Policy on climate change

Climate change is causing serious impacts to our lives in recent years. Recognizing that climate change is a critical social issue that must be addressed sincerely, the Nippon Paint Group has established a global policy on climate change and energy in order for the entire Group to mitigate and adapt to its impacts.

-Nippon Paint Group Global Policy-

We proactively reduce the intensity of energy consumption and increase renewable energy to meet global Net Zero carbon requirements.

Pursuant to this global policy, the Group is now working to rein in its greenhouse gas (GHG) emissions and minimize business risks caused by the progression of climate change. The reduction of energy used in the paint manufacturing process and proactive use of renewable energy will not only help to combat climate change by controlling GHG emissions, but also make a difference in the issue of energy resource depletion.

Report based on the TCFD recommendations

In September 2021, the Nippon Paint Group expressed its support for the final report of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. For Maximization of Shareholder Value (MSV), we are working to enhance climate change-related measures and information disclosure.

Governance

Nippon Paint Group has shifted to an　autonomous management structure based on Asset Assembler model with a new sustainability structure launched in 2022 designed to enhance sustainability initiatives with business activities, rather than initiatives led by the headquarters. We have set up four Global Teams based on Materiality including climate change directly under the Directors, Representative Executive Officers & Co-Presidents, in order to implement sustainability strategy aligned across the Group globally. The Global Teams will directly report to the Co-Presidents their progress and make suggestions on actions related to climate change. Then the Co-Presidents will report the information obtained from the Global Teams to the Board of Directors as necessary. In this manner, the Board of Directors oversees the Group’s sustainability actions.

Strategies

We have identified climate-related risks and opportunities that are critical to the Group’s strategies and are working to assess their financial impacts.
In light of the increasing interest in climate change countermeasures in recent years, there are concerns that global warming taxes will be hiked, resulting in higher energy costs and additional costs related to capital investment and technology development for decarbonization.
In addition, in the event of the greater severity and frequency of foods and other events caused by extreme weather, there is a risk that sales could decline due to damages to our plants that result in the suspension of production.
In the meantime, we are considering taking actions that lead directly to businesses, such as entering new markets by developing products that contribute to reducing CO2 emissions using the Group’s technologies.
We are incorporating our analysis of these climate-related risks and opportunities in formulating the medium- and long-term growth strategy of the Group.
Although our energy intensity is not significant compared to many other manufacturing businesses, our group scale means we still collectively consume a considerable amount of energy and therefore seek to actively reduce our energy consumption. This includes cooling water required in the process of dispersing and stabilizing pigments and other raw materials. We have identified carbon taxes as the greatest risk that could directly affect our operations and anticipate cost increases due to higher carbon prices. Therefore, we have started considering the sourcing of renewable energy as a workaround. Carbon taxes have already been introduced in some countries and it is expected that the tax rates will be hiked gradually to achieve the net zero targets of each country.
In terms of climate-related scenarios, the Group has conducted reviews on the 2-degree and 4-degree scenarios. According to a report by the International Energy Agency (IEA), we will continue to incur certain costs both in a scenario where we will shift to a decarbonization process worldwide (the 2-degree scenario) and a scenario where the current policies for decarbonization go unchanged globally (the 4-degree scenario), unless we make progress with lowering our CO2 emissions assuming our CO2 emissions remain unchanged from 2020 levels. There are concerns that carbon prices will have an even greater impact on operating costs, given the potential increase in emissions associated with the Group’s future business expansion.
Global warming is of interest to society as a whole, including the Group’s major customers. While it entails physical and regulatory risks, global warming can be linked to opportunities to expand our business by addressing its impacts strategically. Specifically, such opportunities include expanding sales of products that improve ship fuel efficiency, help reduce CO2 emissions at automobile manufacturing plants, and mitigate the rise of road surface temperature.
For instance, ATTSU-9 ROAD®, which produces a highly reflective asphalt pavement, is expected to contribute to reducing CO2 emissions by counteracting the heat island effect. We have estimated the financial impacts of road pavement coatings, including degree of contribution to earnings, based on the market growth forecast for these coatings.

Examples of strategies for climate change risks and opportunities

Estimated financial impact of carbon taxes

The Group consumes a large amount of energy, especially in the manufacturing processes. This includes cooling water required in the process of dispersing and stabilizing pigments and other raw materials. We have identified carbon taxes as the greatest risk that could directly affect our operations and anticipate cost increases due to higher carbon prices. Therefore, we have started considering the sourcing of renewable energy as a workaround. Carbon taxes have already been introduced in some countries and it is expected that the tax rates will be hiked gradually to achieve the net zero targets of each country.
In terms of climate-related scenarios, the Group has conducted reviews on the 2-degree and 4-degree scenarios.
According to a report by the International Energy Agency (IEA), carbon prices in developed countries will increase to 100 USD/t-CO₂ in 2030 if a shift to decarbonization proceeds worldwide (if the world achieves the 2-degree scenario). If CO₂ emissions in 2030 remain unchanged from 2020 levels, the impact on the Group is estimated to be around 2.5 billion yen. Assuming the 4-degree scenario of the IEA where current policies for decarbonization go unchanged, we will continue to incur certain costs if we do not make progress with lowering our Scope 1 and Scope 2 emissions in Japan. There are concerns that carbon prices will have an even greater impact on operating costs, given the potential increase in emissions associated with the Group's future business expansion.

Lowering CO₂ emissions of the automotive coating process

The auto industry is expanding its efforts toward decarbonization. A rising number of our main business partners are actively sharing their climate change countermeasures externally, and our environmentally-friendly automotive coatings address the decarbonization needs of these main business partners. In addition, looking at the long term, including internationally, the automotive industry should see a slower growth rate than before due to car sharing and other innovations, but the growth rate of new automobile sales is expected to increase at 2% per annum until 2030, which should keep production of new automobiles rising going forward. In recent years, our main business partners are speeding up initiatives for carbon neutrality or CO₂ reduction throughout the entire automobile life cycle, giving rise to initiatives and plans focused on the environment. With each passing year there is growing demand to reduce CO₂ emissions during paint application because this process has a large carbon footprint within the overall automobile production process. Coatings and electro-deposition used during the automobile manufacturing process have a high baking temperature, requiring large amounts of energy to be consumed; thus, paint that can be applied in a shorter period of time than conventional ones is now in demand. Going forward, these products are expected to see increased sales. Wet-on-wet paint developed by Nippon Paint shorten the baking process for the second coat, which reduces CO₂ emissions during paint application compared to conventional paint.

Lowering CO₂ emissions in anti-fouling paint for ship bottoms

LF-Sea and A-LF-Sea, both fuel-saving anti-fouling paint for ship bottoms that help lower CO₂ emissions, can improve a ship’s fuel efficiency by 4% to 10% by reducing frictional resistance. In addition to improved fuel efficiency, we developed FASTAR, a new anti-fouling paint with low VOCs and low solubility, which was launched in 2021. Considering the more active efforts in the marine shipping business to reduce environmental impacts including lowering CO₂ emission, we are aiming to increase sales of anti-fouling paint that are proven to improve ship fuel efficiency.
The International Maritime Organization (IMO) has established a roadmap for reducing CO₂ emissions from the marine transportation sector. According to this roadmap, the IMO aims to lower CO₂ emissions from international marine transportation by 50% compared to 2008 by 2050 and by 40% compared to 2008 by 2030. The reduction target for 2030 is expected to be achieved through energy-efficient technologies and improved operational efficiency. Our fuel-saving anti-fouling paint for ship bottoms is an effective energy-efficient technology, and going forward we anticipate sales for these paint will increase steadily.
We are working to increase sales of environmentally-friendly products and sustainable products, including fuel-saving anti-fouling paint for ship bottoms, having established KPI. Demand has risen for reducing CO₂, which is the factor behind global warming, while heavy oil prices have increased since 2005, resulting in recommendations for a shift from Bunker C to lower sulfur content Bunker A following tighter restrictions on SO_x. As a result, marine shipping companies have been concerned about the soaring cost of fuel. Given this, Japan’s Ministry of Land, Infrastructure, Transport and Tourism (MLIT) announced guidelines for reducing CO₂ emissions from international marine transportation, which lead us to begin development of anti-fouling paint that helps lower fuel consumption. This resulted in the introduction of LF-Sea as a biomimetics product with viscosity and smoothness inspired from the skin (covered in mucous membrane) of marine organisms (tuna).
Studies have confirmed that LF-Sea lowers ships'fuel consumption by 4%. However, we began development of A-LF-Sea following requests from customers for even greater fuel savings and after receiving financial support from MLIT as part of the program called Support for Technology Development from Marine Vessels for Curtailing CO₂. During the development of A-LF-Sea, which is an improved version of LF-Sea, we conducted joint R&D through a national project involving three companies; namely, Nippon Paint (at the time; currently, Nippon Paint Holdings), Nippon Paint Marine Coatings and Mitsui O.S.K. Lines. R&D received financial support from MLIT and covered the joint research topic of "R&D on greenhouse gas reducing technologies in international marine transportation" by Nippon Kaiji Kyokai (ClassNK). Studies have confirmed that the paint lowered fuel consumption 10% by improving LF-Sea’s hydrogel technology, reducing frictional resistance even more and combining it with the viscosity control technology of an undercoat. Since launching LF-Sea in 2008, both LF-Sea and A-LF-Sea have been used on more than 3,500 ships as of December 2020.

Controlling the increase in road surface temperature with solar heat reflective paint for asphalt road surfaces

Solar heat reflective paint for asphalt roads reflects the sun’s heat to control the increase in surface temperature. ATTSU-9^® heat shielding coatings for asphalt road surfaces reflects the sun’s infra-red rays to control increases in road surface temperature, helping to mitigate the heat island effect in urban areas and reduce the use of energy to power air conditioners. Application of ATTSU-9 ROAD^® to an asphalt road surface has been proven to lower the surface temperature by between 11 and 14 degrees Celsius (during the afternoon in the summer time).

In Japan, this heat island effect driven by global warming in recent years has resulted in significant temperature increases in urban areas. It has been reported that the temperature increase in August in Tokyo over the 100-year period since temperature statistics were first recorded in 1901 was 2.4 degrees Celsius. As a countermeasure against urban heat island including in Tokyo, the national government has formulated “guidelines on urban planning for mitigating heat island”, which have become an important guideline for local governments' Low Carbon City Development Guidance pursuant to the Low Carbon City Act. These guidelines cite primarily three causes of heat island; one of which is artificial ground surface coatings. In other words, heat is accumulated in road surfaces such as asphalt andvconcrete, causing the temperature of urban areas to rise. Highly reflective pavement is effective as a countermeasure, which also has a CO₂-mitigating effect by controlling heat islands. Consequently, we believe that sales of ATTSU-9 ROAD^®, which produces a highly reflective asphalt pavement, will grow not only for local governments, but also companies that endorse its use as a way of mitigating environmental impacts. Currently, net sales of ATTSU-9 ROAD^® total around 100 million yen, but we have calculated latent market to be worth 750 million yen when multiplying existing sales by the road pavement coatings market growth rate of 7.5 times expected to occur up to 2030.
We aim to increase sales of environmentally-friendly products and sustainable products, including heat shielding coatings for asphalt road surfaces, having established KPI. We have explored expanding application for heat shielding roof coatings under the company-wide Heat Shielding Project launched in 2006.
We needed to maintain the heat shielding performance of these roof coatings while improving adherence to asphalt surfaces and increasing durability concerns over constant wear and tear from contact with automobile tires. Tokyo Metropolitan Government had wanted to lower the road surface temperature by 10 degrees Celsius in the summer time to counteract the heat island effect. From around 2009, Tokyo Metropolitan Government began using MMA coatings as a heat shielding coatings for roads to counteract urban heat islands. From around 2014, the problem of paint peeling began to emerge (our urethane/urea coatings do not peel). In addition, MMA coatings have a strong odor, which became a problem unto itself. In response, ATTSU-9 ROAD^®, a urethane/urea coating developed by Nippon Paint, reduces peeling while also offering slip resistance, wear resistance, no odor, and low VOC. The results of a Tokyo Metropolitan Government survey found that our urea coatings rarely if ever experienced peeling. As a result, Tokyo Metropolitan Government revised its requirements to address the peeling issue, selecting urethane/urea coatings (same as our ATTSU-9 ROAD^®) as the principal solution. This accelerated their introduction and earned ATTSU-9 ROAD^® a high market share.

Risk management

The Global Team that works directly under the Co-Presidents identifies and assesses risks, including their importance, based on the criteria of factors directly related to our operations (the amount of raw materials used, energy, water, and CO2 in the manufacturing processes) and external factors (users’ application-based needs and product feature needs).
Once identified and assessed, the Global Team proposes risks and opportunities and their action plans to the Co-Presidents. The Co-Presidents set targets and propose the targets to the Board of Directors. These targets, after approval by the Board of Directors, are set as group-level targets. Group partner companies formulate business plans in line with these group-level targets and action plans.
The Audit Committee has identified the effectiveness of responses to ESG and SDGs initiatives as an issue to be addressed based on the effectiveness evaluation, and is deliberating on this agenda from the perspective of MSV.

See here for details on the integration of climate change risk management to comprehensive company-wide risk management

Comprehensive company-wide climate change risk management

Metrics and targets

We will accelerate our response to climate change by conducting activities to reduce CO2 emissions based on the net zero targets and the carbon neutral policies of the government of each country and contributing to net zero in our operating regions around the world. As concrete measures, we will focus on reducing emissions intensity in emerging countries, where markets are expanding, by introducing renewable energy and replacing equipment with energy-saving and electrified models.
By taking these actions, our Japan Group, DuluxGroup in Australia, and Dunn-Edwards in the U.S. will aim to achieve Net Zero by 2050 and NIPSEA Group by 2060.
We currently calculate Scope 3 emissions from our operations in Japan and DuluxGroup in Australia, and have taken steps to expand the coverage to our global operations.

Global CO2 emissions and energy consumption from operations

Total energy consumption (gigajoules per tonne of production) across the Group decreased 14% during 2021, despite a significant increase in production associated with inclusion of recent acquisitions and business sales growth. This improvement was primarily driven by a 2% reduction in NIPSEA Group, who accounts for 57% of the Group consumption, and a 7% reduction in DuluxGroup, who accounts for 8% of the Group consumption. Consumption in other areas of the business was steady. Consistent with the decrease in energy consumption, Scope 1 and 2 greenhouse gas emissions (kilograms per tonne of production) across the Group decreased 8% during 2021. This excludes Dunn-Edwards where emissions data is not currently available; however this is not significant as they account for 1% of the Group energy consumption. All partner company groups have now established Scope 1 and 2 emissions reduction targets which will drive further improvement in coming years. For Scope 3 greenhouse gas emissions, DuluxGroup and the Japan Group continue to determine their annual footprint, while other partner company groups plan to do this in the near future. This will enable consolidated group reporting of these emissions in future, together with an improved understanding of risks, opportunities, and reduction plans across the partner company groups.

*Coverage of Global data: NIPSEA Group, DuluxGroup, Japan Group, and Dunn-Edwards. Scope 1 and 2(Global) exclude Dunn-Edwards.

Scope 3 category 1-12 (Japan Group) A: Category 1. Purchased goods and services 1,052,051 B: Category 2. Capital goods 112,239 C: Category 3. Fuel and energy-related activities (not included in Scope 1 or 2) 7,936 D: Category 4. Upstream transportation and distribution 37,450 E: Category 5. Waste generated in operations 15,609 F: Category 6. Business travel 428 G: Category 7. Employee commuting 1,455 H: Category 12. End of life treatment of sold products 57,395 * Emissions from Categories 8-11 and 13-15 were calculated as zero because no activity related to these categories was conducted.

CO2 emissions and energy consumption from operations in Japan (results)

We continued with production adjustment and working from home arrangements due to the pandemic in FY2021.
Compared to the previous year, energy consumption increased slightly following the slight recovery of production volume but CO2 emissions remained roughly unchanged.
Scope 3 is becoming more important in understanding business risks and opportunities, so we are refining the calculation method. Processing of sold products (Category 10) and Use of sold products (Category 11) are outside the scope of calculation in accordance with WBCSD’s Chemical Sector Guidance.

In Japan, we have established a short-term target of reducing intensity of energy usage / CO₂ emissions per year (Scope 1 and Scope 2) by 1% through Responsible Care activities. Toward this end, we are promoting activities to reduce energy usage and CO₂ emissions.

For FY2021 targets and results, see the Environmental and safety management page.

Targets and Results for Energy Consumption and CO2 Emissions

In addition to the above, we provide detailed explanations through responses to the CDP climate change questionnaire.

We respond to the questionnaires administered by CDP, an international NGO. In fiscal 2022, we responded to the climate change questionnaire and water security questionnaire.
See here for our responses to the CDP climate change questionnaire.

CDP Climate Change Questionnaire 2022

Interim targets and actions for net zero emissions

Identify specific issues and measures in each region toward net zero target

NIPSEA Group (Asia)	Formulated NIPSEA Green Plan 1.0, the movement to advance the agenda on sustainable development –Profit, People, Environment Aim to reduce energy intensity by 8% by 2025 against a 2021 baseline, with a yearly reduction target of 2%. Also aim to reduce emissions intensity (Scope 1 and 2) by 15% by 2025, with a yearly reduction target of 4% Use a combination of renewable (hydro turbines and solar panels) and non-renewable (petrol and diesel) sources of electric energy to power both operations-related and non-production related activities Introduced battery-operated forklifts
DuluxGroup (Oceania)	Agreed DuluxGroup targets of 50% renewable energy consumption and 50% CO2 emissions reduction by 2030, plus net zero carbon by 2050 Commenced development of detailed action plans to achieve the 2030 targets in the first half of 2022 Commenced pilot program of specialist energy effciency studies at two factories to identify reduction opportunities Achieved a 5% reduction in energy consumption intensity in 2021 Reduced the CO2 emissions intensity (Scope 1 and 2) by 5% in 2021, achieving the minimum value
Dunn-Edwards (U.S.)	Plan to adopt software to track company-wide Scope 1, 2 and 3 emissions in order to achieve true metrics for net zero carbon (Scope 1 and 2) by 2050 Discussed operating new corporate office on generated renewable energy Committed to reducing energy usage through efficient lighting and EnergyStar™ equipment Committed to providing electric vehicle charging resources Used renewable energy supplied in each state (at least 34% of energy supplied in California was renewable energy)
Japan	Agreed Japan targets of 37% CO2 emissions reduction (Scope 1 and 2) by 2030 from 2019 levels, plus net zero carbon from our domestic operations by 2050 Purchase renewable energy in Japan. 100% renewable energy at Osaka headquarters in FY2021, about 7% of electricity used in Japan in FY2022. Afterwards, increase gradually Consider energy-saving and use of renewable energy to reduce the impact of carbon taxes

We have not yet introduced internal carbon pricing at present, but we are now gathering information to consider its introduction in the future.

Other initiatives concerning climate change (mitigation and adaptation)

Participation in the Osaka Zero Carbon Foundation

We have decided to participate in the Osaka Zero Carbon Foundation made up of administrative organizations under Osaka Prefectural Government and private-sector companies. The Foundation was established to contribute to the realization of sustainable economy and society in harmony with the environment by carrying out a wide range of activities for the SDGs and decarbonization through public-private collaboration.
The Foundation includes Osaka Prefectural Government and local governments in the prefecture along with groups and companies involved in manufacturing, consulting, real estate, healthcare/welfare with a head office or business office in Osaka Prefecture. The Foundation is working to resolve social issues through collaboration with various stakeholders in promoting a sustainable, decarbonized society.

Initiatives Nippon Paint is involved in

We participated in the Keidanren Voluntary Action Plan on the Environment from fiscal 1997 to fiscal 2012 as a member of the chemical industry through the Japan Chemical Industry Association. During this time, we continued to promote energy conservation and activities that mitigated CO₂ emissions. From fiscal 2013, we began participating in Keidanren’s Commitment to a Low Carbon Society. Since then, we have been promoting global warming countermeasures following the four pillars of: (a)curtail CO₂ emissions from domestic business operations; (b) strengthened co-operation with lead actors for reducing CO₂ emissions across the entire supply chain through the spread of low-carbon products and technologies; (c) contributions on the international level, including the promotion of technology transfers to developing countries of Japan’s chemical products and processes; and (d) the development of innovative technologies using medium- to long-term technical development focused on commercialization in 2020 and beyond.

Nippon Paint endorses the targets and initiatives of the Japan Chemical Industry Association and we are cooperating to propel initiatives forward as a company driving the paint industry.
In addition, through our membership in the Japan Chemical Industry Association, we confirm whether policies align with our strategies. Our main direct and indirect activities with external parties are reported to the ESG Committee on a quarterly basis to verify whether they align with our climate change strategy. To ensure consistency of these initiatives, the ESG Promotion Department, which is the secretariat for the ESG Committee, regularly checks whether responses align with our strategies. Material matters are delegated to subcommittees and the global team, with these matters taken up as issues of the ESG Committee to check whether they align with our strategies and policies. In the event consistency is found to be lacking, we hold discussions again with related parties inside the company and stakeholders involved in the policy, repeating this process until consistency is achieved. Matters requiring approval are discussed by the ESG Committee and then approved by the Board of Directors to ensure they align with strategies and policies.

Environment - Climate change initiatives

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