Starter's Guide To Climate Change Scenario Analysis:

Practices and Trends for Scenario Analysis in theLife Insurance Industry
February 2022

Contents
Introduction

3

I. The current state of climate change

4II. What is scenario analysis?

11III. What is scenario analysis for the life insurance industry?

18

IV. Scenario analysis practices in the life insurance industry

25

IV-1. Scenario analysis practices in the life insurance industry: Life insurance providers

26

IV-2. Scenario analysis practices in the life insurance industry: Institutional investors

44

V. Case studies of disclosure of scenario analysis

61

VI. What are the latest trends in scenario analysis?

66

Examples of guidance and tools for scenario analysis

85

List of references

87

Appendix88

2

Introduction
Background and purpose of this guideThere are concerns that climate change (global warming) will have a wide range of adverse impacts on human life,
quality of life, natural ecosystems, economic activity, and more. In this context, the private sector, particularly
financial institutions, are seen as playing a major role in the transition to a decarbonized society.



Because of growing impacts and concern, there is growing expectation for disclosures relating to sustainability.
Japan's Corporate Governance Code calls on listed companies to appropriately disclose their initiatives onsustainability, and companies in prime markets in particular are being expected to enhance the quality and quantityof disclosures based on the TCFD (recommendations) or an equivalent international framework.
* For an overview of the TCFD recommendations, please refer to the Life Insurance Association of Japan's Climate
Change Starter's Guide.
Many companies find the scenario analysis aspects of the TCFD recommendations to be among the mostchallenging. They need to first understand scenario analysis, not only for their own internal analysis, but also sothat institutional investors can interpret the information disclosures of the companies they invest in.

This Guide was written mainly for people in the insurance industry who are getting started on this topic. It provides
basic knowledge and key points to keep in mind, as well some guidelines for initiatives, useful examples, andsources for more information. We hope that it will serve as a reference for companies about to embark on full-scale
scenario analysis.

This Guide also takes into account the sector-specific guidance of the TCFD recommendations, as revised in
October 2021.

This Guide was prepared under contract with Green Pacific Co., Ltd. (GP), a consulting firm specializing in
responses to climate change.
3

I. The current state of climate change
1. Examples from Japan

Weather-related disasters such as torrential rainfall events are increasing and intensifying
everywhere in Japan. In July 2020, Japan experienced heavy rainfall, with historical records
smashed in many locations for the amount of rain falling in a 24-hour period. Total rainfall
observed nationwide in early July and the number of occurrences of over 50 mm falling per hour
were the most nationwide since 1982, resulting in major rivers breaching their banks, sedimentrelated disasters, and the flooding of low-lying areas, as well as 82 deaths and 4 persons missing.
Annual occurrences of hourly precipitation of 80 mm or more (AMeDAS)

Source: Kumamoto Stock Photo Archives, "Kiroguma!"• Rainfall of over 80 mm per hour leaves people feeling breathlessness,
unsafe, and threatened, umbrellas are completely useless, and poor
visibility makes it dangerous to be driving a vehicle.
• For the 10-year period 2011 to 2020, the average annual number ofoccurrences of rainfall over 80 mm per hour has increased byapproximately 1.9 times compared to the period 1976 to 1985.
Source: Japan Meteorological Agency website

Torrential rainfall in Kumamoto, July 2020

Changes in torrential rainfall events4I. The current state of climate change
2. Examples from around the world
 In July 2021, extensive flooding from intensive rainfall events occurred in Germany
and Belgium, which previously had little experience of flood damage, resulting in 181
deaths in Germany and 38 deaths in Belgium. In China, 302 people were killed and 50
went missing due to heavy rains in Henan Province.
 In June 2021, an extreme heat wave in western Canada killed more than 230 people.
At this time, temperatures in British Columbia smashed records at 49.6℃.

Torrential rains and flooding in Germany

Extreme heat wave in Canada
5

I. The current state of climate change
2. Examples from around the world
 Permafrost has been melting with the advance of global warming. For millennia it
previously stayed frozen all year round. The permafrost layer contains vast amountsof methane, which is released when the permafrost melts. Methane is a greenhousegas (GHG) with 25 times the global warming potential of carbon dioxide, so its
release may further accelerate global warming and climate change.
 There are also concerns that unknown viruses and other pathogens could be released
as the permafrost melts, which could adversely affect humanity.
Researcher

Approx 40 m

Sediment

Ice

Source: National Institute for Environmental Studies, Is the permafrost melting due to global warming? Alaska Research Report 2017, 2018.

Melting permafrost in Alaska
6I. The current state of climate change
3. Impacts on future generationsIntergenerational inequities from the impacts of climate change have also become increasingly
apparent. A study published in June 2021 by a team that included the National Institute forEnvironmental Studies (NIES) estimated the number of times that grandchildren will experienceextremely hot days and heavy rainfall events during their lifetime (2020-2100), compared totheir grandparents’ generation (1960-2040).



The report suggests that in some tropical areas, the grandchildren’s generation may experienceextremely hot days more than a thousand times in their lifetimes (in Japan, about 400 times),
while their grandparents may not have experienced even one instance in a scenario with noclimate change. For torrential rainfall the ratio was estimated at five times or more (about threetimes in Japan).
 A similar trend was also shown in a paper
published in September 2021 in the magazine
Science by an international research team.


The paper estimates that children born in2020 will experience extreme weather events
two to seven times more than those born in1960 if humanity does little to tackle climatechange.

How many hot days will the grandchildren experience in their lifetimethat their grandparents will not encounter? (days)
Source: National Institute for Environmental Studies, How many hot days and heavy precipitation days
will grandchildren experience that break the records set in their grandparents’ lives? - Assessment ofIntergenerational and Regional Inequities in Extreme Weather Events, June 11, 2021 (in Japanese).
https://www.nies.go.jp/whatsnew/20210611/20210611.html

Source: Wim Thiery et. al, Intergenerational inequities in exposure to climate
extremes, Science, September 26, 2021, Vol 374, issue 6564, pp. 158-160.

7

I. The current state of climate change
4. Assessments by the Intergovernmental Panel on Climate Change (IPCC)


IPCC reports are among the most important sources of information for considering the impacts of climatechange.



In 1988, the IPCC was established by the United Nations Environment Programme (UNEP) and the World
Meteorological Organization (WMO) to conduct comprehensive assessments of climate change fromscientific, technical and socio-economic perspectives, and provides scientific information to contribute to theclimate change policies of governments in each country.

* The reports are produced by approximately 2,500 researchers from 195 countries participating in reviews of
the latest scientific findings, ultimately resulting in a "Summary for Policymakers," which is checked line byline by the government representatives of each country, and then released on the consensus of all participating
countries.

* Research has progressed over the past 20 years, regarding the "likelihood that human activity may be theprimary cause of warming of the climate system":Working Group I Report of the IPCC (Physical Science Basis)
1990 First Assessment Report

Likely1995 Second Assessment Report

Likely2001 Third Assessment Report

Highly likely (>66%)

2007 Fourth Assessment Report

Very high likelihood (>90%)

2013 Fifth Assessment Report

Extremely high likelihood (>95%)

2021 Sixth Assessment Report

Unequivocal

Advances in research
have made it
increasingly clear thathuman activities are theprimary cause of climatechange.

8

I. The current state of climate change
5. Key points of the Sixth Assessment Report from IPCC Working Group I (August 2021)
 The Sixth Assessment Report comes to about 4,000 pages, so a separate Summary for
Policymakers was compiled into just 42 pages. These are some of the topics covered:

The scale of recent changes across the climate system as a whole, and the present state ofmany aspects of the climate system, are unprecedented over many
centuries to many thousands of years.

The global average temperature (2011-2020) is already about 1.09℃
above preindustrial levels.



Human-caused climate change is affecting many extreme weather andclimate phenomena around the world.

Global average temperatures will continue to rise at least until the middleof this century. The global average temperature at the end of the century
will be 1.0 to 5.7℃ above preindustrial levels.

Global warming will exceed 1.5 and 2℃ in the 21st century, unless greenhouse gas (GHG)
emissions decrease significantly in the next few decades.

 In order to avert unacceptable adverse impacts of climate change, the Paris Agreement
calls for global efforts to limit the increase in global average temperature to well
below 2℃ above pre-industrial levels, and to pursue efforts to limit the increase to
1.5℃. This latest IPCC report warns that these targets may not be met.
9

I. The current state of climate change
For reference: Climate-related risks and opportunities
 * TCFD Recommendations describe both "risks" and "opportunities" of climate change.

Source: TCFD Recommendations Recommendations of the
Task Force on Climate related Financial Disclosures(2017) "Physical risks" include slow-moving "chronic" risks, such as increases in average temperatures,and "acute" risks, such as floods and heat waves.
 "Transition risks" refers to risks that a company with of damage gas (GHG) emissions will beforced to "transition" to decarbonized or low-carbon business, in the context that GHGs are
emitted by human socioeconomic activities such as the burning of fossil fuels, and are causing
climate change.
 However, companies that can counter these risks or take advantage of changes may also bringnew "opportunities."10II. What is scenario analysis?
1. Definition and significance of scenario analysis in TCFD recommendations
 What is a scenario?


Scenarios are used to consider situations where uncertainty is high and accurate predictions/projections are
difficult.



They provide a means for companies to think about what will happen to their business in the future if
certain trends continue (e.g., policy support for climate change is implemented on a large scale andcontinuously), or if certain conditions are met (e.g., innovative decarbonization technologies aredeveloped).

However, a scenario is a hypothetical model and not intended to provide detailed predictions or forecasts.
It is a descriptive representation of a possible future.

 What is scenario analysis?


Scenario analysis is a method of increasing the flexibility and resilience of a company's strategy for avariety of future situations. It is a method to consider the long-term impacts on a company’s business,strategies, finances, and performance, using scenarios to anticipate the impacts of climate change andchanges in the business environment due to long-term policy trends related to climate change.

 Scenarios used for analysis


A company can develop its own scenarios, or refer to existing scenarios created by industry groups orinternational organizations, etc.

→ This section explains why scenario analysis is important in the TCFD
Recommendations and what kinds of responses are anticipated.
11

II. What is scenario analysis?
2. Why is scenario analysis necessary and important in response to the TCFD
Recommendations?
 The TCFD Recommendations call on companies to analyze the financial impacts (risks andopportunities) of climate change on their business and to disclose their efforts based on results ofanalysis, so it is essential to consider the long-term future on a scale of 10 to 30 years. In addition, theimpacts of climate change involve significant uncertainty (e.g., frequency and timing of weatherrelated disasters).
 Corporate management typically has a time horizon of 3 to 5 years for medium-term plans, and may nothave adequate experience formulating plans upon a future vision based on long-term and uncertain
conditions.
 The TCFD Recommendations encourage the use of scenario analysis as an effective means of doing so.
TCFD Recommendations (excerpt): B. Climate-Related Risks, Opportunities, and Financial
Impacts, 3. Financial Impacts
The Task Force encourages organizations to undertake both historical and forward-looking analyses when considering
the potential financial impacts of climate change, with greater focus on forward-looking analyses as the efforts tomitigate and adapt to climate change are without historical precedent.
This is one of the reasons the Task Force believed scenario analysis is important for organizations to consider
incorporating into their strategic planning or risk management practices.
Source: TCFD Recommendations

12II. What is scenario analysis?
Background: Reasoning for TCFD Recommendations to promote scenario analysis
For many companies, the most significant impacts of climate change are expressed on a medium- to longterm timescale. Therefore, predicting the timing and scale of such impacts is highly uncertain, even with thelatest science. It is therefore very difficult for individual companies to accurately understand the likelihoodand scale of climate change impacts on their business, strategy, and financial performance, and toincorporate these considerations into their business.



To properly incorporate the impacts of climate change into a company's business planning processes, itneeds to examine when and how climate-related risks and opportunities may arise and change, and consider
how to respond to those changes. The TCFD found that "scenario analysis" was one way to do this.



If a company uses scenario analysis and discloses the results of its assessment of climate change impacts on
its business, investors will be able to see how the company is susceptible to climate-related risks, how it isaddressing the potential impacts, and how it intends to deal with future impacts. Companies that are dealing
with these issues may also find themselves better able to attract investment and financing.

Thus, the TCFD concluded that companies should use scenario analysis to evaluate the impacts of climaterelated risks and opportunities on business, strategies, and finances; develop responses; and disclose thesematters appropriately in their annual financial reports.



As a result, scenario analysis was deemed to be an important tool among four pillars of strategies of the
TCFD Recommendations, which stated that companies should "describe the resilience of the organization's
strategy, taking into consideration different climate-related scenarios."13II. What is scenario analysis?
3. How to do it?
"Scenario analysis is an important and useful tool for understanding the strategic
implications of climate-related risks and opportunities." Source: TCFD Recommendations
 As a "recommended approach" to scenario analysis, the TCFD stated:
For an organization in the initial stages of implementing scenario analysis or with limited
exposure to climate-related issues, the Task Force recommended disclosing how resilient,qualitatively or directionally, the organization's strategy and financial plans may be to a rangeof relevant climate change scenarios.
Organizations with more significant exposure to climate-related issues should consider
disclosing key assumptions and pathways related to the scenarios they use to allow users tounderstand the analytical process and its limitations.
Source: TCFD Recommendations→ In other words, it is important to start with a qualitative understanding and thenmove ahead in stages based on the extent of impacts on the organization.

14

II. What is scenario analysis?
Background: Qualitative and quantitative scenario analysis in TCFD Recommendations


Scenario analysis techniques can be qualitative based on descriptive and narrative stories, quantitative
based on numerical data or models, or a combination of the two.
Qualitative scenario analysis is used to explore relationships and trends for which little or no numerical
data is available. Quantitative scenario analysis is used to assess measurable trends and relationships
using models and other analytical techniques.

Background: Approaches to scenario analysis in the TCFD Recommendations








The TCFD recommended that all companies consider (1) using scenario analysis to inform their strategy
and financial planning processes, and (2) disclosing how resilient their strategies will be for multiple
climate scenarios. In addition, while scenario analysis is likely a qualitative exercise for many
companies, organizations with a greater exposure to climate risk should conduct more rigorous
qualitative and/or quantitative scenario analysis.
Industries more significantly affected by transition risk (e.g., fossil fuel-based industries, energyintensive manufacturers, transportation activities) and/or physical risk (e.g., agriculture, transportation
and building infrastructure, insurance, and tourism) should consider more in-depth scenario analysis.
The TCFD recommended selecting a range of plausible scenarios as an important part of scenario
analysis. Recommended scenarios include a temperature increase below 2℃ above pre-industrial levels,
nationally determined contributions (NDCs) scenarios, and business-as-usual (BaU) scenarios.
The IPCC and International Energy Agency (IEA) are the main bodies formulating climate change
scenarios, but recently, the Network for Greening the Financial System (NGFS) has also publishedscenarios for the purpose of managing risks in the financial sector (see Chapter VI).
15

II. What is scenario analysis?
4. The process of scenario analysis
 The TCFD recommended six steps for scenario analysis.
This handbook focuses mainly on Steps ② to ④, which are at the core of analysis.
① Ensure governance is in place② Assess significance ofclimate-related risksMarket,technology
transition

Reputational

Policy/Physicallegislationrisks
・ What are the current and futurerisks and opportunities?
・ Could they become moresignificant in the future?
・ Are the organization’s
stakeholders concerned?

⑥ Document and disclose・ Integrate scenario analysis into strategic planning and corporate risk management processes.
・ Assign supervisory authority to the relevant boards and committees.
・ Determine how internal and external stakeholders are to be involved.

③ Identify and define
scenario scope④ Assess impacts on
business

Scenarios that cover a setof relevant transition andphysical risks for theorganization

Input costs, operating
expenses, revenues, supply
chains, business disruptions,timing・ Given the scale of risks andopportunities, what scenarios areappropriate?
・ What are the analytical options(e.g., input parameters,
assumptions)?
・ Which scenario(s) should be used?

・ For each scenario, assess potential
impacts on the organization's
strategic and financial position
・ Identify factors most likely to beaffected.

⑤ Identify possible
responses
Modify business model,
portfolio mix, invest in
capacity and technology
・ Consider how to manage identified
risks and opportunities.
・ Consider what adjustments areneeded in strategic and financial
planning.

- Document the above process, communicate to stakeholders, and provide relevant details (e.g.,
data/information used, assumptions, analytical methods/results, management team response)
Source: Adapted from TCFD Recommendations

16

II. What is scenario analysis?
4. The process of scenario analysis
The following points should be considered in scenario analysis: Ascertain overall risks and opportunities(Step ②: Assess the significance of climate-related risks)What are the adverse impacts (risks)?
What are positive impacts (opportunities)?

 Determine your scenarios(Step ③: Identify and define the scope of scenarios)

Approach 1: Determine your own scenarios
Approach 2: Select and adapt existing scenarios
 Example: IPCC 2℃/1.5℃/4℃ scenario (see ← Chapter IV) Understand the extent of risk
(Step ④: Assess impacts on your business)

Qualitatively assess whether or not there are/will be impacts
Semi-quantitatively assess the extent of impacts(e.g., large, medium, small) and trends
Evaluate quantitatively (e.g., costs, sales)

Difficulty (Low)
Difficulty (High) Qualitative evaluation is relatively easy, but quantitative evaluation and analysis are
more difficult due to constraints on data available for analysis.

17III. Scenario analysis for the life insurance industry
1. Why should life insurers do scenario analysis?
 As urged by the TCFD Recommendations, it is crucial for companies to properly
understand how climate change could affect them. However, it is difficult toaccurately predict what will occur, when, and to what magnitude.
 Meanwhile, life insurers play a crucial role in people's lives, and society counts onthem to deal with any disruptions caused by climate change and continue maintaining
stability and the quality of life of the people.
 Therefore, it is important to understand the impacts of climate change to the extent
possible today, and prepare to respond progressively, by anticipating (analyzing) whatsociety might look like and how companies can respond in the future.
 Thus, life insurers can also benefit from scenario analysis to prepare for future
uncertainty, as described in Chapter II.

18

III. Scenario analysis for the life insurance industry
2. Climate change impacts on the life insurance industry
 Climate change can expose the many
services provided by life insurancecompanies to a wide range of interrelated risks (see figure). For example,
deaths from weather-related disasters
could affect insurance payouts. Floods
could damage insurers' branch offices.
And as asset owners, insurancecompanies could also be exposed to therisk of investment losses.
⇒ See next page for examples of climate risks
for insurance operations.

 Life insurers must consider any impacts
these risks could expose them to, both aslife insurance providers and as
institutional investors.

Inter-connections between climate change, social trends, andsector-by-sector impacts(Source: Climate Change Starter's Guide）

19

III. Scenario analysis for the life insurance industry
Background: Examples of climate risks across insurance operations/activities


The Issues Paper on Climate Change Risks to the Insurance Sector describes the following
climate risks for insurance operations and activities. It was prepared by the International
Association of Insurance Supervisors (IAIS) and Sustainable Insurance Forum (SIF) together
with the United Nations Environment Programme (UNEP).

(Source: Climate Change Starter's Guide）

20

III. Scenario analysis for the life insurance industry
2. Impacts of climate change on the life insurance industry
Below are examples of plausible risks that could affect each business.
① Life insurance providers
Risk type

Examples of risks in TCFD Recommendations, IAIS, etc.

Physical risk

Intensification of typhoons, floods, abnormal weatherImpacts on human health, such as heat stress due to extreme heat, health impacts for vulnerable seniors

Stricter regulation of greenhouse gas (GHG) emissions, introduction of carbon taxes
Increased business costs associated with stricter climate-related information disclosure requirements

Transition risk
(Mainly indirect impacts
assumed)⇒This guide focuses on insurance underwriting, a core function of life insurance companies.

②

Institutional investors
Risk type

Examples of risks in TCFD Recommendations, IAIS, etc.

Physical risk

Operating costs could increase due to impacts on insurance company assets (e.g., real estate, equipment, IT
systems, human resources), damage to distribution infrastructure, potential disruptions of business operations



Policy changes such as carbon pricing that affect a particular sector or asset
Major public campaigns demanding withdrawal from fossil fuels, criticism of high-emission sectors(Mainly indirect impacts
assumed)Transition risk→Starting next page (top right corner), a “button” will indicate whether thecontent is for life insurance providers (life insurers) or institutional investors.

Life
insurers

Institutional
investors
21

III. Scenario analysis for the life insurance industryLife
insurers

3. The need for scenario analysis in the life insurance industry


Climate change affects human healthand mortality in many ways. This figure
shows how changes caused by climatechange extend across many areas
affecting human health.



Besides increased illness and death due
to extreme heat, extreme weather, anddisease vectors, climate change is also
cited as affecting human health due tofactors such as deterioration in air andwater quality, impacts on mental health,and the likelihood of forced migration.



In Japan, impacts include more actual
heat stroke deaths from extreme heatand the expanded range of disease
vectors. It is crucial to understand thelong-term risks and opportunities causedby climate change.

Climate change impacts on human health(Source: Climate Change Starter's Guide）
Adapted from Center for Disease Control and Prevention(https://www.cdc.gov/climateandhealth/effects/default.htm)
22

III. Scenario analysis for the life insurance industry

Institutional
investors

4. The need for scenario analysis by institutional investorsLife insurers have two major functions: as life insurance providers, and as institutional investors. The
TCFD Recommendations point out that in the function of institutional investor, they are influential
asset owners (see box).
Asset owners carry transition/physical risks to which their investments are exposed whether they
invest directly or through an asset manager. Similarly, asset owners can enjoy operational benefits
from climate change-related investment opportunities.
Large asset owners and asset managers sit at the top of the investment chain and, therefore, have an
important role to play in influencing the organizations in which they invest to provide better climaterelated financial disclosures.
Source: TCFD RecommendationsIn this context, the financial sector plays a role in addressing climate change in a growing number ofways. At the international level, asset managers and other players in the European financial sector havebeen very progressive. For example, the Glasgow Financial Alliance for Net-Zero (GFANZ) establishedin April 2021 by four international alliances (including asset owners, asset managers, banks, andinsurers) announced that they would work together to promote "net zero" emissions (see Appendix).

Clearly, their development of operational strategies today depends directly on having a proper
understanding of climate change. In particular, it is absolutely crucial that life insurers, which operateover long- to very long-term time scales, clearly understand the long-term risks and opportunities ofclimate change.

23III. Scenario analysis for the life insurance industry

Institutional
investors

4. The need for scenario analysis by institutional investors
 Various international initiatives were launched around the time of the COP26 climate
conference of November 2021 (see Appendix). An understanding of thesedevelopments and key facts can also help companies consider their own approaches.
The design and nature of various programs and initiatives already underway in othercountries can have significant impacts (both risks and opportunities) on businesses
where funds are being invested, and can also affect a company's own business andreputation.
 Meanwhile, a key message from the TCFD Recommendations is that organizations
should start where they can, and make steady progress from there. Thus, when it
comes to scenario analysis for asset management operations, organizations areencouraged to learn from leading initiatives and use those examples as footholds forconsidering strategies to prepare for possible futures.
 For actual Programmed scenario analysis, it is essential to have specific data on
companies seeking or receiving investment and lending. Besides what is disclosed bycompanies, information can also be purchased from data providers. Various free tools
are also available (see Appendix).

24IV. Scenario analysis practices in the life insurance industry
Key points for practitioners
 The next two chapters take two perspectives, first for life insurance providers and theninstitutional investors, to introduce basic knowledge and provide step-by-step
descriptions on how to do scenario analysis.
 This starter's guide is intended for practitioners in the industry who are involved intheir scenario analysis. It focuses on understanding the characteristics and key aspectsof both dimensions of the industry. The descriptions for each process are provided
only as examples. Practitioners will need to assess circumstances based on the uniquecharacteristics of their own company.
 Key points for subsequent stages of work are indicated with the heading"Intermediate/Advanced."

Note: Some contents (slides) from Chapter IV-1 (Life Insurers) are repeated again in
Chapter IV-2 (Institutional Investors).

25

IV-1. Scenario analysis practices in the life insurance industry② Assess significance of risks③ Identify/define scenarios④ Assess business impacts

⑤

⑥

Life
insurers

Step ②: Overview
This step is to consider the impacts of climate change risks and opportunities that the company isMarket,currently facing or may face in the future.
Typical categories of risks and opportunities to consider for
scenario analysis are shown on the right.

technology
transition
Policy/legislation

Reputation

Physical risk

It is necessary to assess the significance for the company in the context of climate change. For
example, whether there are risks and opportunities for the company, whether they may become
significant in the future, and whether the organization's stakeholders are aware of and haveconcerns about them.

The following steps are used for this consideration:(a) Using the TCFD Recommendations, list the risks and opportunities related to thecompany's business.
(b) For each risk and opportunity, determine the extent of potential business impact.
(c) Use qualitative statements to describe the rationale and specific impact of that determination.

In this regard, the key points to consider are how to recognize or ignore a given risk for theindustry, as well as the risk for the company, and in how much detail to assess the significance ofthe risk.
26

IV-1. Scenario analysis practices in the life insurance industry② Assess significance of risks③ Identify/define scenarios④ Assess business impacts

⑤

⑥

Life
insurers

Step ②: Example of assessment of significance◆ What follows is an example of a process that could be followed for an assessment of thesignificance of climate risk for the business of life insurance.
 Examples of physical risk from the TCFD Recommendations are used as the starting point here.
 Based on a company's specific characteristics and business, the relevant departments andpersonnel should consider the future significance of these risks and opportunities, and evaluate
the extent of their impacts.
 Assessment results and rationale for determinations are summarized in the following table.
Results of assessment of potential significance to company's business
Examples of physical risk from TCFD Recommendations

Assessme
nt

Rationale, details

Examples

Chronic
・ Heat stroke deaths could increase due to the impacts of heat stress,- Changes in precipitation patterns, extreme variability inresulting in increased payments for insurance claims.
weather patterns
Mediumto large ・ As the average temperature rises, the range of disease vectors could- Increases in average temperature - Sea-level rise
expand and morbidity from infectious diseases could increase,resulting in increased payments for insurance claims.
AcuteIntensification of extreme weather, including cyclones, floods

Small・Injury claims-related insurance payments may increase, but based on
experience to date the business impacts are expected to be negligible,
even if extreme weather intensifies.

・Because the company has no business operations in coastal areas or
low-lying areas along rivers, there is little likelihood that employee
health and safety or business operations will be affected.
Note: The above assessment results are examples only. Companies will need to conduct their own assessments based on their own uniquecharacteristics. For example, the large/medium/small assessments indicated are not predetermined. Each company can assess its own situation interms of the significance of impacts being major or minor, etc.

27

IV-1. Scenario analysis practices in the life insurance industry② Assess significance of risks③ Identify/define scenarios④ Assess business impacts

⑤

⑥

Life
insurers

Step ➂: Overview


Next, identify and define the scenarios to be used for the analysis.

The TCFD Recommendations describe methodologies for analysis using scenarios for the rise intemperature due to changes in greenhouse gas concentrations (see below). Based only onchanges in physical conditions such as temperature, it is difficult to portray an exact image of
future conditions. However, by combining assumptions about what kind of society will develop
under certain climate conditions, it is also possible to envision future changes in human lives,
economy and society in more concrete terms.



Global warming scenarios as well as socioeconomic scenarios (see below) have been developedby the IPCC and other international organizations, government bodies such as Japan's Ministryof the Environment, and major research institutes such as Japan's National Institute forEnvironmental Studies. Baseline scenarios can be chosen from among what they have produced.

Based on these scenarios, it is necessary to develop future scenarios to envision and analyze theimpacts of climate change on each of the company's respective businesses.
(For example, analysis might find that in a world where climate change measures areprogressing well and the temperature rise is limited, impacts on insurance policy payments dueto health impacts, for example, will be lower. Conversely, in a world where the temperature rise
is significant due to delayed climate actions, the impacts on insurance policy payments will begreater.)

The following pages highlight some of the IPCC's scenarios that are most often referenced.
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Step ③ Part 1: Commonly-used climate change scenarios (Shared Socioeconomic Pathways: SSP)The IPCC uses two types of scenarios to make assumptions about climate change, for which
projections are difficult to do. One type is the Shared Socioeconomic Pathways (SSP), which use
a narrative form to describe a number of possible futures, approximately for the period 2025 to
2100, considering what society might look like based on certain greenhouse gas emission
reduction efforts. The five most commonly used SSP scenarios are shown below.

Socioeconomic challenges for mitigation



SSP5 (Fossil-fueled Development)
In the absence of climate policies, energy demand is highand most of this demand is met with carbon-based fuels.
Investments in alternative energy technologies are low, andthere are few readily available options for mitigation.
Nonetheless, economic development is relatively rapid anditself is driven by high investments in human capital.
Improved human capital also produces a more equitable
distribution of resources, stronger institutions, and slower
population growth, leading to a less vulnerable world better
able to adapt to climate impacts.

SSP3 (Regional Rivalry)
Unmitigated emissions are high due to moderate economic
growth, a rapidly growing population, and slow
technological change in the energy sector, making
mitigation [emission reductions] difficult. Investments inhuman capital are low, inequality is high, a regionalized
world leads to reduced trade flows, and institutional
development is unfavorable, leaving large numbers ofpeople vulnerable to climate change and many parts of theworld with low adaptive capacity.

SSP2 (Middle of the Road)
Intermediate case between SSP1 and SSP3
SSP1 (Sustainability)
Sustainable development proceeds at a reasonably highpace, inequalities are lessened, technological change is
rapid and directed toward environmentally friendly
processes, including lower carbon energy sources and highproductivity of land.

SSP4 (Inequality)
A mixed world, with relatively rapid technologicaldevelopment in low carbon energy sources in key emitting
regions, leading to relatively large mitigative [emission
reduction] capacity in places where it mattered most to global
emissions. However, in other regions development proceeds
slowly, inequality remains high, and economies are relatively
isolated, leaving these regions highly vulnerable to climatechange with limited adaptive capacity.

Socioeconomic challenges for adaptation
Source: Ministry of the Environment, Japan, Environment Research and Technology Development Fund S-10, Report on
Comprehensive Study on the Development of Global Climate Change Risk Management Strategies, 2017.

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Step ③ Part 2: Commonly-used climate change scenarios (Representative Concentration Pathways: RCP)

Another set of scenarios for future GHG concentrations is known as Representative Concentration Pathways(RCP). The emissions pathways determine the intensity of the greenhouse effect (radiative forcing).* The
global average temperature rise (e.g., 2℃ or 4℃) due to increased GHG concentrations is typically expressed
relative to pre-industrial levels (late 18th century).

For example, RCP 2.6 is a scenario in which the Paris Agreement target of limiting warming to 2℃ isachieved, with a pathway to radiative forcing of 2.6 W/m2 by the end of the 21st century. In the RCP 8.5,
scenario, radiative forcing is 8.5 W/m2 at the end of the 21st century, and the global average temperature rise is
4℃.

RCP 8.5
About 4℃
increase

RCP 2.6
About 2℃
increase
Source: Climate Change 2013, The
Physical Science Basis, IPCC, 2013

* Radiative forcing, measured as the amount of radiation per unit of area, is an indicator of changes in the energy balance between the atmosphereand the ground surface due to changes in factors such as carbon dioxide concentrations and solar radiation. When radiative forcing is positive theground surface warms, and when negative the ground surface cools.
Sources: EIC Net, Japan Center for Climate Change Actions, etc.

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Background: Scenarios presented in the IPCC Sixth Assessment Report (combination of SSP and RCP)The IPCC Sixth Assessment Report used a combination of SSP and RCP scenarios. For example, SSP1-1.9 is acombination of SSP-1 and RCP-1.9. Among scenarios, it has the lowest CO2 emissions and corresponds to theParis Agreement's target of 1.5℃.

Trends in global average atmospheric temperature relative to 1850-1900
Source: IPCC Sixth Assessment Report

IEA, NGFS, and other organizations have also proposed climate scenarios. Chapter VI provides an overview(see also the Appendix for NGFS).

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Step ④: Overview
 Having assessed the level of significance of risk and identified scenarios, the next stepis to assess and analyze the potential impacts of climate change on the organization's
strategic and financial position, for each scenario.
 As described in Chapter I, assessment and analysis are generally classified as either"qualitative" or "quantitative" approaches. Qualitative assessment and analysis are
generally relatively easy to do and can be performed using narrative descriptions
based on one's own observations and understanding. They can be used when no
numerical data is available, or when looking for trends. On the other hand,quantitative assessment and analysis are often more difficult due to constraints such as
insufficient data and models required for analysis.
 The TCFD Recommendations urge companies that are doing scenario analysis for the
first time to start with a qualitative approach. More experienced companies may wish
to use more advanced methods to perform quantitative analysis. The approach acompany uses will depend on its own needs, resources, and so on.

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Step ④: Impact assessment examples (page 1 of 4)When considering the extent physical risk impacts, Japanese companies could use research focused
specifically on the impacts of climate change in Japan. A large volume of useful data and research results has
been published by the Ministry of the Environment and others （see page 87）.

Among physical risks from climate change in Japan, increased intensity and frequency of extreme heat eventsin particular are expected to affect the life insurance industry. Future projections for Japan are shown below.
Futureprediction

Conditions in Japan if temperature is 2℃ or 4℃ above
pre-industrial levels at end of 21st century (1850-1900)
2℃ warming(Paris Agreement 2℃ goal
achieved)

4℃ warming(No additional mitigation
beyond current actions)Average temperature

1.4℃ warming

1.4℃ warming

Average temperature (world)

1.4℃ warming

1.4℃ warming

Annual extremely hot days

+2.8 days+19.1 days

Annual hot nights+9.0 days+40.6 days

Annual freezing days

–16.7 days

–46.8 days

2℃ warming 4℃ warming
scenario
scenario

Note: Numbers are estimates.
 In both scenarios, Japan’s average temperatures are projected to be higher at the end of the 21st
century, and many regions will have more extremely hot days (max temp above 35℃) and hot nights(min temp 25℃), and fewer freezing days (min temp below 0℃) annually.
Average difference in annual temperature The magnitude of warming is greater in the 4℃ warming than the 2℃ warming scenario.
 Within each scenario, the warming is greater in higher latitudes, and greater in winter than summer. (Japan) at end of 21st century
Image shows average annual temperature
in Japan at end of 21st century (ave. of2076-2095) relative to end of 20th
Source: Ministry of Education, Culture, Sports, Science
century (ave. of 1980-1999)
and Technology, and Japan Meteorological Agency,
Japan Climate Change Report 2020.

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Step ④: Impact assessment examples (page 2 of 4)This flowchart the Ministry of the Environment depicts the impacts of climate change on the health sector. The
impacts of climate change are inter-related with many of these phenomena. Information on the relevant
pathways for each of these changes can be used to help identify those that may affect the company, and toevaluate the extent of their impacts.
Climate/natural factors

Changes in air pressure &wind patterns

Increased air temperatures

Warmerwinters

Changes in precipitation
amounts & patterns

Increased seawater temperatures

Changes in relative
humidity

Increased
production of
air pollutants(ozone, etc.)

Increased heatstressClimate change impacts

Reducedmortality inwinter season

Increased riskof heat-related
mortality &morbidity

Increased risk
Changes in seasonalof mortality
behavior of infectious
overall & from
diseasescardiovascular • Influenza& respiratory • Rotavirus & otherillnesses
infectious diseases

Increase in extreme
weather (heavy rainfall
events, strong typhoons)

Changes in distribution& population sizes• Expanded
distribution, higher
population density,
longer active periodof mosquitoes, ticks,
etc.
• Increased activity ofpest insects & hosts

Increased risk ofarthropod-borne
infectious diseases,
insect bites

Increased
presence ofbacteria such as
Vibrioparahaemolyticu
s in seawater

Disruption ofcritical services
due to natural
disasters

Sewagecontaminationof drinking
water
Increased risk ofwater-borne
infectious
diseases(diarrhea, etc.)

Related sectors

Others － Impacts on life due
to heat stress, etc.
Adverse health impacts (fatigue,
exhaustion, fever, poor sleep
quality, etc.), reduced work
productivity

Health/medical
Increased ambulance use, direct
damage to medical facilities

Others - Shifts in distribution
and populations
Changes in northern range
limits, wintering areas, life
cycles of insects, birds, etc.

Citizens' Livelihoods and Urban Living

Industry / Economic Activities

Natural Ecosystems

Increased risk ofheat-related
illnesses, infectious
diseases, mental
illness due toprolonged living inevacuation

Rivers - Floods
Increased frequency of heavy
rainfall events; flood damage
from river flooding
Others - Windstorms
Climate change impacts on
typhoon intensity, location of
maximum intensity, path
Natural Disasters, Coastal Areas

Flowchart of projectedclimate change impacts(on human health)
Source: Ministry of theEnvironment, Climate Change
Impact Assessment Report,
Detailed Report, 2020.

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IV-1. Scenario analysis practices in the life insurance industry② Assess significance of risks③ Identify/define scenarios④ Assess business impacts⑤

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Step ④: Impact assessment examples (page 3 of 4)
What events/changes/phenomena caused by climate change can affect the life insurance industry? Reports by
Japan's Ministry of the Environment and other bodies detail impacts that have already occurred, as well as
projected future impacts. Companies can use these reports to analyze impacts that might affect them, and theirextent. This table provides some examples.

ExamplesSummary of Climate Change Impacts in Japan (excerpt)
SectorNaturaldisasters

Impacts
River flooding

Industry

Frequency and scale of floods will increase with more intense heavy rainfall events, etc.

Storm surges, highwaves

Sea levels will rise due to thermal expansion of seawater, melting of glaciers, etc., resulting
in damage to levees, damage from storm surges, etc.
Increased risk of storm surges, high waves due to higher sea levels and changes in typhoonfrequency, intensity, paths, etc.

Coastal erosion

Coastal erosion may worsen due to sea level rise, etc.

Debris flows, landslides

Increased frequency and scope of landslide disasters due to increased frequency of heavy
rainfall events.

Warmer winters

Increases in average temperatures could reduce the ratio of cold-related deaths.

Heat stressElevated temperatures could increase deaths from cardiovascular disease, etc. Increased
occurrence of and mortality from heat-related illnesses in summer. Adverse impacts on theelderly, especially those who do not have air conditioning or refrain from using it.

Infectious diseases

Increased morbidity from vector- and water-borne infectious diseases, etc.

Impacts on medical
systems

Impacts of water supply disruptions and turbidity on dialysis treatments, flood damage to
medical facilities

Sea-level rise

Human health

Description

Source: Ministry of the Environment, Climate Change
Impact Assessment Report.

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Step ④: Impact assessment examples (page 4 of 4)

Next, among the climate change-related events/phenomena considered above, a company should review
possible impacts on its own business based on implications of assessments in existing research findings.
Qualitatively assess the relevance to the company and analyze trends (increasing, decreasing, magnitude, etc.).
This table provides some examples.
Source: Ministry of the Environment,
Climate Change Impact Assessment Report.

Category

Extremeheat

Infectious
diseases

・・・

Examples of qualitative and trend analysis

Sign
Conf
Urge
ifica
iden
ncy
nce
ce

Sub-category

Summary of impacts

Mortality risk

Higher temperatures could increase mortalities
from cardiovascular disease, and mortalities of
elderly persons

Heat-related
illnesses, etc.

Increased occurrence of heat-related illnesses
due to hotter summer temperatures

●

●

●

Vector-borne
infectious
diseases

Increased morbidity due to expanded range ofmosquito-borne disease vectors

●

●

▲

Seasonal changes and changes in risk of
Other infectious occurrence may occur.
diseases
Exploitation of tropical forests and melting of
permafrost may increase outbreaks of new
infectious diseases.

◆

■

■

・・・

●

●

●

Future trends Future trends
at 2℃
warming

at 4℃
warming

Relevance to company's life insurance
business

Shorter life spans.
More patients with heat-related
illnesses, especially among thevulnerable elderly population, resulting
in a shorter healthy life span.
Increased number of patients. However,
the impacts on human life in Japan are
not projected to be significant, due toavailability of treatment, etc.

Increased number of patients.

・・・

Note: The above analytical results are examples only. Companies will need to conduct their own analysis based on their own uniquecharacteristics.

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Intermediate/advanced: Deeper impact assessment (e.g., correlation between extreme heat andexcess mortality)
Among physical risks from climate change in Japan, increased intensity and frequency of
extreme heat events in particular are expected to affect the life insurance industry.



An increase in average temperature leads to an increase in excess mortality due to heat, butalso reduces excess mortality due to cold. As this research is ongoing, companies should also
review the latest research and consider complex interactions among impacts.
East Asia (69 sites in China, Japan,
Korea)
Excess mortalities from cold

The figure (right) is one example of publishedresearch.
This study (on right) projects that if the averagetemperature increases by 4℃ in the future in Japanand other East Asian countries, the increase in excess
mortality due to heat in 2090 may exceed the decrease

Excess mortalities from heat

Excess mortalities (%)



in excess mortality due to cold.
Source: Figure adapted from Gasparini, A. et.al., Projections of temperature-related
excess morality under climate change scenarios, Lancet Planet Health 2017; 1: e36067.

2℃ warming← Midway →4℃ warming

Temperature increase and mortality to 2100
Source: Climate Change Starter's Guide

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Intermediate/advanced: Deeper impact assessment (e.g., correlation between extreme heat andmorbidity)Not only is mortality projected to increase, but also the number of patients transported by ambulance due to heat-related
illnesses. The following figure shows projected increases in the number of emergency patients transported due to heat-related
illnesses if the future average temperature rises by 2℃, and an even larger increase if the temperature rises by 4℃.

Projected changes in numbers of heat illness patients transported by ambulance
Source: Climate Change Starter's Guide

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Intermediate/advanced: Deeper impact assessment (e.g., correlation between climate change andmortality in countries around the world)

Published research indicates that some countries will face greater impacts than Japan. Thus,
companies expanding overseas should also consider impacts on overseas operations.



For example, an analysis by the British medical journal Lancet found that annual heat-related
mortalities are increasing. This figure shows the annual number of heat-related deaths(average of 2014–2018) for adults older than 65. Many mortalities have been recorded inmany countries that have strong connections with Japan, including the United States, China,
India, and Russia.

Number of heat-related deaths of adults older than 65 (average of 2014–2018)
Source: The 2020 report of the Lancet Countdown on health and climate change: responding to converging crises
Lancet, Vol 397 January 9, 2021

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Intermediate/advanced: Examples of quantitative scenario analyses in other countries
A UK pension fund thinktank has published examples of current life expectancy projections for people aged
between 20 and 60, based on three scenarios: "Green Revolution," "Challenging times," and "Head in the Sand"(details such as specific methods are not disclosed).

The "Head in the Sand" scenario assumes that society completely fails to cope with the risks of climatechange, resulting in global food shortages, worse outbreaks of infectious diseases, and so on. This scenario
suggests that life expectancy is shortened for all age groups and that the gap may be greater for the younger
population than in the "Green Revolution" scenario, which engages in more aggressive climate responses due
to increased awareness and technology.
ScenarioGreenrevolution

Head in thesand

GenderAge and life expectancy as of 2018
Age 20Age 30Age 40Age 50Age 65

Male

3.7

3.0

2.4

1.9

0.9

Female

3.8

2.9

2.2

1.6

0.8

Male

-10.4

-8.1

-5.8

-3.6

-1.1

Female

-10.1

-8.1

-6.0

-4.0

-1.4

Examplefor males
aged 65

Source: Club Vita, Hot and Bothered? - How climate change might affect UK longevity

Large volumes of data are needed for these kinds of analysis.
At the research level, usable methodologies are already available.
Examples of papers presenting such detailed quantitative analyses
can be found in the Appendix.
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Intermediate/advanced: Putting quantitative scenario analysis into practiceThe extent of climate change impacts on life expectancy and health vary even within Japan, depending on
factors such as location north to south, and age group.

A growing body of research has been published in recent years. Research on human impacts of climatechange is currently ongoing, and much remains to be done, as there is still a lack of quantitative data,such as what changes are likely to occur, where, and when.



Therefore, if insurance companies conduct more detailed quantitative scenario analyses at this point in
time, they will probably have to engage in joint research with researchers and research institutions that
can access the relevant data.

Below are some specific examples of possible efforts.
Gathering and analyzing the latest currently available research findings (see Appendix).

Interpreting the latest understanding through exchanges with experts and academics, etc.

Considering the use of collaborative research and other means to assess impacts quantitatively.

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IV-1. Scenario analysis practices in the life insurance industry②③④⑤ Identify possible responses⑥ Document and discloseLifeinsurers

Step ⑤: Identify possible responses
 This step is to identify the actions a company can take regarding the risks andopportunities identified in analysis to this point and their impacts on the business.
 Scenario analysis is a key aspect of "strategy" of the four pillars of the TCFD. At thispoint, practitioners need to consider how the results of scenario analysis should beincorporated into the company's strategy.
 Companies are expected to make appropriate and realistic decisions about how tomanage the risks and opportunities identified, using scenario analysis results. They
should consider possible actions, such as what adjustments are needed in strategic andfinancial planning.
 In TCFD Recommendations, examples of some possible responses include changes tobusiness model, changes to portfolio mix, and investments in capabilities andtechnologies.
 The results of the review done here are also very relevant for the next step,"disclosure." Thus, it is important to have a shared awareness companywide, not justamong operational managers, but also in senior management.
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IV-1. Scenario analysis practices in the life insurance industry②③④⑤ Identify possible responses⑥ Document and discloseLifeinsurers

Step ⑥: Document and disclose Finally, this step is to document the findings obtained so far and communicate them tostakeholders.
 Examples of key information that should be disclosed include inputs (e.g., data andinformation used), assumptions, analytical methods, output (e.g., results of analysis),and anticipated responses by the management team.
 However, as we saw in Steps ② through ④, there are often constraints such as thelack of available data or information for scenario analysis, and technical difficulties.
Therefore, the key is to aim to implement the best possible disclosure at this stage,
rather than aiming for perfection.
 The results of scenario analysis often include confidential information directly linked
to a company's business strategies.
 There is no obligation to disclose everything with the results of scenario analysis.
Regarding what, where, and how to disclose, each company needs to consider anddecide strategically, based on the results of analysis, and the accuracy and reliabilityof the analytical process.
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Institutional
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Step ②: Overview
This step looks at the impacts of climate change risks and opportunities that the company isMarket,currently facing or may face in the future.
Typical categories of risks and opportunities to consider for
scenario analysis are shown on the right.

technology
transition

Reputation

Policy/legislation

Physical risk

It is necessary to assess the significance for the company in the context of climate change. For
example, whether there are risks and opportunities for the company, whether they may become
significant in the future, and whether the organization's stakeholders are aware of and haveconcerns about them.

The following steps can be followed for this consideration:(a) Using the TCFD Recommendations, list the risks and opportunities related to yourcompany's business.
(b) For each risk and opportunity, determine the extent of potential business impact.
(c) Use qualitative statements to describe the rationale and specific impact of that determination.

In this regard, key points to consider are how to select a certain risk for the company, as well as
for the industry, and to what level of detail to assess the significance of the risk.

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Step ②: Example of assessment of significance◆ What follows is an example of a process that could be followed for an assessment of the significance of climate
risk for asset management operations.


Examples of transition risk from the TCFD Recommendations are used as the starting point here.

Based on a company's specific characteristics and business, the relevant departments and personnel should
consider the future significance of these risks and opportunities, and evaluate the extent of each impact.

Assessment results and rationale for determinations are summarized in the following table.
Results of assessment of potential significance to company's business
Examples of transition risk from TCFD Recommendations

Policy/ legal- Progress in pricing greenhouse gas emissions- More rigorous greenhouse gas emission reporting requirements- More requirements/regulations on existing products/services- More lawsuits

Assessment

Market- Changes in consumer behavior- Uncertainty of market signals- Skyrocketing raw material costs
Reputation- Changes in consumer preferences- Criticism of the sector- Increased stakeholder anxiety or negative feedback

Note: These assessment
results are examples only.
Companies will need to
conduct their own
assessments based on theirown unique characteristics.
For example, the large/
medium/ small assessments
indicated are notpredetermined. Eachcompany can assess its own
situation in terms of thesignificance of impacts being
major or minor, etc.

Example- New legislation developed/introduced in Japan or other countries (e.g., carbon tax,
emissions trading) may affect investment portfolios.
Medium- The costs of doing business may increase for large emitters, as a result of new
requirements to reduce and/or disclose emissions, or other requirements.

Technology- Replacement of existing products/services with low carbon options- Failed investments in new technology- Upfront costs of transition to low carbon technology

Rationale

Large- Rapid adoption of decarbonization technology may transform the market, and value ofinvestment portfolios that provide traditional products and services may decrease.
- Failed investments in decarbonization technology and increased transition costs may
reduce value of investment portfolios.

Small- Investment portfolios may be affected by changes in consumer behavior (demand) andmarket sentiment as they avoid products and services from companies with highemissions.

Large- If high emissions companies are in the portfolio and they are slow to move toward net
zero, there may be pressure from organizations that promote decarbonization efforts,
including shareholder resolutions and legal action.

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Step ③: Overview


Next, identify and define the scenarios to be used for the analysis.

The TCFD Recommendations describe methodologies for analysis using scenarios for the rise intemperature due to changes in greenhouse gas concentrations (see below). Based only onchanges in physical conditions such as temperature, it is difficult to portray an exact image of
future conditions. However, by combining assumptions about what kind of society will emerge
under certain climate conditions, it is also possible to envision future changes in human lives,
economy and society in more concrete terms.



Global warming scenarios as well as socioeconomic scenarios (see below) have been developedby the IPCC and other international organizations, government bodies such as Japan's Ministryof the Environment, and major research institutes such as Japan's National Institute forEnvironmental Studies. Baseline scenarios can be chosen from among what they have produced.

Based on these scenarios, it is necessary to develop future scenarios to envision and analyze theimpacts of climate change on each of the company's respective businesses.
(For example, analysis might find that in a world where climate actions are making good
progress and warming is limited, the value of companies that own significant fossil fuel assets
will drop. Conversely, in a world with significant warming due to delayed climate actions, theperformance of companies that are involved in renewable energy technologies may be sluggish.)The following pages highlight some of the IPCC's scenarios that are most often referenced.
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Step ③ Part 1: Commonly-used climate change scenarios (Shared Socioeconomic Pathways: SSP)The IPCC uses two types of scenarios to make assumptions about climate change, for which
projections are difficult to do. One type is the Shared Socioeconomic Pathways (SSP), which use
a narrative form to describe a number of possible futures, approximately for the period 2025 to
2100, considering what society might look like based on certain greenhouse gas emission
reduction efforts. The five most commonly used SSP scenarios are shown below.

Socioeconomic challenges for mitigation



SSP5 (Fossil-fueled Development)
In the absence of climate policies, energy demand is highand most of this demand is met with carbon-based fuels.
Investments in alternative energy technologies are low, andthere are few readily available options for mitigation.
Nonetheless, economic development is relatively rapid anditself is driven by high investments in human capital.
Improved human capital also produces a more equitable
distribution of resources, stronger institutions, and slower
population growth, leading to a less vulnerable world better
able to adapt to climate impacts.

SSP3 (Regional Rivalry)
Unmitigated emissions are high due to moderate economic
growth, a rapidly growing population, and slow
technological change in the energy sector, making
mitigation [emission reductions] difficult. Investments inhuman capital are low, inequality is high, a regionalized
world leads to reduced trade flows, and institutional
development is unfavorable, leaving large numbers ofpeople vulnerable to climate change and many parts of theworld with low adaptive capacity.

SSP2 (Middle of the Road)
Intermediate case between SSP1 and SSP3
SSP1 (Sustainability)
Sustainable development proceeds at a reasonably highpace, inequalities are lessened, technological change is
rapid and directed toward environmentally friendly
processes, including lower carbon energy sources and highproductivity of land.

SSP4 (Inequality)
A mixed world, with relatively rapid technologicaldevelopment in low carbon energy sources in key emitting
regions, leading to relatively large mitigative [emission
reduction] capacity in places where it mattered most to global
emissions. However, in other regions development proceeds
slowly, inequality remains high, and economies are relatively
isolated, leaving these regions highly vulnerable to climatechange with limited adaptive capacity.

Socioeconomic challenges for adaptation
Source: Ministry of the Environment, Japan, Environment Research and Technology Development Fund S-10, Report on
Comprehensive Study on the Development of Global Climate Change Risk Management Strategies, 2017.

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Step ③ Part 2: Commonly-used climate change scenarios (Representative Concentration Pathways: RCP)

Another set of scenarios for future GHG concentrations is known as Representative Concentration Pathways(RCP). The emissions pathways determine the intensity of the greenhouse effect (radiative forcing).* The
global average temperature rise (e.g., 2℃ or 4℃) due to increased GHG concentrations is typically expressed
relative to pre-industrial levels (late 18th century).

For example, RCP 2.6 is a scenario in which the Paris Agreement target of limiting warming to 2℃ isachieved, with a pathway to radiative forcing of 2.6 W/m2 by the end of the 21st century. In the RCP 8.5,
scenario, radiative forcing is 8.5 W/m2 at the end of the 21st century, and the global average temperature rise is
4℃.

RCP 8.5
About 4℃
increase

RCP 2.6
About 2℃
increase
Source: Climate Change 2013, The
Physical Science Basis, IPCC, 2013

* Radiative forcing, measured as the amount of radiation per unit of area, is an indicator of changes in the energy balance between the atmosphereand the ground surface due to changes in factors such as carbon dioxide concentrations and solar radiation. When radiative forcing is positive theground surface warms, and when negative the ground surface cools.
Sources: EIC Net, Japan Center for Climate Change Actions, etc.

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Background: Scenarios presented in the IPCC Sixth Assessment Report (combination of SSP and RCP)The IPCC Sixth Assessment Report used a combination of SSP and RCP scenarios. For example, SSP1-1.9 is acombination of SSP-1 and RCP-1.9. Among scenarios, it has the lowest CO2 emissions and corresponds to theParis Agreement's target of 1.5℃.

Trends in global average atmospheric temperature relative to 1850-1900
Source: IPCC Sixth Assessment Report

IEA, NGFS, and other organizations have also proposed climate scenarios. Chapter VI provides an overview(see also the Appendix for NGFS).

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Step ④: Overview
 Having assessed the level of significance of risk and identified scenarios, the next stepis to assess and analyze the potential impacts of climate change on the organization's
strategic and financial position, for each scenario.
 As described in Chapter I, assessment and analysis are generally classified as either"qualitative" or "quantitative" approaches. Qualitative assessment and analysis are
generally relatively easy to do and can be performed using narrative descriptions
based on one's own observations and understanding. They can be used when no
numerical data is available, or when looking for trends. On the other hand,quantitative assessment and analysis are often more difficult due to constraints such as
insufficient data and models required for analysis.
 The TCFD Recommendations urge companies that are doing scenario analysis for the
first time to start with a qualitative approach. More experienced companies may wish
to use more advanced methods to perform quantitative analysis. The approach acompany uses will depend on its own needs, resources, and so on.

50IV-2. Scenario analysis practices in the life insurance industry② Assess significance of risks③ Identify/define scenarios④ Assess business impacts⑤⑥

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Step ④: Understand the trends in your company's portfolio









Regarding scenario analysis, the TCFD Recommendations encourage organizations to proceedstep-by-step, starting with what is feasible. In asset management, it is crucial to start byunderstanding the trends in a company's own portfolio.
Many investment and loan portfolios are likely to be very diverse, so the first point to check is,
how much of your portfolio consists of major greenhouse gas emitters?
Large GHG emitters could be Scope 1, Scope 2, or Scope 3 companies (see ☛ p. 58). Depending
on company scale and production volume, companies in the following industries generally tend
to have high GHG emissions: Scope 1 and 2: Power, steel, chemical, cement, paper, shipping, aviation
 Scope 3: Automotive, electrical equipment, machinery, gas supply, residential equipment
By knowing the monetary value and percentage of shares held by the company in each industry,including stocks and bonds, it is possible to ascertain the general trend of GHG emissions in theportfolio.
To determine the emissions of large GHG emitters in its portfolio, a company could review the
integrated, corporate social responsibility (CSR), or sustainability reports of companies in theportfolio. A growing number of companies are disclosing this information, so it will be possible
to track those that have been doing so for some time, including their progress over time.
Note: The use of external data providers is one option for determining GHG emissions. See the next page for details.
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Reference: Using external consultants to determine GHG emissions
To determine the GHG emissions of companies in an investment portfolio for scenario analysis, it is necessary toobtain GHG emissions data for those companies. However, if a firm is investing in many companies, it could be
impractical without extra assistance to collect GHG emissions data from the published materials of every single
company.

Besides a firm using its own resources to gather information, there is an option of using so-called "data providers"that sell GHG emissions data on listed companies. A number of them exist, mainly in the United States and Europe.
A firm could select a suitable provider and purchase GHG emissions data from it on the companies in which it isinvested. However, some providers estimate emissions using their own independent criteria, so it is advisable tocross-check using GHG emissions data from more than one provider in order to improve data reliability.

Some data is also available publicly, although the level of accuracy may be lower. Paris Agreement Capital
Transition Assessment (PACTA) is a free, open-source methodology and tool developed by the 2° Investing
Initiative (2DII), with support from the United Nations Principles for Responsible Investment (PRI). Services suchas these can enable users to measure the alignment between financial asset portfolios and climate scenarios (Source:
PACTA website).
Note 1: See “Examples of guidance and tools for scenario analysis” at end of this guide.
Note 2: Users should verify data accuracy and the appropriateness of analytical methods.

As outlined above, practitioners need to first determine the GHG emissions in their investment portfolios, and basedon that information, conduct future scenario analysis (e.g., analysis of a portfolio's transition pathway to zero
emissions by 2050).



Scope 1 and 2 disclosures by companies are generally very reliable, but Scope 3 disclosures still need some
improvement. Because of this, scenario analysis of investment portfolios should be done carefully when dealing
with Scope 3, through conscientious review of measurement methodologies used for published data, etc.
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Step ④: Understand the trends in your company's portfolio
This graph shows the calculation of GHG emissions in the portfolio of a hypothetical life
insurance company (Company A). A simple example of how GHG emissions are calculated is asfollows: Company B has 1 million tons of CO2 emissions per year, and Company A owns 1% ofCompany B's shares, so Company A's portfolio includes 10,000 tons of emissions. If emissions
are calculated this way, for all Company A's owned shares, bonds, and loans, then added together,it could be presented as shown as in this graph.

Domestic
equities

Domesticbonds

Foreignbonds■Scope 1 ■Scope 2

FY 2021

FY 2020

FY 2019

FY 2018

FY 2021

FY 2020

FY 2019

FY 2018

FY 2021

FY 2020

FY 2019

FY 2018

FY 2021

FY 2020

t-CO2/year

FY 2019

Example of portfolio
analysis for Life Insurance
Company A

FY 2018

Domesticloan

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Step ④: Understand the trends in your company's portfolio
This pie chart shows the sector-by-sector share of GHG emissions in Company A's portfolio(previous page). It is obvious that energy, materials (e.g., steel), and public utilities (e.g.,
electricity, gas) account for a large share.

To move Company A's portfolio toward goals such as zero emissions by 2050, it will be
important to start engagement efforts with these companies first.
Example of portfolio emissions
shares for Life Insurance
Company A

IT

Consumer Discretionary

Industrials

Materials

Utilities

Health Care

Finance

EnergyCommunication Services

Consumer
Staples

Real Estate54

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Intermediate/Advanced: Envisioning your company’s future investment portfolioOnce you have a good grasp of your company's investment portfolio, the next step could be to do a"transition pathway analysis."

A transition pathway analysis is an assessment of how the portfolio's climate change risk willchange in relation to future climate change scenarios.

For example, one approach would be to assess the portfolio's resilience in the context of transition
risk over time, by comparing (a) estimates of the portfolio's future greenhouse gas emissions (e.g.,
emission targets of companies in the portfolio), with (b) CO2 emission factors and emission trends
sector-by-sector as estimated from carbon budgets* calculated based on climate change scenarios(e.g., the IPCC's 1.5℃ scenario).

However, when it comes to transition pathway analysis, there is a dizzying array of indicators,
standards, and methodologies. Thus, practitioners need to consider their options in light of thesituation of international discussions, including the TCFD.

* Carbon budget: The upper limit of cumulative greenhouse gas emissions to keep the global temperature rise due tohuman activities below a certain level. The carbon budget is estimated at 500 billion tons if the temperature rise is tobe kept to 1.5℃ at a 50% probability.

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Step ⑤: Identify possible responses
 This step is to identify the actions a company can take regarding the risks andopportunities identified in analysis to this point and their impacts on the business.
 Scenario analysis is a key aspect of "strategy" of the four pillars of the TCFD. At thispoint, practitioners need to consider how the results of scenario analysis should beincorporated into the company's strategy.
 Companies are expected to make appropriate and realistic decisions about how tomanage the risks and opportunities identified, using scenario analysis results. They
should consider possible actions, such as what adjustments are needed in strategic andfinancial planning.
 In TCFD Recommendations, examples of some possible responses include changes tobusiness model, changes to portfolio mix, and investments in capabilities andtechnologies.
 The results of the review done here are also very relevant for the next step,"disclosure." Thus, it is important to have a shared awareness companywide, not justamong operational managers, but also in senior management.
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Step ⑥: Document and disclose Finally, this step is to document the findings obtained so far and communicate them tostakeholders.
 Examples of key information that should be disclosed include inputs (e.g., data andinformation used), assumptions, analytical methods, output (e.g., results of analysis),and anticipated responses by the management team.
 However, as we saw in Steps ② through ④, there are often constraints such as thelack of available data or information for scenario analysis, and technical difficulties.
Therefore, the key is to aim to implement the best possible disclosure at this stage,
rather than aiming for perfection.
 The results of scenario analysis often include confidential information directly linked
to a company’s business strategies.
 There is no obligation to disclose everything with the results of scenario analysis.
Regarding what, where, and how to disclose, each company needs to consider anddecide strategically, based on the results of analysis, and the accuracy and reliabilityof the analytical process.
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1. Understanding GHG emissions profiles of companies in a
portfolioCompanies can have significantly different GHG emissions profiles
depending on the nature of their business. When practitioners aretrying to decipher the scenario analyses of companies in a portfolio,
a good grasp of their GHG emissions profiles will help practitioners
understand the transition risks and response strategies of thosecompanies.

For engagement with a company, it is helpful to know which of thefollowing three types it is, based on GHG emissions disclosure data(☛ see graphs on right, from Figure II-7 on p. 18 of the Life
Insurance Association of Japan's Climate Change Starter's Guide).


Scope 1 and 2: Companies that primarily consume fossil fuels
and electricity for their own operations



Scope 3: Companies whose raw materials are mainly fossil
fuels or products made from fossil fuels, or whose products
consume fossil fuels or electricity

Low emission: Companies whose total Scope 1, 2 and 3
emissions are significantly lower than 1 million t-CO2/yeareach year

Emission trends of Japanese companies
Source: Climate Change Starter’s Guide

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2. Spotlight on scenario analyses and disclosures of companies in your investment
portfolio
 Climate change-related information is often disclosed in securities, integrated, sustainability, andCSR reports. Referring to these documents can help determine whether or not scenario analysis
has been conducted and information disclosed by companies in a portfolio.
→ If this information has not been disclosed or is not sufficiently explicit, a process of engagement
could be effective in encouraging companies in a portfolio to conduct a scenario analysis (i.e.,
climate change response).
When it comes to assessments and analyses, the following approaches may be useful to decipher
what is written in published materials.
When reading securities, integrated, and CSR reports, practitioners can compare
statements contained in those documents regarding responses to the TCFD
Recommendations, in order to confirm whether or not they are mutually consistent. It isparticularly important to see whether or not strategies arising from scenario analyses areelaborated with some consistency.

Next, confirm that the results and strategies of the scenario analyses are clearly reflected in
explanatory materials aimed at investors (e.g., medium-term management plans). If they
are not reflected in the relevant plans, one interpretation could be that the company's
responses to the TCFD Recommendations were only superficial.
59IV-2. Scenario analysis practices in the life insurance industry◆ Going further: Deciphering the scenario analyses of (and engagement with) companies in investment portfolios

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3. Deciphering scenario analyses


The TCFD Recommendations encourage companies to disclose the results of their scenario
analyses, so it is important for disclosures to be understandable and compelling.



If disclosures of scenario analyses are understandable and compelling, readers should be able tofollow the flow, from risks and opportunities, to future transition risk pathways, strategies toreduce risk and benefit from opportunities, and financial impacts and assessments of strategies.

In addition, by reading the scenario analyses of the companies concerned, taking into account the
GHG emission profiles of portfolio companies that have previously been ascertained, it is possible
to determine whether their analyses align with their profiles, whether they are leading toappropriate actions and strategies, and so on.

4. Confirming whether or not scenario analysis results are reflected in corporate
managementOnce you understand the scenario analysis of a company in a investment portfolio, the next step isto assess whether the results are being applied in the actual management of the company.

→ As a way to confirm the impact of scenario analysis on the corporate management, it is possible touse the opportunity of engagement with management, including the company president, to confirm
and assess senior management's level of understanding of climate change responses.
→ If the results of the analysis are not utilized in the management of companies in investment
portfolios, engagement could be used as a means of encouraging the review of responses based on
the results of analysis and of the reflection of analysis in corporate management.
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V. Case studies of disclosure of scenario analysis

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The next several pages provide examples of companies that are currently
doing scenario analyses and disclosures.
Intermediate/advanced: International insurer uses multiple scenarios (Allianz)The Allianz 2020 Sustainability Report,
published in May 2021, describes how
the firm used a combination of
scenarios for average warming between
1.5℃ and 4℃, including existing
scenarios (IPCC, NGFS, EU, etc.), as
well as its own and third-party
scenarios.
In an analysis of the impact of carbon
price fluctuations using the NGFS
scenario, the portfolio's market value
losses were 4 to 8 percent for a rise of
2℃ and 12 to 19 percent for a rise of
1.5℃.
However, limitations were also pointed
out, including the fact that this analysis
only covered listed stocks, and only
Scope 1 and 2 emissions.

2℃ warming, with CO2 removals
2℃ warming, with limited CO2
removals

1.5℃ warming, with CO2
removals

1.5℃ warming, with limited CO2
removals

Source: Allianz Sustainability Report 2020
https://www.allianz.com/en/sustainability/publications/sustainability-report.html

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V. Case studies of disclosure of scenario analysis

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Intermediate-advanced: International insurer uses Climate VaR (Aviva)

Aviva's Climate-Related Financial Disclosure Report 2020 covers the state of scenario analysis.
It explains that transition risks are likely to emerge more rapidly than physical risks, and that
extreme physical risks pose a fundamental threat to the insurance business model.
It also points out that many of the general climate scenarios are limited in their ability to reflect achaotic world making little progress in climate actions, while the pace of warming andcoordination of international policies are gradual. Aviva writes that it is continuing its own
further reviews, in particular, enhancing the Climate Value-at-Risk (Climate VaR*) index
developed by the financial services company MSCI.
After applying Climate VaR for a variety of
scenarios, the finding was that with 4℃ ofwarming, the greatest negative impacts on
long-term returns were on equities, corporate
bonds, real estate, real estate loans, andsovereign exposures, while with 1.5℃ and 2℃
of warming, there was a potential positive
upside.
Source: Aviva’s Climate-Related Financial Disclosure 2020
https://www.aviva.com/sustainability/reporting/climate-related-financial-disclosure/*Climate VaR: A method of analyzing the present value of costs and benefits of climate change and future changes in corporate value, anddetermining the results as an impact on the equity and bond values of the company concerned.

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V. Case studies of disclosure of scenario analysis Life insurers

Institutional
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Examples of disclosures by Japanese life insurers (from 2021 disclosures)
For reference, here are some examples of companies that are currently doing scenario analyses anddisclosures.


Identifying and describing physical and transition
risks and opportunities



Nippon Life Insurance Company (top right)
identifies significant impacts, risks and opportunities
in the context of strategy and risk management, andshows that scenario analysis is being conducted aspart of strategy and risk management.
Source: Nissay Annual Report 2021 https://www.nissay.co.jp/english/annual/2021.html

Meiji Yasuda Life Insurance Company (bottom
right) shows the main responses of the company
based on qualitative assumptions about how each risk
and opportunity affects each operating company andinstitutional investor, and how the impacts occur onboth long and short-term time scales.

Source: Meiji Yasuda Life Integrated Report 2021
https://www.meijiyasuda.co.jp/english/disclosure/annual-reports/backnumber/pdf/annual_2021_01.pdf

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V. Case studies of disclosure of scenario analysis Life insurers

Institutional
investors

Examples of disclosures by Japanese life insurers (from 2021 disclosures)
For reference, here are some examples of companies thatare currently doing scenario analyses and disclosures.


Scenario analysis of impacts on insurance
revenues and payments and asset management
income

The T&D Insurance Group (table on right)
conducted a scenario analysis of physical risks,transition risks, and opportunities for the Group.
The report provides a qualitative review of the results of the analysis
and strategic responses for two scenarios (1.5℃ and 4℃ of warming).

Source: Sumitomo Life Sustainability Report 2021

Source: T&D Insurance Group Sustainability Report 2021
https://www.td-holdings.co.jp/en/csr/report/



Scenario analyses for life insurance business, asset
management business

Sumitomo Life Insurance Company (table on left)
established two scenarios, then identified events and future
trends that could affect the firm's business areas. Next,
impacts on mortality (for life insurance business) and
impacts on the portfolio (for asset management business)were assessed as minor, moderate, or major.

https://www.sumitomolife.co.jp/english/about/ir-stock/pdf/sr2021.pdf

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V. Case studies of disclosure of scenario analysis Life insurers

Institutional
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Examples of disclosures by Japanese life insurers (from 2021 disclosures)
For reference, here are some examples of companies that are currently doing scenario analyses anddisclosures.

 Research on quantitative impacts (as life insurer) and analysis of total carbon
emissions and weighted average carbon intensity (WACI) (as institutional investor)

Dai-ichi Life Holdings estimated the correlation
between peak temperatures across Japan and mortality
based on the company's actual payments made for death
insurance claims. Under the RCP8.5 scenario (4℃warming by end of 21st century), mortality rates
increased by 1.0%, equivalent to an increase of 4 billion
yen in payments.



As an institutional investor, the company also analyzed
total carbon emissions and WACI, as TCFD
recommends for disclosures (results shown in graph onright).
Source: Dai-ichi Life Holdings, Annual Integrated Report 2021
https://www.dai-ichi-life-hd.com/en/investor/library/annual_report/index.html

65

VI. What are the latest trends in scenario analysis?
Implementing the Recommendations of the TCFD (updated)
Update of "Implementing the Recommendations of the TCFD"
In October 2021, the TCFD updated its sector-specific guidance relating to "Implementing the
Recommendations of the TCFD." Major updates that apply across all sectors are summarized
below.
 Strategy: The following was added as "recommended disclosures" to more explicitly
address disclosure of key information from plans for transitioning to a low-carbon
economy (transition plans).
 Organizations that have made GHG emissions reduction commitments, operate in jurisdictions thathave made such commitments, or have agreed to meet investor expectations regarding GHG
emissions reductions, should describe their plans for transitioning to a low-carbon economy, which
could include GHG emissions targets and specific activities intended to reduce GHG emissions intheir operations and value chains or to otherwise support the transition.
Source: TCFD "Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures," updated October 2021.

 Transition plans are detailed in the TCFD's "Guidance on Metrics, Targets, and Transition
Plans," published at the same time as the main report.
 In this context, transition plans are seen as part of a company's overall business strategy,
which represents a set of goals and actions to support the transition to a low-carbon
economy, including the reduction of GHG emissions.
66VI. What are the latest trends in scenario analysis?
Implementing the Recommendations of the TCFD (updated)

Implementing the Recommendations of the Task Force on Climate-related Financial
Disclosures (updated) Metrics and targets (summary) Where appropriate, organizations should consider providing forward-looking metrics,
consistent with their business or strategic planning time horizons.
 All organizations should provide their Scope 1 and Scope 2 GHG emissions independentof a materiality assessment.
 Organizations should consider disclosing Scope 3 GHG emissions, depending on theirmateriality.
 The governance processes should be as rigorous as those used for existing publicfinancial disclosures, including review by the chief financial officer, audit committee, andBoard of Directors, as appropriate.

Source: TCFD "Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures," updated October 2021.

67VI. What are the latest trends in scenario analysis?
Implementing the Recommendations of the TCFD (updated)"Implementing the Recommendations of the TCFD" (updated)
The following additions have been made for asset owners:
 Metrics and targets
 Asset owners should describe the extent to which assets they own and their funds and investment
strategies, where relevant, are aligned with a well below 2℃ scenario, using whichever approach or
metrics best suit their organizational context or capabilities.
 Asset owners should disclose GHG emissions for assets they own and the weighted
average carbon intensity (WACI) for each fund or investment strategy. These emissions should be
calculated in line with the Global GHG Accounting and Reporting Standard for the Financial
Industry developed by the Partnership for Carbon Accounting Financials (PCAF Standard) or acomparable methodology. (Note: PCAF is discussed on p. 72.)
 In addition to WACI, asset owners should describe the methodologies used, and consider providing
other carbon footprinting metrics they believe are useful for decision-making (total carbon
emissions, carbon footprint, carbon intensity, exposure of carbon-related assets, etc.).
Source: TCFD "Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures," updated October 2021.

 The principles of the TCFD Recommendations have not changed in this edition, but the
update of sector-specific guidance provides more detailed guidance for disclosures. It isalso important that companies continue monitoring these international trends for theirdeliberations.
68VI. What are the latest trends in scenario analysis?
Implementing the Recommendations of the TCFD (updated)

TCFD guidance reports published after the main TCFD Recommendations
 Guidance on Scenario Analysis for Non-Financial Companies (2020)
Provides practical, process-oriented ways for companies to use climate-related scenario
analysis and ideas for disclosing the resilience of their strategies to different climate-related
scenarios. For financial institutions, it is useful to understand what should be noted when
deciphering companies' scenario analyses.

 Guidance on Risk Management Integration and Disclosure (2020)This document describes the issues that companies should consider if they are interested in
integrating climate-related risks into their existing risk management processes and disclosing
information on their risk management processes in alignment with the Task Force's
recommendations.

 Guidance on Metrics, Targets, and Transition Plans (2021)


The latest guidance on climate-related metrics and company transition plans for a low-carbon
economy. The guidance also describes the categories of cross-industry climate-related metrics.
Provides detailed explanations of transition plans, along with the setting of specific metrics andtargets.

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VI. What are the latest trends in scenario analysis?
Various initiativesThe work of the TCFD is becoming a common framework for many initiatives in response to climate change.
Indeed, many organizations around the world have launched their own initiatives, leading to what may be a
dizzying array of standards and methodologies.
For example, documents from the secretariat of the Sustainable Finance Expert Committee (Financial Services
Agency, Japan) lists major initiatives, introduced below.
The next two pages describe the PCAF, which is developing methodologies for measurement and disclosures ofindirect greenhouse gas emissions arising from investment and financing by financial institutions.

Activities on their focus

BI Banks &B Banks
Investors
Collective Commitment to Climate Action
Net Zero Asset Owner Alliance
Net Zero Asset Managers Initiative
PCAF
PACTA
Paris Aligned Investment Initiative
SBTs for Financial Institutions
Climate Action 100+
I Investors

Commitment
◆
◆
◆

GHG
measurement◆

Source: Prepared by Financial Services Agency, Japan, based on PCAF materials.

Scenario
analysis◆◆Target setting◆

Promotingaction◆Initiative name (parent body)Collective Commitment to Climate Action(UNPRB)

Purpose and activities
Aim is to decarbonize loan portfolios. Expected to set targets, conduct engagement withcompanies, disclose information.
Aim is to decarbonize portfolios. Expected to set targets/strategies, actively engage withNet Zero Asset Owner Alliance (UNEPFI-PRI)
companies/industries, disclose information.
Net Zero Asset Managers Initiative (CDP-PRI- Aim is to decarbonize portfolios. Expected to set targets/strategies, conduct active
GIG)
engagement.
Partnership for Carbon Accounting Financials(PCAF)

An investor-led initiative to develop global GHG accounting standards that can beadapted to various asset classes.

Paris Agreement Capital Transition Assessment Publishes free scenario analysis tools to measure investment/loan portfolio alignment(PACTA) (2℃ Investing Initiative/PRI)with Paris Agreement goals.

Source: Financial Services Agency,
Sixth meeting of Sustainable FinanceExpert Committee, April 2021.

Paris Aligned Investment Initiative (GIG)
SBTS for Financial Institutions
Climate Action100+ (GIG/PRI)

Supports construction of portfolios aligned with Paris Agreement.
Framework for financial institutions to formulate and certify science-based targets (SBT)
to keep them below 1.5℃ or 2℃.
Joint engagement targeting 100+ large emitter companies worldwide

Members (Japan)
38 (0)
35 (1)
73 (2)
115 including banks,
investors (0)Used by 3,000+
organizations
112 (0)77 committed (4)575 (14)70

VI. What are the latest trends in scenario analysis?
Various initiatives: PCAF

Partnership for Carbon Accounting Financials (PCAF)
 The PCAF was launched in the Netherlands in 2015 and is an international initiative
mainly involving European financial institutions. As of January 2022, 197 organizations
had joined, representing total assets of $57.3 trillion. It includes 10 companies fromJapan.
 In 2020, the PCAF released the Global GHG
Accounting & Reporting Standard, guidance thatcomplies with GHG protocols, in order to develop
unified international methodologies for financial
institution assessments and disclosures of GHG
emissions associated with financing and investment.
 The PCAF standard also takes into account sectorspecific guidance from the TCFD Recommendations
as revised in October 2021 (see p. 61).

71

VI. What are the latest trends in scenario analysis?
Various initiatives: PCAF

Partnership for Carbon Accounting Financials (PCAF)
 The PCAF calls for disclosures in six asset categories listed here. Since only a limited
number of companies are doing disclosures of Scope 3 emissions, it calls for disclosures
only in sectors where Scope 3 is of particular importance.
Asset classes in PCAF "Global GHG Accounting
and Reporting Standard"

Asset classes in GHG Protocol “Scope 3
Standard, Category 15 (Investments)"

Reporting in all asset classes(Mandatory reporting)

Listed equity, corporate bonds

Equity investment

Business loans and unlisted equity

Debt investment (specified fund uses)

Project finance

Project financeCommercial real estate(Optional reporting)Mortgages

Debt investment (unspecified fund uses)

Motor vehicle loans

Financial services(Assets not included: Government bonds, financial derivatives, etc.)

Prepared by Central Research Institute of Electric Power Industry based on
GHG Protocol (2011), PCAF (2020).

Source: Motoshi Tomita, "Trends in measurement and target-setting for
Scope 3 emissions in financial institution portfolios" Central ResearchInstitute of Electric Power Industry, April 2021 (in Japanese).

 Please refer to the Appendix for details of formulas calculations in each asset class.

72VI. What are the latest trends in scenario analysis?
Scenarios by major organizations

 Various organizations have released climate change scenarios.
 In addition to the IPCC scenarios mentioned above, the following pages describe
scenarios of equally high credibility. First, scenarios from the International Energy
Agency (IEA), which have been used for years by policy authorities and companies,
particularly in the energy sector. Second, from the Inevitable Policy Response (IPR, aclimate change scenario development program) by Principles for Responsible Investment(PRI, a UN-led initiative). Finally, from NGFS, a network of financial regulators.

73VI. What are the latest trends in scenario analysis?
Scenarios by major organizations: IEA

International Energy Agency (IEA) - World Energy Outlook(WEO) 2021



Published October 2021 (386 pages). IEA publishes this report annually, but thistime it was created as a handbook for policymakers for the COP26 climate
meeting held in November 2021.
Prior to this, "Net Zero by 2050 - A Roadmap for the Global Energy Sector" wasreleased in May 2021. It was prepared at the request of the UK, which held the
COP26 presidency, and was primarily sent to investors.
WEO 2021 covers the efforts of governments to date, the significance and issuesof net zero pledges, and what is necessary to achieve net zero globally by mid21st century. The direction is the same as in the IEA Roadmap. Here are some of
the contents in terms of future projections.
 Based on energy and climate measures currently being implemented, theglobal temperature in 2100 is projected to be 2.6℃ above pre-industrial
levels.
 If governments' net zero pledges are fully implemented, the temperaturerise would be 2.1℃.
 In both cases, the temperature rise would be greater than the target of theParis Agreement, and could not be kept within 1.5℃.

Note: The base year for these scenarios was 2019, but where available, the latest data from 2020
was used for energy production and demand.
74VI. What are the latest trends in scenario analysis?
Scenarios by major organizations: IEA

International Energy Agency (IEA) - World Energy Outlook (WEO)2021
 This figure compares how the market for clean energy technology is projected to growfrom 2030 to 2050, using a current policy-only scenario (STEPS) and a net zero
scenario (NZE).
 Under NZE, battery storage
technology is expected tomake significance advances.
 Regionally, the Asia-Pacific is
expected to see the greatest
market growth.

Source: IEA World Energy Outlook (WEO) 2021.

75

VI. What are the latest trends in scenario analysis?
Scenarios by major organizations: IEA

International Energy Agency (IEA) - World Energy Outlook (WEO)2021
 At the same time, however, many sectors are still slow to make technological advances
toward net zero. This figure suggests that electrification, carbon capture, utilization andstorage (CCUS), and hydrogen are among those technologies.

Source: IEA World Energy Outlook (WEO) 2021.

76

VI. What are the latest trends in scenario analysis?
Scenarios by major organizations: IPR of PRI

Inevitable Policy Response (IPR) of UN Principles for Responsible
Investment (UN-PRI)

The Principles for Responsible Investment (PRI) are promoting the Inevitable Policy Response (IPR) initiative
to encourage the financial sector to prepare for climate-related policy and regulatory risks.

These scenarios foresee policies that governments will likely have to adopt as "inevitable" responses as climatechange worsens, and consider changes in society that would likely result. When published in 2019, it attracted
attention for covering the land use and agricultural sectors, where such policies had not yet been broadly
introduced.
Policy sectors covered in projections

Source: PRI, the inevitable Policy Response Policy Forecasts, 2019.

77VI. What are the latest trends in scenario analysis?
Scenarios by major organizations: IPR of PRI

Inevitable Policy Response (IPR), Principles for Responsible Investment(UN-PRI)In October 2021, IPR published two scenarios. One was the Forecast Policy Scenario (FPS), which
updates 2019 forecasts, and assumes that government initiatives will make significant progress overthe next 10 years. Among the assumptions made under this scenario:

By 2030, zero-emission vehicles account for about 30% of all vehicles, and solar and wind power willaccount for more than 30% of the world's electricity generation.
The energy sector will reduce emissions by 75% from 34 GtCO2 in 2020 to 9 GtCO2 by 2050.

However, the Required Policy Scenario (RPS) was newly created because the FPS would still not beenough to limit the temperature rise to 1.5℃. Key actions listed in this scenario:Forest destruction ends globally by 2025.
Alternatively, more sequestration by energy
systems will be needed, including BECCS(see note).
Coal use will be phased out in most developed
countries, including China, by 2035.
All new fossil fuel vehicles will be phased out
in most markets by 2040, and the world willtransition to 100% clean electricity by 2045.

Note: The base year for these scenarios is 2020.
Note: BECCS refers to bioenergy with carbon capture and storage(CCS) and relies on electricity generation from biomass. This
technology is seen as reducing net CO2 in the atmosphere bycapturing and storing CO2 emitted during biomass combustion,
so net emissions are considered to be zero.

Source: PRI, Inevitable Policy Response 2021 Emissions & 1.5℃ required
Policy Scenario (1.5℃ RPS) Policy Summary, October 2021.

78VI. What are the latest trends in scenario analysis?
Scenarios by major organizations: IPR of PRI

Inevitable Policy Response (IPR) of Principles for Responsible
Investment (PRI) The 2021 edition of FPS is an update with improved energy models and regional
analyses, taking into account the increasing number of countries that have made net zerodeclarations (below left).
 The new RPS corresponds to the IEA net zero scenario introduced on p. 75, but it hasreportedly been developed with more detailed consideration of food- and land-related
systems (below right).

Source: PRI, inevitable Policy Response 2021 Emissions & 1.5℃ required Policy Scenario (1.5℃ RPS) Policy Summary, October 2021.

79VI. What are the latest trends in scenario analysis?
Scenarios by major organizations: NGFS

Network for Greening the Financial System (NGFS)
 The Network of Central Banks and Supervisors for Greening the Financial System(NGFS) is a network of national central banks and financial regulators established in2017 with the aim of considering financial regulators' responses to climate change risks.
As of December 2021, there were 16 observers and 105 members, including the Japan
Financial Services Agency and Bank of Japan.
 NGFS released six scenarios in June 2021.
They are revisions of the previous year's
versions and intended for use by member
financial regulators.
 These scenarios were released along withdetails of how they were developed, as wellas underlying data and tools. They can also
be used by organizations other thangovernment regulators.
Source: NGFS Climate Scenarios for central
banks and supervisors, 2021

80

VI. What are the latest trends in scenario analysis?
Scenarios by major organizations: NGFS

NGFS(Network for Greening the Financial System) The six NGFS scenarios are summarized below.
Category

Scenario

Description

Stringent climate policies and innovation aim to limit global warming
to 1.5℃, reaching global net zero CO2 emissions around 2050. Somejurisdictions such as the US, EU and Japan reach net zero for all
GHGs.
The stringency of climate policies gradually increases, giving a 67%
chance of limiting global warming to below 2℃.
Reaches net zero around 2050 but with higher costs due to divergent
Divergent Net Zero policies introduced across sectors leading to a quicker phase out of oil
use.
Annual emissions do not decrease until 2030. Strong policies are
Delayed Transition
needed to limit warming to below 2℃. CO2 removal is limited.
Nationally
Determined
Includes all pledged policies, even if not yet implemented.
Contributions(NDCs)

Orderly scenarios
Assume climate policies are introduced Net Zero 2050*
early and become gradually more
stringent. Both physical and transition
risks are relatively subdued.
Below 2℃
Disorderly scenarios
Higher transition risk due to policies
being delayed or divergent acrosscountries and sectors.

Hot house scenarios
Some climate policies are implemented
in some jurisdictions, but globally efforts
are insufficient to halt significant global
warming. The scenarios result in severe
physical risk including irreversible Current Policies*
impacts like sea-level rise.

Only currently implemented policies are preserved, leading to highphysical risks.

* The base year for these scenarios is 2020.
* The Appendix introduces the global perspectives for these two scenarios.
Source: NGFS Climate Scenarios for central banks and supervisors, 2021.

81VI. What are the latest trends in scenario analysis?
Scenarios by major organizations: NGFSNGFS Each scenario has assumptions for carbon prices and energy mix, as shown below. Under
the current policies scenario (gray: 3℃ rise) carbon prices are only a few dollars even in
2050, but rise to nearly 800 USD in the 1.5℃ scenario (light blue, purple). The energy
mix must reach about 90% renewables for net zero.

Source: NGFS Climate Scenarios for central banks and supervisors, 2021.

82VI. What are the latest trends in scenario analysis?
Scenarios by major organizations: NGFS

NGFS: Intermediate/advanced
Land use changeAs shown in the figure (right), NGFS scenarios assume CO2
removals by carbon capture, utilization, and storage(CCUS), and by forests. To reach net zero in 2050, CO2
emissions from land use change need to be zero by 2030.

Physical risk - labor productivity
Assumptions are also made on multiple physicalrisks. At 3℃ warming, labor productivity is
reduced by 12% worldwide. This is three times
the reduction under the 1.5℃ scenario. Regional
differences are also significant. However, thismodel is still highly uncertain and requires further
consideration.

Source: NGFS Climate Scenarios for central banks and supervisors, 2021.

83VI. What are the latest trends in scenario analysis?
Major events before and after COP26

Column: COP26 (November 2021) and major related events
 COP26 attracted unprecedented attention, but there were also many related developments prior to
the event.
 First was the Climate Leaders' Summit in April 2021 (United States), followed by the release of the
IEA Roadmap in May, then the May/June G7 Summit announcement of a commitment to net zeroby 2050. The IPCC's Sixth Assessment Report came out in August, followed by IEA's release of
WEO 2021, and then just before COP26, countries at the G20 Summit at the end of Octoberpledged to work together to achieve success at COP 26 and continue commitments to meet thegoals of the Paris Agreement.
 The Paris Agreement provides mechanisms for signatories to gradually strengthen their climate
actions. At the heart of this is the Global Stocktake (GST). It is designed to review and evaluate
progress of climate change measures across the international community every five years, andcompare them with the objectives and long-term targets of the Paris Agreement.
 The first Global Stocktake began in November 2021, immediately after COP26, and will continue
for 2 to 2.5 years. By the end of 2023, the results of information gathering and technicalassessments will be reviewed, the necessary international cooperation will be considered, and
NDCs for each country will be revised.

84

Examples of guidance and tools for scenario analysis
Key examples of guidance for scenario analysis
Guidance 2.0 on Climate-related Financial Disclosure (TCFD Guidance 2.0) and Case Studies,
TCFD Consortium, July 2020. https://tcfd-consortium.jp/news_detail/20073103



Examples of strategic planning using TCFD: Scenario analysis practical guide, incorporatingclimate-related risks and opportunities, Ver. 3.0, Ministry of the Environment, Japan, March 2021.
http://www.env.go.jp/policy/tcfd.html

Guidance for responding to Recommendations from the Task Force on Climate-related Financial
Information Disclosures in the real estate sector (TCFD Guidance for Real Estate Sector), Ministryof Land, Infrastructure and Transport, March 2021.
https://www.mlit.go.jp/totikensangyo/totikensangyo_tk5_000215.html

Introduction to disclosures on climate-related risks and opportunities in the food, agriculture,
forestry and fisheries sectors: A manual on climate-related disclosures for Japanese food businesses,
Ministry of Agriculture, Forestry and Fisheries, June 2021.
https://www.maff.go.jp/j/kanbo/kankyo/seisaku/climate/attach/pdf/visual-60.pdf

Guidance on utilizing climate-related information to promote green investment 2.0, TCFD
Consortium, October 2021. https://tcfd-consortium.jp/news_detail/21100501

85

Examples of guidance and tools for scenario analysis
Examples of tools mainly for asset management data collection and analysis
Paris Agreement Capital Transition Assessment (PACTA): https://www.transitionmonitor.com/
 The 2° Investing Initiative (2DII) was developed with support from UN Principles for Responsible Investment(PRI). It can be used with scenario analysis to measure portfolio consistency with goals of the Paris Agreement.

Transition Pathway Initiative (TPI): https://www.transitionpathwayinitiative.org/sectors
 Based on public data, it conducts transition pathway analysis of major emitters in line with IEA scenarios, andanalyzes and publishes corporate climate initiatives.



Investor Energy-Climate Action Toolkit - Developing the framework and platform for non state
actors' contribution to the Paris Agreement (InvECAT): https://cordis.europa.eu/project/id/785087
 Led by UNEP-FI and Bloomberg with EU research funding. A toolkit for setting and monitoring energy andclimate goals.

Open Source Breakthrough For Climate-Smart Investing (OS-Climate): https://os-climate.org/
 Led by the Linux Foundation. An open source model data platform for finance that addresses climate change
risk management, etc. Founding members include Amazon, Allianz, Microsoft and S&P Global.



SENSES Project - SENSES Climate Change Scenario Toolkit: https://climatescenarios.org/toolkit/
 Modules that enable companies to understand and communicate climate change scenarios. Visualization uses
narrative or exploratory approaches.

The PRI website offers a variety of useful tools, data providers, and methodologies for scenario
analysis. Regarding IRP, details are also provided for scenario assumptions, etc.
https://www.unpri.org/climate-change/climate-scenario-analysis/3606.article
https://www.unpri.org/sustainability-issues/climate-change/inevitable-policy-response86List of references
Impacts on human healthWHO, Quantitative risk assessment of the effects of climate change on selected causes of death,2030s and 2050s, 2014.



Gasparrini, et. al., Mortality risk attributable to high and low ambient temperature: a multicountry
observational study, The Lancet, Vol. 386, July 25, 2015.



Ministry of the Environment, Japan, Environment Research and Technology Development Fund S10-3, Research on Critical Climate Change Risk 2012-2016, May 2017.



Vicedo-Cabrera, Ana M., et. al., Hands-on Tutorial on a Modeling Framework for Projections of
Climate Change Impacts on Health, Epidemiology, Volume 30, Number 3, May 2019.



Yasushi Honda, Direct health risk due to climate change: Heat-related morbidity and mortality.
Journal of the National Institute of Public Health, Vol. 69, No.5, p412-417 2020.



Ministry of the Environment, Japan. Climate Change Impact Assessment Report, overview anddetailed report. December 2020.

National Institute for Environmental Studies, Climate Change Adaptation Information Platform (APLAT): https://adaptation-platform.nies.go.jp/index.html

87

APPENDIX

88

What is scenario analysis?
The origins of scenario analysis
 For more than 50 years, the scenario analysis method has been used to develop long-term
strategies for “issues that are difficult to foresee."*1
 A scenario is a narrative about the future.*2 The difference between a scenario and a"projection" (or forecast or prediction) is that generally projections consider the future as
an extension of the past. However, this is difficult for phenomena that have a high level
uncertainty or are difficult to foresee. For example, what will happen if fundamental
structural changes occur in society in the near future.*2
 Just because a "scenario" is a narrative about the future, doesn't mean that just any story
can be created. Normally, it is necessary to create a "realistic" scenario and verify the
likelihood of it being realized using a quantitative or other type of model.*2*1 Source: Theory of scenario planning: Techniques and practical application (Masahiro Kakuwa, Japan Oil, Gas and Metals
National Corporation, 2016).
*2 Source: Energy Transformation Scenario 2021: The latest scenario work by Shell (Masahiro Kakuwa: Japan Oil, Gas andMetals National Corporation, 2021)

89What is scenario analysis?
What are the features of scenario analysis?
 Companies and organizations have their own unique purpose to exist. To fulfill their
purpose, their leaders establish a vision and strategy. In other words, leaders need to be
fully aware of where the organization is headed in the future.*2
 However, the business environment is constantly changing.
 The path to the future environment may be discontinuous.*2
 This is why scenario analysis is needed.
 The first thing to do for scenario analysis is to clarify the organizational purpose andvision for the future (see figure).*1*1 Source: Theory of scenario planning: Techniques
and practical application (in Japanese)(Masahiro Kakuwa, Japan Oil, Gas and Metals
National Corporation, 2016).
*2 Source: Energy Transformation Scenario 2021:
The latest scenario work by Shell ( in Japanese)(Masahiro Kakuwa: Japan Oil, Gas and Metals
National Corporation, 2021)

Event with
futureexpansion inperspective

Eventscurrently
visibleFuture world

How can it beinterpreted?
Events thatare difficult
to predict in
the future

Scenario story
Frameworkof scenario
analysis

Future world

90

Example: Quantitative assessment of impacts on humanmortalities

Quantitative analysis of the impacts of extreme heat due to climate change
is very challenging due to complex risk patterns and uncertainty in
scenarios. The paper referenced here presents a detailed methodology as a"tutorial," and demonstrates the importance of having the cooperation ofexperts in multiple disciplines, such as epidemiology, statistics, climate
science, and more.

This paper projected and assessed the impacts of temperature on mortality
rates in London.

It applied actual data on London's daily average temperatures, total actual
mortalities by age group, and daily model temperature data, to 2.6℃ (RCP
4.5) and 4℃ (RCP8.5) warming scenarios.

With a 4℃ increase, excess mortality rates increased due to extreme heat,
especially among the elderly (see figure).



In Japan, it is also possible to study quantitative impacts based on themethodologies described in this paper, using data such as the number ofmortalities by region and by age.

- Cooling- Warming
Dashed portionis extrapolated■ 2010-19■ 2090-99

Relative Risk



(Climate Risk)

Paper: Tutorial on methodologies for
projection and assessment

Source: Vicedo-Cabrera, A.M., et. al., Hands-on Tutorial on a Modeling Framework for Projections of
Climate Change Impacts on Health, Epidemiology, Volume 30, Number 3, May 2019.
91

Partnership for Carbon Accounting Financials (PCAF):
Formulas for specific asset classes
 As mentioned in Chapter VI, PCAF standards include formulas to calculate GHG
emissions for each asset class.
 These two pages show the formulas for calculating the six asset classes underconsideration.
Financed emissions: Listed equity and corporate bonds
𝐹𝑖𝑛𝑎𝑛𝑐𝑒𝑑 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 = ෎௖𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 𝑐
× 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝑐𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 𝐼𝑛𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝐶𝑎𝑠ℎ 𝑐

Financed emissions: Business loans and unlisted equity
𝐹𝑖𝑛𝑎𝑛𝑐𝑒𝑑 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 = ෎௖𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 𝑐
× 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝑐𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 𝐼𝑛𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝐶𝑎𝑠ℎ 𝑐

Financed emissions: Commercial real estate
𝐹𝑖𝑛𝑎𝑛𝑐𝑒𝑑 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠=෎௕,௘

𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 𝑏
× 𝐸𝑛𝑒𝑟𝑔𝑦 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑏, 𝑒 × 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛 𝑓𝑎𝑐𝑡𝑜𝑟 𝑒
𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑡𝑖𝑜𝑛 𝑏
Source: PCAF, Global GHG Accounting and Reporting Standard for the Financial Industry, 202092Partnership for Carbon Accounting Financials (PCAF):
Formulas for specific asset classes
 Formulas for six asset classes (continued)
Financed emissions: Project finance
𝐹𝑖𝑛𝑎𝑛𝑐𝑒𝑑 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 = ෎௣𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 𝑝
× 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝑝
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦＋𝑑𝑒𝑝𝑡 𝑝

Financed emissions: Mortgages
𝐹𝑖𝑛𝑎𝑛𝑐𝑒𝑑 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠=෎௕,௘

𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 𝑏
× 𝐸𝑛𝑒𝑟𝑔𝑦 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑏 × 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛 𝑓𝑎𝑐𝑡𝑜𝑟 𝑒
𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑡𝑖𝑜𝑛 𝑏

Financed emissions: Motor vehicle loans
𝐹𝑖𝑛𝑎𝑛𝑐𝑒𝑑 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠=෎௩,௙

𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 𝑣
× 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒 𝑡𝑟𝑎𝑣𝑒𝑙 𝑣 × 𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 𝑣, 𝑓 × 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓
𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑡𝑖𝑜𝑛 𝑣
Source: PCAF, Global GHG Accounting and Reporting Standard for the Financial Industry, 202093Network for Greening the Financial System (NGFS) scenarios
Worlds depicted by NGFS scenarios
In this Appendix, we look at two "worlds" among the NGFS scenarios covered on
page 80 of this handbook: one with the lowest emissions and one with the highest.
 A "Net Zero 2050" world
 Decarbonization of electricity: Fivefold increase in renewables over the next 30
years.
 Electrification of buildings, industries, and transportation: By 2050 more than halfof the buildings, industry, and transportation-related energy is electrified.
 Transition to carbon neutral fuels: In 2050, more than 40% of gas, liquid, and solid
fuels are carbon neutral.
 CO2 storage and removal: Carbon removals of about 5 Gt/year are required to costeffectively achieve 1.5℃ by 2050.
 Energy conservation for the entire economy: Reduce energy intensity by about 60%
between 2020 and 2050.
 Decarbonization of agricultural, forestry and other land uses: CO2 emissions fromthese sectors can reach net zero by 2030.
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Network for Greening the Financial System (NGFS)Worlds depicted by NGFS scenarios (continued)
 Current policies: Physical risk in a world of 3℃ average temperature rise.
 Increase in average temperature: If no action is taken, average global temperature
will exceed 1.5℃ in the 2030s and
2℃ by about 2050.
 High temperatures versus laborproductivity: Labor productivity could
fall by an average of 12% globally.
 Changes in population exposed to
extreme weather: More than aneightfold increase in global
population exposed to effects of drought.
 Direct losses due to tropical cyclones:
Could increase by as much as 45%.

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Direction and focus of future NGFS initiatives
NGFS: Glasgow Declaration
The NGFS announced the Glasgow Declaration on November 3, 2021 at COP26. It states theintention to work on the following initiatives in the coming years:
further enhance and enrich its climate scenario, thus providing on a regular basis an important public good for abroad range of stakeholders, both public and private;

deepen its analysis on integrating climate change considerations into monetary policy strategies and frameworks, inthe context of the mandates of its members;

intensify the work to bridge the data gaps that currently hinder the identification, management and mitigation ofclimate-related risks;supplement the set of NGFS practical guides with guidelines on TCFD-aligned reporting for central banks, andfacilitate uplift in supervisory capabilities and the global consistency of supervisory practices;

step up its efforts on capacity building, with a particular focus on members from emerging and developing
economies, to support members' progress in addressing climate-related and environmental risks and in
implementing the NGFS recommendations;keep exploring emerging topics such as the impact of the loss of biodiversity or the risks associated with climaterelated litigation, and work towards addressing them, in the context of the mandates of its members;

continue to cooperate with standard-setters, other policy makers, the financial sector, academia and other relevant
stakeholders to keep on distilling best practices, identifying challenges and solutions and avoiding duplication of
work.

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Alliances based on financial institution initiatives
Glasgow Financial Alliance for Net Zero (GFANZ)
 Established April 2021. This is an alliance that combines four financial initiatives
described below. It was officially inaugurated on November 3, 2021 at COP26, whenthree more initiatives joined.
 Chaired by Mark Carney, former Governor of the Bank of England, UN Special Envoy on
Climate Action and Finance. Co-chaired by Michael Bloomberg, Global Ambassador ofRace to Zero campaign and chair of TCFD. Vice chair is Mary Schapiro, former chairmanof the U.S. Securities and Exchange Commission, and Head of the Secretariat for TCFD.
Permanent secretariats are located in Europe, United States, Asia, Africa.
 All member companies must be certified under the United Nations Race to Zerocampaign and use the guidelines for achieving net zero emissions based on scientificevidence to develop plans for reducing GHG emissions (covering Scopes 1, 2 and 3).
 They must commit to setting provisional targets for 2030 and to transparent reporting andaccounting in line with Race to Zero standards.
 In addition, GFANZ announced that it would regularly report to the G20 Financial
Stability Board (FSB).
 As of January 1, 2022, more than 450 companies had joined, representing total assets of$130 trillion. Four Japanese life insurers are members through NZAOA, described on thenext page.
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Alliances based on financial institution initiatives
Net Zero Asset Owner Alliance (NZAOA) Established in September 2019 at the UN Secretary-General's Climate Action Summit.
 It was initiated by Caisse des Dépôts, La Caisse de depôt et placement du Québec(CDPQ), Folksam Group, PensionDanmark, and SwissRe. Shortly afterward, Alecta,
AMF, CalPERS, Nordea Life and Pension, Storebrand, and Zurich Insurance joined as
founding members.
 Committed to transition to net zero emissions with no and low overshoot pathways by2050.
 As of January 1, 2022, more than 69 companies had joined, representing total assets of$10.4 trillion. Four Japanese life insurers are members.

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Alliances based on financial institution initiatives
Net Zero Banking Alliance (NZBA) Jointly led by UNEP FI and the Prince of Wales' Sustainable Markets Initiative Financial
Services Taskforce (FSTF). Established April 2021.
 As of January 2022, 102 companies from 40 countries were members, representing total
assets of $67 trillion.
 There were initially no members from Japan, but five Japanese financial institutions(groups) had joined by October 2021.

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Alliances based on financial institution initiatives
Net Zero Asset Managers initiative (NZAM)
 Launched October 2020. As of January 2022, 220 companies were signatories,
representing total assets under management of $57 trillion.
 As of January 1, 2022, 9 companies from Japan had signed.

Net-Zero Insurance Alliance (NZIA) In July 2021, NZIA was launched by eight insurers and reinsurers under the Principles
for Sustainable Insurance (PSI), in cooperation with UNEP-FI, in the lead-up to
November 2021 (COP26).
 As of January 2022, there were 20 members, including one each from Kenya, Korea andJapan, and all others from Europe. From Japan, Tokio Marine joined in January 2022.

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Alliances based on financial institution initiatives
New GFANZ members announced at COP26
Paris Aligned Investment Initiative (PAII) Established May 2019. A global forum led by investor groups to help investors align theirportfolios with the goals of the Paris Agreement. It includes four networks working
together: Institutional Investors Group on Climate Change (IIGCC, Europe), Ceres(United States), Asia Investor Group on Climate Change (AIGCC, Asia), and Investor
Group on Climate Change (IGCC, Australia).

Net Zero Financial Service Provider Alliance (NZFSPA)
 Established September 2021. It has 23 signatories (as of January 2022), including theworld's largest rating agencies, audit networks, major index providers, global stock
exchanges, data providers, and advisory service providers.

Net Zero Investment Consultant Initiative (NZICI) Established September 2021. Members include 12 major investment consultancy
companies. It assists customers in prioritizing real emission reductions by integrating
advice on net-zero into investment consulting services.
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Starter's Guide to Climate Change Scenario Analysis:
Practices and Trends for Scenario Analysis in the Life Insurance Industry
February 2022
Research and writing: Green Pacific Co., Ltd. (Kazuhito Yamada, Mariko Fujimori)https://www.hq-greenpacific.co.jp/