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Addressing Climate Change

Addressing Climate Change

Promoting initiatives for carbon neutrality

We carry out initiatives to achieve the goals for CO2 reduction we set with the CO2 emissions from Scope 1 + 2 of FY2020 as a point of reference: a short-term target of 10% reduction by the end of FY2024, and a mid-term target of 30% reduction by the end of FY2030.

Information Disclosure Based on the Task Force on Climate-related Financial Disclosure (TCFD) recommendations

The Alfresa Group views climate change as a major issue that impacts sustainability management.

Based on the declarations^*1 of the Task Force on Climate-related Financial Disclosures (TCFD^*2), Alfresa advances initiatives within the following framework.

*1 Alfresa group supports the TCFD recommendations.

*2 The TCFD was established in 2015 by the Financial Stability Board, an international organization. The TCFD proposes methods to evaluate companies' business risks and opportunities due to climate change and encourages them to disclose information about the financial impact of such risks and opportunities.

Corporate governance (climate governance system)

The Alfresa Group is addressing climate change as one of its aims in the Alfresa Group's Environmental Policy.

The Group set up the TCFD Subcommittee under the CSR Promotion Committee in May 2022 for the purpose of improving information disclosure related to climate change.

The TCFD Subcommittee works closely with the Compliance and Risk Management Committee, which oversees risk management for the entire Group, to identify risks and opportunities related to climate change, evaluate their importance, and advance and monitor countermeasures.

The content of and the progress made by these measures are reported to the CSR Promotion Committee twice a year, with reports subsequently submitted to the Board of Directors.

Our stance on addressing climate change is reflected in Group Management Policies in the Mid-term Management Plan, and we advance initiatives to address climate change through business activities.

* The CSR Promotion Committee and the Compliance and Risk Management Committee are advisory bodies to the Board of Directors.

Roles and Systems

1Role of TCFD Subcommittee

Identify risks and opportunities, analyze scenarios
Evaluate importance
Advance specific measures (work with CSR Promotion Committee and Compliance and Risk Management Committee)
Monitor progress (work with CSR Promotion Committee and Compliance and Risk Management Committee)
Information disclosure

2Climate change risks and promotion and monitoring system

CSR Promotion Committee (TCFD Subcommittee)
Mainly in charge of transitional risks and opportunities

Compliance and Risk Management Committee
Mainly in charge of physical risks

Strategy

In fiscal 2021, the year ended March 31, 2022, Alfresa analyzed scenarios to evaluate the impact of climate change on Groupwide operations. Management conducted interviews in each business segment and, based on the following two possible scenarios, identified risks and opportunities in each business, thereafter classifying them in TCFD categories along short-term, medium-term, and long-term time frames. The magnitude of their financial impact was qualitatively evaluated in five stages, and countermeasures were examined based on the degree of importance.

Alfresa views climate change as a medium- to long-term management issue and thus reflects it in its business strategies. Of the identified risks and opportunities, the following items are considered highly important at the Companywide level.

Possible scenarios	1.5℃ scenario This scenario assumes the average global rise in temperature can be limited to 1.5℃ compared with pre-industrial levels, through the rapid introduction of government policies and regulations, as well as market changes, with an eye on becoming carbon neutral by 2050. Maximum impact from transition to carbon neutrality * Referenced third-party scenarios: International Energy Agency's (IEA) Net Zero by 2050 Scenario / SSP1-2.6 Scenario, RCP 2.6 Scenario
4℃ scenario This scenario assumes the average global rise in temperature can be limited to 4℃ compared with pre-industrial levels, without much progress in government policy and regulation introduction and social efforts to reduce CO2 emissions. The impact from climate change, such as natural disasters, will be much larger. Maximum impact from climate change without transition to carbon neutrality * Referenced third-party scenarios: SSP5-8.5 Scenario, RCP 8.5 Scenario

Possible scenarios

1.5℃ scenario

This scenario assumes the average global rise in temperature can be limited to 1.5℃ compared with pre-industrial levels, through the rapid introduction of government policies and regulations, as well as market changes, with an eye on becoming carbon neutral by 2050.

Maximum impact from transition to carbon neutrality

* Referenced third-party scenarios: International Energy Agency's (IEA) Net Zero by 2050 Scenario / SSP1-2.6 Scenario, RCP 2.6 Scenario

4℃ scenario

This scenario assumes the average global rise in temperature can be limited to 4℃ compared with pre-industrial levels, without much progress in government policy and regulation introduction and social efforts to reduce CO2 emissions. The impact from climate change, such as natural disasters, will be much larger.

Maximum impact from climate change without transition to carbon neutrality

* Referenced third-party scenarios: SSP5-8.5 Scenario, RCP 8.5 Scenario

	Timeframe	Reason for adoption
Short term	Until 2025	End of 2022 -24 Mid-term Management Plan
Medium term	Until 2030 or so	Outlook for next 10 years or so
Long term	Until 2040 or so	Outlook for next 20 years or so
Very long term	Until 2050 or so	Japanese government's carbon-neutral target timeline

Major risks and opportunities in 1.5℃ scenario

Category	Outline of possible scenarios	Business risks and opportunities		Details of risks and opportunities	Timeframe	Strategic response to risks and opportunities
Government policies and regulations	Need to rapidly reduce CO2 emissions in order to become carbon neutral by 2050 Introduction of carbon pricing system for CO2 emissions for companies and their supply chains 2030: $130/t-CO2 2050: $250/t-CO2	Increase in costs to accelerate reductions in GHG emissions	Risks	More costs to reduce GHG emissions, such as energy conservation and procurement of renewable energy at logistics bases, plants, and pharmacies as well as replacement of boilers at plants to reduce carbon emissions	Short term	Monitor trends and forecasts related to carbon pricing systems and energy conservation regulations Examine plans and targets to reduce emissions while estimating costs of measures to conserve energy, use renewable energy and install equipment, and the emissions reduced as a result of these measures
Government policies and regulations		Rise in costs from introduction of carbon pricing	Risks	Possible increase in operating costs in a carbon pricing system, centered on Alfresa’s own GHG emissions	Short term
Technologies	Increasing importance of improving efficiency in transportation from standpoint of carbon neutrality	Opportunities from efficiency gains in transportation	Opportunities	By increasing transportation efficiency through the development and introduction of navigation apps and delivery forecasting systems, help reduce energy use and CO2 emissions	Short term	Potential increase in opportunities from ongoing efforts to develop more efficient transportation
Markets	Medium-term increase in price of electricity due to changes in power source composition and impact from carbon pricing	Rise in electricity prices	Risks	Increase in cost of electricity for logistics bases, plants, and pharmacies	Medium term	Monitor changes in energy prices and expect an impact from price fluctuations Work to increase efficiency of energy use
Markets	As gasoline demand declines, increase in naphtha prices because naphtha is a main product of oil refining	Increase in naphtha prices	Risks	Increase in costs of petrochemical-based bulk pharmaceuticals and packaging, centered on the Manufacturing Business, as a result of higher naphtha prices	Long term
Reputation	Increasing demand from investors and financial institutions for companies to make investments and provide loans that consider risks of climate change and set science-based targets for recipients of investments and loans Heightening demand from customers for companies to utilize renewable energy and reduce CO2 emissions Growing interest from graduates seeking employment in initiatives to counter climate change	Decline in trust of stakeholders due to delays in addressing climate change	Opportunities Risks	Possibility of aggressive initiatives to counter climate change improving brand name, capital procurement, business dealings, and personnel hiring Possibility of delays in efforts to counter climate change tarnishing brand name and adversely affecting capital procurement, business dealings, and personnel hiring	Short term	Advance aggressive measures to reduce GHG emissions Disclose information based on the TCFD framework

Major risks and opportunities in 4℃ scenario

Category	Outline of possible scenarios	Business risks and opportunities		Details of risks and opportunities	Time frame	Strategic response to risks and opportunities
Markets	Increase in crude oil prices due to stronger demand as a result of little progress toward decarbonization	Increase in crude oil prices	Risks	Increase in energy costs due to higher crude oil prices Increase in costs for petrochemical-based bulk pharmaceuticals and packaging, centered on the manufacturing business	Medium term	Monitor changes in energy prices and anticipate and respond to price fluctuations Work to increase efficiency of energy use
Acute climate change impact	Increase in frequency of flooding in regions including Japan Greater frequency of devastating typhoons in regions including Japan	Impact on bases from wind and water damage	Risks	Possible damage to property, such as facilities and machinery, from strong winds and flooding, which may reduce profits due to business suspensions and make it difficult for employees to get to work	Short term	Evaluate in advance the risk of wind and water damage when moving and building new bases, in addition to promoting business continuity planning (BCP) at logistics bases, pharmacies, and plants Examine evaluations of wind and water damage risk in future climates Evaluate the risk of wind and water damage at each base while referring to hazard maps and examine countermeasures with a priority on high-risk bases
Acute climate change impact		Supply chain disruptions due to wind and water damage	Risks	Increase in risk of supply chain disruptions at procurement and transportation stages due to more frequent damage caused by strong winds and flooding	Short term	Update systems and rules while coordinating with other firms in the supply chain in order to respond to emergency situations causing supply chain disruptions For disasters that can be foreseen to a degree, take preventive steps including stockpiling inventories and delivering products to customers ahead of schedule Examine possibility of decentralizing suppliers, as necessary, and evaluate risk of wind and water damage, especially at critical suppliers of raw materials with no alternatives
Chronic climate change impact	Increase in infectious diseases as a result of people living closer to ecosystems—i.e., climate change causing changes in temperatures and humidity, thereby expanding vectors (mosquitoes, mites, etc.) for infectious diseases to spread—damage from flooding degrading hygienic environments, melting of permafrost, and acceleration of the destruction of forests	Increase in infectious diseases	Opportunities Risks	Growing demand for and significance of treatments and diagnostic reagents for infectious diseases Possibility of the spread of infectious diseases and the restriction of people’s movement leading to a potential decline in footfall at hospitals and pharmacies as well as to a curbing of the marketing activities of the Company’s MR staff	Medium term	Prepare systems to handle disease-related products Reduce risks as much as possible by responding to prevailing conditions, such as online services and door-to-door sales
Chronic climate change impact	Increase in average temperatures	Temperature management and higher air-conditioning costs	Risks	Increase in costs to manage temperatures and air-conditioning at logistics bases, pharmacies, plants, and offices due to rising temperatures Increase in costs to manage temperatures during pharmaceutical storage and transportation Possible costs for replacing equipment at plants that degrades in the heat	Medium term	Costs likely to increase as outdoor temperatures rise, based on past trends in costs

In addition to the aforementioned major Companywide risks and opportunities, Alfresa has identified major risks and opportunities within each business segment. In the medical-related business, one risk is earnings deterioration in the pharmacy business due to heat waves, while stronger demand for online and door-to-door sales due to heat waves represents an opportunity. In the manufacturing business, one risk pertains to the impact on coastal plants from rising sea levels.

Risk management (process)

Gather information Identify and evaluate risks and opportunities Manage initiatives pertaining to risk management Report to the Board of Directors	The TCFD Subcommittee monitors external trends related to climate change and gathers information about risks and opportunities related thereto from Group companies. Using the gathered information, risks and opportunities are identified and sorted into TCFD categories for each of the four business segments, and the degree of impact is ranked in five degrees. The relative importance of other risks is evaluated in conjunction with climate-related risks through the use of evaluation standards for Companywide risk management. Management then comprehensively evaluates risks and opportunities within the scope of the entire business and designates major risks and opportunities for the entire Group. The TCFD Subcommittee is in charge of examining and monitoring countermeasures and provides scenarios to the Compliance and Risk Management Committee. The Compliance and Risk Management Committee builds consensus on how to deal with climate-related physical risks (the risk that climate change will materialize), advances measures, and monitors progress on initiatives to counter these risks. Under the CSR Promotion Committee, the TCFD Subcommittee monitors and builds consensus on how to deal with climate-related transitional risks (risks associated with the transition to a carbon-free society), advances Groupwide initiatives, and monitors progress. The TCFD Subcommittee and the Compliance and Risk Management Committee share information and collaborate, with the TCFD Subcommittee monitoring progress and reporting biannually to the CSR Promotion Committee, which then submits reports to the Board of Directors.

Gather information

Identify and
evaluate risks and opportunities

Manage initiatives
pertaining to
risk management

Report to the Board
of Directors

The TCFD Subcommittee monitors external trends related to climate change and gathers information about risks and opportunities related thereto from Group companies.
Using the gathered information, risks and opportunities are identified and sorted into TCFD categories for each of the four business segments, and the degree of impact is ranked in five degrees.
The relative importance of other risks is evaluated in conjunction with climate-related risks through the use of evaluation standards for Companywide risk management.
Management then comprehensively evaluates risks and opportunities within the scope of the entire business and designates major risks and opportunities for the entire Group.
The TCFD Subcommittee is in charge of examining and monitoring countermeasures and provides scenarios to the Compliance and Risk Management Committee.
The Compliance and Risk Management Committee builds consensus on how to deal with climate-related physical risks (the risk that climate change will materialize), advances measures, and monitors progress on initiatives to counter these risks.
Under the CSR Promotion Committee, the TCFD Subcommittee monitors and builds consensus on how to deal with climate-related transitional risks (risks associated with the transition to a carbon-free society), advances Groupwide initiatives, and monitors progress.
The TCFD Subcommittee and the Compliance and Risk Management Committee share information and collaborate, with the TCFD Subcommittee monitoring progress and reporting biannually to the CSR Promotion Committee, which then submits reports to the Board of Directors.

Indicators and targets

The Alfresa Group has set the target of net-zero CO2 emissions by fiscal 2050, as CO2 emissions are a key indicator related to climate change.

Using fiscal 2020 CO2 emissions (Scope 1 and Scope 2) as a baseline, the Alfresa Group has set targets to reduce emissions by 10% by the end of fiscal 2024 as a short-term objective and by 30% by the end of fiscal 2030 as a medium-term objective.

The CSR Promotion Committee evaluates measures and policies for using renewable energy and switching to environmentally friendly vehicles, evaluates and reports on the activities of each Group company, and reports its findings to the representative director and Board of Directors. Fiscal 2021 CO2 emissions (Scope 1 and Scope 2) amounted to 70,420 t-CO2.

* Please also refer to the Alfresa Group ESG Data for more information about energy use and CO₂ emissions.