On the matters such as the overview of business and financial information in the Annual Securities Report, the management identifies significant risks that may materially affect investors making decisions. Two significant risks described below are: “business risks,” which are risks associated with the business, and “operational risks,” which are other risks that may affect our entire Group. The forward-looking statements in the report are based on the judgment of the Group as of March 31, 2024.
The Group promotes risk management for significant risks under the risk management system specified in the “basic policy on internal control.”
Business execution departments manage “business risks,” and special function departments manage “operational risks.” To monitor risks globally, we appoint regional managers for each major overseas geographic region to develop a regional monitoring function.
Each responsible department manages risk information and provides reports at the Corporate Strategy Meeting every month. The Meeting members, joined by Directors and Vice Presidents, deliberate the risk information. The results of the deliberations are immediately instructed to each responsible department, which promptly implements measures, strengthens controls. Eventually, those are reported back again to the Corporate Strategy Meeting with respective actions and remediation status, making the group’s risk management more effective.
The major risks in the current fiscal year, in addition to the remaining risks since the previous fiscal year, were selected by the officer in charge of risk management and the department in charge of risk management after gathering opinions from Directors, departments in charge, the audit firm, analyzing the agenda and deliberation topics at the Board of Directors and the Corporate Strategy Meeting, and deliberating at the Corporate Strategy Meeting.
We considered the relative significance of respective risks by categorizing in the following chart with two axes: the vertical axis showing the “impact” on the businesses when such risks arise and surface, and the horizontal axis showing the “probability” of the occurrence.
At the end of the fiscal year, those risks (business and operational risks) are self-assessed by the responsible departments, and independently evaluated by the department and the officer in charge of risk management, based on the assessment criteria, such as implementation systems, the implementation of controls and measures, and the occurrence of and response to incidents, etc. The results are reported to the Corporate Strategy Meeting and the Board of Directors.
The assessment result below indicates a change in risk from the beginning to the end of the fiscal year.
*The arrow indicates the change in risk from the beginning of the period
(↗: Increase in risk, →: No change, ↘: Decrease in risk)
| Overseas transactions and foreign exchange risks |
| Related Materiality: Building resilient supply chains |
| The Group operates a global business, with more than 80% of total sales revenue earned outside Japan, and about 40 subsidiaries and affiliates conduct trade activities such as export and import.
Accordingly, in the various countries where we operate, there are risks such as interruption of electric power supply and transportation services, rising labor costs, deterioration of employment relationships, labor disputes and risks arisen by prolonged lead times due to cyber-terrorism and environmental issues. The Group’s performance may also be adversely affected by abrupt changes in the global economy triggered by events such as conflicts or outbreak of infectious diseases. Furthermore, the Group’s performance may be adversely affected by unexpected exchange rates, volatility in equity and interest rates, financial instability, the rise of protectionism, and trade restrictions for the sake of national security. The Group manages distribution by increasing risk visibility in the supply chain and establishing BCP (business continuity plan) for distribution to strengthen the supply chain. In addition to conducting timely monitoring of the Group’s internal fund balance, financing situation, asset and liability by currency, etc., we have established financial control centers in each area and are working to consolidate funds and hedge foreign exchange risks, among other measures. |
| Financial position of customers |
| Related Materiality: Enhancing management security |
| Serious financial problems could develop at some customers from whom the Group holds accounts receivable due to major changes in their operating environments.
Should such receivables become irrecoverable at any one of its largest customers in the fast-changing electronics and life science sectors, the amount to be written off could be enormous, which in turn could negatively affect the performance of the Group. The Group has established Credit Control Group, and makes it a rule to closely investigate the financial positions of its customers before starting business. The Group has also purchased credit insurance to mitigate risks. |
| Procurement of raw materials |
| Related Materiality: Building resilient supply chains |
| Some of the Group’s raw materials are sourced from specific individual suppliers.
If the supply of raw materials were to decrease or be disrupted due to unavoidable circumstances on the part of those suppliers, such as damage from natural disasters, accidents, or bankruptcy, the supply-demand balance could be disturbed, resulting in failure to procure necessary raw materials or an increase in costs. Any of these contingencies could influence the performance of the Group. The Group endeavors to reduce the risks involved in securing sufficient supply of key raw materials through measures including sourcing materials from multiple suppliers and setting and managing inventory levels for a given period of time. In the previous fiscal year, we launched the Supply Chain Committee with a cross-sectional team that aims for sustainable procurement in the supply chain. We have been addressing the risks involved in the upstream supply chain by visualizing geopolitical risks and risks related to chemical substance regulations, which have been increasing in recent years. From the current fiscal year, we have established new process and systems for measures in advance of potential future risks to strengthen the supply chain. |
| Research and development |
| Related Materiality: Creating PlanetFlags / Creating HumanFlags |
| The industry in which we operate our business experiences turbulent market changes that are not easy to predict.
New technologies or products from other companies can suddenly and unexpectedly cause our products to become obsolete. Situations like this can impact our future financial results. In order not to be influenced by trends in a given business, the Group works on R&D to develop new technologies and products focusing on the Sanshin (“three new”) Activities, which is to stimulate demand through the development of new applications and new products, as well as make relevant equipment investments. Furthermore, in accordance with the Group policies that place ESG at the center of management, we are concentrating our resources on themes which can be the options for our proprietary PlanetFlags/HumanFlags. We also practice rigorous intellectual property management to protect such products by creating barriers to entry. |
| Intellectual property rights |
| Related Materiality: Creating PlanetFlags / Creating HumanFlags |
| The Group owns, maintains and manages a large amount of intellectual property rights for the purpose of enhancing its market competitiveness.
However, it is possible that a third party could claim that such rights are invalid, or such rights could be inadequately protected, imitated, or involved in litigation in some regions. Should the protection afforded by intellectual property rights be seriously lost, the performance of the Group may be adversely affected. The Group’s Technology and IP Strategy Division and business divisions work together to pay due attention to the intellectual property rights of other companies to ensure the Group does not infringe upon them, while at the same time pursuing initiatives to uncover any products on the market that infringe upon the Group’s intellectual property rights. |
Business risks in each operating segment are as follows:
| Industrial Tape business |
| Related Materiality: All Materialities |
| The Group globally supplies a diverse range of Functional Base Products to a broad range of industries, including its three focus domains of Power & Mobility, Digital Interface, and Human Life. In each domain, customers are increasingly seeking products with high added value.
In Power & Mobility, we offer adhesive materials for the automobile structure and sealing materials for airtight and waterproofing applications in the global market, and fluctuations in automobile production volumes can therefore impact our financial results. By pushing expansion into growth areas such as EVs (electric vehicles) and CASE (Connected, Autonomous, Sharing/Service, and Electric) and working to add to our existing business by capturing new business in growth areas, we are, also in this sector, working to create a business constitution that is resilient to market forces. As part of our efforts in growth areas, we are strengthening collaboration among the Group companies and working to provide a wide range of product lines. In Digital Interface, there is the possibility that our performance may fluctuate in line with market conditions for electronics or semiconductors. By creating Global Niche Top™ products and Area Niche Top™ products under our Niche Top Strategy and Sanshin Activities initiatives, we are working to create PlanetFlags/HumanFlags as new axes for growth while developing a business constitution that is resilient to market forces. Furthermore, by understanding our customers’ processes and offering a lineup that meets their needs, we offer proposals that combine materials and facilities, thereby contributing to our customers’ productivity improvement. In Human Life, we have developed functional films and porous materials from precision-processed special engineering plastics with dustproof and chemical resistance features. We continue to propose materials that are resilient to a change in external environment with keeping compliance with tightened chemical substance regulations. In the markets that the Industrial Tape business serves, an increasing number of customers in the automotive and electronics industries are focusing their efforts on contributing to the environment. To this end, in our Industrial Tape business we are also working to develop and manufacture PlanetFlags products with lower environmental impact, while promoting the collection and recycling of materials discarded by customers to reduce CO2 throughout the supply chain and provide added value as an environmentally friendly product. |
| Optronics business |
| Related Materiality: All Materialities |
| A major market for the Information Fine Materials sector is the display industry, which is rapidly changing and is exposed to fierce competition from a number of companies. The commoditization of products and technologies in which the Group’s components are incorporated, a decline in sales revenue due to market maturation, and pressure on profit margins due to the entry of competitors may negatively affect the Group’s performance. Price hikes and unstable supply of materials affected by geopolitical risks and environmental regulations may affect the Group’s production and supply of products.
We immediately identify the evolving needs of our customers, the leaders of the display industry, and continue to develop and launch new products built on our technology. We also expand markets for our products by accelerating product launches in non-display markets. In addition, to prepare for the various changes in the external environment, we implement BCP measures for our business, such as ensuring stable procurement, diversifying our production locations and promoting digital transformation and data-driven management. In the circuit materials business, we are focusing our efforts on markets and products that support a data-driven society/smart society and are anticipated to grow, and supply products with high market share. Soaring material/power costs caused by continued inflation worldwide and changes in investment trend of data center may temporarily affect our financial results. However, if market growth is sustained over the long term, our responsibility as a supplier to meet demand trend may affect our financial results. In response, we are planning and implementing to secure production capacity satisfying demand trends, including establishing a manufacturing backup system across our multiple sites, creating a BCP for our procurement of materials, and implementing productivity innovations to reduce reliance on manual labor. |
| Human Life business |
| Related Materiality: All Materialities |
| The Human Life business consists of Life Science, Membrane, and Personal Care Materials businesses.
In the Life Science business, we are strengthening our initiatives as a new business field for the Group, with a focus on the oligonucleotide therapeutics business. The oligonucleotide therapeutics market is forecast to grow in the future, with a rise in the number of late-stage clinical research topics and new drug approvals. Demand for contract manufacturing of oligonucleotide therapeutics, which we undertake in the Life Science business, fluctuates according to the progress of customer’s research and development and clinical trials. Accordingly, suspension or discontinuation of customer’s clinical trials based on scientific evidence may affect our performance. In addition, drug discovery of oligonucleotide therapeutics in this business provides technologies to customers in the pharmaceutical industry after our research and development is advanced. Therefore, depending on the progress of our research and development of technologies with competitive advantages, which leads to the provision of value to customers, our performance may be affected accordingly. The Group strives to mitigate the impact of demand fluctuations by handling a wide range of research and development activities and clinical trial projects commissioned by customers. Meanwhile, in drug discovery of oligonucleotide therapeutics, we are steadily advancing our research and development initiatives, including collaborations with external organizations, in order to ensure both safety and efficacy. The Membrane business supplies components for water treatment plants in the energy sector, desalination plants, and water treatment systems in a variety of industries. The Group’s performance may be affected if plant construction or customer’s procuring parts schedules are delayed due to soaring material prices or supply shortages or if the availability of raw materials is limited due to soaring raw material prices. In order to create a business structure that is resilient against the impact of market conditions, we are bolstering efforts to develop new markets and launch new products as quickly as possible. In the area of raw material procurement, we will strive to utilize multiple suppliers and review our sales prices. The Personal Care Materials business offers hygiene materials, primarily diaper materials. The main market is for hygiene materials and daily necessities, of which demand is relatively stable. Meanwhile, as a commodity market, falling sales prices caused by the circumstances where competitors could easily enter may affect our performance. Also, our performance may be affected by rising energy costs, price increases due to inflation (soaring material costs) and rising labor costs. The Group strives to mitigate the impact of those factors by focusing on improvement of our manufacturing capabilities and promoting cost reduction activities. In addition, we will optimize our workforce through investment in digitalization for productivity innovations to reduce reliance on manual labor. The Group aims to further improve profitability by expanding high-value-added products and developing environmentally friendly products. |
| Other business |
| Related Materiality: All Materialities |
| The Group’s performance may be adversely affected if new businesses are not launched as planned.
The Group strives to conduct sound business operations by regularly assessing the alignment of the Group’s position with that of relevant markets and customers. |
| (Additional item) M&As |
| Related Materiality: All Materialities |
| The Group engages in mergers and acquisitions, business alliances, and strategic investments as necessary when such actions provide an effective means of acquiring technologies to enhance corporate value, expanding into new business areas, or accelerating business growth.
However, if the Group is unable to achieve the results or synergies that it initially envisioned due to significant changes in the market or competitive environment, or if acquired businesses are unable to secure revenue as planned, there is a possibility that the Group’s performance may be affected by impairment of goodwill and fixed assets. When forming partnerships with other companies, the Group bases its decisions on due consideration of market trends, customer needs, the business conditions of the counterpart company, and competitive advantage in the market. |
| Product safety |
| Related Materiality: Safe manufacturing |
| The Group manufactures and supplies intermediate materials or products to our customers in accordance with strict quality control standards for the purpose of safe and quality-oriented manufacturing. Also, tightening regulations on chemicals such as fluorinated compounds has been demanded in recent years.
In the event of a product defect, such as a quality defect, or a violation of laws or regulations with respect to a chemical substance, we are subject to have obligations for a compensation for the defect or a penalty for violation of laws or regulations, which may affect our performance. The Group strives to make continuous improvements by obtaining certification of strict international quality management systems in line with those required by industry. We are also considering an alternative product for PFAS, which is expected to be a stricter regulation, and working to strengthen the management system for bisphenols and vinyl chloride. We belong to the specific industry associations as a part of advanced response to comply with the chemical substance regulations. We have obtained regulatory information from authorizations and promoted collaborative actions with industry associations. |
| Environment (CO2 emissions) |
| Related Materiality: Realizing a decarbonized society |
| As climate change and natural disasters grow increasingly severe, the Group is working to reduce CO2 emissions in the entire supply chain to realize a decarbonized society.
A sharp rise in renewable energy prices, carbon taxes, or soaring emissions trading prices could lead to an unavoidable increase in production costs, which could adversely affect the Group’s performance. In addition to complying with more stringent related laws and regulations, we are also working to reduce our customer’s CO2 emissions through our products and solutions by reducing energy consumption and introducing renewable energy in our manufacturing processes to meet societal demands for lower CO2 emissions. |
| Environment (resource conservation and recycling) |
| Related Materiality: Realizing a circular society |
| In response to the global environmental crisis, including depletion of resources and marine pollution caused by plastics, the Group is working to reduce plastics, organic solvents, and other waste, primarily used in its manufacturing processes, with the aim of realizing a circular society.
In the event that the Group faces a refusal to collect plastics, organic solvents, and other waste or a sharp rise in prices for collection of such waste, its production activities slow down due to difficulties in disposing of waste, which could adversely affect the Group’s performance. In addition, improper disposal of products or waste may lead to a loss of public trust and damage to the company’s brand image, which could adversely affect the Group’s performance. In addition to ensuring compliance with relevant laws and regulations, the Group is working to establish a resource-recycling society by promoting the effective use of resources and recycling throughout its supply chain. |
| Environment (pollution and hazardous substance) |
| Related Materiality: Conserving biodiversity |
| The Group is striving to reduce emissions of pollutants and hazardous substances used in its manufacturing processes in order to conserve biodiversity by preventing the destruction of ecosystems.
The release of volatile organic compounds into the atmosphere or rivers due to equipment malfunction or other causes could cause pollution of the local environment, resulting in loss of public trust and damage to the company’s brand image, which could adversely affect the Group’s performance. In addition to ensuring compliance with relevant laws and regulations, we have established our own stringent management standards to control pollutants and hazardous substances, and are working to reduce the amount of such substances used. |
| Information security |
| Related Materiality: Enhancing management security |
| Information systems play a crucial role in every aspect of the Group’s business activities. On the other hand, cyber-attack is becoming increasingly sophisticated, and human-caused risks such as internal fraud and negligence are also increasing.
In the event that the Group’s information systems suffer a malfunction, or leakage or unauthorized use of information such as technical, customer, transaction, or personal information occurs, regardless of intent or negligence, the Group’s performance may be adversely affected. The Group implements a range of information security measures against cyber-attack from both a hardware and software perspective, including implementing multilayered protection and deploying CSIRT, a rapid detection and response system. In addition, we implement a variety of measures to prevent leakage and unauthorized use of information due to negligence or error, including providing officers and employees with training on the importance of information security and targeted e-mail attack preparedness drills in order to enhance management security. |
| Changes in laws, regulations and compliance |
| Related Materiality: Enhancing management security |
| The Group promotes compliance not only with laws, regulations, and internal rules, but also with social norms and ethics. Moreover, the Group operates in 28 countries and regions, each with its own laws and regulations, social norms, and ethical standards, which makes compliance a multifaceted issue.
Compliance violations by a company not only impact its corporate value, but can also affect its stakeholders, including its customer’s procurement and consumption, its supplier’s production, and the livelihood of local residents. We have translated the “Nitto Group Business Conduct Guidelines,” which underpin our commitment to compliance, into 18 languages and thoroughly communicated them to all officers and employees of the Group. In addition, we are working to detect legal violations and ethical breaches at an early stage by operating a whistle-blowing system at all regions. In the current fiscal year, we have established a whistle-blowing system which suppliers can externally use in certain regions, and we are preparing to complete to set that system at all the other regions. |
| Governance of group companies |
| Related Materiality: Enhancing management security |
| The Group conducts business on a global scale across a wide range of fields and maintains operations in 28 countries and regions worldwide, including Nitto Denko Corporation and its 88 subsidiaries and four affiliates.
If corporate governance and internal control functions do not work at those subsidiaries and affiliates, improper actions, business transactions or decisions made by officers or employees of these companies that are not in accordance with the Group’s management policies could result in losses to the Group and affect our performance. The Group operates a matrix-based management approach, in which three axes complement and support each other: the business axis, which includes the business execution departments consisting of Functional Base Products, Information Fine Materials, Circuit Materials, Life Science, Membrane, Personal Care Materials, etc., the regional axis, which divides global operations into seven regions, and the functional axis, which consists of special function departments such as human resources and accounting. The business axis establishes governance and internal control systems, while the regional and functional axes audit and monitor their status appropriately at the regional and operational levels. We are working to conduct thorough governance and strengthen internal controls by detecting and reporting operational risks and issues and implementing necessary improvements in these areas. |
| Natural disasters and climate change |
| Related Materiality: Enhancing management security |
| The Group operates a global business and thus has a number of production sites and sales sites in Japan and overseas.
Natural disasters such as typhoons, which are becoming more severe due to climate change, or earthquakes in any of these locations could damage the employees, sites and facilities of the Group. Moreover, such an event could damage power, gas or other infrastructure, eventually cutting off our supply chain extensively, which could seriously impact our financial results. Such events could also cause considerable damage to our customers or suppliers, stalling orders or supply for an extended period and seriously impacting our financial results. Following our Corporate Philosophy “We place safety before everything else,” we have implemented disaster drills and decision-making drills when setting up the Emergency Headquarters at each site to prepare for accidents and disasters and have prepared a business continuity plan (BCP) as a measure for preventing disruptions to business functions, and we periodically update the BCP in order to enhance management security. |
| Retention of human resources |
| Related Materiality: Empowering diverse employees |
| In order for the Group to promote its business activities and develop into the future, it needs to recruit and train personnel in a variety of fields, including research and development, manufacturing, sales, and administration. It is vital to foster a corporate culture where every employee can enjoy taking on new challenges with motivation and promote DE&I (diversity, equity, and inclusion) to enable the Group to respond to rapid changes in the business environment. Additionally, against the backdrop of intensifying global competition to acquire human resources, as evidenced by the shrinking working population due to Japan’s declining birthrate and aging population, values in terms of work styles and careers are diversifying, and the mobility of human resources is increasing. To respond to these trends, reviewing personnel systems and treatment standards to retain human resources has become an ongoing issue.
Failure to continually hire necessary personnel or to prevent the drain of talent could negatively affect the performance of the Group. As the importance of human capital management increases, as mentioned, the Group works to improve employee’s engagement and recruit and develop a variety of human resources through the development of the environment, allowing employees to take on challenges in a variety of fields, including overseas trainee and job posting fields, and strengthening of its recruiting capability by improving its recruiting branding and strengthening internship initiatives. We also build a workplace environment where diverse human resources can work comfortably through the provision of support for balancing work with childcare/nursing care, etc., teleworking systems, and the implementation of other measures, increase wages to ensure competitive compensation levels and take other measures, thereby retaining and motivating human resources. |
| Occupational safety and health |
| Related Materiality: Safe manufacturing |
| Aiming to realize a safety society, the Group places safety before everything else in its manufacturing under the slogan of “Zero Accidents and Injuries.”
The occurrence of an injury or illness resulting in death or permanent disability or other damage on human health, or a fire that affects production, could result in a loss of public trust, suspension of operations, or suspension of transactions by customers, which could negatively affect the Group’s operations. In order to reduce risks that could lead to injury, illness, or fire, the Group is working to mitigate risks by thoroughly identifying foreseeable risks and to implement maintenance management measures such as compliance with rules. |
| Human rights |
| Related Materiality: Upholding and respecting human rights |
| Stakeholders’ focus on companies’ human rights initiatives have been growing in recent years. The Guiding Principles on Business and Human Rights, approved by the United Nations Human Rights Council in 2011, stipulates that companies are responsible for and must commit to protecting and respecting human rights, and remedying human rights violations. The scope of corporate responsibility is not only within its own company but also throughout its supply chain.
Customers and suppliers are increasingly reluctant to continue doing business with companies without mechanisms in place to address human rights issues such as child labor, forced labor, and discrimination against foreign workers, and the stock market is increasingly reluctant to invest in such companies. The Group communicates its policy on respect for human rights to its stakeholders through disclosure of the Nitto Group Basic Policy on Human Rights in 10 languages. Also, we conduct a compliance survey as one of the initiatives of the compliance management system. We are working to visualize and reduce the risk level of each site. Meanwhile, we hold a partnership meeting at global to inform our main suppliers about our CSR Procurement Policies and their activities. Also, we conduct an annual CSR Procurement Survey under the CSR-Based Procurement Guidelines, which describe rules we expect our suppliers to follow, including respect for the human rights and labors. Based on the survey findings, we assess their risk, suggest improvements to the suppliers whose risk is deemed high, and follow up on their improvement efforts. In order to ensure the objectivity and validity of assessment, we have newly introduced CSR assessment by EcoVadis as a third-party assessment in Japan and China. From the next fiscal year, we will expand the introduction of this assessment globally in South Asia, Europe and the Americas regions. For suppliers that handle raw materials with high risks of human rights violations, we ask them to survey the place of origin and answer the questionnaire on human rights policy to raise their awareness and cooperation in human rights in raw material procurement. |
| Defined benefit liability |
| Related Materiality: Enhancing management security |
| The Group’s defined benefit liabilities are calculated on the basis of various assumptions used in actuarial calculations and investment yields of pension assets. As such, fluctuations in the market value of pension assets, interest rate behaviors, and changes in retirement allowance systems and pension plans can affect the amount of such liabilities that are recognized and reported, thereby having an impact on the performance of the Group.
When managing pension assets affected by market fluctuations, the Group aims to achieve stable returns by setting long-term policy asset mix based on factors such as pension asset liability management (ALM) analysis, diversifying investments, and considering downside risks. In implementing the above, the Group has established an appropriate operation and management system by designating members from its finance and human resources departments as well as members with asset management experience as fund managers, in addition to engaging external consultants. When considering changes to retirement benefits and pension plans, such as reducing the risk of additional contributions by, for example, introducing defined contribution pension plans in certain cases, due consideration is given to the impact on retirement benefit obligations. |
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