Responding to TCFD

Established by the direction of the Financial Stability Board (FSB) in April 2015, the Task Force on Climate-related Financial Disclosures (TCFD) issued its final report in June 2017. The TCFD requires the disclosure of information on four aspects of climate change risks and opportunities: governance, strategy, risk management, and metrics and targets. In particular, strategic aspects recommend disclosure about strategic resilience according to investigations conducted according to future climate scenarios. Sumitomo Forestry Group has undertaken this as one of its agenda items, recognized the risks associated with climate change as serious risks, and announced its support to the TCFD in July 2018. Based on the TCFD recommendations, scenario analysis was begun the same year.

In the initial scenario analysis, the timber and building materials, and the housing and construction business— core businesses of Sumitomo Forestry—examined the circumstances in 2030 according to two scenarios anticipating the global average temperature rising by two degrees Celsius and four degrees Celsius compared to temperatures before the industrial revolution. These findings were reported to the Sustainability Committee and Board of Directors. In addition, the Sumitomo Forestry Group has set targets in the Mid-Term Sustainability Targets for further initiatives in the future based on the scenario analyses.

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Governance Related to the Issue of Climate Change

The Sumitomo Forestry Group will promote the response to issue of climate change centered on the Sustainability Committee, similarly as other ESG challenges. The Sustainability Committee, chaired by the President and composed of members made up of executive officers, directors and each divisional manager, formulates and promotes initiatives for medium to long-term ESG challenges related to the sustainability of the Sumitomo Forestry Group in addition to analyzing risks and opportunities, conducting progress management of the Mid-Term Sustainability Targets, which incorporate business strategies toward achieving the SDGs, including monitoring of implementation and effectiveness of the Our Values and Code of Conduct. The content of all committee proceedings is reported to the Board of Directors.

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Identifying and Evaluating Risks and Opportunities

In business operations in which we position wood as our principal material and product, a major transitional business risk that we face is the increase in timber procurement costs associated with stricter regulations such as forest protection policies and logging regulations. Examples of physical risks include the increased costs associated with delayed construction processes and decreased efficiency of housing construction caused by increasingly intense natural disasters and the impact of abnormal weather involving temperature rises. At the same time, the advance of regulations against fossil fuels provide a boost (opportunities) for our biomass energy generation operations business and demand for fuels made from wood chips.

Our corporate headquarters has worked with each division in these scenario analyses to identify risks and opportunities and to evaluate the impact mainly from financial aspects. We discussed measures to prevent risks with respect to the items identified as material risks and opportunities, and reported them to the Sustainability Committee and the Board of Directors. Moving forward, we will increase the accuracy of our scenario analyses and discuss how to reflect them in our business planning, while moving forward with the creation of business strategies for the resilience that will see us through into an uncertain future.

Timber and Building Materials Division

Risk category Impact on operations Risk level
Transition Risks Carbon emission targets, policies in each country
  • Increased timber procurement costs due to policies related to forest carbon sinks.
High
Forest conservation policies
  • Increased timber procurement costs due to logging taxes, logging fees and other.
High
Energy conservation and other subsidy policies
  • Increased revenues from the promotion of wood biomass operations.
  • On the other hand, if subsidy policies are abolished, decreased revenues.
High
Changes in energy mix
  • Increased revenues if biomass is incorporated into each country’s sustainability criteria.
  • On the other hand, higher costs of biomass fuel (wood chips) with an increase in demand.
High
Economic stagnation with global warming regulations
  • A fall in demand for wood building materials and a decrease in revenues if construction is suppressed.
High
Increase / decrease in demand for important products and increase / decrease in product price Low to moderate
Advances in next-generation technologies Low to moderate
Popularization of renewable energy/energy conservation technologies Low to moderate
Changes in investor evaluation Low to moderate
Physical Risks Rise in average temperatures
  • Increased timber procurement costs with forest fires and tree diseases, insects and other.
  • On the other hand, rising temperatures and increased precipitation will lengthen the growth period. This will increase productivity, which may reduce timber procurement costs.
High
Changes in rainfall and climate patterns
  • Increased timber procurement costs with changes in the regions where we can plant and procure trees.
High
Intensification of abnormal weather
  • A fall in revenues due to factory shutdowns. Increased timber procurement costs with a decline in forest resources.
High

Housing and Construction Division

Risk category Impact on operations Risk level
Transition Risks Carbon emission targets, policies in each country
  • Increased timber procurement costs due to policies related to forest carbon sinks.
High
Forest conservation policies
  • Increased timber procurement costs due to logging taxes, logging fees and other.
High
Policies related to buildings
  • Additional investments and renovation costs to comply with policies.
  • A continuation of the subsidy program will create a monetary incentive. Depending on the policy, this may impact market competitiveness and revenues.
High
Changes in customer evaluation
  • If customer awareness of climate change increases, customer preference will move toward the use of certified timber, increasing procurement costs.
High
Energy conservation and other subsidy policies Low to moderate
Fossil fuel subsidy program Low to moderate
Changes in energy mix Low to moderate
Changes in investor evaluation Low to moderate
Physical Risks Intensification of abnormal weather
  • In the event of a major natural disaster, increased construction costs due to schedule delays, equipment repairs or replacement, and other factors. An increase in extremely hot days will lower outdoor work productivity.
  • Increased costs due to construction delays and maintaining and enhancing worker health.
High

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Climate Change Related Opportunities and Strategies

Expanding Housing Sales in Concert with Government ZEH Promotion

Percentage of orders for ZEH type houses out of new custom-built detached housings Target (%)
(FY2021)
80%*

Percentage of orders for ZEH type houses out of new custom-built detached housings Results (%)
(FY2019)
48.2%*

Japan has launched policy targets that aim for more than half of all custom-built detached houses constructed by housing manufacturers and other companies to be ZEH compliant by 2020 as a countermeasure global warming approved by Cabinet decision in May 2016.

Working in concert with this policy, Sumitomo Forestry is promoting ZEH housing sales with a ZEH order ratio goal set in the Mid-Term Sustainability Targets while also leveraging the appeal of Double Power Generation that distinguishes our ZEH homes by using both solar panel cells and fuel cell batteries for residential use. This gives us a competitive edge that is boosting our ZEH ratio.

In the 2030 scenario analyses, the ZEH ratio required by the government is even higher in the scenario with a 4-degree Celsius rise while a ZEH with even higher energy efficiency becomes the standard in the scenario with a 2-degree Celsius rise. In both scenarios, we anticipate an increase in market competitiveness for Sumitomo Forestry homes due to our technical development capabilities.

* Values based on orders include ZEH and Nearly ZEH. ZEH Standardization Performance (FY2019) submitted to Sustainable Open Innovation Initiative is 51%.

Expanding Renewable Energy Demand

Amount of biofuel material used
(such as wood chips and pellets)
Target (t)
(FY2021)
1,363,930t

Amount of biofuel material used
(such as wood chips and pellets)
Results (t)
(FY2019)
1,112,224t

The need for renewable energy sources such as biomass power generation and solar power generation is increasing as a means of countering climate change. We forecast greater profitability by expanding the supply of wood chips for fuel for biomass power generation.

The Sumitomo Forestry Group wood biomass power generation business expanded to four domestic locations by March 2019. Once the Kanda Biomass Power Generation Plant, slated for completion in Fukuoka Prefecture in 2021, begins operation, the Group will have a total power generation capacity of roughly 177 MW, which will supply electricity to approximately 374,000 households.

Our scenario analyses forecast biomass power generation which currently makes up 1.7% of the power composition in Japan will rise to 3.7% with a 4-degree Celsius rise and 4.6 with a 2-degree Celsius rise by 2030 in light of the overall Agency for Natural Resources and Energy policies to realize the ideal energy mix toward 2030. The Sumitomo Forestry Group anticipates growing sales in the biofuel chip supply business due to these policies.

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Climate Change Countermeasure Metrics and Targets

At Sumitomo Forestry, our climate change countermeasures are driven by quantitative targets that are set each fiscal year by each department within each group company based on the Sustainability Targets, SBT and RE100 as metrics by which climate-related risks and opportunities are evaluated and managed.

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Sustainability Report