HANWA CO., LTD.

The Group handles market-sensitive commodities such as steel products, non-ferrous metals, food products and energy products, and holds distribution inventories, and is therefore exposed to price fluctuation risk arising from changes in supply-demand conditions, foreign exchange trends and the geopolitical environment. The Group measures maximum potential loss using statistical methods, sets position limits and loss limits, and hedges through commodity forward transactions and swap transactions; however, in the event of sudden and drastic market fluctuations, hedging effects may not be sufficiently obtained, and valuation losses under mark-to-market accounting or cash outflows due to additional margin calls may occur.

Because the Group purchases and sells goods globally, it engages in a large volume of foreign-currency-denominated transactions, particularly those centered on the U.S. dollar; a stronger yen adversely affects export transactions, while a weaker yen adversely affects import transactions. The Group hedges through forward foreign exchange transactions, currency swaps, foreign exchange swaps and similar instruments; however, depending on the level of foreign-currency-denominated assets and liabilities held at the fiscal year-end, sufficient risk-mitigating effects may not be obtained.

The Group extends credit to business partners in the form of trade receivables, advance payments, loans and guarantees, and manages this exposure by setting credit limits for each business partner, obtaining credit insurance, and measuring maximum potential loss based on internal credit ratings. However, in the event of unforeseen bankruptcy, civil rehabilitation proceedings or similar events affecting business partners due to sudden changes in the economic environment or geopolitical circumstances, full recovery may not be achieved, which could adversely affect the Group's business results and financial position.

The Group makes business investments aimed at strengthening existing businesses and expanding its business domains, and conducts screening through the Investment Review Committee as well as periodic monitoring after execution; however, if the value of an investee company declines or the initially expected investment return cannot be secured, this could adversely affect business results. In particular, development-type projects and the resources field are subject to large fluctuations in supply-demand balance, market conditions and production costs, and tend to exhibit higher earnings volatility compared with other investments.

Because the Group primarily handles products with high GHG emission intensity, such as steel products, non-ferrous metals and fossil-fuel-derived materials, it is exposed to risks from tightening regulations such as carbon pricing and carbon border adjustment mechanisms, changes in the market environment accompanying the transition to a decarbonized society, and the risk of increasingly severe natural disasters. Should these risks materialize, changes in commodity demand structures, increases in procurement and logistics costs, and impairment of held assets may occur; the Group is addressing this through its target of a 34% reduction in domestic Scope 1+2 emissions by FY2030 (ending March 2031) versus FY2021 (ended March 2022) levels, and by expanding its handling of decarbonization-related products.

Across its diverse business activities in Japan and overseas, the Group is required to comply with the Antimonopoly Act, anti-bribery regulations, security export control laws, export control regulations of various countries, economic sanctions and other laws. Should a violation occur among officers or employees, this could result in fines, surcharges, restrictions on business activities (such as revocation of export licenses), suspension of transactions by business partners, damages liabilities and other costs, as well as loss of social credibility. The Group has strengthened its response, particularly regarding trade-related legal regulations, by establishing a dedicated department.

The Group actively conducts business in overseas markets including Asia, the United States and Europe, and is inherently exposed to risks such as unexpected changes in trade regulations, adverse political and economic developments, international currency fluctuations, and social disruption from terrorism, war and similar events. The Group takes risk mitigation measures such as trade insurance; however, should these risks materialize, they could adversely affect the Group's business results and financial position.

The Group raises funds through borrowings from financial institutions and corporate bonds, among other means; should disruption occur in domestic or overseas financial markets, credit ratings be downgraded, or financial covenants be breached, restrictions on fund procurement or increases in procurement costs could occur. Although the Group strives to secure liquidity on hand, a sudden increase in funding needs or a breach of financial covenants under certain loan agreements could adversely affect its business results and financial position.

The Group operates numerous core and other business systems, and is exposed to risks such as cyberattacks (including targeted attacks, ransomware and supply chain attacks), system failures, human error and natural disasters. Should these risks materialize and result in prolonged system outages, leakage of confidential information or personal information, or impairment of business continuity, this could adversely affect business results and financial position through business interruption, claims for damages, and loss of social credibility.

Securing, developing and providing appropriate treatment for specialized personnel forms the foundation of business continuity and growth; however, the Group is exposed to risks such as structural labor shortages in the labor market, difficulty in transferring know-how amid generational turnover, challenges in recruiting and retaining staff at overseas locations, and delays in addressing diversity. If the Group is unable to smoothly secure, develop and retain personnel, this could adversely affect business results and medium- to long-term growth through loss of specialized expertise, decline in business competitiveness, and delays in overseas business expansion; the Group is addressing this through personnel development centered on the Hanwa Business School (HKBS) and by promoting health management and diversity.