Addressing Climate Change — Support for the TCFD Recommendations

In December 2020, we announced our support for the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Based on this framework, we have organized our approach to climate change using the four different recommended areas: governance, strategy, risk management, and metrics and targets. This will help us maintain good communication with a wide range of stakeholders, including shareholders and investors.

In order to accelerate our efforts to address climate change, we have established specific initiatives for all four areas, and we are continually working to improve these efforts.

In order to achieve the “sustainable growth” set out in the Group Management Vision, we treat climate change and other global environmental issues as priority issues. Furthermore, our aim is to be an energy group that helps to alleviate climate change, practicing “harmony and symbiosis with the global environment,” which is part of our Basic Concept of Sustainability. For this reason, Chapter 4 of the Cosmo Energy Group Code of Conduct, which is entitled, “We take care of the global environment,” states that we will proactively and continuously work to preserve the global environment. We also have an Environmental Policy in place to ensure that all of our business activities are conducted in harmony with the environment.

Cosmo Energy Group Code of Conduct

Group’s Environmental Policy

Governance on climate change has been incorporated into governance on sustainability issues as a whole.

 

In order to put into practice the Cosmo Energy Group Management Vision and Code of Conduct and to execute duties appropriately and efficiently, the Cosmo Energy Group has established and operates a system for the execution of duties by directors and employees of the Company and Group companies, a risk management and internal audit system to support this execution, and a system to ensure that audits by the Audit & Supervisory Committee are conducted effectively, all in accordance with our Basic Policy on Internal Control Systems. We have also established the Sustainability Strategy Committee chaired by the Group CEO as the organization that oversees internal control.

 

The Sustainability Strategy Committee members include the executive officers and the general manager of the Corporate Planning Department, the full-time Audit and Supervisory Committee member at Cosmo Energy Holdings, as well as the CEOs and executive officers in charge of sustainability at core operating companies. The committee evaluates the results of activities on material issues under the Seventh Consolidated Medium-Term Management Plan and reports important issues to the Board of Directors.

In addition, the Sustainability Committee, which is headed by the general manager of the Sustainability Initiative Department, meets as necessary, functioning as the practical working body of the Sustainability Strategy Committee.

 

In fiscal 2023, the Sustainability Strategy Committee met seven times and discussed 15 agenda items, of which 7 were reported to the Board of Directors for deliberation and further discussion. Where necessary, the matters discussed by the Sustainability Strategy Committee were shared with Group companies through the Sustainability Liaison Committee. Moreover, the evaluation of progress toward ESG targets has been reflected in executive remuneration since fiscal 2022 as the directors and executive officers promote sustainability management.

 

Committees have also been established at core operating companies (Cosmo Oil, Cosmo Oil Marketing, and Cosmo Energy Exploration & Production) and the semi-core operating company (Maruzen Petrochemical) according to their respective functions. These committees work with the Company’s Sustainability Strategy Committee to ensure that all Group companies are on the same page.

 

Please refer to the link below for more information on the matters deliberated on by the Sustainability Strategy Committee and the reports to the Board of Directors.

 

Sustainability Management Promotion System

 

The Sustainability Strategy Committee deliberates on matters concerning important operations and policies, including climate change-related issues. Matters deemed to have a major impact on the entire Group are discussed and reported to the Board of Directors, thereby ensuring appropriate oversight by the Board.

 

As part of its agenda related to climate change, the Sustainability Strategy Committee deliberates and decides on policies for addressing climate change, including the review of the Roadmap for Achieving Net Zero Carbon by 2050, and plans and targets for GHG reductions. It also leads environmental conservation activities (risk reduction measures) to minimize the environmental impact resulting from the business activities of the entire Group and identifies business opportunities.

 

In fiscal 2023, the Sustainability Strategy Committee conducted semi-annual monitoring of the progress in initiatives on climate change countermeasures and made regular reports on the progress of CO2 emissions reduction measures to the Board of Directors.

 

Matters discussed and decided on at the Sustainability Strategy Committee meetings are shared by members with their respective departments as necessary, while the secretariat communicates with and delivers reports to the Group companies at the Sustainability Liaison Committee meetings.

In order to help build a world of net zero carbon emissions by 2050, the Group has updated its material issues by identifying important ESG issues that have a substantial impact on the sustainable development of society and the Group, as well as on its medium and long-term corporate value. We have identified and addressed the following  material issues related to climate change “climate change countermeasures,” “provision of clean energy, products, and services,” as a “structural reform of profitmaking businesses” in the category of “material issues for sustainable value creation”, as well as “strengthening of Group risk management” in the category of “material issues that form the foundation of business continuity.”

 

In order to achieve the slogan “Oil & New: Next Stage” of the Seventh Consolidated Medium-Term Management Plan, we are actively pursuing efforts to address climate change. These include expanding our wind power generation business and reducing GHG emissions, while taking into account the risks and opportunities associated with climate change.

Based on the climate change risks indicated in the TCFD recommendations, the Group investigates the significance of potential climate-related risks and opportunities relating to its business activities. To do this, it identifies potential changes in the business environment as a result of global environmental changes.

 

The following is a list of the major risks and their impacts, as well as opportunities, as identified by the Group.

Scope: Petroleum development, refining/sales, electric power (renewable energy, IPP), petrochemicals

Time span Short-term= within 1 year, medium term= within 1 to 5 years, long-term= 5 to 20 years

Impact level when risk emerges: Small=Less than 1 billion yen; medium=1 billion yen or more but less than 10 billion yen; large=10 billion yen or more

TCFD recommends that risks and opportunities be assessed based on scenarios under multiple temperature ranges, including the scenario of global warming limited to 2 °C or less. The Group performed the scenario analysis for its petroleum, petrochemical, and oil exploration and production businesses, looking at possible business impacts by 2030, 2040, and 2050.

 

Two temperature ranges for climate change scenarios were used: the 4 °C scenario (business as usual) and the 1.5 °C scenario (very low-carbon transition). In terms of what the world may look like under these temperature ranges, the Group selected the NZE and APS scenarios of the International Energy Agency (IEA) for the 1.5 °C scenario and the STEPS scenario for the 4 °C scenario, which are used by many companies internationally. We also referred to IPCC RCP8.5, RCP6.0, and RCP2.6 as well as scenarios of Japanese and foreign governments and other sources to take into account physical risks such as natural disasters, which are not included in the IEA scenario.

 

For the scenario analysis, we used demand for petroleum products, carbon prices, disaster incidence rates, and other important parameters that affect our business, and we evaluated the financial impact of each scenario in 2030, 2040, and 2050.

 

The following shows the analysis process.

The analysis results for the two scenarios assumed are as follows.

 

What the world may look like under the 4 °C scenario

With the 4 °C scenario, while the oil business is expected to expand globally, extreme weather events due to climate change will become more frequent and severe. Business losses are expected due to machinery and equipment failure caused by wind and flood damage, along with increased costs in the form of higher insurance premiums.

What the world may look like under the 1.5 °C scenario

Under the 1.5 °C scenario, progress on decarbonization will be significant, and declining demand for oil is expected to accelerate as carbon pricing and emissions trading costs increase. It was recognized that there will be an increasing need to reduce emissions in business operations and review portfolios. It was also recognized that maintaining a competitive advantage in the renewable energy and electricity business could provide opportunities to increase sales. Energy companies will be transforming their business portfolios, requiring further development of solar, wind, hydro and other renewable energy markets.

Based on scenario analysis, we assessed the financial impact under the 4 °C and the 1.5 °C scenarios. The results of our calculations based on the assumptions below are as follows.

 

For the 4 °C scenario, we calculated estimates for physical risk due to natural disasters and transition risk due decreasing demand based on what the world may look like under the 4 °C scenario. For the 1.5 °C scenario, we calculated estimates for the transition risks of decreasing demand and carbon pricing based on what the world may look like under the 1.5 °C scenario.

The results of the scenario analysis were discussed by the Sustainability Strategy Committee, with a review of the Roadmap for Achieving Net Zero Carbon by 2050 and the creation of a system to integrate climate change countermeasures into our management strategies being reflected in the Seventh Consolidated Medium-Term Management Plan.

 

For these scenario analyses, we targeted our mainstay petroleum, petrochemical, and oil exploration and production businesses, and we conducted a financial impact assessment using a 2030, 2040, and 2050 timeframe.

 

In Vision 2030, the Company set out to bolster the green electricity supply chain and expand next-generation energy as opportunities for addressing climate change risks. In formulating our long-term vision for the future and other business plans, we will expand investment in the “New” areas under the medium-term plan, with a focus on the green electricity supply chain and next-generation energy, and strive to increase the impact of opportunities.

 

Going forward, we will perform reviews reflecting our analysis by referring to the latest scenarios and the earnings outlook for opportunities. We will continue to create a system that is integrated with our management strategy, while promoting disclosure in accordance with TCFD recommendations. This includes regular results reporting to the Sustainability Strategy Committee.

The Group has positioned “strengthening of Group risk management” as one of its material issues. It has established a system to identify all potential risks relating to business activities, appropriately manage various risks, and minimize losses. We are striving to enhance risk management using a cycle of planning, implementation, evaluation, and corrective action.

 

Refer to Risk Management for more information on risk management at the Cosmo Energy Group.

 

We regard risks related to climate change as important Group-wide management issues. We have established a system to promote ongoing discussion of this important management issue by the Sustainability Strategy Committee, and we are conducting activities such as ascertaining risks and evaluating the progress of response measures.

In 2021, the Group issued its 2050 Net Zero Carbon Declaration, and set the goal of reducing Scope 1 and 2 GHG emissions from the Group's business activities to net zero by 2050. In 2022, we established a roadmap that outlines the required initiatives and processes to achieve this goal.

 

Then, with the release of the Seventh Consolidated Medium-Term Management Plan (FY2023－FY2025), we announced that we would expand the scope of our Net Zero Carbon Declaration to include supply chain emissions, thereby broadening the goal to include Scope 3 emissions. Accordingly, the Group is investigating initiatives to reduce GHG emissions and ways to achieve them.

 

Under the Seventh Consolidated Medium-Term Management Plan, we have set a target of 30% (or 2 million tCO2) reduction in emissions by fiscal 2030 (vs. fiscal 2013), including the amount of avoided CO2 emissions in Scope1 and 2 under Vision 2030.

As part of our response to climate change risks and opportunities, we have set the following metrics and targets for material issues during the Seventh Consolidated Medium-Term Management Plan.

*Bio-ETBE is a fuel blended with gasoline that is synthesized using bioethanol as a raw material

In fiscal 2023, Scope 1 emissions were 6,886,000 tCO2 (down 6% year on year) and Scope 2 emissions were 226,000 tCO2 (down 5% year on year) for a total of 7,112,000 tCO2 for Scopes 1 and 2 combined, down 6% year on year.

The reduction in Scopes 1 and 2 emissions was 419,000 tCO2 from the previous fiscal year (951,000 tCO2 from fiscal 2013) due to the promotion of energy conservation activities, reductions in capacity utilization, and other measures.

 

GHG emissions (Scopes 1 and 2) and amount of avoided CO2 emissions (Unit: 1,000 tCO2)

	FY2013	FY2022	FY2023
Scope1	7,744	7,285	6,886
Scope2	320	243	226
Emissions total	8,604	7,528	7,112
Biofuel (gasoline containing Bio-ETBE) 1	-74	-193	-207
Expansion of wind power 2	-160	-244	-276
Emissions total including avoided emissions	7,829	7,094	6,629
Reduction vs. FY2013	ー	9%	15%

1. Biofuel: The avoided CO2 emissions resulting from adding ETBE to gasoline is calculated as negative CO2 emissions.

2. Expansion of wind power: CO2 emissions avoiding by using renewable energy is calculated as negative CO2 emissions (total power generation for the fiscal year concerned multiplied by the emissions intensity of the displaced fossil fuel-based electricity for the fiscal year concerned).

 

We expanded the previous scope of tabulation for Scope 3 emissions and tabulated all the relevant categories (1 through 7, 9, and 11 through 13). The total for Scope 3 emissions was 76,047,000 tCO2.

Detailed figures on results are available in ESG Data.

GHG emissions (Scopes 1, 2, and 3)