Disclosures based on the TCFD recommendations

The Chugai Group recognizes that climate change is an urgent global issue, and has set the “Sustainability and the Environment” as one of the key areas under the “Growth Platform Transformation” pillar of our newly formulated growth strategy, TOP I 2030. We will contribute to the realization of a sustainable global environment by setting our Mid-Term Environmental Goals 2030 based on the three issues identified as material: climate change and energy countermeasures, promotion of resource circulation and appropriate water management, and protection of biodiversity. In particular, since climate change countermeasures are the most important theme worldwide, we will actively contribute to solving social issues by setting and implementing a long-term goal of zero Scope 1 and 2 energy-related emissions by 2050.

Click here for more information on the Mid-Term Environmental Goals 2030.

In addition, the Chugai Group regularly classifies and verifies the material issues based on the business environment and external expectations, demands, and strategic progress, and at the same time, conducts ongoing scenario analyses to address climate change-related risks and opportunities with a vision toward 2050, while also enhancing information disclosure.

In 2024, building on the results of the scenario analysis for physical risks conducted in 2021, the analysis was conducted again with new information included, and qualitative and quantitative assessments of transition risks were also added. We will consider countermeasures to address the issues that we have once again recognized, and accordingly, review our targets and indicators in the future.

The Chugai Group will disclose financial information related to climate change in line with the framework of “Governance,” “Strategy,” “Risk Management,” and “Indicators and Targets” advocated in the TCFD recommendations.

The analysis has been conducted with the latest information available as of April 2024.

The board’s oversight for Climate-Related Risks and Opportunities

The Chugai Group has introduced an executive officer system to speed up business execution and clarify executive responsibility, separating the decision-making function regarding the most important management matters from the business execution function. The Board of Directors is the body responsible for the former. Executive officers who are entrusted the authority of business execution from the Board of Directors are responsible for the latter, and decisions on business execution other than the most important management matters to be decided by the Board of Directors are made at the Executive Committee and others.

The Board of Directors is responsible for the decision-making function regarding the most important management issues, including risks and opportunities related to climate change, and supervises business execution by receiving regular quarterly reports on business execution status and reports on important decisions made at the Executive Committee.

The Executive Committee makes important decisions regarding company-wide management strategies and business execution related to sustainability, including climate change, and all Executive Committee members are involved in and committed to executive responsibilities. The Sustainability Committee (held four times a year) and the Risk Management Committee (held four times a year), both of which are advisory bodies to the Executive Committee, are responsible for formulating strategies on more specific and specialized matters and for overseeing the promotion of these strategies.

Issues related to environmental conservation activities are thoroughly discussed by the Sustainability Committee, and important issues are then brought up to the Executive Committee for deliberation and reported to the Board of Directors. For environmental risk management, the Risk Management Committee identifies risks affecting the entire company, including environmental conservation activities, and formulates countermeasures, which are then submitted to the Executive Committee for deliberation and reported to the Board of Directors.

The organization’s Processes for Identifying and Assessing Climate-Related Risks

The Chugai Group has created global and domestic risk maps that include climate change risks and uses them as a tool to quantitatively manage risks. The Risk Management Committee, which is one of the advisory committees of the Executive Committee, identifies the risks that have a particularly significant impact on management, among the risks identified in the risk map, as company-wide risks, and selects the corresponding departments to deal with these risks. An inherent risk score is calculated for each identified risk, based on the degree of impact (financial impact) and the probability of occurrence (frequency of occurrence). Each means to mitigate or avoid the inherent risk, such as measures that have already been taken against the inherent risk, the existence of systems for taking measures, the views of experts, etc., will be given a score, which is subtracted from the inherent risk score. The priority will then be determined according to the residual risk score. High residual risk that has a score of 3.67 or higher is judged to have a significant strategic impact, and countermeasures against which are considered with priority. The residual risk is classified into three levels: High (3.67 to 5.00), Medium (2.34 to 3.66), and Low (1.00 to 2.33), and is addressed in the order of High, Medium, and Low.

The Processes for Managing Climate-Related Risks

Departments working on risk countermeasures selected by the Risk Management Committee report their progress to the Risk Management Committee every three months. The Risk Management Committee monitors the status of risk management in each department from a company-wide perspective, evaluates the content of the report, and reports it to the Executive Committee as necessary.

Enterprise Risk Management (ERM)

Among the 11 major risk categories that comprise the risk map, climate-related risks are identified primarily by the following categories: 1. Natural Disasters, 5. Value Chains, and 8. Environment and Safety. The processes of identifying, assessing, and managing these risks are integrated into the organization’s overall risk management, and risk management is performed based on a comprehensive perspective.

In addition, we have introduced and started operating a new ERM framework from 2021. We aim to create a healthy risk culture by formulating the Risk Appetite Statement to clarify our policy on risk preferences.

Chugai Pharmaceutical Risk Appetite Statement

We divide risks to be addressed on a company-wide basis into “strategic risk” and “operational risk.” On this basis, we will identify, classify, and visualize these risks in a centralized fashion for company-wide discussions to promote efficient risk management. “Strategic risk” refers to risk inherent in strategic decision-making and risk that hinders strategy execution. Accordingly, we have identified risks associated with “Technology and Innovation,” “Healthcare System and Regulation,” “Markets and Customers,” and “Business Foundation” as critical risks, and are proactively taking measures to address them in the execution of the key management issues (materiality) and the growth strategy “TOP I 2030.” In particular, climate change risk is recognized as an issue directly linked to “Business Foundation.” “Operational risk” refers to risk that hinders the smooth operation of business activities, and we strive to manage such risks appropriately on a daily basis.

Definition of the Degree of Financial Impact

The definition of financial impact for the purpose of calculating the inherent risk score for the identified risks is as follows.

Low: Less than ¥100 million
Medium: ¥100 million or more, but less than ¥5 billion
High: ¥5 billion or more

Assumptions for Scenario Analysis

The Chugai Group conducted a company-wide scenario analysis to determine what business issues could emerge in the highly uncertain future as a result of the transition to a decarbonized society, under two scenarios: a scenario in which decarbonization efforts are in progress (1.5℃) and a scenario in which society proceeds as is without any mitigation measures (4℃).

The analysis targets the Chugai Group and takes into account the entire supply chain, including raw material procurement. We also identify, analyze, and assess climate-related risks and opportunities over short-term (1-3 years), medium-term (3-5 years), and long-term (5-10+ years) horizons.

Climate-Related Risks and Opportunities

For physical risks, our main products were analyzed in this study.

[Legends] ▼/▲: Low; ▼▼/▲▲: ¥100 million or more, but less than ¥5 billion; ▼▼▼/▲▲▲: ¥5 billion or more

Business Impact Assessment Based on Scenario Analysis

We conducted a business impact assessment of the risks and opportunities for the following items that were classified as High under the definition of the degree of financial impact: (4) Sales decrease due to suspension of operations at the company’s production sites following an increase in natural disasters such as heavy rainfall and large typhoons; (5) Sales decrease due to disruption in supplier procurement following an increase in heavy rainfall, typhoons, or floods; (8) Increased demand for new drugs to combat the spread of infectious diseases caused by dengue fever and permafrost thawing.

(4) Flood Damage Survey Results for Our Laboratories and Production Sites

We studied the magnitude of flood risk using the “multi-layered hazard map” which is offered by the Ministry of Land, Infrastructure, Transport and Tourism. The results showed that the risk of flooding was small at all sites except for the Ukima Site. Even at sites where damage from flooding is expected, we have not included these sites in our impact estimation because we have determined that there is no risk considering that the damage can be minimized within the scope of the measures currently in place. At the Chugai Life Science Park Yokohama which is our research laboratory located in Yokohama city, although the estimated inundation height was 0.5-3 m in the 1.5℃ scenario and 3-5 m in the 4℃ scenario, the duration of inundation was not estimated and the risk is considered small.

The Ukima Site, which is the production site for our main products B and D, is located near the Arakawa River, a Class A river, and we have put in place countermeasures for critical facilities based on the assumption of an inundation height of 5 m. However, due to the rapid increase in climate change risks in recent years, we determined that a reevaluation of risks was necessary, so we conducted another risk analysis and evaluated the financial impact based on the results of that analysis. The value of sales decrease due to flood damage was examined, and it was found that, under the 1.5℃ scenario, the current number of days in inventory for each product and the response based on the business continuity plan (BCP) would be sufficient to cope with the situation. However, under the assumption of a megaflood that occurs once in 1,000 years under the 4℃ scenario, the estimated inundation height due to flooding was 3.34 m in the 1.5℃ scenario and 6.68 m in the 4℃ scenario. In such a case, the duration of inundation is estimated to be two to four weeks. The calculation logic in this quantitative evaluation is explained below. We will simulate the detailed impact in the future and consider improvement measures to minimize it.

Calculation Logic

Using the “multi-layered hazard map”, the estimated number of days of damage that cannot be covered by the number of days in inventory was calculated for each product. This number was then multiplied by sales per day to estimate the value of sales decrease for evaluation.

(5) Damage to suppliers and outsourced manufacturers due to floods

Our products are procured, manufactured, and shipped not only from our own factories, but also from suppliers and outsourced manufacturers located in various countries and territories.

With respect to domestic and overseas suppliers and outsourced manufacturers of our main products, we verified the overall water risk using the Water Risk Filter (WRF) for overseas sources and the “WRF” and “multi-layered hazard map” for domestic sources. For Products A and D, the estimated inundation heights are 3.34 m in the 1.5℃ scenario and 6.68 m in the 4℃ scenario; for Product B, the estimated inundation heights are 5 m in the 1.5℃ scenario and 10 m in the 4℃ scenario; for Product C, the estimated inundation heights are 3 m in the 1.5℃ scenario and 5 m in the 4℃ scenario. The flood risk for the domestic supplier of Product B was identified to be the highest, with the possibility of an estimated inundation height of up to 10.0 m and an inundation duration of up to two weeks in the case of a once-in-1000-year flood event. The calculation logic in this quantitative evaluation is explained below. We will simulate the detailed impact in the future and consider improvement measures to minimize it.

Parameters Used for Quantitative Evaluation

Calculation Logic

1. Using the WRF and “multi-layered hazard map,” suppliers/outsourced manufacturers with high flood risk were identified for each product.
2. The estimated number of days of damage that cannot be covered by the number of days in inventory was calculated for each product.
3. This number was then multiplied by sales per day to estimate the value of sales decrease for evaluation.

(8) Increased demand for new drugs to combat climate-related diseases

Global warming is increasing the risks of animal-borne infectious diseases, such as the Asian tiger mosquito, and of unknown viral infections due to permafrost thawing. We conducted a scenario analysis taking into consideration the growing demand for antiviral drugs developed by our Company for each of these infectious diseases. The results revealed that significant opportunities exist in the 4℃ scenario in all analyses.

A study of future changes in permafrost area shows that the rate of thawing as of 2050 is predicted to reach about 7% (compared to 2022). This suggests the possibility of an increased risk of viral infection due to the emergence of unknown viruses caused by permafrost thawing, and possibly, a subsequent increase in sales as a result. (See Center for Global Environmental Research News, December 2021 issue)

An analysis was also conducted for mosquito-borne infectious diseases, in terms of the size of population at risk of infection and the growth rate. The analysis based on the 4℃ scenario revealed that Asia accounts for 60% and Europe accounts for 10% of the global population at risk of mosquito-borne infection. Particularly in Europe, the growth rate of the population at risk of infection is predicted to increase significantly from 56.7% to 159.8%, from 2030 to 2050. As a result, it was expected that a lucrative market, including latent markets, could be secured as of 2050. (See data from “Global expansion and redistribution of Aedes-borne virus transmission risk with climate change”; growth rate is compared to 2019 data)

Mid-term Environmental Goals 2030: Climate Change Countermeasures

As metrics used by an organization to assess climate-related risks and opportunities in line with its strategy and risk management process, Chugai has set the following targets.

Additionally, see “Climate Change Countermeasures” for performance against the targets.

Future Direction

The results of this quantitative scenario analysis allowed us to understand the financial impacts of the risks and opportunities for our Company. We recognize that these are important management issues and should be viewed from a strategic perspective. As the next step, we will continue to add or revise our targets and indicators for 2050.