Strategy

Assessment of Risk Severity 

As a preliminary step in selecting a set of scenarios related to climate change, we referred to the typology of climate-related risks in the TCFD recommendations and identified risks and opportunities that could affect the Group's business. 

1. Transition Risks
   1. Policy and Legal
      • Carbon price
        • Increase in raw material prices (steel, rubber, glass, etc.) due to introduction of carbon tax
        • Severity: Large, Time of Occurrence: In the next 3 to 5 years
      • Orders and regulations for existing products and services
        • Decrease in sales of existing products due to GHG emission regulations
          • Severity: Large, Time of Occurrence: In the next 3 to 5 years
        • Increased R&D costs to comply with GHG emission regulations
          • Severity: Medium, Time of Occurrence: Within 3 years
      • Tighter regulations in the shipping industry
        • Increase in shipping costs due to the cost of building new low-GHG ships and passing on the cost of acquiring emission credits
          • Severity: Large, Time of Occurrence: In the next 3 to 5 years
   2. Technology
      • Substitution of existing products and services with lower GHG emissions
        • Decrease in sales of existing products due to GHG emission regulations
          • Severity: Large, Time of Occurrence: In the next 3 to 5 years
      • Transition to low GHG emission technologies
        • Increased R&D costs to comply with GHG emission regulations
          • Severity: Medium, Time of Occurrence: Within 3 years
   3. Market
      • Rising energy prices
        • Increased plant operating costs
          • Severity: Small, Time of Occurrence: Within 3 years
      • Changing customer behavior
        • Decrease in sales of existing products due to shift in demand to low-GHG products
          • Severity: Large, Time of Occurrence: In the next 3 to 5 years
   4. Reputation
      • Stakeholder reputation
        • Delayed action on climate change causes stock price declines, higher capital costs, and difficulty in securing human capital
          • Severity: Medium, Time of Occurrence: Within 3 years
2. Physical Risks
   1. Acute
      • Increased severity and frequency of extreme weather events
        • Supply chain disruptions, production stoppages, and lost sales opportunities due to severe natural disasters
          • Severity: Medium, Time of Occurrence: In the next 3 to 5 years
   2. Chronic
      • Rising average temperatures, rising sea levels
        • Increased temperatures make it more difficult to work at construction sites
          • Severity: Small, Time of Occurrence: In the next 3 to 5 years
3. Opportunities
   1. Reduction of energy consumption charges through the installation of energy-saving equipment
      • Size: Small, Time of Occurrence: In the next 3 to 5 years
   2. Increase in sales of low-GHG products due to GHG emission regulations
      • Size: Large, Time of Occurrence: In the next 3 to 5 years
   3. Increase in sales of low-GHG products due to shift in demand to low-GHG products
      • Size: Large, Time of Occurrence: In the next 3 to 5 years
   4. Increased demand for products due to an increase in disaster recovery and disaster prevention work
      • Size: Medium, Time of Occurrence: In the next 3 to 5 years

• External information referred to in the definition of scenario groups
  • Intergovernmental Panel on Climate Change (IPCC) "SSP1-2.6 Scenario and SSP3-7.0 Scenario of the Sixth Assessment Report (AR6)”
  • International Energy Agency (IEA) "APS and STEPS Scenarios of the World Energy Outlook 2021 (WEO-2021)"
• 2°C Scenario (Sustainability-oriented)
  • Scenarios with high policy transition impact
    • Introduction of carbon tax and increased taxation
    • Significant tightening of regulations on exhaust gas and GHG emissions
    • Soaring raw material and ocean freight costs
• 4°C Scenario (Current transition)
  • Scenarios with high physical impact
    • No significant regulatory tightening
    • Increased damage due to extreme weather events such as typhoons, hurricanes, and floods

Business Impact Assessment, and Definition of Measures

Using logic trees, we have organized the expected flow of manifesting climate change impacts and response measures by scenario. With the Paris Agreement, the international community has agreed to limit the increase in the global average temperature to within 2°C, and interest in and expectations for corporate climate change countermeasures have increased. Climate change occurs over a medium- to long-term time horizon and is highly uncertain due to the wide range of predictions. Nevertheless, we will accept an uncertain and broad future and consider the impact of and the measures in response to climate change, thus enabling us to incorporate resilience into our management strategy to respond flexibly to climate change.

Since this is the first stage of scenario analysis, we have not quantitatively calculated the business and financial impacts, but have classified the impacts into large, medium, and small based on a qualitative assessment of the likelihood and timing of the risk materializing and the degree of significance if it does materialize.