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Risk Management
Risk Management Framework
In order to reinforce its framework for managing business risks for the entire Group, Sumitomo Forestry created the Risk Management Basic Regulations and has appointed the President of Sumitomo Forestry as the chief risk officer of the Sumitomo Forestry Group. Executive officers in charge of each division have also been appointed as risk managers of their respective divisions, and general managers have been appointed as risk management facilitators. The Regulations cover environmental, social, and governance risks comprehensively.
The Risk Management Committee is chaired by the President and composed of the divisional managers and the general managers in charge of administration at the divisions as well as those designated by the general managers of the Corporate Planning Department, Personnel Department, Legal Department, IT Solutions Department, and Sustainability Department and the chairperson of the committee. The Committee convenes once per quarter to comprehensively deliberate on the risks that each of the business divisions has selected as important risks by qualitatively understanding the nature and characteristics of various risks and quantitatively evaluating and analyzing both the degree of their impact and likelihood of occurrence on a five-level scale. The Committee then selects high-priority management risks from among the risks presented by the divisions and monitors the progress of responses to the risks on a quarterly basis. A Compliance Subcommittee and a Business Continuity Management (BCM) Subcommittee have also been established under the command of the Risk Management Committee to carry out specific activities for increasing the effectiveness of responses to compliance and business interruption risks regarded as cross-sectional risks affecting the Group. Moreover, information about materialized risks is shared at the monthly meeting of the Board of Executive Officers. Details of these activities are reported to the Board of Directors. In fiscal 2025, the Risk Management Committee met four times, the Compliance Subcommittee and the BCM Subcommittee met twice, and the details were reported four times to the Board of Directors.
In addition, the Internal Audit Department assesses the status of risk management through internal audits of each department and Group company, and reports the audit results to the Board of Directors.
Risk Management Structure of the Sumitomo Forestry Group
We are implementing specific measures to improve the effectiveness of our response to environmental, social, and governance risks and emerging risks described in the Sumitomo Forestry Group Code of Conduct. With respect to issues such as climate change and nature-related matters, international trends are considered along with the business conditions of each business division in order to evaluate risks and opportunities that are anticipated to have a significant financial impact at both the corporate and divisional levels. Since fiscal 2019, the divisions have worked together to conduct scenario analysis based on the TCFD’s recommendations and analysis based on the TNFD’s LEAP approach.
The Sustainability Committee discusses the risks that are regarded as priority risks on a medium- to long-term basis and reports to the Board of Directors about
its activities, in the same way as the Risk Management Committee does, for reflection into business execution.
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Project Monitoring Committee
In 2023, we established the Project Monitoring Committee to monitor all risks related to new business projects, product development, and other projects throughout the period from the internal approval of the project implementation to the start of the project. The department in charge of a project reports to the Project Monitoring Committee on the progress of the project and possible risks, and each member of the committee evaluates the risks. In addition, the secretariat of the committee reports the proceedings of meetings to the President, and the President instructs the secretariat to (1) provide feedback to the department in charge of the project, including instructions and findings, (2) have the department in charge report to the President, and (3) report to the Executive Committee, depending upon the status of the project.
Risks in Operations
We regard the following risks as risks in operations, as stated in our Annual Securities Report.
- Risks related to trends in housing and real estate markets worldwide
- Risks related to procurement and sales of raw materials, timber and building materials
- Risks related to the declining number of skilled construction workers in Japan
- Legal and regulatory risks
- Foreign exchange risks
- Risks related to raising capital
- Quality assurance risks
- Risks related to granting credit to business partners
- Overseas business risks
- Risks related to forests managed and owned in and outside Japan
- Risks related to the occurrence of serious occupational accidents
- Risks related to information security
- Risks related to retirement benefit accounting
- Risks related to the environment including climate change as well as the loss of nature and biodiversity
- Risks related to natural disasters and others
- Risks related to the infringement of human rights
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The following shows three specific examples of individual risks faced by Sumitomo Forestry and detailed explanations about the risks.
Risks Associated with Illegal Logging
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. In Japan, the Act on Promoting the Distribution and Use of Legally Harvested Wood and Wood Products (the “Clean Wood Act”) was promulgated on May 20, 2016 and enforced on May 20, 2017. Subsequently, on May 8, 2023, the Act Partially Amending the Act on Promoting the Distribution and Use of Legally Harvested Wood and Wood Products (commonly known as the "Amended Clean Wood Act") was enacted and came into effect on April 1, 2025. We need to promote the use of legally harvested wood not only to meet the requirements of the world but also to ensure the sustainable development of the Sumitomo Forestry Group’s business. The departments and affiliated companies registered by the Sumitomo Forestry Group submit performance reports each year to the registration agencies certified by the Japanese government. In recent years, there has been a growing interest in the sustainability of forests from which timber is sourced, in addition to the legality of the procured timber and wood products. Timber generated due to the conversion of natural forest areas into to non-forest areas (such as oil palm plantations) is called “conversion timber.” While the conversion to non-forest land is often discussed from the perspective of commodity producers (oil palm, soy, rubber and cattle producers), conversion timber now poses sustainability risks to the forestry industry.
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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 Group and could directly damage our business performance, such as net sales, and pose liability risks to us.
Risk Countermeasures
The Sumitomo Forestry Group has been committed to responsible wood procurement since before the related laws were enforced in Japan. We set the Timber Procurement Philosophy and Policy in 2005 to make contributions to a sustainable society by making effective use of wood as a renewable resource in our business activities. In 2015, in order to include construction materials, raw materials and other products in our target of responsible procurement in addition to wood, we revised the Timber Procurement Philosophy and Policy into the Sumitomo Forestry Group Procurement Policy. We have also been engaged in responsible wood procurement activities since 2018, formulating the Timber Procurement Management Regulations and Timber Procurement Due Diligence Manual. In 2019, in order to promote the procurement of timber from sustainable forests, Sumitomo Forestry formulated an action plan to enhance due diligence through the Timber Procurement Committee and to take actions for the sustainable use of forests and wood. We have since been implementing the plan.
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Risks Associated with the Revision of the GHG Protocol—Recognition of Carbon Removal by Forests
The forestry sector is currently the only sector that can remove carbon dioxide from the atmosphere through photosynthesis by trees, which store carbon. However, unlike national inventory reports submitted to the IPCC, corporate carbon accounting does not include carbon removal by the land sector or carbon storage by biogenic products.
The Nature based Solutions (NbS) and Natural Climate Solutions (NCS) have now been receiving much attention for the mitigation of climate change. The GHG Protocol, a de facto standard of carbon accounting for companies, was co-developed by the World Resource Institute and the World Business Council for Sustainable Development (WBCSD). In response to the strong demand for carbon accounting related to carbon removals through land use, land use change and nature (biogenic products), the Land Sector and Removals Standard was newly announced by the GHG Protocol.
It is essential for companies in the land sector to be able to report carbon removal with a relatively easy-to-handle inventory accounting protocol.
Impact on the Sumitomo Forestry Group
In 2023, Sumitomo Forestry launched its first forest fund offering future carbon credit to hard-to-abate sectors. In our long-term vision, "Mission TREEING 2030," we disclosed the targets to expand our forest management areas from 280,000 hectares in fiscal 2021 to 1,000,000 hectares by 2030. For the whole sector and for Sumitomo Forestry, it is necessary for forest carbon removals and biogenic carbon storage to be recognized through easy-to-handle accounting protocol, so that the investment flow into the forest sector will not be hindered.
Also, Sumitomo Forestry has been promoting the construction of wooden mid-to-large scale buildings in addition to the wooden detached houses in Japan, the U.S. and in Australia. The effect of substituting construction materials with biomaterials, namely wood, has been recognized as an effective transitional pathway for the carbon neutral society. Visualization of the carbon sequestration effect of biogenic materials is essential, and a globally accepted protocol would greatly help us meet the challenge.
Risk Countermeasures
Sumitomo Forestry has been actively engaged in lobbying through the Forest Solutions Group of the WBSCD and CDP Japan Club. Also, we have joined the International Sustainable Forestry Coalition, which was newly established in December 2023, to better collaborate with industry peers.
Sumitomo Forestry participated in the pilot test carried out by the organization from September 2022 to February 2023, and also provided feedback. Carbon removal through forest carbon absorption is the only currently available solution (and Nature based Solutions), which is indispensable for transition towards a carbon neutral society.
Risks Associated with New Mandatory ESG Information Disclosures
In June 2023, the International Sustainability Standards Board (ISSB) released its inaugural standards which set out requirements for sustainability-related (IFRS S1) and climate-related (IFRS S2) financial disclosures (ISSB Standards) for business entities. The new standards consolidate the requirements of multiple other leading sustainability reporting frameworks and will be mandated by regulatory authorities. While the internationally unified disclosure standards will help companies reduce the cost of sustainability reporting in the long run, the standards may also pose risks to them. Specifically, they may have to take different measures to meet the standards in different countries during the transitional period as the standards will be mandated with different interpretations and at different times in the countries.
In Japan, in July 2025, the Sustainability Standards Board of Japan (SSBJ) released the SSBJ Standards, which was developed basically in alignment with the ISSB Standards. In July 2025, the Financial System Council’s Working Group on Disclosure and Assurance of Sustainability-related Financial Information announced its intention to mandate companies to make their annual securities reports in line with the SSBJ Standards, starting with companies listed in the Tokyo Stock Exchange Prime Market in fiscal 2026. Following this announcement, the Financial Services Agency solicited for public comments during the period from November to December of 2025 toward the establishment of the mandatory system. Sumitomo Forestry, headquartered in Japan and listed on the Tokyo Stock Exchange Prime Market, is required to follow the regulations set by the Financial Services Agency. Moreover, the Sumitomo Forestry Group operates businesses in approximately 30 countries other than in Japan, engaging in procurement and sales, and the regulatory decisions made in each of these countries affect the Group. These sustainability disclosure requirement trends coincide with our rapid growth in overseas operations through mergers and acquisitions. This poses great challenges to the Group especially in the collection and management of social, non-financial information.
Impact on the Sumitomo Forestry Group
While we have already made and updated our Scope 3 disclosures, some of the ISSB disclosure requirements are time-consuming and costly. For example, the requirements include concurrent reporting with financial disclosures, disclosure of information on sustainability-related risks and opportunities linked to financial reporting, and obtaining broader third-party assurance. With the EU Deforestation Regulation (EUDR) already enacted and IFRS expressing their intention to expand information disclosure related to biodiversity, human rights, and human resource development in the supply chain, the impact of risks that should be mitigated by the Group, which operates businesses using forest-derived products, is expected to intensify. Failure to meet disclosure requirements or disclosing incorrect information jeopardizes our brand image and market access, as well as our financing activities.
Risk Countermeasures
The Sumitomo Forestry Group has been conducting an internal sustainability survey since 2012 to collect non-financial information, review sustainability-related preparations made by each Group company and to implement any necessary measures to mitigate related risks. Building up on these initiatives, in June 2024, a task force was formed jointly by the Corporate Planning, Finance and Sustainability Departments to incorporate necessary measures in the next Mid-term Sustainability Targets so that we can meet the SSBJ’s requirements. The task force has also been exchanging views with relevant authorities on foreseeable challenges for the whole society, especially for smaller enterprises.
Risk Assessment for New Business Plans
For all new business and project plans that are brought for deliberation to the Board of Directors and the Executive Committee, which is an advisory body to the president, Sumitomo Forestry conducts risk assessment on the following items targeting the entire supply chain. If a risk is identified, a report is made regarding the risk and measures to deal with it, which is used to determine whether or not to implement the new plan. Similar risk assessment is recommended also for new business projects that can be implemented at the discretion of each business division and affiliated company and are therefore not brought for deliberation to the Board of Directors and the Executive Committee. In fiscal year 2025, a total of nine new business and project plans were discussed. With regard to greenhouse gas (GHG) emissions, we have introduced internal carbon pricing (ICP) to prepare against an increase in our GHG emissions-related cost and to achieve our science-based targets (SBT). For risk assessment, we have added the items on anticipated GHG emissions as well as on the cost estimated by multiplying the amount of emissions by a carbon cost, thereby clearly showing the costs that may be imposed on the Group in the future as a reference material for management decisions.
| Environmental Aspects |
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| Social Aspects |
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| Legal and Regulatory Compliance | Status of Legal and Regulatory Compliance |
| Overall | Recognition of Indications from External Organization About Business Models, Products, Services and the Related Business Entities |
Identifying and Assessing Housing- and Real Estate Development-Related Risks
Properly understanding the geological and geographical risks unique to each property is vital in the housing and real estate development business. The Sumitomo Forestry Group has put in place the necessary systems to conduct detailed surveys in the development examination stage, in addition to conducting various other multistage checks, before determining whether or not to implement the project.
In overseas development activities, we first select the land to develop and then outsource soil and environmental surveys to external research firms to fully understand the risks from an objective viewpoint. We ask local affiliated companies to give their input on risks. In addition, Sumitomo Forestry’s head office also conducts property inspections and environmental and social impact surveys using its own sustainability risk assessment sheet for projects larger than a certain scale. Management also provides feedback through meetings held at Sumitomo Forestry’s head office for the analysis of risks from diverse multistage perspectives. We only engage in projects determined to be acceptable through this process.
In the construction stage, there are risks related to the occurrence of occupational accidents at construction sites. Sumitomo Forestry’s local affiliated companies are committed to complying with local occupational health and safety laws and working to prevent occupational accidents. We also have a system in place in which reports about any accidents faced by the companies will be immediately submitted to the headquarters for the prompt understanding of the situation by the headquarters, which will then plan necessary measures and give instructions on the implementation of the measures.
Risk Education
We provide new employees with risk management and compliance training to help raise their risk sensitivity. We also offer e-learning on risks to all officers and employees of the Group every year. In fiscal 2024 and fiscal 2025, we conducted risk management training for risk management facilitators and those responsible for risk management.
In addition, we are periodically conducting training on corporate law and corporate governance for our officers, including Sumitomo Forestry's outside directors and Outside Audit & Supervisory Board members.
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Prompt Identification and Response to Risks
The Sumitomo Forestry Group implements the Two-Hour Rule reporting system designed to quickly and accurately communicate information to management in case of an emergency that may have a grave impact on company management. In addition to the regular reporting line, we make communication via the department responsible for risk management. Through this system, management can take the best decision swiftly and implement initial measures to avoid loss and control the situation. Moreover, under the system, reported cases are compiled for use as reference materials to prevent the reoccurrence of similar incidents and to make operational improvements.
At our overseas sites as well, employees report back assessed risks. For example, some sites have introduced a system where supervisors install safety management application on their mobile phones for the swift reporting of risks and incidents when they occur. There are also sites that are implementing an incentive system for employees to make a proposal upon the detection of a near-miss incident that might have caused serious damage. Through these initiatives, we are raising the risk sensitivity of employees.
Furthermore, we have built a system for the public relations departments to be informed of the risk-related situations so that they can disclose the information about any serious situations to stakeholders properly and in a timely manner.
Two-Hour Rule and Use of Risk Information
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