Overview of Green Investment Guidance (1)⚫

Disclosure based on the TCFD recommendations is still at an early stage.

⚫

With an aim to promote green investment, this Guidance provides commentary on perspectives needed byinvestors and other stakeholders when understanding the information disclosed.

⚫

Expected to help companies better understand the perspective of investors and other stakeholders, leading tofurther disclosure.

Basic Approach
Promote constructive dialogue (engagement) with companies, leading to enhanced corporate value
Identify and assess the risks and opportunities posed by climate change.
Promote innovation for decarbonization, and to create mechanisms for appropriate flow of funds.

Detailed Discussion

Aims to realize a“virtuous cycle ofenvironment andgrowth”

It is important that investors and other stakeholders understand the information disclosed based on theTCFD recommendations according to the following perspectives.

1.Governance⚫ Consider a company’s organizational structure in terms of governance to address climate change, and also whether it isactually functional and effective to that end.
✓ Identify the organizational structures and functions of corporate boards as well as environmental and sustainability
committees, which include the management.
✓ Verify that board oversight of climate-related governance is being effectively implemented, or that the equivalent toboard oversight is ensured through reports to the boards from the relevant committees.
✓ Management structures related to governance, their specific roles of each organizations and the management, as wellas processes to reflect their deliberations in management.
Example of verification on Governance through engagement by investors and other stakeholders【Verification of effectiveness】 Investor A engages with different counterparts of a company depending on the topic of interest,
seeking dialogue with the CEO to check the company’s commitment to climate-related issues, but going to the director(s) responsible
for specific implementation systems and their effectiveness. Such engagement can change the attitude of the whole company
including management, leading to the creation of an appropriate governance system, such as building climate-related organizational
systems or bringing about discussions in board meetings.

1

Overview of Green Investment Guidance (2)2. Strategies and Business Models⚫ It is more important to check and assess the alignment between the decision-making processes that led to a company’s
strategies and the scenarios used as well as their appropriateness within the industry, than the accuracy of the data of thescenario or analytical results provided by the company.
✓✓✓✓

Context of the relevant scenarios selected and developed, any assumptions behind the scenarios, and alignment of a company’s
underlying future vision with its business model.
Expected timeframe and verification methods, risks and opportunities recognized through scenario analysis and processes toincorporate them into the company’s strategy and financial plans.
The most crucial issue is whether the scenarios are being utilized appropriately to derive persuasive and reasonable results ofanalysis, or narratives, and whether the companies have taken the necessary measures aligned with the narratives, rather thanwhich scenarios have been used.
Disclosures may be limited, and not all of the scenarios that have been used by that company for decision-making in strategy
development may be disclosed, and climate-related information, such as IPCC scenarios and other existing scenarios, inevitably
includes uncertainty.

Example of verification on Strategies and Business Models through engagement by investors and other stakeholders【Scenario assessment】 Investor B is aware that scenarios should be understood as narratives based on multiple assumptions. Whatis important is not credibility of the results of analysis, but the responses to the expected futures, so in evaluation, it checks whether
the companies have taken such measures.

3. Risks and Opportunities⚫ Have a balanced evaluation of a company’s risks and opportunities, by understanding a company’s efforts to address risks,while also actively evaluating the potential opportunities of climate actions.
✓✓

Identify two types of climate-related risks: those related to transition to a low-carbon economy (transition risks) and thoserelated to the physical impacts of 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).
Identify climate-related opportunities such as resource efficiency, adoption of low-emission energy sources, and thedevelopment of new products and services.
➢ Opportunities through efficient use of resources and low-emission energy sources include CO2 recycling and those using
innovative technologies (e.g., CCUS or carbon recycling, and hydrogen and fuel cells).
➢ Opportunities from development of new products and services include those that would contribute in reducing risks of othercompanies from the lifecycle perspective through their value chains.

2Overview of Green Investment Guidance (3)3. Risks and Opportunities (contd.)⚫ Recognize the importance of a company’s efforts toward innovation as a climate action, and to positively evaluate therelationship between innovation and the company’s long-term strategies, as well as organizational systems to promoteinnovation.
✓✓

Alignment of a company’s long-term strategies and underlying perceptions about the future business environment with thedirection of its innovation efforts.
Regarding the management systems of a company engaged in innovation, confirm commitment of its management
organizational design, processes, and organizational culture

Example of verification on Risks and Opportunities through engagement by investors and other stakeholders【Facilitation of proactive disclosure of opportunities through engagement】 Investor C is engaging not only with manufacturersof 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 is of the view that enhanced corporate value will result if investors
discover such opportunities and encourage their active disclosure.

4. Performance and Key Performance Indicators (KPIs)⚫ Understand a company’s rationale for establishing the specific KPIs that it manages and discloses, and confirm its alignment
3with the company’s strategies.
✓ Check not only the levels of KPIs but also their trends (level of improvement).

⚫

Consider relevant industry characteristics upon comparative evaluation of KPIs.
✓⚫

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 for comparative evaluation, taking into
account the appropriateness of the targets to be compared.

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.
✓✓

Evaluate in a comprehensive manner by considering emissions throughout the entire value chain, as well as contributions toreduction at the use phase of products and services.
Pay attention to intermediate products that would bring reduction contributions at a point of usage.

Example of verification on Performance and Key Performance Indicators (KPIs) through engagement by investors and otherstakeholders【Verification of alignment of KPIs and strategies】 Investor D assesses climate-related KPIs, which is set by a company, from theperspective 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.

3