Sustainability

EXEDY Group's Sustainability Activities

Information Disclosure Under the Recommendations
of the Task Force on Climate-related
Financial Disclosures (TCFD)

The EXEDY Group aims to achieve carbon neutrality (substantially zero greenhouse gas emissions) by 2050 in response to the international challenge of preventing global warming. We are working on the introduction and development of next-generation electrified products and future products. In addition, we have expressed our support for the Climate-related Financial Disclosure Task Force (TCFD), the TCFD Consortium, and the Japan Climate Initiative (JCI), and are working to strengthen the resilience of our strategies (ability to adapt and survive) by analyzing the impact of climate change on our business and the resulting risks and opportunities based on multiple scenarios and reflecting them in our management strategies and financial plans.

Here, we will explain the status of our efforts in compliance with the TCFD recommendations.

Governance

The EXEDY Group recognizes climate change as an important environmental issue, and after deliberation by the Management Committee and the Board of Directors, has chosen to contribute to the creation of a decarbonized society as one of its Long-term Visions, and has established climate-related KPIs (key performance indicators). In addition, to achieve the vision and KPIs, we have established a Sustainability Committee as a meeting body that formulates sustainability action plans and manages progress. This meeting is chaired by the President & CEO, and attended by all executive officers (including those stationed overseas) and the full-time corporate auditors, and is held twice a year. The committee deliberates and decides on medium- to long-term goals and the necessary responses based on laws and regulations and the needs of interested parties, and discusses matters that are deemed to have a significant impact on the business at the meeting of the Management Committee and the Board of Directors. In addition, we have formed the Sustainability Working Group as a working force to promote sustainability activities. The group is chaired by a director and senior managing executive officer, and its members are elected from each headquarters, promoting activities across the company.

サステナビリティ活動組織

Strategy

Scenario Assumption

To understand the potential financial impact of climate change on EXEDY Group's operations and to identify climate-related risks and opportunities, we referred to external scenarios such as the International Energy Agency's (IEA) World Energy Outlook and the 2° Investing Initiative as benchmarks. We also reviewed the scenario analysis for the automotive industry, assumed an overall scenario based on the company's perception of its longterm business environment, and identified climate-related risks and opportunities by analyzing the differences between the scenario and our long-term strategy.

The scenario definition was based on the analysis of all projects on a global basis and classified into two categories: 4°C scenario (case of little progress in addressing global warming) and below 2°C scenario (case of accelerated global warming), for the two axes of transition risk and physical risk.

Transition risk

	Parameter	Current	4°C scenario _※3	Below 2°C scenario_※4	Provenance
Carbon price	Carbon price ＜developed countries＞（US$/t-CO₂）	-	-	FY2030: 100 FY2040: 140 FY2050: 160	IEA "WEO 2021" _※5 (SDS/Sustainable Development Scenario)
Changes in the energy mix	Electricity rate （US$/MWh）	216	FY2050: 184	FY2050: 242	IEA "WEO 2018"
Changes in the energy mix	CO₂conversion index （t-CO₂/MWh）	FY2019 : 0.46	FY2030: 0.31	FY2030: 0.16	IEA "WEO 2020"
Raw material price	Iron price （US$/t）	350	FY2050: 382	FY2050: 506	2DII The Transition Risk-o-MeterReference Scenarios for Financial Analysis _※6
Changes in customer behavior	Gasoline diesel vehicle sales volume	Current status（=100%）	100% in 2050 LCT _※1	90% reduction in 2050 ACT _※2	2DII The Transition Risk-o-MeterReference Scenarios for Financial Analysis
Changes in customer behavior	EV penetration rate	0.3%	FY2030 5%	FY2030 39%	Global Calculator

Physical risk

	Parameter	Current	4°C scenario_※3	Below 2°C scenario_※4	Provenance
Average Temperature Rise	Air conditioning cost (US$/person/year)	about 19	FY2030 : about30 FY2050 : about60	FY2030 : about30 FY2050 : about35	IEA ”The Future of Cooling”
Intensification of extreme weather	Flood frequency	FY2018:(100%)	FY2040 : 400%	FY2040 : 200%	MLIT “Recommendations for Flood Protection Planning in the Context of Climate Change” 2019
Intensification of extreme weather	Occurrence of typhoons and cyclones	26 cases/year in 2016	Decrease in frequency, potential increase in intensity		Japan Meteorological Agency / Environment Agency

※1：Limited Climate Transition、
※2：Ambitious Climate Transition、
※3：Case where global warming countermeasures do not make much progress
※4：Case where global warming countermeasures are accelerated (1.5°C scenario in some cases),
※5：International Energy Agency "World Energy Outlook"
※6：2° Investing Initiative（2DII）

Identifying climate-related risks and opportunities

After analyzing the differences between the above scenarios and our understanding of the business environment, which is the premise for the EXEDY Group's long-term strategy, we have identified the key items that we believe will have a huge potential financial impact on our business, as follows.

Main risks

Key Items	Potential Financial Impact	Time axis Impact	Countermeasures
Tighter Government Regulations on Greenhouse Gas Emissions	Increase in direct costs due to introduction of renewable energy Greenhouse gas emission reduction target(FY2030) -46% compared to FY2019. Measures: energy conservation activities (annual reduction of 1%) and introduction of renewable energy If energy conservation activities are carried out as planned, the estimated cost of renewable energy in FY2030 is 590 million JPY/year./ ＜FY2021: ¥2.93/kWh＞	Mediumterm High	Consideration of the introduction of internal carbon pricing to stimulate the introduction of energy-saving equipment. Gathering and researching information on renewable energy options in Japan and overseas to minimize the cost of introducing renewable energy.
Tighter regulations on existing products and market changes	Decrease in sales due to suspension of sales of internal combustion engine vehicles and accelerated transition to electric vehicles In the 2DII scenario, sales of internal combustion engine vehicles will decrease by 90%. ＜FY2050＞ Of the EXEDY Group's sales, 89% is for internal combustion engines, and the impact on sales in FY2050 will be approximately - 180 billion JPY.	Long-term High	Collection of information on regulations and customer trends related to internal combustion engine vehicles in Japan and overseas Development of new products for electric vehicles with features that improve efficiency during rotational energy transfer (EXEDY's strength)
Increased severity and frequency of extreme weather events such as cyclones and floods	Decrease in sales due to factory shutdowns and supply chain disruptions According to the MLIT's " Recommendations for Flood Protection Planning in the Context of Climate Change ", the frequency of flooding is expected to double (2°C) to quadruple (4°C) by FY2040. If operations are suspended (for 5 days) in Japan and Asia (81% of total manufacturing), where flooding is most likely to occur, the impact on sales will be -4.6 billion JPY	Mediumterm High	Implementation of risk assessment using hazard maps Implementation of measures in line with risk assessment ~ Completion of relocation of plants with the greatest risk in FY2020 ~ Installation of temporary flood barriers, etc. Formulation of business continuity plan that includes cooperating companies

Key Items

Potential Financial Impact

Time axis
Impact

Countermeasures

Tighter Government
Regulations on
Greenhouse Gas
Emissions

Increase in direct costs due to introduction of renewable energy

Greenhouse gas emission reduction target(FY2030) -46% compared to FY2019. Measures: energy conservation activities (annual reduction of 1%) and introduction of renewable energy
If energy conservation activities are carried out as planned,
the estimated cost of renewable energy in FY2030 is 590 million JPY/year./
＜FY2021: ¥2.93/kWh＞

Mediumterm
High

Consideration of the introduction of
internal carbon pricing to stimulate the introduction
of energy-saving equipment.
Gathering and researching information
on renewable energy options in Japan and overseas to minimize
the cost of introducing renewable energy.

Tighter regulations
on existing products
and market changes

Decrease in sales due to suspension of sales of
internal combustion engine vehicles and accelerated transition to electric vehicles

In the 2DII scenario, sales of internal combustion engine vehicles will decrease by 90%.
＜FY2050＞
Of the EXEDY Group's sales, 89% is for internal combustion engines,
and the impact on sales in FY2050 will be approximately -
180 billion JPY.

Long-term
High

Collection of information on regulations and
customer trends related to internal combustion engine vehicles in Japan and overseas
Development of new products for electric vehicles
with features that improve efficiency during rotational energy transfer
(EXEDY's strength)

Increased severity and frequency
of extreme weather events such as
cyclones and floods

Decrease in sales due to factory shutdowns
and supply chain disruptions

According to the MLIT's " Recommendations
for Flood Protection Planning in the Context
of Climate Change ", the frequency of flooding
is expected to double (2°C) to quadruple (4°C) by FY2040.
If operations are suspended (for 5 days) in Japan and Asia (81% of total manufacturing),
where flooding is most likely to occur, the impact on sales will be -4.6 billion JPY

Mediumterm
High

Implementation of risk assessment using hazard maps
Implementation of measures in line with risk assessment
~ Completion of relocation of plants with the greatest risk in FY2020
~ Installation of temporary flood barriers, etc.
Formulation of business continuity plan that includes cooperating companies

Main risks

Regarding the transition risk, we evaluated that the potential financial impact on the EXEDY Group's business is high due to stricter government regulations on greenhouse gas emissions, stricter regulations on existing products, and market changes. Regarding physical risks, we evaluated the above impact of increasing severity and frequency of extreme weather events to be high.

Main opportunities

Key Items	Potential Financial Impact	Time axis impact	Countermeasure
More efficient production and logistics process utilization	Lower energy costs through more efficient production ・One of the measures of the Long-term Vision/reduction of greenhouse gas emissions (-46% in FY2030 compared to FY2019) is -1% annually in energy-saving activities (-11% in FY2030). This action is expected to reduce costs by approximately 600 million JPY.	Mediumterm High	Continuation of energy-saving activities Promotion of production technology development that contributes to further production efficiency Examination of optimal production system with consideration of sales forecasts for existing flagship products
Development and sales expansion of low emission products	Increase in sales due to higher demand for products for HEVs (Japan and China) While regulations on internal combustion engine vehicles are becoming stricter in Europe and the United States, HEVs (hybrid vehicles) are exempt from regulations in Japan and China. Global HEV sales in FY2032 will be six timeshigher than in FY 2019 (35 million units). The impact on sales in FY2030 is expected to be 37 billion JPY due to the development of technologies such as HEV damper and direct drive iSG for HEVs, contributing to decarbonization.	Mediumterm High	Set the “sales ratio of products that contribute to decarbonization” as a KPI. Set a target of 15% by FY2030 and 51% by FY2050, and focus on creating and expanding sales of products for HEVs and BEVs Also set the “Ratio of R&D expenses for new product development” as a KPI. Set a target of raising this ratio to 70% in FY2030 and 90% in FY2050 and strengthen the development structure.
Development of new products through R&D and technological innovation	Increased sales due to increased demand for drive unit products centered on motors for BEVs The global BEV (electric vehicle) sales share in FY2032 2 is expected to be 42% (2% in FY 2019), and the global sales volume to be 43 million units. We assume that the development of BEV wide-range drive systems and other technologies will have an impact of 5 billion JPY on sales in FY2030. The market for drive unit products centered on motors for new fields such as drones is also expected to grow in the future	Mediumterm High	In addition to the above, we concluded a capital and business alliance with Aster, a company with strengths in high-output, compact motors. (EXEDY/drive technology × Aster/motor technology) Accelerate technology development of the following motor-centric drive unit products ~BEV wide-range drive systems, motorcycle electric units, drone propulsion systems, Universal e-Drive Units

Key Items

Potential Financial Impact

Time axis
impact

Countermeasure

More efficient production
and logistics process utilization

Lower energy costs through
more efficient production

・One of the measures of the Long-term Vision/reduction of greenhouse gas emissions
(-46% in FY2030 compared to FY2019) is -1% annually
in energy-saving activities (-11% in FY2030).
This action is expected to reduce costs by approximately 600 million JPY.

Mediumterm
High

Continuation of energy-saving activities
Promotion of production technology development
that contributes to further production efficiency
Examination of optimal production system with consideration
of sales forecasts for existing flagship products

Development and sales
expansion of low emission products

Increase in sales due to higher demand for products for HEVs
(Japan and China)

While regulations on internal combustion engine vehicles are becoming stricter in Europe
and the United States, HEVs (hybrid vehicles) are exempt from regulations
in Japan and China.
Global HEV sales in FY2032 will be six timeshigher than in FY 2019
(35 million units).
The impact on sales in FY2030 is expected to be 37 billion JPY
due to the development of technologies such as HEV damper
and direct drive iSG for HEVs, contributing to decarbonization.

Mediumterm
High

Set the “sales ratio of products that contribute to decarbonization” as a KPI.
Set a target of 15% by FY2030 and 51% by FY2050,
and focus on creating and expanding sales of products for HEVs and BEVs
Also set the “Ratio of R&D expenses for new product development” as a KPI.
Set a target of raising this ratio to 70% in FY2030 and 90% in FY2050
and strengthen the development structure.

Development of new products
through R&D and
technological innovation

Increased sales due to increased demand
for drive unit products centered on motors for BEVs

The global BEV (electric vehicle) sales share in FY2032
2 is expected to be 42% (2% in FY 2019),
and the global sales volume to be 43 million units.
We assume that the development of BEV wide-range drive systems
and other technologies will have an impact
of 5 billion JPY on sales in FY2030.
The market for drive unit products centered
on motors for new fields such as drones
is also expected to grow in the future

Mediumterm
High

In addition to the above, we concluded a capital and business alliance with Aster,
a company with strengths in high-output, compact motors.
(EXEDY/drive technology × Aster/motor technology)
Accelerate technology development of
the following motor-centric drive unit products
~BEV wide-range drive systems,
motorcycle electric units,
drone propulsion systems, Universal e-Drive Units

Main opportunities

As for opportunities, we believe that the utilization of more efficient production and logistics processes, the development and sales expansion of low-emission products, and the development of new products through R&D and technological innovation have a high potential financial impact on the EXEDY Group's business.

Impact on management strategy

In order to strengthen the resilience to the impact of the carbon-neutral movement on the EXEDY Group's product development and production system, which we have recognized by identifying the risks and opportunities mentioned above, we are implementing the following two points.

The first is the formulation of a Long-term Vision that incorporates climate change countermeasures and the announcement of a sustainability declaration. In our Long-term Vision, we aim to contribute to the creation of a decarbonized society through both product expansion and production systems. In addition, in the sustainability declaration, we have announced that we will achieve carbon neutrality by 2050.

Secondly, we are strengthening our product development structure through open innovation and organizational restructuring. As for open innovation, we concluded a capital and business alliance with Aster, a company with strengths in high-output, compact motors. As part of our organizational restructuring, we have integrated the Development Headquarters and the Motorcycle Clutch Headquarters, and newly established the Development Planning Department, Smart Technology Department, and other departments. In addition, electric product representatives from the Development, Purchasing, Production Engineering, Quality Assurance, and Manufacturing Headquarters have been assembled to prepare for the mass production of electric products across the entire company. By strengthening these product development systems, we will accelerate the technological development of motor-centered drive unit products, including BEV wide-range drive systems and motorcycle electric units, utilizing EXEDY's drive technology and Aster's motor technology.

Impact on financial planning

There are also two main impacts on financial planning.

The first is an increase in the R&D expense ratio for new product development. As mentioned earlier, against the backdrop of carbon neutrality, it is necessary to expand the number of new products that contribute to decarbonization and strengthen the development system for new products. Accordingly, in our financial plan, we plan to increase the ratio of new product development expenses to R&D expenses from 29% in 2019 to 90% by FY2050.

The second point is to account for the purchase of renewable energy. As part of our production system for carbon neutrality, we plan to start purchasing renewable energy sources in FY2024 and have incorporated this into our consolidated medium-term management plan.

Risk Management

The EXEDY Group's risk management action guideline is to prepare in advance to prevent emergencies and minimize damage. To ensure that these measures are implemented, we conduct risk management after evaluating and identifying risks. We identify major risk items related to safety and health, environmental preservation activities, and business continuity management activities, based on the frequency of occurrence, degree of impact, and surrounding conditions. We are working to strengthen our management system by clarifying the department responsible for each risk, the degree of impact of each risk, the causes of its occurrence, and proactive preventive measures.

Regarding climate-related risks, the Sustainability Committee plays a central role in analyzing scenarios, assessing and identifying risks, and managing the progress of response measures. The status of the response to major risks is as follows. Regarding the risk of sales decline due to the suspension of sales of internal combustion engine vehicles, etc., the Management Committee and the Board of Directors have discussed the issue, and developed a Long-term Vision, and strengthened the product development system. Regarding the risk of increased direct costs from the introduction of renewable energy due to stricter government regulations, the Sustainability Working Group is researching and studying measures to address this issue, including gathering information on renewable energy options. Regarding the risk of supply chain disruptions due to floods and other disasters, the Risk Management Committee, consisting of the President & CEO, (Senior) Executive Managing Officers, and fulltime Audit and Supervisory Board Members, is discussing and promoting business continuity plans for suppliers and other parties.

Metrics and Targets

The EXEDY Group is working to achieve carbon neutrality by 2050, and has set the following targets for FY2030 and FY2050 based on the "NET GHG (greenhouse gas) emission reduction rate" as a climate-related KPI, and is confirming progress at the Sustainability Conference.

Metrics	NET GHG Emissions Reduction Rate Scope 1 (direct emissions) + 2 (indirect emissions: electricity, etc.)
Targets	FY2030 -46% ＜compared to FY2019＞ FY2050 -100% ＜same as above＞
Actual （FY2022）	Reduction rate 20.1% ＜Compared to FY2019＞ Emissions (1000t-CO2) Scope 1: 33.4, Scope 2: 169.1, Scope 3: 1,491.8

As described above, the EXEDY Group recognizes climate change as an important environmental issue and has positioned the Board of Directors and the Sustainability Committee as governance and the Sustainability Working Group as the business promotion organization to establish KPIs and promote sustainability activities. Also, we have analyzed the circumstances surrounding our company based on multiple scenarios to identify significant risks and opportunities, and have estimated the potential financial and strategic impact of climate change on our business, and reflected this information in our management strategies and financial plans. In particular, we have incorporated measures to address major risks and opportunities into our Long-term Vision and consolidated medium-term management plan. By steadily implementing these measures, we will strengthen the EXEDY Group's resilience against the impact of these risks on product demand and other factors.