ITOCHU Corporation

Global economic trends, conflicts and military tensions in the Middle East, the rise of protectionist trade policies, industrial structural changes driven by rapid technological innovation, and intensifying competition with emerging growth economies may have a material impact on existing business models and competitiveness. The Machinery-related, resources, and energy fields are susceptible to global economic conditions, while lifestyle consumption fields such as Textile and Food are susceptible to domestic economic conditions; however, with the advance of globalization, the influence of the global economy on lifestyle consumption fields is also expanding. Changes in the business environment, such as deregulation and entry by companies from other industries, may also have a material impact on future financial condition and business performance.

Import and export transactions are one of the Group's core businesses, exposing it to foreign exchange fluctuation risk on foreign currency-denominated transactions. While hedges are implemented using derivatives such as forward foreign exchange contracts, complete avoidance of this risk is not possible. With respect to investments in overseas businesses, there is a risk of increases or decreases in shareholders' equity through foreign currency translation adjustments due to exchange rate fluctuations, as well as a risk of increases or decreases in the yen-translated amount of period profit or loss. These risks may have a material impact on future financial condition and business performance.

The Group holds long and short positions in various commodities such as metal resources, energy, and chemicals, exposing it to price fluctuation risk. While hedges are implemented using commodity futures and forward contracts, complete avoidance of this risk is not possible. Similar price fluctuation risk also exists for the products of metal resource and energy development businesses and other manufacturing businesses, and risk is monitored using Value at Risk (VaR). Depending on commodity price trends, this risk may have a material impact on future financial condition and business performance.

In investment activities across various businesses, there is a risk that expected returns may not be achieved due to changes in the business environment or stagnation in the performance of investees or partners, a risk that the recoverability of investments may decline, and a risk that additional capital contributions may become necessary. There is also a risk that, due to differences in management policy with partners or low liquidity of investments, the Group may not be able to withdraw from or restructure businesses at the timing or in the manner it desires. While investment criteria are established for decision-making on new investments, and asset replacement is promoted through monitoring of existing investments and the application of exit selection criteria, complete avoidance of this risk is not possible.

Fixed assets such as real estate, resource development-related assets, aircraft and vessels, goodwill, and intangible assets are exposed to impairment risk. New impairment losses may become necessary in the event of declining profitability of stores and warehouses, sluggish market conditions due to fluctuations in resource prices such as coal, iron ore, and crude oil, or changes in R&D policy. Although the Group strives for appropriate management through deliberation on the appropriateness of acquisition prices at the time of investment decisions and regular monitoring after investment, this risk may have a material impact on future financial condition and business performance.

In business activities across various countries and regions overseas, the Group is exposed to country risk arising from political, economic, and social conditions, including unexpected events and changes in laws and regulations such as nationalization or suspension of remittances. If such risks materialize, as in the case of the Middle East or the Russia-Ukraine situation, losses may arise from delays or inability to collect receivables or conduct business operations; however, as of the end of the current consolidated fiscal year, assets in each of these regions account for less than 1% of total assets. While total exposure is managed through the setting of country limits based on internal country ratings, complete avoidance of this risk is not possible.

The Group is required to comply with a wide range of laws and regulations, including the Companies Act, the Financial Instruments and Exchange Act, tax laws, the Foreign Exchange and Foreign Trade Act, the Antimonopoly Act, anti-bribery laws, and various overseas laws and regulations, and is strengthening its compliance framework to ensure thorough legal compliance. However, it may not be possible to completely avoid compliance risk, including personal misconduct by officers or employees, or the risk of damage to social credibility. Nor can the possibility be ruled out of unexpected enactment, amendment, or abolition of laws by domestic and overseas administrative, judicial, or regulatory authorities, or major changes to various regulations accompanying significant shifts in the social and economic environment.

In response to risks related to climate change and natural capital, the Group has endorsed the recommendations of the TCFD and regularly conducts scenario analysis under 1.5°C to 4°C scenarios, and also conducts location-specific risk analysis using the LEAP approach based on the recommendations of the TNFD. While the Group is promoting energy conservation, the use of renewable energy, and withdrawal from thermal coal interests to achieve its GHG emissions reduction targets, if issues such as environmental pollution arise from business activities, this could lead to delays or suspension of operations, the incurrence of countermeasure costs, and a decline in social reputation. Although a Sustainability Committee has been established to formulate and review policies and conduct company-wide activity reviews, complete avoidance of this risk is not possible.

There exists a risk of leakage of confidential information and personal information, and of information system outages, due to unauthorized external access and intrusion by computer viruses, among other causes. The Group is taking measures such as applying a cybersecurity framework, monitoring compliance status, and strengthening its organizational structure through ITOCHU Cyber & Intelligence Inc. In the utilization of generative AI, which has been rapidly evolving in recent years, ensuring safety and accuracy and giving ethical consideration are also required, and guidelines that take these characteristics into account have been established. However, even with such measures in place, depending on the scale of damage, this risk may have a material impact on future financial condition and business performance.

In business activities across diverse countries and regions, the contribution of personnel responsible for business planning and execution and for organizational direction and supervision is important, and the Group achieves appropriate personnel placement through continuous capability development and the creation of a rewarding work environment. However, the environment for securing human resources may change significantly due to further liquidity in the labor market and a concentration of demand for highly skilled personnel in specific fields corresponding to changes in business models. Depending on the state of personnel shortages, there is a risk that the Group may not be able to sufficiently respond to opportunities for new business creation or business expansion, which may have a material impact on future financial condition and business performance.