Response to Recommendations of the Task Force on Climate-related Financial Disclosures

 

The Sompo Group supports the Task Force on Climate-related Financial Disclosures and is involved in a various initiatives to address climate change and to be highly transparent in our information disclosure.

Management Structure (Governance)

Based on SOMPO’s Purpose (With “A Theme Park for Security, Health and Wellbeing,” create a society in which every person can live a healthy, prosperous and happy life in one’s own way), we have identified “contributing to a greener society where the economy, society and environment are in harmony” as one of our material issues for achieving our Purpose. Sompo has established a system under which executive officers and vice presidents implement measures based on Group-wide strategies and policies to realize SOMPO’s Purpose and the Board of Directors supervises the implementation of these measures.

The Group Chief Sustainability Officer (CSuO) is responsible for formulating and implementing strategies related to the Group’s sustainable management, including climate change, and overseeing the Group’s overall sustainability function. We have established a dedicated Sustainable Management Office, and have built a system to promote climate change measures and other sustainability initiatives for the entire group.

The Group Sustainable Management Committee, which is comprised of executive officers from each Group company, disseminates sustainability strategies and policies, including those related to climate change, and also monitors the progress of each company’s initiatives, particularly with regard to potential business opportunities.

Climate change strategies and their implementation are discussed by the Global Executive Committee (Global ExCo) and the Managerial Administrative Committee (MAC), and discussions are reported to the Board of Directors.

The Group has established a risk control system to manage risks based on the Sompo Group Basic ERM Policy established by the Board of Directors. Through the Group ERM Committee, a subcommittee of the Global ExCo, the Group Chief Risk Officer (CRO) comprehensively identifies and evaluates the risks to each business, designates risks that may have a significant impact on the Group as material risks, and periodically reports the state of risk management to the MAC and the Board of Directors to verify its effectiveness. The Group CSuO and Group CRO are responsible for implementing countermeasures against material risks, such as the severity of natural disasters that may be impacted by climate change, the impact on asset prices due to the transition to a carbon-free society, and changes in consumer preferences.

Note: Meetings held in FY2021 (number of times climate change-related agenda items were addressed is shown in parentheses) Global ExCo (2), MAC (5), Group Sustainable Management Committee (3), Group ERM Committee (2)

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.

Scenario analysis

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.

Estimate results
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.

*1Database of climate simulations developed by Japan’s Ministry of Education, Culture, Sports, Science and Technology’s Program for Risk Information on Climate Change. By using a number of ensemble simulations, future changes in extreme events such as typhoons and heavy rains can be evaluated stochastically and with greater accuracy. The results will enable more reliable assessments of the impact on society of natural catastrophes caused by climate change.

*2Model that captures changes in the frequency and wind speed of typhoons between now and 2050 based on the RCP8.5 scenario used in the IPCC Fifth Assessment Report (AR5), and calculates changes in the amount of damage caused.

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.

*3

  • 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

Certain information ©2021 MSCI ESG Research LLC. Reproduced by permission

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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) .

  1. 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.
  2. 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.
  3. 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)

Risk Management

In order to realize the Group's Management Philosophy and Purpose and the goals in the Management Plan, we have established a risk appetite framework by clarifying “risks to be taken” and “risks to be avoided”, so as to increase the certainty of achieving them. For natural catastrophe risk, we clarify risk appetites and quantitatively assess the insurance claim payments expected in the event of a natural catastrophe based on scientific knowledge such as meteorology and the characteristics of our products. We then formulate and manage reinsurance policies and Group-wide risk retention strategies based on the impact on financial soundness, profitability and profit stability, as well as trends in the reinsurance market.

Climate change related risks are controlled through a multifaceted approach within the risk control system framework of our Enterprise Risk Management (ERM) that involves material risk management, capital adequacy management, stress testing, risk limit management, and liquidity risk management.

Climate change risk framework (risk identification, assessment and management)

Climate change can impact various aspects of the Group's business, including our non-insurance business, and the impacts are long-term and highly uncertain. To manage climate change risks, including the risks associated with natural disasters, we have developed a climate change risk framework to complement our existing risk control system and to identify, assess, and manage risks by taking an in-depth look at scenarios in which the Group is affected through various pathways in the long-term.

In order to capture the complex impacts of climate change, the climate change risk framework uses the following three steps to assess and organize the risks and opportunities described in section (2) Addressing Climate-related Risks and Opportunities (Strategies).

In 2022, positioned as an exploratory assessment, we conducted a risk assessment assuming possible policy transition patterns (see table below) based on the research results of external organizations, such as the IPCC and the World Economic Forum, and visualized them as a climate change risk map.

A. Moderate transition Global warming has intensified, causing heat waves over large areas, resulting in severe food crises and water shortages. Mortality rates have also risen due to frequent and severe natural disasters. Political instability has led to regional conflicts, the proliferation of terrorism, and an increase in the number of refugees.
B. Immediate and significant transition The rapid promotion of decarbonization policies has caused a steep rise in fossil fuel prices, and has had significant negative impact on G7 economies, including industrial hollowing out and rapid inflation.
C. Countries transition at different speeds Geopolitical and economic friction and disparities between countries have increased as countries and regions proceed with policy and technological transitions at different speeds.

The climate change risk map visualizes risks that require continuous monitoring and will stimulate discussions on climate change in the Board of Directors and other executive bodies by providing a bird's eye view of the impact, likelihood, timing of occurrence, and trends of risks that will primarily affect insurance underwriting and asset management.

Integration with existing risk management frameworks

The risk perception captured by the climate change risk framework is reflected in the main assumed scenarios relating to material risks for management, while “Biodiversity”, an event that interacts with climate change, is investigated and studied as an emerging risk. (See table below).

Climate-related material risks and their main scenarios
Material risk/Emerging risk Main scenarios related to climate change
Climate change (physical risks) Increased payments in fire and other insurance lines and reinsurance costs due to more severe and more frequent typhoons and hurricanes.
Climate change (transition risks) Tighter policies, laws and regulations for decarbonization, and price volatility of equity and bonds due to technological innovations
Business interruption Prolonged interruption of critical operations, loss of human life, etc. due to large-scale natural disasters and other events that exceed the assumed scenarios
Pandemics Increased occurrence of serious new infectious disease pandemics due to deforestation and thawing of permafrost
Biodiversity Destruction of ecosystems due to climate change and other factors will damage biodiversity and adversely affect the growth of agricultural crops

We will also incorporate the knowledge gained through the climate change risk framework into our existing risk control system framework that involves capital management, stress testing, risk limit management, and liquidity risk management, thereby enhancing the overall sophistication of our risk management.

Metrics and Targets

Main metrics

GHG emissions Total GHG emissions (FY2021)
Category Total Emissions
Scope 1, 2 and 3 (excluding investments and loans)
[unit: t-CO2e]
228,051
Total GHG emissions at investees *(FY2020)
Category Equity Bonds
Scope 3 (investments and loans)
[unit: t-CO2e]
948,530 906,207
Weighted Average Carbon Intensity (WACI) at investees *(FY2020)
Category Equity Bonds
Scope 3 (investments and loans)
[unit: t-CO2e/ million US dollars]
100.58 133.77
Renewable energy introduction rate End of FY2021: less than 2.2%
Other environmental metrics Electricity consumption (FY2021): 280.37 million kWh Paper consumption (FY2021): 5,771 tons
  • Calculated for Scope 1 and Scope 2 in Japanese and foreign listed stocks and bond investees using data provided by MSCI ESG Research (listed stock coverage rate: 93%, bond coverage rate: 84%, both based on market value). GHG emissions are our share of emissions based on investees' Enterprise Value Including Cash (EVIC), and WACI is the weighted average of each investee's GHG emissions per unit sales, according to the holding percentage for that investee in our portfolio.

Main targets

GHG reduction targets
Category Target Achievement Timing
Scope 1, 2 and 3 (including investments and loans) Net zero emission FY 2050
Scope 1, 2 and 3 (excluding investments and loans) 60% (Compared toFY2017 levels) FY 2030
Scope 3 (investments and loans) 25% (Compared to FY2019 levels) FY 2025
Renewable energy introduction rate - 2030 target: 70% or more
- 2050 target: 100%

Leadership to Address Climate Change

Leadership through Various Initiatives

It is important that many stakeholders work collaboratively to address the challenges of climate change. As climate action is being discussed in numerous initiatives both in Japan and the world, we are making an effort to show leadership in such initiatives. Here we introduce some of our major activities.

Participation in CDP (Climate Change) and Support for TCFD

The CDP is a set of collaborative initiatives by the world’s institutional investors. It encourages businesses worldwide to adopt climate change strategies and disclose their GHG emissions. Sompo Japan has been a member since 2005 as an institutional investor. As a responding company, Sompo Holdings selected for the Climate A List as the highest rank in a CDP Climate Change for the fifth times.
Following the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations Report published in June 2017, the Group declared support for TCFD and started participating in the TCFD insurance working group of the United Nations Environment Programme-Finance Initiative (UNEP-FI) to develop TCFD disclosure for the insurance sector.

Paris Agreement: Participation in Initiatives to Achieve 2℃ Target

In 2017, we took part in an initiative led by the Ministry of the Environment, Japan aiming to set Science Based Targets (SBT). In 2018, we submitted a letter of commitment to the SBTi (international initiative that certifies companies that set ambitious targets consistent with the Paris Agreement) and declared our participation in the drafting of financial sector guidance*. In fiscal year 2018, we set new mid- to long-term GHG emission reduction targets for 2030 and 2050 in line with the levels recommended by the SBTi.

  • Guidance on SBT for the financial sector is currently being developed thus it is not yet possible for financial institutions to be certified by SBTi. (As of July 2018)

In July 2018, the Japan Climate Initiative network was established to enhance information dissemination and the exchange of opinions among corporations, local governments, and civil society organizations actively taking measures to combat climate change. We endorse the purpose of this initiative and are participating as a founding member.

Caring for Climate

Caring for Climate is an initiative established by the United Nations Global Compact (UN GC), the United Nations Environment Programme (UNEP), and the United Nations Framework Convention on Climate Change (UNFCCC) to advance the role of business in addressing climate change. Masao Seki, Senior Advisor on CSR at Sompo Japan, is a member of the steering committee.

The Conference of the Parties (COP)

In November 2016, the 22nd Session of the Conference of the Parties (COP22) to the United Nations Framework Convention on Climate Change was held in Marrakesh, Sompo Japan, spoke at a session of a side event organized by Japan’s Ministry of the Environment, focusing on Japanese corporations’ efforts for climate resilience. The company also participated in a High-Level Meeting on Climate Change organized by Caring for Climate during COP22, as a steering committee member. In November 2017, at a side event organized by the Japan International cooperation Agency (JICA) at the COP23 held in Bonn, Germany, Sompo Risk Management gave a presentation on Private Sector Perspective on Agricultural Insurance.

In November 2018, Masaya Futamiya, Director Chairman of Sompo Japan participated in Global Business and Biodiversity Forum held in advance of COP 14 and gave a presentation on the revision of Declaration of Biodiversity by Keidanren and a progress status of the “mainstreaming of biodiversity” in the Japanese business sector as a Chairman of Keidanren Committee on Nature Conservation. He also held dialogs with representatives from organizations that have a great effect on promoting global nature conservation.