Table of Contents
Chapter 1 Introduction ...................................................................................1
A. Purpose of This Guidance ................................................................................................. 1
B. Basic Approach.................................................................................................................. 2
C. Background on the revision of the Guidance ................................................................... 2
D. Target Audience ................................................................................................................ 3
E. Context of this Guidance................................................................................................... 4

Chapter 2 Structure of This Guidance .............................................................5
Chapter 3 Detailed Discussions ......................................................................9
A. Governance ....................................................................................................................... 9
B. Strategies and Business Models ..................................................................................... 11
C. Risks and Opportunities .................................................................................................. 17
D. Performance and Key Performance Indicators (KPIs) ..................................................... 22

Chapter 4 Addendums ................................................................................. 29
About this chapter ............................................................................................................... 29
A. Paris Agreement and Carbon Neutrality ......................................................................... 29
B. Transition Finance ........................................................................................................... 33
C. Initiatives for Investors and other Stakeholders on Climate Change.............................. 36
D. Evaluation of Participation in External Climate Initiatives .............................................. 38
E. Carbon Pricing ................................................................................................................. 40
F. Climate Change Risk Management for Investors and Other Stakeholders, and the Role of
NGFS ............................................................................................................................... 43

Appendix....................................................................................................... 45
Appendix 1︓References .......................................................................................................... 45
Appendix 2︓Members of the TCFD Consortium Steering Committee, List of GIG Supporters,
Number of TCFD Consortium Members, revision history.................................. 46

Chapter 1 Introduction

A. Purpose of This GuidanceMore than four years have passed since the TCFD Recommendations were published. Since
then, disclosure of climate-related information based on the recommendations has
progressed in both quantity and quality. There is a growing number of organizations that
support the TCFD recommendations, with more than 2,500 organizations worldwide, of which
504 are from Japan (as of September 27, 2021). In the future, it is expected that investors andother stakeholders (including asset owners, asset managers, banks, insurers, and other usersof the information: hereinafter, referred to as “investors and other stakeholders”) willappropriately evaluate and utilize information disclosed by companies for their investment
and loan decisions.
Disclosure based on the TCFD recommendations is progressing, and it is expected that thiswill foster investment to support corporate activities to address climate change, (green
investment) using the information disclosed. Furthermore, many countries and companies
have announced the goal of achieving carbon neutrality by the middle of this century, leading
to increased emphasis on transition and innovation. This has brought about a change in thedisclosure of companies that support the TCFD recommendations as well as in the attitude ofinvestors and other stakeholders in their financing activities. As a result, engagement between
companies and investors on climate change issues has become more important than ever.
Under these circumstances, it would be useful to provide perspectives specific to investors andother stakeholders in evaluating and utilizing the disclosed information for the purpose of
facilitating proactive disclosure by companies.
In that context, in order to facilitate green investment, this Guidance provides commentaryon perspectives needed by investors and other stakeholders when understanding theinformation disclosed based on the TCFD recommendations. To help investors and otherstakeholders better understand information disclosed, this Guidance also provides examples
of investment practices utilizing that information as well as viewpoints on assessments thatrecognize industry-specific situations while considering the alignment between the TCFD
Recommendations and discussions about current state of corporate disclosure such as
integrated reporting.

1

Chapter 1 Introduction

Chapter 1

B. Basic Approach

Chapter 2
Chapter 3
Chapter 4

In light of the national “Long-term Strategy under the Paris Agreement” decided by Japan’s
Cabinet in June 2019, this Guidance aims to realize a “virtuous cycle of environment andgrowth,” based on the following three perspectives.
The first perspective is to promote constructive dialogue (engagement) with companies,
leading to enhanced corporate value. As a practice of investors and other stakeholders, it ismore important to be engaged in dialogue with companies to facilitate their climate actions
than to simply divest based on superficial criteria; engagement can lead to the enhancementof corporate value through improved efforts, thus increasing opportunities for investment.
The second perspective is to identify and assess the risks and opportunities posed by climatechange. Climate-related information includes uncertainty, and the implications of climatechange vary by industry. Considering their preconditions and characteristics, investors andother stakeholders will be better able to implement well-balanced corporate evaluation
between risks and opportunities if they not only appropriately identify and assess risks but
also evaluate their potentials for gaining opportunities through climate actions.
The third perspective is to promote innovation for decarbonization, and to create
mechanisms for appropriate flow of funds. To promote climate action, funding needs to beprovided appropriately for various innovations needed for companies to make the transition
to a decarbonized society. If climate risks are being addressed appropriately, there could begreater opportunities for transition in industries that have higher emissions and countries andregions that have lower carbon efficiency.

Appendix

C. Background on the revision of the Guidance
The revision of this guidance takes into account 3 major developments that have occurredin the approximately 2 years since the first edition of this Guidance was published in October
2019.
The first is the progress on social issues. Currently, achieving carbon neutrality is becominga goal for many countries and companies [see Addendum A]. There are various approaches toachieve this goal, but it is a very far-reaching goal compared to the present situation, and it
requires transition [see Addendum B] of corporate activities on a massive scale, as well as
significant technological progress (innovation). Therefore, it has become more important forinvestors and other stakeholders to understand climate-related information of companies andengage with them, resulting in a need to improve the content of disclosure.
The second is progress on financial action. Efforts to reduce emissions from financial
portfolios including indirect financing are gaining momentum through initiatives targetinginternational financial institutions related to climate change [see Addendum C]. In Japan inparticular, indirect financing plays an important role in corporate financing, and banks and2

Chapter 1 Introduction

Appendix3

Chapter 4

In recent years, there have been active movements to establish standards for information disclosure. The International
Sustainability Standards Board (ISSB) at the IFRS Foundation is developing standards that also incorporates the TCFD
recommendations. In Europe, the Corporate Sustainability Reporting Directive (CSRD Directive) has been proposed. The
proposed Directive concerns the mandatory disclosure of sustainability-related information, and requires assurance by anindependent third party to ensure the reliability of the information.

1

Chapter 3

The main target audience for this Guidance is investors and other stakeholders that utilize
the information disclosed by companies for investment and lending decisions. The Guidanceis also expected to assist them in their investment and lending decisions through their
engagement with borrowers and investees, and the development of green financial products.
Since it is necessary for companies to disclose information in ways that provide a common
basis for discussions in order for investors and other stakeholders to implement effective
engagement and make appropriate investment decisions, this Guidance is also expected tohelp companies better understand the perspective of investors and other stakeholders.

Chapter 2

D. Target Audience

Chapter 1

companies maintain close and long-term relationship. Therefore, in order to reduce portfoliowide emissions, it is necessary not only to understand information disclosed by borrowers, butalso to take measures to encourage them to respond to climate change through long-term
engagement.
The third is progress in corporate disclosure. In Japan, the revision of the Corporate
Governance Code in June 2021 made TCFD disclosure virtually mandatory for companies to belisted on the Prime Market. The legislations on TCFD-compliant disclosure, particularly inEurope, has led to a marked increase in the number of corporate disclosure in Japan andabroad 1 . In addition, more and more companies are using internal carbon pricing [seeAddendum E] for quantifying future risks and opportunities. Also, as corporate contributions
to society as a whole are being questioned, the importance of Scope 3 emissions, which
provides information on contribution to reduction through the entire supply chain, isincreasing. Information pertaining to these aspects will lead to better understanding byinvestors and other stakeholders. At the same time, investors and other stakeholders are also
encouraged to consider such information taking into account its materiality in relation to theircorporate activities.
Based on the above, this Guidance is revised as a two-part structure consisting of main text
and addendums. While the main text reflects progress since the publication of the first editionof the Guidance maintaining its original structure, the addendums discuss topics and initiatives
considered to be important for investors and other stakeholders to understand disclosed
information. As described later, the addendums will be revised taking into account the latest
situation.

Chapter 1 Introduction

Chapter 1

E. Context of this Guidance

Chapter 2
Chapter 3
Chapter 4
Appendix

The ultimate purpose of this Guidance is to create mechanisms to smoothly provide funding
to promote companies’ efforts that facilitate the transition to a decarbonized society, thus
promoting the virtuous cycle of environment and growth, by facilitating the appropriate
evaluation of those efforts - through dialogue between companies and investors and otherstakeholders - in terms of responding to climate-related risks as well as gaining opportunities
through transition and innovation. As a starting point, this Guidance provides perspectives
needed by investors and other stakeholders to interpret information disclosed by companies
based on the TCFD recommendations and make their investment decisions. Therefore, it does
not call for any disclosure by companies on top of the disclosure according to the TCFD
recommendations, but intends to support companies that actively promote their climate
actions through efficient dialogues also giving consideration to additional work required toprovide such disclosure.
This Guidance and “Guidance on Climate-related Financial Disclosures 2.0” (TCFD Guidance2.0) originally prepared by Japan’s Ministry of Economy, Trade and Industry in 2018 and revisedby the TCFD Consortium in 2020 are mutually complementary, with the former being forinvestors and other stakeholders who will use the information disclosed and the latter forcompanies engaging in disclosure. The TCFD Guidance 2.0 will be further upgraded and revised
through future discussions within the TCFD Consortium.
This Guidance has been developed based on inputs from the members of the TCFD
Consortium to further promote “green investment”. Inputs and topics that have not beenaddressed this time will be reflected in future revisions of this Guidance along with future
developments in green investment.

4

Chapter 2

Structure of This GuidanceThis Guidance has been prepared with an emphasis on the use of insights accumulated todate through discussions on existing corporate disclosure frameworks. This section
summarizes some key points in this Guidance by comparing the items recommended fordisclosure by the TCFD with the International Integrated Reporting Council (IIRC) framework –a typical framework being used by companies, investors and other stakeholders around theworld - and the “Guidance for Integrated Corporate Disclosure and Company-Investor Dialogue
for Collaborative Value Creation”(Guidance for Collaborative Value Creation), which has been
discussed recently mainly by Japanese practitioners (Figure 1) 2.

IIRC

Guidance forCollaborative Value
Creation

TCFD

Content elements

Items

Recommended Disclosures

Governance

Governance

Governance

Governance

Strategy and Resource
Allocation

Strategy

Strategy(incl. scenario analysis)

Strategies and Business
ModelsBusiness Model

Performance

Performance and Key
Performance Indicators(KPI)

Outlook

Sustainability and
GrowthRisks and
Opportunities

Metrics and Targets

Performance and Key
Performance Indicators (KPI)

Sustainability and GrowthBusiness Model

Green Investment Guidance

Risk in a
Changing
Environment

Risks and Opportunities

Risks and Opportunities

Risk Management

Figure 1 Relationship between this Guidance and Other Frameworks
The comparison shown in Figure 1 leads to the conclusion that all the frameworks have
similar content for Governance as well as Metrics and Targets, suggesting that disclosure basedon the TCFD recommendations can be considered and evaluated as an extension of past
discussions relating to integrated reporting.
Strategy is also common in all the frameworks as well, but the TCFD recommendations differ
On June 9, 2021, the International Integrated Reporting Council (IIRC) merged with the Sustainability Accounting Standards
Board (SASB) to form the Value Reporting Foundation (VRF). The literature referred to as “IIRC” in this Guidance is the <IR>
Framework.

2

5

Chapter 2 Structure of This Guidance

Chapter 1
Chapter 2
Chapter 3
Chapter 4
Appendix

significantly from the other frameworks in that they recommend “scenario analysis” todevelop Strategy, given the uncertainties relating to the medium- to long-term impacts ofclimate change. To understand the information that has been disclosed based onrecommendation on Strategy in the TCFD recommendations, a deeper understanding of
scenario analysis — which is a tool to identify potential influence of the climate change on
business — and the appropriate evaluation of the results of the analysis will lead to a better
understanding and evaluation of business models, which consist the basis of Strategy. Basedon this thinking, therefore, this Guidance includes a section on Strategies and Business Models.
Risks and Opportunities, a content element in the IIRC framework, is addressed as a part ofStrategy in the TCFD Recommendations. As stated in Chapter 1, in order to realize the “virtuous
cycle of environment and growth,” it is important for companies to disclose both such risks
and opportunities, and for investors and other stakeholders to incorporate them into theirinvestment evaluation. Therefore, in this Guidance, Risks and Opportunities are treated as one
distinct element. Under Risk Management, which is one of the core elements of the TCFD
recommendations, companies are encouraged to explain their internal processes to identify,
assess and manage risks. In this Guidance, Risk Management is dealt with under Risks andOpportunities as one of the perspectives for investors and other stakeholders to judge theadequacy of a company’s risk awareness.
Moreover, as for Sustainability and Growth, the “Guidance for Collaborative Value Creation”
states: “For companies to grow their corporate value in a sustainable manner, it is essential
not only that they have clear business models but also that their business models are
sustainable and have growth potential,” then explains on the importance of being aware ofESG, maintaining relationship with key stakeholders, and disclosing information and having
dialogue about risks relating to the change of business environment. This element of“Guidance for Collaborative Value Creation” is not explicitly included in disclosure under the
TCFD recommendations, but investors and other stakeholders can ultimately determine
whether companies satisfy the general concept of Sustainability and Growth, by checking each
item of this Guidance. In other words, investors and other stakeholders can assess whether acompany can realize its sustainability and growth in terms of climate by identifying Risks andOpportunities to understand the company’s long-term Strategy, confirming its Performanceand KPIs, and checking to see if the company’s Governance is functioning to those ends.
Based on the above, Chapter 3 of this Guidance builds upon previous discussions in termsof four elements (1. Governance, 2. Strategies and Business Models, 3. Risks and Opportunities,
and 4. Performance and KPIs) to explain what is needed from the perspective of investors andother stakeholders to look for sustainability and growth in the information disclosed bycompanies.
Upon revising, chapter 4 (Addendums) is newly added, dividing this Guidance into two parts:
main text and addendums (Figure 2). The former provides commentaries on the discussions
on corporate and investor engagement on climate change in Japan, as in the first edition of6

Chapter 2 Structure of This Guidance

Chapter 1
Chapter 2

the Guidance. The revisions reflect the key viewpoints on progressing the “virtuous cycle ofenvironment and growth” between companies and investors which became apparent since
the publication of the first edition.
The addendums focus on themes that still needs to be elaborated to be taken up on themain text. Specifically, themes such as carbon pricing and transition finance were selected due
to its growing importance in understanding disclosed information by investors and otherstakeholders. The addendums are included with an objective to deepen the mutual
understanding of issues from the viewpoint of companies and investors and other stakeholders.
Such viewpoints and issues, which are summarized at the beginning of each topic, is expected
to change over time. Therefore, it is envisaged that revisions will be made according to thelatest development in advance of any revisions in the main text.

Chapter 3
Chapter 4

7

Appendix

Figure 2 Structure of this GuidanceChapter 3 Detailed Discussions

A. Governance
It is important for investors and other stakeholders to consider a company’s organizational
structure in terms of governance to address climate change, and also whether it is actuallyfunctional and effective to that end.
Governance, whether it relates to climate change or otherwise, is a critical factor forinvestors and other stakeholders to consider in building confidence and making decisions toinvest in a company 3 . IIRC expects integrated reports to include “how the organization’s
governance structure supports its ability to create value in the short, medium, and long term,”
and the TCFD recommendations state that understanding the corporate board of directors’
oversight of climate-related issues and its role in assessing and managing climate-related risks
and opportunities can help investors and other stakeholders evaluate the adequacy ofcompany’s governance 4 . In other words, as for governance, in addition to having wellstructured organizational systems in place, those systems need to be functional and effective
in terms of the roles of management.
Investors and other stakeholders identify the organizational structures and functions ofcorporate boards as well as environmental and sustainability committees, which include themanagement, and verify that board oversight of climate-related governance is being
effectively implemented, or that the equivalent to board oversight is being ensured throughreports to the boards from the relevant committees. This verification enables judgment of how
the company is considering climate change and how it is reflecting that consideration incorporate management.
To this end, investors and other stakeholders are encouraged to understand the
management structures related to governance, and also to verify their specific roles of eachorganizations and the management, as well as processes to reflect their deliberations inmanagement. Dialogue with the company will provide the company a chance to improve its
own governance, leading to the enhancement of corporate value, which will also be beneficial
for investors and other stakeholders in the long term.
Examples of verification on governance through engagement by investors and otherstakeholders are provided below.
Guidance for Collaborative Value Creation, p. 30: “6.01. It is imperative for investors that companies steadily execute thestrategies that underpin their business models and possess appropriately functioning governance systems that exert discipline
to grow corporate value in a sustainable manner. By confirming the functioning of corporate governance, investors can trustand invest in companies with confidence.”
4 TCFD Final Report, p. 19: “[investors and other stakeholders] are interested in understanding the role an organization’sboard plays in overseeing climate-related issues as well as management’s role in assessing and managing those issues. Suchinformation supports evaluations of whether climate-related issues receive appropriate board and management attention.”
39Chapter 3 Detailed Discussions

Chapter 1

Case 1

Verification of top management commitment

Chapter 2

Investor A checks with the CEO of the investee company to identify any issues withgovernance related to climate change: for example, whether or not climate related issues
are being addressed above the level of the company’s environment-related departments.
Through dialogue, the Investor checks whether the CEO provides specific instructions
regarding policies indicated in the company’s integrated report and other documents, andwhether the CEO is committed to KPIs and strategies necessary for addressing issues.
Case 2

Verification of effectiveness

Chapter 3

Investor B engages with different counterparts of a company depending on the topic ofinterest, seeking dialogue with the CEO to check the company’s commitment to climaterelated issues, but going to the director(s) responsible for specific implementation
systems and their effectiveness. Through such engagement, the attitude of the whole
company including management is changed, leading to the creation of an appropriate
governance system, such as building climate-related organizational systems or bringing
about discussions in board meetings.

Chapter 4

Case 3

Verification of processes

Appendix

For companies that have environmental committees, etc. attended by corporate
management, Investor C checks how the decisions by the relevant committees aresubsequently circulated within the company and put into practice. Through engagement,
the Investor checks whether the governance is functioning by identifying the content of
the deliberations at the committees and their subsequent reflection into management
strategy, as well as the process of reporting to the board.
Case 4

Verification of management commitment

Investor D values the extent to which climate-related information is reflected in its
management strategy. For this reason, when evaluating a company's ESG strategy, theInvestor places emphasis on information on how the committee in charge of ESG andmanagement work together.
Case 5

Evaluation of carbon neutral commitments

Investor E evaluates how the achievement of the stated carbon neutrality goal isgoverned, whether the management is committed, and whether there is a KPI such as anintermediate goal.

10Chapter 3 Detailed Discussions

Appendix

11

Chapter 4

Guidance for Collaborative Value Creation, p. 9, 2.03: “Therefore, the business model is the most important blueprint forinvestors in evaluating the company’s sustainable profitability.”
6 IIRC, p.28-31: “… business model is its system of transforming inputs, through its business activities, into outputs andoutcomes that aims to fulfill the organization’s strategic purposes and create value over the short, medium, and long term”,“… how its strategy and resource allocation plans relate to the organization’s business model and …are influenced by / respondto the external environment and the identified risks and opportunities”
7 TCFD Final Report, p. 25: “Instead, scenarios provide a way for organizations to consider how the future might look if certain
trends continue or certain conditions are met.”
5

Chapter 3

For investors and other stakeholders, a company’s business model is the most important
blueprint in evaluating its sustainable profitability 5 . The TCFD recommendations state thatstrategy refers to an organization’s desired future state, and establishes a foundation against
which it can monitor and measure its progress in reaching that desired state. Strategy refers
to a foundation for a company to set its medium- to long-term targets and manage its progress,
in order to develop a business model that can address climate change 6.
In order to address climate change, companies need to develop their strategies to ensure
their sustainability with a medium- to long-term perspective. The TCFD recommendations
encourage implementation of scenario analysis in developing strategies. It is important forinvestors and other stakeholders to understand and evaluate the persuasiveness andappropriateness of the scenarios as tools to upgrade a company’s current business model andto develop strategies to enhance future corporate value and reduce risks in addressing climatechange. Investors and other stakeholders are encouraged to consider disclosure related toscenario analysis not necessarily as the company’ commitment based on the future forecast,
but as a narrative for the company to consider a path toward its future business model basedon its strategy, 7 and to verify the context of the narrative through engagement. The “Guidanceon Scenario Analysis for Non-Financial Companies” published by the TCFD lists the following
as correct and incorrect understanding on scenario analysis (Table 1).

Chapter 2

It is more important for investors and other stakeholders to check and assess thealignment between the decision-making processes that led to a company’s strategies andthe scenarios used as well as their appropriateness within the industry and the company’s
responses to the strategies it has developed, than the accuracy of scenario data andanalytical results provided by the company.

Chapter 1

B. Strategies and Business Models

Chapter 3 Detailed Discussions

Chapter 1

Table 1 Comparison of key elements and misconceptions of scenarios
Scenarios Are Not:
Scenarios Are:
Predictions
Variations of a single base case

Descriptions of alternative plausible futures
Significantly different views of the future
Movies of the evolving dynamics of the
futureSpecific decision-focused views of the
futureProducts of management
insight/perceptions
Exploratory

Snapshots of endpoints

Chapter 2

Generalized views of feared or desired
futures
Products of outside futurists
Normative

Chapter 3

Adapted from Table C1, Figure C2 (p.16) and explanation in p.17 of TCFD, 2020, Guidance on Scenario Analysis
for Non-Financial Companies

Chapter 4
Appendix

To this end, it is more important for investors and other stakeholders to check and assess
the alignment between the decision-making processes that led to a company’s strategies andthe scenarios used as well as their appropriateness within the industry and the company’s
responses to the strategies it has developed, than the accuracy of scenario data and analyticalresults provided by the company 8 . The TCFD recommendations, anticipating that many
companies will conduct qualitative scenario analysis, state that organizations with moresignificant exposure should undertake more rigorous qualitative or quantitative analysis 9 .
However, given the current situation that the disclosure and use of such climate-related
scenario analysis is in their infancy, investors and other stakeholders are encouraged to deepen
their understanding of the company’s strategies and business models through engagement 10.
Investors and other stakeholders will be able to better understand the strategies andbusiness models of a target company by identifying the following about the scenarios disclosedby the company:
Ÿ Context of the relevant scenarios selected and developed, and any assumptions behindthe scenarios;Ÿ Alignment of a company’s underlying future vision with its business model;
Ÿ Expected timeframe and verification methods; andŸ Risks and opportunities recognized through scenario analysis and processes toincorporate them into the company’s strategy and financial plans.
In addition, such engagement is expected to lead companies to identify additional risks andopportunities related to climate change and review their strategies and business models,
TCFD Final Report, p. 25: “Scenarios are hypothetical constructs and not designed to deliver precise outcomes or forecasts.”
TCFD Final Report, p. 27: “… for many organizations, scenario analysis is or would be a largely qualitative exercise. However,organizations with more significant exposure to transition risk and/or physical risk should undertake more rigorous qualitative
and, if relevant, quantitative scenario analysis with respect to key drivers and trends that affect their operations.”
10 The importance of scope 3 emissions and contribution to emission reductions as a theme to understand strategies andbusiness models is growing. This is discussed in chapter 3.4 “Performance and Key Performance Indicators (KPIs)”
8
9

12

Chapter 3 Detailed Discussions

13

Appendix

Since consideration of scenarios often includes the latest information related to the key points of a company's latest
technology development strategy, companies do not always disclose all scenarios.
12 In many cases, scenarios referred to include greenhouse gas concentration and socio-economic pathway scenarios by theIntergovernmental Panel on Climate Change (IPCC) and scenarios by the International Energy Agency (IEA), Network forGreening the Financial System (NGFS: see Addendum F) etc.
13 Note that TCFD encourages organizations to describe the resilience of their strategies based on consideration of various
climate scenarios, including scenarios with warming of less than 2ºC. It should also be noted that future envisaged in scenarios
aimed at achieving carbon neutrality and stabilizing temperature increases to 1.5 °C by mid-century is diverse (see Addendum
A).
11

Chapter 4

Investor A requires a company to describe its long-term vision under the envisioned future
market environment. As additional points of evaluation, it also looks at the extent towhich management takes into consideration substantial uncertainty of the future market
environment, as well as whether its narrative of value creation is persuasive and logical.

Chapter 3

Evaluation of strategies based on a long-term vision

Chapter 2

Case 1

Chapter 1

which could lead to further enhancement of corporate value.
Meanwhile, investors and other stakeholders should note the following to understand thescenario analysis.
Ÿ In some cases, disclosures may be limited, and not all of the scenarios that have beenused by that company for decision-making in strategy development may be disclosed 11.
Ÿ Climate-related information, such as IPCC scenarios and other existing scenarios, 12
inevitably includes uncertainty.
Ÿ One should not expect to see disclosures based on a unified scenario, because different
companies face different national policies and business conditions, and diverse scenarios
could be disclosed including those independently developed by a company13.
The most crucial issue for investors and other stakeholders in evaluating a company’s
strategies and business models is whether the scenarios are being utilized appropriately toderive persuasive and reasonable results of analysis, or narratives, and whether the companies
have taken the necessary measures aligned with the narratives, rather than which scenarios
have been used.
In particular, in the case of industries that do not currently have alternative technologies toachieve decarbonization and are aiming for "carbon neutrality", how they will make thetransition will be an important factor in climate change measures. It is expected that theimportance of promoting disclosure of information on such transition and to deepen
understanding of it will grow [See Addendum B].
Examples of evaluation by investors and other stakeholders on the relationship of scenario
analysis and strategies and business models of companies are provided below.

Chapter 3 Detailed Discussions

Investor B is aware that scenarios should be understood as narratives based on multiple
assumptions. What is important is not credibility of the results of analysis, but the
responses to the expected futures, so in evaluation, it checks whether the companies havetaken such measures.

Chapter 2

Scenario assessment, Example 1

Chapter 1

Case 2

Case 3

Scenario assessment, Example 2

Investor C focuses on processes toward scenario disclosure, to see whether they arereasonable or not. It realizes that long-term predictions for 2050, for example, aredifficult, and does not require corporate commitments based on such predictions. It
expects a company to show what it will be like in a society envisaged in its scenarios.

Chapter 3

Case 4

Assessment of a company’s own scenarios and continuous improvement
through engagement

Chapter 4

Investor D is aware that the corporate vision presented by a company is the result of its
analysis using multiple scenarios. However, companies that focus on “complying” withdisclosure requirements by presenting tidy narratives based on a given template or
guidelines tend to end up with similar outcomes. Thus, Investor D gives a more favorable
evaluation to companies that focus on “explaining” their own unique vision that is alignedwith their corporate strategies.

Appendix
14

Chapter 3 Detailed Discussions

Case 2

Evaluation of ICP 2

Investor B uses ICP to confirm whether decarbonization is taken into account in facilities
investment of companies to which it invests. The Investor considers that ICP is a form ofcorporate stress test, and uses the information in understanding how companies address
decarbonization.

14

TCFD, p.9 and TCFD, 2021. Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans

15

Appendix

Investor A looks into the relationship between ICP and the company’s management
strategy, long-term environmental vision and goal setting through engagement, while
confirming the pricing process and how ICP is used in the company.

Chapter 4

Evaluation of ICP 1

Chapter 3

Case 1

Chapter 2

Carbon pricing refers to economic method of putting a price on greenhouse gas emissions
and altering the behavior of the emitters. This includes policy instruments such as carbon taxes
and emissions trading, as well as internal carbon pricing (ICP), which assumes a certain priceinternally. Carbon pricing as a policy measure is currently under discussion in Japan [seeAddendum E]. However, the ICP can be useful for estimating the impact on corporate financeof not only these policy measures but also for considering various measures such as capital
investment. The TCFD Recommendations state that "where relevant, organizations should
provide their internal carbon prices"14.
Various scenarios including carbon neutrality have been published by institutions such as
the International Energy Agency (IEA)., and carbon pricing as a basis of their calculation is also
indicated. ICPs used by companies may apply values shown in these documents, but it isdesirable for investors and other stakeholders to grasp the assumptions and basis of the values
and to use the information after understanding how the future image assumed by thecompanies relates to their business plans. In other words, ICP is also seen as a valuable
engagement opportunity for investors and other stakeholders to deepen their understandingof strategies and business models.
Examples of evaluation by investors and other stakeholders on the ICP are provided below.

Chapter 1

While quantitative estimation of transition risks and opportunities using internal carbon
pricing is becoming common, it is desirable for investors and other stakeholders toconsider their use after understanding the assumptions and basis of the outcomes.

Chapter 3 Detailed Discussions

Chapter 1

Case 3

Quantitative analysis of ICP

Chapter 2

Investor C conducts financial impact analysis (transition risk analysis) incorporating carbon
prices in its ESG scoring, in addition to evaluating the utilization of ICP and carbon credits.
The Investor evaluates disclosed information with respect to application of ICP, its pricing,as well as contribution to emission reductions and carbon credits. In addition, transition
risk is analyzed by multiplying the Scope 1, 2 and 3 emissions disclosed by the company
by the carbon price established in-house.
Case 4

Measurement of portfolio value using CVaR

Chapter 3

Investor D quantifies the impact of climate change to its portfolio through the CVaR 15
method which measures portfolio value of investments and loans by incorporating carbon
pricing to transition and physical risks as well as to technological opportunities.

Chapter 4
Appendix
CVaR (Climate Value-at-Risk) refers to a method which calculates the present value of cost and profits from climate change,
and analyzes how climate change affects the future corporate values.

15

16

Chapter 3 Detailed Discussions

It is important for investors and other stakeholders to have a balanced evaluation of acompany’s risks and opportunities, by understanding a company’s efforts to address risks,
while also actively evaluating the potential opportunities of climate actions.

Appendix

17

Chapter 4

17

Chapter 3

TCFD Final Report, p. 14
TCFD Final Report, p. 14
18 TCFD Guidance 2.0, p.55
19 IIRC, p. 27
16

Chapter 2

Risks and opportunities caused by climate change could significantly influence a company’sbusiness model. The TCFD recommendations, therefore, encourage companies to disclose
information on processes used to identify climate-related risks and opportunities as well as
their influence on business, strategy, and financial planning 16 . As for risks, TCFD
recommendations encourage disclosure of specific processes in which the companies identify,
assess and manage the risks, and whether they are incorporated into their organizational risk
management processes 17. A “Risk Management” disclosure in the TCFD recommendations isinterpreted as a disclosure of processes for identifying, assessing, and managing climaterelated risks. The financial impact of risks identified as a result of “Risk Management” isclassified into the items disclosed in “Strategy,” and the organizational structure of thesupervision/implementation of risk management in the management of the entire
organization is classified into the items disclosed in “Governance” 18. IIRC also encourages thisdisclosure: “What are the specific risks and opportunities that affect the organization’s ability
to create value over the short, medium and long term, and how is the organization dealing
with them.” 19 Investors and other stakeholders, therefore, would be able to appropriately
evaluate the impacts of climate change on a company’s business model by understanding how
it identifies and manages climate-related risks and how it takes advantage of opportunities.
Investors and other stakeholders are able to make investment decisions on the basis ofascertaining whether or not a company has secured the ability to create value in the medium
to long term, by understanding the company’s efforts to address risks and opportunities aswell as its operational systems, organizational arrangements, and operational conditions
relating to monitoring. Therefore, it is important for investors and other stakeholders to ask acompany to appropriately identify, manage and disclose risks, and to engage in dialogue withthe company regarding their impacts on corporate value. Meanwhile, from the perspective ofgaining return on investment to a company that undertakes climate actions, investors andother stakeholders are encouraged to have a balanced evaluation of a company’s risks andopportunities by also actively evaluating the potential opportunities of climate actions. The
TCFD recommendations have introduced two types of climate-related risks: those related totransition to a low-carbon economy (transition risks) and those related to the physical impacts

Chapter 1

C. Risks and Opportunities

Chapter 3 Detailed Discussions

Chapter 1
Chapter 2
Chapter 3of climate change (physical risks). Transition risks include policy and legal risk, technology risk,
market risk, and reputation risk, while physical risks include acute risk (e.g., increase of
extreme weather events) and chronic risk (e.g., sea level rise) 20.
The TCFD recommendations also refer to resource efficiency, adoption of low-emission
energy sources, and the development of new products and services, etc., as climate-related
opportunities 21 . Opportunities through efficient use of resources and low-emission energy
sources include CO2 recycling and those using innovative technologies (e.g., CCUS 22 or carbon
recycling, and hydrogen and fuel cells). Opportunities from development of new products andservices include those that would contribute to reducing risks of other companies from thelifecycle perspective through their value chains (e.g., supply of highly-efficient equipment andcomponents) and those that would contribute to climate adaptation (e.g., technologies toreduce the impacts of extreme weather events, etc.).
Examples of evaluation by investors and other stakeholders on risks and opportunities areprovided below.
Case 1

Evaluation of climate-related opportunities

Chapter 4

Although many companies are concerned about a possible drop in their share prices due
to disclosure of risk-related information, Investor A assesses not only risks but also
opportunities from good practices implemented by companies. It understands thatbalance between risks and opportunities is important since such efforts lead to theenhancement of corporate value.

Appendix

Case 2

Positive evaluation for risk information disclosure

Investor B positively evaluates companies that disclose their risk information. Althoughmany companies are concerned with negative impacts of risk information disclosure,companies demonstrating in detail that they have properly identified and managed theirrisks can provide investors with more sense of security than those not doing so, whencompared within the same industry.
Case 3

Facilitation of proactive disclosure of opportunities through engagement

Investor C is engaging not only with manufacturers of final products but also with those
providing technologies and components that support the final products, to discuss their
future revenue opportunities and social innovation opportunities. It has the view thatenhanced corporate value will result if investors discover such opportunities andencourage their active disclosure.
20 An example to reduce physical risks by companies is impact assessment of the climate change to address adverse effect totheir business activities utilizing publicly provided natural disaster information (hazard maps etc.).
21 TCFD Final Report, p. 6
22 Carbon capture, utilization and storage technologies

18Chapter 3 Detailed Discussions

Corporate engagement to address risks

Case 5

Case 6

Evaluation of competitive advantage

19

Appendix

Investor F is of the view that, in addition to description of products and initiatives,
description of their competitive advantage is necessary, and is promoting discussion ofemphasizing patents regarding decarbonization and reduction of environmental burden.
In relation to management, the Investor proposes that a more in-depth discussion ispossible through disclosure on formulation and development of management andcorporate strategies utilizing intellectual property.

Chapter 4

Investor E not only assesses the environmental burdens of corporate activities such as
GHG emissions from its business operations, but also positively evaluates climate actions
by the company such as their R&D efforts for CO2 capture and reuse (carbon recycling).
For companies where increased commitment to address climate change has been
confirmed, the Investor has advised on disclosure on the value of technologies
contributing to transition as well as its competitiveness.

Chapter 3

Evaluation of opportunities through climate actions by companies seeking
to reduce environmental impacts

Chapter 2

Investor D communicates to the management during its continuous dialogue process on
its expectation that the company discloses how it addresses the change in businessenvironment caused by transition to a low carbon / decarbonized society as well as
management strategy on this issue. In addition, the Investor also pointed out that, as a
global company, proactive disclosure and third-party evaluation can contribute to making
a difference. This has led to a marked improvement in the quantity and quality of
disclosure.

Chapter 1

Case 4

Chapter 3 Detailed Discussions

Chapter 1

It is important for investors and other stakeholders to recognize the importance of acompany’s efforts toward innovation as a climate action, and to positively evaluate therelationship between innovation and the company’s long-term strategies, as well asorganizational structure to promote innovation.

Chapter 2
Chapter 3
Chapter 4
AppendixInnovation through efforts such as technology development, R&D and alliances is an
important part of efforts by companies to take advantage of climate-related opportunities. It
is anticipated that, as more progress is made with disclosure under the TCFD
Recommendations, innovations on response to climate change will become more visible, andengagement with companies will help investors gain a better understanding of the issues,
resulting in innovation-related information being more effectively utilized in investment
decisions.
Innovation means not only efficiency improvements and new combinations of existing
technologies, but also solutions associated with a long-term vision as well as those that may
appear to be disconnected from or discontinuous with current business activities. It is usefulfor investors and other stakeholders to proceed with engagement on the attitude andintention of such companies that seek innovation, in order to improve understanding on theirlong-term strategies. Therefore, investors and other stakeholders are encouraged to confirm
that a company’s long-term strategies and underlying perceptions about the future businessenvironment are aligned with the direction of its innovation efforts. In addition, regarding themanagement systems of a company engaged in innovation, it is also important to havedialogue on issues such as the commitment of its management organizational design,
processes, and organizational culture. 23 Such dialogue will also serve as an opportunity for acompany to objectively review its strategies for innovation.
The need for discontinuous innovation is also increasing as reduction targets set bycompanies become more ambitious in order to achieve carbon neutrality. In addition to
support through policy, financing by the private sector such as investors and otherstakeholders plays a major role in the implementation of future innovation. Advancing
initiatives to support innovation through public-private partnerships can lead to a virtuous
cycle of growth and the environment, and it is expected that appropriate evaluation will be
conducted through the examination of mechanisms and financial methods to realize this cycle
and through engagement 24.
Examples of evaluation by investors and other stakeholders relating to innovation areprovided as follows.
The international standard of “Innovation management system - Guidance (ISO56002)” was issued on July 15, 2019 forchecking a management system of a company that creates innovation.
24 Public-private collaborative efforts include Ministry of Economy, Trade and Industry's Zero Emission Challenge(https://www.meti.go.jp/english/press/2020/0707_004.html)
and
Green
Innovation
Fund
Project(https://www.meti.go.jp/english/press/2021/0312_002.html) which are policies to support innovation with respect toclimate change, and Keidanren's Challenge Zero (https://www.challenge-zero.jp/en/) which are efforts by the private sector.
23

20

Chapter 3 Detailed Discussions

Evaluation of efforts to foster innovation

Evaluation of strategic investment and innovation

Case 3

Proactive evaluation for disclosure of information related to innovation

21

Appendix

Investor C pays special attention to information about how innovative technology, which
can also contribute to a higher level of ambition, can be monetized. For example,
Company A has not provided much information about technology development foraddressing climate change because it is still at the demonstration stage. However, since
the Investor wished to understand the prospects for such technology and evaluate thecompany’s long-term readiness, it encouraged the company to proactively disclose more
information. Furthermore, the Investor proposed to disclosing companies to include
quantitative elements whenever possible, which led to an improvement in the quality of
disclosure.

Chapter 4

Investor B is of the view that the most important aspect to take into consideration iswhether innovation is incorporated into management strategy. Thus, when evaluating acompany’s long-term vision, The Investor looks at factors such as its readiness to makeuse of environment- or climate-related actions for product innovation, measures toreduce climate-related risks, and efforts to limit GHG emissions to a level consistent withthe 2ºC target in line with Paris Agreement.

Chapter 3

Case 2

Chapter 2

Investor A, upon engaging in and evaluating on a company’s sustainability, focuses on theupside, i.e. solution of social problems resulting in increased profit opportunity.
Specifically, it evaluates the company by considering its development of environmentfriendly products and services, reform of business portfolio, and creation of innovation,
while putting emphasis on the alignment of such efforts and the company’s sustainablevalue creation strategy. In addition, the Investor values in a multifaceted way including
corporate efforts to maximizing values which companies create to the society (impacts)
such as Scope 3 emissions and environmental contribution through its products andservices, taking into account climate change measures throughout the supply chain.

Chapter 1

Case 1

Chapter 3 Detailed Discussions

Chapter 1

D. Performance and Key Performance Indicators (KPIs)
It is important for investors and other stakeholders to understand a company’s rationale
for establishing the specific KPIs that it manages and discloses, and confirm its alignment
with the company’s strategies.

Chapter 2
Chapter 3
Chapter 4
Appendix

Key performance indicators (KPIs) serve as metrics for a company to materialize its
corporate philosophy and enhance corporate value, and are crucially important as information
to be disclosed to investors and other stakeholders 25,26.. In the TCFD recommendations, therelevance of a company’s KPIs to its climate-related Risks and Opportunities is considered
important in terms of targets to assess and manage 27.
Climate-related KPIs disclosed by companies need to be verified for consistency with thecompanies’ long-term strategies. When the relationship is not clear between a company’s
strategies and business model vis a vis its KPIs and their rationale as disclosed by the company,
it is important for investors and other stakeholders to seek an explanation through dialogue
with the company, and to confirm an improvement in the alignment between the two. This
will promote the reduction of risks and creation of opportunities, leading to an enhancementof corporate value. In addition, by checking not only the levels of KPIs but also their trends(level of improvement), investors and other stakeholders will have a better understanding of acompany’s climate-related efforts. The proactive efforts of investors and other stakeholders tocheck and evaluate KPIs for a company’s climate actions (including the company’s own
management indicators) can strengthen the companies’ motivation relating to climate action.
Examples of evaluation by investors and other stakeholders on alignment between KPIs andstrategies are provided as follows.
Case

Verification of alignment of KPIs and strategies

Investor A assesses climate-related KPIs set by companies from the perspective of both
environmental and business advantages. In doing so, the Investor looks not only at
increased revenues but also at what corporate value is created and what business benefits
can be anticipated.

Guidance for Collaborative Value Creation, p. 27: “5.02. … it is beneficial for companies to set key performance indicators(KPIs) as benchmarks for growing corporate value throughout their businesses and as a yardstick to measure the achievementof their objectives and share the KPIs with investors.”
26 IIRC p. 8: “Quantitative indicators, such as KPIs and monetized metrics, and the context in which they are provided can bevery helpful in explaining how an organization creates value and how it uses and affects various capitals.”
27 TCFD Final Report, p. 14: “Metrics and Targets: Disclose the metrics and targets used to assess and manage relevant climaterelated risks and opportunities where such information is material.”
25

22

Chapter 3 Detailed Discussions

28 For example, since GHG emissions resulting from consumption of electricity purchased externally depend on the utility that

supplies the electricity, care must be taken when comparing GHG emissions resulting from electricity consumption (Scope 2).
In addition, attention must also be paid on how the disclosed GHG emissions are derived (such as boundaries for calculation),
as well as for difficulties in comparing Scope 3 emissions among different companies.
29 Information on participating in and responding to external climate initiatives can be helpful in understanding companies'
attitudes toward climate change measures. However, it is desirable to take into consideration not only apparent participation
but also specific measures that suit the characteristics of the sector in the assessment Addendum D].
30 Please refer to TCFD Guidance 2.0 p.61 “Disclosure Methods for Companies with Diverse Business Models” for further
discussion.
31 With regard to emission intensities, it is recommended to gain an understanding through dialogue about companies’
technology levels and ability to respond to climate change, while noting that simple comparisons within an industry may bedifficult due to differences in product lineups and business portfolios.
32 It is also worth considering the use of indicators that indicate the state of industry responses to climate change and othersustainability issues, such as those developed by the Sustainability Accounting Standards Board (SASB) in the United States.

23

Appendix

Investor A has set industry-specific metrics to evaluate four elements of the TCFD
Recommendations, as a part of evaluating non-financial metrics, elaborating them byputting them into practice. Its industry analysts quantify the metrics based on their
qualitative judgment in addition to disclosed information and the result of engagement,
for comparison within the same industry, using them for part of their investment decisionmaking.

Chapter 4

Evaluation of KPIs in light of industry characteristics

Chapter 3

Case 1

Chapter 2

Investors and other stakeholders should note in evaluating KPIs that the calculation anddisclosure methods of KPIs will vary by company due to differing business environments andconditions, and that this can sometimes make simple comparisons difficult28.
GHG emissions are a typical climate-related KPI. As the mechanisms producing GHG
emissions and efforts required for emission reduction vary by industry, investors and otherstakeholders are encouraged to classify companies into smaller industry categories forcomparative evaluation, taking into account the appropriateness of the targets to becompared 29 . Meanwhile, the business portfolio of any given company may be involved in
multiple industries, and in such a case, investors and other stakeholders are encouraged toevaluate the company by giving due consideration to that company’s business model 30. In
addition, total GHG emissions are an important metric to evaluate climate-related risks forindustries and companies, though in order to understand factors such as a company’s
technological level or climate resilience, evaluations based on the emission intensity or total
GHG emissions within a given industry can also be useful 31,32.
Examples of evaluation of KPIs by investors and other stakeholders in light of industry
characteristics are provided as follows.

Chapter 1

In comparative evaluation of KPIs, it is important for investors and other stakeholders toconsider the relevant industry characteristics.

Chapter 3 Detailed Discussions

Chapter 1

Case 2

Evaluation of KPIs in light of industry characteristics

Chapter 2

Investor B conducts evaluation based on the understanding that climate actions areindustry-specific. For example, in dialogues with the electricity and gas sector and thetransportation sector where climate-related impacts on business continuity are
considered to be larger, it asked companies that had not disclosed their efforts andpolicies for GHG emission reduction although they belong to industries with higher
dependency on natural resources like water, forests, and fossil fuels, to establish
guidelines or targets for emission reduction.
Case 3Intra-sector comparison of KPI evaluation

Chapter 3

To evaluate a company, Investor C looks at corporate advantage and competitiveness thatis useful for gaining opportunities, hence puts more focus on a company’s relative position
within a sector rather than using one-dimensional information like GHG emissions.
Case 4

Precise evaluation through classification by subindustry

Chapter 4
Appendix

Investor D uses quantitative datasets to score not only GHG emission but several
environmental categories such as supply chain, raw materials and land use, with anobjective to identify the risk and opportunity of the company on an absolute basis. The
Investor classifies their business into sub-industries for accurate assessment, though insome cases such as conglomerates, assessments are conducted on a company basis. The
Investor considers it important that the most up-to-date and accurate information is
obtained for the purpose of investment decision. Thus, the engagement with thecompanies plays an important role in the assessment.

24

Chapter 3 Detailed Discussions

Chapter 4
Appendix

25

Chapter 3

Scope 1 emissions are direct emissions due to fuel consumption, etc. Scope 2 emissions are indirect emissions due toelectricity consumption, etc. Scope 3 emissions are other indirect emissions in the entire supply chain, including the
procurement of raw materials, the use of products, and waste disposal, etc.
34 One indicator in the TCFD recommendations is a description of “avoided GHG emissions,” which have been avoided
throughout the product life cycle. By disclosing GHG emission reductions when products and services are used, in contrast to
a company’s GHG emissions, it is possible to show how much the company has contributed to global GHG emission reductions
through those products and services.
33

Chapter 2

A further point that investors and other stakeholders should note is that even within thesame industry, GHG emissions through the entire value chain could differ by company due todifferent product line-ups and business portfolios, as well as reporting boundaries set by eachcompany. For example, some products and services can contribute to a reduction in GHG
emissions at the point of use (included in Scope 3 emissions) or at the point of installation,although their GHG emissions may be relatively higher at the production phase (Scope 1 and2 emissions) 33 . Demand for such products and services is anticipated to grow as theimportance of climate actions increases.
Thus, Scope 3 emissions is useful in understanding the risks and opportunities throughout
the entire value chain (including overseas component for some products and services). On theother hand, there is no definitive way of calculating Scope 3 emissions, and there is inherent
uncertainty. Furthermore, the reason why a company’s Scope 3 emissions are high may be due
to emissions from the product itself or its lifetime, as well as the to the market expanded
because the product is superior as a countermeasure against climate change. Therefore, thebasis of its calculation as well as assumptions have significant implications. For this reason, it
is desirable to conduct a comprehensive evaluation that takes into account the amount of
reduction contribution when using products and services, in addition to Scope 3 emissions34.
In evaluation, investors and other stakeholders are encouraged to pay attention tointermediate products that would bring reduction contributions at a point of usage, and urge
manufacturers and suppliers of such intermediate products to actively disclose information,
while at the same time actively evaluating their contributions.
Examples of evaluation throughout the entire value chain by investors and otherstakeholders are provided as follows.

Chapter 1

Investors and other stakeholders are encouraged to evaluate companies by considering
not only their GHG emissions through the entire value chain but also their contributions
to emission reduction at the usage of their products and services.

Chapter 3 Detailed Discussions

Chapter 1

Case 1

Comprehensive evaluation through the entire value chain

Chapter 2

Investor A considers it important to cover the entire value chain in evaluation, andevaluates companies with consideration of how their products are used downstream andwhy they are necessary. The Investor is of the view that how to evaluate life cycle
assessment (LCA) which takes into account contribution to the entire value chain, i.e., notonly greenhouse gas emissions but also incorporating addressing emission reductions, will
be regarded as important.
Case 2

Evaluation for manufacturers of low-emission products

Chapter 3

Upon evaluating manufacturers of GHG emitting products, Investor B evaluates positively
on contributions through low energy consumption and CO2 emissions at the time of use.
Through extensive dialogue about both risks and opportunities as part of its engagement,
The Investor analyzes how products contribute to GHG emission reductions throughout
the entire product value chain.
Case 3

Evaluation on disclosure of Scope 3 emissions

Chapter 4

Investor C is of the view that companies that discloses their Scope 3 emissions are likely
to be capable of controlling risks throughout the supply chain, having enough capacity toaddress those risks when they become evident, since it considers climate actions along
the entire supply chain.
Case 4

Evaluation on disclosure of emission reduction contributions

Appendix

Investor D focuses on company’s disclosure of emission reductions that would contributeto reduced GHG emissions for the society as a whole, even if the company’s businessexpansion would increase emissions in its value chain (Scope 1, 2 and 3 emissions). The
Investor considers that information on GHG emission reductions in society as a whole(outside of the company’s Scope 1, 2, and 3 emissions) due to the company’s efforts to letcustomers choose its high-efficiency facilities or low-carbon energy is useful for duly
evaluating a company that is making an effort to reduce GHG emissions.
Case 5

Incorporation of Scope 3 emissions to ESG scoring

Investor E uses the ratio of emissions to the revenue of its investee companies as ameasure of comparison within a sector in its ESG scoring. Presently, Scope 3 emissions are
not included since the Investor views that data and public support towards disclosure are
not yet adequate.

26

Chapter 3 Detailed Discussions

Evaluation of Scope 3 disclosure

Investor F considers Scope 3 emissions and reduction targets as essential items forevaluation of companies with large Scope 3 emissions. On the other hand, the Investor isof the view that further discussion is necessary in determining the extent of value chain
and the timeframe in calculating Scope 3 emissions.
Use of auxiliary information

Chapter 3

Investor G requests companies which have announced carbon neutrality targets by 2050
to disclose short- and medium-term greenhouse gas reduction targets up to 2050, current
emissions intensity and emissions (Scope 1, 2 and major Scope 3 categories), as well as
strategies and KPI such as green revenues earned during the course of achieving GHG
targets.

Chapter 2

Case 7

Chapter 1

Case 6

Chapter 4
Appendix27

Chapter 4

Addendums

About this chapter
In this chapter, topics that are considered to be important for investors and otherstakeholders to understand disclosed information but for which interpretation and viewpoints
have not yet been determined are identified and discussed. The topics are chosen on the basisof its importance as of present, based the activities of the TCFD Consortium and GIG
Supporters. The topics have been attracting particular attention since the initial publication of
the guidance, and it is desirable that both companies as well as investors and otherstakeholders deepen their understanding in the future.
On the other hand, it is possible the issues taken up in this chapter is affected by the
discussions that takes place in the future or by related topics. Therefore, though theperspectives and issues of investors are presented at the beginning of each topic as in Chapter
3, it should be noted that they may change in response to future discussions and trends inrelated topics.

A. Paris Agreement and Carbon Neutrality
In recent years, many countries and companies have adopted "carbon neutral" targets,
but the futures envisaged are diverse. Investors and other stakeholders should keep inmind that there are various pathways to carbon neutrality and should understand thebackground of the scenario used as a reference for disclosure by companies.
The Prime Minister of Japan, in his policy speech of October 2020, has announced that
“Japan will aim to reduce greenhouse gas emissions to net-zero, that is, to realize a carbonneutral, decarbonized society.". The European Union has also committed to achieve carbon
neutrality by 2050 at the latest, while the United States under the Biden administration has
pledged to reach “net zero emissions economy-wide by no later than 2050”. China, the world's
largest emitter, has also pledged to become carbon neutral by 2060.
The Paris Agreement aims to "Holding the increase in the global average temperature towell below 2 °C above pre-industrial levels and pursuing efforts to limit the temperature
increase to 1.5 °C above pre-industrial levels" (Article 2) and to "achieve a balance between
anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second
half of this century" (Article 4). In addition, the IPCC Special Report on 1.5 °C35 published in
IPCC, 2018: Global Warming of 1.5 °C.An IPCC Special Report on the impacts of global warming of 1.5 °C above preindustrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global responseto the threat of climate change, sustainable development, and effects to administer poverty

35

29

Chapter 4 Addendums

Chapter 1

2018 described various emission pathways to limit the temperature increase to 1.5 °C, with
the intermediate pathway achieving zero CO2 emissions in 2050. Therefore, "achieving carbon
neutrality and "stabilization at 1.5 °C" are presently used almost synonymously.
As shown below, the futures envisaged by "carbon neutrality in 2050" are very diverse(Figure 3).

Chapter 2
Chapter 3
Chapter 4

Figure 3 an overview of scenarios for decarbonization.
(Horizontal axis: Temporary energy supply (TPES: unit EJ), vertical axis: Renewable energy ratio in TPES)

Appendix

Source) IRENA, 2021, World Energy Transitions Outlook: 1.5 °C Pathway, International Renewable Energy,
Agency, Abu Dhabi.

Some scenarios towards carbon neutrality depict a future which emissions are reduced toalmost zero by enhancing renewable energy and energy conservation to the utmost limit,
achieving the targets without the use of removal measures such as CCUS, while other scenarios
reduce emissions only to about half current levels but remove emissions to a similar degree
by forests, etc. The IEA's "Net Zero by 2050:" published in May 2021, depicts a scenario whereenergy-related CO2 emissions are reduced to less than a quarter of the current levels throughrenewable energy and energy conservation, and achieving carbon neutrality through therecovery of emitted CO2 and its removal from the atmosphere 36. NGFS [see Addendum F] also
published several scenarios in June 2021 37. It should be noted however that scenarios should
be identified based on regional and sectoral characteristics.
In recent years, an increasing number of companies are taking on carbon neutral targets,and investors and other stakeholders are also encouraged to align their investment and loan
36
37

IEA, 2021, Net Zero by 2050: A Roadmap for the Global Energy Sector
NGFS, 2021, NGFS Climate Scenarios for central banks and supervisors

30

Chapter 4 Addendums

Evaluation of carbon neutral targets 1

Case 2

Evaluation of carbon neutral targets 2

Investor C has formulated a model that estimates the pathway to carbon neutrality in
2050 and uses it for engagement with companies. Specifically, GHG reduction process
towards nationwide carbon neutrality by 2050 is modelled taking into account targets
announced by the government which are compared with short- to medium- and mediumto long-term reduction targets of each company to analyze strategies towards carbon
neutrality. In addition to the above, the Investor is holding continuous dialogues on issues
that are essential to investment evaluation such as asset allocation consistent withdecarbonization strategies, focusing on companies where impact is significant.

31

AppendixUse of models in engagement

Chapter 4

In its efforts to evaluate corporate carbon neutral targets, Investor B obtains anapproximate grasp of the percentage that can be achieved by extending current efforts
and those that require technical breakthroughs. After confirming the progress, theInvestor pays attention to the content of the process to achieve it, its appropriateness, aswell as their consistency with the future vision and business model of the company whichforms the basis of evaluation.
Case 3

Chapter 3

Investor A believes that it is important not only to positively evaluate that a company has
established carbon-neutral targets, but also to conduct detailed analysis and evaluate thecontents, strategies, and likelihood of realization. Recognizing that it is difficult tocompletely eliminate emissions in some industries, the Investor is also paying attention
to companies' efforts regarding carbon sequestration, reduction contributions, andutilization of carbon credits.

Chapter 2

Case 1

Chapter 1

portfolios to be carbon neutral. For these companies as well as investors and otherstakeholders, the analyses on carbon-neutrality described above can serve as a reference for
their own scenario development. It is desirable for investors and other stakeholders intending
to understand the disclosed information and undertaking engagement to understand thebackground of the use of the scenarios used by companies, bearing in mind that there arediverse pathways leading to carbon neutrality.

Chapter 4 Addendums

Chapter 1

Case 4

Understanding carbon neutral targets 1

Chapter 2

During the course of engagement with a company, Investor D noted that it has establisheda carbon-neutral target for 2050 and an intermediate target for 2030. However, since
there were few descriptions of specific measures for CO2 reduction from 2030 to 2050,
the Investor conducted interviews with a purpose to identify elements where likelihoodof achievement is highest, and also to identify issues and responses on the remaining
parts to evaluate on its achievability.
Case 5

Understanding carbon neutral targets 2

Chapter 3

Investor E is aiming to shift to a portfolio that contributes to the realization of adecarbonized society. For investee companies that are large emitters, the Investor
requests that they establish a target of achieving carbon neutrality by 2050 as well as anintermediate target for 2030. For companies with targets, the investor confirms whether
specific efforts to achieve them have been formulated and considers the likelihood ofachievement is high if specific efforts to reduce them are disclosed.
Case 6

Interpreting carbon neutral targets 1

Chapter 4
Appendix

Investor F interprets carbon neutral targets as corporate efforts to identify and address
external diseconomies. The Investor is of the view that, by placing a cap on nationalemissions, emissions among industries is redistributed and is reflected in corporate value.
During engagement, the Investor communicates on the significance of target setting, as
well as on the minimization of risk and maximization of profit opportunity by addressing
decarbonization at an early stage
Case 7

Interpreting carbon neutral targets 2

When undertaking environmentally rated investment, Investor G includes questions
regarding carbon neutrality, which not only inquires on the targets but also strategic
efforts to be taken to achieve them, such as business portfolio transformation, innovation
creation, mid- and long-term GHG emission reduction targets. Furthermore, its overallalignment (integration with business planning such as mid-term management plans) isalso taken into account in its evaluation.

32

Chapter 4 Addendums

Transition finance is an important means for achieving carbon neutrality, and actively
evaluating companies that demonstrate appropriate transition plans will lead todecarbonization of their investment and loan portfolios in the future.

Appendix

33

Chapter 4

39

Chapter 3

IEA, 2021, Net Zero by 2050: A Roadmap for the Global Energy Sector
https://www.meti.go.jp/english/press/2020/0916_001.html
40 https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/climate-transition-financehandbook/
41 https://www.meti.go.jp/english/press/2021/0507_001.html
38

Chapter 2

Achieving carbon neutrality in 2050 is expected to require an annual investment of 4 to 5
trillion US Dollars 38 . In addition to projects such as renewable energy that are alreadydecarbonized, it is also important to take steps to transition in the long run perspective, suchas through research and development for steady decarbonization and energy conservation in
hard-to-abate sectors (industrial and energy conversion sectors that are currently deemed
difficult to decarbonize). While many companies have set carbon neutral targets, investors andother stakeholders have a major role to play in assessing and funding these transitions.
In Japan, the “Climate Innovation Finance Strategy 2020” 39 announced in September 2020
by the Ministry of Economy, Trade and Industry stated that the government would promote
financing for transition actions. Worldwide, countries such as Canada, Singapore and Australia
are also examining transition policies taking into account regional characteristics. In December
2020, the International Capital Markets Association (ICMA) published the "Climate Transition
Finance Handbook"40 in order to share an internationally harmonized approach taking into
account recent developments worldwide. Based on this, Financial Services Agency, Ministry of
Economy, Trade and Industry, and Ministry of the Environment formulated the “Basic
Guidelines on Climate Transition Finance” 41 (hereinafter Basic Guidelines) in May 2021.
The Basic Guidelines state that "transition finance is determined not only by the Use ofProceeds of the funds raised, but also by the credibility of the strategies and practices of thefundraiser". In the sense that a strategy (transition strategy) for realizing long-term goalsconsistent with the Paris Agreement is explicitly required, financing is provided for entities thatcommit to more ambitious efforts towards the future. Therefore, transition finance is statedas being "an extremely important means for achieving a decarbonized society” similar to theissuance of green bonds and other instruments. Investors and other stakeholders cancontribute to the realization of the Paris Agreement by engaging with and investing in andfinancing such enterprises, while earning returns from the investment and financing. In otherwords, it can be said that investments and loans to companies with transition strategies are
consistent with the policy of decarbonizing investment and loan portfolios of investors andothers in the future (even in sectors with high emissions at present).

Chapter 1

B. Transition FinanceChapter 4 Addendums

Chapter 1
Chapter 2
Chapter 3
Chapter 4

In addition, the Basic Guidelines provide a summary of the basic concept of "transition"labeling and raising finance, and progress is being made in the development of sectoral
roadmaps that can be taken into account when developing transition strategies anddetermining their suitability 42 . These roadmaps will be useful for investors and otherstakeholders in engaging with companies. However, it should be noted that transition
pathways are diverse, varying depending on the region, sector, and circumstance of individualcompanies. Therefore, investors and other stakeholders should keep in mind that they do notalways appear to extend linearly to the future, and that various approaches are envisaged 43.
The TCFD’s “Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans”
44 maintains that companies committed to reducing emissions, such as carbon neutral
declarations, should disclose their transition plans and defines them as essential inputs formarket participants to properly assess climate-related risks and opportunities and tounderstand long-term impacts. The disclosure items recommended are presented in line withthe four TCFD recommendations, and are highly compatible with transition financing (the Basic
Guidance also refers to TCFD-based disclosures for governance and scenarios).
Japan has a manufacturing industry with high technological capabilities, and many
companies belong to high emitting sectors. On the other hand, given its position as a world
leader in endorsing TCFD and disclosing according to its recommendations, the nascent market
for transition finance is expected to expand as a mechanism for providing funds to companies
that actively tackle climate change.
Case 1

Information on transition

Appendix

Investor A has initiated dialogue on the sustainability strategy of companies, usingtransition as a starting point. In addition to appropriately grasping long-term businessrisks and opportunities, the Investor considers proposing financing and other solutions
that will contribute to the realization of future strategies of companies aiming fortransitions.
Case 2

Evaluation of transition 1

Investor B considers that making an investment decision based solely on the amount ofemissions is a loss of profit opportunity, and therefore regards transition as important. In
addition to analyzing and evaluating transitions and opportunities, the investor is also
actively working on the development of transition-themed financial products.

Taskforce Formulating Roadmaps for Climate Transition Finance
Basic Guidelines on Climate Transition Finance, p. 11 " (S)ince short- to mid-term targets will likely be set in considerationof various factors (including the starting point and track records of the issuer, timing of capital investments, economic
rationality, cost-benefit analysis, and availability of technology necessary to achieve the targets), it is possible that the pathway
may not necessarily be linear with the same slope at all times but may be nonlinear."
44 TCFD, 2021. Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans
42
43

34

Chapter 4 Addendums

Evaluation of transition 2

Case 4

Perception on utilizing transition-related information 1

Case 5Perception on utilizing transition-related information 2

Utilization of disclosed information on transition

Investing in transition bonds

Investor G evaluated factors such as “recovery and its sustainability based on evaluationof current competitive environment” “financial policy” as well as “issuer’s perception of
ESG issues” and “framework of transition bonds”, upon deciding on whether to invest intransition bonds. Since monitoring of transparency is also a crucial issue in mattersregarding transition finance, the Investor believes that the issuer needs to constantly
update and disclose its transition strategy to investors.

35

Appendix

Investor F uses information on transition activities such as introduction of new
breakthrough technologies (hydrogen, biofuels, ZEBs, ammonia, etc.) or replacement ofexisting facilities in analyzing how and when they will be reflected in corporate value. Suchanalysis is conducted both from the viewpoint of increased return by creating new
business models as well as addressing risks.
Case 7

Chapter 4

Investor E regards transition-related information as important in understanding corporate
CO2 reduction. The Investor looks into whether the emission reduction target is consistent
with the objectives of the Paris Agreement, and uses them as information on the specificsituation of the investee company.
Case 6

Chapter 3

Investor D is of the view that there are still major issues regarding how to utilize as
information the corporate disclosure on its contribution to transition emission reductions
for society and customers. Information on the financial goals of investee financial
institutions is obtained mainly through individual dialogues with companies and is used
for investment decisions after understanding the details.

Chapter 2

Through evaluation of corporate transition, Investor C affirms that investee companies’
efforts to address anticipated climate-related risks and opportunities (fuel switch,
introduction of innovation, process changes, development of new products / services,etc.) are explicit. Based on this, the Investor checks whether the measures are linked tothe management strategy such as the medium- to long-term management plans, andwhether the organizational system for evaluating and managing the efforts is established.

Chapter 1

Case 3

Chapter 4 Addendums

Chapter 1

C. Initiatives for Investors and other Stakeholders on
Climate Change

Chapter 2

Initiatives to decarbonize portfolios of various investors and other stakeholders, including
asset owners, asset managers, banks, and insurance companies are being launched. Under
these circumstances, investors and other stakeholders are expected to engage in activities
that include facilitating the transition of their investees and borrowers towards carbon
neutrality.

Chapter 3
Chapter 4
Appendix

In parallel to the advancement of corporate information disclosure, there is a growing trend
for investors and other stakeholders which are in a position to utilize information to play anactive role in reducing emissions through their operations (investment, financing andinsurance underwriting). Initiatives for investors and other stakeholders are outlined below.
One type of initiative consists of investors and other stakeholders with an aim todecarbonize the investment and loan portfolio. The Net Zero Asset Owner Alliance (NZAOA)45
for asset owners; the Net Zero Asset Managers Initiative (NZAM) 46 for asset managers; theNet-Zero Banking Alliance (NZBA)47 for banks; and the Net-Zero Insurance Alliance (NZIA)48
for insurance companies request supporting financial institutions to commit to align withtargets such as becoming carbon neutral by 2050, and disclose their progress. The Principles
for Responsible Investment (PRI), which aim to incorporate ESG factors into investment
decisions, have made TCFD disclosure mandatory for signatory institutions since 2020. NZAM
has also been requiring TCFD disclosure for its progress reports, therefore these initiatives areclosely related to TCFD.
Another type of initiative is to help investors and other stakeholders standardize thequantification method of their portfolio Scope 3 GHG emissions. The Partnership for Carbon
Accounting Financials (PCAF) 49 , with involvement of NZAOA mentioned above, cooperates
with organizations such as CDP and SBT, and formulated the Global GHG Accounting andReporting Standard in November 2020. This offers guidance on how Scope 3 emissions is
calculated for each of the six asset classes, including equity, corporate bonds, project finance,business loans, and real estate. Another example of such initiative is the CRO Forum, an
initiative established in April 2020 to promote risk management in insurance companies, whichdeveloped a carbon footprint calculation method for underwriting portfolios that utilizes WACI
(weighted average carbon intensity) 50. The TCFD recommends the importance of disclosure of
Scope 3 emissions by investors and other stakeholders in the Proposed Guidance on Climatehttps://www.unepfi.org/net-zero-alliance/
https://www.netzeroassetmanagers.org/
47 https://www.unepfi.org/net-zero-banking/48 https://www.unepfi.org/net-zero-insurance/
49 https://carbonaccountingfinancials.com/
50 https://www.thecroforum.org/
45
46

36

Chapter 4 Addendums

Chapter 1
Chapter 2
Chapter 3

related Metrics, Targets, and Transition Plans, and recommends disclosure of portfolio GHG
using the methods developed by PCAF and the CRO Forum.
Furthermore, in June 2020, the Network of Central Banks and Supervisors for Greening the
Financial System (NGFS) 51 , established at the end of 2017 by central banks and financial
supervisory authorities, published a guideline for addressing climate change risks in thefinancial sector for the purpose of appropriate management of climate change risks in thefinancial sector. Through developing risk scenarios and stress test guidances, it recommends
the financial supervisors to grasp climate-related risks in the financial system. [See AddendumF].
As shown above, there is a growing demand to the investors and other stakeholders to
identify and disclose climate change risks associated with their investment and loan portfolios,
from the perspective of risk management. Under these circumstances, investors and otherstakeholders are expected undertake engagement that include promoting the transition of
investees and borrowers to carbon neutrality. It is also desirable for companies to conduct
disclosure and dialogue with an understanding of the background of responses by investors
and other stakeholders.

Chapter 4
Appendix

51

https://www.ngfs.net/en37

Chapter 4 Addendums

Chapter 1

D. Evaluation of Participation in External Climate Initiatives
An increasing number of companies are taking part in external climate initiatives.
However, it is recommended that evaluations be made taking into account specific efforts
rather than apparent characteristics such as participation or non-participation.

Chapter 2
Chapter 3
Chapter 4
Appendix

Recently, an increasing number of companies are declaring their participation in initiatives
related to climate actions, such as RE100 and SBT (Science Based Targets), and setting targets
based on such initiatives. Participation in them serves as an indicator for investors and otherstakeholders to understand a company’s stance regarding climate actions.
What is important for investors and other stakeholders is the future enhancement ofcorporate value. Therefore, an important perspective for evaluation is how a company is
involved in such initiatives, how it has committed to its targets, and how the commitments
relate to the company’ strategies. In that sense, in evaluation, investors and other stakeholders
are encouraged not only to look superficially at whether or not a company is participating insuch initiatives, but also to consider factors such as the company’s comprehensive strategies
and specific efforts to achieve their long-term objectives (capital investment, R&D investment,
and alliances, etc.).
It should be noted that even if they may not be participating in initiatives such as thosementioned here, many companies have given climate actions a priority in their management
strategies. To evaluate such companies, it is helpful to look at Governance, Strategy, Risks andOpportunities, and Performance and KPIs, etc. in order to achieve the evaluation of theirclimate actions that goes beyond the superficial assessments. Such efforts by investors andother stakeholders will also serve as an opportunity for the target companies to continue
reviewing their approaches to such initiatives.
Examples of external climate-related Initiatives are shown as follows.

38

Chapter 4 Addendums

EV100

An initiative where companies make commitments including the replacement of
their commercial fleets with electric vehicles by 2030.

SBT

An initiative where companies set, announce, and verify their scientificallyconsistent GHG emission reduction targets, in order to limit the global
temperature increase to “well-below 2ºC” or “1.5ºC level.” The appropriatenessof their targets is to be reviewed by SBT in light of specific standards.

Chapter 3

An initiative where companies are committed to sourcing 100% renewableenergy for the power consumption necessary for their activities and reporting
their progress. With the last target year in 2050, it requires the participants toincrease their percentage of renewable energy to 60% by 2030, and more than
90% by 2040.

Chapter 2

RE100

Chapter 1

Name

Table 2 Examples of external climate-related initiatives 52
Description

Chapter 4
Appendix

RE100 website: http://www.there100.org
EV100 website: https://www.theclimategroup.org/project/ev100
SBT website: https://sciencebasedtargets.org/
52

39

Chapter 4 Addendums

Chapter 1

E. Carbon Pricing
Various forms of carbon pricing are considered by the government, with an intention to
introduce without hesitation those that contribute to materializing its growth strategies.
Therefore, it is necessary to pay close attention not only to the trends of discussions
related to carbon pricing, but also to the development of relevant rules and guidelines.

Chapter 2
Chapter 3
Chapter 4

Carbon pricing is an economic method of altering the behavior of emitters by putting a priceon carbon, and is attracting attention both in Japan and abroad due to increasing drive forcarbon neutrality and changes in the way emission reductions is perceived. In order to achievecarbon neutrality in 2050, the Japanese government announced the "Green Growth Strategy
through Achieving Carbon Neutrality in 2050" in December 2020 53. The Strategy states that,“As for economic instruments (e.g., carbon pricing) using market mechanisms, the Japanese
government will introduce without hesitation those that contribute to materializing its growthstrategies…to strengthen the industrial competitiveness and promote innovation andinvestment." and the government is also studying carbon pricing that contributes to growth 54.
Typical categories of carbon pricing (Figure 4) include not only carbon tax and emissions
trading, but also energy taxes, internal carbon pricing (ICP) and voluntary credit trading.

Appendix
Figure 4 Categories of carbon pricing
Source) The Ministry of Economy, Trade and Industry, the Study Group on Ideal Economic and Other
Approaches for Achieving Worldwide Carbon-neutrality

A more detailed version of the Green Growth Strategy is published in June 2021.
Study is ongoing in the Study Group on Ideal Economic and Other Approaches for Achieving Worldwide Carbon-neutrality
established by the Ministry of Economy, Trade and Industry, and Subcommittee on Utilization of Carbon Pricing, establishedby the Ministry of Environment. An interim report by both bodies is published in August 2021.
https://www.meti.go.jp/shingikai/energy_environment/carbon_neutral_jitsugen/pdf/20210825_2.pdf (in Japanese)
https://www.env.go.jp/council/06earth/setchukanseiri.pdf (in Japanese)
53
54

40

Chapter 4 Addendums

Chapter 1
Chapter 2
Chapter 3
Chapter 4

As described in chapter 3.2 Strategies and Business Models, ICP is also mentioned in the
TCFD Recommendations, and the number of companies adopting ICP is on the rise. According
to a CDP survey, 864 companies in the world had adopted ICPs as of 2020, of which 118 are
Japanese companies, which ranks Japan second in the world (No. 1 is the United States, No. 3
is the United Kingdom) a further 134 Japanese companies plan to introduce ICPs within two
years 55. This indicates that internal carbon pricing is drawing attention in Japan, though there
is not enough example of evaluation by investors and other stakeholders, and further
discussions are needed on its treatment.
As regards carbon credits 56. some Japanese companies are already using them 57, and it isexpected that efforts to reduce CO2 emissions will be accelerated by enhancing the market for
credit transactions. Concrete measures to enhance the market such as the review of the nonfossil fuel energy value trading market, enhancing the J-Credit system, and improvement of
the Joint Crediting Mechanism (JCM) are being considered 58. Regarding carbon credits, in asurvey conducted by the TCFD Consortium, some financial institutions pointed out that while
it is one of the important measures to achieve the reduction targets, clarification anddevelopment of rules concerning utilization and disclosure is desirable 59.
As one of the means to promote medium- to long-term behavioral change, there is a
proposal to establish a framework in which companies that are making pioneering efforts on
climate change measures are brought together and their emission reduction value is evaluatedin the market. It is necessary to pay close attention not only to the trend of discussions oncarbon pricing but also to the development of these rules and guidelines.

Appendix

CDP Website ( https://www.cdp.net/en/climate/carbon-pricing/carbon-pricing-connect )A task force (Taskforce on Scaling Voluntary Carbon Markets (TSVCM)) was established to expand the market associatedwith carbon reduction value (voluntary credit) in the private sector. The TSVCM proposed the need to increase the market for
carbon credits by more than 15-fold and proposed the Core Carbon Principles to ensure the quality of carbon credits.
57 According to the questionnaire survey on TCFD disclosure and utilization (TCFD Consortium/FY 2021), 42% of corporate
respondent have procured credits, and an additional 29% are considering procurement.
58 Interim report, Study Group on Ideal Economic and Other Approaches for Achieving Worldwide Carbon-neutrality (inJapanese)
59 Responses to the questionnaire survey conducted by the TCFD Consortium for its members ("Questionnaire on Disclosureand Utilization of TCFD by the TCFD Consortium in FY 2021").
55
56

41

Chapter 4 Addendums

Investor A, in understanding the carbon-neutral target of the investee, checks not only thetarget itself, but also interim target (e.g. 2030 target) and specific measures and efforts toachieve it, as well as on the utilization of carbon pricing and carbon credits, and uses theinformation in a comprehensive manner.

Chapter 2

Comprehensive evaluation including carbon neutral targets

Chapter 1

Case 1Case 2

Evaluating internal carbon pricing

Chapter 3

Investor B exchanges opinions on carbon pricing and carbon credits in the course ofengaging with companies undertaking scenario studies, as well as discusses the directionof in-house management on these issues. However, actual values of ICP and its
management is often a matter of corporate strategy and are confidential. Therefore, theInvestor is of the view that comparability remains to be an issue, and thus considers that,
as of present, it suffices to confirm the basic principles and future directions.

Chapter 4
Appendix42

Chapter 4 Addendums

Source) Network for Greening the Financial System, 2019, First comprehensive report, A call for action: Climatechange as a source of financial risk
60

https://www.ngfs.net/en

43

Appendix

1. Integrating climate-related risks into financial stability monitoring and microsupervision
2. Integrating sustainability factors into own-portfolio management.
3. Bridging the data gaps.
4. Building awareness and intellectual capacity and encouraging technical assistance andknowledge sharing.
5. Achieving robust and internationally consistent climate and environment-related
disclosure.
6. Supporting the development of a taxonomy of economic activities

Chapter 4

Table 3 Recommendations by NGFS (First Comprehensive Report published in April 2019)

Chapter 3

Risk management of portfolios in investors and other stakeholders is defined within the
global regulatory framework, and risk management is implemented at the level of eachfinancial institution. Financial regulatory authorities and central banks in each country manage
and supervise the activities of these financial institutions according to their respective
mandates. At present, however, approaches for managing climate change risks in financial
institutions are still under discussion.
Responding to the publication of the TCFD Final Recommendations, central banks andfinancial supervisors worldwide established the Network of Central Banks and Supervisors forGreening the Financial System (NGFS) in 2017 as an international network to consider
appropriate ways for the financial sector to manage climate change risk 60 . NGFS has 95
members and 15 observers worldwide as of June 2021. From Japan, the Financial Services
Agency joined in June 2018, and the Bank of Japan joined in November 2019.
In April 2019, NGFS released its First Comprehensive Report, summarizing its initial 3 points
of work, namely 1) Supervising of climate and environmental risks, 2) analyzing themacrofinancial impact of climate change, and 3) scaling up green finance. The report provides
six recommendations for central banks, financial supervisors, and policymakers to address
climate change risks, as follows:

Chapter 2

NGFS, a network of central banks and financial supervisors, maintains the view thatclimate change risks pose financial risks, and recommends incorporating climate changerisks into financial supervision monitoring. Through these trends, it is expected thatprivate sector financial institutions will be required to enhance addressing climate changerisks and promote green investment.

Chapter 1

F. Climate Change Risk Management for Investors andOther Stakeholders, and the Role of NGFS

Chapter 4 Addendums

Chapter 1
Chapter 2
Chapter 3
Chapter 4
Appendix

In order to build upon the recommendations presented in the Comprehensive Report, NGFS
has published a number of guidance’s and reports. The NGFS Climate Scenarios are examples
of such publications. The purpose of this project is for central banks and financial supervisors
to assess the impact of climate change on the economy and financial system, and takes into
account progress in climate change policies of various countries in establishing assumptions.
Eight scenarios were made public in June 2020, and six were made public in June 2021 as theirintegrated and updated versions.
The TCFD Recommendations advocates disclosure of "resilience of the organization’s
strategy, taking into consideration different climate-related scenarios" as a part of disclosure
on strategy. For the six NGFS climate scenarios, substantial amount of data is made available,
including not only greenhouse gas emissions and carbon prices, but also GDP and demographic
trends, enabling economic analysis. NGFS is also making efforts to support investors and otherstakeholders to conduct scenario analysis 61, such as opening a portal site for these data 62.
The TCFD is a framework for promoting engagement between companies that disclose
climate-related information and investors and other stakeholders that make investments andloans based on the disclosed information. In the future, it is expected that the financial
institutions throughout Japan will be required to address climate change risks throughfinancial supervisors and central banks. In fact, Financial Services Agency established theExpert Panel on Sustainable Finance in December 2020 and released its report in June 2021 63.
The report asserts that, in order to support the climate change response of borrowers, it isimportant to accumulate know-how and improve skills. In addition, it is consideredappropriate to encourage Financial Services Agency to establish a system to manage climatechange risk by promoting discussions with financial institutions on the utilization of scenario
analysis. In July 2021, the Bank of Japan stated that "The impacts of climate change on
economic activity, prices, and the financial system are highly uncertain and could greatly varyover time", and announced that, as part of its monetary policy, it would provide financial
institutions that introduce a new fund-provisioning measure to financial institutions that
disclose a certain level of information on their efforts to address climate change to support
their efforts to address climate change, and to encourage financial institutions to enhancetheir disclosures , both qualitatively and quantitatively, based on the TCFD framework.
These represent a major development since the release of the first edition of this Guidance-progress on financial action - and indicate that financial institutions are now more actively
promoting investment to support corporate behavior in response to climate change (green
investment).

61 It should be noted that NGFS scenarios do not necessarily incorporate the full spectrum of regional and sectoral
characteristics, and care must be exercised in selecting and using them.
62 https://www.ngfs.net/ngfs-scenarios-portal/
63 Financial Services Agency, “"Report by the Expert Panel on Sustainable Finance" Announced”,
https://www.fsa.go.jp/en/news/2021/20210618.html

44

Appendix
Appendix 1︓References
1. GUIDANCE FOR INTEGRATED CORPORATE DISCLOSURE AND COMPANY-INVESTOR DIALOGUE FORCOLLABORATIVE VALUE CREATION, MINISTRY OF ECONOMY, TRADE AND INDUSTRY (MAY 2017) (ORIGINALIN JAPANESE, TRANSLATED INTO ENGLISH). ABBREVIATED IN THIS REPORT AS "GUIDANCE FOR COLLABORATIVEVALUE CREATION."
2. INTERNATIONAL ENERGY AGENCY, 2021, NET ZERO BY 2050: A ROADMAP FOR THE GLOBAL ENERGYSECTOR.
3. THE INTERNATIONAL <IR> FRAMEWORK, INTERNATIONAL INTEGRATED REPORTING COUNCIL (IIRC),(DECEMBER 2013). ABBREVIATED IN THIS REPORT AS "IIRC".
4. IPCC, 2018: GLOBAL WARMING OF 1.5°C.AN IPCC SPECIAL REPORT ON THE IMPACTS OF GLOBALWARMING OF 1.5°C ABOVE PRE-INDUSTRIAL LEVELS AND RELATED GLOBAL GREENHOUSE GAS EMISSIONPATHWAYS, IN THE CONTEXT OF STRENGTHENING THE GLOBAL RESPONSE TO THE THREAT OF CLIMATE CHANGE,SUSTAINABLE DEVELOPMENT, AND EFFORTS TO ERADICATE POVERTY.
5. INTERNATIONAL RENEWABLE ENERGY AGENCY, 2021, WORLD ENERGY TRANSITIONS OUTLOOK; 1.5°C
PATHWAY,
6. NETWORK FOR GREENING THE FINANCIAL SYSTEM, 2019, FIRST COMPREHENSIVE REPORT: A CALL FOR
ACTION: CLIMATE CHANGE AS A SOURCE OF FINANCIAL RISK.
7. NETWORK FOR GREENING THE FINANCIAL SYSTEM, 2021, NGFS SCENARIOS FOR CENTRAL BANKS AND
SUPERVISORS.
8. TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES, 2017, RECOMMENDATIONS OF THE TASKFORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (FINAL REPORT), TASK FORCE ON CLIMATE-RELATEDFINANCIAL DISCLOSURES (JUNE 2017) . ABBREVIATED IN THIS REPORT AS "TCFD FINAL REPORT".
9. TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES, 2019, 2019 STATUS REPORT OF THE TASKFORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES, TASK FORCE ON CLIMATE-RELATED FINANCIALDISCLOSURES, (JUNE 2019).
10. TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES, 2020, GUIDANCE ON SCENARIO ANALYSIS FORNON-FINANCIAL COMPANIES.
11. TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES, 2021, PROPOSED GUIDANCE ON CLIMATERELATED METRICS, TARGETS, AND TRANSITION PLANS.
12. TCFD CONSORTIUM, 2020, GUIDANCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES 2.0, ABBREVIATED
IN THIS REPORT AS "TCFD GUIDANCE 2.0".

45

Appendix

Chapter 1

Appendix 2︓Members of the TCFD Consortium Steering Committee, List of GIG Supporters,
Number of TCFD Consortium Members, revision history.
(1) Members of the TCFD Consortium Steering Committee*In alphabetical order

Chapter 2[Chair]Kunio Ito

Director of Hitotsubashi CFO Education and Research Center,
Hitotsubashi University

Chapter 3[Steering Committee member]
Takao Aiba
Project General Manager, Environment Affairs & Engineering
Management Div., CN Advanced Engineering Development Center,Toyota Motor Corporation

Chapter 4
Appendix

Takehiro Fujimura

Member, Task Force on Climate-related Financial Disclosures (TCFD)
General Manager, Corporate Sustainability ＆ CSR Department,
Mitsubishi Corporation

Yasunori Iwanaga

Chief Responsible Investment Officer, Amundi Japan Ltd.

Masaaki Izumiyama

General Manager, Head of Environment Div., Nippon Steel Corporation

Naruyoshi Kuwata

General Manager In Charge of Sustainability, Corporate Planning
Department, Sumitomo Life Insurance Company

Masaaki Nagamura

Member, Task Force on Climate-related Financial Disclosures (TCFD)
Fellow, International Initiatives, Tokio Marine Holdings, Inc.

Manabu Shibata

Director, ESG Global Action Promotion, Kao Corporation

Kazunori Takahashi

Deputy General Manager, Sustainability Promotion Division, Hitachi Ltd.

Tatsuya Takeda

General Manager, Corporate Sustainability Dept., Sumitomo Mitsui
Banking Corporation

Keisuke Takegahara

Executive Fellow, Research Institute of Capital Formation, Development
Bank of Japan Inc.
[Chair of the Information Utilization Working Group]

Toru Terasawa

Head of Responsible Investment Group Investment Div., AssetManagement One Co., Ltd.

Hiroyuki Tezuka

Fellow & General Manager, Climate Change Policy Group, Technology
Planning Dept., JFE Steel Corporation[Chair of the Information Disclosure Working Group]

Masaharu Tounai

Environment General Manager, Corporate Management ＆ Planning
Unit ESG Office, Tokyo Electric Power Company Holdings Inc.

Toshihiro Yamauchi

General Manager, Corporate Communications Dept., Sumitomo
Chemical Co., Ltd.

(Note) Affiliation and position as of September 24, 2021.

46

Appendix

GIG Supporters are investors and other stakeholders that utilize or plan to utilize the Green
Investment Guidance. Case studies of utilization of climate information disclosures that should
be referred to in Japan and abroad were recommended in the preparation of the Green
Investment Guidance 2.0.

2.

Amundi Japan Ltd.

3.

Manulife Investment Management Co., Ltd.

4.

Nomura Asset Management Co., Ltd.

5.

Nikko Asset Management Co., Ltd.

6.

Nippon Life Insurance Company

7.

T & D Life Group8.

Mitsubishi UFJ Trust and Banking Corporation

9.

Asset Management One Co., Ltd.

Chapter 3

BNP Paribas Asset Management Co., Ltd.

Chapter 2

1.

Chapter 1(2) List of GIG Supporters

10. Resona Asset Management Co., Ltd.
12. BlackRock Japan Co., Ltd.
13. Sompo Asset Management Co., Ltd.
14. Tokio Marine Asset Management Co., Ltd.

Chapter 4

11. Sumitomo Mitsui Trust Asset Management Co., Ltd.

15. Development Bank of Japan
17. Meiji Yasuda Life Insurance Company
18. Dai-ichi Life Holdings, Inc.
19. Sumitomo Mitsui Financial Group, Inc.
20. Sumitomo Life Insurance Company
21. Mizuho Financial Group, Inc.
22. Mitsubishi UFJ Financial Group, Inc.
23. Invesco Asset Management (Japan) Limited
24. Sumitomo Mitsui Trust Bank, Limited
25. Tokio Marine & Nichido Fire Insurance Co., Ltd.
26. T. Rowe Price Japan, Inc.

(Total 26 companies, in random order, as of September 24, 2021)

47

Appendix

16. Sumitomo Mitsui DS Asset Management Company, Limited

Appendix

Chapter 1(3) Number of TCFD Consortium Members

Chapter 2(4) Revision history
First edition published October 8 2019
Revised edition published October 5 2021

Total of 417organizations (As of September24, 2021)

Chapter 3
Chapter 4
Appendix48