Japan’s climate scenario analysis set to include financed emissions

May 15, 2024|Written by Katy Lee|Japanese Financial Services Agency, Bank of Japan

Japan’s central bank and Financial Services Agency (FSA) have announced they are planning a second climate scenario analysis of the country’s three top banks which will potentially incorporate the lenders’ “financed emissions” – those created by their loans and investments.

The Bank of Japan (BoJ) and FSA said in a joint statement that the exercise would build on an initial climate scenario exercise carried out by the two institutions in 2021, which analysed the impact of climate-related physical and transition risks on Japan’s “mega-banks” – MUFG, Mizhuo and Sumitomo Mitsui – as well as three insurers.

The results of the exercise, published the following year, found that the estimated risks varied significantly depending on the modelling used.

A BoJ spokesperson confirmed to Green Central Banking that the same three banks would be subject to the new analysis, which will be “based on common scenarios for climate related risks” in the 2024 financial year.

They also said that they plan to “consider, on a trial basis, using a scenario analysis framework to examine the impact of financial institutions’ effort to achieve the emissions reduction targets of investee and borrower companies attributable to financial institutions (financed emissions) and its impact on banks’ loans and other portfolio management”.

Environmental campaigners have long pushed for more systematic collection of data on global banks’ financed emissions, highlighting the major contribution of their lending to the continuing dominance of fossil fuels. The 2024 Banking on Climate Chaos report, released on Monday, estimates that the world’s 60 biggest banks have poured US$6.9tn into the fossil fuel industry over the past eight years.

The BoJ and FSA said the new scenario analysis would focus on risks associated with bank lending, within a shorter time frame than the pilot exercise.

“Although climate-related financial risks are expected to manifest over the medium to long term, significant short term changes in climate-related financial risks may occur due to policy changes, technological and resource constraints, and consequent changes in the behavior of firms and households,” they said.

“Therefore, the target time horizon in the second exercise will be set at a relatively short time frame, which may facilitate banks’ risk management.”

The BoJ and FSA are planning a similar scenario analysis for the insurance sector, they said.

This page was last updated May 15, 2024

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