Risk Information

ITOCHU Group is exposed to various risks such as market risks, credit risks and investment risks, due to the nature of a wide range of its businesses. These risks include unpredictable uncertainties and may have significant effects on its future business and financial performance. To respond to these risks, ITOCHU Group establishes necessary risk managing system / method, monitors and controls such risks. However, there is no assurance that it can completely avoid such risks.
The risks described below are not exhaustive. Rather, these risks describe matters that may have a significant impact on investors’ decisions from the perspective of materiality. In addition to the risks described here, ITOCHU Group’s business may be affected by currently unknown risks, and risks that require no special mention or that are not considered material at this point. These risk factors may also affect investor decisions.
With respect to descriptions about future events, ITOCHU appropriately has determined its assumptions and estimates based on information currently available as of March 31, 2024.

(1) Risks Associated with Macroeconomic Factors and Business Model

ITOCHU Group involves a wide variety of business ranging from supply of raw materials to manufacturing and sale in each of its business areas. It conducts diverse types of commercial transactions such as purchase and sale of products in the domestic market, import / export trade between overseas affiliates as well as development of metal and mineral resources and energy.
For the characteristics of the Group’s main areas of business, trade in machinery such as plants, automobiles and construction machineries, trade in mineral resources, energy and chemical products, and investments in development, they are all largely dependent on economic trends in the world, while the domestic economy has a relatively strong influence on the consumer sectors such as textiles and food. However, economic trends in the world have been more influential even on the consumer sectors, as economic globalization proceeds.
Furthermore, global economic trends including specific regional trends, changes in industrial structures due to rapid technological innovation in recent years, increasing competition from companies in newly developing countries due to globalization, and changes in the business environment due to deregulation and entrants from other industries could significantly affect the existing business model and the competitiveness, future financial position and results of operations of ITOCHU Group.

(2) Market Risk

ITOCHU Group is exposed to market risks such as foreign exchange rate risks, interest rate risks, commodity price risks and stock price risks. Therefore, the Group attempts to minimize risks related to market fluctuations such as changes in foreign exchange rates, interest rates, and commodities by establishing risk management policies such as setting and controlling limits and by utilizing a variety of hedge transactions for hedging purposes.

a) Foreign Exchange Rate Risk

ITOCHU Group is exposed to foreign exchange rate risk related to transactions in foreign currencies due to its significant involvement in import / export trading. Therefore, ITOCHU Group works to minimize foreign exchange rate risk through hedge transactions that utilize derivatives, such as foreign exchange forward contacts, however, cannot completely avoid such risk.
Further, ITOCHU’s investments in overseas businesses expose ITOCHU Group to the risk that fluctuations in foreign exchange rates could affect shareholders’ equity through the accounting for foreign currency translation adjustments and the amount of periodic income when converted to yen. These foreign exchange rate risks could significantly affect the future financial position and results of operations of ITOCHU Group.
For more details, please refer to “Foreign exchange rate risk management” in “Notes to Consolidated Financial Statements 24. Financial Instruments.”

b) Interest Rate Risk

ITOCHU Group is exposed to interest rate risk in both raising and using funds for investing, financing, and operating activities. Among interest insensitive assets, such as investment securities or fixed assets, the part acquired using floating interest loans is considered to be the interest mismatch amount exposed to interest rate risk. ITOCHU seeks to quantify the interest rate risk to control the fluctuation of gains and losses due to interest rate change properly.
In addition, ITOCHU Group periodically tracks interest rate trends and monitors the amount of influence on interest payments due to interest rate changes, using the Earnings at Risk (EaR). However, interest rate trends could significantly affect the future financial position and results of operations of ITOCHU Group.

c) Commodity Price Risk

ITOCHU Group conducts actual demand transactions that are based on the back-to-back transactions of a variety of commodities. In some cases, the Group is exposed to commodity price fluctuation risk, because it holds long or short positions in consideration of market trends. Therefore, the Group analyzes inventories and purchase and sales contracts, and each Division Company has established middle and back offices for major commodities, which establish a balance limit and loss cut limit for each commodity, as well as conduct monitoring, management, and periodic reviews.
In addition, ITOCHU Group participates in development businesses such as mineral resources and energy and other manufacturing businesses. The production in these businesses are also exposed to the same price fluctuation risk noted above.
To reduce these commodity price risks, the Group uses such hedges as futures and forward contracts. However, ITOCHU Group cannot completely avoid commodity price risk. Therefore, commodity price trends could significantly affect the future financial position and results of operations of ITOCHU Group.
ITOCHU Group uses “Value at Risk (VaR)” to ascertain and monitor risk in commodity transactions, which are susceptible to market fluctuations. The figures in this method are based on market fluctuation data for specific past periods, and statistical methods are used to estimate maximum loss amounts that may be incurred during specific future periods.

d) Stock Price Risk

ITOCHU Group holds a variety of marketable equity securities, mainly to strengthen relationships with customers, suppliers, and other parties, and to secure business income, and to increase corporate value through means such as making a wide range of proposals to investees. These shares are exposed to stock price fluctuation risk and could significantly affect the future financial position and results of operations of ITOCHU Group depending on stock price trends.
ITOCHU Group periodically tracks and monitors the amount of influence on consolidated shareholders’ equity, using “Value at Risk (VaR).” The figures in this method are based on market fluctuation data for specific past periods, and statistical methods are used to estimate maximum loss amounts that may be incurred during specific future periods.

(3) Investment Risk

ITOCHU Group invests in various businesses and in these investment activities, there are risks such as being unable to achieve expected earnings due to changes in business conditions or deterioration in the business results of its partners and investees. The likelihood of investment recovery is lowered due to poor corporate results of investees, or stock prices may drop below a specified level for a considerable period of time, which may lead to necessities that the whole or partial investment is recognized as a loss, and that the infusion of additional funds are required. Also, there are investment risks that the Group may be unable to withdraw from a business or restructure the business under a timeframe or method that it desires due to differences in business management policy with partners or the low liquidity of investments; or the Group may be put at a disadvantage because it is unable to receive appropriate information from an investee. To reduce these risks, ITOCHU Group works through decision making based on the establishment of investment criteria for the implementation of new investments while monitoring existing investments periodically and promoting asset replacement through the application of exit criteria to investments with low investment efficiency that has little reason to hold.
However, management cannot completely avoid the investment risks, and such risks could significantly affect the future financial position and results of operations of ITOCHU Group.

(4) Risks Associated with Impairment Loss on Fixed Assets

ITOCHU Group is exposed to the risk of impairment losses on fixed assets which are held or leased. These include real estate, assets related to natural resource development, aircraft and ships, and goodwill and intangible assets.
ITOCHU Group has recognized impairment losses that are currently necessary. However, new impairment losses might be recognized if stores, warehouses, and other assets were to become unable to recover their book value due to declining profitability. Impairment losses could also be recognized if a market slump were to occur due to price fluctuations on coal, iron ore, crude oil or other resources, or the R&D policies were to change and if a decline in asset prices or unplanned additional funding were to result in losses on all or some investments. Such losses could significantly affect the future financial position and results of operations of ITOCHU Group.
ITOCHU Group sustains its strength, highly efficient management, through investment in developing the foundations for sustainable growth and by steadily implementing flexible asset replacement. In addition, we manage investments appropriately, making investment decisions after thoroughly deliberating the appropriateness of the acquisition price and then monitoring investments periodically.

(5) Credit Risk

Through trade receivables, loans, guarantees, and other formats, ITOCHU Group grants credit to its trading partners, both domestically and overseas. The Group bears the credit risk in relation to such receivables becoming uncollectible due to the deteriorating credit status or insolvency of the Group’s partners, and in relation to assuming responsibilities to fulfill contracts where an involved party is unable to continue its business and cannot fulfill its obligations under the contracts. Therefore, when granting credit, ITOCHU Group works to reduce risk by conducting risk management through the establishment of credit limits and the acquisition of collateral or guarantees as needed. At the same time, the Group establishes an allowance for doubtful accounts by estimating expected credit losses based on the creditworthiness, the status of collection, and the status of receivables in arrears of business partners.
However, such management cannot completely avoid the actualization of credit risks, which could significantly affect the future financial position and results of operations of ITOCHU Group.

(6) Country Risk

ITOCHU Group conducts transactions and business activities in various countries and regions overseas. The Group is exposed to country risk, including unforeseen situations arising from the political, economic and social conditions of these countries and regions and national expropriation or remittance suspension due to changes in various laws and regulations.
Therefore, we formulated the appropriate risk countermeasures by project. To control the risk, from the standpoint of preventing ITOCHU Group from excessive concentrations of risk in specific countries or regions, we set limits for each country that are based on internal country ratings and maintain overall exposure at a level that is appropriate for the Group’s financial strengths.
Although we strive to reduce risk through these measures, ITOCHU Group cannot completely avoid such risks and the actualization of such risk as the Russia-Ukraine situation could delay or incapacitate debt collection or operational implementation, causing losses under certain circumstances, and could significantly affect the future financial position and results of operations of ITOCHU Group.
With regards to the impact from the Russia-Ukraine situation, ITOCHU Group has exposure including resource-related investments in Russia, the ratio of them to our total assets is less than 1% as of March 31, 2024. As a result of continued appropriate accounting treatment reflecting the most recent situation for our Russia-Ukraine-related assets, we do not expect a material impact on our financial position and operating results.

(7) Risks Associated with Fund-raising

ITOCHU Group procures the necessary funding for its businesses through debt from domestic and international financial institutions, as well as the issuance of commercial papers and debentures. However, should ITOCHU’s credit worthiness in the capital market deteriorate due to a significant lowering of the Company’s credit rating, or should there be an upheaval in the financial systems in major financial markets, there are risks that the Group may experience an inability to raise funds from financial institutions or investors when necessary or under desirable conditions and may consequently experience an increase in funding costs. Therefore, while securing adequate liquidity by utilizing cash deposits and commitment line, the Group has taken steps to diversify its sources of funds and methods of fundraising, however, cannot completely avoid such risks. The actualization of such risks could significantly affect the future financial position and results of operations of ITOCHU Group.

(8) Risks Associated with Taxes

ITOCHU Group has established the Group tax policy, whose basic principles are to conduct our tax affairs in a sincere manner in accordance with the provisions, significance, and legislative intent of the taxation system, not to engage in transactions designed to avoid taxation, and to pay appropriate taxes based on income earned through our business activities. In addition, to ensure appropriate and fair taxation, we strive to ensure tax transparency throughout the Group through timely and appropriate information disclosure, build relationships of trust through sincere responses to tax authorities in each country and region, and maintain fair relationships through constructive dialogues. Through these measures, we are addressing risks such as damage to corporate value due to increased tax expenses resulting from differences in views with tax authorities.
However, ITOCHU Group is unable to completely avoid all risks associated with taxes. Factors such as fluctuations in estimates of taxable income used in tax planning, changes in tax planning, revisions in tax rates and other changes to tax systems could significantly affect the future financial position and results of operations of ITOCHU Group.
In addition, the amount of deferred tax assets recorded in the asset section of ITOCHU Group’s consolidated statement of financial position is significant, and accounting judgments related to the valuation of deferred tax assets significantly impact ITOCHU Group’s consolidated financial statements. For these reasons, ITOCHU Group takes future taxable income and viable tax planning into consideration, recording recoverable amounts of deferred tax assets.

(9) Risks Associated with Significant Lawsuits

Currently, there is no significant pending lawsuit, arbitration, or other legal proceeding that may significantly affect the financial position and results of the operations of ITOCHU Group. However, there is a possibility that domestic or overseas business activities of ITOCHU Group may become subject to such lawsuits, arbitrations or other legal proceedings, and significantly affect the future financial position and results of operations of ITOCHU Group.

(10) Risks Associated with Laws and Regulations

ITOCHU Group is subject to a number of diverse laws and regulations both domestically and overseas due to the vast array of products and services the Group provides. To be specific, ITOCHU Group is required to adhere to laws and regulations such as companies act, financial instruments and exchange laws, tax laws, and the laws for each industry, as well as all laws pertaining to trade such as foreign exchange control laws, antitrust laws, intellectual property laws, environmental-related laws, anti-bribery related laws and the laws of each country in which ITOCHU Group conducts business overseas. ITOCHU Group has made every effort to observe these laws and regulations by reinforcing the compliance system, being aware that the observance of laws and regulations is a serious obligation of the Group.
However, even with all these measures, there is a possibility of the situation where, including personal misconduct by directors and employees, risks associated with compliance or suffering social disgrace cannot be avoided.
Also, the possibility of unexpected, additional enactment or changes in laws and regulations by both domestic / foreign legislative, judicial and regulatory bodies, and the possibility of major changes in laws and regulations by political / economical changes cannot be ruled out.
Such occurrences could significantly affect the future financial position and results of operations of ITOCHU Group.

(11) Risks Associated with Human Resources

ITOCHU Group conducts diverse business activities in various countries. In the advancement of individual businesses, important roles are played by personnel responsible for operational planning and execution as well as organizational direction and supervision. ITOCHU Group has secured a diverse workforce and is able to place the right people in the right positions through continuous skills development, which includes collaboration between ITOCHU and Group companies, and through the creation of rewarding work environments.
Going forward, however, the environment for securing human resources could change significantly due to such factors as further mobilization of the labor market or a business model change that results in the concentration of demand on personnel with advanced knowledge and experience in specific fields. Therefore, even if ITOCHU Group strengthens its efforts to secure and develop human resources, it cannot completely avoid the risk of being unable to fully respond to opportunities for new business creation and operational expansion due to shortages of the required human resources in certain business fields. Shortages of human resources could significantly affect the future financial position and results of operations of ITOCHU Group.

(12) Risks Associated with the Environment and Society

ITOCHU Group positions the resolution of global issues related to the environment and society as one of the most important management issues. Accordingly, we have formulated a basic policy on sustainability and identified material sustainability issues. The Group takes an active approach to managing risks. These efforts include building an environmental management system (ISO 14001) to minimize environmental risk, such as the risk of infringement of laws and regulations in the handling of goods, the provision of services and business investment; conducting extensive sustainability studies of supply chains; evaluating and identifying the effects of businesses on human rights; building human rights due diligence processes; and evaluating proposed new business investments in relation to environmental, social, and governance (ESG) factors. Specific actions include establishment of the Sustainability Committee, the formulation and revision of policies related to sustainability, and annual reviews of company wide activities as well as the promotion of environmental and social management activities in individual departments.
With regard to risks related to climate change, ITOCHU Group endorses the recommendations of the Task Force on limate related Financial Disclosure (TCFD) and regularly conducts 1.5°C to 4°C scenario analyses of the impact of climate change on our operations and business performance to examine countermeasures and business opportunities, and uses this information for management purposes. In addition, for achieving the Group's GHG emissions reduction targets, ITOCHU Group will strive to reduce emissions as much as possible through energy conservation, use of renewable energy, asset replacement including withdrawal from thermal coal interests, and provision of products and services in an environmentally friendly manner, while at the same time actively promoting businesses that will contribute to reducing emissions in our society.
With regard to risks related to natural capital, in addition to the conventional risk management described above, based on the recommendations of the Task Force on Nature-Related Financial Disclosure (TNFD), ITOCHU Group will assess the degree of dependence and impact on natural capital in the Group’s business and analyze risks and opportunities by location using the LEAP approach. Through the above methods, ITOCHU Group is working on effective measures for sustainable business activities.
However, despite such countermeasures the occurrence of environmental pollution and other environmental or social problems due to ITOCHU Group’s business activities could lead to the delay or suspension of operations, the incurring of countermeasure expenses, or the lowering of society’s evaluation of the Group and could significantly affect the future financial position and results of operations of ITOCHU Group.

(13) Risks Associated with Natural Disasters

In the countries and regions in which ITOCHU Group conducts business activities, natural disasters, such as earthquakes, or the outbreak of infectious diseases may adversely affect the Group’s business activities. ITOCHU has implemented measures such as developing Business Continuity Plans (BCPs) for large-scale disasters and the outbreak of infectious diseases, introducing a safety confirmation system, and conducting emergency drills. Also, various measures have been implemented individually in each Group company.
However, ITOCHU Group conducts business activities across a wide range of regions and the Group cannot completely avoid damages arising from natural disasters or the outbreak of infectious diseases. Therefore, such occurrences could significantly affect the future financial position and results of operations of ITOCHU Group.

(14) Risks Associated with Information Systems and Information Security

ITOCHU Group has established a code of conduct for the handling of information and recognizes that ensuring a high level of information security is an important matter. ITOCHU Group formulates company-wide informatization strategies for digitization/data utilization, builds and operates information systems for information sharing and business efficiency, and implements various information security measures. Specifically, ITOCHU Group applies information security guidelines and cyber security frameworks that take cyber security risks into account and monitors compliance with them. In addition to the existing cyber security team, ITOCHU Cyber & Intelligence Inc. has strengthened the system, and is continuing its efforts to ensure thorough risk management.
Despite these measures, ITOCHU Group cannot completely avoid the risk of sensitive information leakage due to unauthorized access from the outside or computer viruses, and the risk of the stoppage of information systems due to equipment damage or problems with telecommunications circuitry. Depending on the scale of the damage, such occurrences could significantly affect the future financial position and results of operations of ITOCHU Group.