NRI’s initiatives regarding the TCFD Final Report
The NRI Group established our Sustainability Activities Committee to carry out initiatives a foundation upholding value co-creation in sustainability management by implementing initiatives related to sustainability management.
Because we consume a large amount of electric power—mainly at our data centers—the NRI Group acknowledges the importance of the effect electricity usage has on the climate. We announced that the NRI Group endorses the TCFD*1 Final Report (“TCFD”) in July 2018, and we are appropriately disclosing information based on the TCFD framework. Repeated discussions are being held in the Sustainability Activities Committee together with experts from the consulting business division, and in FY2018 we began publicly releasing information about our progress at the annual ESG Briefing*2.
In FY2018, we identified risks and opportunities throughout the NRI Group’s overall business. In FY2019, we conducted a scenario analysis for the data center business (which is vulnerable to the impacts of climate change) and calculated the financial impacts. In FY2020, we conducted a scenario analysis for profit centers—the asset management solution business (which is part of the Financial IT Solutions business) and Consulting business—and calculated financial impacts.
Anticipated impacts on our businesses (opportunities and risks)
After declaring our support for the TCFD Final Report, we established the scope of our investigations in FY2018, the first fiscal year. We defined and identified scenarios*3: a “2°C or lower scenario,” in which the temperature increase is kept below 2°C according to the Paris Agreement, and a “4°C scenario,” in which no measures are implemented besides those expected at present. We identified the impacts in these scenarios on the Consulting, Financial IT Solutions, Industrial IT Solutions, and Data Center businesses.
Scenario analysis for the data center business
Among the risks and opportunities identified in FY2018, we conducted a scenario analysis for the data center business—upon which climate change has the greatest impacts—in FY2019.
To define and identify scenarios, we established two scenarios for the mid-to-long term (2030 on): the 2°C or lower scenario and the 4°C scenario. In selecting the subjects of the scenario analysis, we chose scenario analysis subjects to evaluate business impacts in the 2°C or lower scenario and in the 4°C scenario.
Finally, we evaluated impacts on the data center business in each scenario.
【Evaluating impacts in the 2°C or lower scenario】
In the 2°C or lower scenario, to study the effects of adopting a carbon tax and renewable energy, we anticipated a Baseline, Case 1, and Case 2, and evaluated the financial impacts for each. In the Baseline, we anticipated that the adoption of a carbon tax ($75 – $100/t-CO2) caused electric utility expenses to rise 21% to 28% compared to FY2018, and that NRI did not procure renewable energy. In contrast, in Case 1 we anticipated that NRI achieved a renewable energy procurement rate of 36% by FY2030, which is a medium-term target. Case 2 had the same conditions as Case 1 while also assuming a world in which the renewable energy procurement cost*4 had fallen.
As a result, it was found that under the 2°C or lower scenario, the impact of the introduction of a carbon tax can be mitigated by achieving the renewable energy procurement target (see the differences compared to the Baseline for Case 1 and Case 2 in the illustration below).
We are currently investigating the procurement of renewable energy, and are exploring methods for long-term, stable procurement with an eye towards 2030 and 2050.
Assessment of impact in 2℃ or lower scenario
【Evaluating impacts in the 4°C scenario】
In the 4°C scenario, to research the impacts of natural disasters on data center facilities, we used hazard maps and other methods to analyze flood and landslide disaster risks near data centers. We evaluated these impacts as being small. However, data centers are taking measures against anticipated risks.
Scenario analysis for the asset management solution business
In FY2020, we conducted a scenario analysis for the asset management solution business, which is part of the Financial IT Solutions business.
【Business model analysis】
To identify risks and opportunities in the asset management solution business, we first conducted a business model analysis for the asset management solution business. The asset management solution business is broadly classified into the asset management service, investment information service, and BPO service. We surveyed the relationships between these three services and the variation factors of profit that are expected to be affected by climate change events. The below illustration demonstrates these relationships. In the asset management service, we learned that client companies’ asset balances had the largest impacts. In other words, in this business model, as client companies’ asset balances increase, NRI’s profit grows. As client companies’ asset balances decrease, NRI’s profit falls. In the investment information service, we found that the amount of information required by investors had the largest impacts.
【Risk and opportunity analysis】
We then conducted a risk/opportunity analysis. We surveyed impacts on our services and changes anticipated at client companies regarding six climate-related events, and analyzed whether these posed risks or opportunities for NRI. The results are shown in the following illustration.
We assumed that there would be opportunities overall as ESG disclosure and other information advances. We have also conducted interviews with the management of client companies to corroborate the expected changes.
【Calculating financial impact】
Next, we predicted how variation factors of profit will change based on the anticipated changes at client companies and calculated financial impacts for the six events. The below illustration shows the calculation methods used.
We derived calculation methods for and calculated financial impact for each of the events based on the calculation methods in the above illustration and what we anticipated for each scenario.
For instance, regarding (1) Adoption of carbon pricing (carbon tax, etc.) and subsidies for new technology, changes to corporate competitiveness and corporate value impact the asset balance. These impacts on the asset balance also affect profit in the asset management service. Therefore, we conducted a regression analysis to find the correlation coefficient for client companies’ asset balances and profit in NRI’s asset management service. Assuming asset balance changes caused by the 2°C scenario and 3 to 4°C scenario, we can derive profit changes in the asset management service.
To predict stock asset balance changes in the 2°C scenario and 3 to 4°C scenario, we used the rate of fluctuation, which indicates the impacts of climate on the corporate value of the entire portfolio, from the GPIF’s ESG Report released in August 2020.
For events (2) to (6), we once again derived calculation methods and calculated financial impacts.
Financial impact was expressed as profit change. The following illustration shows the financial impacts in terms of changes in earnings, summarized in four categories: adoption of a carbon tax, etc.; improved disclosure; increased interest in ESG investing; and intensifying natural disasters.
According to the illustration above, the impact of increased sales is relatively larger in the 2°C or lower scenario, while the impact of decreased sales is larger in the 3 to 4°C scenario.
Scenario analysis for the consulting business
In FY2020, we conducted a scenario analysis for the consulting business.
【Risk and opportunity analysis】
We conducted a risk and opportunity analysis for the consulting business. The results are shown in the illustration below.
We found that, while climate change results in increased needs for consulting business regarding sustainability, there is a high level of business risk if an economic slowdown occurs due to a failed shift to decarbonization and intensifying natural disasters.
【Opportunities in the consulting business】
We anticipated future consulting opportunities based on our current track record for consulting work regarding sustainability. The results are shown in the illustration below.
We found that there would be greater consulting needs in the 2°C or lower scenario than in the 3 to 4°C scenario, and that sales would increase as well.
【Risk in the consulting business】
Regarding consulting risks, the economy will worsen if the global shift to decarbonation fails, causing natural disasters to intensify. Assuming that the impacts of a worsened economy would be similar to the financial crisis, we calculated that sales would decrease by 12.1%.
TCFD: The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board, whose members include ministries of finance, financial regulatory agencies, and central bank governors from 25 major nations around the world. TCFD recommends that corporations disclose climate-related financial information, in formats such as major annual reports, so investors can make suitable investment decisions. TCFD asks that these reports disclose information on four themes about the risks that climate change poses to corporations, including governance, strategy, and risk management.
ESG Briefing: The NRI Group holds its ESG Briefing so investors, analysts, and members of the media can understand our sustainability management and specific ESG-related initiatives. Refer to the website（https://www.nri.com/en/sustainability/management/esg/2018）
Scenario: We are striving to conduct scenario analyses (analyses on how climate change could affect our business in the future) as recommend by TCFD. Regarding the 2°C or lower scenario, the NRI Group uses the Sustainable Development Scenario in the World Energy Outlook 2018 released by the International Energy Agency (IEA), and Representative Concentration Pathway (RCP) 2.6 (low, stable scenario) from the Intergovernmental Panel on Climate Change (IPCC). We also use the IPCC Special Report on the impacts of global warming of 1.5°C (SR1.5) in a supplementary manner. For the 4°C scenario, we use the IPCC’s RCP8.5 (high reference scenario).
Renewable energy procurement cost: This scenario analysis utilizes two types of renewable energy procurement costs, supposing a case in which the price remains on the same level as today (Case 1), and a case in which the price falls until 2030 (Case 2). For the price on the same level as today, we added four yen to the past electric rate.