The COVID-19 pandemic and the rapid progress of decarbonization since 2020 have brought about major changes in the business environment, further increasing the importance of ESG management. There is a common understanding that social and environmental issues are directly linked to management issues, and integrated reports that "focus on medium- to long-term value creation from the perspective of ESG management" (Editorial Policy) are attracting more attention than ever before. While ESG information is increasingly being disclosed in securities reports, which are legally required disclosure media, a major feature of integrated reports is their ability to convey a company's unique and creative value creation story that cannot be expressed in securities reports, making them a major pillar of evaluation.
The section of this report that caught my attention the most was its "Environmental Strategy." In addition to the Japanese government's carbon neutrality declaration and its announcement of a 46% reduction, it also sets targets for 2030 and 2050, laying out roadmaps and specific initiatives, suggesting that these goals are feasible. The 2030 target is a mandatory target, not a target to strive for. It marks a major milestone in determining whether carbon neutrality will be achieved by 2050, and with the World Meteorological Organization warning that temperatures could rise by 1.5°C compared to pre-industrial levels by 2025, I hope that a more detailed roadmap with more convincing quantitative information leading up to 2030 will be presented in the future.
Furthermore, with regard to disclosure regarding climate change, we highly commend the company for supporting the TCFD, including its description of its four core elements and presenting risks and opportunities based on more detailed scenario analysis than last year. The Corporate Governance Code, revised in June 2021, states that "Companies should work to improve the quality and quantity of disclosure based on the TCFD or an equivalent framework," which we believe is an appropriate response.
Japanese companies have traditionally been known to excel at reporting past performance but lack expertise in future scenario-based analysis. We believe this scenario analysis has helped to refine their internal thinking. Going forward, we hope to see companies disclose information in line with the 11 core elements (especially strategy, which is of high investor demand) and quantify the impact of risks and opportunities (or categorize the degree of impact as high, medium, or low and the impact period as long, medium, or short term) to address stakeholder concerns and expectations and enhance the information to be "useful for decision-making" for institutional investors and others. The second noteworthy point is the presentation of key business indicators in a diagram, taking into account the timeframe leading up to financial results. The core of an integrated report is to clarify the relationship between financial and non-financial information and convey the potential for long-term corporate value creation. While this approach is in-depth and in-depth, there are currently few examples. We hope to see more reports incorporating non-financial information from these perspectives, actively addressing how it is reflected in financial results, and summarizing it in financial logic trees and other formats. Such reporting will help raise awareness of the non-financial nature of non-financial information.
The third point of interest is the enthusiasm conveyed to accelerate efforts toward "business portfolio transformation." This transformation is one of the growth strategies and has been mentioned before, but it is clear that its necessity has become even more urgent, as it has become one of the pillars of the roadmap toward carbon neutrality.
Amidst the rapidly changing business environment, how companies allocate management resources to achieve sustainable growth is a major challenge. Against this backdrop, the Ministry of Economy, Trade and Industry has formulated the "Practical Guidelines for Business Restructuring - Towards Business Portfolio and Organizational Transformation" to encourage change, but there are cases where companies have incorporated business portfolio transformation into their management plans but have faced setbacks or stalled in their implementation. This report expresses a strong determination to "be able to announce a clear path for portfolio reform both internally and externally by fiscal 2022" and "set goals for portfolio transformation within two years," thereby allaying concerns about realization.
On the other hand, there were some areas where the information I was hoping for was insufficient. One example was the response to COVID-19, which was mentioned in several places but not comprehensively. The impact of COVID-19 on the economy and society is orders of magnitude greater than that of past recessions or natural disasters. It has not only caused an economic downturn, but has also expanded and accelerated existing risks, causing discontinuous and irreversible changes in a wide range of areas, including people's values and lifestyles, as well as industrial structure, management methods, and technological development. Confronted with such a situation, a comprehensive description in the report of the company's response and its convictions would convey the state of "corporate resilience," which is sought by investors and many other stakeholders. While the end of COVID-19 is unclear, I hope that the company will provide a comprehensive summary at the appropriate time and disclose information from a resilience perspective.
Looking at individual items, the coverage of "human rights" is extremely insufficient. Since the United Nations formulated the "Guiding Principles on Business and Human Rights" in 2011, a wave of emphasis on human rights has been sweeping over Japan. Human rights coverage in reports has increased in response to growing demands for disclosure, and the content has steadily improved. Last year, the government compiled an action plan on business and human rights, making three requests of companies (commitment, human rights due diligence, and remedy). In light of this situation, we believe that companies should clearly establish a "human rights" pillar and include efforts and descriptions to meet these three requests.
Furthermore, when looking at how human rights are perceived, as shown in the "Response to Human Rights Risks" (2020 edition) and the "Details of Major Risks" (2021 edition), it can be seen that human rights responses are "defensive" with the aim of risk avoidance. Today, some companies are positioning human rights responses as part of their strategies for increasing corporate value, and we hope that in the future they will shift to "offensive" efforts and disclosure.
I would also like to comment briefly on information disclosure. This report has been significantly reduced from last year's 70 pages to 50. The page reduction itself is not particularly problematic, as the IIRC also positions integrated reports as "concise primary reports." However, it is important to note that integrated reports are intended to coexist with other disclosure media. Our company has also established an "ESG information website," which I believe is intended to complement our integrated report. However, I believe it is necessary to verify whether this level of disclosure is sufficient. I believe it is important to verify this through guidelines such as those of the GRI and SASB, as well as surveys and questionnaires conducted by rating agencies and index-related companies. It is said that performance is the engine that drives stock prices, and information disclosure is the stabilizer that stabilizes them. However, I believe that information disclosure is now also playing a role in this engine. In addition to this verification, I would recommend that you consider publishing an "ESG Information Book" or similar publication in your annual report.