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Initiatives for the environment Addressing climate change

We regard environmental issues, including climate change, as important management challenges, and in June 2019, we declared our support for the TCFD recommendations. We strive for transparent disclosure of each of “Governance,” “Strategy,” “Risk Management,” and “Numerical Targets and Goals,” items included in the TCFD recommendations for disclosure.

Governance

The Group has established the Sustainability Promotion Committee, chaired by the President and Representative Director and reporting to the Board of Directors and the Group Management Council. Every three months, the Sustainability Promotion Committee meets to receive reports and discuss action plans and other important matters pertaining to environmental challenges, including climate change. The results of these activities are then reflected in the Group’s management strategy and risk management. In December 2020, we formulated the Environmental Policy, establishing a system in which the status of our environmental efforts, including for climate change, is regularly reported to the Board of Directors, in order for the Board of Directors to supervise efforts against climate change.
In addition, our Sustainability Management Office and the Sustainability Promotion Office of Higo Bank and Kagoshima Bank worked together to resolve environmental issues, including climate change, and managed progress, and reported on its progress to the management.

[Climate Change Initiatives]

Participation in initiatives		Establishment of internal policies
June 2019	Support for TCFD recommendations	July 2019	Establishment of Guideline for Investments and Loans
		December 2020	Establishment of Environmental Policy
		April 2021	Establishment of CO2 reduction targets
		February 2022	Establishment of Sustainable Investment and Loan Policy
March 2022	Endorsement of the GX League Basic Concept
May 2022	Membership in PCAF
April 2023	Participation in the GX League	March 2023	Carbon Neutrality Declaration

Strategies

(1) Risks and opportunities

The Group is aware that risks resulting from climate change will have effects on its business operation, strategies, and financial plans.While simultaneously taking action in risk management related to the climate utilizing scenario analyses, etc., we consider customer investments and loans toward reduction of greenhouse gas emissions and improvement of energy efficiency (sustainable finance,transition finance) in the interest of achieving a decarbonized society as a business opportunity. To that end, we will actively develop financial initiatives aimed at mitigating environmental burden.

(2) Transition plan development

As a regional comprehensive financial group that plays an important role in realizing a decarbonized society in the region, we have declared to achieve carbon neutrality by FY2030 under Scope 1 and 2 (calculation scope: the Company and subsidiaries wholly owned by the Company).
Going forward, we will formulate a transition plan to achieve carbon neutrality.
In addition, since May 2022, we have joined the international initiative, Partnership for Carbon Accounting Financials (PCAF), and are working to further refine our calculation and disclosure of CO2 emissions of our investment and loan partners.
We will continue to contribute to the realization of a decarbonized society in the region by promoting investments and loans in renewable energy businesses and helping our customers reduce their CO2 emissions.

Transition plan

(3) Scenario analysis

In order to concretely understand the impact of climate change on business, Higo Bank and Kagoshima Bank conducted scenario analysis up to the year 2050, and the entire Group worked to upgrade and refine the scenario analysis.
In recognizing the climate-related physical risk and transition risk as climate-related risks, physical risk was anticipated to increase credit cost due to asset damage from abnormal weather such as flood disasters, and its transition risk was anticipated to be growing credit cost for customers affected by changing consumption preferences and stronger regulations due to climate change.

[Physical risk]

In the 8.5 scenario (4°C scenario) from the Intergovernmental Panel on Climate Change (IPCC), we calculated the impact on credit cost from flood disasters, which would comprise more than half of climate change-caused natural disasters and would be especially frequent in Kyushu.
Higo Bank and Kagoshima Bank’s increase in credit costs by 2050 due to devaluation of held collateral (direct impact) and performance deterioration due to stagnation of customer businesses (indirect impact) will be approximately ¥6.5 billion at the most.

	Direct impact (devaluation held collaterall)	Indirect impact (performance deterioration due to customer business stagnation)
Risk event	Flood disasters
Scenario	4°C Scenario*¹
Local community	Kumamoto, Kagoshima
Risk indicator	Credit cost
Analysis results*²	Credit cost increase of ¥800 million	Credit cost increase of ¥5.7 billion

* 1 Flooding depth and amount of damage based on flooding depth is calculated for each asset based on hazard maps and the Manual for Economic Evaluation of Flood Control Investment released by the Ministry of Land, Infrastructure, Transport and Tourism.

* 2 RCP8.5 scenarios by IPCC and others are used for reference.

[Transition risk]

We quantified transition risks in the energy sector (oil, gas and electricity) defined in the TCFD recommendations. Regarding the Group’s customers in the selected sectors, the increase in credit costs was estimated based on the impact of carbon taxes and changes in energy prices and product mix on customers’ operating expenses, and the impact of increased credit costs on sales due to increases or decreases in demand. The maximum single fiscal year increase in credit costs through 2050 would result in an increase of approximately ¥15.4 billion.
Going forward, we will continue to refine our transition risk by expanding the scope of our analysis.

	Direct impact
Scenario	1.5℃ Senario*
Scope of analysis	Energy sector as defined by TCFD (oil, gas, electricity)
Local community	Japan
Analysis period	Until 2050
Risk indicator	Credit cost
Analysis results	Up to ¥15.4 billion in a single fiscal year

Reference is made to the Net Zero Emissions by 2050 Scenario (NZE2050) by the IEA. However, scenario data for Japan that are not included in the NZE2050 scenario are supplemented by the Acknowledged Proclamation Scenario (APS) and other scenarios as necessary.

(4) Carbon-related assets

The ratio of carbon-related sectors* to loans of the Group is as shown in the table on the below.

Energy	Transport	Materials and buildings	Agricultural, food and forestry products
2.05%	2.13%	10.22%	3.30%

Classified using TCFD recommendations, Japan Standard Industrial Classification and industry codes of Higo Bank and Kagoshima Bank, etc.
[Energy] Oil and gas, coal, electric power (excluding renewable energy generators, independent power producers, and water utilities)
[Transportation] Air transportation, shipping, land transportation, automobiles
[Materials and Buildings] Metals and minerals, chemicals, construction materials and capital goods, real estate management and development
[Agriculture, Food and Forestry Products] Beverages, food, agriculture, paper and forestry

The Group’s Main Risks and Opportunities, Based on Physical and Transition Risks

We analyze risks and opportunities associated with climate change in time frames of the short term (3 years or less), medium term (3-10years), and long term (10 years or more).

(Risks)

There is a risk of damage to the value of the Group’s loan assets by intensifying abnormal weather, which could cause stagnation in customer business activities and/or property damage and therefore affect customer businesses and financial statuses. (Short-term to long-term)
There is a risk of diminished Group corporate reputation in the event of poor Group response to environmental issues versus its competitors. (Short-term to long-term)
There is a risk of damage to the value of the Group’s loan assets by the introduction of carbon tax, climate change-related policies such as increased oil coal tax rates, and stronger GHG emission regulations and energy efficiency regulations for new buildings, which could affect customer businesses and financial statuses. (Medium-term to long-term)

(Opportunities)

Demand is expected to increase for funds as a result of customer capital investment, etc. toward decarbonization, including from the spread of renewable energy in the energy sector, the introduction of high-efficiency construction and low-carbon building materials in the real estate sector, and the growth of electric vehicles and low-carbon technologies in the automobile and transportation sectors. (Short-term to long-term)
Increased opportunity is expected for providing financial instruments and services related to environmental conservation and insurance products in preparation for natural disasters due to the intensification of natural disasters and changes in customer behavior driven by heightened awareness of environmental responsibility. (Short-term to long-term)
Demand is expected to increase for funds across all sectors from additional customer investments in disaster prevention facilities, etc. due to the intensification of abnormal weather. (Medium-term to long-term)

Risk management

Based on the results of its scenario analysis, the Group recognizes that climate change risk may affect the Group’s finances, and has implemented the following initiatives.

(1) Risk capital allocation

We took climate change risk as one of the risks related to external factors, and we added physical risk to the stress scenario for credit risk calculation for the first time in our FY2023 risk capital allocation. We have confirmed capital adequacy after the addition of physical risk in the event of a hypothetical scenario.

(2) Investments and loans

For investment and loans, our Sustainable investment and loan policy states that in principle, we will not engage in projects that are likely to have a negative impact on climate change, such as coal-fired power generation and deforestation projects. In the screening of loans, the first line sales branches and the loan related departments that is responsible for loan screening will perform checks, and make their loan decisions taking into account the impact on climate change.

Going forward, we will deepen our scenario analyses across the Group and work to quantify climate change risk and sophisticate risk management. In addition, we will discuss policies for investments and loans in each sector, including energy and other carbon-related businesses.

Metrics and Targets

(1) CO2 emissions

Carbon Neutrality Declaration: Achieve carbon neutralityfor Scope1 and 2 by FY2030

Scope of calculation: the Company and subsidiaries wholly owned by the Company

CO2 Emission Reduction Targets: By FY2023, vs. FY2019 levels-10%By FY2030, vs. FY2019 levels-30%

Scope of calculation: The Company, Higo Bank and Kagoshima Bank
Targets: Scope1,Scope2, Category 1 (partially excluded), 3, 4, 5, and 12 of Scope 3

[Changes in CO2 emissions (target scope)]

	FY2019	FY2020	FY2021	FY2022
Scope1	1,653	1,792	1,818	1,676
Scope2	8,017	9,143	11,219	8,233
Scope3	24,245	25,642	20,256	16,712
CO2 absorption certification, etc.	-	-	-84	-82
Total	33,915	36,577	33,209	26,539

[Changes in CO2 emissions (total emissions)]

	Measurement item	FY2018	FY2019	FY2020	FY2021	FY2022
SCOPE1	Gasoline, LPG, city gas, etc.	1,672	1,653	1,792	1,818	1,676
SCOPE2	Electricity	10,633	8,017	9,143	11,219	8,233
Subtotal		12,305	9,670	10,935	13,037	9,909
SCOPE3	Total for figures below	53,147	66,947	51,058	342,270	1,003,070
Category 1: Purchased items and services	Stationery, copy paper, subcontracting services, advertising, etc.	23,980	25,908	26,810	22,731	19,329
Category 2: Capital goods	Property, plant, equipment and intangible assets acquired in the relevant fiscal year	23,566	35,599	18,315	24,775	12,479
Category 3: Fuel and energy-related activities not included in SCOPEs 1 and 2	Gasoline, LPG, city gas, electricity	1,966	1,970	2,105	2,023	1,840
Category 4: Transport, delivery (upstream)	Postal fees	493	409	375	372	346
Category 5: Waste produced from business operations	Waste disposal fees	690	675	964	68	72
Category 6: Business trips	Business trips	564	559	559	560	555
Category 7: Commute by the employed	Commute	1,335	1,307	1,329	1,330	1,316
Category 12: Disposal of purchased goods	Disposal of bank books, PR items	553	520	601	369	173
Category 15: Investment	Listed stocks and corporate bonds	-	-	-	290,042	205,872
Category 15: Investment	Business loans (oil, gas and electricity)	-	-	-	-	761,088
Total		65,452	76,617	61,993	355,307	1,012,979

Scope of calculation: The Company, Higo Bank and Kagoshima Bank
The calculation of CO2 emissions is based on the GHG Protocol and uses the Ministry of the Environment’s Basic Guidelines on Accounting for Greenhouse Gas Emissions Throughout the Supply Chain, Emission Intensity Database Ver. 3.2.
The emission factors in Scope 2 are based on the emission factors by electric utility for the grid electricity of the project location (actual emission factors) as of the most recent date of the calculation.
Emissions of Scope 3, Categories 8, 9, 10, 11, 13, and 14 were zero.
Regarding Category 15
[Listed stocks and corporate bonds]
From FY2021, we began using the measurement method proposed by PCAF in our calculations. The calculation uses the Group’s outstanding investments and loans at the end of the fiscal year, the latest CO2 emissions (consolidated emissions: Scope 1 and 2) and financial information disclosed by each company. In FY2022, the coverage ratio of our Group’s investments (based on market value) is 88.2%, and the data quality by PCAF definition is equivalent to a score of 2.
[Business loans]
From FY2022, we began using the measurement method proposed by PCAF in our calculations. The calculation covers the energy sector (oil, gas and electricity). The data quality by PCAF definition is equivalent to a score of 4.
In the future, we will continue our efforts to refine the calculation in Category 15. Please note that there is a possibility that the amount of CO2 emissions will increase or decrease due to the expansion of calculation targets and changes in calculation methods.

(2) Environment-related investments and loans

Target for environment-related investments and loans: Cumulative execution amounts for FY2021 to FY2030¥200.0 billion