China and other Asian markets are important locations for the development of the FANCL Group’s overseas business development. In particular, if geopolitical issues such as trade friction between the U.S. and China and between Japan and China arise, it could have a significant impact on our overseas business, which in turn could have a significant impact on the Group’s overall performance.
In addition, as we work toward VISION 2030, the importance of our overseas subsidiaries continues to increase as we continue down the path of globalization of our business. Inadequate governance of overseas subsidiaries can lead to violations of overseas laws and regulations, or losses incurred due to decisions without prior approval from the Head Office. In such cases, the FANCL Group's business performance may be affected.

The FANCL Group aims to maintain brand value that ensures its products are selected even in the event of geopolitical issues. Additionally, China is still the Group's main overseas market, but as we continue down the path of globalization going forward, we will strengthen our expansion into Asia, Europe, and the U.S. This will balance our sales regionally, and through this optimization, we will reduce our exposure to geopolitical risk.
Furthermore, we are working to establish various regulations and decision-making standards to strengthen the governance structure of our overseas subsidiaries, and are developing a system of timely and accurate reporting lines for performance and financial information.

The FANCL Group faces potential regulatory risks including the risk of non-compliance with the Act Against Unjustifiable Premiums and Misleading Representations (Premiums and Representation Act) concerning our product packaging, labeling, and advertising. In the Cosmetics business, there is a risk of violating the Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices (Pharmaceutical Affairs Act). In the Nutritional Supplements business, there is a risk of violating the Food Sanitation Act or the Health Promotion Act. In the Online and Catalogue sales business, there is a potential risk of violating the Act on Specified Commercial Transactions. Any violations may result in guidance or penalties imposed by administrative agencies.
In addition, there is a risk of violating domestic or foreign laws and regulations applicable to business activities, such as bribery, labor, accounting, and transaction management, and being subject to penalties, incurring liability for damages, or having our reputation as a company damaged.

For the purpose of establishing a cross-organizational compliance system within the FANCL Group, the Group Risk and Compliance Committee, consisting of the departments in charge of legal affairs, quality assurance and others, has been established to oversee the status of compliance and report regularly to the Board of Directors. With respect to the Premiums and Representation Act and the Pharmaceutical Affairs Act, which have a particularly large impact on business operations, a Quality Control Working Group has been established under the Group Risk and Compliance Committee to regularly review and confirm the status of compliance and report to the Board of Directors.
In addition, the FANCL Group Compliance Code of Conduct has been established to clarify the rules that employees must follow as members of the FANCL Group and to ensure that all employees work with a common understanding of these rules. We provide employees with general compliance training on a regular basis from the time they join the Company.
In addition, we have established a Compliance Helpline to appropriately accept whistle-blowing reports and to ensure the early detection and correction of issues including possible violations of laws and regulations.

There is a potential risk that the application or ingestion of FANCL Group cosmetics or health foods may have adverse effects on the skin/physical condition of customers, depending on their physical predisposition, etc. If there is a problem with the quality of FANCL Group products, the product or brand image may be damaged, which may affect the business performance of the FANCL Group.
In the event of a quality issue, the FANCL Group's business performance may be affected by a product recall or the suspension of factory operations implemented either voluntarily or in accordance with laws and regulations such as the Pharmaceutical Affairs Act or Food Sanitation Act, or due to burden of liability under the Product Liability (PL) Law.

The FANCL Group has established its own quality standards for Cosmetics, Nutritional Supplements, Hatsuga Genmai and Kale Juice, each of which is evaluated more strictly than general standards.
In our manufacturing, we have adopted ISO and GMP (Good Manufacturing Practice) mechanisms to ensure product quality and safety by (1) preventing human error, (2) preventing bacterial contamination and foreign material contamination, and (3) implementing strict manufacturing and quality control to establish a process for the stable production of quality products.
In addition, in order to improve product quality, the department in charge of quality assurance holds quality-related meetings to check the quality control status with related departments, and conducts on-site inspections of factories to maintain quality. We have established and implemented a system whereby third-party experts evaluate customer feedback on the health effects of consuming our Health Food products, allowing us to promptly and appropriately respond to any issues that may arise.
Furthermore, we are working to develop and improve products and services by sharing information among related departments and effectively utilizing information through our customer feedback aggregation system.

The FANCL Group faces the potential risk of falling victim to targeted attacks such as ransomware, which could lead to ransom demands, or business suspension due to incidents involving encryption or data lockout.
In addition, there is a potential risk that confidential or personal information may be leaked or spread due to cyberattacks or internal fraud, resulting in a decrease in sales due to loss of trust from society and customers, along with losses due to liability for damages to customers and other parties.

The FANCL Group has established an IT Security Working Group under the Group Risk and Compliance Committee to strengthen IT security measures. In addition, we have established an Information Security Policy that is shared across all FANCL Group companies, and we carry out activities based on this policy.
Specifically, we have reinforced our measures for the detection of issues through a 24/7/365 monitoring system, including behavior detection by installing EDR tools on all PCs. In addition, we regularly conduct training for all employees on targeted attack e-mails to prevent virus infection, and carry out penetration tests by white hat hackers on a regular basis. We also regularly educate our employees and publish security information on our site to raise awareness.
With respect to the management of personal information, we adhere to relevant laws and regulations, including the “Guidelines concerning the Protection of Personal Information in the Area of Correspondence Delivery Business” set by the Japan Direct Marketing Association, as well as our own internal regulations. In addition, we are working to enhance our information management system and implement thorough employee training with cooperation between the departments in charge of legal affairs and information security.

Natural disasters, such as major earthquakes and wind and flood damage caused by climate change, have become increasingly frequent in recent years.
In the event of a natural disaster, if the FANCL Group's Head Office, factories, and logistics centers are impacted, it could lead to the functional suspension of operations, and the FANCL Group's business performance could be significantly affected.
In addition, with regard to Hatsuga Genmai and Kale Juice, the harvest of the raw materials for these products (rice and kale) is dependent on weather conditions, and if there is a shortage of raw materials or a sharp rise in prices due to unseasonable weather, the FANCL Group's business performance may be affected.

The FANCL Group has formulated an all-hazard business continuity plan, not only covering natural disasters such as major earthquakes, but other possible hazards that the company may face.
In addition, we operate a communication system to confirm the safety of employees in the event of a disaster, we stockpile emergency food and drinking water, and conduct regular emergency drills to ensure the effectiveness of our measures in the event of an emergency.
Our Head Office functions have been upgraded with disaster countermeasures such as using seismic base isolation to protect core system servers necessary for business continuity, and a system that allows employees to work from home.
In terms of procurement, we have identified manufacturing and inventory locations of raw materials and materials for our main products and are aiming to reduce risk by diversifying our suppliers and storing rare raw materials in inventory. For rice and kale, which are dependent on weather conditions, we strive to diversify production sites and stockpile raw materials.
With regard to factory functions, the FANCL Group manufactures Cosmetics, Nutritional Supplements, and Hatsuga Genmai at six directly managed factories in Japan and other locations, while the production of Kale Juice is outsourced to affiliated companies and others. We are working to reduce risk by establishing a production system spread across multiple locations, including outsourced production.
With regard to logistics functions, logistics centers are located in both the Kanto and Kansai regions to diversify risk.

The FANCL Group operates its business in the fields of beauty and health.
In recent years, there has been an upward trend of newcomers into the markets of cosmetics for sensitive skin and nutritional supplements due increasing numbers of women with skin sensitivities and a growing health consciousness.
If our response to changes in consumer values, needs, and purchasing behavior in relation to beauty and health is insufficient, and if we experience a relative decline in the competitiveness of our products due to the introduction of new products by competitors, etc., the growth potential and profitability of the FANCL Group may decline.

Since its establishment, the FANCL Group has developed Mutenka cosmetics, Nutritional Supplements, Hatsuga Genmai, Kale Juice and other businesses based on the corporate philosophy of eliminating "negatives". Regarding product development, the department that oversees product planning and development follows this corporate philosophy and operates based on customer needs and market research. In addition, we have appointed an executive in charge of new businesses and established a new specialized department focused on the creation of new businesses that meet the needs of the times.
By maintaining the philosophy of eliminating "negatives" faced by those around us and by our customers, and further developing our businesses, we are able to swiftly respond to changes in consumer behavior and maintain our competitive edge.
Our multiple sales channels both in Japan and overseas, including directly managed online and catalogue sales, physical store sales, and wholesale sales to retailers through online malls, enable us to respond to changes in consumer behavior from a variety of angles.

The risks related to the impact of climate change on our business are described in "2. Status of Business 2. Sustainability Policy and Initiatives (2) Climate Change Initiatives" in accordance with the TCFD framework.
The main risks are assumed to be: flood risks due to global warming and extreme weather conditions; raw material procurement risks, such as decreased production and quality of agricultural raw materials; risks relating to CO2 emission reductions, plastic reduction, and resource recycling policies and regulations; and changes in consumer needs and investor reputations.

In 2018, we formulated the FANCL Group Sustainable Declaration – “Building a Bright Future Together” and pledged our intention to contribute to the realization of a sustainable society in line with the Sustainable Development Goals (SDGs). In our Medium-Term Management Plan “Forward 2023,” we have set priority issues for sustainability, and in terms of key environmental issues to address, we have set quantitative targets for the reduction of CO2 emissions, reduction of plastic use, and the procurement of sustainable palm oil, and we are promoting these targets throughout the FANCL Group.
The Sustainability Committee, composed of executive directors and executive officers, manages and evaluates the progress of these risks and measures, and deliberates on individual measures, while the Board of Directors performs oversight and monitoring functions. Under this framework, we aim to achieve our key sustainability goals and increase our corporate value.

In the event of a pandemic involving the rapid spread of an infectious disease, there may be a closure of the FANCL Group's business establishments and direct stores, which may have a significant impact on the Group's business performance.

In accordance with the FANCL Group's business continuity plan, we maintain multiple manufacturing, distribution, and call centers, and have constructed a system that allows for business continuity even in the event of an infectious disease spreading at one of our business sites.
In addition, the Head Office and the call center division have established an environment that allows employees to work from home, enabling them to carry out their duties without needing to travel to the workplace in the event of an infectious disease outbreak. In response to the closure of direct stores, the FANCL Group has developed a structure that aims to mitigate the overall impact by leveraging its multi-channel strengths, including directing customers to online and catalogue sales.

In addition to quality and compliance issues, with the increasing use of social media platforms, there is a risk that posts on such platforms by our official accounts, or the words and actions of our activities, employees, and others, may be subject to criticism from the public, regardless of the facts or intent, and may be spread through social media or other means, thereby potentially damaging the image of the Company and our brands.
In addition, there is a risk that the image of the Company and its brands may be tarnished by consumers purchasing counterfeit products that do not meet the original quality standards of FANCL products.

Countermeasures against risks arising from quality and compliance issues are described in "Risks Related to Legal Regulations/Compliance" and "Risks Related to Manufacturing and Quality Control".
At the FANCL Group we have formulated guidelines for the operation of official social media platforms, as well as a crisis management manual for dealing with a flood of criticisms or the threat of such incidents. These guidelines and manual have been distributed internally, and we use them as a basis to conduct regular training for those in charge of managing our official social media accounts.
With regard to counterfeit products, we cooperate with government agencies to stop the importation of suspected counterfeit products, conduct regular investigations of suspected counterfeit products, especially those on overseas e-commerce sites, and take action to expose stores and factories selling counterfeit products.

There is a risk that the price of raw materials used in our products may increase due to issues surrounding the global economy, geopolitics, supply-demand balance, abnormal weather conditions, or exchange rate fluctuations, or that we are unable to achieve the stable procurement of raw materials due to issues at suppliers or dependence on specific suppliers.
In addition, there is a risk that we may not be able to fulfill our social responsibility of achieving sustainable procurement that takes into consideration global warming prevention, biodiversity conservation and other environmental aspects, as well as the labor environment and human rights at our suppliers, potentially causing damage to the reputation of the Company and our brands.

The FANCL Group is working to reduce the impact of rising raw material prices through cost reductions and advance purchases, etc. In addition, we are proactively shifting to a multi-supplier (multiple purchasing), multi-hub (multiple manufacturing bases) structure, and switch between two logistics bases. Furthermore, for natural ingredients used in our Nutritional Supplements products, we are reducing risks related to stable procurement by forming annual contracts with suppliers.
In addition, every year we conduct supplier evaluations and review our dependence on suppliers, and revise our supplier structure based on our findings. We also conduct lead-time and manufacturing capacity studies to confirm the status of our suppliers.
At the same time, in order to practice sustainable and responsible procurement, we conduct questionnaires and interviews with our suppliers to confirm their compliance with the standards set out in our Supplier Guidelines before conducting business with them.
In addition, in order to achieve the quantitative targets listed under "Risks related to Climate Change/Environmental Issues," we are working to realize procurement that takes the environment into consideration. As examples of this, we are proactively procuring sustainable palm oil (mass balance), and for packaging materials we proactively use FSC certified paper and have changed from plastic cases to decorative paper boxes, and switched to chemically recycled bottles.

The FANCL Group operates overseas through its overseas subsidiaries, and is subject to the influence of fluctuating exchange rates on transactions denominated in foreign currencies.
In addition, the Group is also affected by exchange rate fluctuations when converting the financial statements of overseas consolidated subsidiaries into yen as part of the Group’s consolidated financial statements.
In the event that exchange rate fluctuations are unexpectedly severe, there may be a significant impact on the FANCL Group’s financial position and business performance.

The FANCL Group has established a system for quickly responding to currency fluctuations by monitoring the fluctuations of major currencies used for the Group's transactions and preparing appropriate forward exchange contracts, among other measures.

In Japan, the working population is expected to decrease further due to the declining birthrate and aging population. At the same time, the employment environment is changing drastically due to the development of information technology, globalization, and the reform of work styles.
In order to realize VISION 2030, the FANCL Group will need to secure diverse and talented human resources who can play an active role in various fields. If the Group is unable to secure human resources in a planned manner due to changes in the hiring environment, or if the secured human resources are insufficiently trained, there is a possibility that business activities will stagnate, which may affect the business results of the FANCL Group.

Under the slogan "Embrace differences", the FANCL Group is actively engaged in supporting diversity and inclusion and health management to create a comfortable work environment where diverse employees can demonstrate their unique abilities in beauty and health.
We have set up a department specialized in employee education and have significantly increased our investment in our human resources to systemize our human resource development and ensure that we can secure human resources in line with future expansion of business development.
In April 2017, the FANCL Group established a new employment category called the "Active Senior Employee System" which has no fixed retirement age. The purpose of this new employment category is to help retain excellent human resources within the company, and also to contribute to the enhancement of human resources by passing on the corporate philosophy and skills and training to future generations.
In addition to these initiatives, the Board of Directors discusses human capital management to support sustainable growth, and formulates and implements human resource strategies to achieve our management strategy. Details are described in "2. Business Status 2. Sustainability Approach and Initiatives (3) Initiatives for Human Capital".