Express Its Support of the TCFD and TNFD

Changes in the natural environment, such as climate change and biodiversity, affect the Sumitomo Forestry Group's performance in various ways because its business focuses on forests and trees. For this reason, the Sumitomo Forestry Group has been among the first to respond to the recommendations of international initiatives such as the Task Force on Climate-related Financial Disclosure (TCFD) and Task Force on Nature-related Financial Disclosure (TNFD).

In response to the TCFD recommendations of 2017, the Sumitomo Forestry Group expressed its support for the recommendations in July 2018, and conducted its first TCFD scenario analysis in September 2018 as part of a project supported by Japan's Ministry of the Environment.

On the other hand, as for the TNFD, it took more than two years from the call for its launch at the G7 Environment Ministers' Meeting in May 2019 to the official establishment of the Task Force and Forum. After v0.1 of the TNFD framework beta version was released in March 2022, v0.3 was released in November 2022, reflecting user feedback. Sumitomo Forestry utilized v0.3 to conduct a trial analysis in the area of timber procurement, where the Group has accumulated the most data, and disclosed the results in its Sustainability Report 2023 released in April 2023. In December 2023, after the final recommendations (v1.0) were released by TNFD in September 2023, we announced that we had become an early adopter to the recommendations.

In preparing this report, we have referred to the disclosure recommendations in the TCFD and TNFD recommendations and have made every effort to disclose information in all areas.

*Created by integrating the disclosure items listed in the TCFD and TNFD recommendations.

*For items that cannot be integrated, recommended disclosures only in the TCFD recommendations are indicated by (C), and items recommended for disclosure only in the TNFD recommendations are indicated by (N).

Governance

The Sumitomo Forestry Group promotes 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, also appointed as 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 this, the committee members analyze risks and opportunities, conduct 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 Group's Values and Code of Conduct. All activities at committee meetings are reported to the Board of Directors, which are then reflected in business execution.

The Sumitomo Forestry Group Human Rights Policy, formulated in accordance with international standards such as the United Nations Guiding Principles on Business and Human Rights, sets forth the Group's commitment to respect the human rights of all people involved in its business operations, including indigenous peoples, local communities, affected stakeholders, and other stakeholders, which represents a priority in its efforts to address nature-related issues. Similarly, the Sustainability Committee manages the situation in terms of human rights, and reports to the Board of Directors.

In February 2022, we made partial revisions to our executive compensation system to further integrate our business and ESG, and introduced compensation linked to the achievement rate of sustainability indicators. A system, where in the event that Sumitomo Forestry fails to meet its long-term targets for greenhouse gases emissions reduction certified as Science Based Targets (SBT), the amount of remuneration paid will be reduced from the regular stock remuneration amount in accordance with the degree of target performance. Under Mission TREEING 2030, our long-term vision announced at the same time, we created the three-year Mission TREEING 2030 Phase 1 (2022 -2024) of Medium-Term Management Plan, along with the Mid-Term Sustainability Targets, the progress of which we are managing.

Strategy

The Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) states unequivocally that human activity is warming the air, seas and land, causing extreme weather and increases the frequency of occurrence, and that greenhouse gases emissions are strongly related to changes in ice sheets and sea levels. In addition, according to the report Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy, published by the World Economic Forum in January 2020, more than half of the world's GDP, or 44 trillion US dollars, is nature itself or the services it provides, and loss of nature has a particularly large impact on the agriculture, forestry, fisheries, and construction industries. The international community has proposed the concept of “Nature Positive,” which calls for halting the loss of nature or reversing it by 2030, compared to 2020, and fully restoring it by 2050.

Against this backdrop, society's expectations for the role of forests in absorbing CO₂ and fixing carbon and providing ecosystem services, timber and wood products supplied from sustainable forests, carbon fixation and reduction of greenhouse gas emissions through wooden buildings, and the use of unused forest resources as biomass fuel are increasing.

In February 2022, we announced Mission TREEING 2030, our long-term vision that incorporates our business concept behind the Sumitomo Forestry Group's ideal vision for 2030, which is also the target year of the SDGs. Mission TREEING 2030 sets out the following four strategies as our business policy: 1. Maximizing the value of forests and the wood to create decarbonization and create a circular bioeconomy; 2. Advancing globalization; 3. Striving for transformation and the creation of new value; and 4. Transforming our business foundation for growth. To achieve this long-term vision, we aim to simultaneously supply value for our planet, value for people and society, and value for the market economy, without compromising on any of these values and by enhancing value in each of these areas.

The Sumitomo Forestry Group contributes to the realization of a carbon neutral and nature positive society, by effectively utilizing forest resources, which are renewable natural resources produced from natural capital, and providing "shared benefit" through forest management, manufacturing and distribution of timber and building materials, and wooden construction and renewable energy businesses.
As for the first phase of our long-term vision Mission TREEING 2030, we have announced a three-year Mission TREEING 2030 Phase 1 (2022 -2024) of Medium-Term Management Plan, which provides the groundwork for our future growth and contribution to decarbonization. FY2024 is the final year of the current plan and the time when we will formulate Mission TREEING 2030 Phase 2 (2025-2027), which will start in FY2025. We will identify forms of contribution to the concept of nature positive through the establishment of a circular bioeconomy.

Management of Risks and Impacts

At the Sumitomo Forestry Group, each department decides on specific countermeasures and evaluation indicators for business risks, and reports progress to the Risk Management Committee on a quarterly basis. The Risk Management Committee is chaired by the President as the highest authority on risk management and consists of executive officers and general managers in charge of the Corporate Planning Department, Personnel Department, Legal Department, IT Solutions Department and Sustainability Department, along with divisional managers of each division and the General Manager of the General Administration Department.

In addition, medium- to long-term risks related to ESG issues are discussed extensively covering the entire value chain by the Sustainability Committee, chaired by the President and whose members consist of executive officers, directors and the divisional managers of each division. The committee meets four times a year. The committee will meet regularly six times a year starting in FY2024.

Management process of business risks

Process for managing medium- and long-term risks in response to ESG issues

Metrics and Targets

The Sumitomo Forestry Group has established long-term targets related to climate change and is promoting initiatives while incorporating them into its Mid-Term Management Plan Mission TREEING 2030 Phase 1 (2022 - 2024) and annual plans. In 2017, the Group declared its intention to formulate SBTs and formulated new Group-wide greenhouse gases emissions reduction target, which were approved as SBTs in July 2018. In September 2021, we submitted an application to the SBT Initiative secretariat to enhance our Scope 1 and 2 greenhouse gases emissions reduction target for 2030 from the previous 21% to 54.6% reduction, which is in line with a 1.5°C reduction in order to expedite our initiatives. In January 2024, in accordance with latest SBT guidance, we re-established our short-term and long-term reduction targets and newly applied for FLAG (Forest, Land and Agriculture) targets. It is expected to be approved by the end of this fiscal year.

Furthermore, we joined RE100, an international initiative aiming for 100% renewable energy for electricity consumption, in March 2020. We are accelerating our initiatives to cut greenhouse gases emissions toward achieving the goal of using 100% renewable energy for electricity used in the Group's business activities and fuel for power generation in our power generation business by 2040. According to the Mid-Term Sustainability Targets (2022-2024) announced in February 2022, each division will set its own target for the ratio of renewable energy procurement and take necessary budgetary measures, including capital investment, to steadily promote initiatives toward achieving RE100.
We also disclose data corresponding to core global metrics and core sector metrics set forth in the TNFD final recommendations.

Responding to TCFD and TNFD

Climate Change Impacts on the Sumitomo Forestry Group (TCFD scenario analysis)

The results of our TCFD scenario analysis* conducted in 2018, 2021, and 2022, respectively, were reported to the Sustainability Committee each time and disclosed in the Sustainability Report. In addition, they will be reflected as numerical targets for each division and headquarters department in the next Mid-Term Management Plan, Mission TREEING 2030 Phase 2 (2025-2027), which will be formulated before the end of FY2024.

*TCFD scenario analysis: We considered the situation in 2030 using two scenarios: the 4°C scenario, in which no further progress is made in tackling climate change, and the 1.5/2°C scenario, in which progress is made in transitioning the society toward decarbonization.

Source: Compiled from IPCC AR5, AR6, SR1.5, IEA WEO 2020, Net Zero Emission by 2050

Source: Compiled from IPCC SR1.5 and AR6 WG1 SPM

Impacts of nature-related issues on the Sumitomo Forestry Group (TNFD LEAP analysis)

From the end of 2023 to 2024, we organized a working group consisting of members from the headquarters and business divisions to conduct an analysis using the LEAP approach* covering our dependence/impact on nature, risks and opportunities. The findings of this working group were compiled in March 2024. The tools used in each process of the LEAP approach are all recommended by TNFD. The results of this analysis will be reflected in the next Mid-Term Management Plan Mission TREEING 2030 Phase 2 (2025-2027), which will be formulated by each division during FY2024.

*LEAP approach: an integrated approach developed by TNFD to assess nature-related issues such as interfaces with nature and dependencies, impacts, risks, and opportunities in a business. Process consists of locate, evaluate, assess and prepare

Relationship between Sumitomo Forestry's business and nature (examples)

*1Negative impacts: temporary soil degradation due to development 　
Positive impacts: enhancement of forest ecosystem services through proper management

*2Risks: landslides in planted forest
Opportunities: monetization opportunities for ecosystem services, higher value-added wood products

Identification of Priority Sites (Locate)

The “Locate” process involved taking a bird's-eye view of the Sumitomo Forestry Group's supply chain, examining interfaces with nature at each business location, and identifying locations that should be prioritized for response.
First, 148 business locations were selected for evaluation in four businesses that are considered to have particularly large interfaces with nature (timber and building materials, housing, construction and real estate, and natural resources and environment) to ensure that the number of locations was not biased toward any particular business from direct operations and locations upstream and downstream in the supply chain of each business.

Next, the location information of the locations was overlaid and evaluated using geographic information systems (GIS) and other tools, and ecosystem information using nature-related risk analysis tools such as ENCORE*¹. As a result, of the 148 locations listed above, we narrowed down the list to those that are financially significant or located in ecologically sensitive areas.

For financially significant locations (B in the “Classification of Priority Areas” figure), selection was based on actual conditions, with the basic criterion that one or more of the rating items in ENCORE must be very high, and that the ratio of sales or transaction value to each business must be 10% or more, and that in the event of an emergency it is considered difficult to replace the location within one year.

For locations located in ecologically sensitive areas (C in the figure “Classification of Priority Areas”), the sensitivity of the ecosystem in which each location is located was assessed using ENCORE and IBAT*² , etc. to evaluate five requirements ([1] significance of biodiversity, [2] high integrity of the ecosystem, [3] rapid decline in ecosystem integrity, [4] significance of providing ecosystem services and [5] physical water risk) on a five-point scale [1-5]). Locations with an average score of 4 or higher for the five requirements were selected.

*1ENCORE: Exploring Natural Capital Opportunities, Risks and Exposure. A nature-related risk analysis tool developed by the Natural Capital Finance Alliance, an international financial industry organization for the natural capital sector, and others.

*2IBAT: Integrated Biodiversity Assessment Tool. Integrated Biodiversity Assessment Tool developed by the World Conservation Monitoring Centre of the United Nations Environment Programme and others to integrate biodiversity information globally.

Classification of Priority Areas

As a result, we identified 37 “priority locations” that need to be addressed with priority. In addition, two priority locations considered financially significant and located in ecologically sensitive areas (A in the figure “Classification of Priority Areas”) were identified in overseas forest management PT. Wana Subur Lestari (WSL), PT, Mayangkara Tanaman Industri (MTI), PT. Kubu Mulia Forestri (KMF) of Indonesia and manufacturing plant Kutai Timber Indonesia (KTI) were identified.

Scores for identified priority locations and the sensitivity of the ecosystem in which each is located

*1Comprehensive assessment criteria were extracted from the tools described in the TNFD LEAP Guidance based on the availability of data, natural capital to be evaluated, and other factors.

*2For (2) high integrity and (4) significance of providing ecosystem services, a 50 km buffer was established around the location to determine overlap with the data set for assessment. Regarding (3) rapid decline, the year 2000, when our overseas forest management and administration were in full operation, was used as the base year, and the year 2023 was used as the comparison year.

*The table above was compiled based on Guidance on the identification and assessment of nature-related issues: The LEAP approach v1.0.

*Company-owned forests covering large areas were analyzed by establishing centroids and 30-50 km buffers for each geographic mass, with individual centroids for enclaves not included in the buffers, and integrating the results in favor of higher-risk results.

Diagnosing Priority Locations (Evaluate)

The Evaluate process assessed the dependence and impact of the Group's operations on nature at 37 priority locations. Based on ENCORE results from the Locate process and regional characteristics from analytical tools such as Aqueduct and IBAT, we qualitatively assessed the dependence and impact of each priority location. Impacts were evaluated both positively and negatively, including the analytical tools as well as the company's own knowledge through its business. The results of the Evaluate process are shown below.

*PKS: Palm Kernel Shell.

Comment from an expert

The Sumitomo Forestry Group reported to and obtained advice from external stakeholder experts on the process of narrowing the Locate and Evaluate processes of the TNFD LEAP approach conducted from December 2023 to February 2024.

■Mutai Hashimoto, Lead, Sustainable Finance, WWF Japan

For many years, Sumitomo Forestry has implemented a procurement policy aimed at avoiding negative impacts on nature in wood procurement, and its disclosures are in line with SBT for Nature's recommended framework for actions to achieve nature positivity (AR3T). Although many of the nature-related opportunities listed have a clear business connection at this point in time, it is expected that the restoration of nature itself will be extracted as a nature-positive opportunity more broadly, and that these opportunities will be linked to business opportunities in the future.

■Makino Yamanoshita, Joint Programme Director, Biodiversity & Forests, Institute for Global Environmental Strategies

While it is academically recognized that climate change measures and the conservation of biodiversity and ecosystem services are interdependent, I found it very interesting that Sumitomo Forestry's efforts to find common analytical results in the analytical process from the business perspective corresponding to the TCFD and TNFD, and to report these results in an integrated manner. As the Company moves ahead with further analysis, there may be a need to consider tradeoffs in addition to synergies. Furthermore, I believe that true nature positive can be achieved by utilizing nature-related information and on-the-ground experience accumulated by Sumitomo Forestry in its overseas forest management operations and other activities at project sites, which are not represented in the database and other information presented by the TNFD, in future TNFD LEAP analyses and by implementing countermeasures.

Main Risks and Opportunities Identified (Assess)

The Assess process identified business risks and opportunities arising from the dependence and impacts on nature determined in the Evaluate process, each of which was qualitatively assessed, with the main ones identified. First, we conducted a risk/opportunity analysis for 25 locations, which were selected evenly from priority locations to avoid bias toward specific businesses. Based on what had already been addressed, a qualitative assessment was made of the remaining risks and the priority of obtainable opportunities.

The residual risks were qualitatively prioritized based on the criteria of “degree of impact” for financial impact on the business and “probability of occurrence” for past cases and existing initiatives. For obtainable opportunities, we qualitatively prioritized them based on the criteria of “business attractiveness” in terms of the amount of increase in market size* by 2030, and “our strength” in terms of our advantage in capturing such opportunities.

*Estimated based on Identifying Biodiversity Threats and Seizing Business Opportunities published by AlphaBeta in July 2020 and New Nature Economy Report II: The Future of Nature and Business published by the World Economic Forum in July 2020.

The main opportunities and risks identified in the TCFD scenario analysis conducted over the last year and the main opportunities and risks identified in this TNFD LEAP analysis are as follows.
Forests and trees, the core of Sumitomo Forestry Group's business, absorb and fix atmospheric carbon as they grow, while at the same time nurturing biodiversity and providing ecosystem services. These characteristics led to common or similar results for several items in the TCFD scenario analysis and TNFD LEAP analysis, suggesting that in the Sumitomo Forestry Group's business, efforts toward decarbonization are also expanding nature-related business opportunities.

(C): Items identified only through TCFD scenario analysis
(C/N): Items identified from both TCFD scenario analysis and TNFD and LEAP analysis
(N): Items identified only through TNFD and LEAP analysis

*1The Lifestyle Services Business underwent TCFD scenario analysis only.

*2LCCM housing: houses that reduce CO₂ emissions during construction, occupancy, and demolition, and also generate renewable energy using solar power generation, etc., to achieve negative CO₂ emissions over their entire life cycle.

Financial significance analysis (TCFD scenario analysis and TNFD LEAP analysis)

In terms of the TCFD scenario analysis, among the risks and opportunities identified through the business-by-business analysis, some are affecting more than one business, and the business and items experiencing particularly large financial impacts are presented below. The increasing operating costs associated with the introduction of the carbon tax, environmental regulations, and the intensification of weather-related disasters will affect Timber and Building Materials Business and all divisions, while the growing preferences of customers for decarbonization will present opportunities for Environment and Resources Business and all divisions.

*The amount of impact is 10% or more of each division's ordinary income.

In the TNFD LEAP approach, there were 71 remaining significant risks and 36 potential opportunities identified from the qualitative assessment results, of which 30 risks were rated as high priority in terms of “degree of impact” and “probability of occurrence” based on the following qualitative assessment criteria, and 34 opportunities were rated as high priority in terms of “business attractiveness” and “strengths of the company.”

We also attempted to quantify the financial impacts of eight of the above risks and 11 of the opportunities listed in the table below. This includes those that cannot be quantified at this time and those for which quantification has not yet been completed.
Among the remaining risks, for example, in the Timber and Building Materials Business, under the scenario of manufacturing sites shutting down due to increased risk of inland flooding caused by climate change, the financial impact of “reduced sales and increased recovery costs due to the shutdown of four direct operation sites” was indicated as significant.

Among the obtainable opportunities, for example, in the same Timber and Building Materials Business, under a scenario where the promotion of wood use is promoted as a policy around the world as a means to achieve carbon neutrality and nature positive, the financial impact of “increased sales from new product development related to the mass timber market, such as CLT” was significant.
Regarding scenarios, we utilize some of the scenario analysis for physical risks from TCFD that has been already conducted, and we plan to conduct a full-scale scenario analysis for TNFD in the future.

*All risks and opportunities at direct operation locations are quantified and shaded.

*Short-term: from the present to 2024 (Mission Treeing 2030 Phase 1), medium-term: from 2025 to 2030 (Mission Treeing 2030 Phase 2 and beyond), and long-term: from 2031 to 2050.

Sumitomo Forestry's Countermeasures (Prepare)

In the TCFD scenario analysis conducted for all divisions from the end of 2022 to 2023, among the risks and opportunities identified in the business-by-business analysis, we identified items that affect multiple businesses. Of these, we identified particularly important items as cross-organizational issues, for which all divisions jointly discussed countermeasures.

Relationship Between Cross-organizational Issues/Countermeasures in TCFD Scenario Analysis and the Wood Cycle

The TNFD LEAP analysis utilizes some of the scenario analysis for physical risks from TCFD that has already been conducted. In anticipation of promoting nature-positive businesses in the next Mid-Term Management Plan Mission TREEING 2030 Phase 2 (2025-2027), we plan to conduct a full-scale scenario analysis of TNFD in the future.
Key measures to address identified priority risks and opportunities include the following.