Risk Management Framework

In order to reinforce its framework for managing business risks for the entire Group, Sumitomo Forestry has created the Risk Management Basic Regulations and has appointed the President of Sumitomo Forestry as the highest authority on risk management for the Sumitomo Forestry Group, executive officers in charge of head office departments and each division headquarters have been appointed authorities on risk management of their department, and general managers have been appointed to promote risk management. The Regulation encompasses risks in environmental, social, and governance aspects, comprehensively.

Based on these regulations, the Company also places the Risk Management Committee, comprised of the Company president as the chairperson, together with all of executive officers. Each executive officer identifies and analyzes the priority risks to be addressed in their respective area of responsibility as well as drafts and executes response plans at all relevant workplaces. The progress of measure against these risks is also shared and discussed at a committee held periodically each quarter. This committee mainly deliberates on short-term risks and risks that have already manifested, including anti-corruption and other compliance-related matters. The Committee primarily discusses responses to compliance-related risks and other short-term risks, as well as risks that have already emerged. Executive Officers and Directors attend this committee as it outlines and reports about the content of the activities to the Board of Directors to put in place systems representative of the business.

A Compliance Subcommittee and a BCM Subcommittee* have also been established under the command of the Risk Management Committee. These are chaired by the general manager of the General Administration Department, and are comprised of the executives in charge of risk management at each Group company. These subcommittees carry out specific activities for increasing effectiveness against “compliance risk” and against “business interruption risk”, which are both regarded as cross-sectional risks affecting the Group.

In fiscal 2019, the Risk Management Committee met four times, and confirmed the state of progress with respect to 45 priority risks. Also, the Compliance Subcommittee and BCM Subcommittee met twice and four times, respectively, and reports on the proceedings were also submitted to the Board of Directors four times.

Against risks in environmental, social, and governance aspects specified in the Sumitomo Forestry Group Code of Conduct, tangible actions have been taken to increase effectiveness. With respect to climate change, for example, the latest information is considered together with information obtained from each department in order to evaluate risks and opportunities that are thought to have a severe financial impact at the corporate and departmental levels. Since fiscal 2018, each business department joined together in conducting TCFD-based scenario analyses.

Items determined through this process to be priority risks in the medium to long term are discussed in the Sustainability Committee. The results are outlined and reported to the Board of Directors to build a system to reflect this information into the execution of our businesses.

At the beginning of fiscal 2020, we reassessed management target risks by analyzing the scale and influence of relevant risks from the likelihood of occurrence in order to properly respond to the changing risks faced by the Sumitomo Forestry Group. In this way, we will strengthen our risk management framework by following the PDCA cycle to make continuous improvements with respect to the priority risks selected at the beginning of each period.

* The BCP Subcommittee was renamed to BCM Subcommittee in April 2019 in order to promote and strengthen the BCM system of the entire group, in and outside Japan.

Risk Management Structure of the Sumitomo Forestry Group

Risk Management Structure of the Sumitomo Forestry Group

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Risks in Operations

The following risks have been identified in operations as stated on the Security Reports.

  1. Risks related to trends in housing markets worldwide
  2. Legal and regulatory risks
  3. Foreign exchange risks
  4. Quality assurance risks
  5. Credit facility risks of business partners
  6. Overseas business risks
  7. Risks of mountain forests and plantation forest operation locations held and managed
  8. Risks of informational leaks
  9. Risks in accounting retirement benefits
  10. Climate change risks
  11. Risks of emergency situations caused by natural disasters, etc.
  12. Risks of the COVID-19 impact on business

Risks associated with quality assurance

Sumitomo Forestry Home Tech Co., Ltd. (“Home Tech”), a renovation service subsidiary of Sumitomo Forestry, which published the incidents of non-conformance with the building standards laws and regulations in its detached house extension works (the “Incidents”) on September 18, 2019, conducted an on-site examination of the extension works to the detached houses in the prefectures of Aichi, Mie and Gifu (the “Three Tokai Prefectures”) that it had contracted for in the past. Furthermore, on September 27, 2019, Home Tech established a special investigation committee composed by members including outside experts (the “Special Investigation Committee”) and requested that the Special Investigation Committee investigate the facts, analyze the causes of the Incidents and propose recurrence prevention measures.

As a result, on August 11, 2020, Home Tech received a written report (the “Report”) from the Special Investigation Committee, and based on its substance, the board of directors of Home Tech adopted, at its meeting held on August 12, 2020, a resolution confirming the causes of the Incidents and the recurrence prevention measures to be taken, as follows:

  1. Outline of the results of investigation by Home Tech
    Certain input from outside parties gave rise to a suspicion that non-conformance with the building standards laws and regulations (the “Legal Non-conformance”) existed in part of the properties in the Three Tokai Prefectures whose extension works had been contracted for by Home Tech. In response, Home Tech conducted an exhaustive investigation of all of the 361 properties that had received construction confirmation, from among the detached houses in the Three Tokai Prefectures regarding which Home Tech had contracted for extension works since April 1997, when Home Tech started its business as a company specialized in renovation, in order to identify whether those properties conformed to the building standards laws and regulations as of the survey date (the “Legal Conformance”).
    As a result of such investigation, Home Tech confirmed that as of July 31, 2020, the Legal Non-conformance existed in 206 out of the 333 properties whose investigation had been completed. All of those incidents of Legal Non-conformance arose from the failure to appropriately implement design work to make the enlarged houses conformant to the building standards laws and regulations and the failure to incorporate in the design the works required to be performed to ensure conformance to laws and regulations. Home Tech will endeavor to promptly carry out the necessary repair works for the 206 properties with respect to which the Legal Non-conformance has been confirmed.
    The impact of the Incidents on our results of operations has already been reflected in the consolidated financial statements disclosed in the annual securities report of Sumitomo Forestry for the 80th term that was filed with the Director of the Kanto Local Finance Bureau on June 23, 2020.
  2. Causes of the Incidents
    On the basis of the analysis of the causes of the Incidents contained in the Report and the results of the investigation of the properties conducted by Home Tech, Home Tech believes that the combination of the problem indicated in (4) below with the existing problems specified in (1) through (3) below was the main cause of the occurrence of the Legal Non-conformance in part of its extension works to detached houses in the Three Tokai Prefectures.
    • (1) Building designers lacked sufficient knowledge and experiences and had a low regard for ensuring the Legal Conformance;
    • (2) No organizational checks had been conducted to ensure the Legal Conformance of design work;
    • (3) The managing architects stationed at each of the branches, who were supposed to supervise the technical matters in the architectural office, were not in a condition to fulfill their functions to oversee the design work by the architects belonging to their respective branches; and
    • (4) With respect to checking of the Legal Conformance of the design drawings, the scope of the tasks outsourced to independent architectural offices was not clear, and the deliverables of the outsourced tasks had not been sufficiently checked.
  3. Recurrence prevention measures based on the Incidents
    Home Tech takes seriously the Special Investigation Committee’s proposals for prevention of recurrence as described in the Report and will seek to implement the following recurrence prevention measures:
    • Raising of awareness of compliance of design work with laws and regulations, acquisition of pertinent knowledge and accumulation of relevant experiences;
    • Reinforcement of organizational checking systems to ensure the Legal Conformance of designs;
    • Improvement of outsourcing to independent architectural offices; and
    • Enhancement of communications between the head office and branches as well as sharing and accumulation of technical and technological information.

Risks Associated with Illegal Logging and Conversion Timber

Illegal logging is recognized as a crucial issue globally, and progress is being made to strengthen related laws and regulations in a number of countries and regions. Japan has announced the Act on Promotion of Use and Distribution of Legally-Harvested Wood and Wood Products (The Clean Wood Act) on May 20, 2016, which was enacted on May 20, 2017. Addressing stronger control of illegally harvested timber not only responds to the requirements of the world but it is also extremely important for the Sumitomo Forestry Group to continue businesses sustainably. In addition to legality of the procured timber and timber products, sustainability of forests that produce timber has been in question recently. “Conversion timber” is timber generated during the conversion of natural forest areas to non-forest use (such as oil palm plantation). While the conversion to farm land is often discussed from the commodity side (oil palm, soy, rubber and cattle), conversion timber now poses sustainability risks to forestry industry.

Impact on the Sumitomo Forestry Group

The Sumitomo Forestry Group could jeopardize its own businesses that handle wood resources if it neglected its duty and dealt in illegally logged timber. Moreover, these actions would harm the image of the company and could directly damage our business performance such as compensation for damage and turnover.

Risk Countermeasures

The Sumitomo Forestry Group has been committed to responsible timber procurement, pioneering legislation in Japan and having established the Timber Procurement Philosophy and Policy in 2005, to bring contributions to a sustainable society via business activities of “wood” -a renewable resource. In 2015, Timber Procurement Philosophy and Policy was extended beyond timber and became subject to procurement of building materials, raw materials of products, and end products, and reestablished as Sumitomo Forestry Group Procurement Policy. The Group's economically, socially and environmentally responsible procurement today is being carried out based on the policy. Furthermore, in order to tackle this emerging issue surrounding conversion timber, Sumitomo Forestry has set a target in its Mid-term Sustainability Targets, targeting FY2021, to 100% procure “sustainable timber,” which eliminate conversion timber.

Emerging Risks Associated with Carbon Accounting on Biomass Fuel

Biomass power generation using wood chips as fuel has long been considered as “carbon neutral” and as clean energy. While burning wood fuel generates methane and N2O and thus it is not “GHG neutral,” it is only required to report emissions other than CO2.

However, SBT initiative announced its updated criteria this April;
Bioenergy accounting: Direct emissions from the combustion of biomass and biofuels, as well as GHG removals associated with bioenergy feedstock1, must be included alongside the company’s inventory and must be included in the target boundary when setting a science-based target and when reporting progress against that target. If biogenic emissions from biomass and biofuels are considered climate neutral, the company must provide justification of the underlying assumptions.

Detailed information is not yet available from the initiative, nor the guidance on what could be the justification for biomass to be considered climate neutral.

Impact on the Sumitomo Forestry Group

Sumitomo Forestry operates four wood biomass power generation plants in Japan and is currently planning to add another in 2021, which would generate total of 177MW. If it is required to add CO2 emissions to currently reported methane and N2O from the biomass power generation operation, Sumitomo Forestry Group’s SBT emission reduction target would be extremely challenging.

Climate-related regulation changes in each regions/countries are unpredictable and may cause the company additional payment if carbon pricing incurs additional tax payment. Sumitomo Forestry’s corporate brand image of being an environmentally friendly company may also be negatively impacted.

Risk Countermeasures

Sumitomo Forestry continues to strive to reduce carbon emissions based on its Mid-term Sustainable Targets for each business units.

Also, Sumitomo Forestry is becoming more active in lobbying through the Forest Solution Group of the WBCSD (World Business Council for Sustainable Development) and CDP Japan Club, where Sumitomo Forestry serves as member.

Risk Associated to IPCC 1.5 Degree-C Special Report

Based on IPCC’ 1.5 Degree-C Special Report published in October 2018, SBT initiative announced its updated criteria in April 2019; new scope 1+2 targets shift from 2 degree-C to well below 2 degree-C or 1.5 degree-C. The companies will need to have their targets reviewed every 5 years to make sure these are in line with the latest climate science. By the end of 2024 at the latest, based on the current criteria, updated targets will need to be aiming at well below 2 degree-C.

Impact on Sumitomo Forestry

Sumitomo Forestry’s targets that were approved as an SBT targets in July 2018 is reportedly considered as “2 degree-C” target. Targets review every 5 years for Sumitomo Forestry is July 2022 at the latest. Currently approved target of reducing 21% by FY2030 compared to FY2017 is already a challenging one, requiring the company to invest heavily for overseas manufacturing facilities and to purchase renewable energy. In order to align with the updated criteria, each business units of the company, especially manufacturing and biomass energy power generation, faces additional cost and investment.

Risk Countermeasures

In addition to current effort to reduce energy consumption, the company started actions to secure electricity from renewable energy sources. One of the sources would be to purchase electricity from solar-panels on each detached houses sold by the company in the past. Under the FIT Act of Japan (Feed-in Tariff for Renewable Energy) residential PV system owners have signed up for 10-year contract, which expires in November 2019 at the earliest.

While the current regulation does not allow Sumitomo Forestry to directly contract with each residential PV system owners, the company is undertaking studies for future plan as well as potential utilization of the “environmental value” from portion of power generated and consumed in-house.

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New Business Plan Risk Assessment

All new business and project plans that are brought for deliberation to the Board of Directors and the Executive Committee, which is the advisory body to the president, Sumitomo Forestry conducts risk assessment for the following categories, taking into account the entire supply chain. If a risk is confirmed, a report is made regarding the risk and measures to deal with it, which is used to determine implementation. In addition, the same risk assessment is recommended for new business projects that are not brought for deliberation to these meetings because they can be implemented under the jurisdiction of the respective division or affiliated company.

■ Environmental Aspects

  1. Greenhouse Gases
  2. Biodiversity Conservation (Including Verification of Protected Regions)
  3. Waste
  4. Water Resources
  5. Soil Contamination
  6. Noise
  7. Other

■ Social Aspects

  1. Relationships with Companies We Do Business With
  2. Anti-Corruption in All Its Forms, Including Extortion and Bribery.
  3. Human Rights Considerations for Workers and Other Stakeholders
  4. Promotion of Employee Diversity
  5. Prohibition of Forced labor and child labor
  6. Appropriate working hours and wages
  7. Occupational Health and Safety
  8. Impact on Local Communities (Including Concern for Local Residents and Administrations, Industry Organizations, NPOs, Municipal Citizens' Groups and Indigenous People)

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Risk Education

As ways to increase the sensitivity of risk in the executives and employees and in the corporate culture of the Sumitomo Forestry Group, the Group conducts e-learning each year for executives and employees as well as a risk management training for newly joined employees. In 2019, the Group introduced and shared examples from risks emerged in the past that should be noted beyond specific business departments at the Compliance Subcommittee as a venue for people in charge of risk management at the Company and each Group company.

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Rapidly Comprehending and Dealing with Risks

The Sumitomo Forestry Group operates Two-hour Rule system designed to quickly and accurately communicate information to management in the event of an emergency situation that may have a grave impact on company management. In addition to the regular reporting line, it utilizes communication via the Division responsible for risk management. Through this system, management can take the best decision speedily, ensuring an initial response which avoids loss and controls the situation. Moreover, it serves a role in collecting and accumulating reported cases and assists in improved business practice and prevention of recurrence.

Furthermore, the structure is organized so that, by sharing information with the public relations departments, important situations are disclosed to stakeholders properly and in a timely manner.

Two-Hour Rule and Use of Risk Information

Two-Hour Rule and Use of Risk Information

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Sustainability Report