Addressing Climate-related Risks and Opportunities (Strategy)
The Group has identified “contributing to the creation of a green society in which economy, society, and environment are in harmony” as a material issue that must be addressed to achieve our Purpose. To address this priority issue, in our Medium-term Management Plan, which started in FY2021, we identified three actions – adaptation, mitigation, and contribution to societal transformation – as part of the SOMPO Climate Action plan that takes a composite approach to climate-related risks and opportunities, and we are now in the process of executing various related initiatives.
Climate-related risks and opportunities
In addition to physical risks such as the increased severity and frequency of natural disasters, droughts, and chronically rising sea levels due to climate change, transition risks may arise as a result of changes in industrial structures and markets brought about by strengthening of laws and regulations and development of new technologies for the transition to a carbon-free society that could affect corporate finances and reputations. These risks are accompanied by an increasing number of climate change lawsuits globally, particularly in the US, that seek to hold companies legally liable for the impact of climate change resulting from their business activities, investments in highly carbon-intensive businesses, and improper disclosure. Such lawsuits may increase liability insurance payouts in our P&C insurance business (liability risk). On the other hand, the growing societal awareness of natural disaster risks and changes in may bring business opportunities such as the creation of new service demands and technological innovations.
We have identified the risks and opportunities that climate change poses to our business based on the results of studies conducted by external organizations such as the Intergovernmental Panel on Climate Change (IPCC) and the World Economic Forum, and we are assessing, analyzing, and responding to such risks and opportunities on a short-, medium- (5-10 years: around 2030), and long-term (10-30 years: around 2050) time horizon. The main environmental changes associated with physical and transition risks due to climate change, as well as risks and opportunities that are expected to have a significant impact on the Group, are shown in the table below.
1. Physical risks
The Group’s P&C insurance business could be financially affected by higher-than-expected insurance payouts due to the increased severity and frequency of natural disasters, including typhoons, floods, and storm surges. In 2018, we started working with universities and other research institutions to quantitatively grasp risks based on scientific findings. Based on large-scale analysis using weather and climate big data, such as the Database for Policy Decision-making for Future Climate Change (d4PDF)*1, we are working to evaluate the long-term impacts in climate scenarios of 2°C and 4°C global warming with respect to changes in the average trends for storm surges affected by typhoons, floods and sea level changes and trends in the occurrence of extreme weather events. We are also examining the medium-term impacts over the next five to ten years to incorporate the information into our business strategies.
The Group is a member of the TCFD insurance working group of the United Nations Environment Programme Finance Initiative (UNEP FI) and estimates the impact related to typhoons using a quantitative model*2 based on the guidance issued by the working group in January 2021. We will continue our analysis using the scenario analysis framework being developed by the Network for Greening the Financial System (NGFS), which works on financial regulatory responses to climate change risks.
|Frequency of typhoons
||approx. -30% to +30%
|Amount of damage per typhoon
||approx. +10% to +50%
We are also analyzing the impact of climate change on natural disasters outside Japan, including US hurricanes and floods, through partnerships with external risk modeling companies and research institutions. We have developed our own scenarios and are working to apply them to our risk model for natural disasters outside Japan.
P&C insurance policies and reinsurance policies are mostly short-term contracts, and the risk of higher-than-expected claim payments can be controlled by revising underwriting conditions and reinsurance policies based on trends in the occurrence of extreme weather events. We also strive to ensure resilience to physical risks through a multifaceted approach that includes decentralizing functions globally, quantitative modeling based on short- and medium-term climate forecasts, and identifying and assessing material risks using long-term scenario analysis.
2. Transition risks
We have analyzed the impact of transition risks on assets held by the Group (Japanese equity, Japanese bond, foreign equity, and foreign bond) using the Climate Value-at-Risk (CVaR)*3 model provided by MSCI, based on scenarios in which global warming by the end of this century are limited to 1.5°C, 2°C, or 3°C above pre-industrial levels. We focused on the impact of policy risks associated with the transition to a low-carbon global economy and the impact of technological opportunities from climate change mitigation and adaptation initiatives.
- One method to measure the impact on corporate value associated with climate change-related policy changes and disasters
- Future costs and profits associated with climate-related risks and opportunities are translated into the current valuation in this approach. We calculated the impact as of the end of March 2021, taking into account the market price weight of each stock in our portfolio.
Sompo Holdings: CVaR Analysis of Transition Risks and Opportunities by Global Warming Scenario
- Policy Risk:
Figures calculated for each level of Scope 1, 2, and 3 for the cost required to achieve the GHG reduction targets.
- Technology opportunity:
Figures calculated for the potential business opportunities created by environment-related technologies owned by companies against the backdrop of the transition to a low-carbon economy.
- Transition risk and opportunity:
Sum of policy risks and technology opportunities
Source: Prepared by Sompo Holdings
using MSCI Climate Value-at-Risk
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As outlined above, the overall impact of policy risks is limited as it is offset by that of technological opportunities. By scenario, the impact of policy risks and technological opportunities under the 1.5°C scenario is the largest, and by asset holdings, the impact on Japanese equities is the largest.
Initiatives to enhance resilience
1. Responding to risks
The Group is working to enhance corporate resilience to social change by providing green transition support to insurance client and investment portfolio companies, while at the same time working to mitigate transition risks by managing asset management portfolios and taking other measures.
We are promoting green transition to investment portfolio companies by strengthening engagement with the top 20 greenhouse gas (GHG) emitting companies among our equity holdings. We have set a target of reducing GHG emissions in our investment portfolio by 25% by 2025 (compared to FY2019, based on total GHG emissions of equity and bonds) by promoting a switch from high GHG emitting sectors to low emitting sectors when public and corporate bonds reach maturity in order to reduce transition risks and capture opportunities.
In addition, we promote the transition through our insurance of and investments in renewable energy and other innovative green technologies.
We will not underwrite new insurance or make new investments in or loans for new or existing coal power plants or thermal coal mine projects (*1). We also will not underwrite new insurance or make new investments in or loans for oil and gas extraction projects in the oil sands or the Arctic National Wildlife Refuge (ANWR).
We will not insure or make investments or loans to companies whose primary business is coal (*2), or oil and gas extraction projects in the ANWR, unless they establish a GHG reduction plan by January 2025 (*3) .
- We may carefully consider and respond to cases where there are innovative technologies such as Carbon Dioxide Capture, Utilization, and Storage (CCS, CCUS), carbon recycling, ammonia co-firing, or other innovative technologies in palace that are expected to reduce GHG emissions and contribute to the realization of the Paris Agreement.
- Defined as companies that derive at least 30% of their revenues from coal-fired power generation, thermal coal mines, or oil sands, or electric utilities companies that generate at least 30% of their energy from coal.
- We will not apply restrictions to insurance that supports the health and wellbeing of individuals, e.g. workers' compensation insurance.
Policy for ESG-related Underwriting, Investment and Loan
We have also set a target of reducing our own GHG emissions by 60% by 2030, compared to FY2017. In FY2021, we steadily implemented initiatives in line with the roadmap to achieve this target, including switching to renewable energy as a source of electricity at Sompo Japan's head office building.
2. Responding to opportunities
The Group is working to enhance natural disaster resilience through our products and services, including contributing to a stable food supply through the global roll-out of agricultural insurance through the AgriSompo platform, developing and providing climate risk consulting services, and developing AI-based disaster preparedness and mitigation systems.
In terms of energy sources, we are rolling out products and services that contribute to the spread of renewable energy, such as ONE SOMPO WIND (an insurance and risk management service for offshore wind power companies), while developing new products and services in collaboration with our business partners that contribute to carbon neutrality.
Various organizations and groups around the world are actively discussing the formulation of regulations and guidance to realize a net-zero society. By proactively participating in and leading these rulemaking efforts, the Group will not only contribute to social transformation but also seek to create and expand business opportunities for the Group, such as attracting partners by accumulating knowledge and enhancing our reputation through these efforts.
Participating net-zero related initiatives:
- PCAF Insured-Associated Emissions Working Group (working group to develop international standards to measure and disclose GHG emissions through insurance underwriting)
- Net-Zero Insurance Alliance (NZIA)
- Net Zero Asset Owner Alliance (NZAOA)
- Net Zero Asset Managers initiative (NZAM)