Addressing Climate Change and Preservation/Restoration of Natural Resources (TCFD/TNFD)

Governance

The NRI Group positions sustainability, including responses to climate change and biodiversity, as a critical management issue. The Board of Directors considers sustainability in its composition and oversight, and in addition to appointing outside directors who have insight regarding sustainability, the Board makes decisions on basic sustainability policies (including materiality) and other important matters.
In addition, under the supervision of the Board of Directors, a Sustainability Committee, chaired by a director in charge of promoting sustainability management, has been established. There are subcommittees under this Committee, each chaired by a senior managing director. They are the Social Value Creation Promotion Committee and the Sustainability Promotion Committee, which promote group-wide sustainability and regularly report their progress to the Board of Directors. Climate-related matters are reported to the Board of Directors at least twice each year.

Sustainability governance structure

Promotion of Net-Zero Journey

The Sustainability Promotion Committee, chaired and vice-chaired by senior managing directors, and composed of employees with climate-related expertise, designates "Net-Zero Journey" as one of its key themes. The Committee advances the consideration and implementation of climate-related measures, such as decarbonizing data centers and offices, reducing Scope 3 emissions, and procuring renewable energy. It also considers issues related to the conservation and restoration of natural resources within this theme.
In addition, a system has been introduced that takes into account the NRI Group's efforts towards achieving sustainability indicators, including greenhouse gas emissions reductions, when determining stock-related compensation for directors (excluding outside directors), senior managing directors, and other employees with officer status.

Strategy

The NRI Group conducts scenario analyses to identify risks and opportunities related to climate change and natural resources, as well as their financial impact on the NRI Group (TCFD scenario analysis, TNFD scenario analysis).

Identification of Risks and Opportunities from Climate Change (TCFD Scenario Analysis)

Assumed scenarios

In the TCFD scenario analysis, two scenarios were assumed: the "1.5°C scenario" with strengthened regulations and measures, and the "4°C scenario" under the current scenario.

Reference Scenarios and Anticipated Contents

Scenario analyses conducted to date

From FY2019 to FY2021, scenario analyses were conducted for individual businesses.

• Scenario analysis for the data center business [FY 2019]

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 [FY 2020]

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 [FY 2020]

• Scenario analysis for the capital markets & wealth management solution business [FY 2021]

In FY 2021, we conducted a scenario analysis for the capital markets & wealth management solution business, which is part of the Financial IT Solutions business.

【Business model analysis】

To identify risks and opportunities in the capital markets & wealth management solution business, we first conducted a business model analysis for the same. The services provided by the capital markets & wealth management solution business are broadly classified into ASP (Shared Online Services) and SI (System Integration). We surveyed the relationships between these services and the variation factors of sales, likely to be affected by climate change events. The below illustration demonstrates these relationships. Within ASP services, we identified that sales variation factors differ between wholesale and retail. We learned, that "number of transactions" and "number of functions used per client" hugely impact wholesale. While for retail, in addition to these, "share price, asset balance, and revenue from securities firms" are the most important factors. On the other hand, for SI services, "number of contracts" is the variable affecting sales.

【Risk and opportunity analysis】

We then conducted a risk/opportunity analysis. We surveyed impacts on our services and potential changes in the external environment in response to climate-related events, and analyzed whether these posed risks or opportunities for NRI. The results are shown in the following illustration.
Within the climate-related events, blue represents "transition risk" which indicates the economic and social transition due to climate change, while orange is for "physical risk" indicating the physical change caused by climate change.
With regard to "transition risk,” we determined that a likely increase in utility and equipment (such as servers) costs to sustain and manage the service due to the adoption of carbon pricing (including a carbon tax) would pose a significant risk to NRI's ASP services.
On the other hand, we believe market reforms, such as sustainability bond market classification, sustainability ranking of companies, and increased pressure/demand to be environmentally-conscious, will create opportunities for NRI's securities services with more individual investors focusing on sustainable investments. With regard to "physical risk," we determined that the risk is high for society as a whole, including NRI, because the entire macro economy will come to a halt or stagnate.

【Calculating financial impact】

Next, we predicted how variation factors of profit would change based on the anticipated changes and calculated financial impacts for each climate-related event. The below illustration shows the calculation methods used. We predicted the anticipated changes from climate change events and derived a method for calculating the financial impact.

The adoption and strengthening of policies for transitioning to carbon price (carbon tax, etc.) were estimated to have an impact on NRI through the profits of securities firms due to fluctuations in share prices. (Above illustration ①) In addition, since it is expected that electricity prices will rise if a carbon tax is adopted, we are looking at the impact in terms of cost increase for NRI due to the increase in electricity prices. (Above illustration ②)
For market reform (sustainable finance-related) and increasing pressure and demand for environmentally-conscious behavior, we believe that expanding sustainable investment to individual investors will become an opportunity for NRI. We used the Fermi estimation to predict the increase in sustainable investment and estimated the impact on NRI. (Above illustration ③)
Changes in trading terms and conditions and increased pressure and demand for environmentally-conscious behavior anticipate that renewable energy will become more prevalent and that use of renewable energy will be introduced into the trading terms and conditions with clients. Based on the assumption that NRI can maintain business with clients by adopting renewable energy as targeted, we estimate the cost impact of switching to renewable energy compared to existing electricity. (Above illustration ④ & ⑤))
Assuming that the market would be suspended due to a natural disaster, we estimated the decrease in sales, etc. that would occur if trading were to be suspended for 1 or 2 days. (Above illustration ⑥) The cost of responding to widespread damage caused by intensifying natural disasters is estimated with reference to existing data. (Above illustration ⑦)
It is assumed that overseas development will be suspended due to intensifying natural disasters and that development will be domestically substituted. We are looking at the cost impact of substituting in Japan if overseas development were to cease operations by 10-20%. (Above illustration ⑧)

The above illustration shows the impact on sales and expenses due to anticipated changes ① through ⑧ in the figure "Method for calculating financial impact for Capital Markets & Wealth Management Solution Business" by range of effects in the 1.5 °C and 3 to 4 °C scenarios, respectively.
The blue graph on the left depicts the impact on sales. The impact of carbon price on share prices is calculated by the GPIF in the form of value-at-risk, which is the impact of climate change on share prices. According to this, in the 1.5°C value-at-risk case, opportunity is high and the share price is expected to rise by about 25%, and NRI's sales increase rate is estimated to be high, through securities firms' profits. The physical impact from natural disasters is limited, it is estimated that the 1.5°C scenario and even the 3-4°C scenario could result in negative sales of about 3% and 5%, respectively.
The yellow graph on the right depicts the cost-related impact, and the positive portion represents a cost increase for NRI. The impact on carbon price and renewable energy procurement is not expected to lead to significant cost increases. The impact of natural disasters is expected to be greater than other expenses such as the cost of repairing facilities, etc., in response to wide-area disasters, and higher labor costs due to suspension of overseas development (offshore development) and the substitution of such development in Japan.

Scenario analysis for all NRI Group businesses

In FY2023, the risks, opportunities, and financial impact on the NRI Group's business overall were re-assessed, based on the results of these analyses. In the table's Category column, "transition" primarily refers to risks and opportunities under the "1.5°C scenario," while "physical" refers to those under the "4°C scenario."

Risks, opportunities, and financial impact of climate change on the NRI Group (223KB)

In addition, for some representative risks and opportunities, we have estimated the financial impact on the NRI Group's business overall as follows.

Estimated financial impact of individual risks and opportunities (assuming FY2030)

Classification		Impact	Estimated value	Assumptions of estimate, possibility of risk mitigation, etc.
Transition	Risks	Increased cost burden from implementation of a carbon tax	Approx. 1 billion yen to 2 billion yen	The tax amount is calculated from the net greenhouse gas emissions assuming business expansion without changing the current renewable energy usage (carbon tax price is based on the IEA scenario). However, if the renewable energy usage rate reaches 100% by FY2030 according to the low-carbon transition plan, the tax amount can be almost zero.
Transition	Opportunities	Increased revenue from consulting and IT solutions due to customers transitioning to decarbonization	Approx. 6 billion yen to 7 billion yen	Assumes expansion of consulting themed on decarbonization in line with the growth of consolidated sales from current orders, recording the entire increase. Similarly, for the business platform business, it assumes expansion in line with the growth of consolidated sales, recording 10% of the increase as resulting from customer transition to decarbonization.
Physical	Risks	Interruption of business activities due to the company experiencing a disaster	Approx. 1 billion yen to 2 billion yen	The decrease in sales was calculated on the assumption that the business platform operation revenue of the NRI Group is not obtained for 2 days due to impact on the infrastructure (electricity, water, communication, etc.) around the Data Center from large-scale flooding, etc. However, the possibility of this risk materializing is considered extremely low due to various measures and training to prevent system stoppage, such as using Osaka Data Center II as a DR site if the Tokyo Data Center is not operational.
Physical	Risks	Disruption of the supply chain disruptions due to a business partner experiencing a disaster	Approx. 2 billion yen to 3 billion yen	Assumes a decrease in sales due to project delays, on the assumption that 10% (based on procurement amount) of business partners commissioned for system development by the NRI Group cannot operate for one month due to large-scale flooding.

Identification of Risks and Opportunities from Natural Capitals (TNFD Scenario Analysis)

Recognition of points of contact with nature

Since July 2022, the NRI Group has participated in the TNFD Forum and advancing scenario analysis, with the Locate, Evaluate, Assess, Prepare (LEAP) approach outlined in the TNFD disclosure framework as a reference.
In conducting the analysis, the NRI Group first grasped the general points of interaction between its business and nature. Specifically, the NRI Group's value chain was laid out to provide an understanding of the relationship of dependency and impact each element has on nature, with tools such as ENCORE^* as a reference. As a result, three main points of interaction were identified. These are (1) interaction related to Data Center and office use (including upstream in the value chain such as energy and equipment procurement), (2) interaction with recipients of services such as IT solutions and consulting (downstream in the value chain), and (3) indirect interaction through societal change initiatives like recommendations for society and consulting services.

^*

ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure): A web-based tool provided by Natural Capital Finance, among others, which allows understanding of the potential dependencies and impact on nature of 157 industries based on GICS. It is also used by TNFD as a useful tool for referencing in Scoping and the Locate step of LEAP, etc.

Points of contact between the NRI Group’s business and nature

Identification of risks and opportunities for the NRI Group based on LEAP analysis

Based on these results, further examination was conducted in FY2023 to identify nature-related risks and opportunities.
During the Locate and Evaluate stages, the NRI Group's relationship of dependence and impact on nature, including geographical information, was investigated in more detail. Using tools such as ENCORE, it was found that the NRI Group primarily impacts nature through waste disposal, and greenhouse gas emissions in Data Centers and offices. In particular, it was confirmed that the Data Centers are highly dependent on water resources. The detailed impact of greenhouse gas emissions is as described in the previously mentioned TCFD scenario analysis. Regarding water usage and waste disposal, the amounts are minimal compared to overall regional usage and disposal, and it is currently believed that the NRI Group's operations alone do not significantly alter the state of nature. In addition, some of the NRI Group's sites are adjacent to wildlife conservation areas, but there has been no immediate impact on these areas due to the Group's operations. The impact on nature at these sites will continue to be monitored closely.
In the Assess stage, considering the interactions and dependencies/impact on nature mentioned above, a scenario analysis was conducted to understand the potential future risks and opportunities for the NRI Group. The following risks and opportunities were identified as a result of the analysis.
In the Prepare stage, based on the above analysis results, the goals outlined in the "Indicators and Targets" section were set. As TNFD recommends setting science-based targets for nature (SBTs for Nature), we will continue to monitor these trends and conduct further analysis, periodically revising the targets as needed.

Risks, opportunities, and financial impact related to natural resources for the NRI Group (251KB)

Risk Management

In managing the overall risks of the NRI Group, including climate-related and nature-related risks, an officer responsible for risk management is appointed, and the Integrated Risk Management Office is established as the risk management department. The Integrated Risk Management Office is responsible for building and maintaining the risk management framework, and for identifying, evaluating, and monitoring risks, and for organizing the overall risk management structure. The Integrated Risk Management Committee, chaired by the officer responsible for risk management, meets twice a year to evaluate the PDCA cycle of risk management and deliberate on risk response measures, reporting the results to the Board of Directors.
Specifically, the risks that may arise in the execution of the NRI Group's business are classified into 13 categories, and risk items are set for each risk classification. The risk items are periodically evaluated by the department in charge of risk management, and the risk items, importance, and impact are reviewed. Of the 13 risk classifications, those recognized as particularly important each fiscal year are selected as "key themes for risk management" by the Integrated Risk Management Committee. One of the 13 risk classifications is "management strategy risk," which includes "sustainability management risks (including responses to climate change)."
In addition, particularly regarding the identification, evaluation, and response to climate-related risks and opportunities, since FY2018, the Sustainability Promotion Committee has considered and decided on measures for each climate-related risk, including business continuity risks due to the intensification of natural disasters, by taking into account the external environment, initiative status, and information from service provision departments.

Indicators and Targets

The NRI Group has established the following environmental goals. For climate-related goals, the Group has publicly committed to achieving net-zero greenhouse gas emissions for Scopes 1, 2, and 3 by FY2050, which aligns with the "Net-Zero Standard" of the Science Based Targets initiative (SBTi). This net-zero target received SBTi certification in February 2024. In addition, the Group raised its existing greenhouse gas emission reduction targets (Scope1+2) for FY2030 to meet the latest SBTi standards and received updated certification.

Environmental Targets of the NRI Group

Indicators		Targets	(Reference) FY2023 results
Indicators		Targets	Rate of reduction	Results
Greenhouse gases	Rate of reduction of greenhouse gas emissions (Base year: FY2019)	[FY2030] Scope 1 + 2: 97% reduction, remaining emissions neutralized^*1	86% reduction	8,000 tons^*2
		[FY2030] Scope 3: 30% reduction	21% increase^*3	218,000 tons^34
		[FY2050] Scope 1 + 2 + 3: Net Zero (92% reduction, remaining emissions neutralized^*1)	6% reduction^*3	226,000 tons^*3
	Rate of use of renewable energy	[FY2030] 100%	--	95％^*2
Water resources	Clean water usage (Base year: FY2013, target: Data Center)	[FY2030] 10% reduction	26% reduction	174,000 m³^*2
Waste	Final waste disposal volume (Base year: FY2020, target: domestic)	[FY2027] 10% reduction	71% reduction	23 tons
Energy conservation	Reduction of Electricity Usage through Energy Conservation Measures^*5 (Base year: FY2023, target: Data Center)	[FY2030] + 1,000,000 kWh	--	+ 0,000 kWh (For the base year)

^*1

“Remaining emissions” refers to emissions that cannot be reduced within the value chain by the target fiscal year. “Neutralization” refers to offsetting these remaining emissions using carbon removal technologies outside the value chain.
^*2

Results values have been verified by a third party.
^*3

Scope 3 calculations are based on simplified methods outlined in the Ministry of the Environment's guidelines, and actual reductions are not reflected in the numbers. The calculation method is currently under review.
^*4

The values listed have been verified by a third party, based on the assumption that the simplified calculation method indicated in *3 was used.
^*5

Energy conservation measures include free cooling, and machine learning optimization of air conditioning.