Climate-Related Risk Assessment and Scenario Analysis

Impact Analysis of Climate Change-Related Risk

The risks of climate change can be divided into transition risks and physical risks.

Transition risk refers to the risk that occurs in transitioning to a society with low greenhouse gas emissions (a low-carbon society). For example, the introduction of a carbon tax levied on greenhouse gas emissions could lead to a negative financial impact on investees and borrowers that have high emissions. This in turn could result in credit costs for financial institutions.

Physical risks are risks of intensification or increase in extreme weather events due to climate change or from long-term changes in climate patterns. Physical risks can be classified further into acute risks, such as increased flooding or other extreme weather events, and chronic risks, such as the agricultural impact of prolonged high temperatures.

Climate Change Risks Recognized by the Bank

Risk	Classification	Major Risks	Time Frame
Transition Risk	Government Policy, Legal, Technology,	Increase in credit costs due to the impact of regulatory measures aimed at achieving the 1.5°C target on the business models and performance of investees and borrowers Increased in credit costs due to changes in the supply-demand relationship for goods and services and corporate performance as markets become more focused on decarbonization	Mediumm to long term
	Policy	Changes in regulations in response to growing international concern regarding climate change	Short term
	Reputation	Risk of inadequate climate change efforts and information disclosure from the perspective of external parties	Short term
Physical Risk	Acute	Downturn resulting from stagnating investees’ and borrowers’ businesses due to natural disasters such as typhoons and torrential rains, as well as increasing credit costs resulting from damage to collateral value of real estate and other assets	Short, Medium, and Long Term
	Chronic	Risk that climate change will affect land use, productivity of primary industries,etc. Impact on business continuity due to damage to the Bank's assets caused by extreme weather

Climate Change-Related Risk Assessment by Sector

The impact of climate change will become even more apparent over the medium- to long-term, and will vary depending on the sector in which our investees and borrowers operate. Therefore, we evaluated where and when transition and physical risks would occur in the targeting sectors and other areas defined by the TCFD recommendations.
The occurrence of risks associated with climate change is caused by various external factors, environments, and spillover channels. We created the table below after identifying these risks and factors. The table shows (in chronological order) the impact of these risks on the sectors in which the Bank has most financial exposure. Our analysis also reflects the effects of climate change occurring at different times according to region, geographic conditions, and legal regulations. As one example, transition risks in the EU are expected to occur early due to environmental regulations being adopted ahead of the rest of the world.

Transition Risk Assessment^*1

Physical Risk Assessment^*1

• *1 Transition risks are assessed based on a 2°C scenario in which policy measures mitigate climate change, while physical risks are assessed based on a 4°C scenario in which global warming advances.

Impact Analysis of Climate Change-Related Risk (Scenario Analysis)

We conduct scenario analyses to understand the impact of climate-related risks on our credit Step 2 Step 3 portfolio and finances.

Transition Risk Scenario Analysis

We selected target sectors for our transition risk scenario analysis of based on our assessments depicted on the above chart. These sectors include the high-risk sectors of power and oil-gas-coal, as well as the food and agriculture and beverages sectors, which form the food and agricultural value chains. Through scenario analysis for these sectors in fiscal 2020, we evaluated medium- and long-term changes in credit costs caused by the progress of decarbonization. In fiscal 2022, we began working to upgrade our analysis of these sectors, expanding our scope of analysis for the chemical sector.
Scenarios analyzed include the Net Zero2050 scenario published by the Network of Financial Authorities on Climate Change Risk Network of Central Banks and Supervisors for Greening the Financial System (NGFS), as well as scenarios published by the leading International Energy Agency (IEA) and the Food and Agriculture Organization of the United Nations (FAO).
Our analysis was based on the method published by the pilot project led by the United Nations Environment Program Finance Initiative (UNEP FI) with the objective of discussing and developing methods for climate-related financial information disclosure in the banking industry.

Transiti Risk Scenario Analysis Overview

Analysis Target	Selection Scenario	Complementary Scenario
Energy (Electricity, Oil-Gas- Coal)	NGFS Current Policies Delayed Transition Net Zero 2050	IEA World Energy Outlook 2021ーSDS、STEPS SDS stands for Sustainable Development Scenario STEPS stands for Stated Policies Scenario
Food and agriculture, beverages		FAO Food and agriculture projections to 2050－TSS, BAU TSS stands for Towards Sustainability Scenario BAU stands for Business As Usual
Chemicals		IEA Energy Technology Perspectives 2022ーSTEP、SSDS IEA Ammonia Technology Roadmap October 2021 ーSTEPS、SDS

Six-Way Scenario Analysis

About the NGFS Scenario Used in Analysis

• Our transition risk scenario analysis adopts version 2 of the NGFS scenario published in 2021. Of the three NGFS models, we analyze scenarios using the values of the REMIND-MAgPIE model. These values were also used in the Pilot Scenario Analysis Exercise on Climate-Related Risks Based on Common Scenarios by the Financial Services Agency and the Bank of Japan, the results of which were published in August 2022.

Overview of NGFS Scenarios Analyzed

	NetZero 2050	Delayed Transition	Current Policies
Overview	Limits rise in global temperatures to 1.5°C through strict climate policies and technological innovation, reaching net zero CO₂ emissions by 2050	Assumes annual CO₂ emissions will not decrease until 2030, followed by strict policies	Assumes that only current policies will be retained
Rise in temperature (by 2100)	Less than 1.5℃	Approx. 1.8℃	Approx. 3℃

• Each NGFS scenario analyzes from different forecasted perspectives. The Net Zero 2050 scenario assumes that countries implement immediate, strict climate change policies and regulations, thereby reducing corporate CO₂ emissions. On the other hand, the Current Policies scenario assumes that CO₂ emissions will not be curbed, while the Delayed Transition scenario assumes rapid decline in CO₂ emissions starting in 2030 after implementation of strict measures and policies.
• A carbon price refer to the price assigned to CO₂ emitted from companies and others entities. Each scenario assumes that governments would impose taxes on carbon based on the amount of CO₂ emitted. For example, Japan introduced a restrictive carbon tax to address global warming, which the Current Policies scenario assumes will be maintained. While tax per ton of CO₂ emissions is assumed to be limited, the Net Zero 2050 and Delayed Transition scenarios assume significant introductions of carbon tax. The Bank assumes the introduction of a carbon tax in our scenario analysis, and we reflect impacts on corporate earnings and other factors in the analysis results.
• The Net Zero 2050 and Delayed Transition scenarios aim for carbon neutrality by 2050. In these scenarios, solar power, wind power, and other renewable energy sources serve as the main energy sources to reduce CO₂ emissions. At the same time, power generation that emits large amounts of CO₂ using coal and natural gas is reduced in these scenarios.

CO2 emissions (Japan)

Carbon pricing (Japan)

Power generation capacity under the Net Zero 2050 Scenario (Japan)

Transition Risk Scenario Analysis Results

• Electricity and Oil-Gas-Coal Sectors
  In every scenario, greater demand for renewable energy and stricter regulations on carbon emissions in various countries would result in stranded fossil fuels and reduced market demand. Business whose profits depend on fossil fuel prices will likely see declining performance. On the other hand, companies that view renewable energy as a climate change opportunity tend to increase revenues through capital investment.
• Food and Agriculture and Beverages Sectors
  In every scenario, the global demand for food will increase due to global population growth and other factors. This demand will lead to increased production and increased profits for companies engaged in global business activities. On the other hand, companies whose operations are limited to a specific region may see revenues increase or decrease depending on the characteristics of the region (changes in food culture, population increase or decrease, etc.), and the results of the analysis are mixed.
• Chemicals Sector
  Results varied depending on the chemical products manufactured and the region in which the company operates. The Delayed Transition Scenario toward decarbonization and the Net Zero 2050 scenario resulted in slower economic growth. These scenarios revealed relatively lower demand for each chemical product compared to the Current Policies Scenario, with the exception of certain products. On the other hand, demand for hydrogen and ammonia as fuels that do not emit CO2 directly is likely to increase. Demand for functional chemical products used as battery materials is also likely to increase with the wider adoption of electric vehicles; however, price shifts to products should be limited in nature.
• Impact on Credit Portfolio
  The total impact of transition risk in the three aforementioned sectors could increase the cost of credit by between 3 billion yen to 22 billion yen per year through the year 2050 (the range is the difference between the Dynamic and Static approaches). The impact on our credit portfolio would be limited.

Using Analysis Results
Based on the results of the transition risk analysis, we initiated dialogue on climate change initiatives with our investees and borrowers in sectors where we identified a relatively large impact. By sharing an awareness of the issues with our investees and borrowers, we will strengthen our efforts to address climate change together and work toward creating a lowcarbon and decarbonized society.

Scenario Analysis for Physical Risk Related to Climate Change (Acute Risk)

We analyzed acute risk related to flood damage, which has caused significant problems in recent years. In addition to key global locations of domestic and overseas borrowers and real estate collateral pledged to the Bank, we included the assets of Bank Group locations (buildings and equipment) in the analysis.
Our acute risk scenario analysis indicated a cumulative additional loss of about 23 billion yen (sum of credit costs and damage to the Norinchukin Bank Group assets) through the year 2100. The impact of additional losses would appear to be limited. See the Appendix for details.

Physical Risk (Acute Risk) and Scenario Analysis Overview

Physical Risk (Acute Risk) Analysis Overview

Subject of Analysis	(1) Key domestic and overseas locations of borrowers expected to be affected by flooding (2) Real estate collateral pledged to the Bank (3) Assets at the Bank Group domestic and overseas locations (buildings and fixtures)
Not Subjected to Analysis	Industries where flood damage is not expected (e.g., advertising, publishing, finance, etc.)
Analysis Scenario	IPCC RCP2.6 and RCP8.5
Measurement Results	Cumulative additional losses of approximately ¥23 billion through the year 2100 (credit costs plus damage to Bank Group assets)

Using analysis results

For this analysis, we extended the scope of scenario analysis measurement to identify the additional cumulative losses through the year 2100 for which we must prepare. We will consider analyzing and measuring the impact of hazards other than flooding associated with physical risks. These analyses will take the supply chain into account, utilizing the information related to the borrower's key domestic and overseas locations surveyed in this analysis.
In addition, we plan to practice operational risk management for the high-risk assets owned by the Norinchukin Bank Group. We intend to engage our borrowers appropriately and work with them to step up their efforts in addressing climate change.

Physical Risk (Chronic Risk) Analysis

The Norinchukin Bank is committed to achieving Net Zero by 2050 across our investees and borrowers. In conjunction, we pursue an increase in the income of farmers, fishermen and foresters as a 2030 medium- to long-term goal in support of sustainable agriculture, fishery and forestry industries and local communities. Given that the agriculture, fishery and forestry industries are vulnerable to the effects of climate change, we endeavor to analyze the impact of climate change on the incomes of participants in these industries.
For chronic risk, we selected agriculture and fisheries as sectors to analyze. These industries are important to the Bank, which serves the agriculture, fishery and forestry industries. We chose rice cultivation, livestock production (raw milk and beef cattle), and ocean fisheries (bonito) as target commodities to analyze. Our analyses addressed the impact of climate change, including increases in air and ocean surface temperatures, on producer and fisher income, as well as adaptive measures.
This analysis estimated the change in revenue as of the end of the 21st century compared to the end of the 20th century in two scenarios: (1) one in which no measures are taken to adapt to rising temperatures and (2) one in which measures are taken to adapt to rising temperatures. We adopted the IPCC RCP 2.6 and RCP 8.5 scenarios (“2°C increase” and “4°C increase,” respectively) for analysis, conducting a total of four analyses.

Analysis method: Rate of change in production volume + Rate of change in product prices = Rate of change in revenue

The following provides a summary of the results of chronic risk analysis for the agricultural sector. The results indicate a decline in income due to the effects of climate change. However, it may be possible to achieve flat income levels through adaptive measures.

	Scenario	Production Volumes	Price	Income Without Adaptive Measures	Income Introduction of Adaptative Measures
Rice Crop	4°C rise	-6.4%	+1.4%	-5.0%	+3.5%
	2°C rise	+3.3%	-1.6%	+1.7%	‐
Raw Milk	4°C rise	-1.1%	+0.9%	-0.1%	±0.0%
	2°C rise	-0.2%	+0.2%	±0.0%	‐
Beef Cattle	4°C rise	-1.2%	+0.6%	-0.6%	±0.0%
	2°C rise	-0.3%	+0.2%	-0.2%	‐

The following provides a summary of the results of chronic risk analysis for the fisheries sector. The results indicate regional variances in income due to the effects of climate change. However, it may be possible to limit income declines through adaptive measures.

	Scenario	Production Volumes	Price	Income Without Adaptive Measures	Income Introduction of Adaptative Measures
Ocean fishing (bonito)	4°C rise	-9.2% ～+4.7%	-0.6% ～+1.3%	-8.0% ～+4.0%	-7.6% ～+4.0%
	2°C rise	-9.2% ～+9.5%	-1.2% ～+1.3%	-8.0% ～+8.1%	-6.1% ～+4.0%

Our analysis includes several assumptions and hypotheses due to the many limitations in scenario analysis models for the agriculture and fisheries sectors. These limitations include 1) a lack of available methodologies established globally, 2) incomplete data, and 3) diversified and complicated impact channels. Note that impacts may differ from the actual impact on agriculture and fisheries management, as our analysis targets revenue, not income (i.e., the amount after deducting expenses, etc., from revenue).