Background to Climate Change Initiatives

Based on the changing social trends and increased awareness relating to climate change that have occurred since the adoption of the Paris Agreement in 2015, the Asset Management Company recognizes that striving to implement climate change countermeasures through real estate management will contribute to achieving the SDGs and to the organic development of Tosei Reit, and it therefore addresses this as a management issue.

Support for TCFD Recommendations

In January 2022, the Asset Management Company announced its support for the TCFD (Task Force on Climate-Related Financial Disclosures) and joined the TCFD Consortium. Based on the following disclosure items recommended by the TCFD, it strives to disclose climate-related information of Tosei Reit.

Four Recommendations		Eleven Recommended Disclosures
Governance	Disclose the organization’s governance around climate-related risks and opportunities	The board’s oversight of climate-related risks and opportunities Management’s role in assessing and managing climate-related risks and opportunities
Strategy	Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning (if the information is important)	The climate-related risks and opportunities the organization has identified over the short, medium, and long term The impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning The resilience of the organization’s strategy, taking into consideration different scenarios, including a 2°C scenario
Risk management	Disclose the organization’s processes for identifying, assessing, and managing climate-related risks	The organization’s processes for identifying and assessing climate-related risks The organization’s processes for managing climate-related risks How processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management
Metrics and targets	Disclose metrics and targets for assessing and managing climate-related risks and opportunities (if the information is important)	Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process Scope 1, Scope 2, and, if applicable, Scope 3 GHG (greenhouse gas) emissions and related risks Targets used by the organization to manage climate-related risks and opportunities and performance against targets

Governance

Addressing climate change risks is pursued by the REIT Division ESG Committee as one of its ESG initiatives. Details about the ESG Committee are reported to Tosei Reit’s board of directors and the Asset Management Company’s board of directors as needed.
See below with regard to Tosei Reit’s governance.

• Governance Initiatives
• ESG Promotion System

Strategy

Global Outlook Forecast by Tosei Reit in the 4℃ and Less Than 2℃ Scenarios

The scenarios were created for Tosei Reit Investment Corporation, which entrusts management of its assets to the Asset Management Company, by restricting the forecasts to areas relating to its asset management and financing.
Furthermore, when formulating the scenarios, we referred to future climate prediction scenarios and the like published by international organizations (physical risks: IPCC RCP8.5*, transition risks: IEA SDS**).

	4℃ Scenario	Less Than 2℃ Scenario
Natural environment	More severe natural disasters Increased building damage due to more severe wind and flood damage Being impacted by natural disasters localized in the Tokyo metropolitan area due to the portfolio’s characteristics	GHG emissions are controlled and natural disasters are mitigated compared with the 4℃ scenario
Investors and financial institutions	Provision of investment and financing is smooth, but attention is paid to environmental performance and resilience to disaster risks of managed assets Environmental performance of managed assets itself is not a constraint on investment and financing The extent to which the insurance covers the damage is ascertained Efforts to green the portfolio through asset management are reassessed	Investment and financing are provided on a selective basis, and the resilience of managed assets to disaster risks is viewed as a top priority Funds are not provided if climate issue-related response and disclosure are insufficient Preference is given to financing buildings with excellent environmental performance and construction work aimed at improving environmental performance
Technology	Work to upgrade existing facilities at managed assets is vigorously pursued, energy costs are reduced, and the work environment within buildings is improved dramatically Power consumption is reduced through the adoption of LED lighting and A/C performance is improved Improvement of materials and technologies to insulate buildings	Surge in low-carbon solutions Enhanced accessibility of renewable energy and development of a distributed energy-based society (aggregation, etc.) Proactive capital investment becomes necessary for the purpose of introducing innovative renewable energy and energy-saving technology
Customers	Tenants demand a response to rising temperatures and countermeasures for disasters/heat stroke Installation of A/C equipment with excellent performance and energy efficiency Installation of disaster preparedness facilities and supplies When deciding whether to lease, potential tenants weigh the rent versus environmental performance, and higher costs due to renewable energy are not necessarily accepted	Accelerated need for decarbonization among tenants Enhanced reduction activities and setting of long-term CO2 targets, especially among publicly listed companies, due to carbon emission regulations, etc. Higher costs due to use of renewable energy are accepted Priority is given to excellent environmental performance when deciding whether to lease
Governments		Introduction of effective and deliverable low-carbon policies and regulations for companies Introduction of carbon pricing/carbon tax Expansion of renewable energy and energy-saving tax incentives
Other	Possibility of energy price surges and increase in volatility due to increased demand for fossil fuels

• Scenario among four presented by the ICPP (Intergovernmental Panel on Climate Change) in which GHG emissions are not reduced in the future.
• Sustainable development scenario established by the IEA (International Energy Agency), which assumes that clean energy policies and investment are developed on a large scale and the world’s energy supply system steadily develops with the aim of achieving the sustainable development goals such as those in the Paris Agreement.

Tosei Reit’s Risks/Opportunities and Their Impact

Tosei Reit selected, assessed, and analyzed two scenarios: one in which the temperature rises by around 4℃ by the year 2100, and one in which it rises by less than around 2℃.

Item	Category	Change in Business Environment	Risks/Opportunities	Occurrence Period	4℃	Less than 2℃
					Degree of Impact	Degree of Impact
Physical risks	Acute	More severe extreme weather	Decrease in property values and profitability	Short to long term	Large	Small
			Increased repair costs due to occurrence of water and flood damage to buildings	Short to long term	Large	Small
			High investment ratio in the Tokyo metropolitan area resulting in high proportion of properties being impacted when localized damage occurs	Short to long term	Large	Small
			Increased damage insurance premiums	Short to long term	Large	Small
	Chronic	Rise in average temperatures	Increased operating costs, such as A/C costs	Long term	Large	Small
		Rise in sea levels	Costs incurred for work to prevent damage for properties in low-lying areas	Long term	Large	Small
Transition risks	New regulations	Introduction of carbon taxation/spread of carbon pricing	Increased operating and procurement costs, including tax burden	Medium to long term	Small	Large
		Capital investment in energy-saving equipment	Costs incurred for upgrading of equipment/facilities to comply with GHG emission regulations / increased depreciation burden	Medium to long term	Small	Large
		Renovation costs for leased areas	Rise in raw material costs and costs of waste disposal during construction	Medium to long term	Small	Large
	Technological innovation	Development of low-carbon technologies	Risk of failure to use or delay in use of low-carbon technologies	Medium to long term	Small	Large
	Markets	Assessment by investors/financial institutions	Properties’ environmental performance and ESG initiatives are considered upon investment or financing decisions, impeding smooth financing	Short to medium term	Small	Large
		Changing tenant needs	When tenants with strong decarbonization needs (publicly listed companies, etc.) are selecting properties to lease, building environmental performance and disaster preparedness capacity will be prioritized, and occupancy rates will decrease	Short to long term	Small	Large
		Changing demand for fossil energy	Increased energy procurement costs	Short to medium term	Small	Large
	Reputation	Assessment by investors/financial institutions	Market reputation will decrease due to insufficient response to climate change and ESG initiatives	Short to medium term	Small	Large
Opportunities	Resource efficiency	Transition to low-carbon society	Conversion to LED lighting, upgrading of A/C equipment, etc. will reduce environmental footprint and energy costs, even for aged properties	Short to long term	Large	Large
	Energy sources	Phasing out of fossil fuels	Decreased energy procurement costs due to introduction of renewable energy; tax incentive system for renewable energy/energy-saving	Medium to long term	Small	Large
	Technological innovation	Development of low-carbon technology	Reduced energy costs as a result of receiving benefits of technological innovations such as improved A/C performance and improved accessibility of renewable energy	Medium to long term	Small	Large
	Products and services	Environmental certification	Improved tenant loyalty and profitability due to acquisition of DBJ Green Building certification, etc.	Short to long term	Small	Large
	Markets	Assessment by investors/financial institutions	Building environmental performance and ESG initiatives are recognized and green financing methods such as green bonds become more widespread, leading to favorable financing	Short to long term	Small	Large
		Changing tenant needs	Competitiveness is maintained and occupancy rates are improved by developing environmental performance and disaster preparedness capacity commensurate with rent levels	Short to long term	Small	Large

• Short term: 1 to 3 years, medium term: 3 to 10 years, long term: 10 to 30 years

Risk Management

Process for Identifying and Assessing Climate-Related Risks and Opportunities

• Tosei Reit’s climate change-related risks and opportunities are identified and assessed by the Asset Management Company’s REIT Division ESG Committee.

Process for Managing Climate-Related Risks and Opportunities

• The REIT Division ESG Committee establishes applicable plans for Tosei Reit’s risks and opportunities that have been identified and assessed and manages and monitors their progress status.

Integration Status of Company-Wide Risk Management

• At the Asset Management Company, integrated management of company-wide risks is handled by the Risk & Compliance Committee, which reports directly to the board of directors.
• Among the company-wide risks, Tosei Reit’s climate change-related risks and opportunities, which are of particularly high importance and should be managed using a framework based on the TCFD’s recommendations, are overseen by the REIT Division ESG Committee under the supervision of the board of directors. The REIT Division ESG Committee incorporates the applicable risks into the integrated management process for company-wide risks by sharing and collaborating with the Risk & Compliance Committee as needed.

Metrics and Targets

Tosei Reit has established and strives to meet the following metrics and targets, with the aim of reducing its climate change-based environmental footprint through asset management.

Target by FY2030
Energy consumption	35% reduction in intensity
Water consumption
GHG emissions
Environmental certifications	Environmental certification acquisition rate: 50% (based on total floor area) Of which, proportion of eligible green assets: 50%

Please see below with regard to past performance.

• Environmental Performance
• Acquisition Status of Environmental Certifications