The TCFD’s recommendations suggest consideration based on multiple warming scenarios. MRA assessed the impact of climate-related risks and opportunities for the current scenario (3-4°C scenario) and transition scenario (1.5°C scenario).

An overview of the respective scenarios, including the global outlook in each case, is shown below.

The TCFD’s recommendations divide climate-related risks into two categories: physical risks and transition risks. In the scenario analysis, we identified physical risks in the current scenario and transition risks in the transition scenario, then specified the key risks that are presumed to have a strong correlation with our business.

In information disclosure recommended by the TCFD framework, climate-related risks are typically organized as shown below.

Based on the importance assessment results, the risks and opportunities regarded as highly important for each scenario were extracted and the items that have a significant impact on our business were determined.

• Chronic risks
  It is presumed that tenant sales will drop and occupancy rates and rent income will decline, if consumption trends change, going out/traveling is restricted, or tropical disease epidemics occur due to increased average temperature.
  
  However, the assets owned by United Urban are diversified across multiple usage types, so if, for example, a given usage type is negatively affected, such as decreased tenant sales and rents for offices, the impact will unlikely extend to other usage types. It is therefore expected that the impact on the overall revenues of United Urban will be limited.
• Acute risks
  It is presumed that our business will be harmed by increased repair costs and decreased rent income, especially for properties in coastal areas, if damage occurs due to flooding and violent winds because of more frequent and more severe heavy rains and increased and more critical tropical cyclones.
  
  The buildings presumed to be at risk of such damage have already been identified by means of government hazard maps, etc., and the necessary measures have been already implemented including installation of tide prevention panels.
  As shown in the table below, MRA recognizes that approximately 21% of the portfolio (based on total floor area) is exposed to flooding risks as of the end of November 2023. Since these properties represent only a part of all owned assets of United Urban and their locations are diversified across the entire country, it is presumed that the impact of damage in a specific region to the overall revenues of United Urban will be limited. However, it is also possible that the area in which there are flooding risks will increase in the future.

• Opportunities
  While possibilities such as increased rent for logistics facilities accompanying growing demand of e-commerce due to rising average temperature were discussed, but we did not find any phenomena that would have a significant impact on the revenues of United Urban.

• Policy risks
  Assumed risks include increased costs for equipment replacement and response to regulatory compliance due to tighter greenhouse gas (GHG) emission regulations such as energy-saving adaptations and environmental policies for real estate owners.
• Technology risks
  It is presumed that there will be cases involving advanced depreciation or disposal of existing equipment with poor environmental performance due to the transition to low-carbon technology in construction work.
• Market/Reputation risks
  Decline of rent income and loss upon property disposal due to lowering competitiveness of buildings with poor environmental performance will likely, as people’s behavior becomes more environmentally conscious and investment appetite for real estate with excellent environmental performance become stronger.
  
  However, since it is likely that these risks will arise gradually over the medium to long term as decarbonization initiatives are put into practice step-by-step at the global level, significant immediate decline of asset value is not assumed in the short term.
  
  Furthermore, in case that a policy or restriction is introduced in advance or a situation of market or reputation changes in a given usage type, the impact on the overall revenues of United Urban is presumed to be limited, because United Urban’s properties that have acquired environmental certification are diversified across multiple usage types (refer to (4) Metrics and Targets).
• Opportunities
  We also discussed possibilities of rent increase at United Urban’s properties with environmental certification driven by people’s growing awareness toward environment and rent income by leasing rooftops with solar panels, which are aimed at higher penetration of sustainable energy. However, it is thought to be negligible that those opportunities would have a significant impact on the revenues of United Urban at present. That said, with an eye on policy and technology trends, we continue to assess and execute strategies which are likely to bring about opportunities.

Based on the scenario analysis, the countermeasures to reduce risks we assessed to be highly important to our business at present are as follows.

In the current scenario, it is assumed that climate disasters cause physical damage to assets and as a result an increase in maintenance and repair costs and damage insurance premiums is likely. And such climate disaster risks will also give an impact to tenants’ preferences. When disasters occur, it is possible that tenants will become highly conscious of such physical risks and avoid potential areas and buildings which will be affected. On the other hand, properties that are adequately prepared against climatic disaster risks will be viewed favorably by tenants and may be expected to have stable occupancy in the long term. Based on these ideas, MRA implements comprehensive disaster countermeasures at United Urban’s properties to reduce physical risks and enables opportunities for more stable revenues.

While the Japanese government sets legal restrictions relating to energy efficiency and carbon emissions of buildings, no notable regulatory compliance costs have been incurred at properties of United Urban as of today. However, in case that the government introduces carbon taxes and tightens the regulations with the aim of achieving the Paris Agreement’s targets, it is possible that energy costs will increase and the cost burden of installing equipment to comply with regulations will increase going forward.

Furthermore, as the transition to a low-carbon/carbon-neutral society moves forward, greater consideration will be given to the environmental performance of assets of United Urban by tenants, investors and society. And it is possible that the profitability of our properties and financing conditions will be impacted as a result. At the present time, there are third parties’ survey findings showing that a rent premium exists for properties with environmental certification, and financing methods such as green bonds and green loans are becoming more widespread. Besides this green premium, there is also a risk that brown discount may occur for real estate with inferior environmental performance.

MRA implements initiatives aimed at managing the environmental footprint (energy consumption, etc.) and increasing efficiency at the United Urban’s portfolio as well as making the portfolio greener by obtaining environmental certifications in order to reduce the financial impact due to regulatory changes and meet the perception of tenants and investors who are very conscious of ESG. In particular, we recognize that reducing the environmental footprint is one of the business opportunities that will bring direct financial benefits, such as lowering building management costs.

In our internal risk management regulations, which stipulate holistic risk management policy of the asset management company, MRA sets our basic risk management approach, which specifies risk management as a key management issue. From the perspective of performing asset management tasks, the risks to be managed are categorized as follows:

1. Real estate investment risks
2. Administrative risks
3. System risks
4. Other risks

Specific risks are defined by further categorizing the risks above in accordance with the detailed risk management rules. In addition, these rules stipulate the periodical review of risks inherent in business processes in order to monitor and recognize risks and risk control activities.

Monitoring and recognizing risks and risk control activities are performed by using a risk control matrix as follows:

1. Each department of MRA documents its business processes and reviews them periodically
2. Each department also reviews the risks inherent in each business process, whether there are risk control activities in place for the applicable business process and the scope of the risks
3. When reviewing those business processes, the head of each department stipulates another appropriate method as required, taking into account factors such as the management environment, with the approval of the CIO, CFO, and CCO

United Urban and MRA have identified "Energy consumption and management, utilization of renewable energy" as materiality issues, and have set medium- to long-term action goals following the Paris Agreement. These goals are: "(1) Reduce total portfolio Scope 1 and Scope 2 GHG emissions by 42% by 2030 (compared to 2021)(ii) By 2050, Reduce total GHG emissions including value chain (Scope 3) to net zero."
In parallel with this, we have established sustainability targets and are striving to achieve the "five-year average reduction of 1% or more per unit" of energy consumption per unit, which is calculated by taking into account the amount of energy used in the properties we own and the total floor space, etc., and is an effort target required by the government under the Energy Conservation Law (Law Concerning the Rational Use of Energy, etc.).

In order to reduce greenhouse gases in a practical manner, we continue to incorporate a green lease clause to a lease contract with tenants and replace with renewable energy based on the characteristics of given properties. Also, we implement appropriate measures based on circumstances of each property including consulting with energy experts on energy saving, increasing efficiency through upgrades to air-conditioning systems and converting to LED lighting.

One of the metrics to manage climate-related risks and opportunities is the environment certification coverage rate for the portfolio of United Urban. We set a medium-term target of an 80% rate (based on gross floor area) by 2024. As a result of acquiring new environmental certifications and continued efforts to re-acquire them for properties for which they would expire, we had reached 77.4% as of November 30, 2023.

• Note:As of the end of November 2023. 132 properties, excluding land with leasehold interest.
  • For Arena Tower, the duplicated portion is deducted from the total column as it has acquired both DBJ Green Building and BELS certifications.
  • Loop-X and Loop-M consist of two buildings, Loop-X (an office building) and Loop-M (a residential building), and the duplicated portion is deducted from the total column as Loop-X has acquired CASBEE-Real Estate and Loop-M has acquired BELS.
  • While the office and retail sections of OSAKA BAY TOWER have obtained DBJ Green Building certifications respectively, it is counted as one property in the total column.
  • Also, the commercial buildings "Arura City" and "Arura City 2nd building" in the Reigaryoal Hotel Kokura Arua City have each acquired CASBEE-Real Estate, and the "Hotel building" (office section) has acquired BELS, so the duplicated portion is deducted from the total column.
  • Chatle Otemachi has acquired BELS for Building S and Building N, so duplicates are excluded from the total.