OBAYASHI CORPORATION

Amendments, abolition, new enactment, or changes in application standards of legal regulations such as the Construction Business Act, the Building Standards Act, the Antimonopoly Act, and the Industrial Safety and Health Act may cause response costs to affect business performance. In addition, if legal violations occur, criminal or administrative sanctions may be imposed, leading to restrictions on business activities and loss of credibility. As countermeasures, each business division and the Legal Department proactively grasp trends in legal regulations, disseminate information through internal education and training, and appropriately reflect such costs in estimated costs.

If the construction market contracts significantly due to domestic and overseas economic downturns, etc., a decrease in order volume may affect business performance. As the Group is highly dependent on the Construction Business, its main business, it faces the risk that changes in market conditions directly affect earnings. As countermeasures, the Group is working on formulating personnel plans that anticipate mid- to long-term market trends, strengthening sales and procurement capabilities, improving productivity through the development of next-generation production systems, and diversifying revenue sources by expanding business domains.

If soaring labor unit costs and a shortage of skilled workers, supply chain disruptions due to geopolitical situations and economic sanctions, or sharp price increases and procurement difficulties for construction materials due to price inflation and exchange rate fluctuations occur, this may result in a decline in profit margins due to rising construction costs and the risk of damages claims due to construction delays. As countermeasures, the Group maintains order levels appropriate to construction capacity, hedges risk through forward exchange contracts, builds a stable supply chain through the "Rinyu-kai" (an association of cooperating companies), thoroughly implements early purchasing and accurate cost tracking, and conducts appropriate price pass-through negotiations with customers.

If a serious quality defect occurs in design or construction, or a major accident involving injury or damage to structures occurs, substantial compensation costs may arise, affecting business performance and corporate reputation. Given the nature of the Construction Business, accidents on large-scale projects can result in enormous losses. As countermeasures, the Group has established a rigorous quality management system based on ISO9001, built a company-wide safety management framework through the Safety Division, and hedges risk through construction insurance and liability insurance coverage.

If the market value of real estate for sale, leased real estate, investment securities, etc. declines significantly, or if goodwill value declines significantly due to failure to achieve expected results from a corporate acquisition, valuation losses or impairment losses may be recorded, affecting business performance and the financial base. As countermeasures, the Group formulates mid- to long-term investment plans that take into account balance with its financial base, tightens prior screening of individual investments by the Investment Committee, and conducts regular monitoring of operational and management conditions after investment.

As the Group conducts business mainly in Asia and the United States, changes in the business environment in the countries where it operates—such as political instability, economic fluctuations, sharp exchange rate movements, and changes in legal systems—may affect business performance. As countermeasures, the Group develops business in relatively politically stable countries and regions, promptly and accurately grasps conditions through its Asia Branch and North America Branch established in Singapore and the United States, and implements natural hedging of exchange rate risk by receiving contract proceeds and paying subcontractor fees in local currencies.

If business operations are suspended due to external cyberattacks (such as ransomware), personal information or confidential information is leaked, or intellectual property rights are infringed due to improper use of generative AI, this may lead to a loss of social credibility and the occurrence of damages, affecting business performance and corporate reputation. As countermeasures, the Group has established a dedicated team for early detection and rapid response, renewed its security infrastructure based on the zero-trust concept, and established the "Personal Information Protection Regulations," the "Information Security Policy," and the "Obayashi Group Intellectual Property Management Policy," while continuously educating and raising awareness among employees.

Strengthened legal regulations, such as the introduction of carbon taxes accompanying the transition to a decarbonized society, may affect business performance, and physical risks such as rising summer temperatures and the intensification of natural disasters may also affect business activities. As countermeasures, the Group has set "decarbonization" as its target for 2040-2050 in the "Obayashi Sustainability Vision 2050" and has designated CO2 emissions reduction as a key ESG issue. In July 2020, the Group announced its support for the TCFD recommendations and is promoting countermeasures based on scenario analysis.

Amid the need to comply with labor-related laws and regulations, including the cap on overtime work, deterioration of the workplace environment caused by long working hours may seriously affect employees' health and safety, and may also affect productivity, engagement, and the recruitment and retention of personnel. As countermeasures, the Group thoroughly manages working hours appropriately and promotes leveling of workload, improves operational efficiency through the use of ICT tools, builds appropriate staffing and construction systems, engages in order-taking activities premised on appropriate construction periods, and promotes flexible working styles and the taking of leave.

If human rights issues occur within the Group or its supply chain, this may affect corporate reputation and business performance due to a loss of social credibility. In the construction industry, which has a global supply chain, there is a latent risk of human rights violations across a wide range of business partners, including subcontractors. As countermeasures, the Group has established the "Obayashi Group Human Rights Policy" and conducts human rights due diligence based on international human rights norms, and promotes CSR procurement throughout the supply chain based on the "Obayashi Group CSR Procurement Policy" and the "Obayashi Group CSR Procurement Guidelines."