TCFD disclosure as of 2021

Our corporate philosophy and the Principles of Fiduciary Duties and Sustainability, which serve as the basic policy for our corporate activities, clearly state our intention, as an asset management firm and as a corporate citizen, to contribute to build a sustainable society. Therefore, sustainability initiatives, including for climate change, are positioned as the most important task of management.

Basic policies and action plans at the company level are developed through an established process in which the policies and plans are fully considered by the Sustainability Promotion Subcommittee at the practical level and by the Management Meeting, which is attended by the CEO and executive officers, and then approved by the Board of Directors. In addition, the Board of Directors receives reports twice a year on the progress of action plans and monitors whether processes are being carried out appropriately.

Moreover, the Board of Directors actively discusses the form of ESG integration in the investment process, the state of stewardship activities, operations that take sustainability into account, and other related matters. In addition, outside directors with ample expertise provide advice and recommendations to management.

Company-level policies and actions plans related to sustainability, including climate change, are formulated through a process that involves discussions led by the officer in charge of the Corporate Strategy Department in coordination with related internal departments. Deliberations are conducted by committees, including the Management Meeting, which is attended by the CEO and executive officers, and then, depending on the importance, approval by the CEO or Board of Directors. These policies and plans are executed under the responsibility of the CEO, while stewardship activities are led by the Responsible Investment Officer, investment management, by officers in charge of the Investment Management Division, and our own risks and opportunities, by officers in charge of corporate divisions, which allows us to respond quickly to individual risks and opportunities.

We recognize the following as risks and opportunities caused by climate change.

One study* has found that if the temperature has risen by 2℃ as of 2100, global GDP per capita in 2100 will be around 15-20% lower than the case assuming temperature remains unchanged from the first decade of this century. This can be expected to have a negative impact on our profits due to the declining market caps of global stock markets. On the other hand, at the level of individual sectors and companies, there are likely to also be cases of performance growth from innovative technology and changes in people's lifestyles. As an asset management firm with strength in active investment, we will work to minimize the negative financial impact by carefully assessing and investing in sectors and companies where growth can be expected.

Since we are an asset management firm however, we do not own production facilities that emit greenhouse gases, so we do not anticipate major transition risk. Moreover, we operate our business out of relatively small offices located in major cities in Japan and overseas, so we do not expect any major physical risks from climate change. Carbon offsets, which will be needed for us to achieve effectively zero greenhouse gas emissions by 2030, are a factor that will increase costs, but we expect to be able to minimize the impact.

We have implemented a compatibility analysis on the funds we manage (”SMDAM funds” hereafter) so as to confirm the consistency of our portfolio with Paris Agreement goal. Our analysis was conducted utilizing “Paris Agreement Capital Transition Assessment” (PACTA), a tool developed by the independent think tank “The 2° Investing Initiative (2DII)” with partners such as the UN PRI, etc.

“Oil and Gas (28%)”, “Electric Power (power generation only, 7%) “, and “Steel (6%)” are sectors that account for high percentage of GHG emissions in the SMDAM funds, while the other four sectors had a very low rate.

As a result of scenario analysis over the next 5 years, we also found that “Oil and Gas” and “Electric Power” sectors are aligned with Paris Agreement goal, or could be aligned with the target without severe impact on our portfolio by reallocating some of our assets.  On the other hand, the “Automobile” sector is not aligned with the target unless the drastic progress in EV adoption by 3 major Japanese automobile companies.

We believe that innovations will gradually implement a decarbonized society, and radical de-carbonization such as to abandon the use fossil fuels could cause unexpected inflation and environmental destruction as a result.

With such conviction, our investment policy is to engage investee companies to obtain SBT (Science Based Targets) certification and to improve CDP climate change scores, while considering an option to divest high GHG emissions sectors and/or companies.

We assess climate change risks of investee companies through proprietary ESG evaluations and assign scores based on the companies’ relative performance within their same sector. As climate change is one of our priority ESG themes, we conduct engagement primarily for sectors with high GHG emissions and companies with room to improve their ESG scores.

At the same time, for our major investment products, we measure climate change risk at the portfolio level. We utilize the resulting measurements for the overall portfolio and the investee companies that comprise it in investment decisions related to stock selection.

When climate change risk metrics are included in the investment guidelines of specific products, the Investment Management Division autonomously manages them just as it does other restrictions. Meanwhile, the Risk Management Department monitors compliance and invites the Investment Management Division to take the necessary actions or decide a policy to deal with such a situation if the threshold is closely approached or reached.

Focusing on Japan and global equities and domestic and foreign fixed income products, we analyzed our portfolio against benchmarks (BM) for GHG emissions (Scopes 1 and 2) and three other metrics. The metrics are calculated using data provided by Sustainalytics.