Risk Management

The Company and other companies in the Group work to avoid and mitigate different types of risk, and manages these to keep their impact to a permissible amount. In this way, the Group recognizes that working on continuous development and sufficiently fulfilling its social responsibilities are important management issues.
In selecting Materiality, the Group considers two perspectives: creating value and solving social issues through JSW Group's businesses, and bolstering JSW Group's management foundation for sustainable growth. Based on these, we will encourage awareness that there are both risks for the sake of sustainable growth that should be taken actively and risks that should never be taken, even if for the sake of making profits. We will also carry out appropriate and efficient risk management.

Framework

The Group has established JSW Group Risk Management Regulations, which clearly stipulate that the Company and Group companies manage risks in accordance with their respective management structures and division of duties, and that all employees, from officers to general employees, are responsible for implementing appropriate and effective risk management in accordance with their respective roles.
In addition, the Company has appointed a director in charge of risk management (CRO), who oversees risk management of the Company and Group companies. The Operations Management Division acts as the risk management secretariat, and the Company has constructed a risk management framework based on the three lines of defense model. The Company is pushing forward with risk management for the entire Company by strengthening the risk management divisions, which forms the second of those lines. Also, to deal with risks by divisional function, divisions such as those in charge of health and safety, environmental management and export control management are each conducting appropriate operations through steps such as forming committees or putting in place regulations from a company-wide, cross-sectional perspective.

With regard to company-wide risk management, the Risk Management Committee (chaired by the CRO) endeavors to share information on role-specific risks and on evaluations, for important issues, whether potential or apparent problems in different management organizations. Where necessary, the committee responds to these and discusses specific efforts and as needed utilizes the lines of reporting shown in the risk management framework diagram to guide or instruct relevant divisions.
As the third line of defense, the Internal Audit Division monitors risk management, and reports to the Board of Directors and the Executive Board. Information on major risks and related efforts are suitably announced via the annual financial reports and the website.
In the event of a major accident, disaster or any other risk that could cause serious damage to JSW Group, the Crisis Management Headquarters, led by the director in charge of risk management, is promptly established to offer response. As the COVID-19 virus spread during the period from fiscal 2020 to fiscal 2022, a Crisis Management Headquarters was set up to provide functions such as ascertaining the health status of employees, establishing a telecommuting system and offering response to those infected.

In fiscal 2021, it was revealed that inappropriate conduct in quality inspections by Japan Steel Works M&E, Inc. had taken place and this was the case of an operational misconduct risk that manifested itself in the quality assurance process.
After this discovery, in September 2022, the Group set up the Quality Management Office to control quality assurance functions and by as clarifying the functions of the second line of risk defense in risk management (under the three lines of defense model), it has strengthened the work processes and the management framework to secure work suitability and efficiency. In these ways, the Group is striving to prevent recurrence.

Risk Management Framework

Risk Information

The following are the major risks that management recognizes as having the potential to materially affect the consolidated company's financial position, operating results, and cash flows, among other matters related to the business and accounting conditions described in the Annual Securities Report.
The Audit Office currently serves as the risk management secretariat, requesting each department to report comprehensively on the risks currently faced by the Company and its affiliated companies, and reporting a summary of the reports to the Corporate Strategy Meeting on a quarterly basis.
The Company will continue to improve and strengthen its operational structure to further promote the Group-wide risk management from April 2022.
Forward-looking statements are based on the judgment of the Group as of the end of the current consolidated fiscal year.

• Business Environment

  The Group's business, which is mainly equipment investment-related, is affected by economic trends in Japan and overseas.
  In addition, due to the long delivery time of products, there is a possibility that the estimated cost at the time of order receipt will increase due to a decline in profitability and additional costs caused by fluctuations in procurement prices and exchange rates.
  The Group carefully monitors global economic conditions and discusses forecasts for orders directly related to business performance based on the current situation at monthly division performance reporting meetings, and takes prompt actions such as mobilizing management resources according to the situation. In addition, we strive to manage our business with an awareness of our product and business portfolio over the medium to long term by keeping a close eye on product life cycles.

• Risks related to impairment of facilities

  The Group makes capital investments to strengthen the competitiveness of existing businesses as well as to attract new businesses and products. In accordance with accounting standards for the impairment of fixed assets, we periodically review the balance sheet amount of these assets to determine whether they can be recovered through future cash flows.
  If sufficient cash flow cannot be expected, the Group's performance and financial position may be affected.
  The Board of Directors deliberates and decides on the appropriateness of investment plans for the Group's capital investment plans. In addition, for important investments, the monthly division performance reporting meeting is held to confirm whether the performance after the investment deviates significantly from the plan, and if necessary, the relevant divisions consider and implement countermeasures.

• Procurement of Raw Materials, Parts, etc.

  The Group's procurement of raw materials and parts is affected by fluctuations in exchange rates, market conditions, and energy prices. The occurrence of quality problems, supply shortages, delivery delays, or production stoppages due to disasters, as well as sharp rises in procurement prices of raw materials and parts due to rapid market fluctuations, may affect our group's business performance.
  In order to respond flexibly to market fluctuations in raw materials and parts, our group is taking measures to reduce the impact on our group's business performance and financial position by further promoting multiple procurement of procurement items and examining and selecting alternative procurement items as appropriate.

• Quality control and product liability

  Since the Group mainly manufactures and sells products on an individual order basis as a manufacturer, its business performance may be affected by the burden of compensation for damages resulting from non-conformance to contract, such as poor performance or defects in its products.
  The Group has a well-developed quality control system in design, procurement, and manufacturing led by the Quality Control Department. Each month, the occurrence of defects and the status of countermeasures are discussed at each plant, and the results are reported at the division performance reporting meeting to enhance management.
  In addition, the Company has product liability insurance and comprehensive corporate liability insurance to cover damages arising from product liability, and reviews the coverage every year to mitigate the impact on the Group's performance and financial position.
  
  (Impact of Improper Conduct)
  In some of the inspections that should be carried out in the manufacturing process of some of the products manufactured by Japan Steel Works M&E, Inc. a subsidiary of the Company, it was found that inappropriate acts were performed, such as setting inspection figures that deviated from the customer's required specifications to be within the range of related specifications.
  Although no specific problems affecting the quality and performance of products caused by inappropriate conduct have been confirmed in the internal investigations and verifications to date, depending on future progress, the Group's business performance and financial position may be affected by losses such as compensation costs to customers.
  The Company has established a Special Investigative Committee composed of outside lawyers and will fully cooperate with the investigation of the Committee.

• Risk of exchange rate fluctuations

  The export ratio of our group's products is about 50% every year, and the period from order to sales takes a relatively long time.
  In addition, some of our overseas procurement, such as raw material imports, are denominated in foreign currencies.
  Therefore, the Group's performance may be affected by differences in profit/loss at the time of sales compared to the forecast at the time of order receipt due to foreign exchange trends during the period from order receipt to sales.
  In addition, foreign exchange rates may change the relative competitiveness of our group against overseas competitors, which may affect our group's performance and financial position.
  As a countermeasure against exchange rate fluctuations, we enter into forward exchange contracts and other hedging transactions with financial institutions to minimize the impact of fluctuations in the U.S. dollar, euro, and other major currencies in accordance with internal regulations.

• Health and safety

  The Group takes all possible measures to prevent occupational accidents and to manage the health of its employees at its production facilities and activity sites. However, in the event of an unforeseen accident or disaster, production activities may be disrupted and our business performance and financial position may be affected.
  The Group promotes safety and health activities by introducing safety equipment, reviewing standards to ensure safe operations, providing total care for employees' health and mental health, as well as thorough training, mainly at its manufacturing plants, which are its production bases.
  The safety and health activities formulated here are extended to our branches, sales offices, sub-branches, and each service location. In addition, measures are discussed at company-wide safety and health meetings held twice a year.
  We review the contents of various types of non-life insurance coverage every year.

• Intellectual Property

  The Group strives to appropriately preserve its intellectual property (patents, utility models, and prior user rights). However, if a third party imitates our products or technologies or unintentional loss of technology, our products or technologies may become obsolete, which may affect our group's business performance by decreasing sales. This could have a negative impact on our group's business performance due to a decrease in sales and other factors.
  In addition, the Group's performance and financial position could be adversely affected if the products and technologies that the Group is developing for the future unintentionally infringe on the intellectual property rights of other companies.
  In order to reduce these effects, the Intellectual Property Department, an independent organization within the head office structure, conducts risk assessments to prevent infringement of intellectual property rights held by other companies, takes measures against risks, and promotes activities to enhance the value of intellectual property held by the Group.

• Environmental preservation

  The Group is committed to preventing environmental pollution, saving energy, conserving resources, and reducing environmental impact, as well as to thorough environmental management, including compliance with related laws and regulations. In the event of major changes in related laws and regulations, or in the event of environmental pollution due to unforeseen circumstances, the Group's performance and financial position may be affected due to loss of public trust and liability for damages.
  We comply with environment-related regulations by operating an environmental management system, and hold biannual meetings of the Environmental Management Committee to discuss how to manage and respond to regulatory changes.
  In addition, the ESG Promotion Office will be newly established in April 2022 to formulate and promote various measures related to climate change response and environmental impact reduction.

• Risks related to corporate acquisitions and alliances with other companies

  The Group acquires other companies, establishes business alliances and joint ventures with other companies, develops products jointly with other companies, and invests in other companies in order to strengthen the competitiveness of its existing businesses and to incorporate new businesses and new products.
  In these strategic alliances, if the collaboration with the partner does not proceed smoothly, or if the expected results are not fully achieved, the Group's performance and financial position may be affected.
  The M&A/Alliance Council, the Corporate Strategy Committee, and the Board of Directors deliberate on investment effects, risks, synergies, and other factors before deciding whether to approve or disapprove acquisitions or alliances with other companies.

• Impact of Natural Disasters, etc.

  The Group's business activities may be affected by the occurrence of physical or human damage due to various disasters such as earthquakes, windstorms, floods, and fires, as well as the impairment of social infrastructures.
  In order to minimize the occurrence of damage and the spread of damage in the event of a disaster, the Group prepares for the continuation of important business operations and the early restoration of business operations even in the event of a disaster by conducting facility inspections and drills, establishing a communication system, and developing a business continuity plan (BCP). In addition, we review the contents of our non-life insurance coverage every year.

• Geopolitical risk

  The Group operates globally and conducts its business activities in accordance with the laws and regulations of Japan and other countries and regions overseas.
  Changes in policies and laws and regulations resulting from changes in international relations have a significant impact on our business activities. The Group's costs for restructuring its business activities and complying with laws and regulations may increase in the future due to the revision or abolition of various laws and regulations, stricter regulations, restrictions on technology transfers, and tariff increases. As a result, the Group's business performance and financial position may be affected.
  Our group is making efforts to collect information on trends in domestic and overseas laws and regulations and changes in their operation and interpretation at an early stage and implementing prompt responses, and will take appropriate actions as needed based on information from trading companies and customers regarding the impact on our company of Russia's invasion of Ukraine in late February 2022 and thereafter.

• Information Security

  Through its business activities, the Group holds confidential information, including business partners' and its own sales information and personal information. The leakage or loss of confidential information from PCs, servers, or other equipment due to external cyber attacks or unauthorized access, or the failure of network equipment, could result in the suspension of production or operations, or a loss of public trust, which could affect the Group's performance and financial position.
  In addition, the Group's performance and financial position could be affected by a loss of public trust or other factors.
  The Group takes the utmost care to protect confidential information by backing up data, one of its important management resources, at multiple data centers, and has strengthened information equipment management and system management.
  In addition, we have introduced a system to block malicious e-mails from outside the company to prevent business e-mail fraud, and we also conduct training to prepare for information leaks and system failures.

• Human resource development and retention

  The Group considers the securing of competent human resources and the development of human resources to be one of the extremely important points for the growth of our group.
  In particular, failure to pass on technical skills from veterans to younger workers or to secure competent human resources may affect the Group's business activities, business performance, and financial position.
  Each plant implements an annual plan to pass on technical skills to each of its employees.
  In order to secure competent human resources, we are strengthening not only new graduates but also mid-career hires, and as measures to strengthen recruitment, we are promoting the enhancement of our name recognition, improvement of various benefits, and creation of a rewarding workplace.

• Social and Human Rights

  The Group recognizes that its business activities cover an extremely wide range of fields and that the people involved are diverse. Any negative impact on human rights, either directly or indirectly, could result in a loss of public trust, which could affect the Group's business performance and financial position.
  The Group will promote dialogue with its stakeholders, establish priorities and address them appropriately, and strengthen its risk management regarding human rights. In the future, based on the belief that the achievement of the SDGs and the promotion of human rights protection are inseparable and mutually reinforcing, the Group will aim to enhance its human rights management system by referring to the UN Guiding Principles on Business and Human Rights, including the implementation of human rights due diligence.

• Spread of infectious disease

  In countries and regions where new coronavirus infection has peaked out, quarantine measures have been eased and people are living in harmony with coronaviruses. However, the situation is still prolonged due to measures such as curfews due to the spread of infection in some areas in Japan and overseas, making it a challenge to balance health and the economy.
  Our group has also been affected by delays in contract negotiations and the order process, as well as stagnation in the service business due to travel restrictions. In addition, if production functions are severely affected, our group's business activities, business performance, and financial position may be affected.
  The safety and health of our customers, employees, and their families is our first priority, and the Group is committed to preventing the spread of infection and implementing appropriate business continuity initiatives.