Sumitomo Mitsui Trust Group, Inc. (hereinafter referred to as "Sumitomo Mitsui Trust"), which focuses on sustainability-oriented financial services and actively finances ESG (Environmental, Social and Governance) investments and renewable energy sectors. Sumitomo Mitsui Trust has introduced Weathernews' climate change risk analysis service, which enables more sophisticated analysis of the frequency of occurrence and expected reproduction of climate risks up to the year 2100. We asked Hanawa-san and Onishi-san of Sumitomo Mitsui Trust how the results of climate risk analysis are used in the bank's business.
We would like to analyze the impact on cash flow of 130 solar power plants across the country and publish it in the TCFD report.
Sumitomo Mitsui Trust has a long history of initiatives related to climate change, with its subsidiary Nikko Asset Management Co. (then Sumitomo Trust & Banking Co., Ltd.), another subsidiary, developed an SRI fund and entered ESG investment in earnest. In 2018, it was also one of the first to clarify its policy of refraining from financing coal-fired power generation, and has recently been addressing climate change issues from both investment and financing and environmental perspectives.
In the TCFD report, which we have been publishing since 2019, we have been analyzing physical risk scenarios by deciding which assets to focus on in depth each year in order to clearly show the relationship between financial institutions and climate change risk," said Ohnishi-san.
In FY2023, the analytical services of Weathernews will be used to attempt to analyze risks related to solar power generation projects, which have seen an increase in transactions at Sumitomo Mitsui Trust in recent years.
In the past, we have analyzed the impact of flood damage on the mortgage business." When flood damage destroys homes, the cost of repairs can increase the number of borrowers who cannot afford to repay their loans. There is also a possible risk that property values in flood-damaged areas will decline, making it difficult to recover loans. Similarly, we wanted to approach the 2023 project from a climate angle to see what risks exist in different areas of solar power plants," said Hanawa-san.
Quantify the risk of solar panel damage due to future landslides and snow accumulation
In this report, we surveyed the risk of instrumental damage due to landslides and snow accumulation at solar power plants across Japan. In the event of a landslide, the risk of nearby panels being washed away must be taken into consideration. If the snowfall exceeds 2 meters, there is a risk of damage to the solar panels due to the weight of the snow. We have an insurance system that covers the damage to a certain extent, but we were concerned that the overall cost of the business would increase as a result of higher insurance premiums, etc.," Hanawa-san said.
Sumitomo Mitsui Trust is providing financing for as many as 120-130 projects (points) throughout Japan. Based on the location information of these solar power plants, we analyzed the risk of disaster up to the year 2100 for each of them in chronological order and simulated the credit-related costs. There are only a limited number of large areas where solar power plants can be built, and in many cases they are located in mountainous areas. "There are only a limited number of large areas where solar power plants can be built, and in many cases they are located in mountainous areas, including areas prone to snow and landslides. In particular, the number of accidents involving damage increases in years with heavy snowfall, so there was a lot of attention paid to how much it would affect business in the future," said Ohnishi-san.
More than just information disclosure, future data can be used to promote projects.
The results of the scenario analysis using the Weathernews climate model show that the estimated credit-related expenses for landslides will be only about 400 million yen cumulatively until 2100 even under the 4°C scenario, and for snow accumulation, there will be two cases nationwide where the risk of snow accumulation will exceed the load capacity of the equipment in the future, and the credit-related expenses will be only about 190 million yen cumulatively. The snow accumulation risk is limited to about ¥0.4 billion cumulatively until 2100 even under the 4°C scenario. The analysis at this point shows that this amount will not have a significant impact on PV project financing. In terms of snowfall, while the risk of damage to equipment installed in areas with heavy snowfall is not low, we also learned that overall snowfall is decreasing due to global warming," said Hanawa-san.
It was a breakthrough in that we can now have meaningful discussions with the sales department based on the numerical values, rather than just analyzing the data for the purpose of information disclosure. In addition, we used to analyze weather data in the past, but now we have the possibility to 'promote projects while utilizing data from the future,'" says Ohnishi-san.
Climate risk analysis 30 to 50 years into the future to stay ahead of the curve and increase corporate value
In the future, the company is also looking to increase the sophistication of its analysis in light of the increase in renewable energy-related project financing and changes in its portfolio (composition of assets), as well as to conduct global analysis.
He adds, "We will be expanding our business not only to solar power on the ground, but also to offshore wind power generation. In real estate finance overseas, which we are already developing, there are different risks than in Japan, such as hurricanes and wildfires in the United States, for example.
Also, now that analysis over a long period of time (2100 years) has become possible, I think we will see ideas for incorporating data from the portfolio construction stage," said Hanawa-san.
Sumitomo Mitsui Trust Group's efforts to enhance resilience in various ways and to stay ahead of the curve in an era that will require increasingly sophisticated disclosure will be closely watched.
