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 27, 2024). 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 FY2024/3.

(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 be difficult to sustain the growth and competitiveness of our business, which could have an impact on our operating results and financial position.

We are working 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 by creating of 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.

As for safety, all of the Group's mills strive to operate with the highest priority on it. However, the occurrence of an occupational accident is a serious risk that could result in the loss of health and human life of workers. Depending on the nature of the accident, the Group is held liable for management as a company, and there is the possibility of facility shutdowns. Therefore, the Group operates a unique occupational health and safety management system to prevent occupational accidents. Through this system, we incorporate specific, ongoing, and voluntary activities at each business site into our safety and health plans, prevent occupational accidents, promote employee health, and ensure a comfortable workplace environment, to elevate the health and safety level.

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

2) Natural Disasters and Infectious Diseases, etc.

A large-scale natural disaster, such as an earthquake, typhoon or flood, 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.

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.

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 working to reduce 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 TCFD. To reduce risks, we are accelerating our efforts to reduce GHG emissions by introducing high-efficiency facilities and optimizing manufacturing processes to conserve energy, and by raising the ratio of renewable and waste-based energy use through a review of the energy mix. Furthermore, in logistics, we are working to reduce emissions throughout the value chain through collaboration with other companies in the same industry and across industries, through measures such as round-trip transportation, modal shifts, and shortening transportation distances. In this way, we are deepening collaboration with stakeholders.

Not only we strive to reduce the Group's GHG emissions, but we also actively undertake initiatives such as forest absorption and carbon recycling through appropriate forest management. We will promote decarbonization from a multifaceted perspective, strengthen our efforts to achieve 2050 carbon neutrality, and contribute to the realization of a sustainable society.

Addressing climate change goes beyond mere risk management and creates new business opportunities. We promote innovation centered on sustainability and aim for growth that is sustainable from both environmental and economic perspectives.

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

Our Graphic Paper business continues to shrink due to the ongoing digitization and changes in working styles and lifestyles triggered by the COVID-19. Based on this situation, we are shifting our resources to growing fields such as Daily-Life Products Business and are working to quickly bring new businesses and products to market. However, if these initiatives do not progress as scheduled, the Group's operating results and financial position may be affected.

In 2021, we formulated 2030VISION and Medium-Term Business Plan 2025 with the aim of accelerating business structure transformation and expanding the scope of our growing and new businesses. By ensuring that this policy is instilled in employees, we strengthen awareness of our initiatives. Specific measures include developing paper containers and packaging that serve as plastic substitutes; expanding the use of wood biomass, including CNF; investing in growing businesses and reallocating human resources; and expanding oversea business.

In particular, we are accelerating and expanding oversea business. We manufacture and sell paper and pulp in North and South America, Northern Europe, Southeast Asia, Australia, and elsewhere. We also operate afforestation in overseas, with the aim of realizing synergies with our group businesses.

Opal Limited in Australia withdrew from Graphic Paper business and is strengthening its integrated system focusing on Packaging Business, which is expected to grow. With the launch of a new corrugated boxes plant Opal is expecting further growth in the packaging field.

Oversea business expansion is subject to unique risks such as changes in local governmental laws and regulations, labor disputes, and economic stagnation caused by political instability. To cope with these risks, we conduct appropriate risk management through information sharing with external law firms and strive to prevent risks from occurring. In addition, we recognize that global supply chain vulnerabilities, responsiveness to environmental changes, and the speed of technological innovation can bring new challenges to business development, and we continue to consider strategies to respond flexibly to these changes in the external environment.

5) Product Demand and Market Conditions

Our operations span a wide range of fields, including Paper and Paperboard Business, Daily-Life Products Business, Energy Business, and Wood Products and Construction Related Business. These products and services are subject to risks of fluctuations in product selling prices due to changes in economic conditions, changes in consumer behavior and preferences, changes in demand caused by factors such as the supply and demand balance in the market, changes in raw materials and fuel prices, and price competition with competitors. These fluctuations may affect our operating results and financial position.

In Graphic Paper business, which has been particularly affected by the acceleration of DX and the establishment of new lifestyles due to the outbreak of COVID-19, we are improving cost-efficiency by reorganizing production system and consolidating production bases.　We are also working to optimize our business portfolio by increasing investment in Daily-Life Products Business to meet emerging consumer needs, which include growing online shopping and spread of remote work.

Furthermore, we have strengthened our analysis based on global market trends and economic indicators, and to build strategies that can respond quickly and flexibly to market fluctuations. We are also working to increase resilience to market changes by capturing the needs of new markets, developing new products through innovation, and expanding our services.

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

Our group procures raw materials and fuel such as wood chips, waste paper, heavy oil, coal, and chemicals, for manufacturing. Prices of raw materials and fuel are significantly affected by domestic and overseas market conditions, and such price fluctuations may affect our operating results and financial position, etc.

We expect that transportation costs will continue to increase as a result of rising raw materials and fuel prices, primarily due to port workers and transportation capacity shortages, delays in the transportation network in the global supply chain due to high geopolitical tensions, and decarbonization policies to address climate change. In the case of domestic operations in particular, the so-called "Distribution 2024 Problem" has emerged as a new issue, and these problems may further affect our operating results and financial position.

To cope with this issue, we have set up and operate a scheme for purchasing reservations to hedge risks with respect to some of our raw materials and fuels. Also, as a measure to reduce cargo handling time, some plants have introduced a truck acceptance reservation system to shorten the waiting time for cargo handling. In addition, we will strengthen good relationships with suppliers and logistics companies to ensure stable procurement and optimize financial position through enhanced control on inventory levels realized by procurement from multiple regions and sources, expansion of distribution and procurement networks with strengthening group-wide collaboration. We are also working to optimize our financial position by strengthening the management of our warehouses.

In response to the 2024 Logistics Issue, we established an internal cross-functional project team for product sales and raw materials and fuel procurement. This team works to achieve both regulatory compliance and minimization of cost increases. In cooperation with our business partners, we are implementing measures such as planning delivery in advance, changing transportation system, and establishing a new inventory base near the consuming area. In addition, we have realized marine joint transportation with other companies, which contributes to reducing GHG emissions compared with trucking.

7) ESG, SDGs and other social demands

We are addressing key environmental issues such as climate change, sustainable forest resources, and biodiversity. Furthermore, we are focusing on social and management issues such as human rights, diversity, and corporate governance. Efforts to address these ESG issues are essential for realizing a sustainable society. If we are slow to address ESG issues or fail to properly disclose the information required by investors and ESG assessment organizations, we could lose understanding and confidence of our stakeholders, which could affect our long-term growth potential and our group's brand value. To respond to this, we continue to engage with ESG assessment organizations, as well as carefully communicate with stakeholders.

Of the major ESG issues, initiatives related to climate-change are listed separately. With regard to human rights, we will encourage suppliers and other business partners, as well as all executives and employees, to support and comply with the the Nippon Paper Group Human Rights Policy formulated in 2022 in line with the United Nations Guiding Principles on Business and Human Rights. Furthermore, within the framework of human rights due diligence introduced in 2021, we list and assess related human rights risks in the value chain in three businesses, such as Paper and Paperboard Business, then identify high-priority human rights risks and implement countermeasures. As forest resources are the business foundation of the Group, we set targets for sustainable forest management that take biodiversity into account in the Nippon Paper Group Environmental Targets 2030. We strive to balance economic use of forests with environmental conservation, such as conducting fixed-point surveys of forest ecosystems and setting reserves and protected forests to conserve biodiversity. Our Group Mission, "Aim to contribute to better living and cultural progress everywhere it does business", is in harmony with SDGs's Mission, which says "no one is left behind." By addressing ESG issues, we aim to achieve Group Mission while contributing to the achievement of SDGs.

(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. 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.

Furthermore, we conduct compliance training in response to changes in social conditions and surveys on compliance awareness in an effort to raise the awareness of compliance among employees. Through these initiatives, we aim to respond flexibly to changes in social conditions and minimize the risk of non-compliance.

3) 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 safety incidents by promoting the development of product risk management regulations.

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

5) 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.

6) 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.

7) 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.