ESG update

Oct 30, 2023

Slides

Summary

Sustainability priorities center on eight material issues, stronger governance and HR, DX and GX transformation. The roadmap targets a 30% reduction in Scope 1 and 2 emissions by 2030 and net zero including Scope 3 by 2050.

Good morning. Thank you for taking time out of your busy schedules today to attend the ESG briefing. This is the second time the briefing is held following the one last year. We will mainly cover non-financial topics today, which may not be as easy to understand, but we hope that we can gain your understanding of our overall approach. Before I begin, there are a couple of comments I would like to convey regarding the plan announced on October 24, to hold an extraordinary general meeting of shareholders. I am afraid that my explanation may overlap with what was already announced. But let me give you a brief explanation about what we are trying to do and why. On July 27, approximately one month after the last AGM, annual general meeting of shareholders, we received a statement of intent for a large-scale purchase action from Mr. Murakami's group company, Minami Aoyama Fudosan and Aya Nomura. Subsequently, after several exchanges of questions and answers through the information provision process to understand what Mr. Murakami intends to do after the purchase of the company's shares, while respecting the opinions of the independent committee to the maximum extent possible, we have come to a conclusion on October 24, that further purchases by the group would not be desirable for the company. It is on this conclusion that we would like to ask for the judgment of our shareholders. That is why we are convening an extraordinary shareholders meeting. For more details, please refer to the document disclosed on October 24, as I cannot go into specific details today. Simply put, the content of their proposals would not improve the enterprise value of the Cosmo Energy Group and could potentially damage the interest of shareholders. That is the conclusion reached by the board. We would like to ask for our shareholders' judgment regarding this conclusion at the extraordinary meeting of shareholders we have decided to convene. We are committed to growing the Cosmo Energy Group further and enhancing enterprise value further. Today's topic, ESG, is part of the goals we are trying to accomplish. These goals are also woven into our midterm plan and the Vision 2030. So we would like to ask for shareholders' judgment based on these details. At this time, you may have various questions, but we hope that we can clarify them and gain your understanding of the company's position, not only today, but also on November 8 at the Q2 earnings briefing. Now, I would like to start my explanation of the ESG topic, which is the main topic for today. Please refer to page 3. I will explain about Cosmo Energy Group's sustainability management. At the top of the slide, you can see our group philosophy. As you can see, harmony and symbiosis and the creation of future value are the two components comprising our basic concept of sustainability and characterizing our approach to sustainability. The group is committed to the realization of a sustainable society through its business activities while achieving sustainability and sustainable growth of its own. Based on this group philosophy, we have identified material issues for the group as well as for society, and are working to realize KPIs towards our Vision 2030. Please turn to page 4 for material issues of the 7th Consolidated Medium-Term Management Plan and the Vision 2030. The 7th Consolidated Medium-Term Management Plan, covering until FY 2025, defines three areas of fundamental management transformation, HRX, DX, and GX, each of which is linked to and support material issues to be addressed towards year 2050. By addressing material issues, we will realize the ideal state defined by Vision 2030 and enhance the enterprise value. Please turn to page 5, explaining our material issues. I will discuss the details of these issues. In the light of Vision 2030, we have revisited our material issues set 2 years ago. As of April 2023, we have consolidated it into 8 material issues, as shown on the right-hand side of this slide, based on the ideal state. Through the process of identifying material issues, we have consolidated related issues and added DX, or digital transformation, as a new area, given its increasing importance for society and the company. For each of these 8 material issues, we have set them and implemented KPIs by backcasting from the ideal state. Next, on page 6, I would like to explain about sustainability governance. As part of the material issues monitoring system, we have established a Sustainability Strategy Committee, where I am chairing as the President of the company. The committee will discuss important sustainability-related issues, monitor the progress of material issues KPIs on a semi-annual basis, and report to the Board of Directors. On top of that, during FY 2022, the committee conducted lively discussions on the KPIs of the 7th Consolidated Medium-Term Management Plan, the roadmap to net zero emissions, and a report on human rights and due diligence. Next, page 7 shows governance promotion structure. I will discuss the details of the structure. We believe that transparency and diversity of the Board of Directors with an oversight responsibility is crucial in ensuring effective sustainability governance. We have reinforced diversity by assigning women directors for one-third of the board positions, as you may be aware. We have ensured the skill matrix of both internal as well as external directors will sufficiently cover those skills required to realize Vision 2030 in terms of business strategy and the management foundation. To enhance the board effectiveness and transparency, we are currently considering the use of a third party to evaluate the effectiveness of the board. Please turn to page 8 for further details. First, executive remunerations plan. We have adopted a performance-linked system. Please look at the pie chart at the bottom. This is to ensure mid to long-term performance improvement, enterprise value, and shareholder value, and alignment of interest with our shareholders. From FY 2023, this year, we have implemented revised performance evaluation criteria focused on net income, excluding the impact of inventory valuation, instead of ordinary income, excluding the impact of inventory valuation, to be in line with the shareholder return policy of the 7th Consolidated Medium-Term Management Plan. The ESG related personnel evaluation introduced in the previous fiscal year has been also made consistent with the material issues KPIs of the 7th Consolidated Medium-Term Management Plan. Mr. Uematsu and Ms. Takeda will explain the specific transformation initiative of HRX, DX, and GX later in the briefing. I would like to conclude my part by reiterating my commitment to a more robust, sustainable management. Thank you. Next is Mr. Uematsu. Thank you. Please refer to page 10. I would like to discuss our initiatives to achieve net zero carbon neutrality by 2050. In 2013, our group closed the Sakaide Refinery to rationalize our production system. In 2013, we worked not only on energy saving, but on the reduction of carbon intensity through more efficient operations. On the other hand, we are maintaining high utilization of refineries until 2030, despite the declining demand for petroleum products. This is to continue with the short position strategy in the midst of reduced imports from other countries. As indicated by the roadmap, the group aims to achieve 30% reduction for Scope 1 and 2 by 2030, and net zero emissions, including Scope 3, by 2050. Next pages will discuss our initiatives to achieve high utilization of refineries and net zero emissions. Page 11, please. Among our climate change countermeasures, I will talk about the initiatives to reduce emissions. In order to reduce emissions while maintaining high refinery utilization, the use of negative emission technologies is essential. CCS is one of the negative emission technologies. For that, on October 13th, announced was the start of a joint study with Kansai Electric Power Company, KEPCO, to establish a CCS value chain, as explained in the press release. Normally, each company needs facilities for liquefaction and temporary storage. What we are aiming at is to design highly efficient shared facilities. On October 27th, announced was the conclusion of an MoU with MOL regarding maritime transportation. We will continue to study the establishment of a CCS value chain, both internally and jointly with other companies going forward. Page 12, please. The slide shows climate change countermeasures and emissions reduction initiatives. After carbon capture and storage, the next stage is utilization. Let me discuss CCU technology first. We are studying collaboration with third parties, listed here on this slide. We are studying a wide range of materials, such as methanol and ethanol, to convert CO2 components to sustainable products, such as synthetic fuels and petrochemical substitutes. Various methods have been developed so far to produce methanol and ethanol from CO2. We will study the progress of technological innovation, CO2 reduction effects, investment profitability, and other factors in cooperation with other companies. As for negative emission initiatives, we will first work on CCS, which captures and buries CO2 emitted by refineries and other facilities. Once CCU technology is established, we can start using CO2 as raw materials. Page 13, please. Provision of green energy products and services initiatives for Scope 3. As for Scope 3, we have set a target of net zero emissions to be achieved by 2050 through development and supply of biofuels, such as SAF, reinforcement of the green electricity supply chain, and initiatives for hydrogen supply chain and carbon recycled products. Through these efforts, we will contribute to carbon neutrality of the society as a whole. Each of these measures has been incorporated into material issues KPIs and set as midterm targets. For example, as a KPI for strengthening green electricity supply chain, we count the amount of CO2 reduction through renewable energy. The result for Q1 FY 2023 was approximately 6,500 tons. In this way, we will continue to monitor each KPI and update the roadmap with new initiatives, such as CCS and CCU, discussed earlier. By doing so, I would like to keep the roadmap up to date. That was my brief explanation of GX initiatives. Please turn to page 15. This slide shows the information about digital transformation, or DX. Regarding DX, we are implementing various initiatives to transform our business model. Among them is the oil business, where a roadmap was developed for shifting to digital plants to realize higher capacity utilization and more efficient operations. During the 7th Consolidated Medium-Term Management Plan period, we will establish a data infrastructure and enhance productivity by utilizing plant digital twin. Please move on to page 16. The plant digital twin, the meaning of this is to reproduce an oil refinery in a virtual space. Using the AI-based simulation, humans can focus their efforts on complicated and exceptional situations and decision-makings. In addition, multiple refineries can be integrated together in a digital space, linking various data and consolidating maintenance functions. This will allow us to ensure safer operations, more effective trouble risk control, and higher utilization. Page 17, please. The other day, we have announced the adoption of Cognite Data Fusion, which is a data integration platform. Combined with the visualization tools already in place, the platform helps building a plant digital twin. All refineries are in scope in order to help accelerate data linkage and functional integration. We will continue to promote DX, also in other areas of the company. This concludes my presentation. Thank you. Next is Ms. Takeda. Yes. Next, I will explain about the HRX initiatives. Please refer to page 19. I will explain the people's strategy to motivate employees and harness their skills. Our HR strategy aims to develop a pool of people who can realize our Vision 2030 and enhance our enterprise value. We will strengthen competencies of our human resources and enhance their wellbeing, so that they can promote change and support business activities in each business area. We will secure competencies in each of the three business domains of Vision 2030, while promoting the four general aspects of mindset to support transformation. Namely, as you can see on the slide, the directions are promotion of diversity, transition to autonomy and independence, motivation for self-growth, and development of DX literacy. These are the common aspects. In addition, as shown at the bottom, wellbeing and engagement should be the basis of all human resources in order to realize the full potential of each and every employee. We are working on measures in five areas to support the four general aspects of mindset. Page 20, please. Based on the direction of transformation, we have translated the human resources strategy for 2030 into the following specific measures, which are being executed today. First, on the left-hand side, is human resources training and development, which includes self-directed career development and training and development of change agents and specialized talent. In order to promote employees to remain a strong individual in a rapidly changing business environment, considering and realizing their careers autonomously, that is important. In order to do so, we will encourage self-learning and make their abilities and skills visible, and expand the job challenge system. We will also create a system that highly values actions and that lead to change, and develop people who can promote change in businesses. Next, in the purple area in the middle, I will discuss about the organizational culture. We are aiming to maximize performance and improve engagement through diverse human resources and work styles. In expanding diversity, in addition to women and mid-career hires, we are strongly promoting the activities of senior employees and specialized professionals. For senior employees, in FY 2021, we have fundamentally revised the senior employee system to utilize their knowledge and experience, and to fulfill the same roles and performances as they did before the status change at age 60. The personnel system, job grade, and so forth, will stay the same even after age 60. In addition, we have established a system for specialized professionals in terms of hiring of highly skilled talent, their training, and the skills development. Finally, on wellness. In promoting employee wellness management, we have established a new committee to reinforce the management's commitment to health. We are also promoting employee education on smoking, drinking, and eating habits, which can pose high risks on their health. Page 21, please. These are the KPIs for the 7th Consolidated Medium-Term Management Plan. In addition to the KPIs announced in March on investment in education and engagement, we have set new KPIs related to change promotion. Especially for employees' skills development and enhancement, we are investing more during the 7th Consolidated Medium-Term Management Plan in order to improve human resources capabilities and form a pool of those talent, beyond what we have done during the sixth Midterm Plan to develop a pool of talent who can realize Vision 2030. In the second half of this fiscal year, we will focus on the development of core digital personnel, as mentioned by Mr. Uematsu earlier. The expanded subsidies for self-development courses that employees can voluntarily take, and the regular sessions by professional coaches for management personnel. We are working more aggressively than in the past in order to secure sufficient resources to support the ongoing transformation. Page 22 onwards are just for your reference. Thank you very much for your kind attention.