TCFD made the following recommendations on disclosure concerning climate change risks and opportunities to companies, etc. in its final report.

Scenario analysis is a method for predicting how the business environment is changed by the impact of global warming, climate change and long-term policy trends concerning climate change, and considering what impact such changes have on the company’s business and management. ^*3

• *3 Ministry of Environment Strategy (Scenario Analysis)
  https://www.env.go.jp/policy/j-hiroba/kigyo/2-08_kaisetusyo_senryaku%28shinariobunseki%29_190411.pdf

The Chugai Group performed scenario analysis in STEP 1 and STEP 2 as shown below. Furthermore, the scenario of future climate change performs analysis using the two RCP scenarios devised by the IPCC (Intergovernmental Panel on Climate Change): RCP 8.5 (4°C scenario) and RCP 2.6 (2℃ scenario).

Overview of RCP scenarios used^*4

• *4 IPCC Fifth Assessment Report

[STEP 1] Qualitative evaluation of risks and opportunities

• Investigations of various public information and expert hearings
• Identification of physical risks, transition risks and opportunities
• Consideration and organization of risks
  (Based on the value chain of pharma industry in general (research, development, procurement, manufacturing. Shipping and sales), risks and opportunities are surveyed in each of the value chain.)

[STEP 2] Risk scenario analysis

• Establishment of scope of risk scenario analysis
• Analysis of current and post climate change risk of flood
• Estimation of financial impact

Overview of qualitative evaluation of climate change risks and opportunities

• *5 Pharmaceutical: Risks more relevant to pharma sector. General: Risks common among industries including manufacturing businesses in general.

1. Board supervisory system for climate change risks and opportunities

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 The Board of Directors supervises business execution by receiving quarterly reports on business execution status and reports on important decisions made by the Executive Committee. Important decisions regarding company-wide business strategy and business execution are made at the Executive Committee and other meetings. One of the advisory committees for the Executive Committee is the EHS Promotion Committee (held twice a year) and the Risk Management Committee (held four times a year). After the EHS Promotion Committee has conducted sufficient deliberation on environmental health and safety (EHS), particularly important issues are submitted to the Management Committee. The Risk Management Committee plays a central role in the risk management process, that identifies risks affecting the entire company, develops countermeasures, and submits them to the Board of Directors.

2. The role of Management in assessing and managing climate change-related risks and opportunities

Vice Chairman of the Board is appointed as Chief Sustainability Officer (CSO). The CSO is a member of the Board of Directors and the Executive Committee, and chairs the EHS Promotion Committee and the Risk Management Committee. The CSO receives reports on decisions made by the Executive Committee regarding EHS policies, risks and opportunities, business strategies, targets, action plans, and progress, and also supervises EHS promotion operations and risk management systems.

3. Short-, medium- and long-term climate-related risks and opportunities identified by the organization

Risk: No significant climate-related risks are recognized, such as the high-risk sectors defined by the TCFD, which would require significant business transformation or investment in the long run. However, as common climate-related risks in the manufacturing industry, continuous risk analysis of climate disasters, water shortage risks, carbon tax on the value chain, etc. related to manufacturing bases and procured products is necessary, and countermeasures will be considered.

Opportunity: Although business opportunities such as increase of specific diseases due to temperature rises are possible, items with great potential such as renewable energy and EV are not recognized at this time. However, it is expected that the number of drug-resistant bacteria that are ineffective against current antibiotics will increase due to the rise of average temperature, precipitation, and floods, therefore there are opportunities for new research and development that will increase.

4. Impact of climate-related risks and opportunities on business, strategy, and financial planning for organization

There is also a study that the GHG emission intensity of the pharmaceutical sector (Scope 1 & 2) is about 55% higher than that of the automobile sector. Hence, an attention should be paid to the regulatory trends with the possibility that new regulations will be strengthened in the pharmaceutical industry in the future. On the other hand, build a manufacturing process that reduces environmental impact, and strengthening climate resilience throughout the supply chain have great potential as the opportunities that apply to the general manufacturing industry.

5. Resilience of the organization strategy, taking into account considerations under various climate-related scenarios, including WB 2℃ scenarios

A scenario analysis was conducted based on 2℃ and 4℃ scenarios as climate change scenarios for domestic main product manufacturing and distribution bases. As a result, compared with the current assumption (3.96 billion yen/year), the amount of sales decrease under flood risk increased by 37% in the 2℃ scenario (5.41 billion yen/year) and in the 4℃ scenario, it is estimated to increase by about 60% (6.33 billion yen/year).

6. Process for identifying and assessing climate-related risks

The Chugai Group creates global and national risk maps that include climate change risk and uses them as a risk management tool. The Risk Management Committee, which is one of the advisory committees of the Management Council, identifies the risks that have a significant impact on management among the risks identified in the risk map as company-wide risks and selects the corresponding departments. For risk, an inherent risk score is calculated from the degree of impact (financial impact) and the probability of occurrence (frequency of occurrence). Measures that have already been taken, the existence of systems that can take measures, the views of experts, etc. will be scored. The priority will be determined by the residual risk subtracted from the inherent risk. Residual risk that has 3.67 or higher is judged to have a significant strategic impact, and countermeasures 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 treated in the order of high, medium, and low.

7. The process of managing climate-related risks

Departments working on risk measures report to the Risk Management Committee every three months. The Risk Management Committee evaluates the content of the report and reports it to the Management Committee.

8. How the processes for identifying, assessing and managing climate-related risks are integrated into an overall risk management of organization

Climate-related risks are included in 11 major risk categories when creating risk maps. Risk categories are 1. Natural disasters, 2. Political, economic, social, 3. Business structure, 4. Shareholders, investors, 5. Value chains, 6. Management, 7. Humans, 8. Environment and safety, 9. Other Compliance, 10. GxP; and 11. Other. Climate-related risks are mainly identified by the Risk categories of 1, 5 and 8. The process of identifying, assessing and managing climate-related risks is integrated into the overall risk management of the organization.

9. Indicators used by an organization to assess climate-related risks and opportunities in the context of its strategy and risk management process.

The Chugai Group is promoting environmental conservation activities from a medium- to long-term perspective, and in 2020 set the “Mid-Term Environmental Goals 2030” that have a longer term perspective and are more comprehensive based on analysis of the results of the previous mid-term environmental goals and change in society’s expectations and requirements. The “Mid-Term Environmental Goals 2030” establish ten items enabling the inclusion of responses to materiality from a medium- to long-term perspective including water risk and chemical substance management. Milestones have been set for 2025 ahead of 2030 for many of the items. Furthermore, the long-term goal with 2050 as the final year is to aim for zero CO₂ emissions as a measure to address climate change requiring long-term and large-scale action.

Furthermore, as we work toward achieving our mid-term environmental goals, we have implemented an ongoing program of environmental and safety activities that involve setting yearly action goals or plans for each item based on the mid-term plan, evaluating the results, and reflecting those results in the following year’s plan.

See “Goals and Initiatives” for Details of Mid-Term Environmental Goals 2030 data.

10. Greenhouse gas emissions and related risks (Scope 1, 2, 3)

Scope 1, Scope 2 and Scope 3 emissions were 42,771 tons, 59,935 tons and 1,052,337 tons. Scope 1 emissions calculate direct emissions by the Company and include CO₂ emissions associated with the use of gasoline, light oil, heavy oil, city gas, and LPG, and emissions of halogenated hydrocarbons and carbon dioxide gas, etc. Scope 3 emissions calculate all relevant categories of greenhouse gas emissions.

11. Indicators used by the organization to manage climate-related risks and opportunities and performance against targets

There was no direct target for greenhouse gases as a medium-term environmental goal until 2020, but since energy consumption and greenhouse gas emissions are correlated, we have promoted reduction of greenhouse gases through reduction of energy consumption. By 2020, the energy consumption per employee was reduced by only 17% compared to 2010 against a target of a reduction of 20% compared to 2010, but CO₂ emissions per employee were reduced by 20%. Energy consumption per employee will be reduced by 20% in terms of non-renewable energy consumption through the use of Green Electricity Certificates. The new medium-term environmental goals are a 5% reduction compared to 2019 in 2025 and a 15% reduction in 2030.

In addition, the average fuel consumption of MR vehicles was 27km/L in 2020 against the target of 16 km/L or higher. The new medium-term environmental goals for total fuel consumption of business vehicles are a 35% reduction compared to 2019 in 2025 and a 75% reduction in 2030.

As a result of scenario analysis, no significant climate-related risks were recognized in qualitative evaluation, such as the high-risk sectors defined by the TCFD, which would require significant business transformation or investment in the long run. However, as common climate-related risks in the manufacturing industry, it was found that continuous risk analysis of climate disasters, water shortage risks, carbon tax on the value chain, etc. related to manufacturing bases and procured products is essential. Furthermore, there is also research showing that the GHG emission intensity of the pharmaceutical sector (Scope 1 & 2) is not necessarily low, and we believe that it is necessary to assume that regulation of the industry as a whole will be strengthened.

In terms of quantitative evaluation, climate change analysis was performed based on 2℃ and 4℃ scenarios for domestic main product manufacturing and distribution bases. As a result, compared with the current assumption (3.96 billion yen/year), the amount of sales decrease under flood risk increased by 37% in the 2℃ scenario (5.41 billion yen/year) and in the 4℃ scenario, it is estimated to increase by about 60% (6.33 billion yen/year). Furthermore, in the case where Distribution Center (East Japan) ^*8, which deals with all products, is suspended for more than 1 month, a damage of 72.3 billion JPY is expected. Such probability is estimated at 0.01% at present, but it increases to 0.04% in B1 scenario and 0.06% in A2 scenario.
This analysis was conducted according to the following procedure.

• Calculation of the probability distribution of the inundation height of each site based on plan scale and inundation information according to the latitude and longitude of each site
• Calculation of the expected value of sales decrease as “current risk of flood damage” based on the number of days of business stoppage and frequency of occurrence of each inundation height
• Revision of distribution taking into account information on large-scale rainfall fluctuations caused by climate change
• Estimation of expected value of sales decrease in each scenario as “flood risk after climate change”

• *8 Relocated to new distribution center with measures against flooding based on the disaster map in January 2021.

The risk items used in TCFD scenario analysis are consistent with the items subject to BCP measures, resulting in a decrease in the anticipated impact in terms of the financial impact in climate change risk analysis due to these initiatives. Specifically, in addition to taking steps to address an inundation height of 5m when constructing the third facility at the Ukima site (UK3) as a means of addressing earthquakes and flooding, measures to address flooding have been implemented based on the disaster map at the new distribution center relocated in January 2021.
We will continue to address climate change risks and opportunities through the results of the analysis and engage in further improvement of disclosure.