Risk Management

Overview of Risk Management

"Taking the leap to becoming a global social infrastructure company" is a key element of MOL's new management plan "Blue Action 2035," reflecting the goal of expanding our activities in various areas beyond the traditional ocean shipping business. On the other hand, we can take on new challenges and risks only with appropriate risk management. We have classified the various risks to which we are exposed into two categories: "emerging risks" and "business execution risks," for deeper risk management based on our recognition of the issues in the table below. Through strategy and vision discussions, the Board of Directors will establish a risk management system that encourages risk-taking in execution, as we strive to develop more effective supervision.

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Risk Management Structure

Executive officers in charge of each management division in the corporate organization supervise the status of risk management for business divisions in the sales and regional organizations, respectively, and provide advice as needed. Major risks are centrally managed through regular reports to the Executive Committee and its subordinate committees, with priority given to those deemed particularly significant.
In addition, a dedicated internal review division identifies the risks in advance when making an important decision, including new investment decisions. We then enter the decision-making process through the assessment of each responsible division, which will draft a proposal as needed. We delve deeper into the risks and identify issues to be discussed, by establishing six committees as subordinate bodies of the Executive Committee, depending on the decision-making nature and the significance of the decision, while the committees conduct preliminary deliberations. We also make decisions with an emphasis on risk management, with the most important matters being brought to the Board of Directors after careful deliberation by the Executive Committee.
The Corporate Audit Division, which reports directly to the President, maintains the independence and objectivity as an internal audit division. The Corporate Audit Division evaluates the adequacy and effectiveness of internal controls derived from risk assessments conducted by business units through the risk management process in accordance with internal audit standards. The Corporate Audit Division identifies substantive problems related to internal control issues through internal audits and proposes improvements to general managers of each business unit in the sales organization and regional organizations, as well as the presidents of Group companies and the appropriate divisions within the organization., to resolve the problems.
The Board of Directors is responsible for supervising these initiatives.
(→ Click here for our organization chart)

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Emerging risks

MOL defines "emerging risks" as those resulting from irreversible changes in the external environment that impact our business, for which the probability of occurrence and the degree of impact cannot be quantified.
Since it is considered ineffective to manage emerging risks based only on historical data and knowledge, we will manage emerging risks using different methods from those used for business execution risks.
Specifically, to quickly identify opportunities and threats from these risks, we have implemented the following process to identify key risk scenarios and collect relevant information.

• 1 Information gathering
  Using external expertise, list up scenarios of changes in the external environment (i.e., risk scenarios), without limiting them to MOL-related domains.
• 2 Risk assessment
  When likelihood of a risk scenario becomes larger, assess the probability and degree of impact on MOL's individual businesses and value chains.
• 3 Identification of material emerging risks
  Identify material emerging risks while considering the importance of individual value chains, etc.

For those identified as significant risk scenarios, the Board of Directors discusses the impact on our business and possible measures that we can take, in line with basic management policies and based on the most recent data and expert opinions. We also recognize emerging risks as business opportunities, and the Board of Directors and the Executive Committee will thoroughly discuss them to establish management plans and business strategies.

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Business execution risks

Business execution risks can be effectively managed based on past data and knowledge, and we have defined a specific risk management system that has already been established and implemented in each responsible division.

Major Business execution risks

① Operational risks

Centered on marine transport, MOL operates roughly 800 vessels and offshore plants, and these vessels and plants are of many different types. As a company that provides social infrastructure, some of the most serious risks we face are damage to ships and cargo or injury to crew members caused by vessel collisions, ships running aground, fires and other accidents, as well as environmental pollution from leakage of cargo oil and bunker oil (oil spills). To prevent accidents from occurring, without regard to owned vessels or chartered vessels, MOL's Headquarters of Safety Operations, sales divisions, shipowners (for chartered vessels), and ship management companies work closely together on tangible and intangible aspects of safety, from training and supervising crew members to adoption of safety standard specifications which effectively maintain the safety of our vessels. We also make a variety of preparations to counter the dangers of piracy and terrorism by providing sufficient training, putting in place precise operational rules, providing support from our Head Office, and installing necessary facilities.
Even in the event of an accident that could not be avoided despite our best efforts, involving damage to MOL or related parties, the Company is prepared with insurance policies that have the necessary amount of coverage (general liability insurance, hull and machinery insurance, war-risk insurance, loss of hire insurance) in order to secure adequate funds for any compensation and to avoid a major impact on the Company's business performance.
To mitigate reputational risk, MOL implements emergency response training once a year for major maritime accidents, responding to the media and disclosing information about the accident. Media consultants are hired when necessary.

② Cybersecurity risks

The MOL Group's business and operations are heavily dependent on information systems, and serious information and communication technology (ICT) incidents (security and privacy breaches and damage to the group's reputation that have occurred or may occur as a result of ICT system failures, cyberattacks, natural disasters, operational errors, and so on) could have a major impact on the group's business.
We set forth the criteria for determining the incident level common to the group and the response policy according to the incident level in the "Rules of the Emergency Headquarters for Serious ICT Incidents" and "Guidelines for Responding to Major ICT Incidents," We established the framework to formulate a task force when a serious ICT incident occurs, promptly and systematically report the incident and explain it to stakeholders (shareholders, customers, media, etc.), and take technical and legal action to prevent the reoccurrence of situations that seriously damage the group's profits, brand, and credibility.
(→ Click here for details)

③ Natural disaster and epidemic risks

Large-scale disasters, epidemics, and other events could restrict the activities of not only the seafarers on the MOL Group-operated vessels, but also employees working on land, and are expected to have a significant impact on the group's sustainable business activities. To keep vessels operating even in the event of major earthquakes or other natural disasters and to fulfill our social role of maintaining supply chains, we have formulated a Business Continuity Plan (BCP) manual and introduced satellite offices and backup systems, and also provide ample training. We have completed the distribution of notebook PCs to all executives and employees and put remote working environments in place that use cloud-based tools. In the event of a disaster or the outbreak of an epidemic, the group places the highest priority on the safety of its vessels, executives, and employees, establishes a BCP to ensure uninterrupted ocean transport services, the core of our business, and makes every effort toward a swift recovery in the event of an interruption to such services. We also periodically conduct drills at the Head Office and outside the company on the assumption of disaster and so on to further enhance effectiveness by addressing issues identified in these drills.

④ Group Governance Risks

MOL has subsidiaries and affiliated companies including MOL Drybulk Ltd., MOL Chemical Tankers Pte. Ltd., Utoc Corporation, MOL Logistics Co., Ltd., and Daibiru Corporation. We have established the framework to ensure the enhancement of our corporate value and the appropriateness of our operations as a group, but in case of a failure in subsidiary governance that results in a delayed response to an incident and may adversely affect our business performance. To address this risk, in FY2023, we established a "Chief Officer System" to oversee corporate functions across the group and shift to a system that strongly supports integrated and strategic initiatives. Each Chief Officer is delegated a portion of the President's (CEO's) authority and responsibility, and the mission is to direct and control not only the company (the Head Office) but also the entire group in a specific cross-sectional function. In addition, we introduced risk assessment for domestic and overseas group companies in FY2022. This initiative aims to provide basic information with the objective of establishing a more effective risk management system for each group company, by identifying the location and description of risks by each group company and the responsible management division in the Head Office. Executives and corporate divisions in the Head Office also identify group-wide risks based on self-assessments by each group company.

⑤ Risks related to human rights and various risks in value chains

Throughout all of the MOL Group's value chains, there are various sustainability risks, such as human rights, safety, and environmental aspects. In particular, risks related to human rights, such as discrimination in all forms, excessively long working hours, harassment, forced labor, and child labor, have become a social concern and may damage the group's corporate value. Therefore, the group has set "Respect for human rights" and "Responsible procurement" as the themes of its sustainability agenda, "Governance." Effective governance and compliance support our business, and we are strengthening our human rights due diligence and value chain management initiatives.
(→ Click here for details related to human rights)
(→ Click here for details related to responsible procurement)

⑥ Shipping market fluctuation risks, customer credit risks, and country risks

MOL manages shipping market fluctuations, customer credit, and country risks based on the following concepts.
The total amount of these risks (asset risk) is measured every six months and compared to the shareholders' equity, and the results are reported to the Board of Directors. This is called asset risk control.

[Shipping market fluctuation risks]
In case of investments in assets that are not subject to medium- to long-term contracts, we selectively execute this process after carefully scrutinizing the outlook for the future supply-demand balance. The company is involved in a wide range of shipping-related businesses with various types of ships and different market fluctuation patterns, and we have established the framework in which market fluctuation risks are offset by each business. We strive to diversify the risks, based on the portfolio strategy of proactive investment in non-shipping businesses, such as offshore projects, offshore wind power, logistics, and real property. To address periodic risks, for example, with vessels such as Capesize bulkers and very large crude carriers (VLCCs), we are working to stabilize profit/loss and risk by reducing our exposure throughout the fiscal year by using freight forward agreements (FFAs) as hedging tools.

[Customer credit risks]
In principle, we align the contract and investment period of owned assets with the holding period as much as possible to keep them neutral to market conditions, as well as proactively pursue medium- to long-term contracts with high creditworthy customers in Japan and overseas and limit the amount of the group-owned assets that are exposed to markets and the duration of such exposure. And in the case of loans, our business performance and financial condition may be affected, for example, by provisions of allowance for doubtful accounts due to deterioration in the credit risk of the borrower. For this reason, we have established the framework to periodically monitor the financial condition and so on of loan recipients.

[Country risks]
We have established the framework to periodically monitor the total amount of invested capital (country exposure) by country/region and customer, which have significant risk potential, every six months at the Board of Directors and the Executive Committee, in addition to assessing the level of country risks as part of asset risk control.

Overview of Asset Risk Control

1. Importance of Risk Exposure Management and Introduction of Asset Risk Control
Not only can freight rates be extremely volatile, the availability of means such as leasing and chartering vessels allows shipping companies to expand their fleets relatively easily without necessarily being restricted by their balance sheets. This mix of extreme volatility and ease of leveraging means that this kind of business is one wrong step away from taking on too much risk. For the long-term stable operations of marine transport companies, it is of vital importance that a company identifies the asset risk exposure it can take and understands the amount of risk it is actually taking, while having a framework for balancing these two factors.
At end of the marine transport boom in the 2000s, MOL failed to cut back on investments at the right timing, anticipating ship tonnage shortages to continue around the world. Having placed a large volume of orders for ships, MOL began to receive these ships, built at a high cost, while the market entered a long-term slump in the 2010s. This continued to weigh heavily on the Company's profits until management decided to make drastic business structure reforms. Learning its lessons from this painful experience, MOL developed and introduced its own risk management framework, called Asset Risk Control, in 2014 as a set of constitutional guardrails against excessive investment in the future.

2. Approach to Asset Risk Control
Asset Risk Control is an adaptation of a risk management technique widely used by financial institutions serving the shipping industry. Highly stressful scenarios are applied to the entire fleet at the same time and run for a certain length of time to calculate maximum potential losses. The risks are managed so that the total loss is not excessive compared to shareholders' equity. Additionally, we take into account the dispersion effect of market fluctuations at different times for each asset. The framework can more appropriately measure the level of risk, including country risk, customer credit risk, and group company business risk.

⑦ Exchange rates, interest rates, and bunker price fluctuation risks

[Exchange rate]
In the ocean shipping industry, most of the revenue is denominated in U.S. dollars; on the other hand, a portion of costs and borrowings are denominated in yen based on the level of interest rates between Japan and the U.S. and other factors. Therefore, foreign exchange risk arises. Based on the outlook of the future financial environment through the Finance Division, we strive to reduce risk by limiting exposure through dollarization of expenses and dollar borrowing when necessary, and by flexibly hedging foreign exchange during the term.

[Interest Rates]
The MOL Group is constantly investing capital to build new ships and replace existing ones. When securing long-term funding for capital investment, in principle we hedge interest rate risk by using fixed-rate loans or interest rate swaps.

[Bunker Prices]
Bunker costs represent a large portion of ship operating costs, and in the past, price fluctuations had a significant impact on the MOL Group's profits. However, currently, most medium- to long-term contracts with customers contain bunker adjustment factor or bunker price surcharge clauses that have the customer shoulder the risk of bunker price fluctuations. For short-term contracts, we work out freight rates reflecting bunker prices at the time or employ a formula to adjust freight rates that take into account changes in bunker prices. For the remaining exposure, we work to reduce the risk amount by using bunker forward trading. With these countermeasures, the impact of bunker price fluctuations on profit and loss is now very limited.

⑧ Climate Change Risks

By causing more severe weather and sea events, climate change such as global warming can present a danger to safe ship operations. The movement toward decarbonization to combat climate change has the potential to drastically change the business environment for MOL, which requires large volumes of bunker oil and transports various kinds of fossil energy as a main cargo, in the context of higher costs to comply with public regulations and a structural reduction in transport demand.
Under MOL Group Environmental Vision 2.2, which is in tune with these trends, MOL aims to achieve net zero GHG emissions by 2050. The Company has formulated and disclosed a road map for achieving this goal and is now in the process of introducing clean alternative fuels and energy-saving technologies while increasing the sophistication of efficient fleet operations. By developing and providing solutions for alternative fuel transportation and low-carbon or decarbonization technology, MOL views this change as a business opportunity as decarbonization stimulates new demand. The MOL Group uses the TCFD framework to visualize its climate change risks and formulate related policies.
(→Click here for details related to TCFD.)

⑨ Technological innovation/Official regulations

The MOL Group may incur losses due to a decline in the value of its owned assets as a result of the obsolescence of assets caused by technological innovation, changes in official regulations, or other factors. We may sell assets or terminate charter or lease contracts mid-term due to a decline in the value of owned assets, and as a result, the group's performance and financial condition may be affected.

[Technological innovation]
In the ocean shipping business, which is the MOL Group's main business field, the holding period of assets such as vessels, which are the main investment, exceeds about 20 years. With the rapid development of technologies related to the internet and alternative fuels, the group's assets may become obsolete or less competitive. In addition, the group's business performance may be affected by an increase in capital investment and other burdens to keep pace with technological innovation. The MOL Group has been keeping up to date on technological innovations and trends in information technology and working closely with domestic and overseas shipyards and external research institutions to grasp these trends and effectively respond to them. By developing advanced technologies internally, we evaluate and verify new technologies and adopt them in business development.

[Official regulations]
The ocean shipping industry is subject to various official regulations such as laws and policies of international organizations and governments, and rules of classification societies to ensure the safety of equipment and safe vessel operation. In addition, in each country where we operate, including fields outside ocean shipping, we are subject to laws and regulations such as business and investment permits, transportation, commerce, anti-monopoly laws, taxation, foreign exchange regulations, environmental standards, and various safety assurances. Costs are incurred to comply with these regulations, and if these regulations are changed, or if new regulations are introduced, it may result in new costs. In addition, the group has established a compliance framework for these regulations and collects information on the status of new or revised regulations, but it may be subject to investigation by the relevant authorities and, depending on the outcome of such investigations, may subject MOL or group companies to disciplinary action or punishment.

⑩ Compliance risks

In the MOL Group, compliance-related risks such as various types of harassment, bribery, violation of the Antitrust Act and Competition Law, and insider trading, can sometimes lead to huge claims for damages, likely resulting in major adverse effects on the group's sustainable business activities.

[Initiatives to achieving compliance]
In 2014, the Japan Fair Trade Commission (JFTC) found that MOL violated Article 3 of the Antimonopoly Act in connection with transactions in specified car carrier services. We established compliance regulations that set forth standards of conduct to be followed and are working to ensure thorough compliance with these regulations through ongoing training to ensure that all executive and employees are fully aware that compliance is a prerequisite for corporate activities and can make appropriate judgments in their daily operations. The Compliance Committee also meets every three months to discuss compliance issues within the group and respond to any violations and promote awareness among executives and employees by disclosing the number and details of non-compliance cases internally.

[Internal Compliance Advisory Service Desk]
The MOL Group established internal and external compliance adversary desks available in both Japanese and English for use by its executives and employees, as well as temporary employees of MOL and its group companies. Outside lawyers are assigned to the external advisory service, and reports and consultations received are provided to the Secretariat of the Compliance Committee. After that, they will liaise between the reporting/consulting parties and the company. In all cases, the confidentiality of anyone making a report or consulting is strictly maintained, and it is guaranteed that those reporting, consulting, or cooperating in an investigation will not be subjected to adverse treatment or retaliation. Furthermore, compliance-related inquiries from domestic and overseas business partners and other general external parties can also be submitted on our website.

[Initiatives on compliance with antitrust and anti-corruption laws]
The MOL Group has established the Antimonopoly Act Compliance and Anti-(Corruption) (Anti-Bribery) Regulations, as well as the "DO!s & DON'T!s Guide," which provides more specific guidelines. We strive to ensure compliance with antitrust acts and prevent corruption by disseminating an overview of domestic and international laws and regulations and points for all employees to keep in mind through various training programs.
(→ Click here for details related to compliance)