Initiatives to Address Climate Change
(Response to TCFD Recommendations)

Governance

Addressing sustainability is a key element in the response to climate change and, under the supervision of the Board of Directors, Aozora has established a program led by the Sustainability Committee to advance sustainability initiatives that are integrated with our management strategy.

Click here for more details on governance related to sustainability programs

Strategy

As initiatives towards becoming carbon neutral advance throughout the world, Aozora clearly recognizes the role that it should play in order to contribute to realizing a decarbonized society as a financial institution and has identified response to climate change as a Materiality issue.

Click here for more details on Key Sustainability Issues (Materiality)

Specific recognition and initiatives regarding risks and opportunities related to climate change are as follows. To respond to environmental changes in the future, we will review multiple cases and risk classifications.

Opportunities Related to Climate Change

Opportunity cases	Timeframe
Expand initiatives in green energy finance, transition finance, and decarbonization innovation finance, and promote decarbonization domestically and overseas Increase loan initiatives for Aozora’s ESG Support Framework and expand opportunities to provide solutions taking into account customers’ needs regarding support for transitioning to decarbonization Continue sales of “Juunen Toiro” and “Manten Kansoku,” which are ESG-related investment trusts, and newly establish impact-related investment trusts Advise on building sustainability promotion systems for business partners and build and strengthen relationships Identify new business opportunities through collaboration with companies engaged in environment-related businesses (including venture companies) Generate further synergies with Aozora’s Strategic Investments Business (support industrial transition)	Short- to medium-term
Increase financing opportunities for new energy-related technology developments in areas such as hydrogen and ammonia, CCS and DAC Increase financing opportunities for fundamental fuel conversion and energy-saving promotion in the manufacturing and transport sectors Increase diversity of transaction opportunities with retail customers who share our new value of “contributing to the realization of a decarbonized society”	Medium- to long-term

Opportunity cases

Timeframe

Expand initiatives in green energy finance, transition finance, and decarbonization innovation finance, and promote decarbonization domestically and overseas
Increase loan initiatives for Aozora’s ESG Support Framework and expand opportunities to provide solutions taking into account customers’ needs regarding support for transitioning to decarbonization
Continue sales of “Juunen Toiro” and “Manten Kansoku,” which are ESG-related investment trusts, and newly establish impact-related investment trusts
Advise on building sustainability promotion systems for business partners and build and strengthen relationships
Identify new business opportunities through collaboration with companies engaged in environment-related businesses (including venture companies)
Generate further synergies with Aozora’s Strategic Investments Business (support industrial transition)

Short- to medium-term

Increase financing opportunities for new energy-related technology developments in areas such as hydrogen and ammonia, CCS and DAC
Increase financing opportunities for fundamental fuel conversion and energy-saving promotion in the manufacturing and transport sectors
Increase diversity of transaction opportunities with retail customers who share our new value of “contributing to the realization of a decarbonized society”

Medium- to long-term

Risks Related to Climate Change (Transition Risk, Physical Risk)

Risk Classification		Transition Risk Examples	Timeframe	Physical Risk Examples	Timeframe
Credit risk		Risks arising from impairment to the credit portfolio and losses due to deterioration in customers’ business performance or financial condition caused by policies, technological advances, changes in consumer preferences, etc.	Short- to long-term	Risks arising from impairment to the credit portfolio and losses due to deterioration in customers’ business performance or collateral damage caused by a natural disaster Risks arising from significant adverse impact on Aozora or customers’ businesses due to a greater frequency in cases of heatstroke or viral pandemics	Short- to long-term
Market risk		Risks arising from incurring losses or damage resulting from fluctuations in the values of securities held, financial derivatives, etc., caused by such issues as a decrease in customers’ earnings or impairment of existing assets	Short- to long-term	Risks arising from incurring losses or damage resulting from fluctuations in the value of the securities portfolio, etc. due to market disruption caused by the impact of extreme weather, or changes in the medium- to long-term outlook or the expectations of market participants	Short- to long-term
Liquidity risk		Risks arising from limited funding sources, deposit outflows or cash flow pressure due to a decline in Aozora’s creditworthiness due to factors such as a delayed response to transition risk	Short- to long-term	Risks arising from increased demand for funding from customers affected by extreme weather, and an increased outflow of funds for reconstruction and recovery	Short- to long-term
Operational risk		Risks arising from increases in equipment expenses for measures to reduce CO₂ or to strengthen business continuity	Short- to long-term	Risks arising from incurring losses or damage due to interruption of operations at the Head Office, branches, and data centers as a result of damage caused by extreme weather	Short- to long-term
	Reputation risk	Risks arising from deterioration in Aozora’s reputation due to lack of a response to climate change or assessments by stakeholders of our response being inappropriate or insufficient Risks arising from deterioration of Aozora’s reputation and adverse impact on employment due to continued transactions with customers who are not sufficiently environmentally conscious and due to our delays in its transition	Short- to long-term	Risks arising from deterioration of Aozora’s reputation and suspension of business due to lack of support for customers affected by extreme weather	Short- to long-term

Definitions of short-, medium-, and long-term: Aozora defines short-term as up to 3 years; medium-term as 3-10 years, and long-term as 10-30 years. Short-term is defined to align with duration of the Mid-term Plan (up to 3 years).

Roadmap to Becoming Carbon-neutral

As part of our medium- to long-term initiatives for the risks and opportunities related to climate change, Aozora has developed a roadmap and specific plan of action to achieve becoming carbon-neutral in line with the items of the Paris Agreement.

We will update our action plan as necessary and promote communication with our stakeholders through proper disclosures regarding the progress.

an image about Roadmap to Becoming Carbon-neutral

Initiatives to Achieve Net Zero CO₂ Emissions as a Business Entity

We will continue working towards achieving net zero emissions in Scope 1 and Scope 2 by FY2030, which is one of Aozora’s Sustainability Targets. Towards this goal, we will focus on initiatives to reduce environmental load as a business entity by promoting upgrades to energy-saving equipment/devices as well as adopting self-supply sources and responding to vendors.

Conversion to Renewable Energies, Reduction of Electricity Used

Aozora’s Head Office, which is located in the Sophia School Corporation Sophia Tower, uses only renewable energy-driven electricity. In addition, the Head Office is equipped with highly insulated glass, a natural ventilation system, and rooftop greenery. With office areas employing LED lighting with automatic dimming control systems, the environmentally friendly building also minimizes power consumption compared to the level of traditional equipment.

We are also gradually transitioning to green electricity at each branch office, starting with the Nagoya Branch, followed by the Nihonbashi Branch in April 2023, and the Sapporo Branch in conjunction with its relocation in August 2023.

Upgrading to Energy-saving Equipment at Offices

Fuchu Annex proceeds with its upgrade to energy-saving equipment in consideration of impact on the environment, and as of the end of FY2023, approximately 80% of lighting in the annex had been converted to LED, and the air conditioning system has eliminated air-cooled chillers and replaced them with the latest water-cooled air conditioning system. Moreover, nearly all lighting in almost all branches has been converted to LED.

Converting to Ecofriendly Vehicles and Installing EV Battery Charging Devices

Aozora has made progress in replacing company cars at our Head Office and branch offices with ecofriendly vehicles, which accounted for 92% of our fleet as of May 2024. In addition, we installed battery chargers for electric vehicles and PHV on the first floor of the Head Office in FY2023, making it available not only for company cars but also for our customers’ use.

Carbon Offset Initiatives

Aozora is focused on reducing CO₂ emissions at our Fuchu Annex, which also serves as a data center. In FY2022, we applied carbon offsets using J-Credits^* for the hot and cold water used in the building. In FY2024, we plan to substantially convert the consumed energy to renewable energy.

J-Credit: A program in which the government certifies the amount of greenhouse gas emissions (such as CO₂) reduced through introduction of energy-saving equipment and the use of renewable energy, or amount removed through appropriate forest management, as “credit.”

Supporting Customers’ Initiatives to Decarbonize

Companies left behind in engaging climate change have the possibility of facing significant risks such as enormous carbon burdens in the future, therefore Aozora believes we have an important role in supporting customers’ initiatives to decarbonize.

Moreover, advances in customers’ decarbonization led to net zero CO₂ emissions in Aozora’s investment and loan portfolio, so we have built a decarbonization support framework and provide multifaceted support.

Customers’ Decarbonization Support System in Aozora’s ESG Support Framework

Status of Carbon-related Assets

Aozora discloses the status of outstanding loans and percentages by sector for carbon-related assets, taking into account the TCFD recommendations.

Carbon-related Assets (loan outstandings)

(As of March 31, 2024)

Sector	Loan outstandings (billion yen)	Percentage
Oil and gas	63.7	1.6%
Coal	－	－
Electricity^*	76.4	1.9%
Energy sub-total	140.0	3.4%
Air cargo transportation	5.7	0.1%
Air passenger transportation	2.6	0.1%
Maritime transportation	8.0	0.2%
Rail	23.0	0.6%
Road transportation	12.2	0.3%
Vehicles/components	21.5	0.5%
Transportation sub-total	72.9	1.8%
Metals and mining	46.5	1.1%
Chemicals	98.7	2.4%
Construction materials	15.2	0.4%
Capital goods (buildings, etc.)	157.4	3.9%
Real estate management/development	1,122.8	27.6%
Materials, construction materials sub-total	1,440.6	35.4%
Beverages	9.5	0.2%
Agriculture	0.1	0.0%
Packaged foods/meat	14.2	0.4%
Paper/forest products	31.1	0.8%
Agriculture, beverages, and forest products sub-total	55.0	1.4％
Total for all sectors	1,708.6	42.0%

Excludes renewable energy providers

Scenario Analysis

The results of our quantitative scenario analysis until 2050 are as follows. Apart from these cases, we have also started initiatives to ascertain the impact of NGFS scenarios^*1 on corporate finances. Looking ahead, we will expand our knowledge of analysis methods and strive to enhance accuracy.

	Transition Risk	Physical Risk
Scenario	IEA (International Energy Association) World Energy Outlook STEPS (3°C) scenario, NZE (1.5°C) scenario	IPCC (Intergovernmental Panel on Climate Change) RCP 8.5 scenario (4°C scenario) / RCP 2.6 scenario (2°C scenario)
Method of analysis	Preliminary calculation of loss reserves increases after assessing the degree of impact on corporate customers’ business results (damage to their creditworthiness) based on parameters and public information, etc. in addition to considering the increase in investment burden in the future	Preliminary calculation of increase in loss reserves arising from damage to properties after assessing the rate of damage due to the properties inundated with floods / high tides (effects of direct harm to properties and suspended business activities)
Subject of analysis	Electricity, energy, automotive, and real estate sectors (excluding non-recourse loans, REITs) as well as raw materials sector^*2 (accounted for 18.4% of total loan outstandings) As of March 31, 2023	Collateral for domestic and overseas real estate non-recourse loans (accounted for 15.1% of total loan outstandings) As of June 30, 2021
Results of analysis	Recognized that the electricity sector faced rising costs from carbon price increases, in addition to importance of the development of technologies for reducing GHG emissions and changes in the electricity mix Recognized that for the energy and automotive sectors it was important to respond to changes in market needs towards transition to a decarbonized society Recognized that the raw materials sector was comparatively highly vulnerable to rising costs from carbon price increases	Confirmed that there are only a limited number of properties with a risk of damage due to flooding / high tides as many properties were robust collateral and located in areas less susceptible to natural disasters
Loss reserves expected to increase	In comparison with the current loss reserves, we expect an increase of up to 20 billion yen by 2040, and an increase of up to 4 billion yen in 2050 as the financial condition improves with the progress of the transition to a net-zero society	An increase of around 1 billion yen is expected in the period until 2050
Valuation of financial impact, etc.	Estimated loss reserves increased compared to the previous fiscal year, mainly due to considering the future investment burden in the analyzed sectors	New analysis was not conducted in FY2023, as the assumption that the impact of increased natural disasters and extreme weather is not of a nature that changes over several years We will ascertain changes in the situation, and review as necessary

Climate change scenarios from the Network for Greening the Financial System (NGFS)
Transition risk analysis scope: Important sectors in the credit portfolio were identified using a risk map based on the degree of impact from climate change. The selected sectors were raw materials, real estate (excluding non-recourse loans and REITs), as well as the electricity, energy, and automotive sectors, which have comparatively small exposure but a significant impact.

Risk Management

We manage climate change risk as an important financial risk within the traditional financial risk categories, including credit risk, market risk, liquidity risk, and operational risk, and integrate the management of this risk into our existing risk management framework. In addition, we incorporate climate change risk into Aozora’s “Key Risks” and use it in discussions of our risk appetite and business planning to enhance the effectiveness of risk management.

When we initiate individual projects, we respond in accordance with the Aozora Bank Group Investment and Lending Policies regarding Environmental and Societal Issues. These policies are reviewed as necessary through discussions by the Management Committee and the Sustainability Committee in response to changes in the business environment, social demands, and business activities.

For any credit transactions that are believed to fall under the prohibited credit category, the Credit Committee or Investment Committee is responsible for making credit decisions by comprehensively reviewing the background, features, and other factors of each transaction
Our policy prohibits the financing of new projects for coal-fired power plants as well as the expansion of existing power generating facilities
We identify, assess, and manage environmental and social risks based on Equator Principles when making investments or loans for large scale development projects
When considering projects, we obtain the greenhouse gas emissions data of the customer where available
We recognize the need to understand and respond to climate change, natural capital, and biodiversity in an integrated manner

Adopting the Equator Principles

The Equator Principles are a framework to identify, assess, and manage risks and the impact on the environment and society that accompany development projects.

Aozora has signed the Equator Principles and when financing projects accompanying large-scale developments, verifies that they are carried out appropriately, avoiding or mitigating any impact on the natural environment or local communities.

Click here for more details on Initiatives for the Equator Principles

Metrics and Targets

Climate change-related targets based on Aozora’s Sustainability Targets are as follows.

	Targets	FY2023 Results
CO₂ emissions as a business entity (Scopes 1 and 2)	Net zero by FY2030	40% reduction (vs. FY2020)
CO₂ emissions from the investment and loan portfolio (Scope 3: category 15)	Net zero by FY2050	Refer to “CO2 Emissions from the Investment and Loan Portfolio.”^*
Amount of project financing for coal-fired power plants	Zero balance by FY2040	25.7 billion yen
Sustainable financing amount	1 trillion yen by FY2027 (seven years) Including environmental finance of 700 billion yen	Approx. 647 billion yen Including environmental finance of approx. 474 billion yen

CO₂ emissions from the investment and loan portfolio (Scope 3: category 15) measurements based on the balance as of March 31, 2023

CO₂ Emissions from the Investment and Loan Portfolio (Scope 3: category 15)

[Loans] Financed Emissions (kt-CO₂)

(Note) Balance in the coal sector is zero, so is not listed.

	Oil and gas	Electricity	Air cargo transportation	Air passenger transportation	Maritime transportation	Rail	Road transportation	Vehicles/ components	Metals and mining	Chemicals	Construction materials	Capital goods (buildings, etc.)	Real estate management/ development	Beverages	Agriculture	Packaged foods/meat	Paper/forest products	Other	Total
Scopes 1, 2	146	763	20	40	9	47	122	8	918	558	268	85	16	11	58	581	44	1,120	4,815
Scope 3	326	335	11	22	5	26	68	130	1,525	3,275	730	318	90	45	27	264	75	3,656	10,925

	Scopes 1, 2	Scope 3
Oil and gas	146	326
Electricity	763	335
Air cargo transportation	20	11
Air passenger transportation	40	22
Maritime transportation	9	5
Rail	47	26
Road transportation	122	68
Vehicles/components	8	130
Metals and mining	918	1,525
Chemicals	558	3,275
Construction materials	268	730
Capital goods (buildings, etc.)	85	318
Real estate management/ development	16	90
Beverages	11	45
Agriculture	58	27
Packaged foods/meat	581	264
Paper/forest products	44	75
Other	1,120	3,656
Total	4,815	10,925

Data Quality Score (1 rated highest, 5 rated lowest)

	Oil and gas	Electricity	Air cargo transportation	Air passenger transportation	Maritime transportation	Rail	Road transportation	Vehicles/ components	Metals and mining	Chemicals	Construction materials	Capital goods (buildings, etc.)	Real estate management/development	Beverages	Agriculture	Packaged foods/meat	Paper/forest products	Other	Total
Scopes 1, 2	3.1	2.8	4.8	4.0	4.0	4.0	4.0	4.4	2.3	2.3	2.0	4.2	4.2	4.0	4.0	4.2	4.0	4.1	3.8
Scope 3	3.9	4.5	4.8	4.0	4.0	4.0	4.0	4.4	3.4	3.4	2.8	4.2	4.2	4.0	4.0	4.2	4.0	4.1	4.1

	Scopes 1, 2	Scope 3
Oil and gas	3.1	3.9
Electricity	2.8	4.5
Air cargo transportation	4.8	4.8
Air passenger transportation	4.0	4.0
Maritime transportation	4.0	4.0
Rail	4.0	4.0
Road transportation	4.0	4.0
Vehicles/components	4.4	4.4
Metals and mining	2.3	3.4
Chemicals	2.3	3.4
Construction materials	2.0	2.8
Capital goods (buildings, etc.)	4.2	4.2
Real estate management/ development	4.2	4.2
Beverages	4.0	4.0
Agriculture	4.0	4.0
Packaged foods/meat	4.2	4.2
Paper/forest products	4.0	4.0
Other	4.1	4.1
Total	3.8	4.1

Financed Emissions Measurements Loan Outstandings (1 billion yen)

	Oil and gas	Electricity	Air cargo transportation	Air passenger transportation	Maritime transportation	Rail	Road transportation	Vehicles/ components	Metals and mining	Chemicals	Construction materials	Capital goods (buildings, etc.)	Real estate management/development	Beverages	Agriculture	Packaged foods/meat	Paper/forest products	Other	Total
Loan outstandings	54	199	6	4	3	23	14	19	49	107	53	59	316	12	5	17	33	1,337	2,310
Measurement coverage rate (%)	100	100	100	100	100	100	100	100	100	100	100	100	100	100	100	100	100	100	100

	Loan outstandings	Measurement coverage rate (%)
Oil and gas	54	100
Electricity	199	100
Air cargo transportation	6	100
Air passenger transportation	4	100
Maritime transportation	3	100
Rail	23	100
Road transportation	14	100
Vehicles/components	19	100
Metals and mining	49	100
Chemicals	107	100
Construction materials	53	100
Capital goods (buildings, etc.)	59	100
Real estate management/ development	316	100
Beverages	12	100
Agriculture	5	100
Packaged foods/meat	17	100
Paper/forest products	33	100
Other	1,337	100
Total	2,310	100

Applicable assets	Corporate loans, project financing
Applicable fiscal year	FY2022
Formulas used in calculations (PCAF scores 1-4)	Financed emissions = attribution factor x GHG emissions <Attribution factor> Loan outstandings ÷ (interest-bearing debt + equity of customers or projects) <GHG emissions> Customer’s disclosed Scopes 1-3 values, or estimated values if unknown
Formulas used in calculations (PCAF score 5)	Financed emissions = loan outstandings x emission factors per asset value taken from the PCAF database

Measurement results may change significantly due to additional data availability and accuracy accompanying expanded disclosure by customers and advances in estimation methodologies. Aozora plans to discuss the timing of setting interim targets and the target scope, etc.

Initiatives to Address Climate Change(Response to TCFD Recommendations)