## Japan’s climate-related risks and policy responses (content unit: 1jpnea2024009)

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### Japan’s climate targets and financing needs
- Japan’s interim target: reduce GHG emissions by 46 percent from 2013 levels until 2030; objective: net-zero GHG emissions by 2050.
- Green Transformation (GX) Promotion Act enacted May 2023 as foundation for net-zero transition.
- Financing required for decarbonization: JPY 150 trillion over 10 years.
  - Of the total, JPY 130 trillion expected from private financing through financial institutions and the remaining from government’s issue of GX Economy Transition Bonds.
- Seven emission intensive sectors account for 80 percent of Japanese GHG emissions.
- Among G7 countries, Japan had the second highest output share from sectors with high emission intensity in 2018.
- Direct emission intensive sectors include mining and quarrying, electricity and gas, and water transport.
- Note: Initial sale of JPY 1.6 trillion of labelled Japan Climate Transition Bonds occurred in February 2024 under the “Japan Climate Transition Bond Framework”.

### Exposure of the financial system and key risks
- Japan is among the largest GHG emitting economies, exposing it to significant transition risk.
- Physical risk profile:
  - Overall exposure categorized as “very high” based on Moody’s 427 dataset assuming no global mitigation policies.
  - Hurricanes and sea level rise: deemed exceedingly high; flood risk: high.
  - Flood-related disasters (storms, floods, landslides) account for over 70 percent of major natural disasters in Japan.
  - Flood damages have been rising.
  - High-level analysis: about one-third of physical assets are at risk of flooding in Japan, with significant variation across prefectures.
  - Despite exposure, overall vulnerability is relatively low because of strong adaptive capacity (IMF climate-driven INFORM indicators, flood control manuals, updates to Expected Flood Inundation Area, 6.3-kilometer underground discharge channel example).
  - Global context cited: global average surface temperatures risen at about 0.76°C per century; annual number of global heavy rain events has increased significantly.
- Financial system risk channels identified by banks and insurers:
  - credit risk, market risk, liquidity risk, operational risk, reputational risk, and litigation risk (distinct category).
- FSAP systemic risk analysis findings:
  - Banks generally resilient to a transition to net zero GHG emissions by 2050 relative to a “current policies” scenario.
  - Banking sector’s exposure to emission intensive sectors is non-negligible and constitutes, on average, about one-fifth of their assets.
  - Heterogeneity: regional banks’ capital positions are affected relatively more than other banks in the sample.
- Insurers:
  - Non-life insurers exposed to increasing claims costs from acute physical risks; life insurers exposed to mortality/hospitalization risks and portfolio losses from investees.
- Opportunities for financial institutions:
  - New investments, reduction in energy costs, potential new insurance products, financing renewable energy, and other transition finance activities (aligned with JPY 150 trillion GX need).

### Government policy, transition finance guidance, and sector roadmaps
- Key commitments:
  - October 2020: carbon neutrality by 2050.
  - April 2021: reduce GHG emissions by 46 percent by 2030 compared to 2013.
  - February 2023: Government announced GX policy to transform industrial and social structures from fossil-based to clean energy.
- GX financing structure:
  - GX proceeds targeted to renewables, nuclear and other non-fossil energy, structural transformation, energy efficiency, R&D on recycling, carbon storage and other decarbonization technologies.
  - Government expects banks, insurers, and other investors to play important funding roles and emphasizes availability and credibility of transition-related information and credible transition plans.
- May 2021 “Basic Guidelines on Climate Transition Finance” (METI, MOE, FSA):
  - Transition Finance must meet four elements:
    - Element 1: issuer transition strategies aligned with the Paris Agreement, intend to transform business toward decarbonization, incorporate ‘just transition’, disclosures aligned with TCFD recommendations or similar.
    - Element 2: initiatives must be core business activities that are environmentally material.
    - Element 3: climate transition strategy must be science-based including targets and pathways.
    - Element 4: implementation transparency: capex and opex set out and quantitative indicators of progress where possible; if not possible, use external certification systems for qualitative assessment.
- METI sector-specific Roadmaps for GHG-intensive sectors: steel, chemicals, cement, pulp and paper, electricity, gas, oil, and automobiles.
- MLIT “Roadmap to Zero Emissions from International Shipping” used as benchmark for transition bond financing offshore wind, ships using ammonia and hydrogen fuel, and other projects.
- Financed Emissions Working Group (October 2023) key messages:
  - Methodologies for financed emissions remain under development; definition of transition finance still evolving.
  - Use definition for financing of hard-to-abate sectors.
  - Recommend disclosing additional financed emissions metrics beyond total financed emissions, including carbon intensity, separation of financed emissions for transition finance/use of proceeds, avoided emissions, portfolio alignment with net zero/Paris, temperature ratings, proportion of financed entities with credible transition strategies, future GHG reduction effects through transition finance, physical metrics (e.g., number of decarbonization projects financed), and decarbonization contribution metrics aligned with GFANZ work.

### Disclosure landscape and scenario analysis
- Disclosure requirements and standards:
  - Companies listed on Tokyo Stock Exchange Prime Market must make disclosures based on or equivalent to TCFD requirements.
  - Since fiscal year ended March 31, 2023, all listed companies required to submit securities reports including sustainability views and initiatives; listed companies expected to address Governance, Strategy, Risk Management and Metrics and Targets and to actively disclose Scope 1 and Scope 2 GHG emissions.
  - SSBJ developing sustainability disclosure standards likely aligned with ISSB Standards S1 and S2; exposure drafts by no later than March 31, 2024, final standards by no later than March 31, 2025.
- TCFD implementation status:
  - Japan has the fourth highest absolute number of companies disclosing TCFD reports (TCFD October 2023 status report).
  - As of February 9, 2024, 1655 companies listed on the Prime Market; more than 4000 companies now required to make climate disclosures.
- Review of TCFD disclosures for nine major financial institutions:
  - Disclosures vary in depth across and within sectors; significant variability in approaches, scenarios and methodologies for quantifying climate risks.
  - Quantified risks appear relevant for long-term profitability rather than immediate solvency risk for the nine institutions reviewed.
- Scenario analysis summaries (selected figures preserved as in source):
  - Banks (acute physical risk reported):
    - Cumulative total: JPY 115.5 billion.
    - Cumulative total: JPY 67-85 billion.
    - Maximum increase if a stress event occurs: Cyclones and floods JPY 90 billion; Wildfires JPY 30 billion; Droughts JPY 1.5 billion.
  - Banks (transition risk reported):
    - Single-year basis JPY 1.5 billion to JPY 28.5 billion.
    - Single year: JPY 2.5 billion to JPY 28 billion.
    - Cumulative increase in credit costs to 2050: Below 2°C: JPY 360 billion; Delayed Transition: JPY 1.17 trillion; Net Zero 2050: JPY 1.65 trillion.
  - Life insurers (acute physical risk examples):
    - Life Insurance Group 1: RPC 2.6 (2oC) – impact on mortality rate JPY 3.5 billion, own property JPY 35 million, asset management JPY 8.1 billion; RPC 8.5 (4oC) – mortality JPY 7 billion, own property JPY 110 million, asset management JPY 10.9 billion.
    - Life Insurance Group 2: Death benefits: JPY 4.5 billion; Hospitalization: JPY 100-200 million.
    - Life Insurance Group 3: Death Benefits (10-year average 450 billion) JPY 1 billion; JPY 5 billion; Hospitalization (10-year average 36 billion) JPY 20 million; JPY 70 million.
  - Life insurers (transition risk examples using CVAR):
    - Life Insurance Group 1: CVAR risks only 1.5oC scenario: JPY -7.8 billion, 2oC scenario JPY -16.7 billion, 4oC scenario JPY -0.2 billion.
    - Life Insurance Group 1: Tech opportunities estimate to outweigh risks.
  - Non-life insurers (acute physical risk reported):
    - Non-Life Insurance Group 1: Losses from typhoons – Intensity +5% to +50% and Frequency -30% to +28%. No yen value provided.
    - Non-Life Insurance Group 2: Frequency change: -30% to +30%. Amount of damage: +10% to +50%. No yen value provided.
    - Non-Life Insurance Group 3: Japan - Intensity (windspeed) +5% to +53%, frequency -30% to +28%; US – Intensity 0% to 37%, frequency -36% to +30%.
  - Non-life insurers (transition risk examples):
    - Non-Life Insurance Group 1: Stocks: 18.2% EBIT at risk in 2030, 27.6% in 2040 and 31.4% in 2050; Corporate bonds: 29.7% EBIT at risk in 2030, 43.8% in 2040 and 49.4% in 2050.
    - Non-Life Insurance Group 2: Domestic equity -0.66% to -54.76%; Foreign equity -0.11% to -3.02%; Domestic Bond -0.04% to -19.62%; Foreign bond -0.01% to -3.67%.
    - Non-Life Insurance Group 3 (NGFS Orderly and Disorderly up to 2050 using Aladdin Climate): Orderly: Equities -7.7%, Corp Bonds -2.4%, CMBS 0%, Gov Bonds 0%, Total -1.5%. Disorderly: Equities -5.6%, Corp Bonds -1.8%, CMBS -0.2%, Gov Bonds -0.4%, Total -1.3%.
- Cross-sector observation:
  - Banking scenario analysis focused mainly on risks; life insurers using MSCI CVAR to quantify opportunities and risks; non-life insurers quantify impacts but often do not attach yen values; variability offers scope for cross-learning and supervisory thematic reviews.

### FSA and BOJ initiatives, pilots, and supervisory practice
- FSA strategic priorities (July 2023−June 2024):
  - Promote sustainable finance by enhancing corporate sustainability disclosure and promoting dialogue between industry and financial institutions toward green transition and impact investment.
- FSA organizational steps:
  - Chief Sustainable Finance Officer appointed; Sustainable Finance Office established in the Strategy and Development Division; Risk Analysis Division, Macro-financial Stability and Data Strategy Office, Major Bank Monitoring Office, and Corporate Accounting and Disclosure Division have specific roles in climate risk analysis and disclosure processing.
  - Disclosure processing: analyzing first reports from approximately 4000 listed companies for years ended 30 March 2023.
  - Capacity challenge: promulgating knowledge to front line supervisors; no strategy yet to equip all supervisors with climate expertise; aim to position experts within supervisory functions.
- BOJ actions:
  - BOJ strategy on climate-change set out in 2021; Climate Coordination Hub created.
  - BOJ Climate-Related Lending Facility:
    - Lending facility for green loans/bonds, sustainability-linked loans/bonds and transition finance; loans against pooled collateral.
    - One-year facility with rollover possible until FY 2030; conducts twice yearly auctions.
    - Interest rate offered is 0.1 percent after the Monetary Policy Meeting during March 18-19, 2024 (previous rate was zero percent).
    - BOJ disbursed JPY 8.2 trillion through this facility as of January 30, 2024.
    - 81 eligible counterparties.
    - BOJ requires banks using the facility to disclose criteria for eligible investments and meet TCFD disclosure requirements; BOJ does not judge eligibility of individual investments.
- Pilot Scenario Analysis (August 2022; BOJ and FSA):
  - Participants: three major banks and three major non-life insurance groups using NGFS scenarios (Net Zero 2050, Delayed Transition, Current Policies).
  - Purpose: learning exercise; not intended as a reliable quantitative assessment.
  - Banks’ results: estimated increase in annual credit costs considerably lower than average annual net income.
  - Non-life insurance focus: acute physical risks (typhoons and floods) using insurers’ own risk models; claims payments increased with intensified scenarios.
  - Findings highlighted sensitivity to model choice, variable selection, and assumptions; value in common scenarios and comparability; need for stochastic analysis and unified risk models (General Insurance Rating Organization of Japan).
  - FY 2024 planned scenario analysis with publication of results approximately a year later and intention to continue scope; recommendation to expand scope to additional banks, non-life insurers, and life insurers.
- FSA experimental analysis for regional banks (49 regional banks data):
  - Components: financed emissions using CO2 inventory (NIES/IPCC guidelines); exposure to engine-related SMEs affected by EV shift; visualization of flood risks using borrower head office addresses and hazard map data.
  - Findings: regional banks’ financed emissions had relatively lower contribution from high-emission industries compared to economy-wide emissions; significant regional differences imply tailored approaches; exercise identified data infrastructure improvements and facilitated dialogues.

### Gaps in guidance and supervisory practice
- Climate Guidance (Supervisory Guidance on Climate-related Risk Management and Client Engagement, July 2022) is discussion-paper style, non-binding, and emphasizes client engagement and business evolution opportunities.
- Identified gaps in Climate Guidance and supervisory frameworks:
  - No elaboration on climate-related responsibilities and reporting lines within three lines of defense.
  - No discussion of assessing climate-related risks during client onboarding, credit assessment or underwriting.
  - No elaboration of the role of risk functions or internal audit for climate risk.
  - Limited linkage of financial risk quantification to internal capital and liquidity assessment processes.
  - No treatment of climate-related risk concentrations at geographic or industry level.
  - Minimal treatment of expectations for risk data aggregation and internal risk reporting practices.
  - No elaboration on credit policy/process expectations to address material climate-related credit risks.
  - No articulation of expectations for assessing/managing climate-related market risks, liquidity risk impacts, or operational risk impacts.
  - Need for more articulation of expectations for underwriting practices of non-life insurers regarding physical, transition and liability risks.
- Observed practice:
  - Major financial institutions are addressing many issues in practice despite gaps in guidance; FSA should set clearer expectations and consider enforceability while maintaining flexibility.

### Key recommendations (selected and preserved)
- Build on the pilot climate scenario analysis, and increase the scope of analysis to additional banks and non-life insurers, as well as extend the exercise to life insurers, and publish the detailed results.
  - Timing: MT
  - Authorities: BOJ and FSA
- Take action to develop supervisory tools and embed climate-related risk issues in supervisory practices in a systematic way.
  - Timing: ST
  - Authorities: FSA
- Consider training needs of supervision staff in relation to climate-related risks and how to best structure internal resources to facilitate knowledge transfer related to climate issues.
  - Timing: ST
  - Authorities: FSA
- Review supervisory requirements and guidance on climate-related risks management and client engagement in consideration of international principles and guidance.
  - Timing: MT
  - Authorities: FSA
- Conduct a thematic cross-sector review of TCFD disclosures with a focus on scenario analysis and publication of a report with recommendations for improvement and greater consistency to assist with the implementation of IFRS S1 and IFRS S2.
  - Timing: ST
  - Authorities: FSA

*This Technical Note has been prepared by Peter Windsor (IMF, Monetary and Capital Markets Department, Financial Supervision and Regulation Division).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Japan’s climate targets and financing needs
- Japan has set an interim target to reduce GHG emissions by 46 percent from 2013 levels until 2030, with an objective of achieving net-zero GHG emissions by 2050.
- The Green Transformation (GX) Promotion Act was enacted in May 2023 and underpins a comprehensive strategy to facilitate the transition to a net zero GHG economy.
- Financing required for decarbonization: JPY 150 trillion over 10 years.
  - Of the total, JPY 130 trillion are expected to come from private financing through financial institutions and the remaining from government’s issue of GX Economy Transition Bonds.
- Seven emission intensive sectors are responsible for 80 percent of Japanese GHG emissions.
- Among G7 countries, Japan had the second highest output share from sectors with high emission intensity in 2018.
- Direct emission intensive sectors include mining and quarrying, electricity and gas, and water transport.

### Exposure of the financial system and key risks
- Japan is among the largest GHG emitting economies, exposing it to significant transition risk.
- Physical risk: Japan’s overall exposure to physical risk is considered as very high due to increasing frequency and severity of natural catastrophes; however, overall vulnerability to physical risks is relatively low because of strong capacity to cope with such risks.
- Banks and insurers have identified transition and physical risks as potential drivers of:
  - credit risk,
  - market risk,
  - liquidity risk,
  - operational risk,
  - reputational risk.
- The climate risk analysis as part of the FSAP systemic risk analysis shows:
  - banks are generally resilient to a transition to net zero GHG emissions by 2050 relative to a “current policies” scenario,
  - the banking sector’s exposure to emission intensive sectors is non-negligible and constitutes, on average, about one-fifth of their assets.
- Opportunities identified by banks and insurers include new investments, reduction in energy costs, and potential new insurance products.
- Litigation risk is acknowledged as a distinct category of climate-related risk.

### Policy, regulatory, and supervisory framework
- The FSA’s approach is informed by overall government policy to promote economic growth through transition opportunities while managing transition risks.
- Relevant government and supervisory initiatives:
  - METI and MOE together with the FSA formulated “Basic Guidelines on Climate Transition Finance” in May 2021.
  - METI has developed Sector-Specific Roadmaps for GHG-intensive sectors (steel, chemicals, cement, pulp and paper, electricity, gas, oil, and automobiles) to provide benchmarks for sectors and financial institutions.
  - The BOJ aims to actively support financial institutions in identifying and managing climate-related financial risks to maintain financial stability and smooth financial intermediation.
- The FSA’s strategic priorities for July 2023−June 2024 include promoting sustainable finance by enhancing corporate sustainability disclosure and promoting dialogue between industry and financial institutions toward the green transition and impact investment.
- The FSA set out Supervisory Guidance on Climate-related Risk Management and Client Engagement (Climate Guidance), intended to be applied in the context of Comprehensive Supervisory Guidelines for major banks and insurers and to frame supervisory discussions.

### Gaps and supervisory practice
- Supervisory discussions with FSA staff revealed:
  - there is yet to be a systematic approach to addressing climate issues in regular supervisory interactions with banks and insurers;
  - climate-related issues are incorporated in supervisory discussions with senior management on an ad hoc basis;
  - promulgating knowledge about climate-related risks and sustainable finance issues to front line supervisors is a challenge.
- The Climate Guidance emphasizes client engagement and assessing opportunities for business evolution of clients, but:
  - some approaches to managing risks are not elaborated;
  - comprehensive guidelines for major banks and insurers lack specificity for climate-related risks.
- The FSA should develop supervisory tools and embed climate-related risk issues in supervisory practices systematically, consider training needs of supervision staff, and structure internal resources to facilitate knowledge transfer related to climate issues.

### Disclosure and scenario analysis
- Japan leads in implementation of climate-related disclosures:
  - Companies listed on the Tokyo Stock Exchange Prime Market, which includes banks and insurers, must make disclosures based on or equivalent to Task Force on Climate-related Financial Disclosures (TCFD) requirements.
  - Since the end of fiscal year 2023, all listed companies have been required to submit securities reports including a description of their views and initiatives on sustainability.
  - Sustainability disclosure standards are being developed by the Sustainability Standards Board of Japan (SSBJ) and will likely be aligned with the International Sustainability Standards Board (ISSB) Standards S1 and S2.
- Review of TCFD reports for three major banks, three major life insurers, and three major non-life insurers found:
  - disclosures vary in depth across and within sectors;
  - significant variability exists in approaches, scenarios and methodologies used to quantify climate risks;
  - quantified risks appear to be relevant for profitability in the long-term rather than a risk to solvency for all nine major financial institutions.
- The BOJ and FSA conducted a pilot climate-risk scenario analysis in 2022 involving three major banks and three major non-life insurance groups using NGFS scenarios.
  - The pilot was a learning exercise and not intended to provide a reliable assessment of quantitative impacts.
  - Recommendation: BOJ and FSA should build on the pilot, increase scope to additional banks and non-life insurers, extend to life insurers, and publish the detailed results.
- The FSA should conduct a thematic cross-sector review of TCFD disclosures with a focus on scenario analysis and publish a report with recommendations for improvement and greater consistency to assist with the implementation of IFRS S1 and IFRS S2.

### Key recommendations (excerpt from Table 1)
- Build on the pilot climate scenario analysis, and increase the scope of analysis to additional banks and non-life insurers, as well as extend the exercise to life insurers, and publish the detailed results.
  - Timing: MT
  - Authorities: BOJ and FSA
- Take action to develop supervisory tools and embed climate-related risk issues in supervisory practices in a systematic way.
  - Timing: ST
  - Authorities: FSA
- Consider training needs of supervision staff in relation to climate-related risks and how to best structure internal resources to facilitate knowledge transfer related to climate issues.
  - Timing: ST
  - Authorities: FSA
- Review supervisory requirements and guidance on climate-related risks management and client engagement in consideration of international principles and guidance.
  - Timing: MT
  - Authorities: FSA
- Conduct a thematic cross-sector review of TCFD disclosures with a focus on scenario analysis and publication of a report with recommendations for improvement and greater consistency to assist with the implementation of IFRS S1 and IFRS S2.
  - Timing: ST
  - Authorities: FSA

*This Technical Note has been prepared by Peter Windsor (IMF, Monetary and Capital Markets Department, Financial Supervision and Regulation Division).*

### 7.      Japan's transition to net zero GHG emissions by 2050 requires the decarbonization of

### 7.      Japan's transition to net zero GHG emissions by 2050 requires the decarbonization of

### Transition risks from decarbonizing high-GHG industrial sectors
- Large-scale enterprises in GHG intensive industrial sectors (for example, steel) have underpinned the Japanese economy for decades; transforming these sectors to achieve carbon neutrality by 2050 requires significant transformation and investment in technology to reduce emissions.
- The Japanese economy will need to mobilize investment through financial institutions in projects and companies that will enable the transition.

### Physical climate risk exposure and impacts
- Japan’s overall exposure to physical risk is categorized as “very high” based on Moody’s 427 dataset assuming no global mitigation policies.
- When assessing individual hazards:
  - Risks associated with hurricanes and sea level rise are deemed exceedingly high.
  - Flood risk is classified as high.
- Flood-related disasters (including storms, floods, and landslides) account for over 70 percent of major natural disasters in Japan.
- Flood damages have been rising in recent years, indicating growing vulnerability.
- The evolution of climate patterns is likely to affect viability of some sectors, such as part of agricultural production.
- Banks’ and insurers’ asset portfolios are exposed to physical risk:
  - Non-life insurers are exposed to increasing claims costs.
  - As non-life insurers respond through higher premiums or reduced underwriting exposure, the increasing cost and decreasing availability of insurance is likely to negatively impact certain geographical areas in Japan.
- Despite high exposure, Japan’s capacity to cope with physical risks is strong:
  - According to the IMF’s climate-driven INFORM risk indicators, Japan is recognized for strong adaptive capabilities.
  - Risk management includes maintenance of high-quality flood control manuals, regular updates to the “Expected Flood Inundation Area” per the Flood Prevention Act, and innovative flood prevention measures (example: a 6.3-kilometer underground discharge channel 50 meters below ground near Tokyo redirecting overflow to the Edogawa River).
- Climate patterns show global context cited:
  - Global average surface temperatures have risen at a rate of about 0.76°C per century.
  - The annual number of global heavy rain events has increased significantly.

### Litigation risk trends
- Climate-related litigation is increasing globally:
  - UNEP reports 2,180 climate-related cases filed in 65 jurisdictions as of December 2022 (compared to 884 cases in 2017 and 1,550 cases in 2020).
  - Of the 1,522 cases reported by UNEP as of December 2022, five were in Japan.
- Notable Japanese case:
  - Citizens’ Committee on the Kobe Coal-Fired Power Plant (CCKCPP) v. Japan (2023): Osaka District Court rejected an injunction to prevent construction/operation of two new coal-fired units; CCKCPP argued inconsistency with Japan’s 2030 and 2050 climate targets. CCKCPP has filed a case against two companies planning the project (Citizens’ Committee on the Kobe Coal-Fired Power Plant v. Kobe Steel Ltd., et al. 2023).
- Financial institutions are recognizing litigation risks in climate disclosures.
- NGFS report notes rapid growth in climate-related litigation in volume, sophistication of legal arguments, and range of entities involved.

### Government commitments and GX policy
- Climate commitments:
  - October 2020: goal announced of achieving carbon neutrality by 2050 in line with the IPCC Special Report Global Warming of 1.5°C.
  - April 2021: goal of reducing GHG emissions by 46 percent by 2030 compared to 2013 levels.
- February 2023: Government announced Green Transformation (GX) policy to transform industrial and social structures from fossil-based to clean energy.
- GX financing needs and structure:
  - GX policy underpinned by the need for JPY 150 trillion of financing over 10 years to achieve decarbonization targets.
  - Expected JPY 20 trillion of that investment will come from the government through the sale of GX Economy Transition Bonds.
  - Proceeds targeted to renewables, nuclear and other non-fossil energy, structural transformation, energy efficiency improvements in key industries, R&D on resource recycling, carbon storage and other decarbonization technologies.
  - The investment may be offered with subsidies and loan guarantees and may supplement financing from financial institutions.
- Government view: banks, insurers, and other investors have an important role to fund the transition; availability and credibility of transition-related information, including thorough transition plans supported by credible pathways, are important for an orderly net-zero transition.
- Note: An initial sale of JPY 1.6 trillion of labelled Japan Climate Transition Bonds occurred in February 2024 under the “Japan Climate Transition Bond Framework”.

### Transition finance guidance and sector roadmaps
- May 2021: METI and MOE together with the FSA formulated “Basic Guidelines on Climate Transition Finance” setting basic requirements for credible transition finance.
  - Transition Finance must meet four elements:
    - Element 1: Issuer must have transition strategies aligned with the goals of the Paris Agreement, intend to transform business toward decarbonization, incorporate ‘just transition’ elements, and have disclosures aligned with TCFD recommendations or similar frameworks.
    - Element 2: Initiatives covered must be core business activities that are environmentally material.
    - Element 3: Climate transition strategy must be science-based including targets and pathways.
    - Element 4: Implementation transparency: capital expenditure and operational expenditure set out and quantitative indicators of progress where possible; if not possible, use external certification systems for qualitative assessment.
- METI sector-specific Roadmaps developed for GHG-intensive sectors: steel, chemicals, cement, pulp and paper, electricity, gas, oil, and automobiles.
  - Roadmaps provide benchmarks, chronological decarbonization technology lists, policy support, emission reduction effects, industry characteristics, and technology prospects.
- MLIT published, with stakeholders, a “Roadmap to Zero Emissions from International Shipping” used as a benchmark and used for issuance of a transition bond financing offshore wind, ships using ammonia and hydrogen fuel, and other projects.

### Financed Emissions Working Group report (October 2023)
- Convened: Financed Emissions Working Group (10 members from internationally active financial institutions) convened by METI, MOE, and FSA in February 2023.
- Report title: “Addressing the Challenges of Financed Emissions” (October 2023).
- Purpose: Address challenges of relying solely on current financed emissions figures in disclosures; propose approaches for financial institutions to comprehensively disclose contributions to decarbonization and demonstrate quantitative and qualitative capabilities for executing medium- to long-term transition.
- Key points on metrics and disclosure approaches:
  - Acknowledge methodologies for financed emissions remain under development and definition of transition finance is still under development.
  - Use definition of transition finance as financing of hard-to-abate sectors where decarbonization options are technologically and economically limited.
  - References international bodies: GFANZ, PCAF, NZBA, WBCSD, SBTi.
- Report advocates disclosure of additional financed emissions metrics beyond total financed emissions, including:
  - carbon intensity
  - separate reporting of financed emissions related to transition finance or ‘the use of proceeds’ approach (separating emissions attributed to transition assets and other emissions on a per financed entity basis)
  - avoided emissions
  - the absolute or proportional amount of a financial institution’s portfolio aligned with net zero targets or the Paris Agreement
  - temperature ratings
  - the amount or proportion of financed entities with credible transition strategies or related projects
  - future GHG reduction effects through transition finance
  - physical metrics (for example, the number of decarbonization-related projects financed)
  - decarbonization contribution based on work currently being done by GFANZ

### FSA and BOJ initiatives, scenario analysis, and regulatory learning exercises
- Pilot Scenario Analysis (August 2022 paper, Box 1):
  - Conducted by BOJ and FSA involving three major banks and three major non-life insurance groups using NGFS scenarios (Net Zero 2050, Delayed Transition, Current Policies).
  - Purpose: learning exercise for FSA, BOJ, and participating institutions; not intended to provide reliable quantitative assessment of climate impacts on the financial system.
  - Banks’ results: estimated increase in annual credit costs was considerably lower than their average annual net income.
  - Findings highlighted sensitivity to model choice, variable selection, and assumptions (client transformation, technology evolution, extent of transition financing required, and pass-through of carbon prices).
  - Exercise demonstrated banks’ capacity to undertake risk analysis based on common scenarios and the value of ensuring comparability through common assumptions.
  - Non-life insurance analysis focused on physical (acute) risks: typhoons and floods; used insurers’ own risk models to measure risk amounts.
- FY 2024 planned scenario analysis:
  - Another scenario analysis exercise planned for FY 2024 with publication of results approximately a year later.
  - Development note: General Insurance Rating Organization of Japan’s risk models will be used as a unified risk modelling tool in the next scenario analysis for non-life insurers.
  - Intention to continue scope of banks and non-life insurance groups; recommendation to expand scope to additional banks, non-life insurers, and life insurers in the medium term and publish detailed results.
- FSA experimental analysis for regional banks (data from 49 regional banks):
  - Three components:
    1. Analysis of financed emissions of regional banks using CO2 gas inventory compiled by NIES based on IPCC guidelines.
    2. Analysis on exposure to engine-related companies that may be affected by shift to electric vehicles (focused on SMEs).
    3. Visualization of flood risks using borrower address information and hazard map data (based on location of head offices, not all plants/offices).
  - Findings:
    - Regional banks’ financed emissions had relatively lower contribution from high-emission industries compared to economy-wide emissions (postulated because large enterprises in high-emission industries are more likely financed by major banks).
    - Significant regional differences imply regional banks should tailor efforts to reduce financed emissions based on individual portfolios rather than uniformly prioritizing high-emitting industries.
  - FSA used the exercise to identify data infrastructure improvements and facilitate dialogues with financial institutions.

### Recommendations
- Recommendation 1: The BOJ and FSA should build on the pilot climate scenario analysis, increase the scope of analysis to additional banks and non-life insurers as well as extending the exercise to life insurers for climate-scenario analysis exercises subsequent to the FY2024 exercise, and publish the detailed results.

*Source: IMF staff chapter on Japan’s climate-related risks and policy responses (content unit: 1jpnea2024009).*

### 2. Other sectors ¬ Analysis using

### 2. Other sectors ¬ Analysis using

### Box 1: FSA and BOJ Pilot Scenario Analysis
- Scenarios based on past disasters with intensified magnitude; did not take into account the impact of future climate change per se.
- Typhoon scenario:
  - Based on Typhoon Vera from 1959.
  - Central pressure in the typhoon system was lowered in several patterns based on future projections.
  - A second route of impact (the Metropolitan route) shifted the typhoon’s impact eastward to hit the Tokyo metropolitan area.
- Flood scenario:
  - Taken from each insurance group’s risk model resembling the Arakawa River flooding scenario with a breach point of the embankment at the 21-kilometer point on the right embankment (Akabane-iwabuchi), used by the Ministry of Land, Infrastructure, Transport and Tourism in its Arakawa river flood assumption.
  - Amount of rainfall and river flow were intensified based on future projections.
- Results and learnings:
  - Overall results were not mentioned for the non-life physical risk scenarios; there are no comparisons to TCFD disclosures.
  - Claims payments increased for typhoons as central pressure dropped and for floods as rainfall and river flow intensified.
  - Increase in projected claim payments was smaller for flooding than the typhoon due to the assumed point of embankment breach and surrounding topography.
  - Results varied due to differences in risk models and differences in assumptions; analysis sampling a specific disaster cannot capture changes in the probability of occurrence of that specific disaster in the future.
  - Stochastic analysis using the same risk model would be desirable.
  - The FSA stated it would promote discussions about using risk models owned by the General Insurance Rating Organization of Japan for scenario analysis to remove model differences and upgrade to stochastic analysis.
  - The FSA and BOJ will continue dialogue with financial institutions about methods and practical application of scenario analysis; a further scenario analysis exercise is planned to be launched within the next year.

### BOJ Climate-Related Lending Facility and Disclosure Requirements
- Facility features:
  - Lending facility for banks for green loans/bonds or sustainability-linked loans/bonds and transition finance.
  - Provides loans against pooled collateral.
  - One-year facility with rollover possible until FY 2030.
  - Conducts twice yearly auctions.
  - Interest rate offered is 0.1 percent after the Monetary Policy Meeting during March 18-19, 2024 (the previous rate was zero percent).
  - BOJ disbursed JPY 8.2 trillion through this facility as of January 30, 2024.
  - There are 81 eligible counterparties for the facility.
- Taxonomy and eligibility:
  - The BOJ does not have a taxonomy for green loans/bonds, sustainability-linked loans/bonds or transition finance.
  - BOJ relies on banks’ own definitions based on international standards or the Japanese government’s guidelines.
  - BOJ requires banks to disclose criteria determining which investments or loans can be used for the operation to provide market discipline.
  - BOJ requires banks using the facility to meet the TCFD disclosure requirements.
  - The BOJ does not judge eligibility of individual investments or loans nor get directly involved in how the funds are used; it selects financial institutions that organizationally engage in investment or loans to address climate change under appropriate governance.

### Research and Regional Bank Activity
- BOJ research:
  - Bank of Japan Review article published in March 2022 assessed physical risks from climate change faced by Japan’s financial institutions.
  - Empirical analysis found the indirect effect of flooding damage on the real economy, land prices, and financial condition of financial institutions has not been sizable to date, but future increases in flood damage could have a non-negligible impact on real GDP and financial conditions.
  - Article highlighted uncertainty of physical risks depending on pace of decarbonization, interactions between global average temperature increase and frequency/scale of disaster, and subsequent impact on the real economy.
- Regional and Shinkin banks (Annex to Financial System Report, June 2023):
  - Regional banks increasingly offer financial and non-financial services to support client firms addressing climate change, creating new profit opportunities and reducing banks’ own climate-related financial risks.
  - About 70-80 percent of regional banks focus on fostering awareness among client firms through non-financial services (seminars, SDG management support, SDG declarations, evaluation services).
  - More than 20 percent of all SMEs plan to measure their GHG emissions within the next few years; regional banks provide emissions measurement services and consulting.
  - More than 70 percent of regional banks are making efforts in this direction.

### Vulnerability Findings (FSAP risk analysis and TCFD disclosures)
- Banks’ exposure:
  - Banking sector’s exposure to emission intensive sectors is non-negligible and constitutes, on average, about one-fifth of their assets.
  - Banks generally appear resilient to a transition to net zero GHG emissions by 2050 relative to a “current policies” scenario.
  - Heterogeneity exists: capital positions of regional banks in the sample are affected relatively more than of other banks.
- Physical assets at risk:
  - High-level analysis shows that about one-third of physical assets are at risk of flooding in Japan, with significant variation across prefectures.
  - Future damage rate expected to increase notably in some regions.
  - Available climate adaptation indicators suggest Japan has a strong capacity to cope with extreme weather events.
- Caveat:
  - Long-time horizon of physical and transition risk analysis creates significant uncertainties.

### A. Physical Risk: Banks and Insurers
- Banks:
  - Physical risk can lead to increasing credit risk, market risk, liquidity risk, operational risk, and reputational risk.
  - Examples:
    - Credit risk: deterioration in clients’ financial performance or impairment of collateral assets due to natural disasters.
    - Market risk: declines in strategic holdings of stocks of clients due to deterioration from natural catastrophes.
    - Liquidity risk: deposit withdrawals due to impact of natural catastrophes.
    - Operational risk: business interruption from damage to headquarters or branches and recovery costs.
    - Reputational risk: customers’ inability to access services for extended periods.
- Non-life insurers:
  - Identify both acute and chronic physical risks.
  - Acute physical risk: growing frequency and severity of catastrophic climate-related events such as typhoons and floods.
  - Chronic physical risk: rise in temperature affecting weather patterns (increasing droughts and heat waves), rising sea levels, increasing infectious diseases.
  - These changes may lead to issues in estimating claims costs and premium rates.
- Life insurers:
  - Increasing claims and benefits due to heatstroke and infectious diseases; rising temperatures may lead to increasing deaths (increase in mortality rates) and hospitalizations.
  - Investment portfolios exposed to acute and chronic physical risks via potential losses at investee companies from natural catastrophes and extreme weather fluctuations.

### B. Transition Risk: Banks and Insurers
- Banks:
  - Transition risk can drive credit risk, market risk, liquidity risk, and operational risk.
  - Credit risk increases from deteriorating client business performance due to decarbonization costs or declining revenues.
  - Market risk increases from declining value of strategic holdings tied to affected clients.
  - Liquidity risk linked to reputational harm from perceived inaction or declines in credit ratings and increased outflows to clients needing to invest in decarbonization.
  - Operational risk may increase due to litigation.
- Insurers:
  - Transition risk mainly affects investment portfolios through increasing market and credit risks.
  - Examples: policies and regulations causing loss of value of invested assets; price volatility from technological innovations; changes in consumer behavior.
  - Reputational damage if insurers’ efforts are perceived as inadequate.

### C. Litigation Risk
- Banks:
  - Litigation identified as a potential source of increasing operational risk from stakeholders filing lawsuits due to inaction on climate change or failure to comply with regulations.
- Insurers:
  - Non-life insurers exposed to litigation risk through liability insurance portfolios (Property Owner’s Liability Insurance, Directors and Officer’s Liability Insurance).
  - Insured companies and directors may face lawsuits for failure to take action on climate issues.
  - One non-life insurer identified climate litigation as a medium likelihood, medium impact risk to its investment portfolio.
  - One major life insurer identified litigation as a source of increasing operational risk similar to major banks.

### D. Opportunities
- Banks:
  - Increased demand for capital investment as net zero initiatives accelerate; transition finance and sustainable finance seen as business opportunities.
  - Financing renewable energy businesses cited as a new opportunity.
  - Supported by the Japanese government’s GX policy that identifies the need for JPY 150 trillion of public and private investment over ten years to achieve decarbonization targets.
- Life insurers:
  - Opportunities for investments and loans contributing to resolving climate change (e.g., renewable energy).
  - Opportunities from reduced operating costs via infrastructure with higher resource efficiency.
  - Potential in investments in companies with competitiveness from low-carbon technologies and products/services facing increased demand.
  - Potential growing demand for new insurance products and services for customers experiencing economic anxiety due to climate impacts.
- Non-life insurers:
  - Opportunities from new products and services, consulting services related to decarbonization and disaster prevention.
  - Potential for new markets and rapidly growing industries addressing decarbonization.
  - Cost reductions from more efficient use of resources, energy efficient buildings, and low-cost renewable energy.
- Methodology and scenario analysis:
  - Particularly life insurers are using the MSCI Climate Value-at-Risk (CVAR) methodology for scenario analysis to incorporate opportunities as well as risks.
  - MSCI CVAR is evolving; at least one life insurer mentions significant revisions in its 2023 TCFD report.

### Regulatory and Supervisory Responses
- FSA role and priorities:
  - Supervision and regulation of climate-related risks anchored on existing powers at the FSA, the integrated regulator of financial services including banking and insurance.
  - FSA conducts both prudential oversight and business conduct regulation and supervision.
  - FSA’s strategic priorities for July 2023-June 2024 include promoting sustainable finance by enhancing corporate sustainability disclosure and promoting dialogue between industry and financial institutions toward green transition and impact investment, within the broad strategic priority of ‘Build the Financial System for Achieving Economic Growth and Resolving Social Issues’.
  - FSA view: managing risks from climate change within the financial sector requires addressing vulnerabilities in the real economy and financing the transition of clients and investees toward decarbonization.
- BOJ strategy and coordination:
  - The BOJ set out its strategy on climate-change in 2021.
  - BOJ aims to actively support financial institutions in identifying and managing climate-related financial risks to maintain financial system stability and smooth financial intermediation, including through on-site examinations and off-site monitoring.
  - BOJ created the Climate Coordination Hub (CCH) as an internal network to promote information sharing and coordination on climate measures.

*Source: IMF staff summary of chapter "2. Other sectors ¬ Analysis using" from the provided Japan FSAP content.*

### 43.      An example of the BOJ’s  research to assist banks in identifying climate-related

### 1jpnea2024009 - 43.      An example of the BOJ’s  research to assist banks in identifying climate-related

### BOJ top-down scenario analysis (December 2023)
- Paper title: Top-Down Scenario Analysis of Climate-Related Financial Risks: Perspective from Time Horizon and Inter-Industry Spillovers.
- Time horizon used: 5 years.
- Scenarios examined:
  - Smooth adjustment case (firms adjust to carbon price increases smoothly).
  - Slow adjustment case (firms adjust to carbon price increases slowly).
  - Inter-industry spillovers were explicitly examined.
- Key findings:
  - The degree of firm adjustments to higher carbon prices had substantial effects on the credit cost ratios of banks.
  - Carbon price increases impact directly affected sectors and also other sectors through inter-industry linkages.
  - Regional banks with small exposures to sectors directly impacted by higher carbon prices may still need to pay close attention to transition risk through inter-industry exposures.
- References included in source text:
  - https://www.boj.or.jp/en/about/release_2021/rel210716b.htm.
  - https://www.boj.or.jp/en/research/brp/ron_2023/data/ron231221a.pdf.

### Supervisory resources, capacity, and organization (FSA)
- Organizational changes:
  - The FSA has appointed a Chief Sustainable Finance Officer.
  - A Sustainable Finance Office was established within the Strategy and Development Division and acts as a hub for sustainable finance matters.
  - The Sustainable Finance Office has been bolstered through hiring experts external to the FSA and ongoing organic development of staff.
- Roles and offices:
  - Risk Analysis Division: key role in assessing climate-related risks.
  - Macro-financial Stability and Data Strategy Office: responsible for conducting scenario analysis and has been working with the BOJ to develop climate scenario analysis.
  - Major Bank Monitoring Office: conducts analysis and discussions with major banks about climate-related issues.
  - Policy and Markets Bureau / Corporate Accounting and Disclosure Division: engages with sustainable finance disclosures and the Sustainability Standards Board of Japan; developed requirements for mandatory sustainability-related information in annual securities reports based on the TCFD pillars from FY 2022.
- Disclosure processing:
  - The division was analyzing the first reports from approximately 4000 listed companies in Japan received in relation to years ended 30 March 2023.
- Capacity and training:
  - Promulgating knowledge to front line supervisors is a challenge; Climate Guidance was released in 2022.
  - No intention for all supervisors to be equipped with climate-related expertise; aim is to put experts within supervisory functions in the Risk Monitoring Office and Supervisory Bureau.
  - The FSA has ambition to enhance expertise and knowledge but has no specific strategy to achieve that objective at this stage.
- Supervisory practice:
  - No systematic approach yet to addressing climate issues in regular supervisory interactions with banks and insurers; discussions incorporate climate-related issues on an ad hoc basis.
- Recommendations:
  - Recommendation 2: The FSA should take action to develop supervisory tools and embed climate-related risk issues in supervisory practices in a systematic way.
  - Recommendation 3: The FSA should consider training needs of supervision staff in relation to climate-related risks and how to best structure internal resources to facilitate knowledge transfer related to climate issues.

### Supervisory approach, tools, and technique
- Climate Guidance:
  - Title: Supervisory Guidance on Climate-related Risk Management and Client Engagement (Climate Guidance).
  - Published: July 2022.
  - Approach: Replace checklists with engagement; issue discussion papers to present concepts, approaches and principles as references for dialogue with financial institutions.
  - Intended nature: Discussion paper format, non-binding, ready to hear comments from banking and insurance sectors.
- Comprehensive guidelines:
  - Comprehensive Guidelines for the Supervision of Major Banks set out supervisory principles and apply not only to Major Banks but also to other similar entities.
  - Comprehensive Guidelines for Supervision for Insurance Companies serve as a manual for FSA employees conducting inspection and supervision of insurance companies.
- BOJ supervisory practice:
  - BOJ conducts on-site examinations and off-site monitoring; discussions with board members and committee chairs cover strategy, risk management and internal control; in-depth discussions on efforts addressing climate-related financial risks and engagement with corporate customers for decarbonization.

### Supervisory expectations on management of climate-related risks
- Board and management expectations:
  - Boards of directors and management must understand profit opportunities and risks from climate change for both institutions and clients.
  - Emphasis on banks and insurers working with clients in developing and investing in solutions to decarbonization.
  - Managing risks includes encouraging clients to decarbonize or minimize GHG emissions.
  - Alignment with Japanese government desire for financial institutions to continue supporting GHG intensive industries in the transition period to 2050 when net zero should be achieved across the Japanese economy.
- Business strategy and planning:
  - Financial institutions’ management strategies must incorporate strategies to increase business resilience against climate change and contribute to achieving GHG neutrality by supporting clients’ responses.
  - Evidence required: an implemented business plan including specific targets, evaluation indicators and achievement deadlines based on strategies for responding to climate change.
  - Progress must be tracked through disclosure and reporting involving responsibilities of customers, shareholders, creditors, and relevant authorities.
- Scenario analysis and forward-looking assessment:
  - Financial institutions must be able to identify and assess opportunities and risks in a forward-looking manner.
  - Institutions must develop scenario analysis of climate-related risks to build strategies.
- Client support expectations:
  - Financial institutions expected to support clients’ and investees’ responses to climate change, accumulating knowledge of climate change impacts and using that knowledge to support clients.
  - Direct support examples: providing consulting and solution delivery services; supplying financing to support decarbonization steps.
  - Indirect support examples: area-wide support such as mapping strategies for linked suppliers in a region; supporting community-wide initiatives involving local governments and research institutes.
- Gaps identified in the Climate Guidance (areas needing enhancement):
  - No elaboration on how climate-related risks should be addressed in the three lines of defense in internal control frameworks; no identification of climate-related responsibilities and reporting lines.
  - No discussion of assessing climate-related risks during client onboarding, credit assessment or underwriting processes.
  - No elaboration of the role of the risk function or internal audit in assessing climate-related risks.
  - Limited linkage of financial risk identification/quantification to internal capital and liquidity assessment processes; Climate Guidance’s Section III - 3(2) does not clearly link to internal capital and liquidity processes except a footnote reference to non-life IAIGs’ ORSA.
  - No coverage of how to address climate-related risks in risk appetite and risk management frameworks; lack of treatment of climate-related risk concentrations at geographic or industry sector level.
  - Minimal treatment of expectations for risk data aggregation and internal risk reporting practices (Section III-1); acquisition of necessary data noted as an issue but not expanded.
  - No elaboration of expectations regarding credit policies and processes to address material climate-related credit risks, including identification, measurement, evaluation, monitoring, reporting, and control/mitigation of climate-related credit risk drivers.
  - No articulation of expectations regarding assessment and management of climate-related market risks; life insurers and banks need understanding of transition and physical risk impacts in investment portfolios and pricing/availability of hedges under different pathways, particularly disorderly transition.
  - No address of liquidity risk impacts from climate-related drivers; examples include non-life insurers’ liquidity risk from increasing incidence and severity of natural catastrophes, potential drawdowns on lines of credit, accelerated deposit withdrawals, and impacts on assets used as sources of liquidity.
  - Operational risk impacts from climate-related drivers are not specifically addressed.
  - Need for more articulation of expectations on incorporating climate-related issues in underwriting practices of non-life insurers, including physical, transition and liability risks.
- Observed practice vs guidance:
  - Major financial institutions are addressing many issues raised in paragraphs 59–67 in practice (noted for largest banks, life insurers and non-life insurers), despite those issues not being covered in the Climate Guidance.
  - Importance of voluntary advances in practice noted, but the FSA should set out expectations clearly and in an enforceable way if necessary, while maintaining flexibility for diverse institutions.
- Recommendation:
  - Recommendation 4: The FSA should review supervisory requirements and guidance on climate-related risk management and client engagement in consideration of international principles and guidance.

### Practice by financial institutions (overview)
- Basis: Observations from TCFD disclosure of the three major banks, three major life insurers and three major non-life insurers; focuses on development and disclosure of climate targets and transition plans and incorporation of climate-related risks into risk management, capital management and liquidity risk monitoring.
- Banks (major observations):
  - All three major banks have made commitments to carbon neutrality with specific interim targets.
  - All three banks committed to carbon neutrality by 2050 with separate declarations for GHG emissions from their own operations along with progress towards that target.
  - All three banks have reported progress in reducing financed emissions from high emission sectors.
  - Two of the three major banks have developed and disclosed transition plans at the time of writing this Technical Note.
  - Governance:
    - All three major banks have set out their approach to governance of climate-related risks and opportunities.
    - Governance structures include specific committees (e.g., a sustainability committee) and roles of other committees charged with reviewing specific risks such as credit risk.
    - All three major banks have created a full-time Chief Sustainability Officer role within the governance structure.
  - Liquidity risk:
    - Banks acknowledge a possible impact on liquidity risk from climate-related drivers based on their disclosures.
    - They consider climate-related drivers of liquidity risk to be of low materiality; this assessment is not explained or quantified.
  - Integration into traditional risk management:
    - All three banks have outlined an approach to incorporating climate-related drivers into management of traditional financial risks.
    - Major banks are still evolving considerations; impact on capital management is described at a high level without clear practical examples or quantified impacts.

*Source: JAPAN — International Monetary Fund Technical Note (excerpts provided).*

### 76.      The three major life insurers shown in Table 4 have announced commitments to

### The three major life insurers shown in Table 4 have announced commitments to carbon neutrality by 2050.

### Life insurers: commitments, governance, and risk management
- Commitments:
  - The three major life insurers shown in Table 4 have announced commitments to carbon neutrality by 2050.
  - These commitments include interim targets.
  - However only one of the three major life insurers has set out a detailed transition plan.
- Governance:
  - The three major insurers shown in Table 4 have set out their approach to governance of climate-related risks and opportunities.
  - Their governance disclosures are not as extensive as those for the banks.
  - Specific committees have been established and climate-related risks are issues for risk management committees to consider.
  - Two of the three major life insurers have appointed Chief Sustainability Officers.
- Risk management disclosures:
  - Risk management disclosures indicate that climate change is seen as a key risk by the three major life insurers.
  - Risk management disclosures are quite summarized and high level.
  - It is therefore not possible to understand how life insurers view climate-related risks in relation to capital and risk management.

### Non-life insurers: commitments, governance, and risk management
- Commitments:
  - All three major non-life insurers (see Table 5) have committed to net zero GHG emissions by 2050.
  - However, they have not formulated and disclosed transition plans for achieving this commitment.
- Governance:
  - The major non-life insurers have set out governance related to climate opportunities and risks.
  - They have appointed Chief Sustainability Officers and have set up sustainability committees.
  - Roles for risk management committees and ultimate oversight of the board of directors are set out.
- Risk management disclosures:
  - Major non-life insurers provided a high-level overview of how climate-related risks are included in their risk management frameworks.
  - It is not clear what the links are to capital and liquidity management.
  - The major non-life insurers have all identified litigation risk in their underwriting portfolios as potential sources of material risk.

### Disclosure landscape and regulatory developments
- Tokyo Stock Exchange Prime Market:
  - Companies listed on the Tokyo Stock Exchange Prime Market (which includes banks and insurers) must make disclosures based on or equivalent to TCFD requirements.
  - The Tokyo Stock Exchange’s Corporate Governance Code was updated in June 2021 to include the stipulation on TCFD disclosures.
  - As of February 9, 2024, there were 1655 companies listed on the Prime Market.
  - Mutual insurers are also voluntarily making TCFD disclosures so the major banks, major non-life insurers and major life insurers are all making TCFD disclosures.
- TCFD implementation status:
  - According to the TCFD’s October 2023 status report’s analysis of implementation by region, Japan has the fourth highest absolute number of companies disclosing TCFD reports.
  - The Asia Pacific region has the highest percentage of TCFD supporters in the world largely driven by supporters in Japan.
- Securities reporting requirement:
  - Since the fiscal year ended March 31, 2023, all listed companies have been required to submit securities reports including a description of their views and initiatives on sustainability.
  - More than 4000 companies are now required to make climate disclosures including many smaller insurers and banks.
  - Listed companies must address the four pillars of TCFD disclosures: Governance, Strategy, Risk Management and Metrics and Targets.
  - Listed companies are expected to actively disclose Scope 1 and Scope 2 GHG emissions.
- Sustainability standards development:
  - Sustainability disclosure standards are currently being developed by the SSBJ which will likely be aligned with the ISSB Standards S1 and S2.
  - The SSBJ is an independent standard setter within the organizational structure of the Financial Accounting Standards Foundation.
  - The SSBJ has committed to issuing exposure drafts of its standards by no later than March 31, 2024, and issuing final standards by no later than March 31, 2025.
  - The mandatory effective date of the standards is yet to be determined.
- MOE practical guidance:
  - The MOE released a practical guide for scenario analysis for banks: first version March 2019, update in March 2022.
  - The guide sets out the sequence from risk identification to quantitative assessment and provides case examples obtained through a pilot program in cooperation with three regional banks.

### Scenario analysis: variability across sectors and key quantitative findings
- General observations:
  - TCFD disclosures vary in depth across sectors and within sectors.
  - The three major banks generally have more depth to their TCFD disclosures than the insurers.
  - Non-life insurers appear to have the least detail in their TCFD disclosures.
  - TCFD disclosures reveal significant variability in approaches, scenarios and methodologies used to quantify climate risks.
  - Only one bank is considering chronic physical risk; the other financial institutions represented in the three tables only consider acute physical risk.
  - Mutual insurers are implementing TCFD on a voluntary basis.
- Bank scenario analysis (Table 2 summary in text):
  - Acute physical risk results reported include:
    - Cumulative total: JPY 115.5 billion.
    - Cumulative total: JPY 67-85 billion.
    - Maximum increase if a stress event occurs: Cyclones and floods JPY 90 billion; Wildfires JPY 30 billion; Droughts JPY 1.5 billion.
  - Transition risk results reported include:
    - Single-year basis JPY 1.5 billion to JPY 28.5 billion.
    - Single year: JPY 2.5 billion to JPY 28 billion.
    - Cumulative increase in credit costs to 2050: Below 2°C: JPY 360 billion; Delayed Transition: JPY 1.17 trillion; Net Zero 2050: JPY 1.65 trillion.
- Life insurance scenario analysis (Table 4 summary):
  - Acute physical risk results reported:
    - Life Insurance Group 1: RPC 2.6 (2oC) – impact on mortality rate JPY 3.5 billion, own property JPY 35 million, asset management JPY 8.1 billion; RPC 8.5 (4oC) – impact on mortality rate JPY 7 billion, own property JPY 110 million, asset management JPY 10.9 billion.
    - Life Insurance Group 2: Death benefits: JPY 4.5 billion; Hospitalization: JPY 100-200 million.
    - Life Insurance Group 3: Death Benefits (10-year average 450 billion) JPY 1 billion; JPY 5 billion; Hospitalization (10-year average 36 billion) JPY 20 million; JPY 70 million.
  - Transition risk results reported:
    - Life Insurance Group 1: CVAR risks only 1.5oC scenario: JPY -7.8 billion, 2oC scenario JPY -16.7 billion, 4oC scenario JPY -0.2 billion.
    - Life Insurance Group 1: Tech opportunities estimate to outweigh risks.
    - Life Insurance Group 2: Policy risk opportunities and physical risk netted - CVAR 1.5oC Orderly 19.5%; 1.5oC Disorderly 21.8%; 3oC Orderly 21.2%.
    - Life Insurance Group 3: No figures given but indication that technological opportunities do not outweigh physical and transition risks.
- Non-life insurance scenario analysis (Table 5 summary):
  - Acute physical risk results reported:
    - Non-Life Insurance Group 1: Losses from typhoons – Intensity +5% to +50% and Frequency -30% to +28%. No yen value provided.
    - Non-Life Insurance Group 2: Frequency change: -30% to +30%. Amount of damage: +10% to +50%. No yen value provided.
    - Non-Life Insurance Group 3: Japan - Intensity (windspeed) +5% to +53%, frequency -30% to +28%; US – Intensity 0% to 37%, frequency -36% to +30%.
  - Transition risk results reported:
    - Non-Life Insurance Group 1: High Scenario results: Stocks: 18.2% EBIT at risk in 2030, 27.6% in 2040 and 31.4% in 2050; Corporate bonds: 29.7% EBIT at risk in 2030, 43.8% in 2040 and 49.4% in 2050.
    - Non-Life Insurance Group 2: Domestic equity -0.66% to -54.76%; Foreign equity: -0.11% to -3.02%; Domestic Bond: -0.04% to -19.62%; Foreign bond -0.01% to -3.67%.
    - Non-Life Insurance Group 3 (NGFS Orderly and Disorderly up to 2050 using Aladdin Climate): Orderly: Equities -7.7%, Corp Bonds -2.4%, CMBS 0%, Gov Bonds 0%, Total -1.5%. Disorderly: Equities -5.6%, Corp Bonds -1.8%, CMBS -0.2%, Gov Bonds -0.4%, Total -1.3%.
- Cross-sector lessons:
  - Non-life insurance sector describes quantitative impacts but does not yet attach yen value to those impacts.
  - Life insurance sector is using the CVAR to attempt to quantify both the opportunities and risks from transition.
  - Banking sector scenario analysis appears to be focused on risks only.
  - These differences provide opportunity for Japanese banks and insurers to learn from each other and further develop approaches to quantifying climate risk that may converge over time.
  - The FSA could play a significant role in accelerating learning by conducting analysis of scenario analysis methodologies and other aspects of TCFD disclosures across all four TCFD pillars.

### Recommendations and supervisory actions
- Supervisory review and thematic work:
  - TCFD reports issued by major banks and insurers are reviewed and there are discussions in relation to the development of scenario analysis.
  - The supervisory review of TCFD reports could be more systematic.
  - It would be useful for the FSA to conduct an analysis across each sector and also a comparison among sectors.
  - The FSA should conduct a thematic cross-sector review of TCFD disclosures with a focus on scenario analysis and publish a report with recommendations for improvement and greater consistency to assist with the implementation of IFRS S1 and IFRS S2. (Recommendation 5)
- Suggested FSA activities:
  - Conduct a thematic cross-sector review of TCFD disclosures with a focus on scenario analysis.
  - Publish a report with recommendations for improvement and greater consistency to assist with the implementation of IFRS S1 and IFRS S2.
  - Conduct analysis of not only scenario analysis methodologies but also other aspects of TCFD disclosures by banks and insurers across all four TCFD pillars.

*Source: IMF staff analysis of TCFD disclosures and related text (paragraphs 76–91).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1jpnea2024009.pdf_