Third Party Opinion
In preparing for the current medium-term business plan, MUFG formulated the "MUFG Re-Imaging Strategy" in May 2017. The details of the background for why MUFG revised its business strategy without waiting for the next medium-term business plan, which starts from fiscal 2018, is described in this year’s integrated report.* In short, this strategy is aimed at accelerating and further deepening MUFG’s reforms in order to quickly respond to the current global, social, and economic environments, which are rapidly changing.
Corporate social responsibility (CSR) initiatives focused on environmental, social and governance (ESG) factors have reached a turning point where further preparation is required. In environmental aspects, while the Paris Agreement, a pact bringing the world’s countries together in the fight against climate change, entered into force at the end of 2016, the Trump administration announced that the United States will withdraw from the agreement. Under these circumstances, a number of globally operating companies are being asked to make their own judgments regarding climate change mitigation measures.
As for social aspects, initiatives toward the United Nations Sustainable Development Goals (SDGs), adopted in September 2015, are moving into full-scale implementation. How do companies address the 17 goals and 169 targets to achieve sustainable development in society and convert them into business opportunities? With a series of issues that call for management judgments emerging one after another, greater adaptability is required in corporate governance.
In the message from the CEO at the beginning of this year’s report, MUFG declared its commitment to addressing these sustainable development issues as "our inherent mission in society as a financial group." What is required next is "from Declaration to Action." In fact, some initiatives have already started to be undertaken within MUFG. One particularly remarkable initiative among these is the green bond issued in September 2016. This is particularly groundbreaking due to the fact that it showed "wisdom" to fulfill both objectives: risk management of core businesses and development of new businesses in the ESG market.
Major global banks including MUFG were identified by the Basel Committee on Banking Supervision (BCBS) as Global Systemically Important Banks (G-SIBs). To the G-SIBs, the Total Loss-Absorbing Capacity (TLAC) standard will apply from March 2019, which aims to reinforce and secure their equity capitals. MUFG incorporated the green bond into part of the TLAC bonds issued according to the TLAC standard. This is indeed a concrete example of the integration of ESG into core businesses, and it also showcased MUFG’s financial technology.
In addition, the Financial Stability Board (FSB)’s Task Force on Climate-related Financial Disclosures (TCFD) report was compiled last year, which called for the role of finance in addressing climate change. This report became a trigger that led the financial industry to confront environmental issues head-on. The report also demanded a framework in which the financial sector should evaluate and rank climate-related risks and opportunities facing their borrowers. In this respect as well, MUFG can be seen as having an advantageous position.
As I pointed out in this column last year, since 2005, MUFG has been undertaking initiatives to reduce CO2 emissions produced by borrowers through financing in environment and energy fields, and the current cumulative CO2 reduction resulting from these efforts has already reached over 1 million tons. It can be said that, with over a decade of experience evaluating "environmental impacts" of its borrowers, MUFG has gotten a head start in meeting TCFD’s requirements for assessing impact of climate-related risks and opportunities. I expect the further development of "MUFG’s capabilities to cope with climate change" going forward.
The idea that ESG will bring new risks and opportunities to the financial industry has become better understood among people working in finance. However, one thing to be noted here is that not only do ESG-related risk factors—in other words, non-finance factors—differ from traditional finance factors for which economical evaluation can be carried out, the risk assessment methods for these factors differ as well.
Simply put, while financial risks from investments or loans will remain within the amount of assets and liabilities, ESG-related risks may extend beyond that amount. Also, while environmental risks such as climate change can be quantified to some extent by measuring CO2 emissions, when it comes to impacts on community or human rights issues, quantification becomes extremely difficult. This is the difference between environmental risks, which represent external diseconomies, and social risks, which arise from the fact that companies rest upon the external economy of society. Looking at governance risks, there is also the issue that no clear method exists for grasping uncertainties, such as changes in the business environment.
In terms of these kinds of risk management aspects, as well, MUFG is expected to play a leading role in achieving both financial stability and sustainable development in society by giving due consideration to both financial and non-financial factors in an integrated manner.
(As of September 2017)