Identification of Priority Sites (“Locate”)

In the "Locate" phase, we took a bird's-eye view of the Sumitomo Forestry Group's supply chain, examining its interfaces with nature at each business site and identifying the sites that should be prioritized for relevant measures.
First, we selected 148 business sites for evaluation evenly from the five businesses that are considered to have particularly large interfaces with nature (timber and building materials, housing, overseas housing, real estate, and environment and resources). For each of the five businesses, we selected the sites from among our direct operation locations and those in the upstream and downstream sections of the supply chain.

Next, we evaluated the 148 sites by making combined use of their location information gained through geographic information systems (GIS) and other tools, and ecosystem information obtained by using nature-related risk analysis tools such as ENCORE*¹. As a result, we narrowed down the list of the sites to those that are financially significant or located in ecologically sensitive areas.

We selected financially significant sites (B in the following figure titled "Classification of Priority Areas") based on actual situations and on the following criteria: rating for one or more of the evaluation items is “Very high” in ENCORE; the site accounts for 10% or more of total sales or total transaction value in the business; and the site cannot be substituted within one year in the event of an emergency.

For sites located in ecologically sensitive areas (C in "Classification of Priority Areas"), we assessed the sensitivity of the ecosystem in which each site is located by using ENCORE, IBAT*² and the like to conduct evaluation concerning 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]. Then we selected the sites with an average score of 4 or higher for the five requirements.

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

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

Classification of Priority Areas

As a result, we identified 37 sites that need to be prioritized (“priority locations”). In addition, as priority locations considered financially significant and located in ecologically sensitive areas (A in "Classification of Priority Areas"), we selected two locations. One is PT. Wana Subur Lestari (WSL), PT, Mayangkara Tanaman Industri (MTI), PT. Kubu Mulia Forestri (KMF) of Indonesia (forest management companies) and the other is Kutai Timber Indonesia (KTI) (manufacturer).

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

Quantitative Analysis of Environmental Impacts (Estimates Using LIME)

In order to quantitatively assess the environmental impacts of our business activities on nature, we are promoting life cycle assessment (LCA) using LIME3.*¹
In 2025, we attempted a quantitative evaluation using LIME3 for raw materials in the upstream section of the value chain and for electricity and fuel mainly used in manufacturing operations, focusing on the Sumitomo Forestry Group’s material balance analysis results.
LIME3 quantifies human health damage, social asset depletion due to resource consumption, and biodiversity loss measured by species extinction probability, and the disruption of primary production in trees to use them as indicators.

Regarding biodiversity loss and primary production in trees, assuming a 50% reforestation rate after forest harvesting, timber accounts for the majority of the impact. The integrated results of all the indicators reaffirmed that timber has a significant impact. On the other hand, it was also confirmed that the loss of biodiversity and the impact on primary production in trees decrease when the reforestation rate is estimated at 100%. We will continue to promote sustainable timber procurement and aim to grasp its quantitative impacts by using life cycle assessment methods such as LIME.

LIME3 currently provides coefficients only at the national level. Also, the impacts related to land-use change and maintenance through afforestation in timber production are still under investigation, and average values by region are used. Therefore, we recognize the need to continue improving the analysis method going forward.
Sumitomo Forestry is participating in the Development and Demonstration Project of Nature Footprint Based on the Promotion of Nature-related Information Disclosure by Financial/Investment Institutions and International Standardization (Cabinet Office BRIDGE*²), and we are proceeding with estimations using LIME. In this project, the development of biodiversity and ecosystem service footprints is planned at a more detailed regional level than the national level, and we also intend to conduct evaluations focusing on the upstream section of the value chain in our timber business.

*1LIME3: Life Cycle Impact Assessment Method Based on Endpoint Modeling 3. It was developed in Japan as a life cycle impact assessment method. LIME3 utilizes the latest knowledge and analytical techniques from natural and social sciences. It is applied not only in LCA but also in various fields, such as environmental efficiency, environmental accounting, and full cost assessments.

*2Cabinet Office BRIDGE is a set of programs that leverage the leadership function of the Council for Science, Technology and Innovation (CSTI) of the Cabinet Office of the Japanese government to promote and accelerate the implementation of policies by various ministries and agencies in areas in which public-private R&D investment is expected to increase. It aims to bridge innovative technologies and outcomes generated through initiatives such as the Strategic Innovation Promotion Program (SIP) and other governmental R&D measures for solving societal issues, creating new businesses, and ultimately realizing Japan’s future vision (Society 5.0).

Impact Assessment of Our Entire Business Using LIME3

Main Risks and Opportunities Identified (“Assess”)

In the “Assess” phase, we identified business risks and opportunities arising from the dependency and impacts on nature as determined in the “Evaluate” phase. We then conducted qualitative assessment to identify the major risks and opportunities. First, we made risk/opportunity analysis for 25 sites, which were selected evenly from priority locations to avoid bias toward specific businesses. Based on what had already been addressed at the sites, we qualitatively evaluated the priority level of remaining risks and potential opportunities.

For remaining risks, we qualitatively evaluated their priority level based on the criteria of "degree of impact" for financial impact on the business and "probability of occurrence" based on past cases and existing initiatives. For potential opportunities, we qualitatively prioritized them in terms of an increase in market size* by 2030 (“business attractiveness") and on our advantage in capturing such opportunities (“the Company’s strengths”).

*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

(N): Items identified only through analysis based on TNFD's LEAP approach
(C/N): Items identified from both TCFD scenario analysis and analysis based on TNFD's LEAP approach

*The Lifestyle Service Division underwent TCFD scenario analysis only

Analysis of Financial Impacts

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. Also, 34 opportunities were rated as high priority in terms of "business attractiveness" and "the Company’s strengths."

In addition, we 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 potential opportunities that could materialize, for example, in the same Timber and Building Materials Business, under a scenario where 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 deemed significant.
Regarding scenarios, we utilize some of the TCFD scenario analysis for physical risks that has been already conducted, and we plan to conduct a full-scale TNFD scenario analysis in the future.

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

*Short-term: from the end of 2023 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 Measures (“Prepare”)

In our analysis based on TNFD's LEAP approach, we utilized the TCFD scenario analysis performed for physical risks. To promote businesses that contribute to a nature positive world under the medium-term management plan "Mission TREEING 2030 Phase 2 (2025 -2027),” we are implementing TNFD scenario analysis and setting targets in a step-by-step manner by utilizing quantitative assessments including LIME3, which is a life cycle impact assessment method.
Currently, as a preparatory step for target setting, we are designing pilot projects aimed at quantifying and monitoring the specific impacts of our business activities on nature, excluding indicators such as water which we have already quantitatively assessed and set targets for. Specifically, we are promoting projects, such as forest biodiversity and water resource surveys. We will utilize the results of these surveys when setting targets for the next medium-term management plan, while disclosing the results to the public by reporting them through conference presentation and other means as appropriate. Furthermore, in accordance with TNFD guidance, we will proceed with considering the formulation of a nature transition plan.
Key measures to address the identified priority risks and opportunities include the following.

Comment from experts

The Sumitomo Forestry Group reported to and obtained advice from external stakeholder experts on the narrowing-down process in the “Locate” and “Evaluate” phases of the TNFD LEAP analysis 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 a nature positive world (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 regarded 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 scientifically recognized that climate change measures and the conservation of biodiversity and ecosystem services are interdependent, I found it very interesting that Sumitomo Forestry has accumulated nature-related information and on-the-ground experience in its overseas forest management operations and other activities, which are not represented in the database or other materials provided by the TNFD. I believe that the company can become truly nature positive by utilizing such information and experience for its future analyses based on TNFD’s LEAP approach and related measures.