Of all risks in businesses, listed below are the main risks that Sumitomo Chemical Group (the Group) recognizes may significantly impact our investors’ decisions. Please be reminded that these main risks may not be limited to only those mentioned below, and any conditions with reference to the future are based on information available to the Group as of the end of this consolidated fiscal year.
The Group works to minimize such risks, while also building and enhancing our risk control system that allows us to use these risks as opportunities.

1. Risks involving management strategy

(1)Short-term risks

1) Market-related risks

As a chemical manufacturer offering a diverse range of products, the Group engages in a wide range of businesses which are subject to a number of risks. Market risks associated with the Group’s businesses are mainly as follows.

Price competition
The Group's businesses are exposed to price competition. It is expected that the product lines of the Group will be exposed to severe price competition for various reasons, such as the participation of foreign enterprises in the domestic market, the inflow of imported products as a result of tariff reductions, and the increasing market entry of generic products. Although the Group is seeking to reduce costs, failure to address price competition may have an adverse effect on operational results and the financial condition of the Group.
Impairment losses may be recorded in tangible fixed assets owned by the Group due to lower productivity and declining market prices as a result of a deterioration of the business environment. This may affect the business performance and financial status of the Group.
Deferred taxes may be reduced if some or all of them are deemed unrecoverable because of a change in our forecasts or assumptions of future taxable income, triggered by a significant deterioration of the business environment, or because of a rate change after a tax law revision. This may affect the business performance and financial status of the Group.

Overseas markets
Overseas sales of the Group account for close to 70% of total sales, with sales in the Asian market being particularly large, while in recent years the Group has been expanding its businesses in regions such as South America as well. Given this situation, in the event that the Group is required to cut prices due to deteriorating economic conditions in specific markets or changes in the business standing of client enterprises, such circumstances may have an adverse effect on the operational results and financial condition of the Group.

Agro & Life Solutions
The shipments of agrochemicals and household insecticides in the Agro & Life Solutions Sector are affected by the growth status of target crops and by outbreaks of crop diseases or pest infestations caused by abnormal climate conditions in various parts of the world. Depending on such factors, drastic price fluctuations for feed additives may also occur. If crop growth is not as good as expected, if pest infestations are reduced, or if drastic price fluctuations occur, such circumstances may have an adverse effect on the operational results and financial condition of the Group.

ICT & Mobility Solutions
Since the speed of technical innovation for products in the ICT & Mobility Solutions Sector is extremely rapid, it is essential that the Group develop and supply new products to its customers in a timely manner. In the event that the Group is unable to effectively develop new products that satisfy customer needs, or if an important technical innovation is made by another company in advance, the business results and the financial condition of the Group may be adversely affected.

Advanced Medical Solutions
The Advanced Medical Solutions Sector is engaged in the CDMO (Contract Development and Manufacturing Organization) business for developing and manufacturing production processes for small-molecule pharmaceutical active ingredients and intermediates, oligonucleotide drug substances, and regenerative medicine and cell therapies. If orders were to be lost due to failure to meet the needs of the sector’s customers, which are pharmaceutical companies, or if the development of a new drug were to be postponed or discontinued due to changes in the business environment of its customers, the business results and the financial condition of the Group may be adversely affected.

Essential & Green Materials
Naphtha, a main feedstock for the Essential & Green Materials Sector, is sometimes subject to radical price fluctuations arising from various causes, including security problems in the Middle East or global economic conditions. If the price of naphtha radically increases, it may have an adverse effect on the operational results and financial condition of the Group due to a delay in the reflection of such cost increases in product selling prices.
The supply of naphtha and some other raw materials is dependent on particular geographical areas or suppliers. Although the Group is seeking to reduce the risk associated with its inability to procure major raw materials by developing multiple supply sources, there is no guarantee that supply shortages of such major raw materials will not occur. In the event that the Group cannot procure necessary major raw materials on its own, such circumstances may have an adverse effect on the operational results and financial condition of the Group.

Sumitomo Pharma
In the Sumitomo Pharma Sector, the difficulty of new drug discovery and development is increasing, and there are no guarantees that development will proceed according to plan and achieve approval and sales. Moreover, concerns about safety or effectiveness could delay development, or lead to a situation where development must be cancelled. If these sorts of circumstances occur, the Group’s operating results and financial position may be significantly affected.
In Japan, the precipitous decline in Japan’s birthrate and the rapid rise in the country’s elderly population are the prime factors causing the country’s financial state to deteriorate. In this climate, measures continue to emerge aimed at curbing healthcare costs by price constraints of branded prescription drugs and promotion of generic drug use, and debates on the country’s healthcare reform continue. Moreover, there is a possibility that regulatory changes may be passed and implemented with the goal of controlling drug costs in the US as well, while in China, there is a possibility that changes to the healthcare system may be implemented with the aim of controlling national healthcare expenses. These sorts of regulatory changes, depending on their direction, may have a significant effect on the Group’s operating results and financial position.

Exchange rate fluctuations
Sumitomo Chemical (the Company) and its domestic consolidated subsidiaries import raw materials from overseas and export finished products manufactured in Japan, and the export value of finished products exceeds the import value of raw materials. If the Japanese yen appreciates against foreign currencies, the products will be less competitive in price compared with products made in foreign countries. Moreover, the reduction in the proceeds received from exports could exceed the reduction in payments for imports. In addition, in recent years, as the Group has expanded its business activities outside Japan, in areas such as South America and India, the impact of changes in the exchange rates between the various local currencies in those regions and the US dollar and other currencies has correspondingly grown as well. In order to cope with these circumstances, the Group is seeking to minimize short term exchange rate risks through currency hedges, such as forward-exchange contracts, or by conducting export transactions in Japanese yen. However, since it is impossible to completely hedge risks due to medium or long-term fluctuations in currency exchange rates, there is a possibility that the appreciation of the Japanese yen would exert an adverse effect on the operational results and financial condition of the Group.
Furthermore, the operational results of affiliated group companies in foreign countries are converted into Japanese yen for the purpose of preparing the consolidated financial statement. Depending on the exchange rate at the time of conversion, the values after the conversion into Japanese yen may potentially be impacted and may negatively affect the operational results and financial condition of the Group.
The impact of exchange rate fluctuations on core operating income is estimated to be about a 2.0 billion-yen decline in annual income, on the assumption of one yen appreciation against the US dollar.

Interest volatility
With respect to the demand for financing, the Group determines the amount, term, and method of funds procurement, taking into consideration the demand for financing, financial position, and the financial environment. In preparation for interest rate fluctuations, the Group raises funds by combining both fixed interest rates and floating interest rates, as applicable. If interest rates rise, however, the increase in interest expenses may have an adverse effect on the operational results and financial condition of the Group.

Fluctuation in stock market prices
Since most of the securities held by the Group are marketable securities, if stock market prices sharply decline, there may be an adverse impact on the financial condition of the Group.

2) Overseas business expansion

The Group has production and sales facilities in countries around the world, and close to 70% of its revenue is generated outside Japan. For this reason, if geopolitical issues occur, such as an increase in tariffs due to a trade conflict or a breakdown in supply chains due to regional conflicts, the business results and financial condition of the Group could be affected.
In addition, to conduct business activities in foreign countries, the Group needs to address the potential risks of changes in laws and restrictions, disputes stemming from differences in working conditions, difficulties in hiring and procuring human resources, social disorder caused by terrorism or war, and other factors. In the event that these risks surface, there is a possibility that such events might adversely affect the business results and financial condition of the Group.
Rabigh Refining & Petrochemical Company (Petro Rabigh), jointly founded by the Company and Saudi Aramco, is operating an integrated refinery and petrochemicals complex (the Rabigh Phase I Project and Rabigh Phase II Project) in Rabigh, Saudi Arabia. Sumitomo Chemical, to safeguard our total investment in these projects against damages from unforeseen circumstances, has taken out overseas investment insurance in accordance the rules of Nippon Export and Investment Insurance, which was formerly known as the Independent Administrative Institution Nippon Export and Investment Insurance. Sumitomo Chemical has also guaranteed a portion of the bank loans made by Petro Rabigh. In the consolidated 2024 fiscal year, Petro Rabigh had positive refining margins due to improved market conditions stemming from issues at refineries in Southeast Asia, Europe, and the Middle East. Despite this, petrochemical products, especially resin products, continued to have low margins, which resulted in a continued weak performance. On the other hand, as a result of the debt waiver by the Group and Saudi Aramco, Petro Rabigh’s cumulative losses have improved, and the Group’s cumulative loss ratio of its capital was 35.72% as of the end of fiscal 2024. Depending on the results of uncertain future economic conditions, if the recoverable amount of Sumitomo Chemical’s investments in Petro Rabigh significantly decline, and if there are severe fluctuations in the fair value of the loans and long-term accrued interest, leading to the debt guarantees on Petro Rabigh being exercised, it could negatively impact the Sumitomo Chemical Group’s business results and financial condition.

3) Acquisitions and equity alliances

The Group is engaging in domestic and international acquisitions and equity alliances with the aim of expanding its business and enhancing its competitiveness. The Group, however, may not be able to generate the synergies or other positive effects initially expected due to changes in the business environment surrounding the Group or the acquired business. Impairment loss of goodwill may be recorded if the expected results are considered unattainable due to changes in the business environment and competitive environment, or if there is an increase in the applicable discount rate. This may affect the business performance and financial status of the Group.

4) Technology, Research and Development

The Group is vigorously carrying out research and development to rapidly commercialize new technologies and new products that will meet customer needs. The research and development (R&D) conducted by the Group may sometimes extend over a long period of time, particularly when it includes discovery research in order to create next-generation businesses. In the event that the subject of such R&D is not put into practical implementation, or if the development of new products is significantly delayed or abandoned, the competitiveness of the Group may be diminished, which may have an adverse effect on operational results and the financial condition of the Group.
The Group promotes R&D by the deployment and full use of AI and materials informatics on the R&D frontlines, and by the enhancement of collaboration (open innovation) with academia and startups.

5) Sudden changes to the business environment due to DX

The Sumitomo Chemical Group is accelerating the strengthening of the competitiveness of its businesses and its efforts toward value creation. At the same time, however, if the Company’s application of digital technology is significantly delayed, if other companies utilize digital technology to improve their productivity or competitiveness, or if there is some other sudden change to the business environment, such as the creation of new business models, the relative competitive strength of the Group could decline, which could adversely affect the operational results and financial condition of the Group.

(2)Medium- to long-term risks

1) Climate change issues

One of the important agendas of the Group is climate change issues facing society. Using technologies cultivated as a diversified chemical company, the Group has been proactively working from the perspectives of both its obligation to bring the Group’s greenhouse gas (GHG) emissions close to zero and contribution to reducing greenhouse gas emissions through the Group’s products and technologies. If these issues cannot be properly addressed, it may affect the business activities of the Group. The Group works towards the resolution of climate change issues that affect our daily living on a global scale from the perspectives of both “obligation” and “contribution.”

2) Plastic waste problem

Plastics underpin our daily living as materials for various uses in automobiles, aircrafts, electronic devices, household goods, and various packaging materials. The current issue is that, because they are not treated or recycled properly and adequately after use, plastics create environmental pollution. If this issue is not properly addressed, it may affect the business activities of the Group.
The Sumitomo Chemical Group is potentially in a beneficial position with respect to the plastic market that may exist after the creation of a recycling-based society, due to its efforts to achieve carbon resource recycling, including plastics, through the development of technologies and other efforts.

2. Risks involved in the foundation of business continuity

1) Accidents and disasters

Sumitomo Chemical, to minimize the potential risk of accidents and disasters involving our production facilities, clearly follows relevant regulations and, based on the risks, conducts periodic equipment inspections and implements various safety policies. However, there are a variety of risks, and there is no guarantee that such accidents and disasters arising out of production facilities, including the impacts of natural disasters, such as typhoons and earthquakes, will be completely prevented or reduced.
In the event of an accident or disaster that causes property damage and/or human injury near the plant, it may undermine the Group’s business activities, major costs may be incurred, and it may have a significant impact on market perceptions of the Group. This, in turn, may adversely affect the operational results and financial condition of the Group.
Regarding the risk of potential accidents and disasters, as appropriate, the Group is sharing information and improving the ways that it addresses these risks.

2) Quality of products

Although the Group manufactures a wide variety of products in accordance with globally recognized strict quality control standards, there is no assurance that the Group will be able to fully eliminate defects from all of its products or that no incidents involving products or recalls will occur in the future. If a particularly large-scale incident involving its products were to occur, it could be extremely costly and have a significant impact on market perceptions of the Group, which, in turn, may adversely affect the operational results and financial condition of the Group.
Although our products that are on the market, such as Agrochemicals and pharmaceuticals, have been approved in accordance with strict quality examinations in each country, new quality problems or side effects may be identified as a result of progress in science and technology, as well as from accumulated clinical experience. If such unexpected quality problems or side effects are discovered after products have been marketed, there is a possibility that such circumstances may adversely affect the operational results and financial condition of the Group.
The Group has established mechanisms and systems to manage product safety and is proactively working on implementing risk assessment and risk reduction measures during the development of new products, conducting thorough daily quality control, as well as issuing guidance on handling its products. Through these activities, we will continue our efforts to prevent the occurrence of incidents involving products and quality issues.

3) Cybersecurity

The company is accelerating its digital transformation, making use of IT to pursue improvements in productivity, secure competitive advantages in its businesses, and create new business models. At the same time, the threat of cyberattacks and other risks related to information systems are increasingly rising, which could adversely affect the Company’s business operations.
The Group properly manages information, information systems, and information communication networks and takes measures to obviate leaks and losses and to minimize the impact of security-related incidents. Positioning cybersecurity as a management issue, we are taking appropriate measures to address the associated risks.

4) Compliance-related risks

The Group positions compliance as the root of business management, and builds/operates a group-wide compliance promotion system under the guidance and supervision of its Compliance Committee. Enhancing guidance and assistance to the Group from the regional legal compliance operation (RLCO) under the Compliance Committee, we focus on strict group-wide compliance. However, compliance-related risks may not be completely eliminated even after all possible measures are taken. In the event of compliance violations that breach domestic or foreign laws, these may undermine the social credibility of the Group, and may result in monetary liabilities and penalties. This may affect the business performance and financial status of the Group.

5) Change in regulations

The Group conducts its businesses in accordance with the laws and regulations of each country in which it operates. Changes in laws, regulations, government policies, business customs, and interpretations or other changes, as well as the resulting implications, may have adverse effects on the financial condition, including the business operations and results, of the Group. Moreover, more legal regulations on the environment and safety for chemicals may be imposed in the future, possibly incurring additional costs for the Group.

6) Human rights issues

The Group regards respect for human rights as one of the foundations for business continuity. By enacting the “Sumitomo Chemical Group Basic Policy on Respect for Human Rights,” we set up the “Human Rights Promotion Committee” as a system to accelerate the process and work as one on initiatives to protect human rights, such as human rights due diligence. At the same time, however, even having established these policies, there is a possibility that the Group may not be able to completely eliminate risks relating to human rights, and if a human rights issue were to occur further up the Group’s value chain, that may have an adverse effect on the business activities of the Group.

7) Harassment

The Group is working to reduce the risk of harassment by thoroughly educating our employees on the occurrence of harassment and establishing a contact point for employees to report it. Even with the implementation of such measures, however, there is a possibility that the Group may not be able to completely eliminate the risk of harassment. In the event a complaint stemming from harassment were to be brought to the media or Japan’s Labour Standards Bureau and result in damage to Sumitomo Chemical’s corporate image or an obligation to pay reparations, the business results and financial condition of the Group may be adversely affected.

8) Intellectual property rights

The Group has been strengthening its competitiveness by developing and accumulating proprietary technologies and know-how that will differentiate itself from competitors.
Although such technology and know-how are under strict control by the Group, there is a possibility that some of the proprietary technologies, products, and know-how of the Group may be unexpectedly leaked to others. Furthermore, intellectual property may not be completely protected in particular geographical areas. In some areas, there is a possibility that the Group may be unable to effectively prevent a third party from manufacturing similar products that are covered by the Group’s intellectual property rights. Furthermore, the Group may become involved in intellectual property rights disputes, which might result in outcomes that run counter to the interests of the Group. If that were to happen, it could have an adverse impact on the business results and financial condition of the Group.

9) Spread of Infectious Diseases

In the event of a global pandemic, the business performance and financial status of the Group may be affected. We set up a Risk Crisis Management Committee to address risks that may affect Sumitomo Chemical, and it deliberates on policies to address the situation.
The Group formulated a business continuity plan and conducts reviews of it annually, and carries out business operations in accordance with the status of any pandemic. In response to the Japanese government’s revision of pandemic measures in 2024, Sumitomo Chemical has also conducted a review of how our business operations should match the status of the pandemic.

10) Lawsuits

As the Group’s businesses develop in Japan and elsewhere in the world, they remain exposed to the risks of becoming the target of lawsuits, disputes, or other legal procedures. In the event any significant lawsuit is filed against the Group, this could have a considerable adverse effect on the operational results and financial condition of the Group.