September 24, 2020
(Updated on October 30, 2020)
Evaluating the TCFD Recommendations Disclosures by the Three Japanese Megabanks
~Still Falling Short of Global Best Practices~
Mitsubishi UFJ Financial Group (MUFG), Mizuho Financial Group and Mitsui Sumitomo Financial Group (SMBC) all released their integrated reports and TCFD (Task Force on Climate-Related Financial Disclosures) reports by the middle of October (Note 1). 350.org Japan has evaluated the disclosure status of each of the banks line by line based on each part of the TCFD recommendations (governance, strategy, risk management, metrics and targets) (Note 2). Additionally, as the policies of the corporations are strongly influenced by the will of senior management, 350.org Japan has also compared the CEO Messages in each of the integrated reports. We have also carried out a comparative analysis against the TCFD report of France’s BNP Paribas, one of the most advanced overseas examples available (Note 3). The main points can be summarized as follows.
Underlined: points of improvement from the last reportings Italicized: remaining issues
- 350 Japan awarded scores to the three megabanks and BNP Paribas based on the four parts of the TCFD recommendations (4 areas x 25 points), the CEO’s message (25 points), and the publication of the TCFD report (25 points). Out of the full marks 150 points;
- BNP Paribas Group scored 145 points
- Mizuho Financial Group scored 87.5 points
- SMBC Group scored 72.5 points
- MUFG scored 70.0 points (revised from 42.5 points after its publication of the Sustainability Report in October)
For details of the scoring criteria, please refer to the special website(in Japanese).
- Progress was seen in the content of the disclosures of each of the three megabanks compared to the disclosures of the previous year. In particular, Mizuho Financial Group and SMBC Group published TCFD reports, and demonstrated a willingness to disclose detailed information based on the TCFD recommendations. ( Updated information: MUFG published the Sustainability Report in Japanese on October 16, 2020.)
- CEO Messages: While all three megabanks touched on the issue of dealing with climate change, only Mizuho Financial Group made it clear that it was a main priority. What’s more, none of the banks made any mention of the 1.5 degree warming target or the Paris Agreement (Note 4). By contrast, BNP Paribas made repeated reference to alignment with the Paris Agreement and the 1.5 degree target not only in the CEO Message, but throughout the TCFD report.
(Updated information: MUFG only touched upon the Paris Agreement in the explanation of the Principles for Responsible Banking, in the CEO Message of its Sustainability Report.)
- Governance: Progress has been seen in the disclosures about governance structures by all three banks, and disclosures about supervision by the boards of directors and the responsibilities of the management layer have been done in line with the TCFD recommendations. On the other hand, none of the three banks made clear statements about supervision that would guarantee compliance with the targets of the Paris Agreement.
- Strategy: All three banks showed progress in terms of implementing scenario analyses of transition and physical risks. A broadening of scope in regards to the geography and phenomena considered as physical risks would be expected, as it is currently limited to risks such as water related disasters in Japan. From the point of view of verifiability, more detailed disclosure of the calculations the risk analyses are based on should be expected. In terms of transition risks, energy and electricity sectors are targeted as they are defined as carbon-related assets by the TCFD recommendations, but similar progress is expected (Note 5). Furthermore, the International Energy Agency’s Sustainable Development Scenario (2 degrees scenario) is based on an unrealistic scenario in which the use of CCUS (carbon dioxide capture, utilization and storage) is assumed (Note 6), so the introduction of the internationally mainstream 1.5 degrees scenario is expected. It should be noted that the definition of carbon-related assets by TCFD recommendations excludes renewable energies. However, exposure to biomass energy produced through palm oil, along with agriculture, forestry, and other forms of emissions from land use (including reduction in tropical rainforest), should also be included which are considered problematic from the point of view of environmental damage and greenhouse gas reduction. (Note 7)
- Risk Management: All three banks have classed climate-related risk as a “top risk” and integrated it into the organization’s general risk management. However, compliance with the targets of the Paris Agreement could not be observed in the sector policies that serve as their risk management methodology, leaving this inadequate as a form of risk management. A phasing-out strategy from the coal sector as a whole within a time frame that is compliant with the Paris Agreement (by 2030 for developed countries and by 2040 for the rest of the world) is needed not only in project finance, but also in corporate finance. A strengthening of the policies is also needed in the oil and gas sectors which still remain as sectors that require “special attention”.
- Metrics and Targets: While we welcome the fact that Mizuho Financial Group, SMBC Group, and MUFG have announced targets to reduce credit balance for coal-fired power projects to zero by FY2040 (Note 8), this is limited to project financing for coal-fired power stations. The fact that the provision of corporate finance to the coal sector as a whole is not included, and that this goal is not in line with the targets set out in the Paris Agreement (Note 9), means that a strengthening of targets is required. Carbon-intensive sectors other than coal sectors should also be subject to the same consideration.
It is worth noting that MUFG, for the first time, disclosed the amount of CO2 emissions from its financing targets, even though this is limited to project finance. Going forward, we expect all the three banks to also capture and disclose the emissions of its financing portfolio beyond project finance. Mizuho Financial Group is considering the implementation of SBT (science-based targets), which we await the development of.
350.org Japan campaigner Eri Watanabe said: “We acknowledge some progress seen from all three megabanks in performing disclosures in line with the TCFD recommendations compared to last year. In particular, we welcome the improvement seen from the partial adoption of the NGO’s recommendations in terms of scenario analysis of climate-related risks (transition risks and physical risks) and the establishment of targets to reduce financing for coal-fired power projects to zero. However, we must recognize that large gaps remain in terms of the scope of the scenario analyses and risk management methods for high-risk sectors when compared with one of the best practices disclosed by BNP Paribas. We particularly call on the banks to strengthen their policies on the fossil-fuel sector as a whole in line with the targets of the Paris Agreement, and to design a phasing-out strategy.“
350 Japan Report 2020: Comparing the TCFD Recommendations Disclosures of the Three Megabanks (in Japanese)
Note 1: MUFG published its Sustainability Report (in Japanese) on October 16th after our first release. 350 Japan revised the scoring for MUFG incorporating the new report.
MUFG’s Integrated Report: https://www.mufg.jp/dam/ir/report/annual_report/pdf/ir2020_all.pdf
MUFG’s Sustainability Report (Japanese): https://www.mufg.jp/dam/csr/report/2020/ja_all.pdf
Mizuho FG’s Integrated Report: https://www.mizuho-fg.co.jp/investors/financial/disclosure/pdf/data20d_all/pdf
Mizuho FG’s TCFD Report: https://www.mizuhogroup.com/binaries/content/assets/pdf/mizuhoglobal/sustainability/overview/report/tcfd_report.pdf
SMBC Group’s Integrated Report: https://www.smfg.co.jp/english/gr2020/pdf/2008_ird_e00.pd
SMBC Group’s TCFD Report: https://www.smfg.co.jp/english/sustainability/materiality/environment/climate/pdf/tcfd_report_e.pdf
Note 2: Regarding the analysis, 350 Japan has included its own additional points, based on leading overseas example. This analysis is solely based on information cited in each integrated report and TCFD report, while no evaluation is included regarding the implementation of each line. The analysis also endeavors to place the emphasis on the management of “risks” associated with the climate emergency, rather than on the idea of “opportunities.”
Note 3: BNP Paribas’ TCFD Report: https://group.bnpparibas/uploads/file/bnpparibas_tcfd_report_en.pdf
Note 4: All three megabanks are signatories to the Principles for Responsible Banking (PRB), issued in September of 2019. The PRB signatories commit to aligning their business strategies with the Paris Agreement and the Sustainable Development Goals (SDGs).
Note 5: SMBC’s geographic target of transition risks scenario analysis is global. (Updated information: According to MUFG, their geographic scope of transition risks scenario analysis is also global.)
Note 6: https://www.ieta.org/resources/COP24/Misc%20Media%20Files/Dec6/SE12%20(2).pdf See the Kiko Network’s report (2019) for information(in Japanese) on the problems with CCUS. (https://www.kikonet.org/wp/wp-content/uploads/2019/08/pp-CCUS-f.pdf）
Note 7: According to the IPCC (2019), emissions from agriculture, forestry and other forms of land use make up 23% of total emissions from human activities, with deforestation in tropical regions being singled out as the biggest problem among these. Biomass electricity generation through palm oil as a renewable energy source has also been singled out by NGOs as inappropriate as a renewable energy source from the perspective of its contribution to deforestation and its release of greenhouse gases. http://japan.ran.org/?p=1517(in Japanese)
Note 8: Mizuho Financial Group made an announcement at its 2020 general shareholder’s meeting that it would come in ahead of schedule for this goal in 2040. (Updated information: MUFG announced the same goal in its Sustainability Report in October.)
Note 9: Complete phasing out in developed countries by 2030 and in the rest of the world by 2040. On the basis that power stations will operate for decades after reimbursement, the amount provided in credit to them needs to be reduced to zero much earlier.
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