Addressing Climate Change
How We Look at and Approach Climate Change
Our Perception of and Basic Approach to Climate Change
We are well aware that climate change is a critical issue that has a great impact on our business activities.
The Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), published in 2021, firmly concludes that humans have warmed the atmosphere, ocean, and land. The report attributes increases in greenhouse gas (hereinafter refers to as “GHG”) concentrations including carbon dioxide since around 1750 to human activities such as heavy consumption of fossil fuels. At the 26th United Nations Climate Change conference (COP26) also held in 2021, participating countries formally agreed that they will pursue efforts to limit temperature increase to 1.5℃. This agreement came amid growing awareness that limiting the increase in the global temperature to 2℃ above levels in the Industrial Revolution--the maximum allowable level under the Paris Agreement of 2015--will not preclude tremendous negative impacts. Given the global temperature has already risen by more than 1℃, however, we believe that achieving this target requires bold actions, including social and structural changes.
Given such circumstances, we recognize the importance of efforts to achieve the Japanese government’s goal of attaining net zero GHG emissions by 2050. (“Net zero” refers to a balance between anthropogenic emissions and their removals. The same applies hereinafter.)
We need to adapt to emerging waves of change generated by these increasing impacts of climate change, more solid global frameworks for climate change, and transition to a decarbonized society. We also need to secure both stable earnings and steady growth in assets under management over a medium to long term. To these ends, it is important for us to predict risks and opportunities that climate change may present to our business, to work with our unitholders and other stakeholders, and to reflect such risks and opportunities in our investment strategies and property management.
TRM, the asset management company to which CRR entrusts the management of its assets, is mindful of the need for environmental and social considerations and strong governance. And, as a member of the Tokyu Fudosan Holdings Group(hereinafter referred to as “the Group”), the asset management company shares the Group’s Sustainability Vision.
The Group has a goal of net zero carbon dioxide emissions by 2050 (hereinafter referred to as “net zero policy”) for itself and its supply chains as one of its climate targets.
The asset management company believes that addressing these needs constitutes part of its social responsibilities and is also an avenue to practice its management philosophy. It also believes that doing so will contribute to development of a sustainable society. To put this belief into practice, the asset management company has identified materialities under its Sustainability Policy and shares them with CRR. For more information on the Sustainability Policy and the materialities, please refer to the asset management company’s Sustainability Initiatives.
The escalation of climate change has a huge impact on our efforts toward “reducing environmental impact,” one of our materialities. For this reason, we demonstrate to our suppliers our commitment to environmentally preferable purchasing with our Green Procurement Standards, established in September 2020. We join hands with our suppliers in taking action based on mutual understanding.
To redouble its efforts to address these issues, the asset management company has signed on to the Principles for Responsible Investment (PRI), joined GRESB as a member, and embraced the UN Global Compact (UNGC) in conducting business activities.
Support for the TCFD Recommendations
TCFD stands for “Task Force on Climate-related Financial Disclosures,” a unit established by the Financial Stability Board (FSB) at the request of the G20. With the recognition that climate change poses a serious risk to the global economy, the TCFD is tasked with examining how climate-related information should be disclosed as well as what action should be taken on the part of financial institutions.
In January 2022, The asset management company to which CRR entrusts the management of its assets--announced its support for the TCFD Recommendations. The asset management company is now a member of the TCFD Consortium, an association of Japanese businesses that endorse the recommendations.
Organizational Governance for Addressing Climate Change
Promotion System
For information on the implementation setup at The asset management company (including responses to climate change; hereinafter the same), please refer to “Promotion System” under “Our approach to sustainability.”
Sustainability Promotion Council
As part of its efforts to address sustainability issues, the asset management company convenes the Sustainability Promotion Council regularly to share sustainability-related information (including responses to climate change) and discuss measures to take on these challenges and implement them. The Council also monitors progress in our sustainability efforts regularly and continuously. For more information about the Council, please refer to “Sustainability Promotion Council” under “Our approach to sustainability.”
Environment Management System
The Asset Management Company established a unique environment management system (EMS) which applies PDCA cycle to continuously approach to environmental challenges. We are working to continuously reduce environmental impacts in the management operation for CRR, through the cycle of four steps; set targets (Plan), assess performance (Do), analyze budget vs. actual (Check), and implement countermeasures for a better performance (Act). The Asset Management Department of Comforia Management Division reviews actual performances regularly, reports review findings to the management at least once a year and receives both feedbacks for the fiscal year under review and directions for further improvement for the next fiscal year from the management.
Climate Action Standards
For matters related to addressing climate change, the Asset Management Company has in place a set of climate action standards, under which it has built its structure to promote sustainability and established an action policy that builds on the TCFD framework. To reduce the impact of GHG emissions on climate change, the asset management company, as a member of the Group, sets climate indicators and targets under the net zero policy. For information on the management of risks and opportunities related to climate change, see “Managing Risks and Opportunities Related to Climate Change”.
Reporting on Performance
For information on the Asset Management Company’s structure for reporting and monitoring related to sustainability, please refer to Promotion System.
| Meeting entity | Convening entity | Meeting frequency |
|---|---|---|
| ESG meeting at Comforia Management Division | TRM | Three times or more a year |
| Sustainability Promotion Council | TRM | Four times a year |
| TRM’s Board of Directors meeting | TRM | Once a year (reporting) |
| CRR’s Board of Directors meeting | CRR | As needed (reporting) |
Strategy That Factors in Risks and Opportunities Related to Climate Change
In developing a strategy that factors in risks and opportunities related to climate change, CRR has conducted the following scenario analyses under the net zero policy, which builds on the climate action standards.
Scenario Analysis Assumptions
Climate change risks can be largely divided into transition risks and physical risks. CRR has analyzed three scenarios--1.5℃, below 2℃, and 4℃ scenarios--using future climate predictions announced by two international organizations*. These scenario analyses have used two timeframes during which we will continue to be affected: mid-term (2030) and long-term (2050).
- International Energy Agency (IEA), World Energy Outlook 2022
UN Intergovernmental Panel on Climate Change (IPCC), The Sixth Assessment Report (AR6)
Global outlook under 4℃ scenario
In this scenario, GHG emissions remain high due to a lack of progress in decarbonization action, resulting in more frequent natural disasters. Actions need to be taken to address physical risks rather transition risks, which are outweighed by the former.
This table can be scrolled sideways.
- Climate, Natural Environment
-
- A 4.5℃ rise in annual mean temperature in Japan from the 20th to 21st centuries
- More frequent violent typhoons toward the end of the 21st century
- About a fourfold increase in flooding frequency in Japan by the end of the 21st century compared with the 20th century
- More frequent storm surges due to a sea level rise of 0.45–0.82 m on global average caused by global warming
- Policies, Laws & Regulations
-
- No progress in decarbonization policy from the present
- No strengthening of such systems as carbon taxes and emissions trading as well as of energy efficiency standards for buildings
- Tighter laws and regulations on disaster prevention and reduction
- Mild improvement in energy efficiency of existing properties
- Investors, Financial Institutions
-
- The established practice of factoring in physical risks in making investment decisions despite a measure of increase in ESG investment
- Integrated or standards criteria not available despite more diversity in green finance mechanisms
- CRR
-
- Rising costs of addressing floods and localized torrential rains
- Operating losses due to cessation of operations resulting from damage to properties caused by natural disasters
- No notable increase in construction and refurbishment costs as demand for constructing ZEBs and converting to ZEBs remains low
- More burden on PM, BM, and AM companies due to the need to procure emergency supplies, implement BCP, and conduct disaster response drills
- Tenants, Customers,
Local Communities -
- More considerations paid to the health, comfort, and safety of tenants and customers (measures to prevent heat stroke, BCP, etc.)
- 3.2-fold increase in the per capita cost of air conditioning (to 61 dollars) from the current level due to rising mean temperatures
- Closer cooperation with local communities in times of disaster
Global outlook under the below 2℃ and 1.5℃ scenarios
In these scenarios, GHG emissions are curbed thanks to various environmental regulations, and there are more ZEBs. Actions need to be taken to address transition risks rather than physical risks.
This table can be scrolled sideways.
- Climate, Natural Environment
-
- A 1.4℃ to 1.7℃ rise in annual mean temperature in Japan from the 20th to 21st centuries
- The frequency and intensity of typhoons largely unchanged from the current level
- About a twofold increase in flooding frequency in Japan by the end of 21st century compared with the 20th century
- A sea level rise of 0.26–0.55 m on global average caused by global warming
- Policies, Laws & Regulations
-
- ZEBs being the standard for new constructions
- A rise in the average carbon price in developed countries up to 250 dollars per tonne by 2050 with the introduction of a carbon tax and emissions trading
- Scale-up of environmental standards and disclosure policies associated with improved environmental literacy
- Investors, Financial Institutions
-
- More emphasis on regulatory compliance and environmental certification
- Higher procurement costs for properties with low environmental or fire-resistant performance as investors consider ESG in making decisions and environmentally certified properties constitute a larger percentage of the investment portfolio
- Performance in addressing environmental impacts required as an essential appraisal criterion with green finance mechanisms in place
- CRR
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- ZEBs accounting for 100% of new constructions and more than 85% of existing properties from 2030 onward; an increase in capital investment for achieving these targets being reflected in acquisition costs
- A reduction of 40% in energy use from compared with 2020 due to more ZEBs, resulting in lower utilities expenses
- Additional operating expenses for complying with stricter laws and regulations, demonstrating environmental actions to stakeholders, and improving disclosures
- Lower income from rentals of properties with low environmental or fire-resistant performance
- More work to comply with stricter laws and regulations at PM, BM, and AM companies
- Tenants, Customers,
Local Communities -
- Tenants’ preference for properties with high environmental or fire-resistant performance; lower demand for those with low environmental or fire-resistant performance
- Only 1.8-fold increase in the per capita cost of air conditioning (to 35 dollars) from the current level despite rising mean temperatures
- Communication with local communities about disaster response playing a key role
Analytical Procedure
The analysis of the 4℃ scenario, which assumes a world in which physical risks need to be addressed more than transition risks, has involved identifying and analyzing long-term (2050) risks, which outweigh mid-term (2030) risks. The analysis of the below 2℃ and 1.5℃ scenarios, which assumes a world in which transition risks need to be addressed more than physical risks, has involved identifying and analyzing both mid-term (2030) and long-term (2050) risks and opportunities for each scenario. In both analyses, financial impacts have been analyzed and assessed both quantitatively and qualitatively.
The analyses, both qualitative and quantitative in nature, have been conducted in light of the status of CRR's asset holdings, with reference made to currently available scenarios as published by the IEA and the IPCC and to objective projections published by other third-party specialized institutions. The impact assessments thus made assume some risk factors and their uncertainties; therefore, they do not guarantee their accuracy or safety that they may suggest.
| Risk Category | Type | Item | Description of risks and opportunities | Category | Global outlook under 4℃ scenario Financial Impact | Financial Impact Global outlook under the below 2℃ and 1.5℃ scenarios | |||
|---|---|---|---|---|---|---|---|---|---|
| 4℃ | Below 2℃ | 1.5℃ | |||||||
| 2050 | 2030 | 2050 | 2030 | 2050 | |||||
| Transition Risks | Policies, Laws & Regulations | Increased pricing of GHG emissions | Cost arising from carbon tax levy | Risk | Minor | Minor | Minor | Minor | |
| Higher efficiency due to shift to properties with higher eco performance | Opportunity | Minor | Minor | Minor | Minor | ||||
| Mandates on and regulation of existing products and services | Increased construction costs arising from compliance with ZEB-related and other environmental regulations | Risk | Minor | Major | Minor | Major | |||
| Increased verification costs arising from compliance with ZEB-related and other environmental regulations | Risk | Minor | Minor | Minor | Minor | ||||
| Higher efficiency due to shift to properties with higher eco performance | Opportunity | Minor | Minor | Minor | Minor | ||||
| Technology | Substitution of existing products and services with lower emissions options | Increased costs arising from introduction of new technologies | Risk | Minor | Major | Minor | Major | ||
| Higher efficiency due to shift to properties with higher eco performance | Opportunity | Minor | Minor | Minor | Minor | ||||
| Market | Changing customer behavior | Higher vacancy of properties with lower environmental performance | Risk | Minor | Minor | Minor | Minor | ||
| Lower demand due to little shift to properties with higher fire-resistance | Risk | Minor | Minor | Minor | Minor | ||||
| Shift to high-efficiency properties | Securing competitive edge by shifting to properties with higher environmental performance | Opportunity | Major | Major | Major | Major | |||
| Reputation | Increased stakeholder concern or negative stakeholder feedback | Divestment or poor access to capital markets | Risk | Minor | Minor | Minor | Minor | ||
| Changing customer behavior | Lower demand due to little shift to properties with higher fire-resistance | Risk | Minor | Minor | Minor | Minor | |||
| Physical Risks | Acute | Increased severity of extreme weather events | Costs incurred from the need to address torrential rain disasters, etc. | Risk | Moderate | ||||
| Loss of sales opportunities due to torrential rain disasters, etc. | Risk | Minor | |||||||
| Chronic | Rising mean temperatures and sea levels | Increased costs of air conditioning due to rising temperatures | Risk | Minor | |||||
| Inundation due to sea level rise | Risk | Minor | |||||||
- Risks are represented in orange and opportunities in blue. The scale of the financial impact (minor, moderate, major) is expressed by the depth of color: the deeper the color is, the larger the impact is.
Analysis Findings
Both the below 2℃ and 1.5℃ scenarios entail substantial transition risks. In these two scenarios, the introduction of a high carbon tax designed to curb CO2 emissions in Japan is likely to mean higher operational costs stemming from, for example, a heavier tax burden on CO2 emissions from proprietary properties. Stricter environmental regulations with regard to ZEBs, energy saving standards, and the like are likely to translate into additional costs of refurbishments needed to comply with them.
Tighter regulations will have a tremendous impact on tenants’ choice of properties. It is expected that in comparing properties of different real estate agencies, demand for properties with lower energy efficiency will decline.
With an eye on a transition to a decarbonized society under the scenarios of below 2℃, CRR is committed to addressing these risks and maintaining its competitive edge. To these ends, CRR will take a number of actions. These include introducing renewable energy to common area in a planned way; implementing energy efficiency retrofits, a typical example of which is a systematic switch-over to LED lighting in the communal areas; increasing the proportion of environmentally certified properties; and incorporating green-lease provisions in contracts with new tenants.
Under the 4℃ scenario in which little progress will be made in decarbonization, CRR expects damage to its proprietary properties due to increased severity of extreme weather events and resultant increases in repair expenses. With regard to chronic changes such as rising mean temperatures, CRR is committed to reducing CO2 emissions by, for example, considering and replacing existing key equipment such as electric and air conditioning equipment with more energy-efficient equipment wherever possible when it reaches its end of life.
It is worth noting that these analyses (slated for publication in September 2023) did not find any marked changes from the previous analyses (published in September 2022) or any matters of significant concern. It is unlikely that there will be major changes to the trends concerning the above scenarios. Accordingly, CRR will continue with what it has been doing.
Addressing Physical Risk
Japan is prone to natural disasters. Its geographical factors expose it to inundation and other damage due to typhoons and torrential rains. Earthquakes are frequent as well. CRR has in place a structure that minimizes such damage and enhance resiliency to intensifying disasters to reduce the risk that disasters will erode portfolio profitability. The Asset Management Company has a business continuity management (BCM) policy on crisis response and business continuity planning (BCP) under its basic policy on risk management.
Progress in global climate change may make natural disasters more frequent and destructive. CRR regards an increasing financial impact of such disasters as a major physical risk of climate change. Please see the link for our preparedness for disasters.
Predicting flood risks
CRR keeps abreast of possible flood damage to its portfolio with the help of hazard maps prepared by the Ministry of Land, Infrastructure, Transport and Tourism and local governments. (CRR uses information on flood and inundation hazard areas as well as storm surge and inundation hazard areas.)
To minimize economic losses, CRR makes necessary Preparation for Disasters for its properties and has a fire insurance that covers flood losses in place for each of them.
Please check earthquake PML in Financial Statements.
| Flood Depth (m) | Central Tokyo | Sub-central Tokyo | Tokyo Metropolitan Area | Other Major Cities | Total (building) | Rentable Units (units) |
|---|---|---|---|---|---|---|
| Over 5.0 | 0 | 5 | 0 | 0 | 5 | 564 |
| 3.0 to 5.0 | 0 | 18 | 2 | 2 | 22 | 1,539 |
| 0.5 to 3.0 | 20 | 19 | 1 | 4 | 44 | 3,300 |
| 0 to 0.5 | 8 | 7 | 2 | 2 | 19 | 1,951 |
| No damage expected | 20 | 32 | 3 | 1 | 56 | 3,556 |
| Total | 48 | 81 | 8 | 9 | 146 | 10,910 |
- The table above shows the numbers of properties we owned as of the end of January 2023 (excluding those that had been sold by the end of August 2023).
Managing Risks and Opportunities Related to Climate Change
Matters related to materialities regarding climate-related risks and opportunities and adaptation and resilience to climate change are regarded by the Asset Management Company as matters related to climate action in accordance with its climate action standards. They also constitute specific sustainability initiatives and are therefore part of the matters related to promoting sustainability.
In January 2022, we announced our support for the TCFD Recommendations, which prompted us to conduct scenario analyses described above. The analyses were aimed at identifying risks and opportunities arising from the impact climate change may have on CRR, assessing the impacts of these risks and opportunities on our business, and making changes to our future strategies as needed. Risks of particular importance were singled out in light of how likely they emerge, when they emerge if ever, and how they may impact our finances.
Based on the analysis findings, we will review and further improve our initiatives. To this end, we will execute function management with the help the EMS and monitor CRR's actions and their progress through the Sustainability Promotion Council.
Setting Metrics and Targets Related to Climate Change
Metrics and Targets
CRR has identified its metrics and targets related to climate change under the category of "reducing environmental impact," one of the materialities it shares with the Asset Management Company. For the purposes of identification, CRR assessed risks and opportunities presented by the impacts of climate change as well as the importance of specific actions aimed at addressing these impacts. CRR has also set out a policy for reducing environmental impact. The policy covers four key areas: energy use, energy-related CO2 emissions, water conservation, and waste generation. Additionally, CRR has set the following targets in line with the net-zero policy based on the Asset Management Company’s climate action standards to improve energy efficiency. Specific actions to this end include implementing energy efficiency retrofits and incorporating green-lease provisions in tenant contracts.
- ① Energy use: Medium- to long-term target of 1% average annual reduction in energy use intensity
- ② Energy-related CO2 emissions: by 2030, 40% reduction in greenhouse gas emissions intensity (vs.2020).
- ③ Proportion of our portfolio properties with environmental certifications: 40% by 2030
Progress toward Targets as Well as Practices
CRR regularly discloses information on environmental performance with regard to energy consumption, CO2 emissions, and water consumption, as well as Environmental Certification and environmental impact reducing works. It also provides relevant information on the annual Sustainability Report and financial statements as part of ESG-related information.