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Risk Management

Risk Management

Reflection in the Risk Appetite Framework

From FY 2021, the risks related to climate change have been newly added to the Risk Appetite Statement. We aim to establish, maintain, and further develop a framework for appropriately managing risks related to climate change.

Outline of the Risk Appetite Framework

The Risk Appetite Framework is a framework for clarifying the risk appetite (the type and amount of risk to be undertaken) to achieve MUFG's business strategy and financial plan and for conducting business management and risk management.

The introduction of the framework will enhance transparency in our management planning and make the pursuit of more revenue opportunities possible, while also enabling management with risks controlled.

Outline of the Risk Appetite Framework

Climate Change-Related Risk in Enterprise Risk Management -Top Risk Management-

In the "Top Risk Management" approach that MUFG primarily adopts for enterprise risk management, we consider the risks arising from climate change as one of the Top Risks. We also recognize that climate change-related risks are likely to become apparent and worsen in the medium to long term. In MUFG and its core subsidiaries, management is regularly engaged in discussions regarding the Top Risks to gain a further understanding of the risk recognition, and to develop appropriate risk control countermeasures.

Top Risk Management

MUFG defines a risk event as a loss that could be brought on to the Group as a result of the materialization of various risk scenarios and determines the importance level based on the impact and probability of the event. Risk events that should be paid most attention to over the next year are identified as Top risks.

Overview of Risks Related to Climate Change
Risk scenarios Risk countermeasures

・If our efforts to address climate change-related risks or to make appropriate disclosure are deemed insufficient, our corporate value may be impaired.

・Our credit portfolio may be adversely affected by the negative impact of climate change on our borrowers and transaction counterparties.

・Promote various measures in line with the Carbon Neutrality Declaration while disclosing relevant information and enhancing scenario analysis based on recommendations from the TCFD.

・Formulate interim targets consistent with the Paris Agreement regarding the volume of GHG emissions in addition to updating our Environmental and Social Policy Framework and strengthening engagement with corporate clients.

Construction of a Management Framework to Address Change on a Group and Global Basis

MUFG has established a project team on a group and global basis to strengthen the response to risks related to climate change. The team will implement appropriate measures by identifying and sharing information on regulatory trends etc. and by establishing a framework for risk management on a group and global basis.
To consider a management framework for risks related to climate change, a project team is established with the Group Chief Risk Officer (CRO) as the lead and with participation of the CROs from the Bank, Trust Bank and Securities, as well as regional CROs.
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Main items to be considered and addressed

 

● Consideration of a method of classifying and analyzing risks related to climate change, clarifying risk appetite, establishment of a framework for clients transition evaluation as the way to reflect risk in the credit process, and incorporating risk quantification and management models.

● Organization of risk recognition related to transition risks and physical risks through studies

Framework for Evaluating Client Transitions

We have developed a qualitative framework to evaluate client transitions and started a trial run of the framework in FY2022.  Under the framework, we are trying to understand and assess clients’ transition strategy, feasibility of their plan, governance and so on through engagement. In addition, we support client transitions by verifying each transaction or project, considering sector, regional characteristics and clients’ transition strategy through the initiatives such as Power PT (domestic) and ESG Consultation Process (overseas).
Framework for Evaluating Client Transitions

Environmental and Social Risk Management in Finance

We implemented MUFG Environmental and Social Policy Framework to manage environmental and social risks associated with our f­inancing(note). Concerning coal-fired power generation, mining (coal), oil and gas, and other specific sectors in which concerns are raised over environmental and social impacts, including climate change, we have established our finance policy and a due diligence process to identify and assess the environmental and social risks or impacts associated with transactions has been introduced.
  1. Credit, bond and equity underwriting for corporate clients of MUFG's main subsidiaries, the Bank, the Trust Bank and the Securities HD.

MUFG Environmental and Social Policy Framework

MUFG Environmental and Social Policy Framework

The Process of Identifying and Assessing the Environmental and Social Risks or Impacts of a Business to be Financed

The Process of Identifying and Assessing the Environmental and Social Risks or Impacts of a Business to be Financed
Policies on the Sectors Related to the Environment, Including Climate Change

Since its establishment in May 2018, the MUFG Environmental and Social Policy Framework has been periodically reviewed in response to changes in business activities and the business environment.

Our most recent revision in 2023 tightened our policies concerning climate-related sectors (forests, palm oil, and coal mining).

Environment-Related Policies in the MUFG Environmental and Social Policy Framework
Environment-Related Policies in the MUFG Environmental and Social Policy Framework

Response to Climate Change-Related Risks Based on the Equator Principles

The Equator Principles is an international framework developed to identify, assess, and manage the potential environmental and social risks and impacts of large-scale projects, including infrastructure and natural resource development. The Bank conducts environmental and social risk assessments based on the Principles prior to loan decisions.

Regarding climate change risks, in addition to examining technically and economically feasible options that contribute to reducing GHG emissions, the Bank evaluates the status of project developers' measures to identify and manage physical and transition risks in line with the TCFD recommendations.

Climate Change-Related Responses Required under the Equator Principles
Applicable projects Responses required under the Equator Principles

Among the risk categories used in the Equator Principles, all Category A projects, and as appropriate, Category B(note) projects

・Identification of physical risks and measures to manage those risks
Projects with GHG emissions (Scope 1 and Scope 2), during its operational phase, of more than 100,000 tonnes of carbon dioxide equivalent per year

・Alternatives Analysis

・Assessment of transition risks and countermeasures

・Annual public reporting of GHG emission levels
  1. Category A refers to projects with potential significant adverse environmental and social risks and/or impacts that are diverse, irreversible, or unprecedented. Category B refers to projects with potential limited environmental and social risks and/or impacts that are few in number, generally site-specific, largely reversible, and readily addressed through mitigation measures.

Examples of Climate Change Risk Assessment

In environmental and social risk assessments prior to a loan decision, the Bank evaluates the project proponent’s countermeasures on climate change and confirms that they meet the requirements for climate change risk assessment in accordance with the Equator Principles. The following are examples of physical and transition risk assessments of individual projects for which the Bank conducted environmental and social risk assessments.
Physical risk (arterial road expansion project)
In order to expand an arterial road located in an urban area, the project’s physical risks were assessed as part of the environmental assessment submitted to host-country authorities. Increased flooding associated with extreme rainfall and increased frequency of bushfires were identified as key physical risks. We have ensured that the project proponent commits to management and mitigation of these risks.

Physical risks identified in the assessment

 

・Increase in flooding and landslides associated with extreme rainfall causing damage to road facilities

・Increased frequency of bushfires (associated with increase in average temperatures) resulting in damage to motorway corridor and/or associated infrastructures

Key actions taken by the project proponent

 

・Communication to contractors on increased likelihood of extreme rainfall and wind events occurring during construction; incorporation of extreme weather events in construction planning

・Adoption of a drainage design able to withstand projected extreme rainfall and flooding

・Augmented routine maintenance and inspections of structural components
Transition risks (refinery expansion project)
The refinery expansion project intends to increase the facility’s processing capacity to meet market demands. A climate change risk assessment report, which included an assessment of transition risks, was prepared in line with TCFD recommendations. In the report, policy, regulatory, and market risks were identified as key transition risks.

Transition risks identified in the assessment

 

・New costs associated with GHG emissions e.g., introduction of carbon tax

・Increasing obligations against measuring and reporting GHG emissions

・Decline in demands for oil manufacturing services

Key actions taken by the project proponent

 

・Evaluation of project economics with carbon tax (when introduced)

・Disclosure of climate-related risks and impacts on business and project’s initiatives to support low carbon transition

・Monitoring of global and emerging issues on the perceptions on oil and gas industry
(As of November 2023)

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