Ongoing Initiatives to Address TCFD Recommendations

Governance System for Climate Change Response

INPEX’s Board of Directors maintains its oversight role and has expanded its involvement in our climate change response. Specifically, matters relating to the company’s position on climate change require a resolution of the Board of Directors. In January 2021, we announced our goals for tackling climate change based around our corporate target of net zero emissions by 2050 (Scope 1+2). In February 2022, we released our Long-term Strategy and Medium-term Business Plan (INPEX VISION @2022), which envisions accelerated expansion of our five net zero businesses as we head towards net zero in 2050. Accordingly, we revised and disclosed our Corporate Position on Climate Change⁸ in March 2022. We also update and disclose, in principle once a year, INPEX’s Current Initiatives⁸, a document that details progress in implementing climate change measures based on the Corporate Position on Climate Change.

8 “Corporate Position on Climate Change” and “INPEX’s Current Initiatives”

Climate Change Response and Directors’ Compensation

In February 2022, we revised our compensation system in relation to bonuses for all of the company’s representative directors and other internal directors. We adopted GHG emissions intensity, the indicator used in our Long-term Strategy and Medium-term Business Plan (INPEX VISION @2022), as a key performance indicator for stock-based compensation, which serves as a medium- to long-term form of incentive.

Further to this, for the directors in charge, qualitative targets are set each year to promote climate change response, risk management and information disclosure. The degree to which these targets have been achieved is evaluated and reflected in the director’s remuneration.

Assessing and Managing Climate-related Risks and Opportunities

As a general rule, INPEX assesses and manages climate-related risks and opportunities in an annual cycle. Our overall response to climate change is handled by the Climate Change Strategy Group within Corporate Strategy & Planning Unit, Corporate Strategy & Planning Division.

For climate-related risks, the Climate Change Strategy Working Group (WG), composed of some 30 members representing each of the divisions, conducts assessments and devises preventive and mitigation measures. These measures are discussed in Sustainability Committee meetings and reflected in annual plans.

The process of risk assessment follows the procedure outlined in ISO31000 (2009) (Figure A), an international risk management standard. We update external and internal factors and share information regarding the company’s status among WG members. We then identify risks and analyze their causes, preventive measures, mitigation measures, and residual risks (Figure B). The residual risks are assessed using the Risk Assessment Matrix Based on TCFD Recommendations (Figure C), created by INPEX.

Figure A. ISO31000 Process

Figure B. Risk Analysis Process

Figure C. Risk Assessment Matrix based on TCFD Recommendations

FY2021 Workshop for Assessing Climate-related Risks and Opportunities

As outlined in our Long-term Strategy and Medium-term Business Plan (INPEX Vision @2022), we take a company-wide approach to climate-related opportunities, with our Hydrogen & CCUS Development and Renewable Energy and New Business divisions at the core.

In addition, INPEX’s Current Initiatives based on the Corporate Position on Climate Change includes initiatives related to the five net zero businesses, the transition to natural gas, and making upstream operations cleaner. These initiatives are considered by the Sustainability Committee, approved by the CEO, and then reported to the Executive Committee and the Board of Directors.

Figure D: Process of Assessing and Managing Climate-related Risks

FY2022 Status of Climate-related Risks: Assessment Coverage, Expected Timing and Action Plans

Climate Change Opportunities to Be Assessed in FY2022, Proposed Timing and Progress Status

Development of Physical Risk Assessment Process

In 2018, we reviewed the process of assessing physical risks and drew up a roadmap covering the facilities at both operator and non-operator projects. In 2019, we conducted a trial physical risk assessment for our major operator facilities. To determine climate variables, including the increase in average temperature and sea-level rises in the mid-21st century, we started with external data from the RCP8.5 (Representative Concentration Pathways 8.5) scenario outlined in the IPCC Fifth Assessment Report (AR5), which assumes the highest level of global warming. Using the data, we identified the risks for our major facilities in Niigata Prefecture, Japan and in Darwin, Australia. In 2021, we completed trial assessments for almost all facilities in the eleven major projects with which INPEX is involved as a non-operator after confirming the status of physical risk assessments. We will also analyze gaps between the IPCC Fifth Assessment Report and the subsequently published Sixth Assessment Report (Working Group I).

For chronic risks, the assessments indicate a low risk from floods at Ichthys LNG and other major facilities located on the seaboard because they have been designed to withstand rising sea levels. Temperature increases could conceivably impair operating efficiency, but because we conduct ongoing improvements to the facilities as required, we have concluded that no major damage is likely to occur through 2030.

For acute risks, we endeavor to ensure that our major operator projects are adequately prepared for typhoons, cyclones and other natural disasters through planning, operational measures, training and use of external information. Insuring our property against natural disaster is another way we strive to reduce financial losses associated with acute risks. With respect to natural disasters in Japan, as the national government upgrades infrastructure, INPEX has also conducted pipeline risk assessments and studied countermeasures against natural disasters. Based on these reviews, we have carried out replacement work on portions of the pipeline deemed to have a high natural disaster risk.

Going forward, cross-organizational teams will conduct periodic physical risk assessments and make appropriate disclosures regarding physical risks.

Physical Risk Assessment Roadmap

Assessment of Financial Impact of Climate-related Risks

INPEX uses two methods to assess the potential financial impact of climate-related risks. The first method is an economic assessment of each of our projects using internal carbon pricing. This assessment forms our base case. The reason we use this is because more than 130 countries have already declared net zero targets by 2050, and we expect a growing number of countries to introduce carbon pricing as they bolster efforts to tackle climate change. INPEX’s internal carbon price is reviewed each year with reference to the carbon prices in the IEA WEO Stated Policies Scenario (STEPS). In FY2022, we adjusted our internal carbon price from US$40/tCO₂-e to US$65/tCO₂-e to reflect the IEA WEO carbon price forecast.

The second method is to assess the financial impact on our business portfolio. This is a financial assessment of the market risks to our portfolio resulting from the oil and carbon prices in the IEA WEO Sustainable Development Scenario (SDS: scenario consistent with the Paris Agreement’s goals). By applying oil and carbon prices shown in the IEA WEO SDS to the net present value (NPV) calculation for projects, we calculate the extent of change against a base-case NPV as the impact on our portfolio. Despite difficulties in formulating assumptions, we adopt this as one of the methods to assess the financial impact on our portfolio. We will continue to refine the implementation standards for this method and to improve the competitiveness of our portfolio as we factor in changes in the business environment.