Strategy

Hulic aims to maintain sustainable growth, while mitigating and adapting to climate change, through business activities, and we recognize that our climate change response is an important management issue. The effects of climate change are expected to become more apparent over time, so we analyzed the impact of risks and opportunities on our strategy using multiple climate change scenarios and examined resilience of our current strategies including the need to change management plans and basic strategies.
At Hulic, we have been taking actions on strengthening earthquake resistance and disaster prevention measures of our properties, as well as implementing environmental initiatives including decarbonization. As a result, we have found no potential financial impacts that were deemed large related to both transition and physical risks in the scenarios we examined, and have found that our business is sustainable and our strategy is suitably resilient.
Based on our motto of “Driving Innovation and Accelerating Progress,” we are going ahead with a business model that is able to flexibly respond to changes in external environment. We concluded that, going forward, we will be able to continue improving our corporate value through risk mitigation by flexibly evolving our business model against social transformation towards decarbonization. In addition, as valuations increase for environmental initiatives for owned properties, we will build a competitive advantage in the leasing and development businesses. Furthermore, for the environment-related business field, we will seize opportunities in providing new products and services.

Time Horizon for the Short, Medium, and Long-term

While the real estate industry makes business plans looking 10 years into the future, the effects of climate change will likely become apparent over a far longer period. We have established short-, medium- and long-term time horizons when analyzing the clime change effects in conformity with timeline of our long-term vision for the environment, as well as the target years set by the Paris Agreement and Japanese government.

Hulic's climate change time horizon:
confirming with Hulic long-term vision for the environment and CO2 emission reduction target

By 2025 By 2030 By 2050
Short-term Medium-term Long-term
5 years 10 years 30 years
Reduce CO2 emissions by 40% Reduce CO2 emissions by 45% Reduce CO2 emissions by 100%
  • We are revising our related KPIs as we have brought forward the target years of net zero CO2 emissions and RE100, respectively from our initial plans.

Hulic's management and business time horizons

Medium- and Long-Term Management Plan
(2020-2029)
Phase I Phase II and III
3 years 10 years
By 2022 By 2029

Financial Impact of Climate Change

In assessing the financial impact of climate change, we used consolidated ordinary income among other earning indicators including net sales, operating income, ordinary income, and profit attributable to owners of parent as it is especially important key earning indicator for us. We have set the following criteria based on the latest financial results of consolidated ordinary income: JPY 95.6 billion in FY2020 and a forecasted JPY 100 billion in FY2021. For classifying impact, we referenced criteria for revising earnings forecasts, a 30% increase or decrease in the consolidated ordinary income forecast among the "important matters" of the timely disclosure standards of financial instruments exchanges and set such impact as “large”.

Financial impact matrix

Impact
Classification
Ratio to Consolidated Ordinary Income Amount / Year
Large 30% or higher JPY 30 billion or more
Medium 15% or higher, less than 30% JPY 15 billion or more, less than JPY 30 billion
Small 5% or higher, less than 15% JPY 5 billion or more, less than JPY 15 billion
Minimal Less than 5% Less than JPY 5 billion

Businesses Largely Impacted by Climate Change

For each Hulic business, we assessed the impact of climate change according to the type of climate change risks and opportunities as outlined by TCFD. Regarding risks, departments within the Real Estate Business Division, the Planning and Administration Division, and the department responsible for environmental technologies first evaluate the inherent risks for each risk type based on the likelihood of event and the degree of impact. The residual risk was then determined by considering the control effectiveness. Opportunities were also evaluated based on the likelihood of event. By integrating the results of these assessments, we selected businesses that could have a large impact from climate change.
As a result, real estate and the environment-related businesses were deemed to have large impacts from climate change, we selected these businesses for a scenario analysis. We may consider to add other businesses to the climate change scenario analysis when these become significantly impacted by climate change and important.

Businesses subjected to climate change scenario analysis Businesses excluded from scenario analysis
  • Real estate leasing business
  • Real estate development business, Value-added business
  • Environment-related business
  • Tourism-related business
  • New and other businesses

Process for Identifying Businesses with Large Impact from Climate Change

Evaluation of Climate Change-related Risks and Opportunities

1. Identifying key drivers of material risks and opportunities

As a pre-process for selecting a group of climate change scenarios, for each type of climate change risk and opportunity according to TCFD, we identified the key drivers of risks and opportunities that could be important to our business and our major stakeholders (factors that could have a significant impact on our business). At the same time, we excluded risks and opportunities that were deemed less impactful and relevant. Identified key drivers of risks and opportunities were as below:

Key Drivers of Identified Risk

■Key driver: Factors that are likely to have a large impact on Hulic business and as such parameters were collected when creating scenarios

Type according to TCFD Drivers Identified Key Drivers
Risk Category Risk Type
Transition Risks Policy and Legal
  • Strengthened CO2 emission regulations
  • Increased CO2 emission pricing
  • Strengthened energy saving standards
  • Increased subsidies to promote net zero CO2 emissions from buildings
  • Primary energy reductions
  • Carbon pricing
  • Negative emission policies
  • CO2 emission control regulations on buildings
  • Disclosure of energy-saving performance
  • ZEB/renewable energy subsidies
Technology
  • Advances in building equipment technologies
  • Advances in clean energy supply technologies
  • Advances in fireproof wooden construction technologies and cost fluctuations
  • Advances in ZEB technologies and cost fluctuations
  • Advances in renewable energy and cost fluctuations
  • Advances in storage battery technologies and cost fluctuations
Society (Market, Reputation)
  • Increased awareness of environmental issues
  • Changes in company or tenant behavior
Physical Risks Acute
  • Increase in natural disasters
  • Increase in torrential rains
  • Increase in typhoons
  • Increase in flooding
Chronic
  • Chronic climate change
  • Increase in average temperature
  • Rise of sea level

Key Drivers of Identified Opportunities

Type according to TCFD Drivers Identified Key Drivers
Opportunity Type
Resource Efficiency
  • Advances in clean energy supply technologies
  • Reduced CO2 emissions
  • Advances in building equipment technologies
  • Advances in renewable energy and cost fluctuations
  • Adapting to the possibility of increase in expense due to the introduction of carbon taxes
  • Advances in fireproof wooden construction technologies and cost fluctuations
  • Advances in ZEB technologies and cost fluctuations
  • Advances in storage battery technologies and cost fluctuations
Energy Source
  • Development and use of renewable energy
  • Advances in renewable energy and cost fluctuations
Products and Services
  • Increasing demand for products and services that support disaster prevention and energy conservation
  • Growing need for renewable energy and increasing revenue opportunities from selling electricity
  • Rise in asset value and rents of environmentally friendly buildings
  • Advances in ZEB technologies and cost fluctuations
  • Energy conservation and renewable energy cost fluctuations
Markets
  • Creation of new markets that contribute to the resolution of climate change
  • Increased opportunities for collaborative projects with governments, municipalities, and private organizations to realize a carbon-free society
  • Improved competitive advantage of environmentally friendly buildings
  • Increased profits from new market entry
  • Profit opportunities through collaborative projects

2. Formulation of climate change scenarios

The TCFD recommendations propose explaining the resilience of our company strategies in light of an analysis based on different climate-related scenarios including a 2°C or lower scenario. We formulated a 2°C or lower scenario and a business as usual scenario by referring multiple climate change scenarios that include key drivers for the material risks and opportunities that were identified.

Overview of Two Scenarios

  • *1For scenarios where the global average temperature rise is limited to 2°C or lower with at least 50% rate by 2100, the TCFD recommended it is imperative that one of the climate change scenarios be a 2°C or lower scenario
  • *2Temperature rises from 3.8°C to 6.8°C between 2081 and 2100 in scenarios without additional measures/responses for climate change mitigation and adaptation

The following is a group of climate change scenarios for which parameters for the identified key drivers were collected when formulating climate change scenarios. We also used estimated values when the parameters for the exact length of time were not found in a scenario group.

Referenced Major Climate Change Scenarios

[Transition Risks] Policy and legal, technology, market, society, reputation

Organization name Document name Business as usual scenario 2°C or lower scenario
International Energy Agency (IEA) World Energy Outlook 2019 CPS (Current Policies Scenario), STEP(Stated Policies Scenario) SDS (Sustainable Development Scenario)
IEA Perspectives for the Clean Energy Transition, The Critical Role of Buildings (2019) NPS (New Policies Scenario) FTS (Faster Transition Scenario)
2 Degrees Investing The Transition Risk-O-Meter: Reference Scenarios for Financial Analysis (2017) LCT (limited climate transition with 3-4°C decarbonation range) Scenario ACT (ambitious climate transition with 2°C transition) Scenario
Institute for Global Environmental Strategies (IGES) The “net zero world” in 2050 Japan (tentative plan)(2020) Lock-in scenario Transition scenario

[Physical risks] Temperature rise, sea level rise, natural disasters (typhoons, floods, wind damage)

Organization name Document name Business as usual scenario 2°C or lower scenario
The Intergovernmental Panel on Climate Change (IPCC) Representative Concentration Pathways (RCP) Scenario of Fifth Assessment Report (AR5) RCP8.5 RCP2.6
Ministry of the Environment, Japan Meteorological Agency, etc. Climate Change Observation, Forecast and Evaluation Integrated Report 2018 Forecast for annual average temperatures across Japan based on IPCC AR5 RCP8.5 Forecast for annual average temperature across Japan based on IPCC AR5 RCP2.6
Climate Change Adaptation Information Platform (A-PLAT) Observations by meteorological offices, etc. RCP8.5 RCP2.6
IPCC The Ocean and Cryosphere in a Changing Climate (2019) RCP8.5 RCP2.6
Aqueduct Aqueduct Flood (2020) Business as usual, RCP8.5, SSP2 Optimistic, RCP4.5, SSP2
Ministry of Land, Infrastructure, Transport and Tourism, Technical Study Group on Hydraulic Control Plans Based on Climate Change Hydraulic control plan based on climate change (2019) RCP8.5 RCP2.6

3. Risk and opportunity assessment

To examine the impact of climate change risks and opportunities on Hulic’s strategy, we evaluated transition risks and opportunities in the 2°C or lower scenario and physical risks and opportunities in the business as usual scenario.

2°C or Lower Scenario Transition Risks and Opportunities

The financial impact of climate change risk was assessed greatest in the “medium-term” on the time horizon with the degree of impact at that time was assessed “medium.” On the other hand, the financial impact of climate change opportunities was assessed greatest over the “long-term” and the financial impact at that time was assessed “large.” Under the 2°C or lower scenario, we concluded that we will be able to continue improving our corporate value through risk mitigation by flexibly evolving our business model based on current Medium-and Long-term Management Plan against social transformation towards decarbonization by leveraging our motto of “Driving Innovation and Accelerating Progress.” In addition, as valuations increase for environmental initiatives for owned properties, we will build a competitive advantage in the leasing and development businesses. Furthermore, for the environment-related business field, we will seize opportunities in providing new products and services.

2°C or Lower Scenario Transition Risks and Opportunities

■Continue on the basic strategies of current Medium-and Long-term Management Plan (further develop and evolve our business model based on the real estate leasing business)

[Risk]:

  • Ability to promptly respond to a wide range of policies and regulations introduced as climate change countermeasures

[Opportunity]:

  • Environmental measures implemented at Hulic-owned properties become highly valued as social transformation occurs
  • Opportunities to entering new markets that help mitigate climate change will be created

■Hulic’s Basic Strategies

  • *Stages I, II, and III: displays progress in stages.

■Conclusion:

  • We concluded that we will be able to continue improving our corporate value through risk mitigation by flexibly evolving our business model based on current Medium-and Long-term Management Plan against social transformation towards decarbonization by leveraging our motto of “Driving Innovation and Accelerating Progress.”
  • In addition, as valuations increase for environmental initiatives for owned properties, we will build a competitive advantage in the leasing and development businesses. Furthermore, for the environment-related business field, we will seize opportunities in providing new products and services.

Financial impact matrix

Impact
Classification
Ratio to Consolidated Ordinary Income Amount / Year
Large 30% or higher JPY 30 billion or more
Medium 15% or higher, less than 30% JPY 15 billion or more, less than JPY 30 billion
Small 5% or higher, less than 15% JPY 5 billion or more, less than JPY 15 billion
Minimal Less than 5% Less than JPY 5 billion

Business as Usual Scenario Physical Risks and Opportunities

Physical risks become apparent as greenhouse gas emissions continue to climb and climate change remains unmitigated. However, the financial impact of climate change has been estimated as “minimal” on the back of a detailed examination of natural disaster risks conducted when properties are developed or acquired, as well as the mitigation of physical risks through design standards and disaster prevention measures in Hulic properties. Looking at our opportunities, we believe that there will be no financial impact as we do not expect any additional opportunities from climate change.

Business As Usual Scenario Physical Risks and Opportunities

■Maintain current priority area, location policy and portfolio composition by use as described in the current Medium-and Long-term Management Plan

[Risks]:

  • Physical risks, such as natural disasters due to climate change, will become apparent

[Opportunities]:

  • Opportunities up to 2030 have already been incorporated into the Medium-and Long-term Management Plan
  • No additional opportunities pertaining to climate change after 2030 and therefore no financial impact

■Conclusion:

  • Sea level rise: The assumption that average global sea levels will rise 0.45 to 0.82 m*1 after 2081 is out of scope
  • Temperature rise: The increase in air-conditioning-related costs (costs for improving air-conditioning equipment and utility costs due to rising temperatures) is minimal
  • Flood damage (typhoons, torrential rain, floods, inland water, storm surges): Minimal due to measures already taken
  • Wind damage (typhoons): Considering past typhoon damage experiences, the impact was determined to be minimal
  • *1.Compared wirh1986 –2005 average. Shown as highly likely in the IPCC RCP8.5 scenario
Types of
Risk
Risk
Event
Risk Scenario Occurrence Evaluation on Financial Impact of Climate Change Basis for Financial Impact Assessment
Chronic Risk Sea level rise Average global sea levels rise 0.45 to 0.82 m*1 (comparison with the 1986–2005 average in 2081–2100) Flooded/submerged Out of scope of analysis Not applicable to the time horizon (up to 2050)
Temperature rise Japan's temperature rises 1.1 to 3.1
degrees Celsius (2031–2050)
-Increased cost of air-conditioning equipment expansion
-Increased energy costs
Minimal If temperature rises +3.1°C in 2030:
  • Increase in costs related to air-conditioning equipment expansion: Minimal
  • Energy cost increases: Minimal
Acute Risk Typhoons Number of typhoons approaching Japan decreases or pattern changes Flood damage Minimal Damage caused by past typhoons: Minimal
There is a strong possibility that the frequency of severe typhoons (category 4 or higher, maximum wind speed 59 m/s or higher) will increase over the southern seas of Japan
Storm surge High tides with a recurrence period of 100 years occurs every year (2050–2070) Flood damage Minimal Implementing countermeasures for flood damage
Torrential rain Increased frequency of short-term heavy rainfall in all regions and seasons Flood damage Implementing countermeasures for flood damage
Floods Frequency of flooding quadruples (2100) Flood damage Minimal Implementing countermeasures for flood damage
Inland waters The frequency of inland flooding increases in proportion to increase in torrential rains Flood damage Implementing countermeasures for flood damage
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