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 in the business 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. We then enter the decision-making process through the assessment of each relevant division as needed. Depending on the content and significance of the decision, a preliminary review is conducted by one of the six committees established under the Executive Management Meeting, allowing for in-depth risk analysis and clarification of key issues. In addition, for the most critical matters, careful deliberation is conducted at the Executive Management Meeting before they are submitted to the Board of Directors, ensuring that decisions are made with a strong emphasis on risk management.
The Corporate Audit Division, which conducts internal audits, is an organization reporting directly to the President. They ensure independence and objectivity while evaluating the appropriateness and effectiveness of internal controls through a risk management process aligned with internal audit standards, based on risk assessments conducted by the business divisions. They identify substantive problems related to internal control during audits and provides improvement proposals aimed at resolving these issues to the heads of divisions within the business and regional divisions, as well as to the presidents of group companies and the relevant divisions within each organization. These efforts are subject to oversight by the Board of Directors.
(→ 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

"Operational risks" in our risk management framework refer to those risks that require management by executive officers responsible for functional areas and for which concrete risk management systems have already been established and are being implemented within each respective department.

Major Business execution risks

① Operational risks

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 centered on the shipping industry, 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, business 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 and infectious disease outbreaks not only restrict the activities of crew members aboard our Group-operated vessels but also significantly impact the operations of onshore employees, thereby posing a serious threat to the continuity of our Group's business activities. In order to fulfill our social responsibility of maintaining vessel operations and supporting supply chains even in the event of major disasters such as large-scale earthquakes, we have established a Business Continuity Plan (BCP) manual and developed systems such as satellite offices and IT system backups.
We regularly conduct drills both at our headquarters and at external locations, simulating disaster scenarios. By identifying and addressing issues uncovered during these exercises, we work to enhance the effectiveness of our response measures. Furthermore, to ensure the safety of vessels and personnel during disasters or pandemics, and to maintain the provision of our core service - marine transportation - as well as to enable prompt recovery in case of interruption, we have formulated a comprehensive BCP. In addition, we have distributed laptop computers to all head office employees and established a work environment that allows remote operations by utilizing cloud-based tools and other digital solutions.

④ Group Governance Risks

MOL has numerous subsidiaries and affiliated companies, including MOL Drybulk Ltd., MOL Chemical Tankers Pte. Ltd., Utoc Corporation, MOL Logistics Co., Ltd., Daibiru Corporation, MOL Sunflower Ltd., MOL Cruises, Ltd., and MOL Maritex Corporation - all of which are particularly important group companies in terms of the MOL Group's management strategy. We have established systems to enhance our Group's corporate value and ensure the proper execution of operations.
Since FY2023, we have introduced the Chief Officer System, under which cross-functional corporate roles are overseen at the Group level. This structure enables us to strategically and cohesively support Group-wide initiatives. Each Chief Officer is delegated a portion of the President (CEO)'s authority and responsibility and is tasked with leading and overseeing specific corporate functions not only within the Head Office but also across the entire MOL Group.
Additionally, from FY2022, we have implemented a risk assessment framework for both domestic and overseas Group companies. Through self-assessments conducted by each Group company, both the companies themselves and the relevant Head Office departments identify and understand the nature and location of risks. Furthermore, the Head Office executive management and corporate departments use this information to gain a comprehensive view of Group-wide risks. The goal is to establish a more effective risk management structure throughout the MOL Group.

⑤ Compliance risks

In MOL Group, compliance-related risks such as various forms of harassment, bribery, violations of antitrust and competition laws, and insider trading may potentially lead to significant claims for damages. To mitigate these risks, we implement the following initiatives.

[Initiatives for Ensuring Compliance]
On March 18, 2014, the Japan Fair Trade Commission (JFTC) found that the MOL Group had violated Article 3 of the Japanese Antimonopoly Act in certain car carrier shipping trades. In MOL Group, we regard compliance as the fundamental premise of all corporate activities. Each officer and employee is expected to internalize this principle and make sound judgments in their daily work. To support this, we have established Compliance rules that define the standards of conduct to be followed, and we promote thorough understanding and adherence through ongoing training programs.
In addition, the Compliance Committee convenes every three months to review compliance cases within the Group and to determine appropriate responses to any violations. The number and details of such cases are disclosed internally to raise awareness and enhance the compliance mindset among officers and employees.

[Initiatives to Comply with Antitrust Laws and Prevent Corruption]
MOL Group has established the Antitrust Compliance Code of Conduct, the Anti-Bribery Regulations, and more detailed guidelines such as the "DO!s & DON'T!s Guide." Through various training programs, we ensure that all employees are informed of the key points and regulatory frameworks both domestically and internationally, thereby promoting thorough compliance with antitrust laws and the prevention of corruption.

[Compliance Consultation Desk]
MOL Group has established both internal and external compliance consultation desks that are accessible in Japanese and English by officers, employees, and temporary staff of the Company and its Group companies. The external desk is operated by an outside attorney, who reports any received concerns or consultations to the Secretariat of the Compliance Committee. The attorney also serves as an intermediary for ongoing communication between the reporter and the Company.
All reports and consultations are handled with strict confidentiality, and it is guaranteed that no disadvantageous treatment will be given to the reporter or any individuals cooperating in investigations.
Furthermore, our corporate website accepts compliance-related inquiries from external parties, including domestic and international business partners.
(→ Click here for details related to compliance)

⑥ Risks related to official regulations

In the ocean-going shipping industry, our operations are subject to a wide range of public regulations to ensure equipment safety and the safe navigation of vessels. These include laws and regulations issued by international organizations and national governments, as well as rules set by classification societies.
In addition to shipping, our other business segments are also subject to various legal and regulatory requirements in the countries where we operate. These include approvals for business activities and investments, as well as regulations related to transportation, trade, antitrust, taxation, foreign exchange, environmental protection, and safety.
Our company has established a compliance framework to ensure adherence to these regulations and continuously gathers information on how these rules are being implemented and followed.

⑦ Risks related to human rights and various risks in value chains

Across all value chains within MOL Group, there are various risks related to sustainability, including those concerning human rights, safety, and the environment. In particular, risks related to human rights-such as discrimination in any form, long working hours, harassment, forced labor, and child labor-are matters of significant societal concern, and the manifestation of such issues could potentially damage our corporate value.
To address this, our Group has positioned "Respect for Human Rights" and "Responsible Procurement" as key initiatives under the sustainability theme of "Governance: Governance and Compliance Supporting Our Business," and is actively strengthening related efforts. We have established the MOL Group Human Rights Policy, the MOL Group Basic Procurement Policy, and the Supplier Procurement Guidelines. These clearly communicate both internally and externally our Group's commitment to respecting human rights, and are designed to gain the understanding and cooperation of diverse stakeholders-including our business partners-in building a sustainable value chain that considers human rights, safety, and the environment.
In addition to developing internal policies, we are also working to establish a value chain management system. This includes the planning and implementation of a monitoring scheme that incorporates human rights due diligence, in order to accurately identify and address risks related to the environment, human rights, and governance. By verifying effectiveness and disclosing information in a timely and appropriate manner, we fulfill our accountability to stakeholders.
(→ Click here for details related to human rights)
(→ Click here for details related to responsible procurement)

⑧ Technological innovation risks

In our Group's core business of ocean-going shipping, the assets we invest in-such as vessels-are typically held for a period of 20 to 30 years. As digital technologies and alternative fuel solutions continue to evolve rapidly, there is a risk that our owned assets may become obsolete or lose competitiveness. Furthermore, responding to such technological innovation may increase the burden of capital expenditures.
To address these challenges, our Group closely monitors developments in technology and actively engages in advanced research and development both internally and through close collaboration with domestic and international shipyards, as well as external research institutions. By evaluating and verifying new technologies, we seek to incorporate them into our business strategy and operations.

⑨ Exchange rates, interest rates, and bunker price fluctuation risks

MOL manages shipping market fluctuations, customer credit, and country risks based on the following concepts.
These risks (asset risks) are measured in total twice a year and compared against our shareholders' equity. The results are reported to the Board of Directors, which provides oversight. This process is referred to as Asset Risk Control.

[Shipping market fluctuation risks]
When investing in vessels that are not backed by medium- to long-term contracts, charter rates and freight revenues may be significantly influenced by market conditions. To mitigate this risk, our Group makes investment decisions only after carefully analyzing future supply-demand dynamics.
In addition, we diversify market risk through a portfolio strategy that includes engaging in a wide range of vessel types and shipping-related businesses with differing market cycle patterns, as well as actively investing in non-shipping businesses such as offshore businesses, offshore wind power generation, logistics, and real estate. To reduce exposure during the fiscal year, we also utilize hedging tools such as Forward Freight Agreements (FFAs) for certain vessel types-such as Capesize bulkers and VLCCs-in order to stabilize earnings and manage market-related risks more effectively.

[Customer credit risks]
There is a risk that charter rates or freight revenues may become uncollectible or subject to reductions due to the credit deterioration of customers. To mitigate this risk, our Group actively seeks to secure medium- to long-term contracts with financially sound customers both in Japan and overseas.
In our financing activities, there is also a risk that our financial results and conditions may be adversely affected by the recognition of allowance for doubtful accounts, stemming from a deterioration in the creditworthiness of borrowers. To address this, we have established a framework for regularly monitoring the financial condition and credit status of our borrowers.

[Country risks]
The total amount of invested capital (total related assets) in countries and regions where significant risks are anticipated is regularly monitored-twice a year-by both the Board of Directors and the Executive Management Committee, in the same manner as our "Asset Risk Control" process described earlier.

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.

⑩ Exchange rates, interest rates, and bunker price fluctuation risks

[Exchange rate]
In the ocean-going shipping business, while the majority of revenues are denominated in U.S. dollars, a portion of expenses and borrowings are denominated in Japanese yen-taking into account factors such as the interest rate differential between Japan and the U.S.-which exposes us to foreign exchange risk. Based on forecasts of future financial conditions gathered through our Finance Department, we work to limit this exposure by dollarizing expenses and using U.S. dollar-denominated borrowings when appropriate. In addition, we further mitigate risk by implementing flexible foreign exchange hedging during the fiscal period as needed.

[Interest Rates]
MOL Group continuously makes capital investments for purposes such as the construction and replacement of vessels and the acquisition of real estate. As a general principle, when procuring long-term funds for such investments, we seek to avoid interest rate fluctuation risks by utilizing fixed-rate borrowings or interest rate swaps.

[Bunker Prices]
Bunker occupies 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.