The Cosmo Energy Group has positioned risk management as one of its material issues. Based on the identification of potential risks relating to business activities, we have established a system to ensure appropriate management of various risks using a cycle of planning, implementation, evaluation, and corrective action.
Moreover, in order to respond more appropriately to changes in the business environment surrounding the Group and today’s diverse risks, we are taking a medium- to long-term perspective, approaching risks as business opportunities while working to build an enterprise risk management (ERM) system, both seeking to maximize corporate value. Referring to the approach in the Committee of Sponsoring Organizations’ (COSO) ERM Framework, we determined our policy on the establishment of an ERM structure and methodology at a meeting of the Sustainability Strategy Committee held on September 12, 2023. In the identification of risks, we have introduced a top-down approach by management, and we promote Group-wide risk management for each risk category by appointing risk owners.
(1) Risk Management Structure
The Group is determined to ensure the development and safe operation of its businesses at each Group company. As part of this effort, the Sustainability Strategy Committee deliberates on Group-wide risk countermeasures, summarizes measures to address risk at each company, and discusses the progress of these countermeasures. The results of these discussions are reported to the Board of Directors and communicated to Group companies through the Sustainability Liaison Committee.
In addition, the Sustainability Committee headed by the general manager of the Sustainability Initiative Department meets as necessary, functioning as the practical working body of the Sustainability Strategy Committee.
Please refer to the link below for the organizational chart.
(2) Operation of Risk Management
We select the risks with the most impact and likelihood of occurring, the highest relevance to material issues, and the most importance in terms of industry characteristics from among the medium- and long-term risks we see from the management perspective (Top-down identification Bottom-up Identification of risk identified through management interviews and questionnaires) and risks identified by each department and Group company. The Sustainability Strategy Committee determines the priority risks based on discussion with management, and these risks are also reported to the Board of Directors.
In order to ensure Group-wide control of these priority risks, we appoint a Group risk owner for the entire Group and a risk owner at the core operating companies as the people with responsibility for practical implementation.
As the managers responsible for the entire Group, the Group risk owner formulates countermeasures and plans for the priority risks, sets KPIs, and monitoring and reviews them for further improvement. Risk owners at the core operating companies, in collaboration with the Group risk owner, formulate risk countermeasures and plans for each company, sets KPIs, and conduct monitoring and reviews for further improvement.
Risks extracted from each division and group company that are not included in the priority risks are also managed as part of the enterprise risk management.
Flow of Risk Management Operations
(3) Priority Risks
The priority risks determined at the beginning of fiscal 2024 are as described below. We determine and manage the priority risks as described under (2) Operation of Risk Management. Risks other than priority risks (e.g., interest rate risks) continue to be managed by each department with responsibility for the relevant risk.
| No. | Priority risk | Category | Relevance to material issues | Possible scenario |
|---|---|---|---|---|
| 1 | Decrease in demand for oil due to decarbonization and impact on business assets | Strategy | ✓ | An unexpectedly rapid switch from gas-powered automobiles to EVs or rapid proliferation of green power generation could affect our business and business assets due to a sharp decrease in demand for petroleum products and changes in policies of suppliers, etc. |
| 2 | Impact on business portfolio and strategic investment associated with stronger environmental regulations and climate change countermeasures | Strategy | ✓ | Difficulty in responding to the trend toward stronger environmental regulations and climate change countermeasures could lead to economic losses due to impacts on strategic investments and longer periods for recovery of investments, etc. |
| 3 | Delay in taking action on carbon neutral fuels | Strategy | ✓ | Action on carbon neutral fuels could be delayed by difficulties in procuring such fuels that are on the market, delays or failures in the development and introduction of new technologies. |
| 4 | Fluctuations in prices of raw materials and supplies* | Strategy | Fluctuations in the prices of resources such as crude oil and LNG due to political and economic changes, as well as increases in the costs of materials, equipment, and labor, and fluctuations in exchange rates, may cause the company's performance to deteriorate. | |
| 5 | Increasing difficulty securing and developing human resources due to changes in the labor market | Strategy | ✓ | As the working population declines, it could become difficult to secure and develop diverse and specialized human resources for both existing and new businesses. |
| 6 | Natural disasters | Strategy | ✓ | The Company’s facilities could suffer catastrophic damage due to a large-scale natural disaster such as an earthquake or tsunami, causing difficulties with early recovery and leading to huge losses. |
| 7 | Misconduct related to product quality | Operations | ✓ | Misconduct related to product quality allowed by insufficient quality management could lead to losses due to an extensive product recall, etc., as well as loss of stakeholder trust. |
| 8 | Supply chain interruptions | Operations | ✓ | As the Group’s supply chain covers a wide area, workforce shortages at suppliers or deterioration in political situations could cause supply chain interruptions or losses, in areas such as shutdowns at crude oil production sites, shipping, maintenance of refineries, and operation of service stations, etc. |
| 9 | Information security risk | Operations | ✓ |
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| 10 | Accidents, faults, and breakdowns at production facilities | Operations | ✓ | Accidents, faults, or breakdowns at refineries, oil fields, or power stations could affect continuity of operations as well as the natural environment and living things, resulting in losses, in addition to impacting cash flow generation. |
| 11 | Fraud / inappropriate conduct due to deficiencies in internal control | Finance / compliance | ✓ | Inadequate functioning of the internal control function or serious deficiencies or misconduct due to lack of personnel or expertise, and IT technology introduction etc., could result in administrative guidance or criminal penalties, in addition to loss of stakeholder trust. |
* With regards to fluctuations in prices of raw materials and supplies, we measure sensitivity to changes in the crude oil price and exchange rates that will affect the consolidated Ordinary income forecast for FY2024.
Assumptions for April 2024 to March 2025 are a crude oil price of $85 per barrel and an exchange rate of 145 yen per dollar.
Sensitivity refers to the amounts of impact by each increase of US$1/bl in the crude oil price and of \1/USD in the yen-dollar exchange rate compared to the assumption. Sensitivity is calculated based on the assumption that crude oil prices and foreign exchange rates remain constant during the subject period.
