TCFD scenario analysis｜Sumitomo Forestry

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

In order to address climate change challenges, we considered the likely situation in 2030 based on two scenarios―the 4℃ scenario of the world facing difficulties in implementing climate actions and the 1.5/2℃ scenario of decarbonization initiatives advancing steadily―, conducted financial impact assessments, and discussed response measures for major risks and opportunities.
The results of our TCFD scenario analysis* conducted in 2018, 2021, and 2022 were reported to the Sustainability Committee and the Board of Directors each time and disclosed in the Sustainability Report and the Integrated Report. In addition, the results are reflected in the Medium-Term Management Plan "Mission TREEING 2030 Phase 2" (2025-2027) to set numerical targets for each business and head office division to achieve.

*TCFD scenario analysis: the likely situation in 2030 was considered 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 facilitating a transition toward decarbonization.

Setting scenario		4°C scenario	1.5/2°C scenario
Assumed state of society		The world gives priority to maintaining economic growth at the present rate while failing to stop global temperatures from continuing to rise and suffering its increasingly severe impact.	The global society has made a major turn toward decarbonization and succeeds in controlling temperature increases.
Reference scenario	Transition risks	Stated Policies Scenario（IEA）	Sustainable Development Scenario（IEA） Net Zero Emissions by 2050（IEA）
Reference scenario	Physical risks	SSP5-8.5（IPCC）	SSP1-2.6（IPCC） SSP1-1.9（IPCC）
Risks & opportunities		Physical risks and opportunities are more likely to become apparent.	Transition risks and opportunities are more likely to become apparent.

Source: Prepared based on IPCC AR5, AR6, SR1.5, IEA WEO 2020, Net Zero Emission by 2050

Source: Prepared based on IPCC SR1.5 and AR6 WG1 SPM

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Disclosures Based on the Four Pillars of TCFD and TNFD

Main Risks and Opportunities Identified

Division^*1	Details		Transition Risks	Physical Risks	Opportunities
Timber and Building Materials Division	Manufacturing and distribution of timber and building materials	C	Costs increased due to the introduction of carbon taxes and stricter environmental regulations Wood procurement costs increased due to higher reforestation costs	Value and sales of wood materials decreased due to preference for more robust buildings growing in fear of the increasing severity of natural disasters	Demand for renovation to environmentally conscious housing increased due to stricter environmental regulations, and sales of wood building materials increased Sales increased due to development of materials processing technology for environmentally conscious housing and medium- to large-scale buildings
		C ・ N	Costs increased to address the need for compliance with stricter laws and regulations on illegal and unsustainable forest harvesting Costs increased due to higher wood procurement costs in response to increased demand for wood products to promote decarbonization, etc.	Sales decreased and business restoration costs increased as a result of operational shutdowns due to the increasing severity of flood damage induced by heavy rain, etc. Sales decreased and restoration costs increased due to operational shutdowns resulting from a landslide in nearby plantations Procurement costs increased as a result of wood supply capacity reduced due to suppliers suffering regional disasters and ecological degradation	Sales increased owing to biorefinery technology and new product development Sales increased owing to new product development for mass timber markets Sales increased owing to new product development that contributes to circular economy in the construction market

Housing Division	Custom-built houses, subdivision houses and greening (in Japan)	C	Technological development and construction costs for LCCM housing* and medium- to large-scale buildings increased for a short period Value of wood materials decreased relatively over a long period of time due to the advancement of decarbonization technologies for steel, concrete, and other building materials, and sales of wooden buildings decreased	Sales of wooden detached houses decreased due to preference for more robust buildings growing in fear of the increasing severity of natural disasters	Demand for and sales of LCCM housing increased on the back of an accelerating shift in demand toward decarbonization Sales of environmentally conscious multi-family housing increased driven by customer preferences, policy changes, etc.
		C ・ N	―	Sales decreased due to construction delays caused by increased disaster risks Costs of insurance premium payments increased to address increased disaster risks	Sales increased owing to sales at premium prices expanded by enhancing “natural symbiotic functions (greening, water retention/permeable pavement, biodiversity initiatives, etc.) installed within housing and construction sites

Overseas Housing Division, Real Estate Division	Detached houses building (overseas), building materials manufacturing (United States), real estate development (Japan and overseas)	C	Costs increased due to the introduction of carbon taxes and stricter environmental regulations Brand value impaired, stock price slumping, and sales declining due to a delayed response to environmental regulations	Materials procurement costs increased due to construction damage, construction period extension, and supply chain disruption caused by disasters becoming severer Competitions Intensifying to secure development sites due to a shift in demand to areas with less risk of natural disasters	Demand for environmentally conscious housing increased in response to a shift in consumer preference toward decarbonization Market for medium- to large-scale wooden constructions expanded in response to growing ESG demand from investors and financial institutions
Overseas Housing Division, Real Estate Division		C ・ N	Costs increased due to higher wood procurement prices in response to increased demand for wood products to promote decarbonization, etc.	Costs of insurance premium payments for properties under construction increased due to growing risk of natural disasters	Sales increased by acquiring new environmentally conscious customers through enhanced natural symbiotic functions (greening, water retention/permeable pavement, biodiversity initiatives, etc.) installed within housing and construction sites
Environment and Resources Division	Forest management, seedling production, and biomass power generation	C	Wood production decreased due to stricter forest protection policies Cost of installing energy-efficient heavy equipment increased due to the introduction of carbon taxes and stricter environmental regulations	Road repair costs increased due to forest road networks damaged as a result of changes in precipitation and weather patterns Wood procurement and reforestation costs increased due to growing forest fire occurrence attributable to higher average temperatures	Demand for logs and wood increased due to a shift in consumer preference toward decarbonization Demand for renewable energy increased backed by strengthened decarbonization policies, and biomass-derived energy business sales increased
		C ・ N	Costs increased to address the need for compliance with stricter laws and regulations related to policies implemented to promote certification of woody biomass feedstock and PKS Costs increased due to higher fuel costs resulting from increased demand and tougher competition for woody biomass feedstock and PKS Costs increased to address the need for further changes to forest management practices to meet growing demand for sustainable timber Costs increased due to delayed adoption of efficient and advanced forestry technology	Sales decreased due to operational shutdowns resulting from forest fires or landslides	Sales increased from the generation of carbon credits in connection with the promotion of forest and peatland management and forest fund operations

Lifestyle Service Division	Nursing home operations and insurance business, etc.	C	Sales in the gasoline card business decreased due to a shift from gasoline cars to electric vehicles	Costs for renovation of company-owned facilities and BCP measures increased in preparation for the increasing severity of natural disasters Number of users of company-owned facilities decreased and costs for safety considerations increased due to rising temperatures	Sales in the insurance business increased backed by a growth in the number of policy purchasers and contract renewal frequency for shorter policy periods, due to the increasing severity of natural disasters Number of Sumirin Denki subscribers increased due to growing consumer preference for renewable energy New customers acquired by responding to an accelerating shift in consumer preference toward decarbonization and preference for safety and security in fear of the increasing severity of natural disasters

(C): Factors identified solely by the TCFD scenario analysis
(C/N): Factors identified by both of the TCFD scenario analysis and analysis based on TNFD's LEAP approach

*1*1 The Lifestyle Service Division underwent the TCFD scenario analysis only

*2LCCM housing: stands for "Life Cycle Carbon Minus housing," the housing model for reducing CO₂ throughout the building's life cycle, including the construction stage, by taking initiatives to save CO₂ during the construction, habitation, and demolition stages, and generating renewable energy with solar panels, etc.

Analysis of Financial Impacts

Using the TCFD scenario analysis, we identified risk and opportunity factors for each business, and made a short list of those affecting more than one business while specifying businesses susceptible to significant financial impacts (the degree of impact worth 10% or more of divisional operating profit) and related factors, which are presented below. Major findings are as follows: increasing operating costs associated with the introduction of carbon taxes, environmental regulations, and the increasing severity of weather-related disasters can affect all divisions, including the Timber and Building Materials Business, in particular, while the growing consumer consciousness of decarbonization can present opportunities for all divisions including the Environment and Resources Business, in particular.

		Factors	Major Financial Impacts	Related Business
Transition Risks	Policies and Regulations	Introduction of carbon pricing	[Risks]Business costs increased due to the introduction of carbon taxes and emissions trading systems (Timber and Building Materials, Environment and Resources)	Timber and Building Materials, Housing, Overseas Housing, Real Estate, Environment and Resources, Lifestyle Services
		Forest conservation policies	[Risks] Wood procurement costs increased due to payment of logging taxes, logging fees, etc. (Timber and Building Materials, Environment and Resources) Domestic wood production costs increased due to reforestation costs entailed as a result of mandatory reforestation legislated, etc. (Timber and Building Materials)	Timber and Building Materials, Environment and Resources
		Introduction of environmental regulations	[Risks]Costs of procuring heavy equipment and trucks increased as a result of governments around the world imposing regulations on the use of used vehicles (Environment and Resources) [Opportunities]Sales increased by responding to growing demand for environmentally conscious housing retrofits on the back of stricter regulations on buildings (Housing) Sales increased by meeting growing demand for environmentally certified /low-carbon housing on the back of stricter regulations on buildings (Global)	Timber and Building Materials, Housing, Overseas Housing, Real Estate, Environment and Resources, Lifestyle Services
	Market	Shift in consumer demand toward decarbonized products	[Opportunities]Sales Increased by expanding demand and the use of domestic wood through effective use of products from wood manufacturing complexes and laminated wood mills(Timber and Building Materials) Sales increased due to higher unit prices for logs and timber products reflecting growing demand for recyclable raw materials and products (Environment and Resources)	Timber and Building Materials, Housing, Overseas Housing, Real Estate, Environment and Resources, Lifestyle Services
	Market	Increased cost of raw materials	[Risks]Raw material costs increased reflecting higher energy costs (Timber and Building Materials)	Timber and Building Materials, Housing, Overseas Housing, Real Estate
	Technology	Advances in next-generation technologies	[Risks]Sales decreased due to lower demand for wood as a result of progress made in research and development for decarbonizing production processes of steel and concrete materials, a category competing with wood materials (Timber and Building Materials)	Timber and Building Materials, Housing, Overseas Housing, Real Estate, Environment and Resources
Physical Risks	Acute	Intensifying weather disasters	[Risks]Sales decreased due to a decline in demand for wooden buildings, reflecting growing demand for robust structures using non-wooden materials (Housing) Costs increased due to higher cost prices as a result of the supply chain affected by a disaster (Global)	Timber and Building Materials, Housing, Overseas Housing, Real Estate, Environment and Resources, Lifestyle Services

Sumitomo Forestry's Countermeasures

Using the TCFD scenario analysis conducted for all divisions from the end of 2022 to 2023, we identified risk and opportunity factors for each business and made a short list of those having financial impact on multiple businesses, and defined particularly important factors as cross-organizational issues, for which all divisions jointly discussed countermeasures.
Also, from 2025, as part of efforts toward achieving carbon neutrality by 2050, we started considering the formulation of transition plans. We are discussing a number of individual measures for decarbonization, such as shifting to EVs and switching to low-emission boilers to be used in manufacturing operations, and in detail about the time of implementation and required investment. We are aiming to incorporate this information into our next Medium-Term Management Plan.

Relationship Between the Wood Cycle and Cross-organizational Issues Identified by TCFD Scenario Analysis and Relevant Countermeasures

Elements of "wood cycle"		Cross-organizational issues	Countermeasures
Energy	Forest	Expand forest supply in response to demand related to a shift to decarbonization	Promote tree species and forest development, particularly for fuel wood and high-strength wood, in response to demand related to a shift to decarbonization Develop supply and demand models for local production for local consumption (secure and consolidate forest ownership rights)
Energy	Wood	Expand the biomass and biofuel supply business	Capitalize on abundant forest resources and wood processing technology (consider development of a wood-based SAF and demonstration plant project) in order to expand the use of wood chips and pellets that would otherwise be disposed of as well as broadening the application of biorefinery/SAF fuel products
Materials	Wood	Develop strategies to supply products to suit regional markets	Organize or participate in rulemaking activities to establish design standards for decarbonized construction process of medium- to large-scale buildings, create specific strategies for each region, and select forests from among those held by the Company to source materials to develop products
Materials	Wood and Construction	Promote cyclic use of wood	Develop new product designs to increase the eligibility and possibility for recycling of demolition waste wood as well as extending the wood product life cycle; and expand the delivery destination list for recycled demolition waste wood while keeping the wood chip mill in Kawasaki (biomass) on the list
Construction		Strengthen property and facility management systems	Expand the implementation of stock-oriented business models for the purpose of building management to reduce GHG emissions after delivering a construction project, which constitutes an extension from the traditional model of construction undertaking
Construction		Promote community townhouse development	Promote advantages of adopting wood materials, including being environmentally friendly
Overall	Forest, Wood and Construction	Enhance supply chain management systems, including options for full internal operations	Upstream: determine the layout of company-owned forests in consideration of the positioning of the forestry fund in the context of resource strategy as well as supply chain efficiency Midstream: study and design the layout and routing of production and distribution networks in accordance with upstream and downstream supply chain requirements Downstream: establish supply chain requirements by project type, such as new detached house construction, renovation/remodeling, etc., and promote cross-divisional cooperation

Responding to TCFD and TNFD