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 26, 2025). 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 FY2025/3.

(1) Major Risks Associated with Management Strategies

1) Human Resources

NIPPON PAPER GROUP (the Group) considers its human resources strategy to be a key element of its business activities. We are focusing on securing and developing appropriate human resources for future business development. If the Group fails to recruit and train adequate personnel, it will not only make it difficult to sustain the growth and competitiveness of our existing business, but also prevent a smooth business transformation, which could have an impact on our operating results and financial position.

With an aim to improve employee engagement, we work on securing human resources by actively recruiting and developing human resources with diverse backgrounds, and by creating a work environment that supports flexible working styles, and thus creating an organization where diverse human resources can demonstrate their full potential. In development, we are working to create "human resources who will take on the challenges of change". We introduced an in-house sideline system and selective education designed to train executive candidates at mills and offices to promote human resource development that will serve as the source for expanding earnings in growth businesses and strengthening the competitiveness of our core businesses.

As for work environment, we are working to establish a system that supports diverse work styles. For example, we are enhancing support system for balancing work with life events such as childcare and nursing care, and extending the mandatory retirement age for general employees from 60 to 65.

In addition, as labor force is decreasing due to low birthrate and aging of population, we are also considering automation and labor saving at mills, and introduction of IoT techniques in logistics.

Through these initiatives, we strive to secure and develop appropriate human resources, prevent occupational accidents, and secure sustainable growth.

2) Delay in profitability improvement of Opal

Opal, our consolidated subsidiary in Australia, is withdrawing from the graphic paper business at the Maryvale Mill and is advancing the establishment of an integrated operating model for the packaging business, which we view as having strong growth potential. We recognize the turnaround of Opal as an urgent management priority and are implementing restructuring measures aimed at achieving profitability as early as possible. However, if these initiatives do not proceed as planned, they could adversely affect the Group's operating results and financial position.

Accordingly, the Group is accelerating initiatives to improve the profitability of the Maryvale Mill. Key measures include optimizing the production structure to position the mill as a packaging base paper facility, stabilizing operations through enhanced Group support, reducing fixed costs primarily through workforce rationalization, and improving the sales mix of base paper products.

In addition, for Opal's packaging business operations outside the Maryvale Mill, we are pursuing rationalization measures such as consolidating production sites, while also making capital investments to expand capacity and improve productivity. These investments include the construction of a new corrugated cardboard plant and the phased replacement of aging converting equipment. At the same time, we are strengthening the sales organization to increase market share, thereby enhancing Opal's overall earnings base.

3) Climate Change

With energy-intensive Paper and pulp as our main business, we view a comprehensive response to climate-change as a crucial task for achieving Group Mission and are actively working to reduce Green House Gas (GHG) emissions with the aim of achieving carbon neutrality by 2050. As the global movement toward decarbonization accelerates, if our group's response is delayed, we may face regulatory risks, such as the strengthening of carbon pricing policies, and reputational risks due to declining confidence from customers and investors, which could have a financial impact.

We appropriately assess the financial impact of these risks and disclose them in a transparent manner based on the framework recommended by Task Force on Climate-related Financial Disclosures (TCFD). In addition, to mitigate climate-related risks, we have set a target to reduce GHG emissions by 54% by fiscal year 2030 compared with fiscal year 2013. We are advancing energy-saving initiatives through the introduction of high-efficiency equipment and the optimization of manufacturing processes, while also increasing the use of renewable energy and waste-derived energy.

To achieve further reductions, we will accelerate our GHG emission reduction efforts by installing one new high-efficiency black liquor recovery boiler at the Ishinomaki Plant in fiscal year 2028, and, at the same time, ceasing operation of one existing coal-fired boiler.

Our Group is also working to reduce emissions across the entire value chain by strengthening collaboration with stakeholders--including companies both within and outside our industry--particularly with respect to emissions from logistics. These efforts include initiatives such as round-trip transportation, modal shifts, and shortening transport distances.

In addition, we are actively pursuing measures such as enhancing forest carbon sinks through appropriate forest management and promoting carbon recycling. Through these multifaceted initiatives, we are advancing decarbonization and strengthening our efforts to achieve carbon neutrality by 2050.

We view addressing climate change not only as risk management, but also as an opportunity to create new business value. By promoting sustainability-driven innovation and further deepening collaboration with a broad range of stakeholders, we aim to achieve sustainable growth that balances environmental and economic value.

4) Risks Related to Declining Demand for Graphic Products

The graphic paper business, one of the Group's operations, continues to face a contracting market due to ongoing digitalization and changes in work styles and lifestyles accelerated by the COVID-19 pandemic. Accordingly, while reallocating management resources to our growing Daily-Life Products Business, we are reorganizing the production structure of the graphic paper business to reduce capacity and enhance competitiveness. However, if these initiatives do not progress as planned, they could adversely affect the Group's operating results and financial position.

To strengthen the foundation of our graphic paper business, we are working to stabilize operations, achieve continuous cost reductions, and secure reproducible and appropriate pricing to ensure a stable supply. We are also maintaining and expanding sales volumes by developing and broadening our lineup of environmentally conscious products in collaboration with customers, and by promoting collaboration in processing applications for food and industrial products.

In addition, we have established a dedicated unit to research overseas markets, particularly in the packaging sector. By capturing global market trends in real time and strengthening our rapid development and sales/supply capabilities for overseas products, we aim to capture overseas demand and expand exports.

With respect to the reorganization of our graphic paper production system, we will enhance competitiveness by linking these efforts to GHG emission reductions. We will also leverage existing resources from the graphic paper business--including personnel, pulp, and utilities--to expand growth areas such as household paper, chemicals, and biomass materials.

Through these multiple measures to mitigate risk, we will strengthen our resilience to market changes and continue to secure stable earnings.

5) Delays in Expanding the Biomass Materials Business

The Group aims to achieve sustainable growth as a "comprehensive biomass company" by expanding its biomass materials business, which develops biomass-based materials and products derived from wood resources for a wide range of markets. However, if the expansion of this business does not proceed as planned, it could adversely affect the Group's operating results and financial position.

The Group has positioned its Green Strategy--set forth in Vision 2030 and the Medium-Term Business Plan 2025--as a key growth strategy, built on two pillars: maximizing forest value and expanding biomass materials and products. Against the backdrop of fossil resource depletion and marine plastic pollution, global efforts to eliminate or reduce plastic use are expected to accelerate, alongside decarbonization and the transition to a circular economy. Through sustainable forest management, the Group will generate wood resources and provide biomass materials and products that combine environmental benefits with superior functional performance to diverse markets in Japan and overseas, including mobility & industrial, food & agriculture, construction, and personal care.

We have already begun developing and selling cellulose-based products--such as containerboard and packaging paper products, cellulose nanofibers, and cattle feed--aimed at replacing fossil-based materials and enhancing functionality. In addition, we have commenced demonstration testing at our Iwanuma Mill for the production of bioethanol from domestically sourced timber. We have also launched products that can reduce GHG emissions in construction, including "Star Ligno," a lignin-based emulsion for warm-mix asphalt produced from lignin, a component of wood.

To respond quickly to market needs, including environmental requirements, we recognize the importance of technological capabilities, sales strength, and robust networks. We are therefore making proactive investments in these areas and reallocating personnel to create synergies with existing businesses. At the same time, we are building networks across industry, government, academia, and finance to promote open innovation. By commercializing the outcomes of these initiatives as products and services, we will strengthen our resilience to market changes.

To respond to market shifts and to gain and maintain competitive advantages in Japan and overseas, an intellectual property strategy that maximizes the value of our intellectual capital is essential. Within the Group, the R&D and IP functions work closely together, regularly reviewing research outcomes to strengthen patent filings and the acquisition of rights in growth and new business domains. We also prioritize foreign patent applications with a view to expanding overseas operations.

Through its biomass materials business, the Group seeks to advance both societal and corporate sustainability by reducing GHG emissions across the entire supply chain, promoting resource circulation and self-sufficiency through recycling, and revitalizing the forestry industry through the utilization of domestic forests.

6) Supply Chain Management

Our group procures raw materials and fuels such as wood chips, waste paper, heavy oil, coal, and chemicals to manufacture and sell products. Raw material prices are significantly influenced by domestic and international market conditions.

Furthermore, the trend toward decarbonization and the decline in Western paper production may lead to instability in procurement and price fluctuations due to business downsizing or withdrawal by raw material suppliers. Such price fluctuations could impact the Group's operating results and financial position. Increased transportation costs, driven primarily by rising raw material and fuel prices due to decarbonization policies in response to climate change, are expected to persist. These costs are further compounded by port labor shortages, insufficient transport capacity, delays in global supply chain transportation networks caused by heightened geopolitical tensions, and the so-called "2024 logistics crisis" in Japan, which is an urgent issue. These problems could also further impact the Company's operating results and financial position.

As key countermeasures, we have implemented measures such as establishing and operating advance purchase schemes for certain raw materials and fuels to hedge risks. Specifically for wood chips used in paper manufacturing, our group owns 160,000 hectares of forest resources globally. We are also working to secure raw materials and stabilize purchase prices by strengthening trust-based relationships with domestic and international chip suppliers built on long-term transaction histories, and by developing and adopting low-cost resources from nearby locations. To reduce loading/unloading times, some factories have introduced truck appointment systems to shorten waiting times. Furthermore, to ensure stable procurement, we are strengthening good relationships with suppliers and logistics companies. We are also advancing efforts to optimize financial conditions by enhancing appropriate inventory management. This includes sourcing from multiple regions and sources, including overseas; switching to alternative products; expanding flexibility and procurement networks through strengthened intra-group collaboration; and reviewing inventory levels.

Regarding the "2024 Logistics Problem," we have established a cross-functional project team to address product sales and raw material/fuel procurement, striving to balance regulatory compliance with minimizing cost increases. Working collaboratively with suppliers, we are implementing measures such as requesting planned deliveries, modifying transportation systems, improving load factors, and establishing new inventory bases near consumption areas. Furthermore, we are realizing joint maritime transport with other companies to reduce GHG emissions compared to truck transport, while also promoting logistics DX initiatives to address labor shortages.

7) Natural Disasters and Infectious Diseases, etc.

A large-scale natural disaster, such as an earthquake, typhoon, flood, or wildfire, in an area where the Group's production and sales bases are located could have a significant impact on business continuity. There is a possibility that there will be an outage of production activities, an increase in expenses for the restoration of facilities, or damage to products or raw materials, which may affect the Group's operating results and financial position.

Therefore, in case of emergency, we will promptly set up a Crisis Management HQ in accordance with the Crisis Management Regulations, to confirm the safety of employees and their families, to ascertain the status of damage, and to implement measures for continuing supply. In addition, we have strengthened our business continuity management (BCM) to respond to emergencies. We have established supply systems between several plants, and regularly conduct evacuation drills and safety confirmation drills based on disaster scenarios.

While we maintain insurance coverage for losses arising from natural disasters, such coverage may not be sufficient to fully cover all potential losses or liability claims that may be asserted against the Company.

The outbreak of COVID-19 has once again reminded us of the possible impact of infectious diseases on business activities.

The risk of infectious diseases, including COVID-19, can be a threat to employee health and business continuity. Our group is continually strengthening its measures against infectious diseases, including measures to prevent the spread of infection among employees, establishment of a telecommuting system, and expansion of use of online conference system. If there are concerns about the occurrence of infection or impact on business activities, we will quickly share information and launch Crisis Management HQ to curb the situation and stabilize our business.

Through these initiatives, we are flexibly responding to unexpected situations, such as natural disasters or infectious diseases, and building and maintaining a system to ensure business continuity and the safety of our employees. We will continue to respond to changing social conditions by continuously reviewing and strengthening risk countermeasures.

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

1) Production Facilities

The Group's production activity is based on planned production that takes into account market demand and the capacity of existing facilities. However, if the operating rate of production facilities declines due to equipment breakdowns, fires, or equipment accidents caused by natural disasters, the supply capacity of products may be insufficient, which could affect the Group's operating results and financial position. In response to these risks, we conduct regular facility inspections and maintenance, implement aging countermeasure works to systematically upgrade vulnerable areas, build supply systems at multiple plants, and optimize inventories.

2) Compliance

Related laws and regulations are constantly changing in a wide range of fields, including Paper and Paperboard Business, Daily-Life Products Business, and Energy Business businesses, as well as Wood Products and Construction Related Business that our group deploys, and new compliance-related issues are emerging.

In particular, the risks of non-compliance are becoming increasingly complex due to changes in social conditions, such as digitization, globalization, and the growing interest in environmental protection and respect for human rights.

As a countermeasure, the Group provides compliance training that is updated to reflect changes in the social environment and conducts compliance awareness surveys to further strengthen employees' compliance mindset.In addition, we have established the "Nippon Paper Group Helpline, which enables employees to report concerns and seek advice outside the normal chain of command regarding conduct that may violate laws, social norms, corporate ethics, the Code of Conduct, the Code of Ethics, or the internal rules of Group companies. We investigate all suspected compliance violations and, depending on the nature and significance of each case, implement corrective actions and measures to prevent recurrence, including internal disciplinary actions, warnings and guidance, and employee education to reinforce awareness.

Because the Group conducts business activities with cooperation of our business partners and various subcontractors for operations that are difficult to execute on our own, we emphasize fair and sound business practices in our relationships with our business partners and subcontractors. While we seek fair trade practices that reflect changes in social values as well as compliance with the Antimonopoly Act and the Subcontract Act, if there is a violation, it is expected to be a major risk in management, such as litigation and the loss of social trust.

In order to respond to these requirements, we comply with desirable business practices between parent companies and subcontractors based on the "Declaration on Building Partnerships", and are actively working to rectify business practices that hinder the establishment of partnerships with business partners.

In addition, based on the "Guidelines on Price Negotiations to Appropriately Pass Through Labor Costs" published in November 2023, we are proceeding with risk assessment and implementation of countermeasures on a Group-wide basis.

Through these initiatives, we aim to respond flexibly to changes in social conditions and minimize the risk of non-compliance.

3) Worker Safety and Health

The Group is committed to operating all facilities with safety as its highest priority. However, workplace accidents remain a significant risk that could impair employees' health or, in the worst case, result in loss of life. Depending on the nature of an incident, the Company may be held accountable for management responsibility and could be required to suspend operations or shut down equipment, which may adversely affect business activities.

To prevent workplace accidents, we operate our own occupational safety and health management system. Under this system, each facility incorporates specific, ongoing, and voluntary initiatives into its safety and health plans, with the aim of preventing accidents, promoting employee health, and improving workplace safety and health standards, including the creation of a comfortable working environment.

Through these efforts, the Group will continue to strengthen accident prevention and strive to ensure a safe and healthy workplace.

4) Product Liablility

The Group could receive claims for compensation for loss or damage in relation to product liability, but we have not received any significant claims of this sort at present. However, the Group may be liable for the payment of compensation for loss or damage in the future. While we have 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 incidents by promoting the development of product risk management regulations.

5) 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, we collect various information from outside the company to establish a system to respond appropriately to legal revisions.

6) Information Systems

The Group strengthens and rigorously implements security measures for its information systems. We also implement 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, we 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. 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. As part of our efforts to strengthen its management structure, we have set force "Personal Information Handling Regulations", made these regulations known to the executives, employees, and business partners, and established communication routes in the event of a security incident. In addition, we conduct regular security audits and vulnerability assessments to detect and correct system vulnerabilities in an effort to prevent security incidents.

7) Intellectual Property Disputes

The Group holds intellectual property rights related to products and technologies, and we may be subject to intellectual property disputes and litigation, which could have an impact on the Group's business performance and financial position.

Specifically, we may be subject to lawsuits alleging that our products and technologies infringe the intellectual property rights of other companies. In addition, there is a possibility that our Group's intellectual property rights may be subject to claims for revocation by other companies or the risk of infringement of intellectual property rights by third parties. The Group is committed to protecting intellectual property rights and educating our employees, while implementing legal measures and risk management measures.

8) Foreign Exchange

The 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.

(3) Financial and Accounting Risks

1) Share Prices

The 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

The 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

The 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

The 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

The 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

The 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.