Guidance for Utilizing
Climate-related Information to
Promote Green Investment(Green Investment Guidance)

October 8, 2019

TCFD Consortium

Contents
Chapter 1 Introduction .............................................................................. 1
Chapter 2 Structure of This Guidance........................................................ 4
Chapter 3 Detailed Discussions ................................................................. 7
3.1 Governance....................................................................................... 7
3.2 Strategies and Business Models ....................................................... 9
3.3 Risks and Opportunities ................................................................. 13
3.4 Performance and Key Performance Indicators (KPIs) .................... 18

Chapter 1 Introduction
Purpose of This Guidance
The number of organizations supporting the TCFD recommendations is increasing
currently at 855 organizations worldwide, of which 194 are from Japan (as of October 1,2019). In Japan, the TCFD Consortium was established on May 27, 2019, as a forum forcompanies and financial institutions, etc. supporting the TCFD recommendations to havediscussions on effective information disclosure and its utilization. It is expected that in
the future investors and other stakeholders (including asset owners, asset managers,banks, insurers, and other users of the information: hereinafter, referred to as “investors
and other stakeholders”) will appropriately evaluate and utilize information disclosed bycompanies for their investment decisions.
Disclosure based on the TCFD recommendations is still at an early stage, andinvestment to support corporate activities to address climate change, (green
investment) using the information disclosed is expected to increase, along with the
future progress of disclosure. Also, providing perspectives specific to investors and otherstakeholders in evaluating and utilizing the disclosed information is considered useful for
facilitating proactive disclosure by companies.
In that context, in order to facilitate green investment, this Guidance provides
commentary on perspectives needed by investors and other stakeholders when
understanding the information disclosed based on the TCFD recommendations. To help
investors and other stakeholders better understand information disclosed, this Guidance
also provides examples of investment practices utilizing that information as well as
viewpoints on assessments that recognize industry-specific situations while considering
the alignment between the TCFD Recommendations and discussions about current stateof corporate disclosure such as integrated reporting.
Basic Approach
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 ofenvironment and growth,” based on the following three perspectives.
The first perspective is to promote constructive dialogue (engagement) withcompanies, leading to enhanced corporate value. As a practice of investors and otherstakeholders, it is more important to be engaged in dialogue with companies to facilitate
their climate actions than to simply divest based on superficial criteria; engagement can
1lead to the enhancement of corporate value through improved efforts, thus increasing
opportunities for investment.
The second perspective is to identify and assess the risks and opportunities posed byclimate change. Climate-related information includes uncertainty, and the implicationsof climate change vary by industry. Considering their preconditions and characteristics,
investors and other 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 tobe provided appropriately for various innovations needed for companies to make thetransition to a decarbonized society. If climate risks are being addressed appropriately,
there could be greater opportunities for transition in industries that have higher
emissions and countries and regions that have lower carbon efficiency.
Target Audience
The main target audience for this Guidance is investors and other stakeholders thatutilize the information disclosed by companies for investment and lending decisions. The
Guidance is also expected to assist them in their investment and lending decisions
through direct discussion, their engagement with borrowers and investees, and thedevelopment of green financial products. Since it is important 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 to help companies better
understand the perspective of investors and other stakeholders.
Context of this Guidance
The ultimate purpose of this Guidance is to create mechanisms to smoothly provide
funding to promote companies’ efforts that facilitate the transition to a decarbonizedsociety, thus promoting the virtuous cycle of environment and growth, by facilitating theappropriate evaluation of those efforts - through dialogue between companies andinvestors and other stakeholders - in terms of responding to climate-related risks as well
as gaining opportunities through 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 their2

investment decisions. Therefore, it does not call for any disclosure by companies in
addition to disclosure under the TCFD recommendations, but intends to support
companies that actively promote their climate actions through efficient dialogues also
giving consideration to burdens of their disclosure.
“Guidance on Climate-related Financial Disclosures” (TCFD Guidance) prepared by
Japan’s Ministry of Economy, Trade and Industry in 2018 and this Guidance are mutuallycomplementary, with the former being for companies engaging in disclosure and thelatter for investors and other stakeholders who will use the information disclosed. The
TCFD Guidance 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 as a first step for future promotion of “green investment.” Inputs and topics
that have not been addressed this time will be reflected in future revisions of this
Guidance along with future developments in green investment.

3

Chapter 2 Structure of This GuidanceThis Guidance has been prepared with an emphasis on the use of insights
accumulated to date through discussions on existing corporate disclosure frameworks.
This section summarizes some key points in this Guidance by comparing the items
recommended for disclosure by the TCFD with the International Integrated Reporting
Council (IIRC) framework – a typical framework being used by companies, investors andother stakeholders around the world - 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 Japanesepractitioners (Figure 1).

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 based on the TCFD recommendations can be considered and evaluated as anextension of past discussions relating to integrated reporting.
4Strategy is also common in all the frameworks as well, but the TCFD recommendations
differ significantly from the other frameworks in that they recommend “scenario analysis”
to develop Strategy, given the uncertainties relating to the medium- to long-term
impacts of climate change. To understand the information that has been disclosed basedon recommendation on Strategy in the TCFD recommendations, a deeper understandingof scenario analysis — which is a tool to identify potential influence of the climatechange on business — and the appropriate evaluation of the results of the analysis willlead to a better understanding and evaluation of business models, which consist thebasis of Strategy. Based on 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 apart of Strategy 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 toincorporate them into their investment evaluation. Therefore, in this Guidance, Risks andOpportunities are treated as one distinct element. Under Risk Management, which isone 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 and Opportunities as one of the perspectives
for investors and other stakeholders to judge the adequacy 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 businessmodels are sustainable and have growth potential,” then explaining the importance ofbeing aware of ESG, maintaining relationship with key stakeholders, and disclosing
information and having dialogue about risks relating to the change of businessenvironment. This element of “Guidance for Collaborative Value Creation” is not
explicitly included in disclosure under the TCFD recommendations, but investors andother stakeholders can ultimately determine whether companies satisfy the general
concept of Sustainability and Growth, by checking each item of this Guidance. In otherwords, investors and other stakeholders can assess whether a company can realize its
sustainability and growth in terms of climate by identifying Risks and Opportunities tounderstand the company’s long-term Strategy, confirming its Performance and KPIs, andchecking 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 in5terms of four elements (1. Governance, 2. Strategies and Business Models, 3. Risks andOpportunities, and 4. Performance and KPIs) to explain what is needed from theperspective of investors and other stakeholders to look for sustainability and growth in
the information disclosed by companies.

6

Chapter 3 Detailed Discussions
3.1 Governance
It is important for investors and other stakeholders to consider a company’sorganizational structure in terms of governance to address climate change, and also
whether it is actually functional 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
to invest in a company. 1 IIRC expects integrated reports to include “how theorganization’s governance structure supports its ability to create value in the short,medium, and long term,” and the TCFD recommendations state that understanding thecorporate board of directors’ oversight of climate-related issues and its role in assessing
and managing climate-related risks and opportunities can help investors and otherstakeholders evaluate the adequacy of company’s governance2. In other words, as forgovernance, in addition to having well-structured organizational systems in place, thosesystems need to be functional and effective in terms of the roles of management.
Investors and other stakeholders identify the organizational structures and functionsof corporate boards as well as environmental and sustainability committees, which
include the management, and verify that board oversight of climate-related governanceis being effectively implemented, or that the equivalent to board oversight is being
ensured through reports to the boards from the relevant committees. This verification
enables judgment of how the company is considering climate change and how it isreflecting that consideration in corporate 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 ofeach organizations and the management, as well as processes to reflect theirdeliberations in management. Dialogue with the company will provide the company achance to improve its own governance, leading to the enhancement of corporate value,

1

Guidance for Collaborative Value Creation, p. 30: “6.01. It is imperative for investors that companies
steadily execute the strategies 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 trust and invest in companies with confidence.”
2
TCFD Final Report, p. 19: “[investors and other stakeholders] are interested in understanding the rolean organization’s board plays in overseeing climate-related issues as well as management’s role inassessing and managing those issues. Such information supports evaluations of whether climate-related
issues receive appropriate board and management attention.”7

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.
Case 1: Verification of top management commitment
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 reportand other documents, and whether the CEO is committed to KPIs and strategies
necessary for addressing issues.
Case 2: Verification of effectiveness
Investor B engages with different counterparts of a company depending on the topic
of interest, seeking dialogue with the CEO to check the company’s commitment toclimate-related issues, but going to the director(s) responsible for specificimplementation systems and their effectiveness. Such engagement can change theattitude 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.
Case 3: Verification of processes
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. Throughengagement, 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.

83.2 Strategies and Business Models
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 and the scenarios used as well as their appropriateness within theindustry and the company’s responses to the strategies it has developed, than theaccuracy of scenario data and analytical results provided by the company.
For investors and other stakeholders, a company’s business model is the mostimportant blueprint in evaluating its sustainable profitability. 3 The TCFD
recommendations state that strategy refers to an organization’s desired future state, andestablishes a foundation against which it can monitor and measure its progress inreaching 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 businessmodel that can address climate change. 4
In order to address climate change, companies need to develop their strategies toensure their sustainability with a medium- to long-term perspective. The TCFD
recommendations encourage implementation of scenario analysis in developing
strategies. It is important for investors and other stakeholders to understand andevaluate the persuasiveness and appropriateness of the scenarios as a tool to upgrade acompany’s current business model and to develop strategies to enhance future
corporate value and reduce risks in addressing climate change. Investors and otherstakeholders are encouraged to consider disclosure related to scenario analysis notnecessarily 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 based on its
strategy,5 and to verify the context of the narrative through engagement.
To this end, it is more important for investors and other stakeholders to check andassess the alignment between the decision-making processes that led to a company’s
3

Guidance for Collaborative Value Creation, p. 9, 2.03: “Therefore, the business model is the mostimportant blueprint for investors in evaluating the company’s sustainable profitability.”
4
IIRC, p.28-31: “… business model is its system of transforming inputs, through its business activities, into
outputs and outcomes 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 theorganization’s business model and …are influenced by / respond to the external environment and theidentified risks and opportunities”
5
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.”9

strategies and the 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 analytical results provided by the company. 6 The TCFD
recommendations, anticipating that a number of companies will conduct qualitative
scenario analysis, state that organizations with more significant exposure should
undertake more rigorous qualitative and quantitative analysis. 7 However, given thecurrent situation with the disclosure and use of such climate-related scenario analysis
still in their infancy, investors and other stakeholders are encouraged to deepen theirunderstanding of the company’s strategies and business models through engagement.
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
disclosed by the company:▪

context of the relevant scenarios selected and developed, and any assumptions
behind the scenarios;▪
▪
▪

alignment of a company’s underlying future vision with its business model;
expected timeframe and verification methods; andrisks 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 additionalrisks and opportunities related to climate change and review their strategies andbusiness models, which could lead to further enhancement of corporate value.
Meanwhile, investors and other stakeholders should note the following to understandthe scenario analysis:▪

In some cases, disclosures may be limited, and not all of the scenarios that havebeen used by that company for decision-making in strategy development may bedisclosed.8

6

TCFD Final Report, p. 25: “Scenarios are hypothetical constructs and not designed to deliver precise
outcomes or forecasts.”
7
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.”
8
Since consideration of scenarios often includes the latest information related to the key points of acompany's latest technology development strategy, companies do not always disclose all scenarios.

10▪

Climate-related information, such as IPCC scenarios and other existing scenarios,9inevitably includes uncertainty.

▪

One should not expect to see disclosures based on a unified scenario, because
different companies face different national policies and business conditions, anddiverse scenarios could be disclosed including those independently developed by
a company.10

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
to derive persuasive and reasonable results of analysis, or narratives, and whether thecompanies have taken the necessary measures aligned with the narratives, rather thanwhich scenarios have been used.
Examples of evaluation by investors and other stakeholders on the relationship ofscenario analysis and strategies and business models of companies are provided below.
Case 1: Evaluation of strategies based on a long-term vision
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 theextent to which management takes into consideration substantial uncertainty of the
future market environment, as well as whether its narrative of value creation ispersuasive and logical.
Case 2: Scenario assessment, Example 1
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 thecompanies have taken such measures.
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, are

9In many cases, scenarios referred to include greenhouse gas concentration and socio-economic pathway
scenarios by the Intergovernmental Panel on Climate Change (IPCC) and scenarios by the International
Energy Agency (IEA), etc.
10Note 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 2 ºC.

11difficult, 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.
Case 4: Assessment of a company’s own scenarios and continuous improvement
through engagement
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”
with disclosure requirements by presenting tidy narratives based on a given templateor guidelines tend to end up with similar outcomes. Thus, Investor D gives a morefavorable evaluation to companies that focus on “explaining” their own unique visionthat is aligned with their corporate strategies.

123.3 Risks and Opportunities
It is important for investors and other stakeholders to have a balanced evaluation of
a company’s risks and opportunities, by understanding a company’s efforts toaddress risks, while also actively evaluating the potential opportunities of climate
actions.
Risks and opportunities caused by climate change could significantly influence acompany’s business model. The TCFD recommendations, therefore, encouragecompanies to disclose information on processes used to identify climate-related risks
and opportunities as well as their influence on business, strategy, and financial
planning. 11 As for risks, TCFD recommendations encourage disclosure of specificprocesses in which the companies identify, assess and manage the risks, and whether
they are incorporated into their organizational risk management processes.12 IIRC also
encourages this disclosure: “What are the specific risks and opportunities that affect theorganization’s ability to create value over the short, medium and long term, and how is
the organization dealing with them.” 13 Investors and other stakeholders, therefore,
would be able to appropriately evaluate the impacts of climate change on a company’sbusiness 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 basisof ascertaining whether or not a company has secured the ability to create value in themedium to long term, by understanding the company’s efforts to address risks andopportunities as well as its operational systems, organizational arrangements, andoperational conditions relating to monitoring. Therefore, it is important for investors andother stakeholders to ask a company to appropriately identify, manage and disclose risks,
and to engage in dialogue with the company regarding their impacts on corporate value.
Meanwhile, from the perspective of gaining return on investment to a company that
undertakes climate actions, investors and other stakeholders are encouraged to have abalanced evaluation of a company’s risks and opportunities by also actively evaluating
the potential opportunities of climate actions. The TCFD recommendations haveintroduced two types of climate-related risks: those related to transition to a low-carbon

11

TCFD Final Report, p. 14
TCFD Final Report, p. 14
13
IIRC, p. 27
12

13

economy (transition risks) and those related 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).14
The TCFD recommendations also refer to resource efficiency, adoption of lowemission energy sources, and the development of new products and services, etc., asclimate-related opportunities.15 Opportunities through efficient use of resources andlow-emission energy sources include CO2 recycling and those using innovativetechnologies (e.g., CCUS 16 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 other companies from the lifecycle perspective throughtheir value chains (e.g., supply of highly-efficient equipment and components) and thosethat would contribute to climate adaptation (e.g., technologies to reduce the impacts ofextreme weather events, etc.).
Examples of evaluation by investors and other stakeholders on risks and opportunities
are provided below.
Case 1: Evaluation of climate-related opportunities
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
that balance between risks and opportunities is important, since such efforts lead tothe enhancement of corporate value.
Case 2: Positive evaluation for risk information disclosure
Investor B positively evaluates such companies that disclose their risk information.
Although many companies are concerned with negative impacts of risk information
disclosure, companies demonstrating in detail that they have properly identified andmanaged their risks can provide investors with more sense of security than those notdoing so, when compared within the same industry.

14

An example to reduce physical risks by companies is impact assessment of the climate change to address
adverse effect to their business activities utilizing publicly provided natural disaster information (hazard
map etc.).
15
TCFD Final Report, p. 6
16
Carbon capture, utilization and storage technologies

14Case 3: Facilitation of proactive disclosure of opportunities through engagement
Investor C is engaging not only with manufacturers of final products but also withthose providing technologies and components that support the final products, todiscuss their future revenue opportunities and social innovation opportunities. It has
the view that enhanced corporate value will result if investors discover suchopportunities and encourage their active disclosure.
Case 4: Engagement with car manufacturers to address risks
Investor D knows that car manufacturers need to have flexible responses to climaterelated risks in light of worldwide trends relating to emission controls. In engagementwith them, therefore, this Investor verified their commitment to introduce nextgeneration low-emission vehicles for overseas markets, their efficient allocation of
resources, including for such technologies, etc., and their policies to prioritize actions
with respect to the CASE trend.17 This was useful for developing a shared perspectivewith management regarding these issues, as well as regarding challenges forappropriate disclosure of climate-related risks.
Case 5: Evaluation of opportunities through climate actions by companies seeking
to reduce environmental impacts
Investor E not only assesses the environmentally unfriendly aspects of corporate
activities, such as GHG emissions from its business operations, but also positively
evaluates climate actions by the company or its affiliates such as their R&D efforts forCO2 capture and reuse (carbon recycling).

17

Connectivity, Autonomous, Shared, Electric15

It is important for investors and other stakeholders to recognize the importance ofa company’s efforts toward innovation as a climate action, and to positively evaluate
the relationship between innovation and the company’s long-term strategies, aswell as organizational structure to promote innovation.
Innovation 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. Disclosure and utilization of information on climate-related innovation
has only just begun. However, it is anticipated that, as more progress is made withdisclosure under the TCFD Recommendations, such efforts 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 useful for investors and other stakeholders to proceed with engagement on theattitude and intention of such companies that seek innovation, in order to improveunderstanding on their long-term strategies. Therefore, investors and other stakeholders
are encouraged to confirm that a company’s long-term strategies and underlying
perceptions about the future business environment are aligned with the direction of its
innovation efforts. In addition, regarding the management systems of a company
engaged in innovation, it is also important to have dialogue on issues such as thecommitment of its management organizational design, processes, and organizational
culture.18 Such dialogue will also serve as an opportunity for a company to objectively
review its strategies for innovation.

18

The international standard of “Innovation management system - Guidance (ISO56002)” was issued on
July 15, 2019 for checking a management system of a company that creates innovation.

16

Examples of evaluation by investors and other stakeholders relating to innovation areprovided below.
Case 1: Evaluation of efforts to foster innovation
Investor A evaluates a company’s climate-related efforts that will increase its
revenues. Specifically, it evaluates the company by considering its development ofenvironment-friendly products and services and creation of innovation, as well as GHG
emission reduction efforts, while also looking to see if the company is making efforts
to visualize and further enhance its internal and external value created from such
efforts (e.g., amount of environmental contribution). The Investor makes anassessment based on systems and specific initiatives in the company, how it is making
an effort to create new value and innovation in order to take advantage ofopportunities, especially in light of the emerging social issues including climate change
and changes in the business environment based on a long-term vision beyond 2030.
Case 2: Evaluation of strategic investment and innovation
For Investor B, the most important aspect to take into consideration is whether
innovation is incorporated into management strategy. Thus, when evaluating acompany’s long-term vision, Investor B 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
with the 2ºC target in line with Paris Agreement.
Case 3: Proactive evaluation for disclosure of information related to innovation
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 for addressing climate change because it is still at the demonstration
stage. However, this Investor wishes to understand the prospects for such technology
and evaluate the company’s long-term readiness, so it encourages the company toproactively disclose more information.

17

3.4 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.
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. 19 , 20 In the TCFD
recommendations, the relevance of a company’s KPIs to its climate-related Risks andOpportunities is considered important in terms of targets to assess and manage.21
Climate-related KPIs disclosed by a company need to be verified for consistency withthe companies’ long-term strategies. When the relationship is not clear between acompany’s strategies and business model vis a vis its KPIs and their rationale as disclosedby 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 thealignment between the two. This will promote the reduction of risks and creation ofopportunities, leading to an enhancement of corporate value. In addition, by checking
not only the levels of KPIs but also their trends (level of improvement), investors andother stakeholders will have a better understanding of a company’s climate-related
efforts. The proactive efforts of investors and other stakeholders to check 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.

19

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 andas a yardstick to measure the achievement of their objectives and share the KPIs with investors.”
20
IIRC p. 8: “Quantitative indicators, such as KPIs and monetized metrics, and the context in which they
are provided can be very helpful in explaining how an organization creates value and how it uses andaffects various capitals.”
21
TCFD Final Report, p. 14: “Metrics and Targets: Disclose the metrics and targets used to assess andmanage relevant climate-related risks and opportunities where such information is material.”

18

Examples of evaluation by investors and other stakeholders on alignment between
KPIs and strategies are provided below.
Case: Verification of alignment of KPIs and strategies
Investor A 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 andwhat business benefits can be anticipated.

In comparative evaluation of KPIs, it is important for investors and otherstakeholders to consider the relevant industry characteristics.
Investors and other stakeholders should note in evaluating KPIs that the calculationand disclosure methods of KPIs will vary by company due to differing businessenvironments and conditions, and that this can sometimes make simple comparisonsdifficult.22
GHG emissions are a typical climate-related KPI. As the mechanisms producing GHG
emissions and efforts required for emission reduction vary by industry, investors andother stakeholders are encouraged to classify companies into smaller industry categories
for comparative evaluation, taking into account the appropriateness of the targets to becompared. 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
to evaluate the company by giving due consideration to that company’s business model.
In addition, total GHG emissions are an important metric to evaluate climate-relatedrisks for industries and companies, but on the other hand, in order to understand factors
such as a company’s technological level or climate resilience, evaluations based on the22

For example, since GHG emissions resulting from consumption of electricity purchased externallydepend 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 thedisclosed GHG emissions are derived (such as boundaries for calculation), as well as for difficulties incomparing Scope 3 emissions among different companies.

19

emission intensity or total GHG emissions within a given industry can also be useful.23,24
Examples of evaluation of KPIs by investors and other stakeholders in light of industry
characteristics are provided below.
Case 1: Evaluation of KPIs in light of industry characteristics
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 ofengagement, for comparison within the same industry, using them for part of theirinvestment decision-making.
Case 2: Evaluation of KPIs in light of industry characteristics
Investor B conducts evaluation based on the understanding that climate actions areindustry-specific. For example, in dialogue with the electricity and gas sector and thetransportation sector where climate-related impacts on business continuity is
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
guidance or targets for emission reduction.

Case 3: Intra-sector comparison of KPI evaluation
To evaluate a company, Investor C looks at corporate advantage and competitivenessthat is useful for gaining opportunities, hence puts more focus on a company’s relative
ranking within a sector rather than using one-dimensional information like GHG
emissions.

23

With regard to emission intensities, it is recommended to gain an understanding through dialogue aboutcompanies’ technology levels and ability to respond to climate change, while noting that simple
comparisons within an industry may be difficult due to differences in product lineups and businessportfolios.
24
It is also worth considering the use of indicators that indicate the state of industry responses to climatechange and other sustainability issues, such as those developed by the Sustainability Accounting Standards
Board (SASB) in the United States.

20

Investors and other stakeholders are encouraged to evaluate companies byconsidering 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.
A further point that investors and other stakeholders should note is that even within
the same industry, GHG emissions through the entire value chain could differ bycompany due to different product line-ups and business portfolios, as well as reporting
boundaries set by each company. For example, some products and services cancontribute 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 and 2 emissions).25 Demand for such products
and services is anticipated to grow as the importance of climate actions increases. Thus,
investors and other stakeholders are encouraged to evaluate in a comprehensive mannerby considering emissions throughout the entire value chain (including overseas for someproducts and services) as well as contributions to reduction at the use phase of products
and services.26 In evaluation, investors and other stakeholders are encouraged to pay
attention to intermediate products that would bring reduction contributions at a pointof 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 below.
Case 1: Comprehensive evaluation through the entire value chain
Investor A considers it important to cover the entire value chain in evaluation, andevaluates companies with consideration of how their products are used downstream
and why they are necessary. In doing so, it requires companies not only to provide
GHG emissions during production but also to explain how the products contribute to
GHG emission reductions downstream.

25

Scope 1 emissions are direct emissions due to fuel consumption, etc. Scope 2 emissions are indirectemissions due to electricity 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.
26
One indicator in the TCFD recommendations is a description of “avoided GHG emissions,” which havebeen 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 thecompany has contributed to global GHG emission reductions through those products and services.

21

Case 2: Evaluation for manufacturers of low-emission products
Investor B evaluates manufacturers of GHG emitting products positively, based on
their contributions by having low emissions at the time of use. Through extensive
dialogue about both risks and opportunities as part of its engagement, Investor B
analyzes how products contribute to GHG emission reductions throughout the entire
product value chain.
Case 3: Evaluation on disclosure of Scope 3 emissions
Investor C is of the view that a company that goes as far as disclosing its Scope 3
emissions is probably very capable of controlling risks throughout the supply chain,having enough capacity to address those risks when they become evident, since itconsiders climate actions along the entire supply chain.
Case 4: Evaluation on disclosure of emission reduction contributions
Investor D focuses on company’s disclosure of emission reductions that would
contribute to reduced GHG emissions for society as a whole, even if the company’sbusiness expansion would increase emissions in its value chain (Scope 1, 2 and 3
emissions). This Investor considers that information on GHG emission reductions insociety as a whole (outside of the company’s Scope 1, 2, and 3 emissions) due to thecompany’s efforts to let customers 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.

22Column 1: Flexibility in medium of disclosure
The TCFD recommendations states that disclosures related to the Governance andRisk Management recommendations should be provided in financial filings, and that,for the Strategy and Metrics and Targets recommendations as well, companies should
provide such information in financial filings when the climate-related information isdeemed material.27 Meanwhile, more progress in information disclosure is expected
for the sake of investors and other stakeholders as the importance of climate actions
increases.28
Climate-related information involves uncertainties, especially if it covers a longer
time period. Therefore, it is sometimes difficult to comprehend the whole picture of acompany’s climate-related efforts just by reviewing statements in financial filings,
which are required to be accurate and rigorous. In practice, companies often disclose
information related to their climate actions through multiple media, such as integrated
reports and environmental reports, and attempts can be seen to facilitate crossreferencing of information.
Therefore, investors and other stakeholders are encouraged not only to review
statements relating to climate change in financial filings but also to refer to various
other disclosure documents. With this in mind, many investors and other stakeholders
already make an effort to refer to multiple reports and documents for the evaluationof a single company (Figure 2). Reviewing multiple documents is burdensome forinvestors and other stakeholders. Nevertheless, promoting efforts for efficient
disclosure such as cross-referencing not only allows investors and other stakeholders
to reduce their own workload, but can also make companies review the consistencyof their own disclosed information as well as their disclosure practices.

27

TCFD Final Report, p. 34
TCFD 2019 Status Report, p. 7: “Many companies disclose some climate-related information, but moreprogress is needed.” “The percentage of companies disclosing climate-related information has increased,but overall is low.”
28

23

Media used to obtain information disclosed (multiple response)

Annual securities reports

27

Integrated reports

34

Environmental / Sustainability

31reports

Corporate website

29

Other

14

No response

7
0

10

20

30

40

Total respondents（ n=42 ）Source: Survey of TCFD Consortium members
Figure 2. Sources of information disclosed by companies(multiple responses accepted)

24Column 2: Evaluation on collaboration with external climate-related initiatives
Recently, more companies are declaring their participation in initiatives related toclimate 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 andother stakeholders 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 thecommitments 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 in such initiatives, but also to consider factors such as thecompany’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
those mentioned 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 and Opportunities, and Performance and KPIs, etc. in order to achieve theevaluation of their climate actions that goes beyond the superficial assessments. Suchefforts by investors and other stakeholders will also serve as an opportunity for thetarget companies to continue reviewing their approaches to such initiatives.

25

Examples of External Climate-related Initiatives29
Name
RE100

EV100
SBT

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

29

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

26

References
1.

2.
3.

4.

Guidance for Integrated Corporate Disclosure and Company-Investor Dialogue forCollaborative Value Creation, Ministry of Economy, Trade and Industry (May 2017)(Original in Japanese, translated into English). Abbreviated in this report as "Guidance
for Collaborative Value Creation."
The International <IR> Framework, International Integrated Reporting Council (IIRC),(December 2013). Abbreviated in this report as "IIRC".
Recommendations of the Task Force on Climate-related Financial Disclosures (Final
Report), Task Force on Climate-related Financial Disclosures (June 2017) . Abbreviatedin this report as "TCFD Final Report".
2019 Status Report of the Task Force on Climate-related Financial Disclosures, Task
Force on Climate-related Financial Disclosures, (June 2019). Abbreviated in this report
as "TCFD 2019 Status Report".

27