TCFD Disclosure

1. Mitsubishi Heavy Industries Group's Approach to Addressing Climate Change

From power plants to industrial machinery and aerospace, MHI Group's business goal has been to continue discovering technological solutions to the challenges faced by society, and we have contributed to society through the development and implementation of the most advanced technologies of each era. We have been engaged in the issue of "how to use energy efficiently" for many years, particularly in the field of energy. We are also a leading company that has contributed to the reliable and cost-effective supply and use of energy through various efforts in developing highly energy-efficient and environmentally friendly products.

As the achievement of a carbon-neutral society is currently a global issue, the Japanese government declared in October 2020 that it would aim for carbon-neutrality by 2050.

As a proven carbon-neutral leader, MHI Group views leading climate change measures as its mission, and in February 2019 announced its support for disclosure in accordance with the TCFD recommendations. In October 2021, we also announced a "Declaration to achieve Carbon Neutral by 2040," our own new goal to achieve a carbon-neutral society, along with the phrase "MISSION NET ZERO," which embodies our commitment to collaborate with our partners around the world and contribute to the realization of a carbon-neutral society through products, technologies, and services that can help reduce CO2 emissions.

Under the concept of "MISSION NET ZERO," the Group : Scope 1 covers direct CO2 emissions from fuel combustion at the company's plants; Scope 2 covers indirect CO2 emissions from the use of electricity, heat, etc.; and Scope 3 covers CO2 emissions from customers and suppliers related to the Group's business based on our original index, which takes into account CO2 reduction contributions that we provide through CCUS (see note below). The year 2040 was chosen as the target year to account for the time required for our developed technologies to be widely adopted in society and to increase the effectiveness of decarbonization aimed at achieving a carbon-neutral society by 2050.

  • CCUS:Carbon dioxide Capture, Utilization and Storage

As we enter a turning point in the energy industry, MHI Group believes it is vital to collaborate with customers, government, and other various stakeholders to build a value chain that encompasses everything from hydrogen production to utilization, as well as the utilization of CO2 after recovery. Our Group will continue to take the lead in addressing climate change with the goal of achieving a carbon-neutral society.

2. Governance System

One of the important social issues ("materiality"; see note below) identified by MHI Group is to "provide energy solutions to enable a carbon-neutral world."

Our approach to materiality is to realize sustainable management in our business operations, and by promoting this approach, we aim to increase our corporate value and lead to medium- and long-term growth. The Materiality Council, which was established on October 1, 2021, and chaired by the President and CEO, meets twice a year to monitor business activities aimed at achieving materiality targets and to direct business divisions to take appropriate actions.

Furthermore, our Sustainability Committee, which is chaired by the Chief Strategy Officer (CSO), generally meets twice a year to address sustainability issues raised by our stakeholders and to further strengthen ESG initiatives. Committee members are corporate officers, and relevant leaders from each business unit are gathered based on the issues at hand. In FY2021, the Sustainability Committee established a task force for disclosure in accordance with TCFD recommendations, and the Committee monitored the progress of efforts.

The committee also reports to the Board of Directors on a regular basis on the status of the Sustainability Committee's activities, including disclosures in accordance with TCFD recommendations.

Mitsubishi Heavy Industries' critical issues Governance System

3. Strategies (Scenario Analysis)

(1) Climate Scenarios and Strategies

MHI Group has developed two climate change scenarios and assessed their future impact on each business in 2030.

The first scenario is the "scenario to promote decarbonization through stricter climate change policies (Decarbonization Scenario)," which aims to achieve economic growth while limiting the global average temperature rise to a maximum of 1.5°C above pre-industrial levels in the year 2100 in order to minimize environmental impact.
This scenario depicts a world in which strict measures are implemented to reduce greenhouse gas emissions, and society as a whole works to address climate change. The scenario is based on data disclosed by international organizations and the Japanese government (see Note 1).
In this scenario, it is necessary to minimize the occurrence of physical risks, such as a rise in climate-related natural disasters, while promoting responses to transition risks that include stricter environmental regulations and carbon taxes.

  • 1 IEA Net Zero by 2050 - A Roadmap for the Global Energy Sector, IPCC Sixth Assessment Report, Climate Impacts of an SSP1–1.9 Scenario, and information disclosed by the Ministry of the Environment and Japan Meteorological Agency

The other scenario is the "scenario in which climate change policies are not made stricter and the dependence on fossil fuels process (Fossil Fuel Dependency Scenario)," which aims to achieve economic growth with fossil fuels as the primary energy source at current levels and assumes a global average temperature increase of 4.0°C above pre-industrial levels in the year 2100.
This scenario assumes a world where no strict measures to reduce greenhouse gas emissions are implemented, and that natural disasters become more severe and frequent over time. The scenario is based on data disclosed by international organizations and the Japanese government (see Note 2).

  • 2 IPCC Sixth Assessment Report, Climate Impacts of an SSP5–8.5 Scenario, and information disclosed by the Ministry of the Environment and Japan Meteorological Agency.

(2) Risks and Opportunities under the Hypothetical Climate Scenarios

As a transition risk shared by the Group, the Decarbonization Scenario assumes that regulations such as carbon taxes will be escalated, and the cost of carbon emissions will rise significantly. However, we believe that there are numerous business opportunities to be had by leveraging the strengths of our emission reduction-supporting products and technologies.

The Fossil Fuel Dependency Scenario, on the other hand, focuses on the physical risks associated with climate change.
In terms of opportunities, as it is difficult to imagine that future regulations will be eased in developed countries that are already promoting various environmental regulations, we can assume that business opportunities will arise by offering the benefits of our emission reduction technologies.

(3) Strategies for the Risks and Opportunities (Scenario Analysis)

We have conducted an examination of the risks and opportunities associated with the two climate scenarios described above in terms of what should be addressed as a whole group and what should be incorporated into the strategies of each individual business. Corporate divisions will play a critical role in continuing and accelerating the group's examination of what issues should be addressed group-wide.
For matters that should be incorporated into the strategies of each business, we will apply our accumulated knowledge and experience to address risks and turn them into opportunities.
We will continue to broaden and refine the scope of our risk and opportunity analysis as appropriate to changes in the business environment.

  

■Matters that should be addressed group-wide (common risks)

Transition Risks: Increased costs of complying with regulations such as the carbon tax (mainly in the Decarbonization Scenario)

We believe that, given the global situation regarding carbon taxes and other carbon pricing policies, the economic burden in developed countries such as Japan will increase. As emissions in Japan would account for over 70% of total CO2 emissions in our Group's Scope 1 and 2 CO2 emissions by region, we recognize that the economic impact would be significant if carbon pricing were to be elevated in Japan in the future.

To reduce this impact, MHI Group will promote energy saving, the introduction of carbon-free power sources, and the carbon neutralization of all plants mainly based on our own technologies. For example, we are considering incorporating high-temperature heat pumps, hydrogen power generation equipment and CCUS into our own manufacturing facilities.

MHI Group has already positioned its factory in Mihara City, Hiroshima Prefecture, as a pilot plant for achieving carbon neutrality, and plans to install solar power generation equipment through a power purchase agreement (PPA) with the electric power supplier.

By leveraging the knowledge and new technologies gained from this initiative, we will also work to develop new business opportunities by establishing this as a plant where customers can actually see the plant as a model case.

Physical Risks: Natural Disaster Damage (Both Scenarios)

In the Fossil Fuel Dependency Scenario, we recognize the risk of increased future natural disasters, such as "increased natural disasters, damage to the factories of our group or partners or supplied plants."
However, even in the Decarbonization Scenario, we believe that these risks cannot be ignored given the recent track record of natural disasters.

As a result, physical risks from natural disasters are assumed in both scenarios.

We have determined that among our Group, which is expanding globally, we are most vulnerable to natural disasters in Japan where roughly 90% of disasters have occurred in the last five years. These have been primarily due to typhoons and torrential rain.

To prepare against disaster damage, we review our procedures on a regular basis, which specify alternative measures and backup systems in the event of a disaster's functional failure, and we administer extensive training to employees and other relevant personnel.
Furthermore, by FY2021, we have conducted a risk survey of all domestic plants to reduce the risk of property damage in the event of a disaster, with the assumption that the frequent occurrence of major disasters could result in higher insurance premiums or suspension of insurance coverage.

  

■Matters to be incorporated into the strategies of individual businesses

As strategic growth areas, the Group has identified "Energy Transition" and "Smart Infrastructure." On the energy supply side, "Energy Transition" contributes to carbon-neutrality, whereas "Smart Infrastructure" contributes to energy savings, labor savings, and emission reduction on the energy demand side.

Recently, we ran scenario analyses on the "Energy Systems” including Nuclear Power Systems and the "Logistics, Thermal & Drive Systems" which are the divisions typically responsible for these growth strategies and have relatively large operating scales.
Below we introduce a study case that combines the government's basic energy plan and our growth strategy as part of the Decarbonization Scenario.

Energy Systems (Decarbonization Scenario)
In our growth strategy, we investigated Energy Systems as a category related to "Energy Transition."

  

(Business Environment Awareness)
The Paris Agreement, signed in 2015, aims to achieve global carbon neutrality in the second half of this century, keeping global average temperature rise well below 2°C above pre-industrial levels. It sets forth that ongoing efforts will be made to limit global warming to 1.5°C and demonstrates that the response toward carbon neutrality has become a global trend.

According to Japan's Sixth Strategic Energy Plan, which was approved by the Cabinet in October 2021, around 76% of Japan's power supply is currently dependent on fossil fuels. With the plan's goal of reducing this to around 41% by 2030, renewable energy is growing in importance. However, to achieve the carbon neutrality aimed at for 2050, securing a stable and affordable energy supply is critical, with safety being a major prerequisite, and all technological options will be pursued to achieve this goal.

We believe that the transition from fossil fuels to cleaner fuels and renewable energy sources will continue to accelerate.

Even for conventional power generation systems based on fossil fuels, incremental CO2 emission reduction measures will need to be implemented and used in order to ensure a stable supply and affordability. Meanwhile, as an escalation of carbon pricing would impact customers' profitability due to higher carbon taxes, an increased number of products subject to carbon taxes, etc., we would expect fewer opportunities for business negotiations resulting from a curbing of capital investments and such.

  

(Risks)
The following risks are assumed based on the above business environment awareness.

  • Delays in the establishment of supply chains for hydrogen and ammonia as cleaner energy sources than fossil fuels, and consequently, delays in the establishment of hydrogen- and ammonia-related businesses
  • As a result of delays in launching CCUS markets, a decrease in after-sales service due to the decommissioning of existing thermal power plants that would have been used
  • Rapid decline of demand for large-scale centralized power supplies due to more than expected promotion of renewable energy innovation

(MHI Group Response and Opportunities)
As we recognize that reducing fossil fuel-derived power generation will be unavoidable in thermal power generation systems, we will commit efforts toward converting the fuel sources used in thermal power generation.

We will first deal with hydrogen and ammonia, which have been positioned as new resources in Japan's Sixth Strategic Energy Plan, as priority measures for the Group to achieve carbon neutrality.
MHI Group will establish the "Takasago Hydrogen Park" at our factory in Takasago City, Hyogo Prefecture, as a hydrogen power generation demonstration facility for the comprehensive verification of technologies from hydrogen production to power generation, and we are promoting the commercialization of hydrogen gas turbines by 2025.
In addition to the large gas turbines already installed at the plant as demonstration facilities, hydrogen combustion for small to medium-sized equipment will also be tested.
In conjunction with this, we are involved in a number of projects aimed at expanding the global hydrogen supply chain.

For coal-fired power plants, which emit higher CO2, in addition to the CCUS solutions and switching to gas-fired equipment, we also aim to capture the market by promoting the development of boilers to co-fire or exclusively burn ammonia or biomass, which are clean fuels, in order to reduce CO2 emissions.

Also, for nuclear power generation, a carbon-free and reliable power source that has already been put into practice with Group technology, we will support the restart of existing light water reactors, the establishment of facilities to deal with specified major accidents, and the establishment of a nuclear fuel cycle, in accordance with Japan's energy policy and the premise that safety is the highest priority. We will also promote the development of next-generation light water reactors, which will achieve not only excellent economic efficiency but also the highest level of safety in the world, with the goal of commercializing them by the mid-2030s. Other challenges we will take on include the gradual implementation of fast reactor development through international cooperation, the practical application of small light water reactors as a distributed power source, the establishment of hydrogen production element technology in high-temperature gas reactors, and fusion research and development through the ITER Project, an international project.

Logistics, Thermal & Drive Systems (Decarbonization Scenario)
This domain was examined primarily as a category related to achieving Smart Infrastructures in our growth strategy.

  

(Business Environment Awareness)
On the energy demand (utilization) side, where internal combustion engines such as automobile engines are used, the social structure is shifting to one that encourages electrification in order to achieve carbon neutrality.
In Japan, the Sixth Strategic Energy Plan expects electrification on the energy demand side as it sets forth extensive energy saving and the effective use of distributed energy resources such as battery storages.

Furthermore, the spread of electrification, intelligence, and networking, as typified by IoT, MaaS, and CASE, is required not only for comfortable living, but also for optimal equipment operation and more efficient use of energy.

In addition to this, we can expect changes in industrial structures if electrification continues to progress at the current rate on the energy demand side. We believe that the simplification of product structures and a reduction in the number of components due to electrification may result in product commoditization, which may have an impact on our business.

  

(Risks)
The following risks are assumed based on the business environment awareness described above.

  • The commoditization of products due to electrification could result in a decline in the superiority of our design and manufacturing technologies
  • Impact from supply shortages of semiconductors, batteries, and other components due to rapid electrification

  

(MHI Group Response and Opportunities)
MHI Group is committed to effectively applying our accumulated knowledge and experience to provide solutions that meet our customers' needs.
This is more than just an isolated effect, such as switching to electrical appliances, but rather combinations of the Group's products and technologies to create new value-added solutions and differentiate ourselves.
In the industrial sector, for example, we envision value-added solutions that cross business domains, such as combining automation with cold chains in the logistics sector.
We are also currently developing a standard platform for synchronizing and coordinating various mechanical systems, with the goal of optimizing operation by electrifying mechanical systems and making them more intelligent.

Because demand for batteries and electronic components is expected to rise as electrification progresses, the Group is developing not only conventional battery-powered vehicles, but also fuel-cell-powered forklifts and port logistics equipment.

Common Risks Across the Group (Transition Risks)
Decarbonization Scenario – Carbon pricing
Content
Risks Increased cost burden due to escalated carbon pricing, including carbon tax. Particularly concerning is the tightening of regulations in Japan, which accounts for over 70% of our bases' emissions.
Measures Shift to carbon-neutral manufacturing.
Consider incorporating technologies such as high-temperature heat pumps, hydrogen power generation equipment, and CCUS in our manufacturing facilities.
Common Risks Across the Group (Physical Risks)
Both Scenarios – Natural disasters
Content
Risks Damage to the factories or supplied plants of our group or partners. Especially damage to properties in Japan, given that around 90% of disasters in the last 5 years have been in Japan (typhoons and torrential rain).
Measures
  • Regularly review the BCP (Business Continuity Plan) and conduct training for employees and relevant persons.
  • Hedge risks with damage insurance.
  • Implementation of measures to counter risks identified in risk assessments at all Japan plants.
Business Risks (Transition Risks)
Decarbonization Scenario – Energy Domain and Nuclear Energy Segment
Content
Risks Delays in the establishment of supply chains for hydrogen and ammonia as cleaner energy sources to replace or supplement fossil fuels, and consequently, delays in the launch of new markets.
As a result of delays in launching CCUS markets, a decrease in after-sales service due to the decommissioning of existing thermal power plants that would have been used
Rapid decline of demand for large-scale centralized power supplies due to more than expected promotion of renewable energy innovation
Measures
・Opportunities
  • Accelerate the commercialization of hydrogen gas turbines through verification of all stages of the process from hydrogen production to power generation, an example being the creation of Takasago Hydrogen Park
  • Apply CCUS to existing coal-fired power plants
  • Develop clean fuels such as ammonia/biomass-fired boilers, etc.
  • Support the restarting of nuclear power plants which are large-scale carbon-free power sources, the construction of facilities to deal with specific major accidents, and the establishment of nuclear fuel cycles
  • Develop and commercialize next-generation light water reactors with enhanced safety (mid-2030s)
  • Develop and commercialize small light water reactors as distributed power sources, fast reactors that contribute to resource efficiency and the reduction of radioactive waste toxicity, and high-temperature gas reactors that meet the emission reduction/hydrogen needs of industry (after 2040).
Business Risks (Transition Risks)
Decarbonization Scenario – Logistics, Thermal & Drive Systems Domain
Content
Risks The commoditization of products due to electrification could result in a decline in the superiority of our design and manufacturing technologies
Impact from supply shortages of semiconductors, batteries, and other components due to rapid electrification
Measures
・Opportunities
  • Propose solutions that take advantage of our collective knowledge
  • Accelerate the development of not only conventional battery-powered vehicles, but also fuel-cell-powered forklifts and port logistics equipment

4. Metrics and Targets

In October 2021, MHI Group planned and announced two new targets aimed at achieving a carbon-neutral society.

The first target is to reduce the Group's CO2 emissions (Scope 1,2 (see Note 1)) to net zero by 2040. As an interim target, we also plan to reduce emissions by 50% by 2030 (versus 2014 levels). This represents a reduction of CO2 emissions from production activities at the Group's plants and other facilities. Through such efforts, we are committed to achieving carbon neutral plants by applying our developed technologies and promoting further energy saving.

  • 1Scopes 1 and 2 of the GHG Protocol, an international standard for the accounting and reporting of greenhouse gas (GHG) emissions.

The second target is to achieve net zero CO2 emissions across the entire value chain by 2040. As an interim target, we also plan to reduce emissions by 50% by 2030 (versus 2019 levels). This is primarily based on our customers reducing CO2 emissions (Scope 3 (see Note 2)), through the use of our Group's products, as well as reduction contributions from the widespread use of CCUS.

  • 2Scopes 3 of the GHG Protocol, an international standard for the accounting and reporting of greenhouse gas (GHG) emissions.

The Group possesses a broad selection of technologies and solutions in all business areas, including the decarbonization of customers' existing equipment, and will continue contributing to the reduction of global CO2 emissions by offering a variety of solutions.
While there are various approaches to working towards carbon neutrality, by introducing innovative technologies and providing solutions that are both economical and reliable, we not only make it possible to reduce transition costs, but also contribute to the realization of a sustainable society.

Mitsubishi Heavy Industries' critical issues Metrics and Targets

5. Risk Management System

Transition risks and physical risks are factors we consider when developing a management plan in all business divisions, including the Energy Systems as well as Logistics, Thermal & Drive Systems.
The Sustainability Committee verifies the findings of analyses on the most prominent items among the aforementioned climate change risks and opportunities.
The activities of the Sustainability Committee, including the aforementioned, are also regularly reported to the Board of Directors.