Response to Task Force on Climate-related Financial Disclosures (TCFD) Recommendations

Policy

• Declared the management philosophy as “Contribute to the development of society through the creation of new value-added financial services”
• Organized the system of sustainability policies, formulating the Aozora Bank Group Environmental Policy under the Code of Ethics and Conduct stipulated in accordance with the management philosophy, and formulated the Aozora Bank Group Investment and Lending Policies regarding Environmental and Societal Issues and the Aozora Bank Group Outsourcing Policy, which are specific operational guidelines

Organizational Structure

• Established the Sustainability Committee with the CEO as Chairperson as a way to discuss and develop solutions to important sustainability-related issues across the entire Group. Principal topics from the committee are discussed with and reported/submitted for approval to the Board of Directors as necessary
• Established the Liaison Meeting of Group Sustainability in order to promote Group-wide sustainability initiatives
• Established an Executive Officer in Charge of Sustainability Management. Also, established the Sustainability Management Division as an independent division
• Established the Sustainable Business Office within the Sustainability Management Division. Strengthened support capabilities and human resource training functions for promoting sustainability, including climate change response in business

Matters Deliberated and Decided, etc.

• Resolved by the Board of Directors to include climate change risk in the Group’s key risks
• The Board of Directors must approve any setting or revision of Aozora’s Sustainability Targets, which are management targets in the distinctive areas that the Aozora Group is focused on. Progress on these targets is also reported to the Board of Directors
• The status of progress and achievement of Aozora’s Sustainability Targets is considered as an important qualitative factor in evaluating executive officers and determining their remuneration

Medium- to Long-term Strategy

• Strengthen initiatives for net zero CO₂ emissions:
  Become carbon-neutral by achieving net zero CO₂ emissions as a business entity (Scopes 1 and 2) by FY2030 and net zero emissions in the investment and loan portfolio (Scope 3) by FY2050
• Strengthen engagement with customers:
  Support the transition to a decarbonized society by executing/originating sustainable finance, including environmental finance, and strengthening customer engagement through decarbonization consulting through collaboration with experts
• Increase the level of risk management:
  Realize a higher level of risk management by increasing the quality and depth of climate change scenario analysis, continuously revising and refining the Investment and Loan Policies regarding Environmental and Societal Issues and strengthening the techniques and system for CO₂ measurement in the investment and loan portfolio

Recognition of and Response to Opportunities Regarding Climate Change

• Medium- to long-term opportunities:
  • Increased financing opportunities for social infrastructure development that utilizes digital innovation and new technology developments related to controlling, collecting, and using CO₂ emissions such as CCS/CCUS
  • Increased diversity of transaction opportunities with retail customers who share our new value of “contributing to the realization of a decarbonized society”
• Short-term opportunities (initiatives):
  • Under the new Mid-term Plan “Aozora 2025,” identified initiatives that each division will focus on by Key Sustainability Issue (Materiality), including “response to climate change”
  • Expand environmental finance initiatives in Japan and overseas, including renewable energy finance and decarbonization innovation finance, centered on the Infrastructure and Environment Finance Division
  • Increase initiatives on Aozora ESG Loans (Positive Impact Finance added in June 2023) through the Aozora ESG Support Framework, and strengthen consulting capabilities to resolve issues for customers’ decarbonization by expanding collaborative partnerships related to the decarbonization business
  • Continue sales of “Juunen Toiro” and “Manten Kansoku,” our ESG-related investment trust products
  • Issue green bonds to finance investment and loans compliant with the Green Bond Framework for renewable energy finance and green building finance

Recognition of and Response to Risks Related to Climate Change

• Transition risks:
  Risks arising from a credit portfolio impacted by the effects on borrower’s business operations and financial conditions associated with political measures, such as a carbon tax accompanying the transition to a decarbonized society, as well as the ongoing replacement of existing products and services in response to new low-carbon technologies and customers’ changing preferences
• Physical risks:
  Risks arising from a credit portfolio impacted by the physical damage caused by natural disasters and/or abnormal weather associated with climate change, such as a greater frequency/scale of storm and flood damage, as well as risks and adverse impacts posed to the business operations of the Bank and its customers caused by a greater frequency of cases of heatstroke or viral pandemics
• Scenario analysis:
  The results of our quantitative scenario analysis through to 2050 are as follows. We plan to continue expanding the target for scenario improvement and analysis, and researching and improving methods of reflecting financial impacts on the Bank’s credit portfolio

  	Transition Risk* (additions and changes from FY2022 are underlined)	Physical Risk
  Scenario	IEA (International Energy Association) World Energy Outlook STEPS (3°C) scenario, SDS (under 2°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 effect on corporate customers’ business results (damage to their creditworthiness) based on parameters and public information, etc.	Preliminary calculation of loss reserves increases 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 (accounted for 18% of total loans*) as of March 31, 2022	Security properties for domestic and overseas non-recourse loans (non-recourse loans accounted for 15.1% of total loans*) as of June 30, 2021
  Results of analysis	Recognized that the raw materials sector is comparatively easily influenced by rising costs from carbon price increases Recognized that the electricity sector is comparatively easily influenced by rising costs from carbon price increases, as well as the development of technologies for reducing GHGs and changes in the electricity mix Recognized that for the energy sector and automotive sector it is important to respond to changes in market needs towards transition to a decarbonized society	Confirmed that there are only a limited number of properties with a risk of damage due to flooding/high tides as many are well-secured properties and located in areas less susceptible to natural disasters
  Additional credit costs	Total increase of around 5.0-10.0 billion yen billion yen by 2050	Total increase of around 1.0 billion yen by 2050
  • 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 scope was expanded to include the raw materials sector, the real estate sector (excluding non-recourse loans and REITs), as well as the electricity, energy and the automotive sectors, which have comparatively small exposure but a significant impact.

• 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
• Incorporate climate change risk into the Bank’s “Key Risks” and focus on key risks when discussing risk appetite and in business planning to increase the level of risk management
• Review the Aozora Bank Group Investment and Lending Policies regarding Environmental and Societal Issues in response to the current business environment, societal demands changes in business activities, etc.
  • 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
  • Policy not to finance new projects which involve coal-fired thermal power stations as well as expansion of existing power generating facilities
  • Identify, assess and manage environmental and social risks based on the Equator Principles when making investments or loans for large scale development projects
  • When considering projects, ascertain the greenhouse gas emissions data of customer where available

• Reviewed Aozora’s Sustainability Targets. Climate change-related targets are as follows

  	Targets	Recent Performance
  CO₂ emissions as a business entity (Scopes 1 and 2)	Net zero by FY2030 (achievement timing brought forward)	31% reduction (vs. FY2020)
  CO₂ emissions from the investment and lending portfolio (Scope 3: category 15)	Net zero by FY2050 (newly set)	See table below
  Amount of project financing for coal-fired power plants	Zero balance by FY2040	27.5 billion yen
  Sustainable financing amount	1.0 trillion yen by FY2027 (seven years) Of which, environmental finance of 700.0 billion yen (achievement timing brought forward)	Approx. 400.0 billion yen Of which, environmental finance was approx. 350.0 billion yen
• Started measuring CO₂ emissions in the lending and investment portfolio targeting business loan and project finance asset classes based on the PCAF Standard (measurement results could change significantly going forward due to increased availability and accuracy of data accompanying expanded disclosure of customers and evolution of measurement methodologies). The Bank plans to discuss the timing for setting interim targets, the target scope, etc. going forward

  	FY2022 results	PCAF score
  Electricity sector	Absolute emissions: 744 kt-CO₂e (coverage 100%) Emission intensity: 149 kg-CO₂/MWh	2.77
  Oil and gas sector	Absolute emissions: 416 kt-CO₂e (coverage 100%)	3.25
  • Projects under construction were excluded from the scope of measurement
• Ratio of carbon-related assets* within lending and investments was 3.5%
  • Assets related to “energy” and “utility” companies. However, water companies and renewable energy providers are excluded