Decouple or degrowth: integrated thinking needed to transform systemic risks into sources of low carbon growth

CDP Japan 500 Climate Change Report 2013

6 November 2013

Scoring partner and report writer

The evolution of CDP

With great pleasure, CDP announced an exciting change this year.

Over ten years ago CDP pioneered the only global disclosure system for companies to report their environmental impacts and strategies to investors. In that time, and with your support, CDP has accelerated climate change and natural resource issues to the boardroom and has moved beyond the corporate world to engage with cities and governments.

The CDP platform has evolved significantly, supporting multinational purchasers to build more sustainable supply chains. It enables cities around the world to exchange information, take best practice action and build climate resilience. We assess the climate performance of companies and drive improvements through shareholder engagement.

Our offering to the global marketplace has expanded to cover a wider spectrum of the earth’s natural capital, specifically water and forests, alongside carbon, energy and climate.

For these reasons, we have outgrown our former name of the Carbon Disclosure Project and rebranded to CDP. Many of you already know and refer to us in this way. Our rebrand denotes our progress as we continue to catalyze action and respond to business, finance, investment and environmental needs globally.

We now have a bolder, more dynamic look and logo that reflects the scale of the work we must undertake in the coming years to move the markets ahead of where they would otherwise be on these issues and realize truly sustainable economies.

Over 5,000 companies from all over the world have been asked to report on climate change through CDP this year;

81% of the world’s 500 largest public companies listed on the Global 500 engage with CDP to enable effective measurement of their carbon footprint and climate change action;

CDP is a not-for-profit organization. If you would like to support our vital work through donations or sponsorship opportunities, please email paul.robins@cdp.net or telephone +44 (0) 7703 184 312.

4 CEO Foreword

5 Message from Mitsubishi UFJ Financial Group

6 PwC Japan Foreword

7 2013 Highlight

8 Executive Summary

10 2013 Leaders

CDP 2013 Responses from Japanese companies

12 1. Climate change management

14 2. Risks and opportunities

15 3. Emisions

18 4. Verification/ assurance

20 External environment for Japanese companies

22 The global trend towards integrated reporting

23 Decouple or degrowth?

24 2013 Disclosure score

26 2013 Performance score

28 Appendix 1: CDP 2013 responding companies and other responding companies

34 Appendix 2: CDP 2013 non-responding companies

36 Appendix 3: 2013 Key trends

38 Appendix 4: CDP 2013 Investor members and signatories

42 Closing remarks

Contents

Important Notice

The contents of this report may be used by anyone providing acknowledgement is given to Carbon Disclosure Project (CDP). This does not represent a license to repackage or resell any of the data reported to CDP or the contributing authors and presented in this report. If you intend to repackage or resell any of the contents of this report, you need to obtain express permission from CDP before doing so.

CDP has prepared the data and analysis in this report based on responses to the 2013 climate change information request. No representation or warranty (express or implied) is given by CDP or any of its contributors as to the accuracy or completeness of the information and opinions contained in this report. You should not act upon the information contained in this publication without obtaining specific professional advice. To the extent permitted by law, CDP and its contributors do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this report or for any decision based on it. All information and views expressed herein by CDP and its contributors are based on their judgment at the time of this report and are subject to change without notice due to economic, political, industry and firm-specific factors. Guest commentaries where included in this report reflect the views of their respective authors; their inclusion is not an endorsement of them.

CDP and its contributors, their affiliated member firms or companies, or their respective shareholders, members, partners, principals, directors, officers and/or employees, may have a position in the securities of the companies discussed herein. The securities of the companies mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates.

Carbon Disclosure Project’ and ‘CDP’ refer to Carbon Disclosure Project, a United Kingdom company limited by guarantee, registered as a United Kingdom charity number 1122330.

© 2013 Carbon Disclosure Project. All rights reserved.

03

04

CEO Foreword

This year we passed a significant landmark of 400ppm of carbon dioxide in the atmosphere and are rapidly heading towards 450ppm, accepted by many governments as the upper limit to avoid dangerous climate change. The Intergovernmental Panel on Climate Change (IPCC) 5th assessment report (AR5) strengthens the scientific case for action.

Fears are increasing over future climate change impacts as we see more extreme weather events, Hurricane Sandy the most noted with damages totalling some $42 billion1. The unprecedented melting of the Arctic ice is a clear climate alarm bell, while the first 10 years of this century have been the world’s hottest since records began, according to the World Meteorological Organization.

The result is a seismic shift in corporate awareness of the need to assess physical risk from climate change and to build resilience.

For investors, the risk of stranded assets has been brought to the fore by the work of Carbon Tracker. They calculate around 80% of coal, oil and gas reserves are unburnable, if governments are to meet global commitments to keep the temperature rise below 2°C. This has serious implications for institutional investors’ portfolios and valuations of companies with fossil fuel reserves.

The economic case for action is strengthening. This year, we published the 3% Solution2 with WWF showing that the US corporate sector could reduce emissions by 3% each year between 2010 and 2020 and deliver $780 billion in savings above costs as a result. 79% of US companies responding to CDP report higher ROI on emission reductions

As countries around the world seek economic growth, strong employment and safe environments, corporations have a unique responsibility to deliver that growth in a way that uses natural resources wisely. The opportunity is enormous and it is the only growth worth having.

investments than on the average business investment. Meanwhile, governments are taking new action: The US Administration has launched its Climate Action Plan, with a new emphasis on reducing emissions from utilities; China is developing air pollution measures and moving toward pilot cap and trade schemes; the UK Government has mandated greenhouse gas emissions reporting for all large listed companies; the EU is looking at improving environmental and other reporting.

The pressure on corporations, investors and governments to act continues. At CDP, we have broadened our work to add forests to climate and water so our programs now extend to an estimated 79% of natural capital, by value3. To reflect this, we rebranded at the start of the year from the Carbon Disclosure Project to CDP and are increasing our focus on projects to accelerate action. One explores how corporations influence public policy on climate change both positively and negatively. Some corporations are still acting – both directly and through trade associations – to prevent the inevitable: nations need sensible climate regulation that protects the public interest over the long term.

As countries around the world seek economic growth, strong employment and safe environments, corporations have a unique responsibility to deliver that growth in a way that uses natural resources wisely. The opportunity is enormous and it is the only growth worth having.

Paul Simpson CEO CDP

1 New York State Hurricane Sandy Damage Assessment; Governor Andrew Cuomo; November 12, 2012 http://www.governor.ny.gov/press/11262012-damageassessment 2 https://www.cdproject.net/CDPResults/3-percent-solution-report.pdf 3 Based on findings from the report Natural Capital at Risk: The Top 100 Externalities of Business, published by TEEB for Business Coalition in April 2013

Message from Mitsubishi UFJ Financial Group

CDP, which requests companies to disclose data and their activities around dealing with climate change and GHG emissions in collaboration with institutional investors, started in 2003 and this is the 11th year of its operation.

As one of the CDP’s investor signatories, MUFG would like to show great appreciation towards those companies who responded to the CDP information request, and encourage them to continue their sustained support for CDP moving forwards.

Prevention of the climate change is a global issue which should be tackled in the long-term. Coupled with the review of energy policy, Japanese government will formulate a proactive diplomatic strategy to address climate change with the aim of contributing to the world by fully utilizing Japanese advanced technologies. The government listed “Realizing clean and economical energy demand and supply” as the main theme in the Japan Revitalization Strategy which was endorsed by the Cabinet in June.

Meanwhile, the Japan Federation of Economic Organizations highlighted in the “Commitment to a Low Carbon Society” that they would continuously promote the development and the practical application of the ultimate level of low carbon technologies even after the end of the first commitment period of the Kyoto Protocol.

The ultimate aim of CDP’s work to encourage companies to measure and disclose GHG emissions data, is to prevent dangerous climate change. CDP’s 722 investor signatories pay great attention to companies’ emissions reduction activities as they can potentially contribute to the continuous improvement in energy efficiency and the shift towards renewable energy.

CDP receives responses from thousands of companies every year, demonstrating great interest in the project. In this year’s responses, we can observe companies’ continued efforts to reduce GHG emissions, as some companies report that they have disclosed their climate change information in the mainstream financial report and more corporations disclose emissions data from their supply chain in addition to their direct emissions.

We hope that this report will serve as a valuable source of information and insight for climate change related activities.

November 2013

Nobuyuki Hirano President & CEO, Mitsubishi UFJ Financial Group Inc.

The ultimate aim of CDP’s work to encourage companies to measure and disclose GHG emissions data, is to prevent dangerous climate change. CDP’s 722 investor signatories pay great attention to companies’ emissions reduction activities as they can potentially contribute to the continuous improvement in energy efficiency and the shift towards renewable energy.

05

PwC Japan Foreword

A new era of growth has commenced in Japan, but is it sustainable? Domestically the policies of the Abe administration have revitalized the financial economy and the success of the Tokyo 2020 Olympics bid will further enhance the already increasingly favorable environment for investment in Japan. But the news is not all good.

The ongoing efforts to stabilize the situation at the Fukushima Dai-ichi plant are continuing to pose challenges for the people of Eastern Japan. The radiation concerns and increased scrutiny from the independent Nuclear Regulatory Authority have delayed the restart of the nuclear energy generators, with implications for both the monthly trade balance and the emissions intensity of domestic business activities. Beyond this, the uncertainty of the impacts of difficult structural reforms in energy, healthcare and the labor market mean companies and investors face many difficult decisions ahead.

These decisions are further complicated by the increasingly clear scientific and economic case for action to decouple business activity from carbon emissions to avoid disruptions to complex supply chains. Whilst policies remain inconsistent, and largely inadequate, in many of the countries targeted for overseas business development by Japanese businesses, the increasing frequency of extreme weather events, both in Japan and overseas, are forcing companies, investors and governments to rethink their strategies. This rethink is driven by economic and financial realities even in the absence of action by regulators.

A holistic approach to measure and manage the total impact of business activity is important to understand the trade-offs inherent in pursuing a low carbon, resilient business strategy. Focusing on material categories of risk and opportunity, however, continues to be a challenge for many Japanese companies responding to this year’s questionnaire. The

leading companies have already commenced their journey to embed low carbon thinking and action into the DNA of their organizations so that their future strategies are compatible with the scientific case for action that was reinforced in the recent Intergovernmental Panel on Climate Change (IPCC) 5th assessment report (AR5).

I congratulate the 24 companies in the Climate Disclosure Leadership Index and the 12 companies in the Climate Performance Leadership Index presented in this report. These leaders have demonstrated the courage and conviction to act; but there is still much to be done. Sharing their stories, collaborating within and across sectors, and working to co-create solutions to reverse the recent upward trend in absolute emissions are all important steps to scale-up the commendable progress to date.

Once again I congratulate CDP for their efforts in driving sustainable economic development and would like to thank them for the opportunity to provide scorer services and to support the drafting of the content included in this report. PwC Japan, working with our global network of climate change experts, is ready to work with companies, investors and the government in Japan to accelerate the transformation towards a low carbon, climate change resilient society to sustain the recent momentum in the financial economy.

Hiroyuki Suzuki Territory Senior Partner, PricewaterhouseCoopers Japan

Sharing their stories, collaborating within and across sectors, and working to co-create solutions to reverse the recent upward trend in absolute emissions are all important steps to scale-up the commendable progress to date.

06

2013 Highlight

8 companies in both CDLI1 and CPLI2

Honda Motor, Nissan Motor, Toshiba, Konica Minolta, Sekisui Chemical, Komatsu, Sony, Fujitsu

73Average Disclosure score (2012:67)

42% has decreasedScope 1 and 2 emissions change from previous year(2012:64%)

3.9/15Average reported categories of Scope 3 emissions (2012:1.7)

45%Response rate (2012:47%)

4.3%Emission reduction activities value / Scope 1 and 2 emissions (total average)

0.56%Emission reduction activities value / Scope 1 and 2 emissions (top 10 emission companies)

P.8

P.8

P.15

P.15

P.15P.16

P.11

1 Climate Disclosure Leadership Index

2 Climate Performance Leadership Index

07

8Companies reported absolute emissions reduction targets for 2050 or beyond (2012:6)

P.12

Executive Summary

2013 marks the 11th CDP’s information reuqest and the eighth since CDP commenced operation in Japan. From 2006 to 2008, questionnaires were sent to 150 Japanese companies and in 2009 the number of target companies increased to 500. The Japan 500 target companies were previously selected based on market capitalization; however, in 2011 the United Nations-supported Principles for Responsible Investment (UNPRI) Japan Network chose 500 companies, many of which are companies in the FTSE Japan Index.

While the response rates in the U.S. and Europe remain high (approximately 80%), only 227 (45%) Japanese companies responded to the CDP 2013 questionnaire – with nine new companies that had not responded in 2012; eight companies that responded in 2012 but did not in 2013; and cases where the parent company responded on behalf of its group companies, there was a net decrease of six companies from 2012. This report is based on the responses of the 206 companies submitted prior to the deadline.

On a sector-by-sector basis the response rate remains almost unchanged from last year; with the response rates of companies in the Industrials, Information Technology, Materials, and Telecommunications sectors all exceeding 50%. The trend for companies in the Electricity/Gas sectors declining to respond to the information request is continuing. Against a backdrop of growing interest from stakeholders in energy issues in Japan driven by continued power shortages, increases in electricity rates, spikes in crude oil prices, introduction of renewable energy and other related factors, the need for the sector to increase transparency and responsiveness in disclosure has never been greater.

The CDP 2013 consists of three sections, divided into 14 questions:

{ Climate Change Management: Governance, Strategy, Emission Targets & Initiatives, Communication;

{ Risks and Opportunities: Climate Change Risks and Opportunities, Economic Impact and Management Method; and

{ Emissions: Emissions Methodology, Emissions Data (Scope 1, Scope 2, Scope 3), Third Party Verification / Assurance, Emissions History, Data Accuracy, Emissions Intensity, Emissions Trading, Energy, and Engaging with the Value Chain.

Similar to other years, not many questions were added to this year’s questionnaire. The survey is structured to highlight the change in performance over past years. The scoring methodology has been changed to require more detailed information and supporting evidence for companies to be awarded scores. Companies need to adequately address each question that covers a wide array of topics to ensure that the credit for actions and initiatives is accurately reflected in the scoring of each response.

Taking the same approach as last year, companies’ responses are evaluated by scoring them for both disclosure and performance. The disclosure score, which indicates the adequacy of a company’s climate related disclosure, reflects the quality and completeness of the disclosure regardless of whether the information is positive or negative.

The performance score is awarded where a company highlights that it is undertaking, or has undertaken, a ‘positive’ climate change action such as a contribution to climate change mitigation, adaptation or transparency and such action has produced tangible results. Submitting detailed supporting materials, as appropriate, contributes to a higher score.

Key findings – Japanese companies’ responses to the CDP 2013 questionnaire{ The number of companies reporting increased total Scope 1 and 2 emissions rose to 114 (55%), and that of companies reporting decreased emissions fell to 87 (42%). One reason why emissions increased on a whole is that energy usage restrictions enforcing energy and electricity saving measures beyond traditional levels that had been imposed on Japanese companies in 2011 were lifted when energy supply picked up in 2012. The other reason is that increased dependency on thermal power since 2011 caused a significant rise in fiscal 2012 emission factors.

{ Supposing Scope 1 and 2 emissions for 2012 were 100%, an average 4.3% reduction was achieved as a result of emissions reduction activities. Most Japanese companies have implemented measures to respond to the above-mentioned unique situation causing emissions to increase. Responses indicate that despite increased Scope 1 and 2 emissions, most companies have spent efforts to mitigate the increase.

{ The number of companies reporting both absolute targets and intensity targets increased to 76 (37%). The most common target year is fiscal 2020, especially for companies participating in the Voluntary Action Plan on the Environment led by the Keidanren (Japan Federation of Economic Organizations). Only eight companies set absolute and/or intensity targets for long-term beyond 2050.

{ Calculated figures were reported for an average 3.9 out of 15 categories of Scope 3 emissions, up from 1.7 in the previous year. 36 companies (17%) were awarded full points for the question by providing assessment or calculation for all 15 categories (including categories determined to be irrelevant). Companies are expected to take a comprehensive approach as all Scope 3 emissions need to be assessed in order to identify the categories that have the largest impact on a company’s emissions. Even in categories where figures were reported, calculation in some cases covered only a part of the emissions. Further examination is expected in the future.

08

{ The number of emissions reduction activities reported increased this year to 663 from 641 compare to the previous year. Similar to last year, the most companies reported payback periods of more than three years. 34 activities were reported to have payback periods of more than 21 years. Key factors such as electricity power shortage and higher electricity rates caused by the shutdown of nuclear power plants and a spike in crude oil prices have prompted capital investment with longer payback periods. Information on ambitious investments in emission reduction activities need to be disclosed to investors. Caution should be exercised for investments with long payback periods, as there are cases where the payback period substantially exceeds the term of the project activity.

{ This year, changes were made to the scoring methodology for external communication besides responding to the CDP survey. Better scores are given when information on climate change and GHG emissions performance is published in mainstream financial reports. Mainstream financial reports for Japanese companies refer to the “yuuka shoken hokokusho” (annual securities report, i.e., the annual mandatory financial reportings published to meet regulatory obligations). 16 companies (8%) achieved full points on this question.

{ Disclosure scores of the Japanese companies continue to improve. The average disclosure score for CDP 2013 is 73 compared to 67 in 2012. The number of companies with scores of 90 or more has increased to 41 companies (20%) from 15 companies (7%) last year. There is still a gap in disclosures with the Global 500 companies; whose average disclosure score is 76 and 98 companies (26%) achieve disclosure scores of 90 and more. Disclosure of information on risks and verification / stakeholder engagement still remains a challenge for Japanese companies.

{ The number of companies achieving either performance band A or A- increased to 13 from five last year. Performance evaluation has generally improved from CDP 2012 while the evaluation criteria for the performance band remained the same. This has allowed Japanese companies to receive better bands. This still compares unfavorably with the Global 500 companies where 20% achieve either performance band A or A-. Disclosures by Japanese companies regarding risks / opportunities and verification / stakeholder engagement leaves room for improvement.

{ Twenty-four companies with the top scores for disclosure were selected to be listed in the Climate Disclosure Leadership Index (CDLI) and 12 companies with the top scores for performance were selected for the Carbon Performance Leadership Index (CPLI). The number of companies that were selected for both CDLI and CPLI was 8, up from four last year.

Figure 1. Number of respondents by industrial sector

{Answered Questionnaire and See Another{No Response{Declined to Participate

0.00.20.40.60.81.0

0 20 40 60 80 100

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecommunication Services

Utilities

33 68 2

17 24

4 3 1

27 46 1

11 20

56 38 2

39 27 4

33 20 5

4 6 4

3 2

09

ConclusionThe results of this year’s questionnaire showed overall improvement by Japanese companies. Although the rate of change is slower than the Global 500, both disclosure and performance scores for Japanese companies continue to increase.

The bottom line is that each company must provide convincing information to external stakeholders including foreign investors in regard to its active efforts and results related to global warming mitigation and adaptation. Disclosed information should be consistent with the company’s mid to long term business strategy; and terminology and evaluation metrics should be easy to understand. This year’s CDP has shed light on the expectation for Japanese companies to further improve their information disclosure.

2013 Leaders10

What are the CDLI and CPLI criteria?

To enter the CDLI, a company must:

• Makeitsresponsepublicandsubmitvia CDP’s Online Response System

• Achieveascorewithinthetop10%ofthetotalJapan500respondents(24companiesin2013)

To enter the CPLI (PerformanceBandA),acompanymust:

• Makeitsresponsepublicandsubmitvia CDP’s Online Response System

• Attainaperformancescoregreater than 85

• Scoremaximumperformancepointsonquestion12.1aforgreenhousegasemissions reductions due to emission reduction actions over the past year (4%orabovein2013)

• Disclosegrossglobalscope1and scope2figures

• Scoremaximumperformancepoints forverificationofscope1and scope2emissions

• Furthermore,CDPreservestheright to exclude any company from the CPLI if there is anything in its response or other publicly available information that calls into question its suitability for inclusion.

2013 Leadership criteriaEach year, company responses are analyzed and scored against two parallel scoring schemes: disclosure and performance.

The disclosure score assesses the completeness and quality of a company’s response. Its purpose is to provide a summary of the extent to which companies have answered CDP’s questions in a structured format. A high disclosure score signals that a company provided comprehensive information about the measurement and management of its carbon footprint, its climate change strategy and risk management processes and outcomes.

The performance score assesses the level of action, as reported by the company, on climate change mitigation, adaptation and transparency. Its intent is to highlight positive climate action as demonstrated by a company’s CDP response. A high performance score signals that a company is measuring, verifying and managing its carbon footprint, for example by setting and meeting carbon reduction targets and implementing programs to reduce emissions in both its direct operations and supply chain.

The highest scoring companies for disclosure and/or performance enter the CDLI and/or CPLI. Public scores are available in CDP reports, through Bloomberg Terminals, Google Finance and Deutsche Boerse’s website.

How are the CDLI and CPLI used by investors?

Good disclosure and performance scores are used by investors as a proxy of good climate change management or climate change performance of companies. Investors identify and then engage with companies to encourage them to improve theirscore.The‘AimingforA’initiativewhichwasinitiatedbyCCLAInvestmentManagement is driven by a coalition of UK asset owners and mutual fund managers. Theyareasking10majorUK-listedutilitiesand extractives companies to aim for inclusion in the CPLI. This may involve filing supportive shareholder resolutions for AnnualGeneralMeetingsoccurringafterSeptember2013.

Investors are also using CDP scores for creation of financial products. For example, NedbankinSouthAfricadevelopedtheNedbank Green Index. Disclosure scores are used for selecting stocks and performance scores for assigning weight.

For further information on the CDLI and the CPLI and how scores are determined, please visit www.cdp.net/guidance

Note: Companies that achieve a performance score high enough to warrant inclusion in the CPLI, but do not meet all of the other CPLI requirementsareclassedasPerformanceBandA-butarenotincludedin the CPLI.

2013 Climate Disclosure Leadership Index (CDLI)

Sector CompanyDisclosure

scorePerformance

bandConsecutive

years in the CDLI

Consumer Discretionary

Honda Motor Company 99 A 2

Nissan Motor Co., Ltd. 99 A 2

Sumitomo Forestry Co., Ltd. 99 B 1

Panasonic Corporation 98 A- 2

Toyota Motor Corporation 96 B 1

Consumer Staples Aeon Co., Ltd. 98 B 2

Sapporo Holdings Limited 96 B 2

KAO Corporation 96 B 1

Shiseido Co., Ltd. 95 B 1

Energy Inpex Corporation 96 B 1

Industrials Nippon Yusen Kaisha Line 98 A- 2

Taisei Corporation 96 B 2

Toto Ltd. 96 B 2

Sekisui Chemical Co., Ltd. 95 A 1

Komatsu Ltd. 95 A 1

Fuji Electric Co., Ltd. 95 B 2

Hitachi, Ltd. 95 B 1

Information Technology

Toshiba Corporation 98 A 2

Konica Minolta, Inc. 96 A 1

Sony Corporation 95 A 2

Fujitsu Ltd. 95 A 2

Materials Sumitomo Chemical Co., Ltd. 95 B 2

Telecommunication Services

Nippon Telegraph & Telephone Corporation (NTT)

95 B 1

Utilities Osaka Gas Co., Ltd. 95 B 1

2013 Climate Performance Leadership Index (CPLI)

Sector CompanyPerformance

bandDisclosure

scoreConsecutive

years in the CPLI

Consumer Discretionary

Honda Motor Company A 99 1

Nissan Motor Co., Ltd. A 99 1

Health Care Daiichi Sankyo Co., Ltd. A 91 1

Industrials Sekisui Chemical Co., Ltd. A 95 1

Komatsu Ltd. A 95 1

Shimizu Corporation A 91 2

Sumitomo Corporation A 87 1

Information Technology

Toshiba Corporation A 98 1

Konica Minolta, Inc. A 96 1

Sony Corporation A 95 1

Fujitsu Ltd. A 95 2

Olympus Corporation A 93 1

11

CDP 2013 Responses from Japanese companies1. Climate change management

This year’s question was modified to a multiple choice format. 180 companies (87%) state that they engage in activities that could either directly or indirectly influence policy. The most common answer was activities through “trade associations” selected by 142 companies (69%) followed by “direct engagement” selected by 81 companies.

Many companies include in their responses obligatory actions such as adherence with the Energy Saving Act or the establishment of a Voluntary Action Plan on the Environment although this question does not regard compliance with existing laws and regulations as collaboration with policymakers. In addition, there were responses where companies failed to provide specific information on initiatives with trade associations. This question is designed to enableinvestors to identify companies actively and collaboratively pursuing measures to mitigate and adapt to climate change, thus companies are expected to describe how it proactively engages in what kind of specific activities.

iv) Emissions reduction targetsA vast majority (194 companies (94%)) set absolute targets and/or intensity targets.

Large enterprises are required to set emissions reduction targets in accordance with the Energy Saving Act and other prefectural ordinances for global warming prevention (such as the ordinance enforced by the Tokyo Metropolitan Government). Many companies are now reviewing their voluntary emissions reduction targets which had been set for FY 2012 in line with the Kyoto Protocol and Voluntary Action Plans on the Environment established by trade

i) Governance197 companies (96%) state that their Board of Directors or equivalent body is designated as having the highest level of responsibility for climate change. This high ratio of companies regarding climate change as a Board level issue is similar to last year.

ii) StrategyIn regard to risk management methods for climate change risks and opportunities, 176 companies (85%) report that they adopt multiple risk management methods and 17 companies (8%) adopt management methods developed specifically for climate change risks. Most companies adopt one or another of these methods. 188 companies (91%) report that climate change is integrated into their wider business strategy.

Although it is up to each company to explain how it manages its risks and opportunities and how it develops its strategies, there were many cases where the level of detail reported is well below expectations or where responses do not adequately address the questions. As this topic is of significant interest to investors, companies are expected to provide more specific information.

iii) Collaboration with policymakersIt is important to collaborate with policymakers such as government, local governments, and international organizations to improve the effectiveness of climate change mitigation and adaptation efforts. This is because the challenges of climate change cannot be resolved by individual companies working alone.

0 30 60 90 120 150

Direct engagement

Figure 3. Reduction target

{ 31% Absolute target{ 37% Absolute and Intensity target{ 26% Intensity target{ 6% No target

Figure 4. Number of emission reduction targets breakdown of reported target by target year and target type

{ 0 - 10%{ 10 - 30%

{ 30 - 50%　{ 50% -

0 40 80 120

Short term

(-2013)

Number of companies

142

23

16

21

5

64 32 3 5

65 27 8 2

34 55 22 5

55 26 19 4

2 1 6

2 1

12

Figure 2. Engagements with policy makers

Trade associations

Funding research organizations

Other

No

No response

81

Number of targets

Intensity target

Absolute target

Intensity target

Absolute target

Intensity target

Absolute target

Mid term

(-2021)

Long term

(-2050)

In this section information is requested on: governance structures associated with climate change; processes and strategies to establish approaches to manage climate change; emissions reduction targets and activities; and disclosure of climate change information.

to meet reduction targets that cover both upstream and downstream emissions associated with its products.

v) Emissions reduction activitiesThe number of emissions reduction activities reported increased this year to 663 (202 companies (98%)) from 641 (212 companies (99%)) the previous year. Answer options for the question on payback period of reduction activities were added up to “25 years or more” (the maximum option in last year’s questionnaire was “3 years or more”). Similar to last year, most companies expect a payback period of more than three years, including a number of cases where the period is 21 years or more.

As to emissions reduction activities by type, “Energy efficiency: processes” account for a quarter (152 cases) of reported activities. The most common answers regarding the payback period for such activities is “4-10 years,” “less than 1 year,” and “1-3 years.” Specific examples provided in the responses include: energy conversion in production facilities; high-efficiency operations; heat recovery; introduction of cogeneration; increase in the ratio of non-defective items; and improvement of processes.

The payback periods of activities are largely long term, or more than three years; 34 of which report payback periods of 21 years or more. The most common responses were introduction of renewable energy such as solar power generation, followed by installation of highly efficient illumination (such as LED) and air conditioning systems. While it is important for management to take a long-term view to make ambitious investments, there are cases where the payback period substantially exceeds the term of the project activity. Therefore, disclosures should include detailed descriptions of a project’s costs and returns, as well as the significance of the investment.

associations. The Keidanren (Japan Business Federation) has announced that as of January 2013, 39 industry sectors have participated in establishing voluntary initiatives including reduction targets for 2020 in line with the Keidanren’s Commitment to a Low Carbon Society. This, however, is not necessarily reflected in the CDP 2013 responses whose reporting year is FY 2012.

The number of companies setting both absolute and intensity targets significantly increased to 76 companies (37%) from 67 companies last year.

While it is important to establish an efficient approach to reduce emissions by setting intensity targets in the context of a company’s planned business growth, it is also necessary to set absolute targets and manage total emissions in order to contribute to GHG emissions reduction for society as a whole. An increasing number of companies are setting both absolute and intensity targets for the mid-to-long term. Companies such as Casio Computer Co., Ltd., Kirin Holdings Co. Ltd., Konica Minolta Holdings, Inc., NKSJ Holdings, Nissan Motor Co., Ltd., Obayashi Corporation, RICOH Company, Ltd. and Sumitomo Rubber Industries, Ltd. have demonstrated good practices by setting absolute emissions reduction targets for 2050 or beyond.

Yet at the same time, setting GHG reduction targets for a company’s own operations is not sufficient to effectively address dangerous climate change. Reduction targets should also be set for indirect emissions from across the value chain. For example, 24 companies (12%) set absolute emissions reduction targets for emissions from “use of products sold,” which for many industry sectors is a major source of emissions. For industry sectors where the amount of emissions from across its value chain are far greater than emissions from the company’s own operations, it is highly effective for companies to strive

Figure 5. Payback period breakdown of reported emissions initiatives by activity type

{ < 1 year{ 1 - 3 years

{ 4 - 10 years{ 11 - 15 years

{ 16 - 20 years{ 21 - 25 years

{ > 25 years{ No answer

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CDP 2013 Responses from Japanese companies2. Risks and opportunities

Despite the increasing number of reported risks and opportunities associated with climate change, the responses by Japanese companies leave much to be improved. Overly vague responses may give the impression that the responding company does not actually realize the importance of the risk and/or opportunity, and that it is not actively addressing the issue. A company that tries with care to explain its risks and opportunities in a way that is comprehensible to overseas investors will naturally provide specific examples and qualitative information together with information such as the company’s industry, size of business, regions where it operates, and applicable laws and regulations. This kind of information that only the company itself can provide is what is expected in the responses to these questions.

Similar to last year, risks and opportunities attributable to laws and regulations were reported by the largest number of responding companies. The gap, however, is narrowing as more companies report physical and other risks and opportunities.

A total 223 risks and opportunities were reported for “Changing customer behavior,” making it the most common factor associated to risks and opportunities. This indicates that companies are considering the risk that profits will fall unless they adequately grasp changes in customer preference to identify opportunities to develop products and services that respond to growing consumer interest in climate change.

“Carbon taxes” and “Cap and trade scheme” remain common responses for risks and opportunities associated to laws and regulations.

“Change in mean (average) temperature” is the leading factor affecting physical opportunities. Opportunities were identified not only with products such as air conditioning equipment, beverages, and agriculture produce but also services including energy management and disaster risk management.

Figure 6. Percentage of companies reporting risks and opportunities regarding climate change

Figure 7. Most commonly reported five risk /opportunity drivers

0 20 40 60 80 100 0 30 60 90 120 150

Carbon taxes

Regulatory Risks

Physical Risks

Other Risks

Regulatory Opportunities

Physical Opportunities

Other Opportunities

Response rate (%)

95%93%

85%83%

80%75%

89%85%

77%69%

80%73%

{ 2013 { 2012

Number of companies

Cap and trade schemes

Reputation

Changing consumer behavior

International agreements

Changing consumer behavior

Reputation

Product efficiency regulations and standards

Cap and trade schemes

Change in mean (average) temperature

Risk

Opportunity

111

101

98

91

73

132

85

72

69

54

14

In this section information is requested on: aspects of climate change that are affecting companies; expected consequences; and risk and opportunity management measures being implemented.

CDP 2013 Responses from Japanese companies3. Emissions

emission reduction initiatives, achieving an average 4.3% year on year decrease of emissions. Even when various elements triggered absolute emissions to increase from the year before, it is clear that many companies are spending efforts to control their emissions. There is a compelling need especially for companies with high quantities of absolute emissions to boost efforts aimed at emissions reduction. It is worthy to note that for companies with the top ten highest quantities of gross Scope 1 and 2 emissions achieved an average 0.56% reduction in emissions, an amount significantly smaller than the 4.3% average for all companies.

In regard to emissions intensity, companies are asked to report on performance, changes, and reasons for such change in emissions compared with an appropriate metric or indicator such as sales revenue or number of full time equivalent employees.

A fewer number of companies are reporting decreased emissions in terms of intensity as well. 197 companies (96%) report on emissions per sales revenue, of which 97 companies achieved reductions from the previous year. 194 companies (94%) report on emissions per number of full time equivalent employees, of which 98 companies achieved reductions from the previous year. 127 companies (61%) use other metrics for intensity measurement. Some companies report with industry

i) Scope 1 and Scope 2 emissions2012 was a challenging year for Japanese companies to report emissions performance due to drastic changes in the energy environment in relation to electricity and other factors.

In 2011, companies significantly cut down their power consumption beyond the usual scope of normal energy and electricity saving measures in response to energy usage restrictions after the Great East Japan Earthquake resulting in what could be called an “emergency situation.” Many companies, however, increased their power usage from the previous year when energy supply picked up again in 2012. The increase in the ratio of thermal power generation due to the shutdown of nuclear energy plants across the nation resulted in a rise in the emissions factor for electricity in Japan. This caused calculated GHG emissions to increase even when electricity usage remained the same. CDP asks companies to report on the total amount of Scope 1 and Scope 2 emissions and change from the previous year in absolute and intensity terms. This year, 114 companies (55%) reported increased emissions from the year before, implying the massive effort that was put forth in electricity conservation last year.

Despite such circumstances, many companies reported

Figure 8. Absolute emissions change from the previous year

Figure 9. Intensity emissions change from the previous year

{ Decrease　 { Other　 { Increase { Decrease { Increase / No change

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2013

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136 9 69

82 14 101

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100 97

111 71

98 96

128 53

66 61

79 37

15

In this section information is requested on: emissions calculations; emissions quantity and breakdown by scope; intensity figures; energy consumption; and emissions trading.

CDP 2013 Responses from Japanese companies3. Emissions

{ “Use of sold products” constitute over 80% of total Scope 3 emissions. However the response ratio is not yet high for manufacturing companies that require high amounts of electricity and energy; and

{ Very few companies answered “Investments”, including only one company in the financial businesses sector despite the fact that investment is the main business activity for companies in the sector.

The categories of emission sources that have the highest contribution to the total emissions footprint differ depending on the industry and/or company. Companies need to understand the whole picture to identify such categories with the most impact. Even though the calculation for many categories may need to rely on estimations, this analysis would enable companies to predict the outcomes of their emissions reduction measures.

36 companies (17%) answered “Relevant, Calculated,” “Not relevant, Calculated,” or “Not relevant, explanation provided” for all 15 categories. This implies that these companies have completed considering all 15 categories of their Scope 3 emissions to a certain degree.

The following Figure. 11 shows reported emissions for each scope and by sector. For the consumer discretionary sector, the amount of Scope 3 emissions which includes emissions from product use by the end consumer is significantly more than Scope 1 and Scope 2 emissions. The Consumer Discretionary sector includes home electronics and automotive manufacturers reporting emissions pertaining to their products. This breakdown of emissions sources indicates that for companies in the consumer discretionary sector, developing products that conserve energy or educating consumers on efficient product usage would yield much greater reduction results than cutting energy use in factories and other facilities. As to the materials sector, the amount of Scope 1 and Scope 2 emissions is greater than that of Scope 3. This is because while the manufacturing stage of materials requires huge amounts of energy, Scope 3 emissions would depend on the end product, complicating Scope 3 calculation and also allowing little influence on such emissions on the part of the materials company. This means that for this sector, pursuing low carbon measures in its manufacturing processes to cut down Scope 1 and 2 emissions and using raw materials with smaller carbon footprints is effective to combat dangerous climate change.

What can companies do to prevent dangerous climate change? What are the expectations of the society? How can companies collaborate with stakeholders

standards such as GHG emissions per production output. 66 of these companies reported decreases in their GHG intensity footprint compared to the year before.

Emission factors for electricity in Japan, which greatly impacts calculation of GHG emissions, may continue to hover at current high levels or even increase further in 2013 and beyond. Although electricity issues are policy-oriented external factors, it is crucial for companies to establish a business case for GHG reduction amid ongoing change in the energy environment.

In addition to such external factors, companies are expected to shed light on internal factors that are not visible from publicly available information. Examples are fluctuations in production output or changes in boundaries. Companies should analyze in detail and disclose such information while also taking into account changes over time.

ii) Scope 3 emissionsScope 3 emissions refer to indirect GHG emissions associated with business activities excluding purchased electricity, heat or steam. This year 170 companies (83%) reported Scope 3 emissions from 847 emission sources (2012: 160 companies with 358 emission sources). In addition to growing interest in Scope 3 emissions over the last year, changes made to the CDP scoring methodology are attributable to this increase. Points are now given to each of the 15 categories, a change from last year when companies were given the same score regardless of whether the company provided answers to just one category or all 15.

Of the 15 categories of Scope 3 emissions, more than 40% companies reported “Downstream transportation and distribution,” “Waste generated in operations,” “Business travel,” and “Purchased goods & services.” More than 30% companies reported “Employee commuting,” “Use of sold products,” and “Fuel-and-energy-related activities (not included in Scope 1 or Scope 2),” and “End of life treatment of sold products.” It is clear that more companies are now monitoring their Scope 3 emissions.

Understanding and estimating Scope 3 emissions is a challenge because they are not the direct emissions by the company, causing issues such as the following:

{ In the future, companies will be expected to understand the categories of emission sources that have the most impact on the operations of the company. This is because the materiality of each category constituting the Scope 3 emissions would vary according to the industry or business category;

{ Even for categories where figures are reported, there are cases where emissions are only partially calculated.

16

in their value chain to tackle issues that a company cannot resolve on its own? Companies need to take a comprehensive view to actively engage in initiatives that are in line with the features of the business.

Consumer Discretionary

Consumer Staples

Financials

Health Care

Information Technology

Materials

Utilities

Figure 10. Number of companies reporting Scope 3 categories and emissions by category

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sFigure 11. Scope 1 and 2 emissions compared to Scope 3 emissions by sector

{ Purchased goods and services　{ Use of sold products　

{ Other Scope 3 emissions{ Scope 1 + 2 emissions

0 300000000 600000000

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Absolute emissions millions tCO2e

17

Industrials

CDP 2013 Responses from Japanese companies4. Verification/ Assurance

18

Information related to climate change is taking on increasing importance. Particularly as absolute figures such as emissions require high levels of reliability. This is because they are used for analysis of year-on-year changes and causes, and also serve as a benchmark for comparison with sector peer companies. CDP considers independent verification/ assurance to contribute to enhanced reliability, and accordingly gives higher points to companies that are demonstrating such effort. It is worth noting that questions related to independent verification/ assurance account for approximately 10% of both disclosure and performance scores.

For questions related to independent verification/ assurance, companies are required to attach independent verification /assurance documents issued by third parties such as verification providers. Only when the response and attached document(s) satisfy the scoring criteria and if such documents provide sufficient evidence of the response, can a company receive a full score for the question. This means that companies need to make sure their answers and supporting documents fulfill each and all scoring criteria.

The number of companies that received full scores on questions regarding independent verification/ assurance this year was 83 (43%) and 82 (41%) with respect to Scope 1 and 2 emissions, respectively. This showed an increase from last year’s results where the percentage of companies that had undergone independent verification/ assurance was around 30% for both Scopes.

However, the percentage of verification/ assurance over total emissions (the verification/ assurance coverage ratio) was not exactly high. For example, among the companies who answered that they had received assurance over Scope 1 and 2 emissions, almost half answered that their

verification/ assurance coverage ratio was “over 90%” whereas approximately 30% answered “below 20%.” This for instance, could be a case where a company’s headquarters would be subject to the Tokyo Metropolitan Government ordinance mandating reduction in total emissions, but its high emission production sites outside Tokyo would be uncovered by verification/ assurance. Companies should have verification/ assurance provided for material sites with high emissions to enhance the reliability of their data.

Assessment points regarding verification/ assurance

{ Standard: The response must be supported by the attached document, and the standard used must be one accepted by CDP.

{ Level of verification/assurance: The response must be supported by the attached document. { Subject of verification/assurance: The statement in the evidence must clearly relate to GHG emissions.

{ Scope: The response must be supported by the attached document.

{ Reporting year: The response must be supported by the attached document.

{ Opinion or findings: The document contains a verification opinion or findings.

Figure 12. Respondents for which indepen-dent verification/ assurance over emissions data are provided

Figure 13. Verification/ assurance coverage ratio to total emissions

{ VAA 1{ VAF 2

{ VAR 3{ Not verified/ assured

{ 0%< x ≤20%{ 20%< x ≤40%{ 40%< x ≤60%

{ 60%< x ≤80%{ 80%< x ≤90%{ 90%< x ≤100%

1 Verification/Assurance approved; companies have reported that they have verification complete or underway with last year’s certificate available and they have been awarded the full performance points available for their statement.

2 Verification/Assurance reported as underway, first year; companies have reported that the have verification underway but that it is the first year they have undertaken verification. In this case there is no verification statement available for assessment.

3 Verification/Assurance reported; companies have reported that the have verification complete or underway with last year’s statement available but the verification statement provided has not been awarded the full performance points available, or they have not been scored and therefore their verification statement has not been assessed.

0 50 100 150 200 250

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Scope 2 emissions

Scope 3 emissions

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Scope 1 emissions

Scope 2 emissions

83 23 965

82 18 1033

36 15417

34 8 9 5 3 51

31 10 6 5 2 51

Number of companies

19

Moreover, CDSB’s Framework is designed to be ready for use by governments introducing new regulations on greenhouse gas emissions and use of natural resources. The recent regulations introduced for United Kingdom quoted companies references CDSB’s Reporting Framework as one means of compliance with the law.

CDP’s disclosure system is the established mechanism for organisations worldwide to measure and disclose greenhouse gas emissions and climate change risk information. This information is of great value to investor decision making and helps companies understand what is material to their specific businesses and take the appropriate strategic action.

Working closely with CDP, CDSB’s Framework acts as a lens of materiality on the data a company measures and discloses to investors through CDP. Together CDP and CDSB provide a full disclosure toolkit for companies on carbon and climate change, both in reporting to financial markets and in preparing for and adhering to mandatory reporting around the world.

Please download CDSB’s Reporting Framework and guidance at http://www.cdsb.net/framework and further information is available on CDSB’s website at www.cdsb.net

Global Emissions Reporting: A summary of current regional, national and multi-national legislationGovernments are increasingly transitioning from voluntary to mandatory reporting of GHG emissions and environmental risks. July 2013 saw the UK government legislate for mandatory reporting of GHG emissions by all quoted companies on the London Stock Exchange. CDP played a central role in ensuring these regulations passed, providing technical advice on the content of the regulations and seconding staff to the UK Department of Environment, Food and Rural Affairs to write the guidance that accompanied the regulations. Whilst other countries have similar reporting requirements in place, the UK regulations are unique in requiring companies to report on their GHG emissions globally, and to include details in their annual report.

Discussions are currently on going at EU-level for mandatory reporting of Environmental, Social and Governance information (including GHG emissions) to be included in companies’ end of year reports. This legislation would affect all large EU companies with more than 500 employees, totalling some 18,000 companies across the EU. This underlines the growing acceptance by policymakers that reporting of corporate sustainability impacts will lead to more effective management of these

impacts, and CDP will continue to engage with European policymakers to support the introduction of non-financial reporting requirements. The inclusion of Article 47 on sustainability reporting in the outcome document of the Rio+20 UN Conference on Sustainable Development also demonstrates increased recognition of corporate sustainability at the international level. CDP is working hard to transform this into long lasting policy change.

Global carbon schemesAlthough there has been no global agreement on a price for carbon, the world currently has 14 national and regional mandatory carbon reporting schemes. These are increasingly moving away from global efforts under the UNFCCC to local and regional cooperation to drive action on reducing carbon emissions. The world’s first international trading scheme and still the largest is the European Union Emissions Trading Scheme, which covers 28 EU Member States and entered its third trading period in January 2013. National or localized schemes are also operating in Australia, New Zealand, Japan, Switzerland, the US and Canada, and are planned in China, South Korea and Brazil. Plans are in place for Australia and Switzerland to link their trading schemes with the EU ETS, and California and Quebec are due to link their carbon prices in 2014.

The Climate Disclosure Standards Board (CDSB)The Climate Disclosure Standards Board (CDSB), managed as a special project of CDP, is an international organisation committed to the integration of climate change-related information into mainstream corporate reporting. Established in 2007 at the World Economic Forum, CDSB is a coalition of leading environmental and business organizations, accountancy professionals, companies and investors from around the world.

CDSB’s internationally accepted Climate Change Reporting Framework is designed for use by companies to make disclosures in their mainstream financial reports about the risks and opportunities that climate change presents to their strategy, financial performance and business model. It has been developed using existing standards and practices to ensure a clear harmonised approach to reporting rather than creating new standards. In so doing, it leads to globally consistent and comparable information reaching financial markets. Designed in-line with the objectives of financial reporting and rules on non-financial reporting CDSB complements the work of the International Integrated Reporting Council (IIRC) as well as the Global Reporting Initiative (GRI). CDSB’s Reporting Framework offers a leading example of how to apply the principles of integrated reporting with respect to reporting on climate change.

External environment for Japanese companies20

1. Overhauling the Basic Energy Plan of Japan In September 2012, the then Democratic Party led government developed the “Innovative Strategy for Energy and the Environment.” A society without dependence on nuclear energy, green energy revolution, stable energy supply, electric power system innovations, and global warming countermeasures were the pillars of that strategy. In March 2013, following a period of inaction, the Liberal Democratic Party (which took office in December 2012) resumed discussion of this strategy under their “New Basic Energy Plan.”

Learning from the challenges faced by the Democratic Party where debate on nuclear power generation hindered discussion, the Liberal Democratic Party has decided to rather focus on stable supply and energy cost.

Japanese companies cannot ignore discussion and policies regarding the resumption of nuclear power plants, the nuclear power ratio on a mid-long term, as well as energy supply and energy cost, all of which will significantly impact consumers. The extent of the burden on consumers caused by the surcharge for the Enhanced Feed-in Tariff Scheme for Renewable Energy is also uncertain. The outcome of the government’s energy innovation discussions due in 2020 which covers policies regarding the separation of transmission and distribution of power, as well as the unpredictable potential impact of the shale gas innovation on Japan’s energy resource must also be continuously observed by companies trying to understand their future energy needs and potential carbon emissions.

2. Japan’s non-participation in the second commitment period of the Kyoto Protocol In December 2011, the Japanese Government stated at the COP17 that Japan would not take part in the second commitment period of the Kyoto Protocol. This has influenced not only the nation’s standing in international society, but also impacted domestic policies related to climate change.

During the first commitment period, the Japanese Government carried out domestic policies in line with their 6% reduction

target. The Keidanren (Japan Federation of Economic Organizations) engaged the business community by establishing the Voluntary Action Plan on the Environment.

The Voluntary Action Plan on the Environment, which played a leading role in driving efforts in the Japanese economy - notably the industrial business community - was, literally, of a “voluntary” nature. In practice, however, this was a political measure adopted by the Cabinet based on international commitments for the government to evaluate and monitor the action of the business community to achieve the Kyoto Protocol targets.

Looking forward, the outlook on cooperation between the business sector and the government remains unclear in view of Japan’s non-participation in the second commitment period and the nation’s overhauled energy strategy yet to be finalized.

In January 2013, Keidanren compiled the “Commitment to a Low Carbon Society” that follows from Voluntary Action Plan on the Environment. The plan provides that the Keidanren will lead the business community to continue domestic emission reduction efforts and enhance technical transfer and innovative technological development to contribute to the global reduction of CO

2 emissions in the long term. The plan is based on a long range goal to halve the global emission of greenhouse gases by 2050.

3. Thermal power accounts for approximately 90% of electric power generation Operations of two nuclear reactors in the Ohi Nuclear Power Plant were restarted in July 2012 for the first time since all nuclear energy plants across Japan were shut down following the explosions at the Fukushima Daiichi Nuclear Energy Plant. They were shut down for regular inspections in September 2013, other nuclear power plants not been allowed to resume operations, Japan is again without any nuclear power. Inspections under new regulatory standards are ongoing with, the ratio of nuclear power generation to total generation dropping drastically from about 30% before the Great East Japan Earthquake to 1.7% in fiscal 2012; while that of thermal

Since the oil crisis of the 1970’s, Japan’s energy strategy has been driven by consideration of stable energy supply by increasing reliance on nuclear power generation. The serious situation at the Fukushima Daiichi Nuclear Plant caused by the Great East Japan Earthquake on March 11, 2011, however, has called on the Japanese Government to overhaul its energy strategy whilst taking into account countermeasures against climate change.

In the meantime, the Japanese Government announced at the 17th Conference of the Parties (COP17) to the United Nations Framework Convention on Climate Change held in Durban that it would not take part in the second commitment period of the Kyoto Protocol. With the New Basic Energy Plan of Japan still pending, the outlook remains opaque. As consensus-building has proven to be a challenge even among the nations participating in the second commitment period, Japanese companies that operate globally are in a situation where the development of their business is subject to various uncertainties regarding energy use and global warming countermeasures.

energy rose from about 60% to 88.3% over the same period, according to the Federation of Electric Power Companies (FEPC). Not only has this resulted in a surge in fossil fuel imports, higher generation costs, and increased energy security risk, but it has also caused a significant rise in greenhouse gas emissions. Although the most recent figures announced by FEPC are for fiscal 2011 (this means figures include nuclear energy generated before all plants were taken off line in May 2012), they still show a 29% (or 92,000,000 metric tons CO2e

1) increase compared to fiscal 2010.

Companies in Japan generally include Scope 2 emissions (indirect emissions from consumption of purchased electricity, heat or steam) in their greenhouse gas emissions reporting. Every year, in accordance with the government’s reporting scheme, the Japanese Government determines emission factors for each major power company for reporting companies to use in such emission calculation. The emission factors have sharply increased in recent years due to change in the breakdown structure of power source. For example, the FEPC emission factor for major power companies included in the scheme has increased 16% from 0.417 kg CO2e/kWh in fiscal 1990 to 0.476 kg CO2e/kWh

2 in fiscal 2011. This increase has had a significant impact on calculation results of companies operating in Japan.

4. Renewable energy market gains momentum Enhanced Feed-in Tariff Scheme for Renewable Energy (FIT) was introduced in July 2012 as part of policy measures to promote renewable energy. FIT has raised expectations especially in the solar power market for the high yields available and the low perceived business risk. Companies that own vast areas of forest such as large pulp and paper companies and forestry companies can build biomass generation plants to utilize their unused materials. This triggered more than 20 plans for construction of geothermal plants for the first time since 1999. Japanese geothermal energy technology is utilized in 70% of the geothermal energy plants around the globe. The government is keen on expanding the scale of exports of such technologies by contributing to overseas studies and promoting dialogue with foreign governments.

FIT has indeed stimulated the renewable energy market. At the same time funds are procured through a surcharge added to the standard utility rate, this cost, which is passed on to all electricity consumers including companies and households, will increase as more renewable energy is supplied. The impact on Japanese businesses arising from expansion of renewable energy, including the implications of political and technological issues and costs to develop and enhance the power grid should be monitored closely.

5. Developments in emissions trading schemes There have been no notable developments in emissions trading schemes since the government introduced the “Pilot Operation of Emissions Trading Scheme” in 2008. Although countermeasures against global warming are planned to be examined along with the overhaul of the Basic Energy Plan, we believe that considerable time will elapse before conclusions are reached.

Meanwhile, emissions trading schemes implemented by local governments are attracting attention. The Tokyo Metropolitan Government's “Cap and Trade Scheme (Tokyo-ETS)” mandates entities that are included in the scheme to cut emissions and also allows them to purchase credits to help achieve their targets.

Tokyo-ETS incorporates the characteristics of the area (i.e., concentration of large-scale office buildings and commercial facilities) by including a flexible mechanism to enable entities covered by the scheme to buy credits earned through reduction efforts by exempt entities such as small and medium-sized enterprises in Tokyo and large-scale offices outside the Tokyo metropolitan area. Renewable energy certificates issued by power generators can also be purchased. The Tokyo Metropolitan Government announced that the project achieved 13% and 23% reductions from base year emissions in fiscal 2010 and 2011 respectively. The Tokyo Metropolitan Government has signed a cooperation agreement to integrate some of the program’s features with that of the “Targets-set Emissions Trading Scheme,” a similar program introduced by the Saitama Prefectural Government. These two local governments are showing progressive efforts in the capital region of Japan.

Approximately 1,300 installations including headquarters of large companies, datacenters, commercial facilities, transmission facilities, and office buildings will be within the scope of these programs. Substantially stricter reduction targets, expected to be imposed in fiscal 2015, will call for action that go beyond existing energy and power saving measures such as introducing renewable energy and improving energy management.

With regard to the emissions trading scheme, the Japanese Government introduced the J-Credit Scheme by expansively integrating the “Domestic Clean Development Mechanism (J-CDM)” (a complementary system to the emissions trading scheme) and the “Offset Credit (J-VER) Scheme” (verified emissions reduction scheme which places focus on carbon offsetting). Launched in April 2013, the J-Credit Scheme is a program under which the Japanese Government certifies as “credit” the amount of greenhouse gas emissions (such as CO

2) reduced or removed by introduction of energy-saving devices and forest management. The credits certified under the scheme can be utilized for various purposes, such as for carbon offsetting or achieving the goals set in the Action Plan for Achieving a Low-Carbon Society. The government continues to provide assistance, having certified reduction credits for 1,500,000 metric tons CO2e through the former J-CDM during the period between fiscal 2008 and 2012; and 520,000 metric tons CO2e (90,000 metric tons CO2e from reductions and 430,000 metric tons CO2e from absorption) through the former J-VER Scheme through July 2013.

(The above information is as of September 25, 2013.)

1 This figure takes into account the Kyoto Mechanism Credit. Figures before adjustment are 65,000,000 tons CO2e (17% increase).

2 This figure takes into account the Kyoto Mechanism Credit. Figures before adjustment are 0.510 kgCO2e/kWh (22.3% increase).

21

The global trend towards integrated reporting

The global trend towards integrated reporting is now undeniable and appears inevitable. The International Integrated Reporting Committee (IIRC) is currently reviewing the 359 submissions to their April 2013 Consultation Draft in preparation for the release of the Framework in December this year. Backed by regulators, standard setters and stock exchanges, this standardized framework for integrated corporate reporting is aimed at addressing the information gaps that have led to significant market failures such as the Lehmann Shock and the ongoing coupling of economic growth with resource and carbon intensive business models.

The global economy remains in a fragile state, with much of developed economy growth since the Lehmann Shock being driven by aggressive and unsustainable fiscal easing and stimuli in the US, Europe and Japan. The winding down of the US stimuli program, in particular, is already being felt in China, India, Indonesia and other developing economies as the softening financial economy further exposes the weaknesses in the real economy. The pursuit of economic growth, higher GDP and short-term corporate profit with inadequate consideration for the impacts on the underlying natural systems has resulted in what many are now referring to as “bad growth”. A key question for regulators, investors and business leaders is how to refocus economies, and companies, to pursue a more multi-dimensional approach to value creation; how to pursue “good growth”?

Investors and insurers are starting to connect the dots on the micro, company level impacts of the mismanagement of the macro, systems level risks. Companies are increasingly expected to have a clear and convincing mid- and long-term value creation story; a story that goes beyond financial and manufactured capital management. The Framework is a response to this challenge. It sets out guiding principles and content elements to support the journey from the current, compartmentalized financial focused reporting to allow CEOs, CFOs and IR teams to present a consistent whole-of-company story about the strategy and management of all of the drivers of value to all audiences from a 2 minute TV interview to a two hour investor briefing.

As noted in the CDP CEO foreword, the atmosphere passed the critical threshold of 400ppm of carbon dioxide this year increasing the urgency for action

to avoid dangerous or even catastrophic non-linear changes to the climate system. Businesses must be able to clearly define their business as the climate changes around them, analyze the interconnected, material risks and opportunities and illustrate how their governance structure and business model are conducive to sustainable value creation across all capitals (financial, manufactured, intellectual, social and relationship, human and natural) even in the face of unprecedented physical risks. This story is needed by investors to move beyond short-termism and evaluate the mid- to long-term corporate strategy. This is the story that must now be told even before explaining actual performance and future outlook; it is the story of “sampo-yoshi”.

“Sampo-yoshi”, a traditional Japanese management philosophy embraced by merchants, means “win-win-win” business for not just the seller but also for the buyer and for society as a whole. Human intervention in the global climate system and other critical environmental systems can now be considered part of the old definition of “society”. This concept has been identified in the Japan Association of Corporate Executives (Keizai Doyoukai) 17th Whitepaper on Companies. The whitepaper describes integrated reporting as the gateway to sustainable management, and reinforces that “business management” must be defined as the balancing, blending and competition between profits and the contribution to the sustainability of civilization. In some respects, the soon to be released Framework is a return to the past for Japanese companies, even as they pursue future growth and expansion opportunities beyond Japan at a scale never before considered. It is a return to a way of doing business, a model of governance and a method of communication that worked well in simpler times. Yet it is exactly what is required now for our complex, interconnected resource-constrained unstable climate future.

At PwC, we believe that companies who embrace and take the difficult decisions necessary to manage the risks and seize the opportunities with long term thinking and short term actions at scale will be rewarded for their efforts. It is time to start the journey and embrace the future by telling your unique value creation story.

Koichiro Kimura CEO, PricewaterhouseCoopers Aarata

22

Economic outcomes drive decision making and define success or failure. However, the metrics that act as incentives to invest do not always shine a light on the invisible risks of disasters. Economic forecasts and country-level risk assessments rarely incorporate available disaster risk information. Perversely, more complete disclosure may act as a disincentive and only serve to improve the relative competitiveness of less transparent locations. When information is considered it is often incomplete with the potential for loss significantly understated1.

Even with the best intentions, as demonstrated by many of the Japanese companies responding to this year’s CDP questionnaire, investments continue to be made in a way that actually increases the risk of future economic and human loss. Continuing urbanization, the globalization of supply chains and the pursuit of growth has driven unprecedented and highly concentrated investment in low-lying coastal and river basin infrastructure. These locations are amongst the most exposed to losses from natural disasters, and often where significant gaps between economic and insured losses exist2. The scale and concentration of these risks is not well understood, and so it is not factored into investment decision making processes. Improved collaboration and integrated thinking may be the answer.

The opportunities for the private and public sectors to collaborate on risk reduction and building systemic resilience are still largely untapped. Most corporate risk reduction initiatives remain unshared and many initiatives by governments and international organizations are promoted without meaningful private sector involvement. In a joint study published by PwC and the UNISDR earlier this year based on research with 14 major global companies it is clear that the focus of business remains on business continuity planning and managing the response to disasters post-investment rather than managing risks pre-investment3.

As we move towards the Sendai World Conference on Disaster Risk Reduction4 in March 2015, and the agreement on the post-Hyogo Framework for Action plan, it is critical that the business case for this shift in thinking is established. Examples of businesses achieving 10:1 returns on pre-investment consideration of disaster risk information are a good start5, but for this to happen at scale business leaders require a common approach to compare a range of impacts to inform decision making. Likewise, the private sector needs to establish a common language for collaboration with the public sector to harmonize efforts at minimizing economic and human losses. The challenges of realizing progress on the involvement of the private sector in the development agenda6 is a core focus of the UN High Level Panel7. PwC have supported the UN HLP by working with our clients to develop a more comprehensive approach to comparing different types of impacts which we call Total Impact Measurement and Management (TIMM)8.

TIMM gives boards better insight into social, fiscal, environmental and economic impacts of their activities. This approach provides a structured way to incorporate disaster risk information, but the real benefit is that it gives management the ability to compare strategies and investment choices using quantified data converted into financial information to shine a light on the economic implications of decisions. It is this connection between physical and social impacts and the economics of those impacts that can help business leaders answer the questions which are currently preventing them from taking action on decoupling their businesses from emissions.

The pathway on the journey towards a more resilient, low-carbon future will not be smooth. Total impact thinking and a better understanding of the economics of undertaking the journey are an important first step. Growth remains essential for our shared future, transforming from “bad” to “good” growth is within our reach. The decisions are in your hands.

Scott Williams Director, PricewaterhouseCoopers Aarata

Decouple or degrowth?23

1 Global Assessment Report on Disaster Risk Reduction 2013 “From Shared Risk to Shared Value: The Business Case for Disaster Risk Reduction”, UNISDR, p197

2 Mind the risk: A global ranking of cities under threat from natural disasters, Swiss Re www.swissre.com/rethinking/climate_and_natural_disaster_risk/mind_the_risk.html

3 UNISDR and PwC: Working together to reduce disaster risk, www.pwc.com/en_GX/gx/governance-risk-compliance-consulting-services/resilience/publications/pdfs/pwc-unisdr-report.pdf

4 www.unisdr.org/we/coordinate/hfa-post2015

5 Global Assessment Report on Disaster Risk Reduction 2013 “From Shared Risk to Shared Value: The Business Case for Disaster Risk Reduction”, UNISDR, p139

6 http://www.un.org/millenniumgoals/

7 www.post2015hlp.org/

8 www.pwc.com/totalimpact

2013 Disclosure score24

There was an improvement in the average disclosure scores across all sections of the questionnaire for Japan 500 respondents this year, with scores approaching those of the Global 500. However, the ‘Risk’, and ‘Stakeholder Engagement’ scores are still relatively low and lagging behind the Global 500. In particular, the average scores achieved for the ‘Stakeholder Engagement’ section were well below the Global 500 average. This is due to the fact that very few companies achieved high scores for verification or assurance of data – an area in which Japan 500 companies still remain outliers compared to their Global 500 peers. Even where data is in fact verified or assured, there were cases where the responses by Japan 500 companies were inconsistent with their verification/assurance reports. There is a need for specific details regarding the relationship between risks and the core business activities of the Japan 500 responding companies to be disclosed.

As a certain level of climate change disclosure becomes commonplace not only for Global 500 companies but also for Japan 500 companies, achieving high disclosure scores is not enough. We have entered a stage where enhancing the quality of disclosures such as making it easy to understand from the external stakeholder’s perspective is called into question.

What does a disclosure score typically represent?Generally, companies scoring within a particular range exhibit similar levels of commitment to, and experience of, disclosure. The indicative description of each level is provided below for guidance only; investors should read individual company responses to understand the context for each business.

How is the disclosure score determined?In determining the disclosure score for each company, we assess the following:

{ The level of understanding and disclosure of company-specific exposure to climate-related risks and opportunities;

Figure 14. Climate Disclosure Elements

Disclosure score (Max.100)

The journey to leadership

Compliance

High disclosure scores, which indicate the adequacy of companies’ climate related disclosure to the CDP questionnaire, suggest good internal data management and understanding of the risks and opportunities climate change presents to the company’s business. Though the score is not an indicator of a company’s performance in relation to climate change management (as no judgment is made about absolute levels of emissions, emission reduction achievements, or carbon intensity), it reflects the quality and completeness of the disclosure and hence the likely usefulness to data-users.