Nippon Paper Industries : Response to TCFD

Response to TCFD

The Nippon Paper Group endorsed the Task Force on Climate-related Financial Disclosures (TCFD) in April 2021 with the aim of disclosing appropriate information on its response to climate change issues.

Governance

The Group has positioned the reduction of GHG emissions as a management issue and has been working on it by setting quantitative targets since 2008. The Board of Directors of the Company regards addressing climate change issues as an important issue in realizing the Group's Mission. In addition to the Risk Management Committee, the Nippon Paper Group Environmental Committee reports on and oversees the Company's efforts. From FY2021, the director in charge of GHG emission reduction and environmental management has been reporting to the Board of Directors on issues once a quarter.

Risk Management

The assessment of and response to climate change-related risks is integrated into the Group's risk management system and is managed by the Risk Management Committee (see P.9 of ESG Databook 2022). In order to appropriately foresee risks, the Nippon Paper Group Environmental Committee, established under the Risk Management Committee, collects and analyzes information, identifies climate-related risks and promotes countermeasures. The Group has also set up a Climate Change Strategy Working Group to gather information and forecast risks.

Indicators and Targets (FY2030)

The Group will continue to analyze 1.5℃ scenarios, expand indicators and targets, and strengthen risk management.

・GHG reduction plan: GHG emissions (Scope 1+2) 45% reduction (compared to FY2013)

Non-fossil energy use ratio of 60% or more ・Amount of investment to address climate-related risk: ¥52.0 billion

・Internal carbon price: Introduced in FY2021, but temporarily ceased being used in FY2022 due to a surge in the price of fuels such as coal

Strategy and Scenario Analysis

As a scenario analysis for the year 2021, the Company drew up a vision of society against the backdrop of growing awareness of ESG issues. Using two different scenarios (1.5℃ scenario and 4.0℃ scenario), the Company conducted qualitative and quantitative assessments of the impacts of climate change risks and opportunities as of 2030 and 2050 on its financial plans, and reported the results to the Board of Directors.

■ Scenario Analysis Methods

1. Establishing an image of society
   1.5℃ scenario (RCP 2.6)
   All kinds of policies will be introduced to keep temperature rise below 1.5℃, and at the same time, society as a whole will take action to limit temperature rise. As a result, temperatures will rise slowly, and therefore, by 2030, there will be little change from the current situation in terms of severe disasters, temperature rises, and precipitation patterns. In markets, production and consumption activities giving priority to environment conservation such as an increase in ethical consumption, will increase.
   4℃ scenario (RCP 8.5)
   No policies will be introduced to control temperature rise. While some stakeholders will take actions to limit temperature rise from the perspective of promoting ESG management, regardless of whether policies are introduced or not and regardless of what society as a whole is doing, society generally will not take actions to limit temperature rise. As a result, temperatures will rise more rapidly than in the 1.5
   ℃ scenario, and the frequency of severe disasters will increase, temperatures will rise, and precipitation patterns will be more changeable in 2030 than in1the current situation.

Response to TCFD

1. Evaluation Items
   Risk: likelihood of occurrence, timing of occurrence, timing of impact, financial impact
   Opportunity: likelihood of occurrence, timing of occurrence, timing of impact, financial impact, market growth

• Summary of Analysis Results

Since the pulp and paper industry is an energy-intensive industry, transition factors such as the introduction of policies and changes in market needs are major risks, as well as physical factors such as an increase in the number of catastrophic disasters. In response to this, the Company is focusing on 45% reduction of GHG emissions, shift to multiple production sites, and green strategy. In regard to GHG emission reduction in particular, the Company will work to ensure strategic resilience by taking additional measures and achieving GHG reduction targets at an early stage through accelerated realization of scenarios in the 2030 Vision.

On the other hand, there are many opportunities for the Company to leverage its strengths to enter, and grow in, markets that are being created and expanded due to the introduction of policies and changes in market needs. As for adaptation to climate change, measures to shift to multiple production sites will lead to increased sales, while the development and sale of environmentally friendly and adaptive products needed by society will also provide opportunities for growth in a market that is expected to expand.

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Response to TCFD

■ Climate Change-Related Risks

Risks as of 2030

Transition factors

Physical factors

Factors		Impact on the Company		Risk assessment
		1.5℃	4℃
		・Energy procurement costs will increase.		scenario	scenario
Policy			High	Low
	・Capital investment costs for fuel conversion and energy
introduction
(e.g., carbon		conservation will increase.
tax, changes in		・Raw material procurement costs will increase.		High	Low
energy mix)
	・Increased acquisition cost of plantation project sites		Medium	Low
		・Increased procurement costs for certified wood chips		Medium	Medium
Changes in		・Development costs and capital investment costs for reducing		Medium	Low to
	environmental impact will increase.		medium
market needs
	・Sales from non - renewable power generation projects will		High	Low
		decrease.
Increase in		・Stoppage of raw material procurement, production, product
	transportation, etc., resulting in reduced production volume and
the number of		delayed or halted deliveries of products		Medium to
severe disasters				High
	・Procurement, manufacturing, and logistics costs will increase.
(frequent				high
typhoons and		・Increase in turbidity of rivers, etc., from which water is taken,
heavy rains)		resulting in production stoppage and delay or stoppage of
		deliveries of products
		・Losses in the company's plantation assets
Increase in		・Raw materials will become difficult to procure and procurement
temperature		costs will increase.		Medium	High
and change in		・Costs for search for alternative materials and technology
precipitation		development will increase.
patterns
	・Sales volume decreases or sales price declines due to difficulty in
		maintaining quality.

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Response to TCFD

1. Transition Factors

1-1. Risks Mainly Due to the Introduction of Policy

Under the 1.5℃ scenario, carbon prices will increase mainly due to the introduction of policies such as carbon taxes, emissions trading schemes, and bans on the use of coal-fired power generation. At the same time, it is expected that fossil fuel prices will rise, and fuel procurement costs will increase. Since the pulp and paper industry is energy-intensive, financial plans are at risk of being significantly affected by the introduction of these policies.

Under the 4℃ scenario, carbon prices will not increase and fossil fuel prices are not expected to rise significantly because no policies will be introduced, but changes in supply and demand for fossil fuel will occur and fuel prices will fluctuate. This is already part of the Company's normal risk management and the risk of being affected is considered to be small.

Meanwhile, in response to risk of rising fossil fuel prices expected in the 1.5℃ scenario in which all kinds of policies will be introduced, the Group will make maximum use of its Nippon Paper Lumber biomass procurement network, which is one of the largest timber procurement companies in Japan, reducing this risk by accelerating the shift to non-fossil fuels.

In addition, in regard to carbon price hikes due to the introduction of emissions trading schemes and carbon tax, the Group will mitigate risk of an impact on financial plans related to carbon price hikes at an early stage by taking speedier actions to reduce GHG emissions. As part of its measures to reduce GHG emissions, the Group employs energy-saving measures to reduce the use of coal on an ongoing basis. As an indicator, the Group is improving energy consumption per unit of paper and paperboard at its mills by at least 1% per annum. At the same time, the Group is also working on initiatives such as a shift to recycled fuels such as biomass and waste fuels, and to maximize the use of black liquor* which is a carbon-neutral fuel.

While the Group has set a target of achieving "45% reduction of GHG emissions (compared to FY2013)" in its 2030 Vision, the path to be followed for achieving the target has become much clearer through the execution of various measures. In addition, social demand for reduction of GHG emissions and the possibility of carbon price hikes are growing. Accordingly, the Group has judged that actions are needed to be taken in a manner speedier than ever, and has begun looking at reducing GHG emissions targets even further.

The Group will mitigate risk of an impact on financial plans related to carbon price hikes at an early stage by considering reorganization of the production system, reducing GHG emissions in an integrated manner, and achieving low-carbon consumption early through steps such as controlling output from, or even ceasing the operation of, coal boilers.

The Group believes that there is a high possibility of carbon price hikes triggered by future introduction of emissions trading schemes and other such systems. Therefore, the Group will also work to mitigate risks by participating actively in creating systems, rules, etc. , for example through the GX League Basic Concept advocated by the Ministry of Economy, Trade and Industry, so that these systems will contribute to growth of companies.

* Black liquor is comprised mainly of a wood component, lignin, and created as a by-product during the course of pulp manufacturing.

In the 1.5℃ scenario, there is a risk that the demand for biomass fuels will increase due to policies to promote the introduction of renewable energy, causing fuel prices to rise and procurement costs to increase. At the same time, under the current FIT system, there is a risk that the procurement cost of wood chips for paper production will also increase due to competition with biomass fuels.

This phenomenon is already apparent, but under the 4℃ scenario, no further policy tightening will take place, and price fluctuations will remain within our normal risk management.

In response to procurement risk associated with increased demand for biomass fuel due to the introduction of policies, the Company believes that it can procure biomass fuel in a stable and low-cost manner by making maximum use of the biomass procurement network of Nippon Paper Lumber, one of the largest wood procurement companies in Japan. With regard to wood chips for papermaking, the Company will reduce risks by securing raw materials and stabilizing purchase prices by strengthening relationships of trust based on our long track record with existing suppliers and developing and adopting inexpensive local resources.

Since the Company imports most of the raw materials necessary for its manufacturing from overseas, it may be affected by the policy trends of resource-supplying countries. Under the 1.5℃ scenario, carbon prices are expected to be raised due to stricter policies in resource-supplying countries, and there is a risk that raw material procurement costs will increase.

The Company collects information on policies in resource-supplying countries and strives to predict the occurrence of risks, while at the same time trying to reduce risks by diversifying supply sources.

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Response to TCFD

In the 1.5℃ scenario where the world is aiming for carbon neutrality (net zero CO2), the market is expected to expand due to increased demand for carbon credits. As a result, the demand for credits from forest absorption is expected to increase, and there is a risk that an increase in the number of plantation projects, for the purpose of creating credits, will lead to an increase in the price of land suitable for plantation and an increase in the cost of land acquisition for the Company's plantation business. Such trends have already been seen in some regions.

On the other hand, under the 4℃ scenario, some stakeholders may secure plantation land from the perspective of promoting ESG management, regardless of whether policies are introduced or not, and regardless of the movements of society as a whole, but the risk of such actions on the Company's plantation business is considered to be small.

Expansion of the plantation business requires a large area of suitable land for plantation, so rising land prices may pose a risk to the Company. However, the Company can reduce this risk by utilizing its strengths, such as its proprietary technology for breeding and propagating highly efficient CO2-fixing trees and operating plantation businesses in cooperation with third parties.

1-2. Risks Arising Primarily from Changes in Market Needs

Under the 1.5℃ scenario, demand for environmentally friendly products is expected to increase, and there is a risk that technology development costs, capital investment costs, etc. will increase in response to this demand while products and services with high environmental burden will no longer be selected in the market.

In the future, the market is expected to favor products and services derived from renewable raw materials, due to expectations of being environment friendly. Therefore, the Company believes that by accurately identifying and forecasting customer needs and further promoting the "paperization" that it is already working on, the Company will be able to promote the replacement of materials with renewable biomass materials, reduce risks associated with changes in market needs, and at the same time seize this as an opportunity to expand its business. The Company will further accelerate reduction of GHG emitted over the course of product manufacturing. At the same time, by taking advantage of the fact that its production bases are dispersed throughout Japan, the Company will offer products that contribute to the reduction of GHG emissions throughout the supply chain by shortening the transportation distance to delivery destinations and reducing GHG emissions during transportation through the use of multiple production bases.

In addition, as part of changes in market needs, under the 1.5℃ scenario, the demand for certified paper based on the forest certification system, which indicates that the paper is made from forest resources that have been properly managed, will increase more than ever due to the heightened awareness of the whole society about the proper management and use of forests, which will increase the procurement cost of certified wood chips that are a limited resource. To reduce this risk, the Company will maintain and continue good relationships with certified timber suppliers, and at the same time, it will secure certified timber in a stable and efficient manner by acquiring certification in new plantation areas and by supporting suppliers in expanding certified resources.

2. Physical Factors

2-1. Risk Due to the Increase in the Number of Severe Disasters

Under the 4℃ scenario, severe disasters such as typhoons and torrential rains are expected to become more frequent, and the probability of damage to production bases and distribution networks is expected to increase, so the risk of a decrease in production volume due to temporary production stoppages and delays or stoppages in deliveries will become greater. In addition, in the event that the power supply is interrupted due to damage to power lines or other essential services, there is a risk that production sites that do not have their own power generation facilities will be forced to temporarily suspend production.

Although the Company cannot control the occurrence of natural disasters, it is working to reduce risks by establishing elaborate systems to ensure business continuation, such as backup systems for production and inventory controls. The Company is also trying to reduce risks by promoting measures to adapt to climate change, such as bulking up equipment installation sites and installing in-house power generation equipment for use in times of disaster.

The Company's main business, pulp and paper, uses water in its manufacturing process. If the water quality (turbidity) of the rivers, etc. from which water is taken deteriorates due to typhoons or heavy rains, product quality cannot be maintained, and there is a risk that production will be suspended until the water quality improves. This event is already occurring, but is expected to become more frequent under the 4℃ scenario.

Natural disasters are unavoidable, but the Company is taking measures to ensure that operations can continue as long as possible by strengthening its water intake purification facilities and methods, and at the same time, working to reduce risks by developing a detailed system for business continuity in case production is suspended.

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