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Initiatives to Counter Global Warming and Climate Change – Based on TCFD Recommendations – Initiatives to Counter Global Warming and Climate Change – Based on TCFD Recommendations –

Initiatives to Counter Global Warming and Climate Change
– Based on TCFD Recommendations –

To contribute towards the realization of a sustainable society, MUFG advances initiatives to address global warming that are consistent with national goals and reduces CO2 emissions within the company. In addition, through financing functions, such as supporting renewable energy and technologies for reducing CO2 emissions, we will contribute to accelerating global warming countermeasures.

At MUFG, we pursue our management vision as part of our mission as a financial institution to develop lasting relationships from a long-term perspective with both our clients and society to achieve shared sustainable growth. As part of this mission, we are advancing initiatives for protecting the global environment, promoting human rights and so on.

In 2018 MUFG established the MUFG Environmental Policy Statement as its fundamental approach to addressing environmental issues and declared its intention to realize a sustainable society by “actively working towards finding solutions to global environmental issues through our business activities” and by responding “appropriately when our operations result in environmental risks or negative impacts, by reducing the environmental impacts of our operations.”

Based on the belief that a sustainable environment and society are a key prerequisite for MUFG’s sustainable growth, we strongly support realization of “a world where no one will be left behind” as envisaged by the SDGs. To contribute towards achievement of the SDGs, we have determined seven priority environmental and social issues to be addressed by MUFG, and we regard initiatives to counter “global warming and climate change” as one such environmental and social issue.

Acutely aware of the importance of climate-related financial disclosure, MUFG has declared its support of relevant recommendations formulated by the Task Force on Climate-related Financial Disclosures (TCFD), a special taskforce established by the Financial Stability Board (FSB). In line with these recommendations, we are working to enhance the content of information disclosure.

Governance

MUFG’s Governance Structure for Countering Climate Change

At MUFG, the Sustainability Committee operating under the Executive Committee regularly engages in the deliberation of the Company’s policies on and the status of initiatives to manage business opportunities and risks arising from environmental and social issues, including climate change. Furthermore, the Corporate Risk Management, Loan and Investment Management, and Credit committees also discuss and report specific themes associated with climate change. The contents deliberated on by these committees are reported to and discussed by the Executive Committee and the Board of Directors, while the Board of Directors oversees the implementation of initiatives for countering climate change.

Steps to Improve Our Governance Structure

We established the position of Chief Sustainability Officer (CSuO). CSuO is filled by the Group CSO, who is a member of the Board of Directors.

Moreover, we have invited external experts from the environmental and social fields to serve as permanent external advisors for MUFG. Through exchanging opinions and ideas with the Board of Directors, etc., we leverage the expert knowledge of these external advisors in our sustainability initiatives.

Strategy

The TCFD recommendations propose that climate change risks and opportunities be disclosed upon grasping impacts on business strategy and finances.

MUFG have positioned global warming & climate change among our environmental and social priorities. We are thus endeavoring to address these issues while giving due consideration to both the opportunities and the risks arising from them.

Opportunities—Supporting the Transition to a Decarbonized Society

MUFG announced a target of providing a cumulative 20 trillion yen in sustainable finance by 2030.

We intend to commit ¥8 trillion of finance in the environmental field, including initiatives to counter climate change. We promote renewable energy through project finance, etc., issue MUFG Green Bonds, which ensure that the net proceeds are allocated to the Eligible Green Projects, provide commodities and services aimed at mitigating environmental loads, encourage the climate change countermeasure consulting business and so on. By doing so, we support the transition to a decarbonized society.

Risks—Transition Risks and Physical Risks

There are two kinds of climate change risk. First, there are risks arising in the course of the transition to a decarbonized society, such as stricter regulation and the introduction of decarbonizing technologies (transition risks), and second, there are risks arising from physical damage due to the growing occurrences of climate change-induced natural disasters and abnormal weather (physical risks).

Financial institutions are required to address both the danger of having their own business activities directly impacted by such risks, and the danger of being indirectly affected due to impacts on clients. MUFG has implemented scenario analysis to gauge the impacts that climate change risks can exert on its credit portfolio based on the TCFD recommendations.

Climate Change Risks in Financial Institutions
  Major Contents
Transition risks Indirect
  • Risk of the credit portfolio being impacted due to stricter regulations or policy changes exerting negative impacts on the business and financial condition of clients
  • Risk of the credit portfolio being impacted due to reduced demand arising from changing consumer preferences and measures in response to adoption of technologies for a decarbonized society exerting negative impacts on the business and financial condition of clients
Direct
  • Risk of increased cost and burden in response to stricter regulations or policy changes
  • Risk of reputation deteriorating due to having an inferior response to SDGs/ESG compared to rivals, and risk of poorer reputation leading to a fall in stock price or rating
Physical risks Indirect
  • Risk of the credit portfolio being impacted due to suspension of clients’ business activities due to storm and flood damage, etc. or impairment of collateral value of real estate due to disaster
Direct
  • Risk of business continuity being impacted due to storm and flood damage, etc. incurred by company employees and held assets

Scenario Analysis

Since the summer of 2019, MUFG has been a participant in the pilot project led by the United Nations Environment Programme Finance Initiative (UNEP FI) with the objective of discussing and developing methods for climate change-related financial information disclosure for the banking industry. Based on the results of examination conducted in the pilot project, MUFG has implemented scenario analysis of transition risks and physical risks for the period from 2020 to 2050.

1.Results of Scenario Analysis

Assuming the given targets, applied scenarios and prerequisites, the scenario analysis found the total transition risks in the energy and utility sectors, and the physical risks (flooding), to be between several billion yen in each fiscal year. Accordingly, the impact of both transition risks and physical risks on the credit portfolio was deemed to be limited concerning the targets of this analysis.

2.Scenario Analysis Methods

Transition Risks

In the scenario analysis, we targeted the two sectors of energy and utilities, which are defined as carbon-related assets in the TCFD recommendations. As the scenario analysis methods, based on the results of examination in the UNEP FI pilot project, an integrated approach to evaluating impacts is adopted by combining a bottom-up method in individual companies and a top-down method on the sector level.

As the scenarios, the International Energy Agency’s (IEA’s) “Sustainable Development Scenario ((below) 2 °C Scenario) and “New Policy Scenario (4 °C scenario)”, which are widely used in various evaluations, were assumed. Primarily concerning the below 2 °C scenario, analysis was implemented on the impacts on credit rating in each scenario, and the financial impact on the overall credit portfolio in the targetted sectors.

In calculating financial impacts, while recognizing that there currently is no standardised method even in discussions conducted within the UNEP FI pilot project, to reflect initiatives aimed at realizing the decarbonized society envisaged by MUFG, we have reflected the costs of renewable energy investment, carbon tax and so on necessary for realizing the world of below 2 °C.

We will continue to work on expanding target sectors and making improvements to the method of reflecting data.

Physical Risks

Concerning risks of physical damage arising from climate change, we targeted flooding, which has occurred especially frequently and caused massive damage in Japan and other countries in recent years. The approach we adopted entailed using changes in default probability imparted by flooding on borrowers to measure impacts on the overall credit portfolio.

Assuming the RCP 2.6 and RCP 8.5 climate scenarios compiled by the Intergovernmental Panel on Climate Change (IPCC), we implemented analysis provided by various agencies to estimate flood damage primarily in the case of the RCP 8.5 scenario.

In calculating financial impacts, in consideration of discussions conducted within the UNEP FI pilot project, we have reflected business interruption periods, damage arising in held assets and so on.

The method we adopted here only reflects the IPCC scenarios in calculation of the occurrence probability of disasters, however, we are aiming to introduce a simulation technique that lets us reflect the IPCC scenarios in the actual disaster data and will continue to work on making improvements to the analysis method.

Risk Management

Climate Change Risks in Enterprise Risk Management

In the “Top Risk Management” approach that MUFG primarily adopts for enterprise risk management, we consider the risks arising from climate change as one of the Top Risks.

In MUFG and its core subsidiaries, management is regularly engaged in discussions regarding the Top Risks to gain a further understanding of the risk recognition, and to develop appropriate risk control countermeasures.

Environmental and Social Risk Management in Finance

We implemented MUFG Environmental and Social Policy Framework to manage environmental and social risks associated with our financing. Concerning coal-fired power generation, mining (coal), oil and gas, and other specific sectors in which concerns are raised over environmental and social impacts, including climate change, we have established our finance policy and a due diligence process to identify and assess the environmental and social risks or impacts associated with transactions has been introduced.

In May 2019, We announced that we will not provide financing for new coal-fired power generation projects. in the Environmental and Social Policy Framework.

In 2005, MUFG Bank, a group company of MUFG, adopted the Equator Principles, an international framework for private financial institutions and their clients to consider the environment and society that includes climate change.in infrastructure development and financing for resource development.

Due Diligence Process to Manage Environmental and Social Risks Associated with Financing
Standard due diligence The decision regarding categorization of the transaction as a “Prohibited Transaction” or “Restricted Transaction” is made by the department in the relevant business division responsible for communications with the client.
Enhanced due diligence Transactions categorized as “Restricted Transactions” are subject to enhanced due diligence in addition to standard due diligence, if necessary. This is implemented by the department responsible for management of environmental and social risks.
Discussions by executive management Transactions assessed as having the potential to have significant negative impacts on the corporate value of MUFG are evaluated with the involvement of executive management.

Metrics and Targets

Progress in Sustainable Finance Goals

Performance in respect to the sustainable finance aggregate target of ¥20 trillion between fiscal 2019 and fiscal 2030 (of which ¥8 trillion is to be used for environmental finance)
〔Unit: trillion yen〕
    Fiscal 2019 performance Fiscal 2030 target
Environment Renewable energy finance projects,
development of project finances, etc.
0.9 8.0
Green bond underwriting 0.5
Others 0.8
Society Finance for social infrastructure, energizing of local communities, etc. 0.9 12.0
Other Fields spanning both environment and social 0.6
Total 3.7 20.0

Reducing CO2 Emissions Attributable to Our Business Activities

To reduce the environmental burden attributable to our business activities, we are working to assess and reduce the environmental footprints of our operations, such as GHG emissions. Please refer to the following for our recent reduction achievements.

CO2 Emission Intensity Index in Project Finance in the Power Generation Business(*1)

This is calculated with the objective of measuring environmental impacts in the fossil fuel (coal/oil/gas)-burning thermal power generation and renewable energy power generation businesses.
〔Unit:t-CO2/MWh〕
Fiscal 2017 Fiscal 2018 Fiscal 2019 (April~December)
0.410 0.368 0.394
  • *1 Targeting the fossil fuel (coal/petroleum/gas)-burning thermal power generation and renewable energy power generation businesses

Status of Carbon-related Assets(*2)

MUFG is working to assess carbon-related assets associated with its lending portfolio based on the TCFD recommendations.
Proportion of Carbon-related Assets Associated with the Lending Portfolio
  End of March 2019
Energy 3.0%
Utility 3.6%
Total 6.6%
  • *2 Based on the TCFD recommendations, MUFG has categorized the value of lending for the energy and utility sectors other than lending for renewable energy projects as constituting carbon-related assets.
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