Risk Management | Sustainability | KH Neochem Co., Ltd.

KH Neochem's initiatives

Risk Management Activities and System

To achieve sustainable growth, KH Neochem engages in risk management activities that identify and recognize risks to the greatest extent possible, prevent latent risks from materializing, and manage active risks with organizational, strategic, and continuous controls. To conduct effective risk management, we have established the Risk Management Committee, chaired by the Chief Legal Officer (CLO) and consisting of all division heads as members. This committee examines and deliberates the identification and assessment of critical management risks and the formulation of countermeasure plans, and monitors the progress of these efforts. In principle, the committee meets twice a year and reports the content of its discussions to the Sustainability Committee. After identifying overall management risks and formulating appropriate countermeasures, key matters are reported to the Board of Directors.

Risk Evaluation Process and Material Risk Selection

We identify risks from both external and internal perspectives, taking into account social and environmental conditions, and create a risk map that evaluates their impact and probability of occurrence. From this risk map, we select risks that have an extremely high impact on the Group’s management and business activities and that should be prioritized in terms of corporate value and social interest, and designate them as “material risks.” A risk owner is appointed from among the CxOs and is responsible for each of these material risks, and these risk owners work closely with the supervising division and relevant divisions to implement risk countermeasures.

Positioning of material risks on the risk map

A risk map plotting major risks by impact and likelihood. High-impact areas include cybersecurity (production), business continuity (natural disasters and supply disruptions), compliance, and production activities (occupational accidents). High-likelihood areas include production activities (equipment and machinery failure), cybersecurity (head office), and human resources risks. — * Material risks are excerpted from the Company-wide risk map.

Material Risks and their Countermeasures

Category	Examples	Countermeasures
❶ Compliance	Law violations, legal restraints	Establishment of a compliance code and education of all executives and employees Legal compliance status checks and other verifications of relevant regulations
❷ Production activities	Damage/malfunction of facilities/machinery, work-related accidents	Development of maintenance plans according to equipment importance Implementation of Comprehensive Safety Check Initiative 2022
❸ HR	Personnel shortages, delayed training of core human resources	Reinforcement of hiring activities and systems, holding personnel meetings Formulation of skill enhancement programs and training systems for core human resources
❹ Business continuity	Major earthquakes and natural disasters Problems procuring certain supplies and raw materials	Formulation of a BCP and conduction of regular exercises Identification of supply risks for critical raw and auxiliary materials, facilities, and supplies; and formulation of risk countermeasures
❺ Cyber Security	Cyberattacks	Strengthen residual risk reduction based on external security assessments Technical and operational measures and updates, and education for all executives and employees
❻ Climate change	Abnormal weather, imposition of carbon tax	See for TCFD recommendation-based climate-related information disclosure

Business Continuity Management (BCM)

The Company manufactures and supplies essential products that are indispensable to production activities across a wide range of industries and to enriching people’s lives. For that reason, we believe that we have an important responsibility to maintain and continue our business activities and achieve an early recovery in the event of a large-scale disaster, and have therefore formulated the Business Continuity Management (BCM) Basic Policy. Based on this, we have established business continuity plans (BCPs) for our Headquarters and plants, and by conducting regular training, we have built a system for minimizing damage in the event of a disaster and ensuring business continuity and early recovery. In 2024, we conducted role-playing drills, simulating a major earthquake directly beneath the Tokyo metropolitan area, affecting both our Headquarters and Chiba Plant simultaneously, and are advancing discussions and countermeasures based on the challenges identified. Moving forward, we will continue to enhance the effectiveness of our BCM through BCP training and other initiatives.

Climate-Related Disclosures Based on TCFD Recommendations

The business environment surrounding KH Neochem is growing increasingly uncertain as cases of heat stroke and natural disasters rise due to climate change, and voices calling for decarbonization and carbon neutrality grow louder and more numerous. In January 2022, we declared our endorsement of the Task Force on Climate-Related Financial Disclosures (TCFD) Recommendations and have disclosed climate-related information ever since.

Governance and Risk Management

We identify material risks according to the risk evaluation process for selecting Material Risks as mentioned previously.The risks arising from climate change have been identified as material risks to our business due to the significant impact they are expected to have on KH Neochem in the future. In addition, we are taking measures to prevent risks from materializing and reduce their impact by continuously conducting risk assessments based on our risk management system and monitoring them at board meetings when necessary.

Strateg

We identify risks and opportunities related to climate change and analyzes scenarios based on warming of 4℃ and 1.5℃ respectively, to assess the impact of future risks and opportunities heading toward 2030. By engaging in the Seven Promises and driving Sustainable Management, we seek to expand the climate change-related opportunities while mitigating the risks, thereby increasing our corporate value.

Strateg

*1 See the RCP 8.5 scenario of the Intergovernmental Panel on Climate Change (IPCC).

*2 See the NZE2050 scenario of the International Energy Agency (IEA).

KH Neochem's climate change-related risks and opportunities

We have listed items that have a significant risk or opportunity impact on the Company.

Category	Risks/Opportunities		Key Countermeasures
Physical risks (4℃ warming scenario)	Impact on operations due to abnormal weather	There is a risk of an increasing impact on operations from increasingly frequent abnormal weather events resulting from climate change, such as high tides, heavy rain, floods, and typhoons.	Conducting drills to increase understanding and improve effectiveness of BCM/BCPs
Transition risks (1.5℃ warming scenario)	Introduction of carbon pricing	There is a risk of an increasing financial burden from the introduction of carbon taxes and other carbon pricing.Assuming CO₂ emissions on the same level as 2024 (approx. 375 kt) and a carbon tax of 130 USD/1t-CO₂ in 2030 (1 USD = 150 yen), the financial burden could increase by 7.13 bn yen per year.	Promoting energy-saving and the introduction of new technologies to achieve carbon neutrality by 2050 Achieving the target of reducing greenhouse gas emissions by 30% by 2030 (compared to 2017) Using CO₂ as raw material for products Introduction of internal carbon pricing (10,000 yen/t-CO₂) Introduction of renewable energy electricity
	Problems procuring certain raw materials	There is a risk to the procurement of raw materials from oil refineries as oil refiners reduce the number of refineries in response to decarbonization trends.	Promoting purchasing from multiple suppliers
	Impact of switching to raw materials obtained from biomass	There is a risk of quality problems and increased procurement costs due to switching from oil-based to biomass-based raw materials.	Maintaining and improving quality assurance
	Delayed response to ESG investment	There is a risk of divestments and falling share prices due to increasing criticism received for using large quantities of fossil fuels.	Promoting energy-saving and the introduction of new technologies to achieve carbon neutrality by 2050 Achieving the target of reducing greenhouse gas emissions by 30% by 2030 (compared to 2017)
Opportunities (4℃ warming scenario)	Increased need for adaptive products	There is a possibility that the increasingly negative effects of climate change will cause rising demand for products that can mitigate those effects (such as heat stroke) and help people adapt to climate change.	Supplying more refrigeration lubricant raw materials, which are indispensable for heat stroke-preventing air conditioners
Opportunities (1.5℃ warming scenario)	Increased need for decarbonizing products	As people become increasingly environmentally conscious, there is a possibility of rising demand for products with a smaller carbon footprint.	As the transition toward environmentally friendly air conditioners accelerates across the world, expanding the provision of refrigeration lubricant raw materials compatible with the refrigerants used in such air conditioners Using CO₂ as raw material for products