Strategy on Climate Change

The SBI Shinsei Bank supports the recommendations of the TCFD (Task Force on Climate-related Financial Disclosures). In line with the TCFD framework, we explain here our initiatives for climate change.

We recognize that responding to climate change is essential for the realization of a sustainable society. Therefore, we designated "response to environmental issues such as climate change" as one of our material sustainability issues. We are striving to create social value through a variety of initiatives, including investment and lending for businesses that are responding to climate change as well as to improve the Group’s corporate value over the medium to long term.

The Group recognizes that addressing global environmental issues, especially climate change, is extremely important for realizing a sustainable society. Climate change is not only a business risk but also a major business opportunity. As a financial institution, the Group believes that providing support to customers developing businesses that contribute to resolving climate change in various ways leads to business opportunities for the Group as well as helps to mitigate climate change.

Based on this perception, the Group supports customers who are helping resolve climate change in both the financial and nonfinancial fields.

In our corporate business, the Sustainable Impact Development Division works with each department to develop and implement sustainable finance as well as provide business support to customers that contribute to resolving climate change. For developing and implementing sustainable finance, we formulated the Shinsei Green Finance Framework and the Shinsei Sustainability Linked Loan Framework, consistent with principles in and outside of Japan, such as the Green Loan Principles and the Sustainability Linked Loan Principles. The Sustainable Impact Assessment Department, part of the Sustainable Impact Development Division, assesses the suitability of the finance within this framework.

Using these sustainable finance products, the Sustainable Impact Assessment Department assessed 20 cases (JPY 77.2 billion in total) in fiscal 2022 that would help to resolve climate change. These include Shinsei Green Loans and Shinsei Sustainability Loans, which specify the use of funds for projects that contribute to creating a positive impact for the environment, and Shinsei Sustainability Linked Loans, which have interest rate preconditions that fluctuate according to the level of achievement of sustainability targets, as well as projects with targets for reducing CO2 emissions. The Sustainability Linked Loan made for Kyushu Leasing Service Co., Ltd. in September 2022 established "the balance of environmental assets contributing to greenhouse gas reduction" as a sustainability target indicator and was a syndicated loan arranged by the SBI Shinsei Bank (“the Bank”), with the participation of six other financial institutions. By setting sustainability target indicators, we can expect a ripple effect for an increase in green assets in the future.

To "achieve sustainability through business activities," one of the core strategies for realizing the MediumTerm Vision for the Group, we developed "initiatives toward the regional revitalization by supporting regional financial institutions, enterprises, residents and local governments." We have also strengthened initiatives in collaboration with regional financial institutions, such as sustainable finance in the form of syndications for renewable energy businesses including solar, wind, and biomass. As part of these initiatives, the Shinsei Sustainability Loan for Fukushima Bank, Ltd. in December 2022 not only provided sustainable financing but also helped establish a system for promoting sustainable financing at Fukushima Bank. A portion of the funds provided by this project was also allocated to renewable energy projects in Fukushima Prefecture, and as a result, this transaction helped to disseminate sustainable finance to regional financial institutions as well as create a flow of funds in the region that contribute to resolving climate change.

In fiscal 2022, we began offering positive impact finance (PIF), a type of financing product intended to create a positive impact in at least one area, as well as assuming effective mitigation and management of significant negative impacts on all three areas: the environment, society, and the economy. Unlike Shinsei Green/Social/Sustainability Finance, the PIF does not specify the use of funds nor is linked with lending preconditions, such as interest rate fluctuations, unlike the Shinsei Sustainability Linked Loan. However, a PIF requires an analysis of the customer’s business as a whole, identifying the core impacts, then holding constructive dialogues to reduce the negative impact as well as increase the positive impact. We aim to create a flow of funds for businesses that contribute to resolving climate change from these various sustainable finance products.

To realize a decarbonized society, we need to keep in mind that not all countries, regions, and businesses are able to work toward decarbonization by themselves, including both the technology and the cost. In addition to businesses already in “green” areas that contribute to decarbonization, it is necessary to promote emission reductions to the highest extent by introducing technologies that are in the transition stage. For this reason, transition finance plays an important role as a inancing tool for customers in hard-to-abate sectors to achieve decarbonization in line with their long-term transition strategy. In transition finance, the key is to assist and promote the steady implementation of a highly reliable transition strategy through dialogues with finance providers, as well as to establish and disclose these strategies. At the same time, we recognize that supporting decarbonization in these sectors is essential, both in our climate-related initiatives and our social responsibility as a financial institution. To support our customers’ transitions, we have formed a cross divisional Transition Taskforce to hold dialogues with our customers. In addition, we are considering strategic transition support that also takes into account business opportunities.

In April 2023, we shaped climate transition finance for JERA Co., Inc., the Bank’s first transition financing case. The Bank arranged a syndicated loan with 9 regional financial institutions. The Bank’s Sustainable Impact Assessment Department reviewed the medium- and long-term transition strategies of this company and assessed their compliance with applicable principles, such as the Climate Transition Finance Handbook, an international guidance. Through dialogues, we will continue to use transition finance to support and promote the steady transition of our customers.

For mitigating climate change centered on reducing emissions, we have found that some customers do not know where to start with emission reductions, while others do not know where to start with calculating their own emissions. For these reasons—aside from continuing to support existing businesses—as well as providing investment and loans to date, we began offering new solutions in the nonfinancial field in fiscal 2022. In addition to cloud service companies that calculate and reduce CO2 emissions, we contracted with several other companies: one that provides software services to reduce disposal losses through sophisticated inventory analyses and the control of defective inventories; and another that provides cloud services for calculating greenhouse gas (GHG) emissions. For customers who have not necessarily made progress in reducing emissions, it is important for them to be aware of the amount of emissions from their own companies and supply chains. Moreover, by providing a way to cut emissions by reducing waste, we have established a system that enables us to provide a range of support services tailored to the phases of climate change-related initiatives and business patterns. In collaboration with these partner companies, we will support our customers’ initiatives to tackle climate change from both the financial and nonfinancial viewpoints.

Climate change risks are mainly classified into physical and transition risks:

Physical risks:

Risks of disasters, etc. caused by climate change. The direct impact of property damage caused by weather events such as floods and storms and the indirect impact from global supply chain disruptions and resource depletion.

Transition risks:

Business and financial risks for companies from transitioning to a decarbonized society.

Carbon-related asset exposure (carbon-related assets in total exposure (energy and utilities, excluding solar and wind power project finance)) accounted for 4.2% in March 2020, 3.7% in March 2021, and 4.4% in March 2022.

We qualitatively assessed climate change risks in sectors that are likely to be affected by climate change. Based on the results of qualitative assessments and the size of exposure, the Group prioritizes each sector and asset type, and delves deeply into the risks through quantitative analysis and other methods.

We have positioned the response to climate change as an important management issue and have organized our worldview, opportunities, and risk scenarios based on economic fluctuations and two-dimensional scenarios that we are monitoring daily (please refer to the following table, Scenario Analysis Matrix). In response to the fact that the world is heading toward a scenario of 2°C or less, we have summarized the state of the Group’s responses.

To identify the investment and lending sectors that will significantly impact the Group for climate change risks, we conduct a risk assessment for each sector— described in the Risk Heatmap, above—and consider the level of importance from the portfolio composition of the Group’s investment and lending. Sectors with high physical risks are focused on real estate (including for individuals), and sectors with high transition risks are focused on electric power utilities, shipping, and the oil and gas industry. For each of these sectors, our policy is to disclose the results of the quantification of physical and transition risks.

Physical risk is quantified as domestic real estate nonrecourse loans, mortgage loans, domestic project finance, and personal unsecured loans from Shinsei Financial. Estimating the impact of physical risks, cumulative credit-related costs through fiscal 2050 are projected cumulatively in the range from ¥5.5 billion to ¥9 billion. Although it is not necessary to take immediate countermeasures at this point, we will continue to monitor and look into expanding the scope of quantification.

For transition risk, we quantified the impact of the shipping sector in addition to electric power utilities and the oil and gas industry, and estimated that there were ¥6.5 billion to ¥28 billion of cumulative credit related costs through fiscal 2050. For the transition to a decarbonized society, we will strengthen engagement with business partners and strengthen our risk management system. We will continue to examine expanding the scope of quantification and proactively engage in investment and lending to projects and businesses that contribute to resolving issues for the transition to a decarbonized society.

In July 2021, the Group established the Responsible Investment and Lending Policy with the aim of upgrading the system for promoting responsible investment and lending. Transactions with partner companies that do not fully consider environmental and social issues is seen as a management risk, and we prohibit or restrict transactions based on the recognition that there are serious risks to the environment and society when investing and lending for certain types of projects.

From the perspective of responding to climate change, based on a precautionary approach, we do not make new investments for the construction of new coal-fired thermal power plants and we are reducing the amount of investment and lending for existing coal-fired thermal power plants.

For creating a positive social impact, the Group is strongly aware of the role of encouraging customers to consider the environment and society as a provider of funds. In April 2020, we adopted the Equator Principles in the belief that this is essential for strengthening the management system for environmental and social risks in project finance and other areas. When lending for projects that involve largescale developments, we review the impact of these projects on the environment and society and make comprehensive decisions based on the Equatorial Principles, in this way fulfilling our social responsibility and enhancing our management of environmental and social risks.

Fiscal 2022 results:

Number of projects financially closed by applying the Equator Principles:10

* Includes one Project Finance Advisory Service (FA) and therefore does not equal the sum of the risk category award outcomes below.

Equator Principles Risk Category Grant Results:

A: 0, B: 8, C: 1

The Group recognizes the importance of financial institutions’ initiatives to address climate change risks in the shipping industry. Reducing GHG emissions is an unavoidable issue for the shipping industry. We understand that it will become more crucial to be aware of the Poseidon Principles and to respond to them in climate change risk for vessel financing.

In March 2021, we signed the Poseidon Principles as the fourth financial institution to do this in Asia. In committing to the Poseidon Principles, as a financial institution that proactively engages in vessel financing, we will provide financial support for transitions to customers and the overall shipping industry as well as manage the climate change risks associated with our businesses.

From now on, we will continue to renew our lending portfolio by strengthening our financing for vessels equipped the latest technologies, such as new/young and dual-fuel vessels. In addition to our customers, we will continue to strengthen our network with stakeholders who support the shipping industry, creating a virtuous circle that seizes opportunities for environmentally friendly vessels and green/transition finance.

In November 2022, the Group announced support for the GX League Basic Concept, a carbon neutral initiative led by the Ministry of Economy, Trade and Industry, and in April 2023 we participated in the GX League. As part of the Group’s initiative to reduce our own GHG emissions, we switched to renewable energy last fiscal year at the Nihonbashi head office and Shinkawa office in Tokyo. In addition, we will continue to work using dialogues to help reduce GHG emissions in the investment and lending sectors.

Investment and lending for renewable energy is an area where the Group has been strong, and we believe it is an important role of financial institutions to provide funds to customers who are working to help resolve environmental and social issues.

• JPY 5 trillion of cumulative origination of sustainable finance by the end of FY2030
• Supporting the transition promotion of corporate customers in high GHG emission sectors

In fiscal 2022, we switched to renewable energy at the Nihonbashi head office and Shinkawa office in Tokyo. Through this initiative, we were able to reduce the greenhouse gas (GHG) emissions of the entire group. Companies in the Group will continue to work together to reduce GHG emissions to reach the Group’s target: "net zero greenhouse gas emissions from the Group’s energy use by the end of FY2030."

For more detailed information on GHG emissions.

• Net zero GHG from the Group’s energy use by the end of FY2030
• Zero loan balance for project finance for coal-fired thermal power generation by the end of FY2040
• Net zero GHG emissions in the Group’s investment and lending portfolio by the end of FY2050