Special Topics~ Top Management's Dialogue A Company that Fulfills an Essential Role in the World of 2030 The Sustainable Development Goals (SDGs) and Management of Sumitomo Riko / Chief Researcher, Research Division, Daiwa Institute of Research Ltd. Mariko Kawaguchi / Representative, IIHOE (International Institute for Human, Organization and the Earth) Hideto Kawakita / Chairperson of the Board Yoshiaki Nishimura / President & CEO Tetsu Matsui / Executive Vice President Toshihiko Ozaki

Dialogue with Stakeholders
Shareholders and Investors, Customers, Suppliers and Other Trade Partners, Employees, Local Communities, Global Environment

* This dialogue is appeared in "Integrated Report 2017".
* The position titles are as of the date in which the dialogue was held.

Taking Initiative for Yourself
Where You will be in 13 Years from Now

Nishimura:We formulated the Sumitomo Riko Group 2020 Vision ("2020V") in 2016, setting our financial targets as well as non-financial KPIs (key performance indicators) for the first time, anticipating the centenary of the Sumitomo Riko Group in 2029. The management of the Company is approached from a long-term perspective, in accordance with the Sumitomo Riko Group Management Philosophy and the Sumitomo Spirit. The discussion today is about how we should try to incorporate the Sustainable Development Goals (SDGs*1) that were adopted unanimously by the United Nations General Assembly into our management of the business, and what practical measures we could take in doing so. I have invited two experts in this field to join us, and I hope we can enjoy a frank exchange of views.

Kawakita:The year 2029 will be an important one for Sumitomo Riko, being its centenary, while the deadline for accomplishing the SDGs is 2030. The question is thus what will the world be like by then, and how will Sumitomo Riko need to change during this period. Looking at the Company against the global backdrop helps to clarify the areas and objectives where action will be required.

Kawaguchi:I think that initiatives are incorporating the SDGs as a framework and involve supply chains will become the norm. Leading companies are now incorporating SDGs into their long-term strategy.

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Nishimura:Over the past year, we have seen Britain vote to leave the European Union and the United States, under the Trump administration, decide to withdraw from the Paris Agreement*2 that sets new CO2 emissions reduction targets. What do you think might be the impact of these decisions?

Kawakita:The United States is unable to leave the framework of the Paris Agreement before 2020. The new policy of putting America first might be able to protect jobs, but even American commentators have pointed out that in the long term it would lead to growth opportunities going elsewhere. Large corporations, universities and state governments do not necessarily agree with President Trump's policy, and I think the auto industry will accelerate its efforts to realize a low-carbon future.

Matsui:SDGs concerning climate change and other environmental themes are relatively easy to grasp, but other fields are less clear. What do you think might be a good approach to convince our employees of the value of the SDGs?

Kawakita:One way could be to start by asking how old you would be in 2030, which is 13 years away. The employees currently in their 20s and 30s are the backbone of the workforce. Let them imagine who their customers will be then and what concerns their customers might have. It is important to let your employees consider the relationships between them and the society and take initiative for their future.

Kawaguchi:There is probably less opportunity to influence the middle managers currently in their 40s and 50s who are responsible for managing budgets. However, an understanding of what the SDGs involve might not develop among the younger employees unless there are actual opportunities to influence them before they are promoted to managerial positions. The other day, I was interviewed for an internal newsletter of a major manufacturing corporation. Roughly half of the discussion was about the SDGs, and I treated the subject in an engaging way so that employees including factory workers would be encouraged to read it. This newsletter will have a print run of nearly 100,000, including English and Chinese editions as well. Internal newsletters are actually read by quite a lot of people including family members.

Nishimura:We also have an internal newsletter. We plan to issue one that features the importance of environmental matters, given the current issue of the Paris Agreement. I would like it to raise the subject of the SDGs as well.

*1 SDGs:
The abbreviation of Sustainable Development Goals. Consisting of 17 goals and 169 targets, they are to be achieved by 2030. There are high expectations of active participation by companies.
*2 Paris Agreement:
Adopted at the 21st Conference of Parties to the United Nations Framework Convention on Climate Change (COP21) held in Paris in 2015, the agreement is an international accord to mitigate global warming. It aims to keep the increase in the average global temperature to well below 2˚C compared to pre-industrial levels, while pursuing efforts to limit the temperature increase even further to 1.5˚C.

Ability to Forecast Sudden Social Changes and Take Action in Advance

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Kawaguchi:The SDGs are not just some theoretical issues that are not of our concern. They have practical value. Screening your company's activities from an SDG-based perspective can highlight risks you might not have considered previously. For example, when a large French apparel manufacturer discovered that the cashmere goats that are the source of cashmere could be under threat of extinction, it was able to take steps ahead of its rivals to procure from other sustainable suppliers. A similar exercise could reveal new risks relating to resources such as natural rubber or naphtha.

Ozaki:I'm telling the Company that we should conduct an analysis to study how the SDGs are linked to our businesses. Once we have analyzed the connection, that would significantly boost the understanding of our employees.

Kawakita:In the wake of the Paris Agreement, all the major players in the auto industry have announced that their long-term policy goal is to move from gasoline to hydrogen or electricity, and from engines to motors. Ten years from now, we will be talking about "mobility" rather than "automobiles." We may even have flying cars (laughter).

Kawaguchi:Change is occurring at an unprecedented rate. When considering the SDGs, rather than pursuing an approach in which inhouse technologies are tailored to external change, it might be better to adopt another approach. First, consider social issues, and change the Sumitomo Riko Group based on them.

Kawakita:Yes, it is important to consider other standpoints. In many developing countries, women and children spend a large part of each day carrying water. If we want to improve their education, first we must find a way of reducing the time spent transporting water, and the challenge then is to find an effective solution for distributing water in a way that minimizes leakage. Once the issue has been defined, it can lead to new business opportunities.

Matsui:Relying only on first world thinking will not help you solve the problems of developing countries.

Kawakita:Another thing that should be considered is whether value creation is mainly internal or external. If we think of the value chain from procurement to usage and how it relates to, say, carbon dioxide, I think we should be focusing more on the functions and products that could reduce emissions during the usage phase rather than considering only the emissions during production.

Kawaguchi:I think your company's electrically conductive "Smart Rubber" has great potential. Looking beyond the automotive sector, in combination with AI it might contribute to aged care, the treatment of the sick, or the construction of more resilient cities.

Nishimura:Based on the Group's core competencies in polymer materials technology and comprehensive evaluation technology, we have secured the top share of the global markets for anti-vibration rubber and automotive hoses by proactively proposing solutions that anticipate the needs of our customers. Until now, we have focused primarily on products that make driving more comfortable. Looking ahead, though, we think the key to success will be in conceiving new ideas for solutions for problems that are affecting society beyond the automotive sector.

Kawakita:It is also important to hone core competencies in collaboration with other companies. Effective alliances with other firms are the fruits of hard work and foresight. It is essential to conceive new ideas. Besides developing practical technology, I think it is also important to develop relationships and connections that allow you to do some blue-sky development as well.

Keeping Up with Global Trends

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Matsui:Managing Executive Officer Hirohisa Maeda and I attended a conference hosted by the International Corporate Governance Network (ICGN*3) this March in Washington DC. Many international investors took part, and the SDGs and ESG*4 were both discussed as themes. We were the only Japanese company represented at the conference. Attention has recently been focusing on ROE in Japanese management circles, but I wanted to find out directly from investors themselves what they are thinking.

Kawaguchi:It is wonderful that the very top management took the initiative to go to an event for investors.

Matsui:When we talked to them, we found that investors were extremely interested in finding solutions to global problems. They also understood our management approach based on taking a long-term view in accordance with the Sumitomo Spirit.

Kawaguchi:Investors have recently begun to position the SDGs at the heart of ESG investing because they constitute a common international language. Having recently announced the Japanese version of the Stewardship Principles, GPIF*5 requires that asset managers put in place the appropriate governance structures. It was previously more a case of just signing up to the Principles for Responsible Investment (PRI*6), but now asset managers have to develop systems and train personnel. Thanks to the growing requirement for ESG-oriented investment, the SDGs have emerged as a major theme. Asset management firms are required to create evaluation systems based on the SDGs by GPIF. Over time, you are bound to get more and more SDG-related questions in your dialogues with investors.

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Matsui:We had a lunch meeting with ISS*7. They were saying that investors are looking not only at ROE, but also at ESG. There has also recently been a shift toward a more long-term investment stance.

Nishimura:In the old days, even if we went to the United States, it would just be to visit a factory before returning home. Moving forward, though, we will need to listen more to external parties if we want to manage the business from a global perspective. It will be vital to keep up with global trends.

Ozaki:The SDGs also address employment and economic growth. Much of the regulatory infrastructure developed by Europe, the U.S. and the rest of the developed world has a role to play in dealing with the problems of inequality and poverty, but just adding more regulation will only succeed in slowing the growth of industry within developed countries. How should we deal with this situation?

Kawakita:From the viewpoint of developed countries, you could view the SDGs as essentially the seeds of business initiatives in the form of social issues. Growth can no longer be sustained simply on the wage differentials between different parts of the world. While interest in human rights, the environment and other issues has increased in Europe and the U.S., in China they are now starting to take serious action to reduce water and air pollution. The issues are certainly pressing. In this context, the SDGs have the potential to foster rapid growth in the future, with education and empowerment to the fore. We must take up the challenge, ensuring young employees and people throughout the world get involved.

*3 ICGN:
The abbreviation of International Corporate Governance Network. ICGN promotes standards of corporate governance and provides support and advice on CG implementation.
*4 ESG:
ESG (environment, society, governance) are areas in which companies are required to show consideration and responsibility when engaging in business activities.
*5 GPIF:
The abbreviation of Government Pension Investment Fund. GPIF is the world's largest pension fund headquartered in Japan.
*6 PRI:
PRI, the abbreviation of "principles for responsible investment," is an investor initiative in partnership with the UN Environment Programme - Finance Initiative and the UN Global Compact. The GPIF signed the PRI in September 2015.
*7 ISS:
The abbreviation of Institutional Shareholder Services Inc. ISS is the world's largest proxy advisory firm.
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Link Between the Sumitomo Spirit and the SDGs

Nishimura: We have a valuable lesson within Sumitomo's corporate history. By the time Sumitomo's second Director-General, Teigo Iba, took charge of the Besshi Copper Mines, the years of development around the mine had denuded the mountain of tree cover, to the point where rapid runoff was causing floods. His response was to plant a million trees every year to restore the mountain to its original verdant state. This initiative, which happened more than a century ago, was based on the Sumitomo Spirit. In my opinion, the SDGs and the Sumitomo Spirit have the same ethical foundation. The issue is how we communicate this to our employees.

Kawakita:How about instituting a system of internal awards to recognize ideas that connect the business with the SDGs?

Kawaguchi:Brainstorming sessions chaired by younger workers might also be fruitful.

Matsui:We already hold automotive-related brainstorming sessions about once every three months in which we invite executive advisors, as well as advisors from overseas, to attend. Lately we have been discussing the future of electric vehicles. I think we could do something similar related to the SDGs.

Kawaguchi:Going back to communicating this initiative, the Manager of Sumitomo Riko's CSR Planning Office gave a presentation at the annual UN Forum on Business and Human Rights that was held in Geneva, Switzerland. She was the first representative from a Japanese company to speak at such a session. The fact that a Japanese woman was speaking at this kind of international event attracted a lot of attention.

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Kawakita:Even a short press release in English about something inspiring like that would tend to make a positive impression outside Japan.

Matsui:Three years ago, we launched the Sumitomo Riko Student Essay Award, an essay competition for students. We have only promoted it through social media, but the response has been excellent. We received 106 entries in 2016, and the number is bound to be even higher this year.

Kawakita:Including such relationships with students, it is important to cultivate an environment in which diverse people can flourish by respecting differences not only of gender and ethnicity, but also age, culture and values. As the proportion of overseas sales rises, it is vital to recruit and develop local staff.

Ozaki:We have corporate bases in China and Thailand that take responsibility for local staff training and development. We are gradually seeing the results of embracing diversity across the Group.

Kawaguchi:This is the fifth year that I have been coming to Sumitomo Riko. Every time I come here, I feel that it has an open culture. These types of reports can become overly formal, and I think it would be good to modify the content slightly to help bring out the individuality of management. For example, the fact that executives went to an ICGN conference is something you could publicize.

Kawakita:Some B2B enterprises mistakenly think they do not need external communications. The impact of communicating to external audiences is perhaps greatest for employees, and especially for those working in sales. When customers are aware of what the vendor is doing from such communication, the conversation will often go much smoother than if the salesperson tells the customer what the company is doing. It is also important to make the non-financial information appealing by using various modes of presentation.

Matsui:There were some aspects of how to incorporate the SDGs into the management of the business that I was unsure about, but now I want us to address this challenge directly, using it to foster the growth of the Group so that we can ensure the Company's survival and become an enterprise that can deal with the huge changes that will affect society as we approach our centenary.

Nishimura:As I mentioned earlier, I believe there is a strong link between the SDGs and the Sumitomo Spirit. Our goal is to develop businesses while using dialogues with stakeholders to discuss the specifics and working to raise awareness of this initiative throughout the Group.

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SUMITOMO RIKO COMPANY LIMITED.

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