Responding to Climate Change

Responding to TCFD

Express its support of the TCFD recommendations

In July 2018, Sumitomo Forestry Group recognized the risks and opportunities associated with climate change and expressed its support for the recommendations from TCFD (Task Force on Climate-related Financial Disclosures) established by the Financial Stability Board. In the same year, we conducted an initial scenario analysis for the Timber and Building Materials Business and the Housing and Construction Business based on the TCFD recommendations, assessing the risks and opportunities that climate change issues pose to society and businesses, as well as the resilience of their strategies, and in the following year 2019, we began disclosing information with reference to the framework recommended by the TCFD. In addition, we conducted scenario analysis for the Environment and Resources Business and the Overseas Housing and Real Estate Business in 2021 to improve the degree of transparency of Sumitomo Forestry Group's scenario analysis.

Sumitomo Forestry Group Disclosure of TCFD Scenario Analysis

Sumitomo Forestry Group Disclosure of TCFD Scenario Analysis

Governance

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. It also reports all proceedings at committee meetings to the Board of Directors.

In February 2022, we revised some contents of the Executive Remuneration System in order to further integrate business with ESG. We have included remuneration linked to rate of achievement of sustainability indicators during Executive Remuneration. In the event that Sumitomo Forestry fails to meet its long-term greenhouse gases emissions reduction target based on Science Based Targets (SBT), amount of remuneration paid will be reduced from the regular stock remuneration amount in accordance with the degree of target performance.

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Strategy

The Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) states unequivocally that human activity causes climate change, that it causes 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 light of this, society's expectations of the CO₂ absorption and carbon storage functions of forests, the carbon stock and CO₂ emissions reduction from wood products and wooden construction, and the unused forest resource for biomass power generation. Sumitomo Forestry Group contributes to the realization of a decarbonized society, by effectively utilizing forest resources, which are renewable natural capital, and providing "shared benefit" through forest management, manufacturing and distribution of timber and building materials, and wooden construction and renewable energy businesses.

In February 2022, we unveiled Mission TREEING 2030, our long-term vision for decarbonization. As one of our business policies in Mission TREEING 2030, we set "promoting decarbonization and circular bioeconomy to maximize the value of forests and trees" and contribute to the decarbonization of society through our business by promoting the benefits of forests and wood resources in all areas in Japan and abroad, such as CO₂ absorption, storage, and reduction. 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 Mid-Term Management Plan, which provides the groundwork for our future growth and contribution to decarbonization. One of our five basic policies is "Further integration of business operations and ESG".

Risk Management

Sumitomo Forestry Group has established the Risk Management Committee, which is chaired by the President and CEO and consists of all other executive officers. The Sustainability Committee, which is chaired by the President and CEO, composed of executive officers concurrently serving as directors, and the divisional managers of each business unit. Each of these committees meets four times a year, and each department decides on specific countermeasures and evaluation indicators for risks that may arise in the short term in daily operations, and reports progress to the Risk Management Committee on a quarterly basis. The Sustainability Committee discusses social, environmental, and governance medium and long-term risks, including climate change comprehensively for the entire value chain.

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Metrics and Targets

Sumitomo Forestry Group has formulated long-term targets related to climate change and is promoting initiatives while incorporating them into its annual planning. 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. 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.

TCFD Scenario Analysis

Identifying and Evaluating Risks and Opportunities

In the first scenario analysis conducted in 2018, we analyzed the business risks and opportunities posed by climate change for the Timber and Building Materials Business and the Housing and Construction Business, using two scenarios in which average global temperature increases are below 2°C and 4°C, respectively, compared to that of pre-industrial times, and disclosed relevant information. For 2021, we conducted scenario analysis for the Environment and Resources Business, as well as the Overseas Housing and Real Estate Business. In order to enhance transparency, we considered the situation in 2030 using two scenarios: the 4°C scenario, in which no progress is made in tackling climate change, and the 1.5/2°C scenario, in which progress is made in transitioning the company toward decarbonization. The relevant departments and each division of our company collaborated to identify risks and opportunities, conducted financial impact assessments, and discussed countermeasures for items that were identified as significant risks and opportunities. In 2018 and 2021, the subject businesses for which scenario analysis was conducted accounted for approximately 98% (as of FY2021) of the net sales of Sumitomo Forestry Group. Results of the scenario analysis are presented to the Sustainability Committee and the Board of Directors, and additional initiatives are outlined in the Mid-Term Sustainability Targets.

In the future, we will increase the accuracy of our scenario analyses and discuss how to reflect them in our Mid-Term Management Plan and other business planning, while moving forward with the creation of business strategies for the resilience that will see us through into an uncertain future.

Resource: IPCC, SR1.5, etc.

Source: IPCC, SR1.5, etc.

Timber and Building Materials Business

In the Timber and Building Materials Business, where timber is the main material and commercial product, major transition risks is the increase in timber procurement costs because of tightening regulations such as forest protection policies and felling regulations in various countries. As for physical risks, rising average temperatures would raise the cost of wood procurement because of forest fires, tree diseases, and pest damage, etc. If fossil fuels are further regulated, however, this will provide a tailwind (opportunity) for the biomass power generation business that Sumitomo Forestry is pursuing, as well as for demand for wood chips as fuel.

Risk Assessment in Timber and Building Materials Business

Risk category Impact on operations Risk level Measures
Initiated
Transition Risks Carbon emission targets, policies in each country
  • Increased timber procurement costs due to policies related to forest carbon sinks.
Large
Forest conservation policies
  • Increased timber procurement costs due to logging taxes, logging fees and other.
Large
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.
Large
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.
Large
Economic stagnation with global warming regulations
  • A fall in demand for wood building materials and a decrease in revenues if construction is suppressed.
Large
Increase / decrease in demand for important products and increase / decrease in product price Small to medium
Advances in next-generation technologies Small to medium
Popularization of renewable energy/energy conservation technologies Small to medium
Changes in investor evaluation Small to medium
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.
Large
Changes in rainfall and climate patterns
  • Increased timber procurement costs with changes in the regions where we can plant and procure trees.
Large
Intensification of abnormal weather
  • A fall in revenues due to factory shutdowns. Increased timber procurement costs with a decline in forest resources.
Large

Housing and Construction Business

In the Housing and Construction Business, transition risks include increased lumber procurement costs because of tighter regulations, including forest protection policies and felling regulations in various countries. With respect to physical risks, greater costs in home building are expected; these are incurred by decreased efficiency with rising temperatures, more severe natural disasters and extreme weather events, and the construction schedule delays. On the other hand, demand for environmentally conscious housing such as ZEH housing is expected to increase because of tougher laws and regulations for decarbonization and growing market demand for decarbonized products.

Risk Assessment in the Housing and Construction Business

Risk category Impact on operations Risk level Measures
Initiated
Transition Risks Carbon emission targets, policies in each country
  • Increased timber procurement costs due to policies related to forest carbon sinks.
Large
Forest conservation policies
  • Increased timber procurement costs due to logging taxes, logging fees and other.
Large
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.
Large
Changes in customer evaluation
  • If customer awareness of climate change increases, customer preference will move toward the use of certified timber, increasing procurement costs.
Large
Energy conservation and other subsidy policies Small to medium
Fossil fuel subsidy program Small to medium
Changes in energy mix Small to medium
Changes in investor evaluation Small to medium
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.
Large

Overseas Housing and Real Estate Business

In the Overseas Housing and Real Estate Business, transition risks include the imposition of a carbon tax and higher expenses of complying with tougher environmental regulations. Physical risks include the possibility of higher expenditures for land acquisition, construction and development as a result of more severe natural disasters, as well as a shift in demand to less disaster-prone locations. Wooden construction, on the other hand, is expected to grow as decarbonization and other rules tighten.

Risk Assessment in the Overseas Housing and Real Estate Business

Risk category Impact on operations Risk level Measures
Initiated
Transition Risks Carbon emission targets, policies in each country
  • Increase in operating costs because of imposition of carbon tax
Large
  • Increase in construction costs because of tougher building standards
Large
Changes in the market
  • Increased insurance and repair cost estimates for damage to buildings under construction
Large
Physical Risks Intensification of abnormal weather
  • Increase in warranty rates because of more severe storms and floods
Large
  • Increase in financing costs because of extended construction periods / Increase in Materials Procurement cost because of higher purchase prices
Large
  • Soaring land prices because of natural disasters
Large
Rise in average temperatures
  • Decrease in sales in existing business areas
Large

Environment and Resources Business

In the Environment and Resources Business, transition risks include increased operational costs because of the imposition of carbon taxes, environmental regulations and tougher felling regulations, as well as a decrease in timber harvest volume. As physical risks, the risk of forests being damaged by frequent typhoons, floods, forest fires, etc. will increase. Disease, insect, and animal damage may become more common, leading to fewer sales prospects and greater replanting expenses. Wood, on the other hand, uses less energy to make and process than steel, concrete, and other materials, contributing to lower greenhouse gases emissions, which can be expected to increase sales prices because of rising demand for wood. Wood biomass power generation will also see a rise in demand. In addition, credit income is expected to increase as a result of active trading of forest carbon credits.

Risk Assessment in Environment and Resources Business

Risk category Impact on operations Risk level Measures
Initiated
Transition Risks Policy and Regulations
  • Increased burdens and costs because of regulations and taxation of CO2 and greenhouse gases
Large
Forest conservation policies
  • Lost opportunities because of increased resource conservation regulations
Large
Changes in energy mix
  • Increased operating costs because of higher fuel prices
Large
Economic stagnation with global warming regulations
  • Deterioration of Labor Environment
Large
Popularization of renewable energy/energy conservation technologies
  • Increased costs related to more efficient resource use and production, development and implementation of low-carbon technologies
Medium
Physical Risks Intensification of abnormal weather
  • Damage to forests because of frequent storms and rainstorms
Large
  • Increased risk of business shutdowns because of frequent windstorms and rainstorms
Large
Changes in rainfall and climate patterns
  • Damage to forests because of reduced precipitation
Large
Rise in average temperatures
  • Damage to forests because of higher average temperatures
Large
  • Changes in growing conditions because of temperature increase and changes in rainfall
Large
Intensification of abnormal weather
  • Damage to forests because of increased insect and animal damage
Medium
  • Disruption of supply chain because of increased precipitation
Medium

Climate Change Related Opportunities and Strategies

Expanding Housing Sales in Concert with Government ZEH Promotion

In the Global Warming Prevention Plan and The Sixth Basic Energy Plan approved by the Cabinet in October 2021, the Japanese government declared that "the government will raise energy conservation standards in stages and raise inducement standards and top-runner standards for Housing and Construction to ensure the level of energy conservation performance of ZEH and ZEB standards for new Housing and Construction to be built in fiscal 2030 and after", and "the government will ensure the level of energy conservation of ZEH and ZEB standards for the stock average of housing and buildings by 2050".

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. Sumitomo Forestry has also adopted 360° TRIPLE Insulation as a standard that enhances the thermal insulation performance of custom-built detached homes (excluding fireproof specifications). In addition to offering high-performance thermal insulation materials, the standard provides all-around insulation for buildings as a whole from structural materials to windows with high thermal performance. 360° TRIPLE Insulation creates a living space that stays cool in the summer, warm in the winter and increases energy-saving performance.

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.

Received orders of ZEH
Target (%)*
(FY2024)

80%

* Include Nearly ZEH, Small ZEH Oriented and ZEH Oriented in Snow Area

Expanding Renewable Energy Demand

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. The Kanda Biomass Energy in Fukuoka Prefecture is set to start operations in June 2021 while the Morinomiyako Biomass Energy in Miyagi Prefecture should be up and running by November 2023. These two power generation plants will give the Group a total power generation capacity of roughly 251.6 MW, which will supply electricity to approximately 274,366 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.

Amount of biofuel material used (such as wood chips and pellets)
Target (t)
(FY2024)

1,640,964t

Promoting the medium -to large-scale wooden constructions overseas

Sumitomo Forestry is developing medium-to large-scale wooden constructions overseas in order to achieve net zero carbon emissions and realize a decarbonized society. In Mid-Term Sustainability Targets (FY2022~2024), Sumitomo Forestry set goals for the development of medium-to large-scale wooden constructions business (in the U.S., Australia, and Europe), and confirmed its involvement in a 15-story wooden office construction project in Melbourne Australia, in October 2021, and a 6-story wooden eco-friendly office development project in London in February 2022. In the future, we will improve our understanding of advanced environmental response and medium-scale wooden constructions in Australia and Europe and expand "Net Zero Carbon Architecture" globally.

Expanding Interest in Forest Carbon Credits

In accordance with the Paris Agreement, governments, companies, and investors are accelerating their efforts to achieve carbon neutrality by 2050, including the Japanese government's declaration to do so in order to realize a decarbonized society. In addition, the Japanese government has announced that it will increase its greenhouse gases emissions reduction target by 2030 from 26% to 46% below 2013 levels. Forests, unlike other carbon-reduction methods, can absorb and repair their own CO2. Forests play an even more important role in achieving carbon neutrality. Scenario analysis reveals that forest carbon credits might become a new source of revenue for forest enterprises as the carbon credit market advances toward decarbonization, as carbon credit expands.

Sumitomo Forestry's long-term vision Mission TREEING 2030 includes establishing a forestry fund to safeguard forest assets including CO2 credits and other new value, and expanding business through forest management and asset management, with the target of all contributing to societal carbon offsetting. As one of its initiatives, Sumitomo Forestry will perform advanced forest management to avoid peat fires through highly accurate water level management, merging the forest management technology it has developed in Japan and overseas with IHI's satellite-based observation technology. Utilizing this knowledge, we plan to start a consulting business for government agencies in countries and regions that combat deforestation and peatlands destruction, as well as corporations contemplating forest ownership for carbon offsets. Furthermore, we have set such target items as "establishing a method for calculating forest absorption and improving its accuracy" and "increasing the ratio of profit/loss and revenue from new forest value creation business" in Mission TREEING 2030 Phase 1 (2022-2024) of our Mid-Term Management Plan and will promote these initiatives.