Sojitz Corporation

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Risk Management

Basic Policies of Risk Management

As a general trading company, the Sojitz Group is engaged in a diverse and globally dispersed range of businesses. Due to the nature of its businesses, the Group is exposed to a variety of risks.

In compliance with its Basic Code of Corporate Risk Management, the Sojitz Group defines and categorizes risks, and manages them according to the nature of each risk. For quantifiable risks such as market risks, credit risks, business investment risks and country risks, risk assets are calculated and reported to management. Difficult-to-quantify risks, such as legal risks, compliance risks, environmental and social (human rights) risks, funding risks, disaster risks and system risks, are managed in the same manner as quantifiable risks, with the status of the risks and other issues being reported to the management based on the Risk Management Policy and Plan formulated by the executive officers responsible for managing those risks. (For details, see “Business Risks, Other Risks and Response” on the following page.)

For the Medium-term Management Plan 2020, we have added several other emerging risks subject to monitoring: risks stemming from use of web sites or SNS (i.e. those requiring crisis management, including efforts to protect personal information and countermeasures for online shaming on social media); risks related to quality control (liability risk for new products arising from diversification of the areas in which we do business); and risks related to industry innovation (risk of being left behind in the technological revolution occurring in AI, etc., rendering existing business models obsolete).

The Internal Control Committee (chaired by the President & CEO) monitors the management of these risks. In addition, the Board of Directors regularly receives reports from organizations including the Internal Control Committee, supervising risks by delegating appropriate actions to be taken.

Business Risks, Other Risks and Response

  Summary of Risks Response
Market risks
  • Exchange rate risk associated with transactions denominated in foreign currencies in connection with trading or business investments
  • Interest rate fl uctuation risk associated with debt fi nancing and portfolio investment
  • Commodity price fl uctuation risk associated with purchase and sale agreements and commodity inventories incidental to operating activities
  • Market price fl uctuation risk for listed securities
  • The Group minimizes market risks through such means as matching assets and liabilities (e.g., long and short commodity exposures) and hedging with forward exchange contracts, commodity futures/forward contracts and interest rate swaps.
Credit risks
  • Risk that receivables will be rendered uncollectible by situations such as deterioration in a customer’s credit status or a customer’s bankruptcy, either in Japan or overseas
The Group:
  • Controls risk by assigning credit ratings and setting limits on transaction amounts for each customer.
  • Implements safeguards (e.g., collateral and guarantees) as warranted by the customer’s credit status.
  • Ascertains credit risk through a system for assessing receivables and estimates provisions for doubtful accounts for individual receivables.
  • For risk associated with deferred payments, loans and credit guarantees, periodically assesses whether profi tability is commensurate with risk, and takes steps to improve profi tability or limit credit risk.
Business investment risks
  • Risk of fl uctuations in the value of business investments and investments in interests
  • Risk of being unable to recoup investments as profi tably as initially anticipated due to low liquidity and other factors
  • The Group rigorously screens prospective business investments and has established standards for after investment.
Country risks
  • Risk that businesses will fail to perform according to plan or will incur losses due to changes in political, economic, regulatory and societal conditions in the countries in which the Group’s customers are located or in which the Group conducts business
  • The Group assigns country risk ratings and sets net exposure limits to avoid concentrated exposure to any single country or region.
  • In countries that pose substantial country risk, the Group hedges against country risk on a transaction-by-transaction basis through such means as purchasing trade insurance.
Funding risks
  • Risk of funding constraints and/or increased financing costs in the event of a disruption of the financial system or fi nancial and capital markets, or a major downgrade of the Group’s credit rating by one or more rating agencies
  • The Group ensures stable funding by maintaining good business relationships with fi nancial institutions and by keeping the long-term debt ratio at a specifi ed level.
  • To provide additional fi nancial fl exibility and liquidity, the Group maintains long-term commitment lines and a long-term multi currency borrowing facility agreement with effective period provisions.
Risks related to environment/society (human rights)
  • Risks related to the suspension of business acitivities due to human rights, environmental, or workplace safety issues; wastewater disposal and cleanup; lawsuits and compensation for damages; damage to reputation. Additionally, risk of damage to business continuity due to climate change-related regulations such as the Paris Agreement.
  • The Group sets a long-term vision and objectives for response to Sustainability Focus Areas (Human Rights, Environment, Resources, Local Communities, Human Resources, and Governance) covering the duration of the medium-term management Plan. The Sustainability Committee oversees progress on these objectives, and the Finance & Investment Deliberation Council confirms their relevence in term so social risk and sustainabiilty. Additionally, The Group has established an Environmental Policy, Human Rights Policy, and CSR Action Guidelines for Supply Chains, and it ensures that all Group members are made aware of these policies.

Legal and compliance
risks

Litigation risks

  • Risk of major revisions to laws or regulations relating to the Group’s business activities, or application of an unanticipated interpretation of existing laws or regulations
  • Risk that litigation proceedings (e.g., arbitration) may be initiated in Japan or other countries against or with the Group
  • The Group has formulated a compliance program and has established the Sojitz Group Code of Conduct and Ethics. The Compliance Committee promotes rigorous regulatory compliance on a Group-wide basis(including corruption prevention).
Information system and information security risks
  • Risk that the Group’s important information assets, including personal information, will be leaked or damaged by a cyberattack or unauthorized access to its computer systems
  • Risk that the Group’s information and communication systems will be rendered inoperable by an unforeseeable natural disaster or system failure
  • The Group has prescribed regulations and established oversight entities, mainly the Information Security Subcommittee, pertaining to the appropriate protection and management of information assets.
  • The Group has implemented safeguards, such as installation of redundant hardware, to protect against failure of key information systems and network infrastructure. Additionally, the Group is strengthening its safeguards against information leaks through such means as installing fi rewalls and taking other steps to prevent unauthorized access by outsiders, implementing antivirus measures, and utilizing encryption technologies.
Disaster risks
  • Risk of an earthquake, fl ood, storm or other disaster that damages offices or other facilities or injures employees and their family members
  • The Group has prepared disaster response manuals, conducts disaster response drills, and has established an employee safety confi rmation system and a business continuity plan.
Risks related to web sites and SNS
  • Risk regarding company invormation made available through web sites and SNS (protection of personal information, crisis management, etc.)
  • The Group monitors and has set administrative guidelines for the establishment of offical websites or SNS accounts belonging to Sojitz Corporation or Sojitz Group companies, as well as for the creation and disclosure of terms of use and rules governing protection of personal information on these sites and SNS accounts.
  • The Group ensures that all members are educated on points of caution regarding use of social media.

Risk Measurement and Control

The goals of risk measurement are (1) to manage risk assets within the strength of the company (total equity), and (2) to maximize earnings in line with the level of risk exposure. Based on that recognition, the Sojitz Group manages risks with a focus on both stability and profitability. The Sojitz Group’s objective for risk control is to keep the ratio of risk assets to total equity within 1.0 times. The ratio of risk assets to total equity was 0.5 times as of March 31, 2018, with the target range. Risk assets are measured quarterly and reported to the Board of Directors and the Management Committee, and each business department receives the results of analysis of the change in risk assets for application in risk management activities. Even as the operating environment grows increasingly uncertain, the Sojitz Group plans to continue its risk control efforts to maintain the ratio within 1.0 times.

The external environment affecting the Sojitz Group’s businesses is constantly changing, with uncertainty in global politics, geopolitical risk macroeconomic conditions and volatility in markets (exchange rates, interest rates, stocks, commodities, etc.) all on the increase. The Sojitz Group promptly conducts appropriate risk management for this external environment. As a specific response, risk assets are calculated factoring in stress to stock price and exchange rate volatility and country credit ratings, and the ratio of risk assets to total equity is monitored to remain within 1.0 times even under stress conditions. In addition, as a countermeasure to tail risk, Sojitz analyses the impact on its business portfolio under stress scenarios. Whiles promoting disciplined investment in the Medium-term Management Plan 2020, we have been reviewing the measurement of risk assets method in a way more suitable for growth investment since FY 2018.

 

Business Investment Proposals

Business investment proposals are deliberated by the Finance & Investment Deliberation Council, which consists of a chairman and members appointed by the President. In order to visualize risks and facilitate deliberation, the council examines downside scenarios as well as expected scenarios, and decides whether or not Sojitz should invest in projects. More specifically, it assesses the feasibility of the overall business plan, including the cash flow plan, and sets internal rate of return (IRR) hurdles in order to select projects that can be expected to produce returns commensurate with the risks. Each corporate department deliberates proposals in advance from its respective specialized viewpoint.

More than ever before, Sojitz seeks to maximize “two types of value”—that is, “value for Sojitz” and “value for society”—in its management of operating companies post-investment. This enhances the value of the business by increasing its competitiveness and profitability. For ongoing projects, careful operational management is conducted, including assessments of commercial viability and profitability, while also paying attention to changes in the external environment, and decisions are made on whether to continue with each business. Exit rules are set for identifying problems early on and withdrawing from business investments in order to minimize losses on withdrawal or reorganization. These criteria are used in making decisions on investments that are not expected to produce returns commensurate with the risks.

 

Risk Management Training

Establishing rules alone is not sufficient to enhance company-wide risk management competence; all employees throughout the Company must have risk management capabilities. In addition to e-learning and other training to familiarize employees with the rules, Sojitz provides training using case studies of actual situations, as well as on measures to avert and mitigate country risks, and transactions with inherent market risks, such as inventory transactions. Training is provided for employees at various levels, including young employees three to ten years after they join the company, employees prior to their promotion to management positions, employees in management positions, and Group company managers. Training is based on the knowledge and on-the-job experience of employees directly involved in daily operations. To date, 2,070 employees have taken these training courses. Workshops by external specialists on topics such as political and economic conditions are also held regularly to foster an ability to respond flexibly to changes in the business environment. In addition, efforts are made to further instill risk management capabilities throughout the Company by brining staff form the business group and overseas operating bases into the risk management departments, and through other personnel exchanges between the Head Office risk management departments and Group companies.

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