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. Non-quantifiable risks, such as legal risks, compliance risks, environmental and social (human rights) risks, funding risks, disaster and other 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 management based on the Risk Management Policy and Plan formulated by the COOs of the divisions responsible for managing those risks.

In MTP 2020, we have added and are monitoring risks related to the use of websites or SNS and other media (such as those requiring crisis management or efforts to protect personal information) and risks related to product quality control ( quality control measures arising from diversification of the areas in which we do business).

Individual Risks

Category Status of response
Quantifiable risks
Market risks
  • -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 The Group:
  • -Assigns credit ratings and sets limits on transaction amounts for each customer.
  • -Implements safeguards (e.g. collateral and guarantees) as warranted by the customer’s credit status.
  • -Uses a system for assessing receivables to pick out certain customers for inquiry from among those customers with business receivables, based on certain standards; regularly ascertains credit risk; and estimates provisions for doubtful accounts for individual receivables.
  • -For risk associated with deferred payments, loans, and credit guarantees, periodically assesses whether profitability is commensurate with risk, and takes steps to improve profitability or limit credit risk.
Business investment risks
  • -The Group closely examines business plans and carefully assesses feasibility when deliberating on investment projects. The Group also sets hurdle rates using internal rate of return (IRR) and selects those projects where profitability is commensurate with risk.
  • -After investment, in order to ascertain issues at an early stage and minimize loss from withdrawal or restructuring, the Group sets conditions for withdrawal and determines whether projects meet these conditions.
Country risks
  • -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.
Difficult-to-quantify risks
Funding risks
  • -The Group ensures stable funding by maintaining good business relationships with financial institutions and by keeping the long-term debt ratio at a specified level.
  • -To provide additional financial flexibility 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)
  • -The Group sets a long-term vision and objectives regarding Key Sustainability Issues (Materiality), covering the duration of the Medium-term Management Plan 2020. The Sustainability Committee oversees progress on these objectives, and the Finance & Investment Deliberation Council confirms environmental risks, social risks, and other risks related to sustainability when deliberating on potential finance and investment projects.
  • -Additionally, the Group has established an Environmental Policy, Human Rights Policy, and CSR Action Guidelines for Supply Chains. It works to mitigate risk by ensuring these policies are observed throughout the Group, sharing them with suppliers, conducting risk assessments, and working to fix discovered issues. For climate-related risks, the Group pays close attention to government policies and regulatory trends worldwide, analyzing their impact on the Group‘s business.
Legal and compliance risks/Litigation risks
  • -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.
Information system and information security risks
  • -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 backup 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 firewalls and taking other steps to prevent unauthorized access by outsiders, implementing antivirus measures, and utilizing encryption technologies.
Disaster risks
  • - The Group has prepared disaster response manuals, conducts disaster response drills, and has established an employee safety confirmation system and a business continuity plan.
Risks related to website, social networking sites and other media
  • -The Group monitors and has set administrative guidelines for the terms of use and protection of personal information on Sojitz Corporation and Sojitz Group companies‘ official websites and SNS accounts.
Risks related to product quality control
  • -As Sojitz Group‘s business investments bring more manufacturing business and other new sectors under the Group umbrella, the Group monitors the status of systems for controlling quality of manufactured products, etc.

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 time. This ratio as of March 2019 has been 0.6time for the past five years, well within the target value. As we pursue disciplined investment under MTP 2020, since March 2019 we have been revising our method of measurement, mainly of goodwill, to make it more suitable for growth investment. 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 for application in risk management activities. The Sojitz Group plans to continue its risk control efforts to maintain the ratio within 1.0time, even as the operating environment grows increasingly uncertain.

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 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 time even under stress conditions. In addition, as a countermeasure to tail risk, Sojitz analyzes the impact on its business portfolio under stress scenarios.

 

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, 2,370 employees as of March 2019 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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