roadmap for implementing future
responses/scenario analysis.
On the other hand, continuing companies should establish specific initiatives for
future responses to significant risks based on dialogues with investors concerning theresults of prior scenario analysis. It is also important that they work to further flesh out
roadmaps for implementing these initiatives, as well as the framework for theorganization structure needed to carry them out. In addition, one guideline thesecompanies may wish to consider is incorporating TCFD recommendations and climatechange as a concept into the medium-term business plan.

① Understand company’s current status on risks management and seizing
opportunities
The company should understand its response status concerning risks/opportunities
with a large impact on its business and confirm the response status of rival companies
if necessary. It is common to have a situation where the company already has
responses in place (but relevant parties did not realize this due to barriers between
divisions/departments). Because of this, it is key that the company first confirm its
current responses while involving internal stakeholders. It will also be important for thecompany to check that there are no problems with its current initiatives by using othercompanies as benchmarks.

② Consider counter measures for climate-related risk management and seizing
opportunities
In Phase 2, the company will consider specific responses for risks/opportunities
with a large impact on its business. The important point is in planning responses thatare resilient in any given situation. The company may also consider deciding on arough direction for responses as a bare minimum before going on to consider
2-xix

Scenario Analysis Key Points of Practice Guide

responses in the course of ongoing implementation. When considering responses, themembers responsible for scenario analysis initiatives may work as a team to come up
with examples to use to identify candidates for potentially relevant
divisions/departments. For companies that have calculated the business impact for2030 in addition to 2050, if the impact for 2030 is large, it is important to additionallyconsider how to recover for 2050 (e.g., investment in technology, expansion of energysaving facilities, etc.).
Additionally, there may be cases where, when incorporating responses into themedium-term business plan, the members responsible for scenario analysis initiatives
will need to negotiate a list of responses with the relevant departments/divisions ifclimate change has been included in the departments/divisions' activities plans. If a
good relationship has already been established with the relevant department/division, it
will be possible to immediately select responses that are related to existing business
operations (for example, EV development for automobile companies). In cases where
there is no relationship with existing business operations, then it will be key to establish
responses based on the medium-term business plan described above.

③ Establish practical action plans on organization structure
In Phase 3, the company should establish the organizational structure required toproceed with responses and commence with practical actions with the cooperation of therelevant department/division. It should also consider how it will proceed with scenario
analysis in the future. Once the responses have been incorporated into the medium-termbusiness plan and management has given its approval, the next step is to establish anorganizational structure (involving the relevant departments/divisions) and moving on topractical actions with the relevant departments/divisions. It is important that the company
continue conducting scenario analysis itself as well as monitoring external information atleast once per year, so the company will need to define the methodology for theseprocesses.
The key points are the following: 1) incorporating climate change into business planssuch as medium-term management plans; 2) establishing an organizational structure (orrestructuring) based on management's understanding of the above (covered by therequired governance items in the TCFD recommendations: “Describe the board's
2-xx

Scenario Analysis Key Points of Practice Guide

oversight of climate-related risks and opportunities”; and “Describe management's rolein assessing and managing risks and opportunities” 16 ). When establishing anorganizational system, a cross-sectional organization on climate change and related
issues could be created directly under the corporate planning department in order tomake the scenario analysis results more effective.
Additionally, it is key that the company conduct scenario analysis/disclosure/businessstrategy as a cycle (not as a one-time effort, as the goal is to create corporate value),
because this will give the process consistency and enable the necessary continuous
monitoring.

16

Refer to Chapter 1, p.1-25

2-xxi

Scenario Analysis Key Points of Practice Guide

2-6.

STEP6

Document and disclose information

In STEP6, the company will perform information disclosure after appropriately
documenting the contents of the steps up to STEP5. In Japan, the revised Corporate
Governance Code requires disclosure based on the TCFD recommendations forcompanies listed on the prime market, and the importance of appropriate disclosure isincreasing. In addition, to the announcement at the end of January 2023 on theamendments toward “Cabinet Office Order on Disclosure of Corporate Affairs” by the
Financial Services Agency, a section on sustainability information has been added tothe securities reports. Due to the increasing demands for climate related financial
disclosures, the number of cases of disclosures in securities report as well as
integrated reports are increasing.17
When disclosing, the key points are for the company to document the positioning of
the scenario analysis in the TCFD's recommended disclosure items as well as theresults obtained from each step to ensure proper disclosure and enhance corporate
value. Specifically, this should be done according to the following process: 1) describe
the relationship between the TCFD's recommended disclosure items and the scenario
analysis; 2) describe the results from each step. It may also be helpful to reference the
TCFD Guidance18.
Companies undertaking scenario analysis for the first time should proceed in thefollowing direction: 1) describe the relationship between the TCFD disclosure items andscenario analysis; 2) describe the results for each step of scenario analysis toward
significant risks; and 3) describe the company's response policy to risks.
On the other hand, companies continuing with scenario analysis should aim for thefollowing based on dialogues with investors concerning the results of prior scenario
analysis: 1) describe the relationship between TCFD disclosure items and the scenario
analysis; 2) describe the results of scenario analysis toward significant risks in as
quantitative a manner as possible for each step; and 3) describe the company's
response policy to risks and specific initiatives.

17

For examples of disclosure in integrated reports and securities report, refer to Chapter 4。

Refer to “TCFD Guidance 3.0” at the following URL
https://tcfd-consortium.jp/news_detail/22100501
182-xxiiScenario Analysis Key Points of Practice Guide① Describe the relationship between the TCFD`s recommended disclosure
items and the scenario analysis
When performing disclosure, the company should first describe the positioning of the
scenario analysis in relation to the TCFD's recommended disclosure items (11 items
total)19 . Specifically, the relevant part of scenario analysis considered here is Strategy:
C in the TCFD recommendations, which states: " Describe the resilience of theorganization’s strategy, taking into consideration different climate-related scenarios,
including a 2°C or lower scenario ".
Scenario analysis is only part of the TCFD's recommended disclosure items, so it
may be helpful to effectively use contrast charts and other methods to show an overall
picture of the disclosure in line with the TCFD recommendations.

② Describe the results obtained from each step
The next process is to list the scenario analysis results obtained up until now foreach individual step. The key points are to clearly describe what kinds ofrisks/opportunities have been identified through the scenario analysis and show theorganization's strategic resilience regarding climate change, such as what kinds of
responses the company will implement. There is the view that it is not the disclosure
itself that investors and experts are actually interested in; they are more concerned thatthe disclosure show the identified risks/opportunities and the impact on businessstrategy that can be seen in the scenario analysis results.
Specific items that should be included in order to show the organization's strategic
resilience include the following: the status of climate change-related governancestructure; information of data used as the basis for each scenario analysis; explanationof the appropriate transition of the company toward decarbonization by 2050;
current/future initiatives toward risks/opportunities identified from the scenario analysis;
narrative for climate change-related value creation based on scenario analysis results;
and how the company will proceed with scenario analysis in the future and achieve the19

Refer to Chapter 1, p.1-25

2-xxiii

Scenario Analysis Key Points of Practice Guide

goals.
On the other hand, the question of what information to disclose, and to what extent(when disclosing quantitative information, for example) is an issue often faced bycompanies undertaking scenario analysis. Some investors say that, in view of thepenetration of the system and the recent trend to strengthen disclosure of climaterelated information, it has been suggested that the disclosure of quantitative
information will also be considered. Companies may consider performing disclosureswhile bearing in mind that investors are focusing on the effect on business, such as
management's involvement in scenario analysis and how scenario analysis results willbe leveraged into the company's business/management.
Furthermore, companies should not perform disclosure once and then leave it atthat, but rather continuously increase the sophistication of the scenario analysis byhaving continued dialogue with investors based on the disclosure. Gradually enhancing
the disclosure of the information used as evidence in the analysis based on dialogues
with investors may lead to increased corporate value.

2-xxiv

2. Scenario Analysis - Key Points of Practice
Scenario Analysis Guide - Key Points of Practice2-1. For beginning scenario analysis
2-2. STEP2. Assess materiality of climate-related risks
2-3. STEP3. Identify and define range of scenarios
2-4. STEP4. Evaluate business impacts
2-5. STEP5. Identify potential responses

2-6. STEP6. Document and disclose information
Chapter 2. Scenario Analysis - Key Points of PracticeThis chapter explains how to practically undertake scenario analysis anddescribes key points of its practice, based on use cases performed by companies
under the support program of the Ministry of the Environment.

The TCFD recommendations present 6 steps as a procedure for scenario
analysis; we explain these with a focus on STEP2 to STEP6
1

2

Ensure governanceIs in place

Integrate scenario analysis into strategic planning and/or enterprise risk management processes.
Assign oversight to relevant board committees/subcommittees.
Identify which internal (and external) stakeholders to involve and how.

Assess materiality ofclimate-related risks

3

Identify and define
range of scenarios

4

Evaluate business
impacts

Get management andoperation divisions involved

Identify potential
responses

5

Impact on:

Market andTechnology
ShiftsReputation

Policy andLegalPhysical
Risks

Pick and choose fromyour industry andcompany viewpoint!

Responses might include

Scenarios inclusive of arange of transition andphysical risks relevant to
the organization

technologies

Clearly imagine a futureworld undercertain assumptions!

Do not narrow down!
Take multiple scenarios
into account.

Try not to seek
too much accuracy!

Tips(examples)

What granularity should be usedin assessments such as riskmateriality?

Subdivision by sector/supply
chain enables analysis that
conforms to the business's
operations

6

Documentation and disclose

Sources: The Task Force on Climate-

Which kinds of scenarios should
be selected?

Selecting scenarios withtemperature ranges andworldviews with as muchvariation as possible will help
Overviews of each scenario
and example parameters arealso provided

How should items that cannot be
estimated quantitatively behandled?

What kinds of steps should be
used to proceed in the future?

Continuous monitoring andinterviews with external experts
will be used for information whichis qualitative or lacks sufficientscientific evidence.
It is important to sort out theevaluated/unevaluated risks andclarify the next action to be taken

The goal is to integrate climatechange strategies with operations
and increase corporate value.
Scenario analysis will be themomentum behind a continuous
cycle of disclosure and system
restructuring (integration withmanagement strategy)

Document the process; communicate to relevant parties: Be prepared to disclose
key inputs, assumptions, analytical methods, outputs, and potential management responses

Disclose information

ure of Climate Related Risks and(Notes in red: Points to consider in each step were added after the support program)

Scenario analysis is the analysis of the impact of climate change on thecompany based on a set scenario; by quantifying impact, it can lead tounderstanding of specific impacts and to effective disclosures[Scenario analysis: Sample evaluation of impact on business]
100 millions JPY
4 C scenario

1.5 C scenario
-XX%

-XX%

-XX millions JPY+XX millions JPY-XX millions JPY-XX
millions
JPY-XX millions JPY+XX
millions
JPY

0

Understand the degree of impact climate change will have on the current business outlook trajectory(future management goals/plans)
Scenario analysis is conducted as a process where the materiality of climate change risks is evaluated, a set of scenarios are selected,
and then the impact on business is evaluatedp2-2
Of the various STEPs, it is particularly important to use business impact evaluation (STEP 4) to understand the financial impact ofclimate change
p2-38 2-57
It is a key to take a step-by-step approach in quantifying financial impacts, such as starting with items that have a significant impact, suchas carbon tax
p2-4 2-6
Page number

How to View the Key Points of Practice

We describe scenario analysis procedures and the different levels for companies
based on their prior experience with conducting scenario analysis
TCFD scenario analysis procedures

Description of the different levels for
implementing gradual initiatives based
Level

companies

Assumed targets
Companies conducting
scenario analysis for the(for example,
companies in their firstyear of scenario
analysis)

Explanation of points
Explains key points and points that may be tricky
when conducting scenario analysis

Sure and steady
implementation withawareness of the key
points of practice, in linewith the direction for
Try starting to implement

Explanation of practical steps
Explains the necessary steps for conducting
scenario analysis

initiatives

possible

Continuing
companies

Companies conducting
scenario analysis for the, but which
are already working on
initiatives related toclimate change tosome degree

Move on to the next stepCompanies that havealready implemented
scenario analysis (forexample, companies intheir second year of
scenario analysis)

Use disclosures anddialogue with investors
to enhance analysis andpresentation of evidence

and use this to increase
the sophistication of
decarbonizedmanagement

Directions for Scenario Analysis (1/2)

Scenario analysis should be conducted on an ongoing basis, and built
upon gradually
Page number

Direction forcompanies

For beginning scenario analysis

STEP2
Assess materiality ofclimate-related risks

STEP3
Identify and define range of
scenarios

Internal consensus has beenreached for conducting scenario
analysis (management consents)

Main climate-related risks for thesector and the company have been
p2-19~21
identified

Reliable external scenarios are beingusedp2-27~35

p2-9~10The cooperation of operation
divisions has been obtained

Additionally, the specific impacts fromrisks have been hypothesized

p2-11~13

Direction forcontinuing
companies

Operation divisions can take the leadin conducting scenario analysis
p2-11~13

The scope / parties responsible(structure) for scenario analysis has
increased compared to the initialeffortp2-11~16

p2-27~35

p2-21~23

The scope/parties responsible(structure) for scenario analysis
have been identified
p2-11~16
The results of the previous scenario
analysis are understood bymanagement / the heads of the
responsible divisions
p2-9~10Multiple scenarios, including those for
2 C or lower (currently 1.5 C), havebeen selected (1.5 C, 2.5 C 4 C)
The worldview for each scenario has
been described in detail, and internal
consensus has been reachedP2-36~37(Based on dialogue with investors)
Main climate-related risks for thesector and the company have beenfurther specified throughincreasing the involvement ofoperation divisions and outside
experts
p2-19~21
The specific impacts from risks havealso been further specified throughincreasing the involvement ofoperation divisions and outside
experts
p2-21~23(Based on dialogue with investors)
Reliable external scenarios are being
used, and additional scenario
information for significant risks
have also been supplemented
p2-27~35

Multiple scenarios, including thosefor 1.5oC, have been selected (1.5 C,
2 C, 2.5 C 4 C)
p2-27~35
The worldview for each scenario has
been described in detail, and has
also been discussed with outside
P2-36~37
experts

Directions for Scenario Analysis (2/2)
STEP4
Evaluate business impacts

Direction forcompanies

The impact on business from significant risks
has been calculated quantitatively (orqualitatively if the former proves difficult)even if this is only a trial estimate
p2-41~45,
The gap between the impact on P2-52~57
business and normal results is understoodp2-46~49
The operation divisionagrees with the method of calculating theimpact on business and the
p2-50~51,
resulting figures
P2-57
In sectors significantly affected by climatechange, the impact on business has been
calculated with 2030 to 2050 as the target
fiscal years
p2-45~49(Based on dialogue with investors)

Direction forcontinuing
companies

Trial estimates for quantitative calculation of
the impact on business from significant risks
has been performed even for impact thatwas initially calculated qualitatively(though qualitative calculation may still be
p2-41~45,
used where this is difficult)P2-52~57
The gap between the impact on business andnormal results is understoodp2-46~49
Management and outside experts agreewith the method of calculating the impact on
business and the resulting
p2-50~51,
figuresP2-57
In sectors significantly affected by climatechange, the impact on business has been
calculated with 2030 to 2050 as the target
fiscal years
p2-45~49

Page number

STEP5
Identify potential responses

STEP6
Document and disclose information

Risks requiring responses have been
identified
p2-62

The relationship between TCFD disclosure
items and the scenario analysis has been
described
p2-71

significant risks is understood

The results of scenario analysis toward
significant risks has been described for eachstep
p2-72~74

p2-62

Policies for future responses toward
significant risks have been establishedp2-63
A rough roadmap for future response
measures / how to proceed after scenario
analysis has been preparedp2-64(Based on dialogue with investors)

been described

p2-72~74

An appropriate disclosure medium has been
selected
p2-72~74(Based on dialogue with investors)

Risks requiring responses have been
identified
p2-62

The relationship between TCFD disclosure
items and scenario analysis has been
described
p2-71

significant risks is understood

The results of scenario analysis toward
significant risks has been described in as
quantitative a manner as possible for eachstep
p2-72~74

p2-62

Specific initiatives for future responses
toward significant risks have been
establishedp2-63
A roadmap and organizational structure
for future response measures / scenario
analysis has been establishedp2-64

specific initiatives have been described
p2-72~74
An appropriate disclosure medium has been
selected
p2-72~74

2. Scenario Analysis - Key Points of Practice
Scenario Analysis Guide - Key Points of Practice2-1. For beginning scenario analysis
2-2. STEP2. Assess materiality of climate-related risks
2-3. STEP3. Identify and define range of scenarios
2-4. STEP4. Evaluate business impacts
2-5. STEP5. Identify potential responses

2-6. STEP6. Document and disclose information
Chapter 2. Scenario Analysis - Key Points of PracticeThis chapter explains how to practically undertake scenario analysis anddescribes key points of its practice, based on use cases performed by companies
under the support program of the Ministry of the Environment.

When starting a Scenario Analysis

Gaining understanding from management on the significance of scenario analysis
is important. Establishing a team, scope and time horizon is necessary whenstarting scenario analysis
Preparation (1)understanding
Make sure management
understands the materialityof the TCFD
recommendations(Recognizes the TCFD
recommendations and instructs
that they be complied with)

Preparation (2)Preparation (3)Preparation (4)Establish execution
team

Choose target foranalysis

Setting the analysis
time axis

Create an execution team for
scenario analysis

Set a target scope for the
scenario analysis

Choose time horizon to
conduct scenario analysis
that looks beyond X years in
the future

Note

Note

How to provide input tomanagement in termsof climate change

How to involve each
operation division(1), (2)Preparation (1)Companies conduct scenario analysis regularly (recognition of a broad range of risks andidentification of potential responses). It is crucial for management to understand that investors
expect companies to conduct scenario analysis on climate change.

In a longer term, where outcomes are highlyIn

VisionTargetMedium term business plan (3-5 Years)

Assume multiple scenarios

Business strategy cannot respond to changes in the
futureThe discussion never reaches a consensus on future
perspectives
Suspected of lacking business resilience

Business management can flexibly respond to futurechangeThe discussion takes places without any subjective
viewpoints on futureManagement can demonstrate business resilience

How to provide input to managementin terms of climate change
It is effective to convey the effect that climate change solutions have on the value of businesses
through workshops with experts

Input from multi-stakeholders

Investors andexperts

NPONGO

ESG investments
Requirement of TCFD
Disclosures
Engagement
OthersOther
companies
in the same
industry

Management level

Compliance
Requests, etc.

Comparison withpeer companies, etc.

Business-related departments
Environment-related departments

Changes in consumer preferences
Specific impacts of climate change on your company, etc.

There are increasingly frequent requests
from multi-stakeholders for responses toclimate change. While there are cases
where management hears about thesetrends directly, there are also cases
management.
In such a case, it is important to compile
the status of requests from multistakeholders, and input to management
through study groups with experts andother means that responding toclimate change can affect corporate
value.
Continuing to input the results of climatechange-related scenario analysis fromthe second round and after onward will
understanding of the specificopportunities/risks related to climatechange for the company.

Preparation (2)Create an execution team for scenario analysis

The implementation of scenario analysis requires internal involvement.
It is important to involve business divisions from the initial stage and have them consider

Pattern A

Pattern B

Get relevant divisions and departments involved
during scenario analysis* Image

Start

STEP2

Develop internal teams and start scenario analysis* Image

STEP3
Business
Divisions

Business
Divisions

Accounting and
Finance

Accounting and
Finance
Management

Management
IR

Scenario analysis team

Environment and
CSR
IRCorporate Planning

Advantages
Easy to start
Minimum burden on each division/department
Disadvantage
Internal coordination needed in the scenario analysis
process
Long process from the environment/CSR division to
management

Environment and CSR

Corporate
Planning

Advantages
Divisions are cooperative as internal coordination iscompleted in advanceThe process swiftly reaches top management as awell-coordinated team performs analysis
Disadvantage
Takes time to start analysis
Great burden on each division/department

How to involve each operation division (1)The following use cases exist as examples for involving operation divisions
for companies that have implemented scenario analysis.
useful strategies, and daily communication of information within the company will also help promote understanding.

Narratives for each operation division
It may be good to put the focus on how the company as a whole can reduce its CO2 emissions through thecontributions of various areas such as products and procurement, rather than concentrating only on reducing
emissions from processes. Framing it in such a way could promote greater participation from each operation division.
Since each operation division is connected, we can motivate them by having each operation division consider
strategies they can implement and come up with a storyline for what to do. The important thing is showing what
they can do as a business, and not being limited to environmental measures.

reviewed based on external data at the management committee, so if there is anything that you as a division
think should be corrected, please let us know
The backing ofallows us to use the momentum to involve operation divisions
While centered on the reduction targets set for the entire company, the project involves related departments,
executives involved in sustainability promotion, and conference bodies.
There are many other issues besides climate change, and some might argue that those issues should be addressed
first. However, we emphasize that there is a need for us to focus on measures against climate change, as thisis something that is required of us as a company.
Having management position climate change measures as a priority issue enables us to gain operation

Strengthening communication of information within the company
We started communicating information within the company about the TCFD recommendations from the
beginning stage of their implementation, so there was no sense of resistance internally as our staff was alreadyaware of them.
When it became time to proceed with the scenario analysis, each division responded quickly by assigningmembers to the scenario analysis team.

How to involve each operation division (2)Operation divisions should also take the lead and be involved in the scenario analysis process.
In the initial stages, it is assumed that operation divisions will provide interviews/data regarding
the analysis results from ESG/sustainability-related departments

Structure for conducting
scenario analysis

How operation divisions
are involved

Departments or otherunits responsible for
ESG/sustainability willtake the lead in
conducting scenario
analysis and interviews
with operation divisions

Provide data to those
conducting scenario
analysis

Provide feedback on
analysis results (foranalysis conducted byother divisions)

ESG/sustainabilityrelated departments
perform a secretarial role

Provide data to those
conducting scenario
analysis

Operation divisions
conduct scenario
analysis/intra-divisional
interviews

Conduct scenario
analysis for related
target areas

Companies
undertaking
scenario
analysis for the
first time

Companies
continuing toconductscenario
analysis

Positions in the operation
division that are involved
Not specified
However, the responsible
parties within theoperation division should
understand thesignificance andoverview of scenario
analysis
Positions closest to decision
making processes should be
involved, as it will benecessary to involve
operation division members
in tasks such as datacollection and promoting
countermeasures

Intra-divisional interviews

Choose target for analysis

Preparation (3)By defining the scope in terms of sales composition, relation to climate change, and difficulty of datacollection, companies can conduct scenario analysis in accordance with their business model. Gradually
expanding the scope of scenario analysis after the second round will enable a more comprehensive analysis
Item

Options for Scenario Analysis Scenario (Example)

RegionDomestic

Overseas

Scope of
Operations

Some businesses

All businesses

Corporatescope

Only for the scope of consolidated
financial statements

Entire supply chain

Proposal for selection (1)Proposal for selection (2)Identify scope of business basedon sales composition ratio[Sales composition (%)]

Proposal for selection (3)Identify scope of business basedon relevance to climate change[CO2 emissions (tCO2)]

Business C
11.8%
Business C
Business B

33.3%

98,765
123,456 Business A

54.9% Business A
3,549
Business B

Let's analyze business A andbusiness B, which have alarge sales composition

Consider businesses A and C,
which emit a large amount ofCO2.

Identify the scope based on
difficulty of data collection[CO2 emissions (tCO2)]
Foreignbranch X

Abundant internal
data

Foreignbranch Y

No internal data

Foreignbranch Z

No internal data

As for the overseas business,start with X with ample data.

Choose time horizon to conduct scenario analysis

Preparation (4)Select the year for analysis from perspectives such as the business plan period, status of involving people
inside the company, degree of impact from physical risks on the company. Based on societal
decarbonization trends, analysis over the 2050-time horizon is considered effective[Forecast of global average surface temperature]

4 C scenario
2 C scenario
1.5 C scenario

2030 2050[Discussions on time horizon decisions raised in support projects (examples)]Benefits
Disadvantage
2050

Physical risks are emerging
Enables analysis in line with societal
decarbonization trends (carbon neutrality
by 2050)

time horizon
for business planning, and getting
management / people inside the company
involved may be difficult

2030

Abundant data available for reference
Relatively easy to link with business
plans

Possibility that the impact of physicalrisk is small and that the impact on thecompany will be low*For companies in sectors which are significantly impacted by climate change, conducting analysis for2030 as well as 2050 is also considered effective
Source: AR6 WG

Chart SPM.29 (IPCC), I

Considering a plan for transitioning to decarbonization
In sectors where climate change has a significant impact, scenario analysis for the target year
2030 in addition to 2050 can be useful to examine the mid- to longThe transition path toward 2050 may not necessarily follow the 1.5 C path
CO2 emissions

2 C path

2 C scenario
Gap with 1.5 C path (carbon
neutrality by 2050) as of 2030
1.5 C path

Transition to 1.5 C
through recovery
from the 2030 gap

1.5 C scenario

2020

2030

2050

The following points should be considered when investigating the transition toward decarbonization for carbon neutrality by 2050:
Is there a significant financial impact in the 1.5 C scenario as of 2030? (i.e., is there a gap between the 1.5 C path and the
If there is a significant financial impact, how will the company recover from it? (investing in technologies, building more lowenergy facilities, etc.)
Furthermore,record, capital investment timing, etc.), so short and medium-term targets (e.g., for 2030) may not necessarily be on the same
linear axis as long-term targets (2050), and also the path may not even be linear

Source: Financial Services Agency, Ministry of Economy, Trade and Industry, Ministry of the Environment,

Guidelines on Climate Transition

2. Scenario Analysis - Key Points of Practice
Scenario Analysis Guide - Key Points of Practice2-1. For beginning scenario analysis
2-2. STEP2. Assess materiality of climate-related risks
2-3. STEP3. Identify and define range of scenarios

2-4. STEP4. Evaluate business impacts
2-5. STEP5. Identify potential responses
2-6. STEP6. Document and disclose information
Chapter 2. Scenario Analysis - Key Points of PracticeThis chapter explains how to practically undertake scenario analysis anddescribes key points of its practice, based on use cases performed by companies
under the support program of the Ministry of the Environment.

Assess materiality of climate-related risks:
What are the current and anticipated organizational exposures to climate-relatedrisks and opportunities?
(Notes in red: Points to consider in each step were added after the support program.)

1
2

Ensure governanceIs in place

Assess materiality ofclimate-related risksMarket andTechnology
ShiftsReputation

Policy andLegalPhysical
Risks

What are the current andanticipated organizational
exposures to climate-relatedrisks and opportunities?
Do these have the potential to
be material in the future? Are
stakeholders concerned?
Pick and choose fromyour industry
and company viewpoint!

6

Get management
and operation
divisions involved!

Integrate scenario analysis into strategic planning and/or enterprise risk management processes.
Assign oversight to relevant board committees/subcommittees.
Identify which internal (and external) stakeholders to involve and how.

3

Identify and define
range of scenarios

4 Evaluate business
impacts

Identify potential
responses

Impact on:

Responses might include

Scenarios inclusive of arange of transition andphysical risks relevant to
the organization

What scenarios (andnarratives) are appropriate,given the exposures?
Consider input parameters,
assumptions, and analyticalchoices. What reference
scenario(s) should be used?

Clearly imagine a future world
under certain assumptions!

5

model

capabilities andtechnologies
Evaluate the potential effects
and financial position undereach of the defined scenarios.
Identify key sensitivities.

Try not to seek
too much accuracy!

Use the results to identify
applicable, realistic decisions
to manage the identified risks
and opportunities.
What adjustments tostrategic/financial plans would
be needed?
Do not narrow down!
Take multiple scenarios
into account.

Document the process; communicate to relevant parties: Be prepared to disclose
Documentation and
key inputs, assumptions, analytical methods, outputs, and potential management responses
disclose
Sources: The Task Force on Climate-

Disclose information
ure of

Overview

List risk items, identify the potential impacts on business, and assess materiality ofclimate-related risks
Stage1
List risk items
List the risks and opportunities
related to targeted businessareas

Stage2
Identify potential impacts on
business

Stage3
Assess the materiality ofclimate-related risks

From the list of risk andopportunities, qualitatively
describe the potential impact on
business

Conduct risk assessment basedon scale of impact (large tosmall) and determine how
important it isNote

To what extent should the risk assessment be conducted?

Stage1: List risk items

List risk and opportunity categories for targeted business areas
Classification

Risks and Opportunities Related to Climate Change(Examples)

Carbon price
Carbon emissions targets/policies
argets/policies ineach country

PolicyRegulation Energy-saving policy

Fossil fuel subsidies

External reports(Industry-specific reports such as
SASB Standard, WBCSD Scenario
Analysis Guide, etc.)

Subsidies for renewable energy, etc.
Transition
Risk /
Opportunity

Changes in the energy mix
MarketChanges in energy demand

Changes in important
products/prices
Diffusion of renewable energy andTechnologies
energy-saving technologies

TCFD Recommended
Disclosures

Reputation

CDP responses fromcompetitors(CDP responses, etc.)

Changes in investor's reputation
Increase in average temperature

PhysicalOther external
information

Changes in customer reputation

Chronic

Risk /
Opportunity

Changes in rainfall and weather
patterns
Rising sea level

Acute

Increasing severity of extreme
weather conditions

Stage2

Describe the possible business impact qualitatively

From the list of risk and opportunity items, qualitatively describe thepotential impact on business

It is important toconsider not only
the company's risks
but also its
opportunities
Separate the risks andopportunities and examine
them

Describe the possible impact in a narrative manner throughdiscussions with related parties within the company, basedon the company s business model, etc. If the analysis is tobe conducted in the second round, it may be a good idea toinclude external stakeholders in the discussion.

CDP
responses
fromcompetitors
External reports and other external
information

Discuss with internal stakeholders

Source: This Practical Guide (example of GUNZE: 3-69)

Stage3

Determining risk materiality

Determine the materiality by looking at the magnitude of the business
impact for each risk and opportunity
Business
impactLarge

Risks and opportunities tied
to business impact

Carbon price
Changes in important
products/prices

MediumChanges in the energymix
Changes in the
reputation of customers
and investors

Small

Energy-saving policy
Fossil fuel subsidies
Subsidies for renewableenergy, etc.
Energy demand
Improving efficiency

Policies and regulationsof each country
Changes in rainfall andweather conditions

Compare each risk andopportunity item from theperspective of the size of thebusiness impact
Example: Rate risks andopportunities that impact in a wide
range, and those that relate toRate those that have no impact on

Diffusion ofrenewable/energy-saving
technologies
Rising sea levels
Increasing in severity of
extreme weather conditions

Example of Analysis(Changes in important Products)

Since raw materials
account for a large
proportion of the cost of
sales, the business
impact may be large.

To what extent should the risk assessment be conducted?
Assessing materiality of risks after categorizing them by differences in products (by sector)
and affected supply chains (by supply chain) enables an analysis
that is convincing to management
Example (1)Example (2)Materiality assessmentof risks by sector

Risk Item

Materiality assessment of risks
by supply chain

Materiality assessmentof risks by sector

Risk Item

Materiality assessment ofrisks by supply Chain
Procur Transpo
Sales
ement rtation

X

Y

Z

Risk A

Large

MediumSmall

Risk A

Large Large

Small

Risk B

Small

Small

Large

Risk B

Small

Large Large

Opportunity C

Large

Medium Medium

Opportunity C

Large Medium Medium

Opportunity D

MediumLarge Large

Opportunity D

Medium Large Large Large

Small

MediumSmall

2. Scenario Analysis - Key Points of Practice
Scenario Analysis Guide - Key Points of Practice2-1. For beginning scenario analysis
2-2. STEP2. Assess materiality of climate-related risks
2-3. STEP3. Identify and define range of scenarios
2-4. STEP4. Evaluate business impacts
2-5. STEP5. Identify potential responses

2-6. STEP6. Document and disclose information
Chapter 2. Scenario Analysis - Key Points of PracticeThis chapter explains how to practically undertake scenario analysis anddescribes key points of its practice, based on use cases performed by companies
under the support program of the Ministry of the Environment.

Identify and define range of scenarios:
What scenarios (and narratives) are appropriate, given the exposures?
(Notes in red: Points to consider in each step were added after the support program.)

1
2

Ensure governanceIs in place

Assess materiality ofclimate-related risksMarket andTechnology
ShiftsReputation

Policy andLegalPhysical
Risks

Get management
and operation
divisions involved!

Integrate scenario analysis into strategic planning and/or enterprise risk management processes.
Assign oversight to relevant board committees/subcommittees.
Identify which internal (and external) stakeholders to involve and how.

3

What are the current andanticipated organizational
exposures to climate-relatedrisks and opportunities?
Do these have the potential to
be material in the future? Are
stakeholders concerned?
Pick and choose fromyour industry
and company viewpoint!

Identify and define
range of scenarios

4 Evaluate business

5

impacts

Identify potential
responses

Impact on:

Responses might include

Scenarios inclusive of arange of transition andphysical risks relevant to
the organization

What scenarios (andnarratives) are appropriate,given the exposures?
Consider input parameters,
assumptions, and analyticalchoices. What reference
scenario(s) should be used?

Clearly imagine a future world
under certain assumptions!

model
capabilities andtechnologies
Evaluate the potential effects
and financial position undereach of the defined scenarios.
Identify key sensitivities.

Try not to seek
too much accuracy!

6

Use the results to identify
applicable, realistic decisions
to manage the identified risks
and opportunities.
What adjustments tostrategic/financial plans would
be needed?
Do not narrow down!
Take multiple scenarios
into account.

Document the process; communicate to relevant parties: Be prepared to disclose
Documentation and
key inputs, assumptions, analytical methods, outputs, and potential management responses
disclose
Sources: The Task Force on Climate-

Disclose information
ure ofOverview

Choose scenarios, obtain forecast information on parameters, and shape
the worldview
Stage 1

Choose scenarios

Stage 2

Stage 3

Obtain forecast information on
relevant parameters (variables)

Shape the worldview inconsideration of stakeholders
Based on forecast information,

Choose a number of scenarios withdifferent temperature targets,
including the below 2 C (1.5 C).

Note

What kind of scenarios
should be chosen?

Obtain objective forecast
information of relevant parameters
on each risk and opportunity items
and identify the effects to thecompany in further detail.

Note

What kind of scenario is the
1.5 C scenario?
Parameter Example

performance, and work towards
achieving internal and external
consensus by incorporating theperspectives from outside ofcompany (If needed).

Note

How to coordinate theworldview with eachbusiness division?

Sources: This Practical Guide (UACJ example: 3-129, GUNZE example: 3-76, Mitsui Mining & Smelting example: 3-113)

Stage1: Choose scenarios

We will select scenarios from multiple temperature ranges, including the
below 2ºC (1.5 C) scenario, in order to respond to an uncertain future
SSP3-7.9: +2.8 4.6 C (approx. 3.6 C)
Mid- to high level reference scenario in which climate
countermeasures are not adopted due to confrontational
stances toward development between different regions
Large volume of emissions besides CO2, such as
aerosols[Predicted global surface temperature change](Difference with the 1850 1900 average)

SSP2-4.5: +2.1 3.5 C (approx. 2.7 C)
Climate countermeasures are adopted, and development
is neutral. Emission levels are largely on par with theincrease compared to pre-industrial levels by the end of
the 21st century is approx. 2.7 C (best estimate)
SSP1-2.6: +1.3 2.4 C (approx. 1.8 C)
There is sustainable development, and climate
countermeasures are adopted to keep the temperature
increase to below 2 C compared to pre-industrial levels.
Net zero CO2 emissions is expected to be achieved by
the latter half of the 21st century
SSP1-1.9: +1.0 1.8 C (1.4 C)
There is sustainable development, and climate
countermeasures are adopted to keep the increase intemperature (median value) by the end of the 21st century
mostly to approx. 1.5 C (there may be cases where it
exceeds it slightly) or below compared to pre-industrial
levels. Net zero CO2 emissions is expected to beachieved by the mid-21st century

2020: +approx. 1.09 C(2011-2020 average)

Up to 2030, the 2 C and 4 C scenarios have mostly the same level of temperature change. Starting in 2030, the gap between the scenarios widens
The equilibrium climate sensitivity (ECS) for 2100 has a likely range of 2.5 4 C and a very likely range of 2 5 C, and a median value of 3 C
If current trends continue, global warming will exceed 1.5 C and 2 C within the 21st century if emissions of CO2 and other greenhouse gases are
not significantly reduced within the next few decades
Source: AR6 WG

Figure SPM.29 (IPCC), Ministry of the Environment(Reference)

WEO 2022 evaluates NZE, which is a prescriptive scenario, and APS andSTEPS, which are exploratory scenarios, as the 3 main scenarios
Global temperature rise in each WEO 2022 scenario
Exploratory

The Stated Policies Scenario (STEPS)
Policies Scenario
The temperature rise in 2100 will be 2.5 C
Realistically examines the current policy situation and indicates the
direction of the energy system in the absence of new policies
Based on detailed sector-by-sector review of the policies andmeasures that are in place or under development in variety of areas.
Also assesses relevant regulatory, market, infrastructure andfinancial constraints. goals

Exploratory

The maximum temperature is introduced with a 50% probability

Assumption
Temperature rise in 2100 will be 2.5 C in STEPS, and 1.7 C in
APS
Temperature rise in the NZE scenario peaks below 1.6 C around2040 and then falls to around 1.4 C in2100
Demand, electricity and fuel conversion are modeled for 26 countries
and regions, while the supply side is modeled for all major producers
Assumes the war in Ukraine will not end in a quick and stablemanner and that the international sanctions against Russia will
be prolonged. On the other hand, the report assumes that theinternational situation in other countries with major resources subject
to sanctions (such as Iran and Venezuela) will gradually normalize
SourceThe Announced Pledges Scenario (APS)
Pledges
The temperature rise in 2100 will be 1.7 C
All climate change commitments are accounted, including NDC andlong-term net zero targets. Assumes all targets are met on-time.
Expanded the analysis to consider the impact on countries that havenot made ambitious long-term commitments when cost reductions inclean energy technologies are accelerated

Prescriptive
Net Zero Emissions by 2050 Scenario (NZE)
The temperature rise in 2100 will be 1.4 C
With a rapid increase in clean energy policies and investments,
leading developed countries will reach net zero faster than others
Meet key elements of the UN Sustainable Development Goals forenergy: achieving universal access to energy and significantly
improving air quality by 2030

IEA

See chapter 5 for examples of the parametersWhich scenario should be chosen?

also be effective to consider scenarios based on recent decarbonization trends (currently 1.5 C)

SSP

IEA WEO
Scenario/temperaturerange

Socioeconomic scenario based onrecent policies and the socioeconomic
environment
Lists the macroeconomic
information scenarios are based onfor each scenario

Lists medium- to long-term energy
market forecasts
Lists future information(quantitative/qualitative) related toenergyNGFSPRI IPR(Shared Socioeconomic
Pathways)(World Energy Outlook)(Inevitable Policy Response)(Network for Greening the
Financial System)

Scenario for climate-related policies
that are likely to be implemented in
the short term
Lists qualitative and quantitative
forecasts for climate-related policies
FPS scenarios also include some
forecasts for natural policies

A common climate scenario for
central banks and financial
supervisors
Scenarios are divided into
temperature zones, technologicaldevelopment, and speed of policy
response

SSP1 SSP2 SSP3 SSP4 SSP5

RCP8.5
4 C

RCP6.0
RCP4.5Current Policies (3 C+, Hot house world)
NDCs (2.6 C, Nationally Determined

STEPS (2.5 C, Stated Policies Scenario)

Contributions, Hot house world)

RCP3.4
RCP2.6

APS (1.7 C, Announced Pledges)

RCP1.9NZE (1.4 C, Net Zero Emissions by 2050)(Under 1.5 C)

Partialachievement

FPS (1.8 C, Forecast Policy Scenario)

Delayed Transition (1.6 C, Disorderly)

FPS + Nature (FPS added nature related policies)

Below 2 C (1.6 C, Orderly)

RPS (1.5 C, Required Policy Scenario)*RCP stands for Representative Concentration Pathways. The subsequent values
are the radiative forcing values (for example, RCP 2.6 indicates a radiative forcing
increase of 2.6W/m2 by the end of the 21st century compared to pre-industrial
levels)(Divergent Net Zero (1.4 C, Disorderly)
Net Zero 2050 (1.4 C, Orderly): Climate models corresponding to RCPs exist) Some portions lacking models

Source IEA website Riahi et al. (2017) https://doi.org/10.1016/j.gloenvcha.2016.05.009 PRI website NGFS website

The Paris Agreement indicated that efforts will be pursued to keep the global average temperature increase well
below 2 and to keep it at 1.5 compared to pre-industrial levels.
In October 2018, the Intergovernmental Panel on Climate Change (IPCC) prepared a special report on the effects
of a 1.5 global warming and the pathways through which it can emit greenhouse gases

Impact difference between
scenario(Examples)
1.5 C scenario
Sea level rise by
Rise of 26
2100

Biological
species loss

77cm

Greenhouse gas emissions pathways to 1.5

2 C scenario
Rise of 30

93cm

Insects:18%
Insects 6%
decreasedecrease
Plants:16%
Plants 8% decrease
decrease
Vertebrates 4%
Vertebrates:8%
decreasedecrease

Disappearance
frequency of sea
ice in the Arctic Once in 100 years
Ocean during
summerOnce in 10 years

Decrease ratio of
1.5 million tons
catches

3.0 million tons

Impacts on coral Approximately 70%
reef
90% dies

Mostly annihilated

Examples of 4 representative pathways (P1 to P4) are listed.
P1: Low energy demand. No use of CCS
P2: Wide focus on sustainability
P3: Middle of the road scenario (business as usual)P4: Expected use of CCS

Source: Global Warming of 1.5 C (IPCC) https://www.ipcc.ch/site/assets/uploads/sites/2/2022/06/SPM_version_report_LR.pdf

Stage2

Obtain future information on related parameters

Obtain objective forecast of risk and opportunity item`s parameters andidentify the effects on the company in detailParameters list

List of Risks and Opportunities

It is important to obtain objective forecast information on parameters fromexternal sources

Scenario Report(IEA WEO (World Energy Outlook),
IEA ETP (Energy Technology
Perspectives) etc.)

External reports(Industry-specific reports, academic
papers, etc.)

Source This Practical Guide (Nishi-Nippon Railroad examples: 3-55, 58)

Climate Change Impact
Assessment Tools(Physical Risk Map, Hazard Map, etc.)
See chapter 5 for examples of parameters

What kind of parameters should be used? Example oftransition risks/opportunities
For transition risks/opportunities, the IEA have partially released parameter data for NZE (1.4 C), APS (1.7 C),
STEPS (2.5 C, business as usual) scenarios, and parameter data such as the following is available
Parameterex.)

Parameter information that allows comparison of multiple scenarios
NZE (1.4 C) scenario for developed countries
2030 140 USD/tCO2
2050 250 USD/tCO2

Carbon Price
2030 2050

APS (1.7 C) scenario for countries that havepledged net zero emissions by 2050
2030 135 USD/tCO2
2050 200 USD/tCO2
STEPS scenario (2.5 C, business as usual) for
developed countries (EU)2030 90 USD/tCO2
2050 113 USD/tCO2

System power
emission factor
2030 2050

NZE (1.4 C) scenario for global
2030 165 g-CO2/kWh
2050 -5 g-CO2/kWh
APS (1.7 C) scenario for global
2030 280 g-CO2/kWh
2050 41 g-CO2/kWh
STEPS scenario (2.5 C, business as usual) for
global2030 325 g-CO2/kWh
2050 158 g-CO2/kWh
See p2-52 for examples for calculating the impact of carbon tax introduction

SourceSee Chapter 5 for examples of other parametersWhat kind of parameters should be used? Example oftransition risks/opportunities
For transition risks/opportunities, the IEA have partially released parameter data for NZE (1.4 C), APS (1.7 C),
STEPS (2.5 C, business as usual) scenarios, and parameter data such as the following is available
Parameterex.

Parameter information that allows comparison of multiple scenarios
In the NZE (1.4 C) scenario, globally
2030 35 USD/barrel
2050 24 USD/barrel

Crude Oil Price
2030 2050

In the APS (1.7 C) scenario, globally
2030 64 USD/barrel
2050 60 USD/barrel
In the STEPS (2.5 C, business as usual)scenario, globally
2030 82 USD/barrel
2050 95 USD/barrel
In the NZE (1.4 C) scenario, globally
2030 61 %
2050 88 %Percentage of
renewable energy
in power mix
2030 2050

In the APS (1.7 C) scenario, globally
2030 49 %
2050 80 %In the STEPS (2.5 C, business as usual)scenario, globally
2030 43 %
2050 65 %See Chapter 5 for examples of other parameters

SourceWhat kind of parameters should be used? Example oftransition risks/opportunities
For transition risks/opportunities, the IEA have partially released parameter data for NZE (1.4 C), APS (1.7 C),
STEPS (2.5 C, business as usual) scenarios, and parameter data such as the following is available
Parameterex.

Parameter information that allows comparison of multiple scenarios
NZE (1.4 C) scenario, globally
2030 (hybrid)
14,460 USD/vehicle
14,783 USD/vehicle(EV)
2050 (hybrid)
14,638 USD/vehicle
13,251 USD/vehicle(EV)

Hybrid/EV
vehiclemanufacturingcosts
2030 2050

APS (1.7 C) scenario, globally
2030 (hybrid) 14,528 USD/vehicle
15,265 USD/vehicle(EV)
2050 (hybrid) 14,718 USD/vehicle
13,618 USD/vehicle(EV)
STEPS scenario (2.5 C, business as
usual), globally
2030 (hybrid) 14,686 USD/vehicle
15,772 USD/vehicle(EV)
2050 (hybrid) 14,861 USD/vehicle
14,185 USD/vehicle(EV)
Future costs of hybrid vehicles will increase due to regional fueleconomy and emissions regulations

See Chapter 5 for examples of other parameters
SourceWhat kind of parameters should be used? Example ofphysical risks/opportunities
For physical risks, the World Bank and others have released parameters, and parameter datasuch as the following is available to obtain
Parameterex.

Parameter data
Average temperature
increase ( C)In the 4 C scenario (SSP5-8.5),
there is an average temperature
increase of 2.13 C for Japanbetween 2040 2059
Increase in
Averagetemperature(2040-2059)

Average

2.13

In the 2 C scenario (SSP12.6), there is an averagetemperature increase of
1.40 C for Japan between
2040 2059

Average temperature
increase ( C)Average

1.40

In the 1.5 C scenario (SSP11.9), there is an averagetemperature increase of
1.04 C for Japan between
2040 2059

Average temperature
increase ( C)Average

1.04

Jan

Feb

Mar

Apr

May

Jun

2.21

2.15

2.18

1.95

1.84

2.13

Jul

Aug

Sep

Oct

Nov

Dec

2.14

2.14

2.25

2.28

2.17

2.06

Jan

Feb

Mar

Apr

May

Jun

1.36

1.57

1.45

1.22

1.09

1.42

Jul

Aug

Sep

Oct

Nov

Dec

1.47

1.61

1.49

1.42

1.37

1.35

Jan

Feb

Mar

Apr

May

Jun

0.84

1.02

1.18

0.97

1.07

1.16

Jul

Aug

Sep

Oct

Nov

Dec

0.98

0.95

1.14

1.29

1.14

0.74

In the 4 C scenario, Japan at the end of the 21st century will have:
Rainfall: approx. 1.3 times
Flow rate: approx. 1.4 times
Flood frequency: approx. 4 times
In the 2 C scenario, Japan at the end of the 21st century (from2040*) will have:
Rainfall: approx.1.1 times
Flow rate approx.1.2 times
Flood frequency: approx.2 times

Rainfall, flowrate andfrequency offlooding(Since 2040

See p2-54~55 for examples for calculating the impact of extreme weather
See Chapter 5 for examples of other parameters*For 2 C (RCP2.6), the temperature increase is level until around 2040, so it is possible to apply values from after 2040
Sources: The World Bank,

ntrol Planning in Consideration of Climate

Stage3: Shape the worldview in consideration of stakeholders

consensus by incorporating the perspectives from outside of company (if needed)
Components of the worldview surrounding the company (e.g.)

Government

Industry

Buyer(Customers)

Seller(Suppliers)

It would be useful to aim for building internal
consensus after incorporating the perspectives
from outside of company in order to understandcomprehensive worldview.
Source: This Practical Guide (example of Mitsui Mining & Smelting: 3-113)

Legal systems and regulations related torisks
Policies to promote opportunities
Trends, technologies and tendencies
related to climate change that are
mainstream in the industry
Customer trends and tendencies affecting
products, businesses, and services weprovideTrends affecting raw materials and costs
required for businessNew comer

Businesses themselves and new entrants
who can change supply chains

Substituteproduct

Substitutes, etc., that could affect themarket for the products, businesses, andservices provided

How to coordinate worldview with each business division?
It is important to create a worldview that can convince relevant departments including
business division through dialogue. In order to encourage relevant department members tothink of climate change as their own problem, and to share the scenario's meaning andperspective, it is important to have a written narrative or some type of visualization tofacilitate discussion
Points in the discussion with eachdepartment to coordinate theworldview (Example)

Worldview (draft) developedby the Scenario Analysis TeamAre there any discrepancies in theworldview, technology, products, etc.,
related to each business?

Business
Divisions

Is it a worldview that is likely to occur inthe future relative to the behavior of thesellers and buyers who interact with us inour day-to-day operations?

Are there any discrepancies comparedwith the company's management
strategy?

Corporate
Planning

Are there any prospects for the futurecompared to the industry outlook
mentioned in our daily operations?

Source: This Practical Guide (example of Mitsui Mining & Smelting: 3-113)

2. Scenario Analysis - Key Points of Practice
Scenario Analysis Guide - Key Points of Practice2-1. For beginning scenario analysis
2-2. STEP2. Assess materiality of climate-related risks
2-3. STEP3. Identify and define range of scenarios
2-4. STEP4. Evaluate business impacts
2-5. STEP5. Identify potential responses

2-6. STEP6. Document and disclose information
Chapter 2. Scenario Analysis - Key Points of PracticeThis chapter explains how to practically undertake scenario analysis anddescribes key points of its practice, based on use cases performed by companies
under the support program of the Ministry of the Environment.

Evaluate business impacts:
under each of the defined scenarios.
(Notes in red: Points to consider in each step were added after the support program.)

1
2

Ensure governanceIs in place

Assess materiality ofclimate-related risksMarket andTechnology
ShiftsReputation

Policy andLegalPhysical
Risks

What are the current andanticipated organizational
exposures to climate-relatedrisks and opportunities?
Do these have the potential to
be material in the future? Are
stakeholders concerned?

3

Documentation anddisclose

Identify and define
range of scenarios

4 Evaluate business

What scenarios (andnarratives) are appropriate,given the exposures?
Consider input parameters,
assumptions, and analyticalchoices. What reference
scenario(s) should be used?

Clearly imagine a future world
under certain assumptions!

5

impacts

Identify potential
responses

Impact on:

Responses might include

Scenarios inclusive of arange of transition andphysical risks relevant to
the organization

Pick and choose fromyour industry
and company viewpoint!

6

Get management
and operation
divisions involved!

Integrate scenario analysis into strategic planning and/or enterprise risk management processes.
Assign oversight to relevant board committees/subcommittees.
Identify which internal (and external) stakeholders to involve and how.

model
capabilities andtechnologies
Evaluate the potential effects
and financial position undereach of the defined scenarios.
Identify key sensitivities.

Try not to seek
too much accuracy!

Use the results to identify
applicable, realistic decisions
to manage the identified risks
and opportunities.
What adjustments tostrategic/financial plans would
be needed?
Do not narrow down!
Take multiple scenarios
into account.

Document the process; communicate to relevant parties: Be prepared to disclose
key inputs, assumptions, analytical methods, outputs, and potential management responses

Disclose information
osure of Climate

Overview

Estimate the financial impact on P/L and B/S, then compare the gap
between future perspectives and financial items in the business as usual
Stage 1

Stage 2

Stage 3

Identify potential financial items
affected by risks and opportunities

Consider calculation formula andestimate financial impact

Be aware of the gap between future
outlook and financial indicators inthe business as usual

Identify which financial indicators
are possibly affected by business
impact of climate change

Consider calculation formula forrisks that can be estimated, thenestimate the financial impact basedon internal information

Based on the estimated results, beaware of the scale of impact on the
future outlook

Source: This Practical Guide (Nishi-Nippon Railroad example: 3-61, Maruha Nichiro example: 3-148, ORIX Asset Management example: 3-24)

Stage1: Identify potential financial items affected by risks and opportunities

Identify which financial items of P/L and B/S are affected by risks andopportunities
Change in operating revenues
affected by climate change

Change in raw material
procurement costs
due to climate change

Increased sales due tothe expansion of CCUS market

Price hike ofsteels

Etc.

Fluctuation of carbon tax

Decline in demandfor plants due totightening regulations

Expenses
Sales

Etc.

Burden of collecting
carbon tax for
Scope 1 and 2 emission

Etc.
Materiality assessment of risks
Etc.
(STEP2)
Impact on businesses

Risks Opportunities
Major
Class
ification

Minor
Classification

Indi
cat
or

Consideration Risks

Damage of physical risk
Ass
ess
me
nt

Increased cost of damage
due to increase
frequency of flood

EachTrans CO2 emission
Tightening regulations affects ordering fossilPro
Larition target
fuel-delivered plants, which results infit
ge
Risks Policies(Subsidies
affecting PL.
included)Net
incomeEtc.

Profit ratio =Fluctuation of profit, which also indicates that the impact can be largely be different.)

Business impact

Stage2: Consider calculation formula and estimate financial impact

Consider calculation formula for financial indicator that can be estimated,then estimate the financial impact based on internal information
Change in raw material procurement
costs
due to climate change

Change in perating revenues
affected by climate change
Revenue/Profitof plant(Yen/Year)

Cost of steels(Yen/Year)

Decline in demand rate
for plant due totightening regulations(%)

Price hike rateof steels

etc..
Fluctuation of carbon tax

Revenue/Profit
of CCUS (%)

Increased rate of profit
due to the expansionof CCUS market(%)

Expenses
Sales

Scope 1,2
GHG
emissions(tCO2)

Carbon tax for Scope
1,2 GHG emissions(Yen/tCO2)

etc.

etc.
Damage of physical risks
Business impact
Internal information to use (Example)

Net income

Damage cost of floodin the past financial
year (Yen/Year)

Increased rate ofdamage cost due
to increased frequencyof flood (%)

etc.
For sectors in which climate change has a significant impact, it will also be effective to conduct analysis as of 2030 inaddition to 2050
the second round and after)

Stage3: Be aware of the gap between outlook and financial indicators in the business as usual

Based on the estimated results, be aware of the scale of impact on theoutlook

Understand the impact of climate change on business prospects(future management targets and plans)
What risks and opportunities have a greater impact?
It is possible to understand the extent to which climate change threatens thebusiness prospects for future management and targets. In some sectors andindustries, the impact may be smaller than anticipated.
Source: This Practical Guide (example of ORIX Asset Management Corporation: 3-24)

Many company`s are unclear on the assumptions, data collecting methods,
and the formulas for calculating the business impact
Response to assess the impact

Doubt
What should be included in
the business impact

First, compare the company`s scenario with and without climate change`s affectFor each scenario, calculate the impact that the main risks and opportunities have on the business

Doubt
First, consider the company`s

How to determine thebusiness- as-usual situationand theRevenue Profit: refer to your company`s long-term goals and business plan
GHG emissions: calculate the emissions for when decarbonization goals are achieved and when they are not achieved

Doubt

revenue and cost of sales. By collecting these data within the company, the calculation
becomes more convincing

What kind of data should becollected

Revenue: Current future business revenue, future revenue by business, operating profit, revenue targets and forecasts for
related products
Cost of sales: Operating cost of electricity, fuels, etc., information on cost of sales, GHG emissions
If the risks for raw materials differs with regions, it would be better to have data on the country that the materials are
source in, volume, price of the materials

Doubt
What kind of formulas are
there

Doubt
How to handle those that can
not be quantitatively
calculated

In this practical guide, an example of thewill be introduced
The latest parameters that can be used for calculations are introduced in chapter 5

and theFirst sort the risks and opportunities as whether or not it is possible to calculate the impact (if there are little tono scientific basis or if it is qualitative, it is not possible to estimate the impact)
If it is an important risk that can not be estimated at this time, continue to monitor the situation and conduct
interviews with outside experts

How to determine thebusiness- as-usual situation

Doubt

First, compare "your company's situation in a business-as-usual scenario" with "your company's situation
in a climate change-affected scenario (= in line with each climate scenario)" based on "the impact of eachrisk and opportunity as it occurs"

1
1
2

2

3

Company`s situation in a climate neutral business-as-usual scenario:
Examine the level of sales/operating income in the year of analysis (e.g., '30, '50, etc.) if climate change is not considered
Impact of each risk and opportunity as it occurs:
Calculate the impact of each climate-related risk/opportunity on sales, costs, and operating income under the scenarios
set in STEP3.

By calculating the total value of 1 - 22 , it is possible to calculate 33 the situation of the company in the
scenario affected by climate change. By comparing 1 and 3,
3 ,the business impact of climate change(i.e., the gap between what is possible and what is not possible) can be determined.

How to determine the business-as-usual
situation: Financial Position

Doubt

If the company has a target set for the year analyzed, financial performance should be based on the targets.
When analyzing a year without a set financial target, it can be assumed that the financial performanceremains flat or external information can be used.

Example of setting a business-as-usual situation when targets are set till the year 2030
If targets are set for the analyzing year in themedium-term management plans, utilize thetargets figures
Pattern
Assume that after thecompany`s target is met
the financial performance
will remain flat

With Company
targets

Pattern
Set using projected GDP
growth rates

2022

2030

Revenue of target business

2050

A conservative outlook pattern that assumes
that the company`s growth will be flat after
the target year

A moderate outlook pattern that assume thecompany will grow at the same rate as theJapanese/global economy
Using the company`s business areas/regions
and the economic growth data that arereferenced to determine whether to use
Japanese/global/other figures

By reaching out to the department in charge of thedeveloping the management plan or business plan
when choosing the pattern, a more convincing
analysis can be done

Example of setting the business-as-usual financial situation Pattern, use projected GDP growth rates

Whether to use Japan or the Global GDP growth rate data should be determined byAssumption for estimation tentative
Net sales and operating income related to the target business in 2022 were 200 billion yen and 20 billion yen, respectively.
The Medium-Term Management Plan sets 2030 targets for the target businesses, with sales of 220 billion yen and operating income of 22
billion yen.

Pattern -2

Set in line with global GDP growth

Pattern -1 Set in line with Japan's GDP growth rate(with growth comparable to that of the Japanese economy)(with growth comparable to that of the global economy)

OECD`s predicted values for the Japanese GDP are2030 $5.631 million
2050 $6.060 million

OECD`s predicted values for the global GDP are2030 $141.996 million
2050 $205.429 million

2030

2050, Japan`s CAGR is expected to be 0.37%

Billion yen

2030

2050, Global CAGR is expected to be 1.86%

Billion yen

2050 sales are set at 236.9
billion yen

2050 sales are set at 318.1
billion yen

1
2022

2
2030

3
2050

1
2022

2
2030

Doubt

How to determine the business-as-usual
situation: CO2 Emissions

32050

CO2 emissions are set separately with whether the company`s target are achieved or not. Changes inemission factors may be considered as well.
By setting patterns for both the highest and lowest impact, detailed impact can be analyzed

Example of setting the business-as-usual CO2 emission
Achieved emission targets

Achieved
company
targets

Change in the emission factor

See 2-52 for the calculation method
Achieved emission targets

No change in the emission factor

Company
targets
are notmet

A pattern with the most decarbonized outlook, in which the company's
CO2 emission targets are met and the emission factor changes (improves)
Calculate based oncompany`s CO2 emission targets the amount ofA pattern in which the company's CO2 emissions target is met, but theemission factor does not change
Calculated with the

Emission targets are not met

A pattern in which the company's CO2 emission target varies linearly with
the number of emissions in previous years, and the emission factor alsochanges (improves)

Change in the emission factor

Calculated based on "CO2 emissions by the company based on previous
years' data - reductions due to changes in emission factors"

Emission targets are not met

A pattern of the least decarbonized outlook, with the company's CO2
emissions targets changing linearly with previous years' emissions, withno change in the emission factor

No change in the emission factor

Calculated based on

By setting bothscenarios, it ispossible todetermine themaximum/
minimum impact

Example of setting the future CO2 emission in a business-as-usual scenario

Set target achievement pattern with target values; and set the non-target achievement patternusing linear estimate of the past year emissions. Assess both the best and worst impacts tounderstand the specific impact on your company
Assumption for estimation

tentative

Aim to reduce emissions by 50% in 2030 (compared to fiscal 2013) and achieve carbon neutrality by 2050 as long-term reduction targets
1,000 tCO2 emissions in FY 2013, then a slight decrease until 2020

Pattern where the company s targets are achieved(without any change in the emission factor)

targets are not met(without any change in the emission factor)

Set emissions projections in line with company targets

Set emissions projections with past CO2 emissions using alinear fashion

tCO2

tCO2

CO2 emissions reduced by
50% in 2030, carbon neutral in
2050

CO2 emissions in 2030 and
2050 were only slightly lower,
missing target

1 20142 20153 20164 20175 20186 20197 20208 20309 2050
10
2013

Doubt

1 20142 20153 20164 20175 20186 20197 20208 20309 205010
2013

What kind of data should be collected

By using data that is commonly used by business divisions (e.g., sales information bybusiness/products, operational costs, cost structure, greenhouse gas emissions), it ispossible to create estimations close to actual company conditions
Information available for consideration
Current and future sales andoperating income
by business segment

Sales
Struc (Targets for net sales and operating income)ture

Sales forecasts and targets for
related products in the future(By product)

Current operating costs(Electricity and fuel prices, electricity andfuel consumption, etc.)

Cost
Struc
ture

Information on the cost structure of
raw materials(Number of raw materials used,procurement cost, etc.)

Current and future GHG emissions(Scope 1 and 2, Scope3 if needed)

Methods for collecting information
Refer to the company's long-term management targets, etc.
In the absence of relevant information, it is possible to calculate
the current value using CAGR (annual growth rate), etc.
Hearings from business divisions, corporate planning, etc.
If owned, also collect information on future market
conditions normally used by relevant departments.
Hearings from business divisions, corporate planning, etc.
Hearings from business divisions, procurement divisions,
corporate planning, etc.
If owned, also collect information on future market
conditions normally used by relevant departments.
Obtain information on the origin of raw materials that are
affected by the origin of agriculture, forestry, fisheries, fossil
fuels, forest resources, etc.
Refer to the company's environment-related targets, etc.

DoubtWhat kind of data should be collected
Data on Raw Materials:

Due to varying regulations and impact of climate change depending on the region, raw materials related toagricultural, forestry and fishery products/fossil fuels/forest resources can be analyzed in detail byobtaining information on their place of origin
List raw materials with different
risks depending on their origin andsource, such as agricultural, forestry
and fishery products/fossil
fuels/forest resources

For the business risks and opportunities that are subjected toscenario analysis, list the related raw materials derived fromagriculture, forestry and fisheries, fossil fuels, forest resources

Of the listed raw materials, extract
key raw materials

high in cost
irreplaceablewith other raw materials if there is a supply-chain disruption or if
there is a change in the yield

Asses the impact based on theorigin and source of identified raw
materials

Raw materials are identified. If there are too many places of origins, start the
scenario analysis with the area with a higher procurement cost/ moreprocurement amount. If finding the origin is challenging, one option would
be to analyze the areas that are generally considered major.
An impact assessment is conducted after obtaining information on regulations
and physical risks at the place of origin of the raw material

Doubt

What kind of formulas are there:
Increase in Cost due to Carbon Tax

Calculate the increase in the cost from carbon taxes by multiplying carbon tax with CO2emissions. It is possible to include the change in emission factors for the assumptions of theemissions.
Increased expenses from 1.5 C
introduction of a carbon tax(100 millions JPY)

4 C

Scope1 and 2 * CO2 emissions(tCO2) for the target year

Carbon tax on CO2 emissions(JPY/tCO2)*Currently Scope1 and 2; it will be effective for sectors significantly impacted by climatechange to consider Scope 3, too
Case

No change in the CO2 emission factor for Scope2

A simulation of thechange in emission

CO2 emissions forthe target business

tCO2

Assumptions
Emissions are expected to decline by XX% compared to 2020
levels by 2050
As there will be no change in the emission factor, the expected
CO2 emission reduction will remain as XX%-XX%

Emissionsdecrease due
to changes inemissionsfactor-YY%
Case

With change in the CO2 emission factor for Scope2

Assumptions
Emissions are expected to decline by XX% 2050 compared to2020 levels by 2050 (same as Case )As the emission factor for 2050 will decline, the emission factor
reduction of YY% will be added to the expected CO2 reduction.
Therefore, the CO2 emission reduction will be (XX%+YY%)

2020

2050 Case

2050 CaseNo change in With change in theemission factors emission factors

See p2-32 for parameters for carbon tax and emission factors

Example calculation of the cost increase due to carbon tax

Assess the impact by calculating each target achievement/nonachievement pattern
Calculation assumptions (tentative)
For businesses that are subjected to the analysis, the revenue was 200 billion yen, and the operating profit was 20 billion yen for2022
In the medium-term management plan, targets for the businesses that are subjected to the analysis were set as revenue of 220
billion yen and operating profit of 22 billion
Pattern where the company`s targets are not met

Pattern where the company`s targets are achieved (nochange in the emission factor)(with change in the emission factor)

tCO2

tCO2

2000

2000

1500

1500

1000
500

1000

CO2 emissions reduction of 50% by2030, carbon neutral by 2050

CO2 emission for 2030 and 2050
only slightly decreases, with targets
remaining unmet

500

0

0
2013
1 20142 20153 20164 20175 20186 20197 20208 20309 205010

Parameters used
Using values from IEA WEO 2022 (NZE scenario)
2030 1.5 C 18,260 yen/tCO2
2050 1.5 C 32,608 yen/tCO2
Calculated using 1 dollar

Parameters used
Using values from IEA WEO 2022 (NZE scenario)
2030 1.5 C 18,260 yen/tCO2
2050 1.5 C 32,608 yen/tCO2

130.43 yen Exchange rate on 2023/1/31

Formula2030 1,000tCO2 18,260 yen/tCO2
2050
No impact since emission is 02013
1 20142 20153 20164 20175 20186 20197 20208 20309 205010

Calculated using 1 dollar 130.43 yen

18.26 million yen

Formula2030 1,818tCO22050 1,540tCO2

Exchange rate on 2023/1/31

18,260 yen/tCO2
32,608 yen/tCO2

33.2 million yen
50.22 million yen

CO2 emissions are tentatively set for calculation
SourceUsed IEA World Energy Outlook 2022 to calculate

What kind of formulas are there:
Damage due to extreme weather

Doubt

For increased costs due to increased incidence of severe weather, it is possible to calculate theamounts of damages using the percentage of increased frequency and the probability of occurrence
after calculating the amounts of damages per day from operations being suspended
Amount of damages
due to flooding

1.5 C(100 millions JPY)

4 C

Amount of damages
per day(XX millions JPY)

Increase infrequency

Probability ofoccurrence(times)(times)

Sales

Operating margin(100 millions JPY)( )Total amount ofdamages due toflooding(YY millions JPY)

Number ofbusiness days

Number oftarget sites(days)(sites)Estimated amount of damages due to flooding for each level[Example for calculating damages]
Flood depth
level(Hazard map)

# of company
sites

5m 10m

1 site3m 5m

2 sites

0.5m 3m

sites

0.5 1m2 sites

Under 0.5m

4 sites

Maximum # ofdays operations
are suspended

Amount of damages at time of occurrence

1 site amount of damages per day (XX millions JPY) 45
days
2 sites amount of damages per day (XX millions JPY) 32
32 daysdays
0 sites amount of damages per day (XX millions JPY) 20
20 daysdays
2 sites amount of damages per day (XX millions JPY) 12
12 daysdays
4 sites amount of damages per day (XX millions JPY) 6
6 daysdays

45 days

Total theamount ofdamages due toflooding andcalculate the total
amount ofdamages, YY
millions JPY

See p2-35 for the parameters of the frequency in floods, and see chapter 5 for examples of a hazard map toolData acquisition method for flood depth level (example)

sites flood depth level, as well as past levels of damages

When searching Chiyoda-ku, Marunouchi, 3chome, 2
the hazard map portal site indicates that the
Flood level is ~0.5

By understanding theand, it is possible todetermine the maximum total damage for eachflood risk level

SourceHazard Map portal site https://disaportal.gsi.go.jp/

Doubt

What kind of formulas are there:
Increase in Cost Related to Raw Materials

With regards to the increase in the cost of raw material procurement as the climate changes
and the yield decreases, it is possible to calculate the increase in the cost by grasping thechange in the yield of raw materials in the procurement area
Procurement cost of the raw material
in the business-as-usual scenario of
the year subjected to analysis 100

Increase in raw material
procurement cost due to climatechange 100 million yen
1.5 C

million yen

4 C

Rate of change in costs due toreduced yields in the procurement
area %

Rate of cost change in each procurement region
Example calculation of the impact due to theincrease in cost
Procurement
regionProcurement
amount2050

Procurement
cost
2050

Rate ofchange inyield

Region A

1,000t XX million yen

5%

Region B

2,000t YY million yen

3%

Region C

1,500t ZZ million yen+2%

Cost change
rate

Cost increase when incurred

XX million yen cost change rate
2%
YY million yen cost change rate
1.2%
1.2%
No increase or decrease in cost
due to climate change
2%

If there is only data on changes in crop yields, it may be
a good idea to calculate the rate of change in cost using
price elasticity, etc.

If possible, identify costchanges in eachprocurement region andcalculate cost increases

How to handle those that can not be
quantitatively calculated

Doubt

Regarding qualitative information or information with little scientific basis, measures such ascontinuous monitoring and interviews with external experts could be methods for evaluation.
It is important to identify evaluated/unevaluated risks and clarify the next action

Validity of quantitative
Risk Item estimation of business
impact[Examples of actions for risks thatcannot be quantified]
Review
StatusInterview with external experts

Risk A

Possible

ConsideredInterview external experts (ex: from research
institutions) for risks and opportunities that
could not be calculated experts

Risk B

Possible

ConsideredStore interview as a qualitative information

Risk C

Opportunity
A
Opportunity
B

Impossible
Qualitative
information only
Impossible
No scientific data forevidence
Possible

Considered
qualitative

Not
Considered

Continuous internal monitoring
Continuously monitor to obtain up-to-date
information on risks.

Considered

2. Scenario Analysis - Key Points of Practice
Scenario Analysis Guide - Key Points of Practice2-1. For beginning scenario analysis
2-2. STEP2. Assess materiality of climate-related risks
2-3. STEP3. Identify and define range of scenarios
2-4. STEP4. Evaluate business impacts
2-5. STEP5. Identify potential responses

2-6. STEP6. Document and disclose information
Chapter 2. Scenario Analysis - Key Points of PracticeThis chapter explains how to practically undertake scenario analysis anddescribes key points of its practice, based on use cases performed by companies
under the support program of the Ministry of the Environment.

Identify potential responses:

Use the results to identify applicable, realistic decisions to manage the identified
risks and opportunities(Notes in red: Points to consider in each step were added after the support program.)

1
2

Ensure governanceIs in place

Assess materiality ofclimate-related risksMarket andTechnology
ShiftsReputation

Policy andLegalPhysical
Risks

Get management
and operation
divisions involved!

Integrate scenario analysis into strategic planning and/or enterprise risk management processes.
Assign oversight to relevant board committees/subcommittees.
Identify which internal (and external) stakeholders to involve and how.

3

What are the current andanticipated organizational
exposures to climate-relatedrisks and opportunities?
Do these have the potential to
be material in the future? Are
stakeholders concerned?
Pick and choose fromyour industry
and company viewpoint!

Identify and define
range of scenarios

4 Evaluate business

5

impacts

Identify potential
responses

Impact on:

Responses might include

Scenarios inclusive of arange of transition andphysical risks relevant to
the organization

What scenarios (andnarratives) are appropriate,given the exposures?
Consider input parameters,
assumptions, and analyticalchoices. What reference
scenario(s) should be used?

model
capabilities andtechnologies
Evaluate the potential effects

Use the results to identify
applicable, realistic decisions
to manage the identified risks
and opportunities.
What adjustments tostrategic/financial plans would
be needed?

and financial position undereach of the defined scenarios.
Identify key sensitivities.

Do not narrow down!
Take multiple scenarios
into account.

Try not to seek
too much accuracy!

Clearly imagine a future world
under certain assumptions!

6

Document the process; communicate to relevant parties: Be prepared to disclose
Documentation and
key inputs, assumptions, analytical methods, outputs, and potential management responses
disclose
Sources: The Task Force on Climate-

Disclose information
ure of

STEP5. Definitions of Actions / Target of Practical Guide

as it is crucial
for countermeasures involving business model transformation

Managements

In-house Participation

Phase 3
Consideration of establishing anorganizational structure and its
practical actions, and scenario
analysis procedure

Relevant
Departments(Operation
Divisions)
Scenario Analysis
Team
Relevant In-house
Department

Solutions

Business modeltransformation responding toclimate change,
Portfolio transformation
Investments for technologies

Incorporating climatechange into medium
term business plan

Incorporating climatechange into business plan

Phase 2
Consideration of future actions forresponding to risks and acquiring
opportunities

Phase 1
Understanding of current in-house
response to climate-related risks
and opportunities

Actions suggested by
Scenario Analysis team

Actions that could beundertaken by relevant
departments within thecurrent medium termbusiness plan

Actions on medium termbusiness plan that
includes climate change

Overviewcountermeasures, and establish practical action plans and an organizational
structure
Stage1

Stage2status on risk management
Regarding climate-related risks withgreat financial impact, it is important tostatus for risk management. If
necessary, confirm the current statusof rival companies

Note

Consider future countermeasuresfor climate-related risk management
and seizing opportunities
Consider practical countermeasures
for risks and opportunities with great
financial impact

Note

How will scenario analysis
results be used in management?

Stage3
Establish an organizational
structure and consider practicalcountermeasures and how toproceed scenario analysis
Establish an organizational structure inorder to promote countermeasures andtake practical actions cooperating with
relevant department. And also consider
how to proceed with scenario analysis

Note

What kind of organizational
structures are suitable after
conducting scenario analysis?

What steps should be taken in
the future?

Source: This Practical Guide (Maruha Nichiro example: 3-151, UACJ example: 3-138, Nishi-Nippon Railroad: 3-66)

Regarding climate-related risks and opportunities with great financial impact, it isIf necessary, confirm the current status of rival companies
Risks and Opportunities

Status of thecompany's own
response

Status of responses by competitors
Company X

Company Y

Company Z

Risk A
Policies/ Target

Risk B
Opportunity C
Risk D

MarketOpportunity E

Organizing
the status ofthecompany's
own
responses

Benchmark Survey of Competitors'
Responses

Opportunity F

It is a suggestion to conduct comparative analysis on the company
and competitors regarding risk management

Stage2: Consider countermeasures for climate-related risk management and seizing opportunities

Consider practical countermeasures for risks and opportunities with great
financial impact

Scenario

1.5 C
scenario

4 C
scenario

Future business impact

Countermeasures (Example)

Operating income -JPY X trillion

Change in business model
Consideration of procuring
alternative materials
Investments in low carbon
technology

Operating income -JPY Y trillion

Strengthen supply chain
performance considering climatechangePromote response to BCP
Invest to improve quality of
raw materials

It will become important to plan resilient countermeasures that can be used in any situation.
Companies may also try deciding on a rough direction for countermeasures as a bareminimum before going on to consider specific countermeasures in the course of ongoing
implementation

Stage3: Establish practical action plans and an organizational structure

Establish an organizational structure in order to implement countermeasures andtake practical actions cooperating with relevant department. And also consider
how to proceed with scenario analysis
Response
implementation period(Example)

Future Actions (Example)
Establish an organizational structure

Taking practical actions cooperating with
relevant department

Dissemination of the results of
scenario analysis within thecompany (including managements)
Currently or for a few
months1 year

How to proceed with scenario analysis
Interviews with experts onimportant risks and opportunities
for which there is little information

Gaining an agreement frommanagements on the needs forestablishing an organizational
structure in order to promote
countermeasures-

Establishing an organizational
structure in order to promote
countermeasures throughexplaining to relevant department

Cooperating with relevant
department and take practicalactions aligned with existing
business plans that is relatively
easy to implement

Establishment of a monitoring
system for scenario analysis
Monitoring

Beginning practical consideration
with relevant department for new
actions
As needed (timings
may differ for eachcompany)

Incorporating climate change into medium term business plan
Encourage dialogue with stakeholders on climate change to create markets
Introduction of internal carbon pricing as a mechanism to promote low-carbon investment

Consider scenario analysis procedure, establishing an organizational structure , and getting relevant
department involved in the course of scenario analysis, alongside with proceeding the incorporation ofclimate change into medium term business plan(Column) What is Internal Carbon Pricing?
Internal Carbon Pricing is carbon prices set by companies and used within them.
Internal Carbon Pricing is the price of carbon estimated internally by the company, and is a mechanism forpromoting low-carbon investment by companies
It is a method used in corporate planning, and is leveraged in incentives for promoting energy efficiency, the identification ofrevenue opportunities and risks, and in guiding investment decisions

Companies

A price is placed oncarbon emissions

National/local
governments

A price is placed on carbon emissions

CO2
CO2 reduction
initiatives change

DivisionsCO2internal office

CO2 reduction
initiatives change

Systems related to carbon
pricing

Internal Carbon Pricing

S
March 2023)
SourceUtilization Guidelines for Internal Carbon Pricing ver. FY2022

How will scenario analysis results be used in management?
It is important that climate change be included in the process of business strategy planning.
One tip is to include climate change into the nearest midterm management plan

Report the results of scenario
analysis to managements

Management
PolicyReport the results of scenario
analysis to managements

Establish an organizational
structure and take practicalactions cooperating with
relevant department

Incorporate climate change
into medium term business
plan

Creation of the mediumterm business plan
Alignment of target level and practicalmeasures for achieving the targets inthe medium-term business plansession on climate change impacts on

Climate Change

Responding
to Risks andOpportunitiesPromoting
Scenario
Analysis

scenario analysis) for managements

Company-wide deployment of
scenario analysis
Materialization of countermeasures forrisk management and seizing
opportunities

FY2021 scenario analysis support project]Company A: Has newly set the 2030
reduction target in the mid-term management
plan, and was able to move forward withsetting reduction targets for the entire
company by sharing the results of
scenario analysis with other divisions
Company B: Management became aware of
the importance of initiatives for the
decarbonization transition period.
Discussion on the review of current 2030
targets has evolved with the aim ofachieving carbon neutrality by 2050

Establishment of a system to promote
the above

Input of external environment

Monitoring of risks andopportunities
Establishment of a system topromote the above

Consider indicators andtargets linked to medium
term business plan
Continuation of monitoringWhat kind of organizational structures are suitable after
conducting scenario analysis?
It may be suggested to create a cross-sectional organization directly under the corporate planningdepartment that deals with climate change to give effectiveness to the result of scenario analysis
As a cross-sectional organization with climatechange as a company-wide theme

Remain as limited initiatives by some divisions

Philosophy

Philosophy

VisionVisionManagement
Strategy

Input scenario
analysis results

Management
Strategy

Climate Change Measures Division
Climate Change
MeasuresBusiness
Divisions

XX Division
Collaborate undercommon goals

CSR
Division

Business
Divisions

XX Division
Cooperation on
climate change
is limited

Collaborate undercommon goals

CSR
Division

Cooperation on
climate change
is limited

Actions to be taken for the next step?
The goal of scenario analysis is to integrate climate change with business management, and to enhance
corporate value. With scenario analysis, it aims to continue the cycle of disclosing information andrebuilding an organizational structure (integration with business management)

Towards improving
corporate value

Scenario
Analysis

4

5
Continuously conducting
scenario analysis
as a cycle

Managements rebuild
an organizational structure
based on feedbacks(Through scenario analysis it
encourages)
incorporating climate change
into business plans(Through disclosure it
encourages)
Beginning dialogue with multistake holders/
Improving corporate value

Corporate
Management

3
Managements receive
reactionsfor the disclosure

Disclosure

2
Begin disclosing with1
Begin to work on
scenario analysis

Scenario
Analysis
understandings

Structure for
conducting
scenario analysis

2. Scenario Analysis - Key Points of Practice
Scenario Analysis Guide - Key Points of Practice2-1. For beginning scenario analysis
2-2. STEP2. Assess materiality of climate-related risks
2-3. STEP3. Identify and define range of scenarios
2-4. STEP4. Evaluate business impacts
2-5. STEP5. Identify potential responses

2-6. STEP6. Document and disclose information
Chapter 2. Scenario Analysis - Key Points of PracticeThis chapter explains how to practically undertake scenario analysis anddescribes key points of its practice, based on use cases performed by companies
under the support program of the Ministry of the Environment.

Overview

disclosure items and the results obtained from each step; use appropriate
disclosure to achieve increased corporate value
Stage 1

Stage 2

Describe the relationship between
thedisclosure items and the scenario
analysis

Describe the results
obtained from each step

Describe the positioning of therecommended disclosure items(11 items total).
Show the overall picture using
contrast charts, etc.

Point

Described the results obtained fromscenario analysis for each step

*It may also be helpful to reference TCFD Guidance 3.0

disclosed?

Stage1: Describe the relationship between thedisclosure items (11 items total). Show the overall picture using contrast charts, etc.
Area ofdisclosure

Recommended disclosure items in the TCFD recommendations-related risks and opportunitiesa)p.XX-XX-related risks and opportunities

p.XX-XXb)Strategy: Disclose the actual and potential impacts of climatestrategy and financial planning (when important)p.XX-XXa) Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long termb) Describe the impact of climate-p.XX-XXgp.XX-XX-related scenarios, includ

Risk management: Disclose the processes used by the organization to identify, assess, and manage climate-related risksa)b)p.XX-XX-related risks

p.XX-XX-related risksc) Describe how processes for identifying, assessing, and managing climate-rall risk managementp.XX-XX

Metrics and targets: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities(when important)a) Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management processp.XX-XXb) Disclose Scope1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks

p.XX-XXc) Describe the targets used by the organization to manage climate-related risks/opportunities and performance against targets

p.XX-XX

allows companies to show the overall picture of TCFD disclosure
Source:-page 19

Stage 2: Describe the results obtained from each step (1/2)

Describe the results of scenario analysis conducted in each step
Visual examples of describing results for each step
STEP2: Assess materiality of climate-related risks

STEP3: Identify and define range of scenarios

STEP4: Evaluate business impacts

STEP5: Identify potential responses

Stage 2: Describe the results obtained from each step (2/2)

It is important to describe climate change-related governance, as well as what wasunderstood from the scenario analysis results and how the company plans to
respondResults of interviews with investors/experts
It is not the disclosure itself that will be evaluated; showing the results of risk/opportunity identification and theeffect scenario analysis results have on management strategy is the important thing
It is not the disclosure itself that will be evaluated; what is important is using qualitative terms to communicate theDisclosures should be made on the assumption that dialogue will take placeand describe the scenario analysis in an easy-to-understand manner as a starting point for discussion.
For scenario analysis disclosures, investors want to know how the results of the scenario analysis will affect management
strategy. They are concerned that there will be companies that make scenario analysis an end.

The results of scenario analysis show that aiming for carbon neutrality by 2050 is not enough; what is important is that thisis reflected in the transition. It is meaningful to present interim targets for 2030, etc., and if they are not along the carbon
neutrality by 2050 path, it is important to show in an easy-to-understand manner how transitions will be made. Many
investors are concerned about how to evaluate companies that are deviating from the ideal reduction path toward 2030, and it isimportant for investors to evaluate individual strategies and encourage companies to plan to reduce emissions more.

-related strategies
Status of climate change-related governance structure

STEP1

p2-11~13

Information of data used as the basis for each scenario analysis

STEP3p2-27~35

appropriate transition toward decarbonization by 2050
Current/future initiatives toward risks/opportunities identified from the scenario analysis

STEP5 (p2-62~63)
STEP6 Disclosure case studies (Chapter4)

Narrative for climate change-related value creation based on scenario analysis results

STEP5 (p2-61, p.2-68)
STEP6 Disclosure case studies (Chapter4)(If necessary) 2030 interim targets and transition plans
How the company will proceed with scenario analysis and achieve the goals

See Chapter4 for transition case studies

STEP5

Source: Prepared based on interviews conducted by the Ministry of the Environment in FY2020-2021 toward investors and experts

p2-64
Page number

to implement a scenario based on recent decarbonization trends (currently the 1.5 C scenario), and focus isalso being put on disclosures made through a wide variety of media

Results of interviews with investors/experts
For
beginning
scenario
analysis

What is important is whether the company has a structure that allows it to proceed with scenario analysis, as well as
management's understanding
Scenario analysis is an area which is not yet covered by mainstream discussions in company management. Because of this, many companies have outsourced the first round of scenario analysis toexternal consultants in their corporate planning and so on, and it is questionable whether the company has established a structure that enables it to tackle scenario analysis on its own
While involving external experts is a good tactic, investors are more concerned about how the company's senior management understands sustainability risks and discusses them at board meetings

Assessmateriality This area is the core of scenario analysis, and risks/opportunities affecting businesses should be explained in detailThis area is the core of scenario analysis, and should be explained in detailof climaterelated risks
Along with the reasons for selecting a wide variety of scenarios, it is also recommended to implement scenarios in line with
Identify and current trends (currently the 1.5 C scenario)
define range
The reasons for scenarios being selected are important, as opinions on scenarios may vary according to the industry
If the company has added its own variables to the parameters, specific explanation is needed, as side-by-side comparisons with other companies cannot be made in such casesof scenarios
A 1.5 C scenario aimed at 2050 may be necessary for companies with a goal of carbon neutrality by 2050, or for sectors with high emissions

Evaluatebusiness
impacts

Identify
potential
responses

Disclosure of quantitative information is also being considered in light of increased implementation of systems and recent
trends toward strengthening disclosure of climate-related information
There is no international consensus on the methodology for impact evaluation, and at present, investors may be satisfied with qualitative information. It is expected that demand for quantitative
information will be determined by the future actions of financial supervisory authorities and the influence those actions have on financial institutions and general business companies afterward
Rather than providing figures, it may be better to disclose the process for internal discussions and have direct dialogue concerning impacts that cannot be publicly disclosed
Investors want to know how climate change will affect business, so the company should put a theoretical image of this into figures, even if it is only a rough one
As exemplified by disclosures in securities reports, deepening of the relationship between climate-related information and financial information is being called for
ESG investors are also paying attention to financial impact disclosure, and theInvestors are focused on how the results of scenario analysis will be leveraged in the company's business and management
Investors are focused on how the results of scenario analysis will be leveraged in the company's business and management
It is also important to express how climate change risks / sustainability issues will be addressed in strategies and which kinds of actions are insufficient
At the same time, individual strategies need to be evaluated with respect to transition plans for high-emitting companies to reduce emissions, as greenwashing concerns
and the Russia/Ukraine issue raise questions about the feasibility of post-2030 reduction plans.

With the revision of the Corporate Governance Code, companies should focus on disclosure through various media such as
Document
reports and websites
andWith the revision of the Corporate Governance Code, investors will start to look at a wide range of disclosure media. In most cases, they will look at integrated reports and sustainability reports, but
disclosestors can check the latest versions for later review
The basic premise is governance disclosure, and whether management has declared its commitment
information
The basic understanding is that TCFD disclosures listed in integrated reports, etc., will also be included in the Corporate Governance Code

Source: Prepared based on interviews conducted by the Ministry of the Environment in FY2020-2021 toward investors and experts