Management PolicyBusiness Risks

The following is a list of major risks that management recognizes as having the potential to materially affect the consolidated company's financial position, operating results, and cash flows, among other matters related to the business and accounting conditions described in the Annual Securities Report (submitted on June 29, 2023). However, these are not an exhaustive list of all risks, and risks other than those listed may also exist and have an impact. Forward-looking statements in the text are based on the Group's judgment (the Company and its consolidated subsidiaries) as of the end of FY2023/3.

(1) Major Risks Associated with Management Strategies

1) Raw Material and Fuel Procurement, Domestic and International Transportation

NIPPON PAPER GROUP is engaged in businesses in which it purchases raw materials and fuel such as wood chips, wastepaper, oil, coal, and chemicals, and uses these resources to manufacture and sell products. The Group is thus exposed to the risk of fluctuations in input prices for raw materials and fuel based on domestic and international market conditions. Such fluctuations could affect the Group's business performance, financial position and other aspects. In addition, the global shortage of container transport capacity triggered by the spread of the COVID-19, the shortage of dockworkers and truck drivers, disruption of global supply chains due to geopolitical risks, furthermore, the use of clean energy in response to environmental issues and price pass-through due to the price increases in raw materials and fuel have caused transport costs to rise and delivery times to be delayed. In the future in Japan, this trend is expected to become even stronger as the so-called "Logistics 2024 Problem," which concerns a driver shortage due to stricter overtime regulations for truck drivers starting in April 2024, becomes more apparent, which could affect the Group's business performance, financial position and other aspects. As main measures, the Group establishes and implemetns forward contracts to certain raw materials and fuels for risk hedging purpose. In addition, the Group has established good relationships with shipping companies to ensure stable procurement, and when necessary, the Group considers joint transportation and joint procurement with other companies, purchasing with long-term contracts and from multiple suppliers and regions, and expanding flexible sourcing and procurement network by strengthening horizontal cooperation among group companies, etc. Regarding inventories, the Group is conducting appropriate inventory management and flexible sourcing, including a review of inventory levels.

2) Delays in Business Structure Transformation and the Creation of New Businesses

In the Paper Business, which is one of NIPPON PAPER GROUP's businesses, a market contraction has been continuing as a trend in response to progress of digital transformation (DX), as well as the lifestyle changes by the COVID-19 pandemic. Therefore, the Group has been shifting management resources to growing businesses such as the Daily-Life Products Business, and working to early positive contribution from new businesses and products. If these efforts do not progress as planned, the Group's business performance, financial position, and other aspects could be affected. The Group's main initiatives are to develop paper products to replace plastics, primarily for containers and packaging; expand the use of woody biomass, including cellulose nanofiber (CNF); and invest in growing businesses, reallocate human resources, and expand overseas business. The Group will implement these initiatives as planned as it strives to improve earnings.
In particular, with regard to overseas business, the Group is accelerating the speed of its overseas expansion more than ever to achieve the Group's growth. NIPPON PAPER GROUP manufactures and sells pulp and paper and operates forestry plantations and other businesses in North America, South America, Scandinavia, Southeast Asia, Australia, and other overseas locations, aiming to capture synergies with existing businesses. In addition, developing business operations overseas entails a number of risks, including changes to laws and regulations by local governments, labor disputes, and the impact of political uncertainty on economic activities. For this reason, the Group strives to prevent the materialization of these risks by sharing information with external law firms and dealing with these risks appropriately.

3) Climate Change

The Group, whose main business is the energy-intensive pulp and paper business, regards addressing climate change issues as one of the key issues in realizing the Group Mission, and has declared itself carbon neutral by 2050 and is working to reduce greenhouse gas emissions. In a situation where the trend toward decarbonization is rapidly accelerating, if the Group's response is delayed, it could be financially impacted by regulatory risks such as carbon pricing and reputational risks from customers and investors.
The Group appropriately assesses the financial impact related to these risks and discloses them in accordance with the TCFD. With regard to risks, in order to reduce them, the Group is working to quickly reduce greenhouse gas emissions by accelerating introduction of high-efficiency equipment, energy-saving measures by review of its manufacturing processes, and by shifting to non-fossil energy sources through a review of its energy mix. The Group is also working with its stakeholders to reduce emissions in the value chain by promoting modal shifts and shortening transportation distances. While continuing to reduce emissions through self-help efforts, the Group aims to be carbon neutral by 2050 through the use of carbon-free fuels and forest absorption.

4) Product Demand and Market Conditions

NIPPON PAPER GROUP carries out businesses such as the Paper and Paperboard Business, Daily-Life Products Business, Energy Business, and Wood Products and Construction-Related Business. The Group is exposed to the risk of fluctuations in demand for its products based on factors such as economic conditions and fluctuations in product prices based on factors such as market conditions. Such fluctuations could affect the Group's business performance, financial position, and other aspects.
As a countermeasure, the Group is reorganizing its production system and consolidating production bases in the Paper Business, where the market is shrinking significantly due to the progress of digital transformation (DX), as well as the lifestyle changes by the COVID-19 pandemic. Concurrently, the Group is implementing measures such as investing in the Daily-Life Products Business, where demand is expected to increase.

(2) Main Risks Associated with the Business Environment and Business Activities Production

1) Production Facilities

NIPPON PAPER GROUP's production activity is based on the estimated demand and production capacity of existing facilities. The Group is exposed to the risk of a reduction in product supply capability due to equipment trouble or fire, etc. Such fluctuations in the product supply capability could affect the Group's business performance, financial position, and other aspects. Therefore, the Group conducts periodic inspections of its production facilities while carries out aging countermeasure works to systematically renew vulnerable areas, establishing supply systems at multiple plants, and optimizing inventories.

2) Natural Disasters and Infectious Diseases, etc.

The occurrence of an earthquake or large-scale natural disaster in the vicinity of NIPPON PAPER GROUP's production and sales bases may impact its production, sales and other business activities. This may lead to opportunity losses due to a production stoppage, additional costs to restore facilities, and/or damage to products, merchandise and raw materials, etc. Such consequences of natural disasters may affect the business performance, financial position, and other aspects of the Group. In accordance with the Crisis Response Regulations, during emergencies, the Group forms a Crisis Response Headquarters and works to confirm the safety of employees and their families, monitor the status of damage to the Company and its customers, and implement measures to ensure the continuous supply of products to corporate customers. Moreover, the Group has established business continuity management (BCM) to address emergencies. BCM measures include establishing supply systems at multiple plants and carrying out evacuation drills, safety confirmation drills, etc. in preparation for natural disasters.
Although the COVID-19 infections have been placed in the same category of "Class 5 Infectious Diseases" as other diseases such as seasonal influenza, the risk of production line stoppages due to employee infection remains. The Group has prepared a system for communicating with the possibility of multiple outbreaks of infectious diseases, including those other than the COVID-19, that could affect business continuity. In addition, the Group has put a system in place to form a Response Headquarters whenever needed.

3) Human Resources Recruitment and Labor-Related

NIPPON PAPER GROUP considers its human resources strategy to be a key element of its business activities. The Group recognizes that there is a vital need to recruit and develop optimal human resources to expand its business in the future. The Group's inability to recruit optimal human resources could restrict its business operations, which could in turn affect its business performance, financial position, and other aspects. Additionally, if the Group is found to be out of compliance with various labor-related rules (employment issues, harassment, human rights infringements, etc.), the Group could be subject to lawsuits or experience a loss of public trust. Such events could adversely impact the business performance, financial position, and other aspects of the Group.
The Group strives to secure human resources optimally and efficiently through proactive recruitment and development of diverse human resources and the development of workplaces premised on flexible and diverse work styles. From FY2023/3, as a measure to improve employee engagement, the Group has reviewed internal systems, focusing on support for balancing work and life events such as childcare. In addition, the telecommuting system, which was implemented as an emergency response from the perspective of preventing the spread of the COVID-19, has been made permanent. With regard to labor-related compliance issues, the Group conducts compliance training on a regular basis to raise employee awareness of compliance.
Moreover, the Group strives to operate all of its business sites with the highest priority on safety, the occurrence of an occupational accident is a serious risk that could result in the loss of workers' health and lives, and depending on the nature of the accident, the Group may be held liable for corporate management and may even have to shut down its facilities. In order to prevent occupational accidents, the Group operates own occupational health and safety management system and incorporate specific, ongoing, and voluntary activities into the health and safety plans of each business site, striving to prevent occupational accidents, promote workers' health, and improve health and safety standards such as a comfortable work environment.

4) Environmental Laws and Regulations

The Group is subject to the application of environmental laws and regulations in various businesses. Revisions and amendments to such regulations could limit production activities and result in additional costs incurred to implement countermeasures, etc., affecting the Group's business performance, financial position, and other aspects. In addition to regularly monitoring the status of amendments to environment-related laws and regulations, the Group conducts periodic inspections of environmental facilities and promote construction of countermeasures for aging facilities.

5) Information Systems

NIPPON PAPER GROUP strengthens and rigorously implements security measures for its information systems. The Group also implements extensive information security measures to address the work-from-home environment, which has been rapidly adopted across society. If there are any problems such as information leakages due to unauthorized access to computers and/or data breaches due to criminal acts, and/or interference with somebody's duties, NIPPON PAPER GROUP may be held liable for the payment of compensation for loss or damage and experience a loss of public trust or suspension of business, etc. in the Group. Such events could affect the business performance, financial position, and other aspects of the Group. The Group installs defense systems and provides employee training on information security in step with current conditions. The Group has set forth rules concerning the handling of personal information, and made those rules known to its executives, employees, and business partners as part of its efforts to strengthen its management structure.

6) ESG, SDGs and other social demands

NIPPON PAPER GROUP must address a variety of ESG issues, including respect for human rights, active participation of diverse human resources, and enhancement of its governance, in addition to environmental issues such as response to climate change, utilization of sustainable forest resources, and preservation of biodiversity. If the Group delays its efforts to address ESG issues or fail to properly disclose information required by investors and ESG evaluation organizations, the Group may not be able to gain the understanding and trust of its stakeholders regarding the medium- to long-term growth potential of its group, and its group brand may be damaged or its social reputation may decline, which may affect the Group's business performance, financial position, and other aspects. Through ongoing careful communication with stakeholders, including engagement with ESG assessment organizations, the Group strives to gain their understanding and trust in the medium- to long-term growth potential of the Group through its efforts to address ESG issues.
Among the main ESG issues, initiatives related to climate change are listed separately. Regarding respect for human rights, Philosophy and Basic Policy on Human Rights, Employment and Labor, formulated in 2004, was revised as the Nippon Paper Group Human Rights Policy in 2022 in line with the United Nations Guiding Principles on Business and Human Rights. The Nippon Paper Group Human Rights Policy applies to all directors and employees of the Group, and the Group encourages its suppliers and other business partners to support and comply with the policy. Furthermore, in 2021, the Group established a Human Rights Working Group and introduced human rights due diligence. After listing human rights risks for all stakeholders in the value chain related to paper and Paperboard Business, Paper-pak Business, and Chemical Business, the Group evaluates them, identify high-priority human rights risks, and proceed with implementation of countermeasures.
The group's business foundation is based on forest resources, and the Group has set targets for sustainable forest management that takes biodiversity into consideration in the Nippon Paper Group Environmental Targets 2030. the Group confirm topographical information that needs to be taken into consideration, such as riparian forests in existing business, and conduct fixed-point surveys of forest ecosystems. In addition, the Group appropriately separates and manages forests for economic use and forests for environmental conservation, such as by establishing protected areas and protected forests that are not logged in order to preserve biodiversity.

7) Foreign Exchange

NIPPON PAPER GROUP is exposed to the risk of foreign exchange fluctuations associated with import, export and other transactions. In terms of the balance of imports and exports, the Group's imports of various raw materials and fuel, etc., such as wood chips, oil, coal, and chemicals, exceed its exports of products and other items. For this reason, the predominant foreign exchange impact is that the depreciation of the yen against the U.S. dollar will have a negative impact on business performance. The Group hedges against this risk through forward contracts and other means in order to mitigate the impact of foreign exchange rate fluctuations on its business performance.

8) Product Liability

NIPPON PAPER GROUP could receive claims for compensation for loss or damage in relation to product liability, but it has not received any significant claims of this sort at present. However, NIPPON PAPER GROUP may be liable for the payment of compensation for loss or damage in the future. While the Group has enrolled in product liability insurance, it may not be enough to cover the amount of compensation for loss or damage for which the Group may be held liable. The Group has established NIPPON PAPER GROUP Product Risk Committee to supervise the product safety risk of its group companies and support efforts to manage and mitigate that risk. Concurrently, Product Risk Committees have been set up at the Group's main manufacturing companies as part of efforts to prevent product safety incidents by promoting the development of product risk management regulations.

9) Litigation

NIPPON PAPER GROUP takes the utmost care in compliance management to observe and follow laws and regulations in the course of doing business. However, as it conducts business activities worldwide, the Group is exposed to the risk of litigation or other actions associated with criminal or civil affairs, taxation, antitrust law, product liability law, intellectual property rights, and environmental and labor issues. As a result, such litigation could affect the Group's business performance, financial position, and other aspects. Heightened environmental awareness has made it particularly crucial for the Group to show consideration to local community residents, perform biodiversity surveys and conduct other activities when making use of forestry resources. In addition, ensuring compliance is one of the main principles of NIPPON PAPER GROUP's Action Charter. The Group strives to raise employees' awareness of compliance through awareness-building and training activities for employees.

10) M&As and Business Alliances

NIPPON PAPER GROUP may conduct activities such as M&As and business alliances with the aim of realizing sustainable growth by creating new business opportunities. However, changes in the operating environment and other factors may prevent the Group from achieving the results it had initially anticipated. In these circumstances, the business performance, financial position, and other aspects of the Group could be affected. In the process, the Group conducts a thorough examination of its business strategies and synergistic effects before it decides to engage in such activities while utilizing M&As advisors, and it works to maximize its results after it concludes such agreements.

(3) Financial and Accounting Risks

1) Share Prices

NIPPON PAPER GROUP holds marketable shares primarily in business partners and affiliated companies. Therefore, the Group is exposed to the risk of share price fluctuations that could affect its business performance, financial position, and other aspects. With this in mind, the Group conducts regular monitoring of the shares it holds, so that it can detect whether the shares could have a significant impact on its financial position.

2) Interest Rates

NIPPON PAPER GROUP is exposed to the risk of interest rate fluctuations with respect to interest-bearing debt and other items. Such fluctuations could affect the business performance, financial position, and other aspects of the Group. The Company maintains the ratio of fixed interest rate loans to long-term debt above a certain level. Also, the Company mitigates the risk of interest rate fluctuations through the use of financial instruments such as interest rate swaps, in addition to spreading out repayment periods and diversifying financing methods, among other measures.

3) Credit Risk

NIPPON PAPER GROUP takes care to limit its credit risk through measures such as continuously evaluating the financial and related information of its business partners in accordance with credit management rules and establishing credit limits accordingly, but any event that disrupts the collection of receivables, such as a deterioration in the financial condition or bankruptcy of customers, could affect the business performance, financial position, and other aspects of the Group.

4) Impairment of Fixed Assets

NIPPON PAPER GROUP owns fixed assets such as production facilities and land. Changes in the operating environment and other factors that result in a significant decline in future cash flow generated through these assets may lead to an incurrence of an impairment loss and affect the business performance, financial position, and other aspects of the Group.

5) Retirement Benefit Obligation

NIPPON PAPER GROUP's retirement benefit expenses and obligation are calculated based on actuarial assumptions such as the rate of return and the discount rate on pension assets. However, any circumstances requiring a change in the actuarial assumptions or an impairment to pension assets resulting from stagnation of the stock market and other factors may affect the business performance, financial position, and other aspects of the Group. With this in mind, the Group has diversified its pension plan assets into multiple asset classes and management styles with different risk and return characteristics based on the advice of external consultants. By regularly conducting an analysis of the risk and return of the entire pension plan assets, the Group conducts an evaluation of the effectiveness of the diversification effect.

6) Reversal of Deferred Tax Assets

NIPPON PAPER GROUP records deferred tax assets after it judges the recoverability of deductible temporary differences and operating loss carryforwards based on an estimation of future taxable income. However, changes in the operating environment and other factors that lead to a decline in taxable income, or changes in the tax regulations and other factors that lead to a revision in recoverability, may cause a reversal of deferred tax assets. Such a reversal could affect the business performance, financial position, and other aspects of the Group.