(1) Business Risks
As a general trading company, the Sojitz Group operates a diverse portfolio of businesses globally and is exposed to various risks due to the nature of these businesses.
Therefore, the Group defines and classifies risks according to its Basic Code of Corporate Risk Management and assigns managers responsible for each risk classification. These managers formulate a risk management policy and management plan at the beginning of each fiscal year, monitor progress and risk mitigation quarterly, and summarize performance at the end of each fiscal year. The Group manages quantifiable risks (market risks, credit risks, business investment risks, and country risks) based on risk asset scores derived from risk measurements. Non-quantifiable risks (legal risks, compliance risks, environmental and social (human rights) risks, funding risks, disaster risks, and system risks) are managed based on quarterly monitoring. While the Group has risk management systems in place to address these risks, not all risks can be completely avoided.
Risks involved in the Sojitz Group’s businesses include, but are not limited to, the following:
1) Risk of changes in the macroeconomic environment
The Group operates a wide range of businesses in Japan and overseas that are engaged in a broad array of activities. Political and economic conditions in Japan and other countries and the overall global economy influence the Group’s results. Therefore, global and/or regional economic trends could adversely affect the Group’s operating performance and/or financial condition.
2) Market risks
The Group is exposed to market risks, including exchange rate risk associated with transactions denominated in foreign currencies in connection with international trade or business investments; interest rate fluctuation risk associated with debt financing and portfolio investment; commodity price fluctuation risk associated with purchase and sale agreements and commodity inventories incidental to operating activities; and market price fluctuation risk associated with holding listed securities and other such assets. The Group has a basic policy of minimizing these market risks through such means as matching assets and liabilities and hedging with forward exchange contracts, commodity futures/forward contracts, and interest rate swaps.
(a) Currency risk
The Group’s principal business activities involve import/export transactions and offshore transactions, denominated in foreign currencies. The revenues and expenditures associated with such transactions are mainly paid in foreign currencies, whereas the Group’s consolidated reporting currency is the Japanese yen. The Group is therefore exposed to the risk of fluctuations in the yen’s value against foreign currencies, and it uses forward exchange contracts and other hedging measures to prevent or limit losses stemming from this currency risk. Even with such hedging, however, there is no assurance that the Group can completely avoid currency fluctuation risk. The Group’s operating performance and/or financial condition could be adversely affected by unanticipated market movements. Additionally, the Group’s dividend income from overseas Group companies and the profits and losses of overseas consolidated subsidiaries and equity-method associates are largely denominated in foreign currencies. Their conversion into yen entails currency risk. The Group also owns many foreign subsidiaries and operating companies. When these companies’ financial statements are converted into yen, exchange rate movements could adversely affect the Group’s operating performance and/or financial condition.
(b) Interest rate risk
The Group raises funds by borrowing from financial institutions or issuing bonds to extend credit (e.g., for trade receivables), invest in securities, acquire fixed assets, and for other purposes. Asset and liability items are categorized based on whether or not they are sensitive to interest rate changes, with the difference between the value of sensitive assets and sensitive liabilities used to determine an interest rate mismatch value. Based on this amount, the ratios of funds procured from fixed-rate sources and floating-rate sources are adjusted to better manage interest rate fluctuation risks. However, the Group cannot completely avoid interest rate fluctuation risks. An increase in funding costs due to a sharp rise in interest rates could adversely affect the Group’s operating performance and/or financial condition.
(c) Commodity price risk
As a general trading company, the Group deals in a wide range of commodities in its various businesses. It is consequently exposed to the risk of commodity price fluctuations. For market-traded commodities, the Group manages exposures and controls losses by setting (long and short) position limits and stop-loss levels for each of its organizational units. The Group also imposes and enforces stop loss limits (i.e., organizational units must promptly liquidate losing positions and are prohibited from initiating new trades for the remainder of the fiscal year if unit losses, including valuation losses, exceed the stop loss limits). Even with these controls, however, there is no assurance that the Group can completely avoid commodity price risk. The Group’s operating performance and/or financial condition could be adversely affected by unanticipated market or other movements. The Group also monitors commodity inventories by business unit on a monthly basis to control inventory levels.
(d) Listed securities price risk
The Group has large holdings of marketable securities. For listed shares in particular, the Group periodically confirms the purpose for holding any given security. Nonetheless, a major decline in the stock market could impair the Group’s investment portfolio and, in turn, adversely affect the Group’s operating performance and/or financial condition.
3) Credit risks
The Group assumes credit risks in extending credit to many domestic and foreign customers for a variety of commercial transactions. The Group mitigates such credit risks by objectively assigning credit ratings to the customers to which it extends credit based on an 11-grade rating scale. The Group also controls credit risks by setting rating-based credit limits on a customer-by-customer basis and employs other safeguards (e.g., collateral and guarantees) as warranted by the customer’s creditworthiness. Additionally, the Group has a system for assessing receivables in which it screens the customers to which it has extended trade credit to identify those that meet certain criteria. It then reassesses the selected customers’ creditworthiness and the status of the Group’s claims against these customers. Through this approach, the Group endeavors to more rigorously ascertain credit risks and estimate provisions, thereby allowing for doubtful accounts for individual receivables. For credit risks associated with deferred payments, loans, and credit guarantees, the Group periodically assesses whether profitability is commensurate with credit risks on a case-by-case basis. For transactions that do not generate risk-commensurate returns, the Group takes steps to improve profitability or limit credit risks.
However, even with such credit management procedures, there is no assurance that the Group can completely avoid credit risks. If, for example, receivables are rendered uncollectible by a customer’s bankruptcy, the Group’s operating performance and/ or financial condition could be adversely affected.
4) Business investment risks
The Group invests in a wide range of businesses as one of its principal business activities. In doing so, it assumes risk of fluctuations in the value of business investments and investments in interests. Additionally, because many business investments are illiquid, the Group also faces the risk of failing to recoup its investment as profitably as initially anticipated. To prevent and limit losses from business investments, the Group has established standards for rigorously screening prospective business investments, monitoring them post-investment, and withdrawing if necessary. In screening prospective investments, the Group analyzes business plans, including cash flow projections, and rigorously assesses the businesses’ prospects. It has also established procedures, including an IRR (internal rate of return) hurdle rate screen, to enable identification of investments with the potential to generate returns commensurate with risk. Once the Group has invested in a business venture, it closely manages business processes. This includes periodically reassessing the business’s prospects, to minimize losses by identifying problems early and taking appropriate action. To identify problems with business investments at an early stage or before they materialize, thus minimizing losses on divestiture or liquidation, the Group sets exit conditions and acts decisively to opportunely exit investments that have failed to generate risk-commensurate returns. Even with such procedures for screening prospective investments and monitoring existing investments, the Group cannot completely avoid the risk that investment returns will fall short of expectations or the risk that businesses will fail to perform according to plan. Moreover, the Group could incur losses when exiting business ventures or may be precluded from exiting business ventures as intended due to their relationships with partners in the ventures or other circumstances. Such events could adversely affect the Group’s operating performance and/or financial condition.
5) Country risks
To minimize losses that may result from country risks, the Group recognizes that it must avoid concentrated exposure to any single country or region. In conducting business in countries that pose substantial country risks, the Group will, in principle, hedge against said risks on a transaction-by-transaction basis, by purchasing trade insurance or through other such means. In managing country risks, the Group assigns one of nine country-risk ratings to individual countries and regions using objective measures based on the size of the country risks. It then sets net exposure (gross exposure minus trade insurance coverage and/or other country-risk hedges) limits based on the country’s size and assigned rating. The Group limits its net exposure to individual countries to no more than the net exposure limit. However, even with these risk controls and hedges, the Group cannot completely eliminate the risk that businesses will fail to perform according to plan or the risk of losses due to changes in political, economic, regulatory and societal conditions in the countries in which the Group conducts business or countries in which the Group’s customers are located. Such events could adversely affect the Group’s operating performance and/ or financial condition.
6) Impairment risk
The Group is exposed to the risk of impairment of the value of its leased and non-current assets, including real estate holdings, machinery, equipment and vehicles, and goodwill and mining rights. The Group recognizes necessary impairment losses at the end of the fiscal year in which they are identified. If assets subject to asset impairment accounting decline materially in value due to a decline in their prices, recognition of necessary impairment losses could adversely affect the Group’s operating performance and/or financial condition.
7) Funding risks
The Group largely funds its operations by issuing bonds and borrowing funds from financial institutions. This means the Group maintains good business relationships with financial institutions and keeps the long-term debt ratio at a specified level, which ensures stable funding. However, in the event of a disruption of the financial system or financial and capital markets, or major downgrades of the Group’s credit rating by rating agencies, funding constraints and/or increased financing costs could adversely affect the Group’s operating performance and/or financial condition.
8) Environmental and human rights risks
The Sojitz Group is committed to fully aligning its business activities with the interests of its stakeholders, to achieve growth while mitigating environmental and human rights risks. To that end, we have established the Sojitz Group Code of Conduct and Ethics, the Sojitz Group CSR Policy, and CSR Focus Areas (human rights, environment, resources, local communities, human resources and governance). However, environmental, occupational health and safety, or human rights issues may still arise in the Group’s business activities or within supply chains. Moreover, environmental or human rights groups or other members of society could accuse the Group of involvement in such issues. Such events could force the Group to temporarily or permanently cease operations or require cleanup work. The Group could also face litigation, incur expenses related to compensation for affected parties, or suffer damage to its reputation. Such developments could adversely affect the Group’s operating performance and/or financial condition.
9) Compliance risks
The Group’s diverse business activities are subject to a broad range of laws and regulations, including the Companies Act of Japan, tax laws, anti-corruption laws, antitrust laws, foreign exchange laws and other trade-related laws, and various industry-specific laws, including chemical regulations. To ensure compliance with these laws and regulations in Japan and overseas, the Group has formulated a compliance program, established a compliance committee, and promotes rigorous regulatory compliance on a Group-wide basis. However, such measures cannot completely eliminate the compliance risks entailed by the Group’s business activities. Additionally, the Group’s operating performance and/or financial condition could be adversely affected by major statutory or regulatory revisions or application of an unanticipated interpretation of existing laws or regulations.
10) Litigation risks
Litigation or other legal proceedings (e.g., arbitration) may be initiated in Japan or overseas against or with the Group in connection with the Group’s business activities. Due to the uncertain nature of litigation and other legal proceedings, it is not possible at the present time to predict the effect that such risks might have on the Group. Nevertheless, such risks could adversely affect the Group’s operating performance and/or financial condition.
11) Information system and information security risks
The Group has prescribed regulations and established oversight entities (the chief of which being the Information Security Subcommittee) to appropriately protect and manage information assets. The Group also has implemented safeguards against failure of key information systems and network infrastructure, such as installing duplicate hardware, and is endeavoring to strengthen its safeguards against information leaks through such means as installing firewalls to prevent unauthorized access by outsiders, implementing antivirus measures, and utilizing encryption technologies. While the Group is working to strengthen overall information security and prevent system failures, it cannot completely eliminate the risk of important information assets, including personal information, being leaked or damaged by increasingly prevalent cyberattacks or unauthorized access to its computer systems. Nor can the Group eliminate the risk of its information and communication systems being rendered inoperable by an unforeseeable natural disaster or system failure. In such an event, the Group’s operating performance and/or financial condition could be adversely affected, depending on the extent of the damage.
12) Natural disaster risks
The Group could be directly or indirectly affected in the event of an earthquake, flood, storm, or other natural disaster that damages offices or other facilities or injures employees and/or their family members. The Group has prepared disaster response manuals, conducts disaster response drills, and has established an employee safety confirmation system and a business continuity plan, but it cannot completely avoid the risk of damage from natural disasters. The Group’s operating performance and/or financial condition could be adversely affected by natural disasters.