Responding to Climate Change

As a measure to mitigate climate change, one of the most serious global environmental risks, The CITIZEN Group is making Group-wide efforts to reduce GHG emissions through energy-saving activities at its plants and offices and the introduction of electricity derived from renewable energy sources.

As an expression of our commitment to climate change mitigation, we have joined the “Climate Change Initiative” and endorsed the TCFD recommendations in 2020. In 2022, we have revised the Group's CO₂ emission reduction targets (Scope 1, Scope 2, and Scope 3) and obtained SBT certification for the revised targets. In addition, measures to respond to large-scale disasters due to climate change are stipulated in our disaster BCP (Business Continuity Plan).

Climate Change Risks and Opportunities

Governance

The CITIZEN Group has established an environmental management system to efficiently promote environmental management. Under the umbrella of the Sustainability Committee chaired by the chairman of CITIZEN WATCH, we have put in place the Group Environmental Committee chaired by a director (in charge of environmental affairs) who has been appointed by the chairman of the company.

Climate change issues are discussed by the Group Environmental Committee, followed by discussions by the Sustainability Committee, and are then deliberated and approved by the Management Meeting. The content approved by the Management Meeting is reported to the Board of Directors on a regular basis (twice a year) and is used for decision-making on environmental risks and environmental investments.

Scenario Analysis

Recognizing that the risks and opportunities associated with climate change will have a significant impact on its business strategy, The CITIZEN Group has identified the risks and opportunities associated with climate change through the following process, and the Sustainability Committee Secretariat took the lead in analyzing and assessing the significance of the 1.5°C and 4°C scenarios.

Process for identifying the risks and opportunities associated with climate change

Process 1

We comprehensively identified the risks and opportunities associated with climate change.

Process 2

We organized the identified risks and opportunities in relation to the four business segments of Watches and Clocks, Machine Tools, Devices, and Electronic Devices and Others, as well as in 3 time frames: short, medium, and long term.

Process 3

For each risk and opportunity identified, we used a 5-point scale to evaluate its "impact on the company" and "likelihood of occurrence". As an overall evaluation, items with a high "impact on the company" and "likelihood of occurrence" were extracted, and important risks and opportunities were identified.

Selected Climate Change Scenarios

We analyzed and evaluated the 1.5°C scenario, which is a scenario of moving toward a decarbonized society, and the 4°C scenario, which is a scenario of increasing warming.

SSP1-1.9 was used for the 1.5°C scenario, and SSP5-8.5 for the 4°C scenario.

• * SSP1-1.9: Assumes that warming is controlled to about 1.5°C above 1850-1900 levels by 2100 "after a slight overshoot" and that CO₂ is reduced to net zero around the middle of this century.
• * SSP5-8.5: High-level reference scenario without implementation of additional climate policies.

• Source: Figure, IPCC AR5 WGⅠ SPM Fig. SPM.7(a)

Scenario Analysis Results

Financial Impact Analysis

Based on the results of the scenario analysis, we have identified financial impacts for the following two items that could significantly affect The CITIZEN Group’s finance.

Transition Risk

Cost increase due to the introduction and strengthening of new regulations

Transition Risk

Increase in the cost of raw materials, etc., supply shortages and supply disruptions

Impact of introducing the carbon tax on Scopes 1, 2, and 3

The financial impact of the carbon tax was estimated based on the following calculation criteria.

We compared the IEA's carbon price projections for each scenario with the financial impact if The CITIZEN Group's CO₂ emissions reduction targets were achieved or not achieved. The cost of the carbon tax was calculated based on The CITIZEN Group's current CO₂ emitting countries (Japan, Thailand, China, the Philippines, and Vietnam), as the amount varies from country to country.

Scopes 1 and 2

We calculated the business impact for production in 2030, 2040, and 2050 when the carbon tax is introduced.

The CITIZEN Group aims to achieve carbon neutrality by 2050 and has established a roadmap for reducing CO₂ emissions (The CITIZEN Group Environmental Goal 2030). Taking these as a standard, we set the CO₂ emissions for each year and calculated the financial impact.

Scope 3

We calculated the financial impact from the CO₂ emissions for Category 1 of Scope 3 and material purchase costs, assuming that all impacts of carbon tax were reflected in the purchase price.

Strategy (Measures and Policies of the Company)

We have formulated the "The CITIZEN Group Environmental Vision 2050" to achieve carbon neutrality in 2050. The CITIZEN Group aims to achieve virtually zero CO₂ emissions from its factories and offices by 2050. We are also working to understand the risks related to climate change throughout our supply chain.

The Group sees the transition to a low-carbon economy as an opportunity to invest in renewable energy and energy-saving equipment, and it is also working to improve product competitiveness through the development and production of environmentally friendly products.

Under the 1.5°C scenario,

we anticipate increased costs due to stricter regulations, including the introduction of a carbon tax, and the risk of higher prices for raw materials and other resources. In addition to promoting decarbonization initiatives to achieve The CITIZEN Group Environmental Target 2030 and The CITIZEN Group Environmental Vision 2050, the Group is considering the introduction of an internal carbon price system to promote investment in GHG emissions reduction.

Under the 4°C scenario,

in order to stably secure raw materials, we will promote diversified procurement sources and appropriate parts and materials procurement management. In addition, we are promoting BCP measures including weather-related disasters and investment related to disaster countermeasures.

Risk management

In accordance with ISO 14001, the risks and opportunities related to climate are identified once a year by the environmental manager and the secretariat on a short to long-term timeline, based on the environmental aspects, laws, and regulations to be complied with, issues in the external and internal environment, and needs and expectations of stakeholders.

Climate-related risks are reflected in the Group's strategy as one of the Group's key risks and are addressed under the supervision of the Board of Directors.

Specific measures to eliminate risks and opportunities are decided at the management meeting attended by directors, after which each measure is implemented by relevant departments under the control of the director in charge of environmental affairs. For cross-group themes, we utilize the established ISO14001 system and the environmental management system that conforms to it, so that we can develop an efficient PDCA cycle.

Indicator and Goal

The CITIZEN Group has set the following targets regarding climate change.

The CITIZEN Group has also set cost reductions through the promotion of energy conservation as an indicator for "climate-related opportunities" and the amount of capital investment in energy conservation and renewable energy as an indicator for "capital allocation," and will continue to monitor these indicators.

Reduction of Greenhouse Gas Emissions

To achieve the 1.5°C scenario, we are promoting the reduction of GHGs, which are the cause of global warming. In addition, we are preparing for the implementation of energy-saving activities at each of the Group's business sites, the introduction of energy-saving equipment and facilities such as LEDs, and capital investment to establish "sustainable factories" using manufacturing processes that are environmentally friendly. In January 2022, the solar power generation system at the CITIZEN FINEDEVICE headquarters and Kawaguchiko Plant started operation, and it is expected to reduce CO₂ emissions by 7.7 tons per year. In addition, we plan to increase energy self-sufficiency by installing photovoltaic power generation systems at all newly constructed plants, starting with CITIZEN MACHINERY’s Karuizawa Plant in Nagano Prefecture, which was constructed in April 2022.

We also calculated Scope 3 emissions for The entire CITIZEN Group in order to reduce GHG emissions throughout the supply chain. As an opportunity, we are working to create new environmentally friendly products, such as watches incorporating the Eco-Drive, in anticipation of the expansion of ethical consumption, which will contribute to solving environmental and social problems.

Scopes 1 and 2 GHG emissions

Trends in The CITIZEN Group's GHG Emissions from Non-Energy Sources (CO₂ equivalent)

In FY2022, direct emissions of GHGs other than CO₂ from energy sources (i.e., nitrogen trifluoride, sulfur hexafluoride, perfluorocarbon, hydrofluorocarbons, nitrous oxide, methane, and CO₂ from non-energy sources) totaled 1,390 tons (CO₂ equivalent). These accounted for 7% of the total Scope 1 emissions. The value is higher than in previous years due to the addition of overseas sites to the scope of calculation and a review of the calculation method.

Calculation of Scope 3 GHG Emissions

In reducing GHG emissions, it is important to understand the GHG emissions (Scope 3) not only at the company's own manufacturing stage, but also throughout the entire supply chain where GHGs are indirectly emitted. Therefore, we calculated the GHG emissions of all The CITIZEN Group operations in FY2022. Based on these calculations, the total indirect GHG emissions of the entire supply chain amounted to approximately 1,651,000 tons. Of these, "products and services purchased" (Category 1) accounted for the largest share, at 57% of the total, followed by "use of products sold" (Category 11) at 35%, which together accounted for about 92% of the total.

In our company, we calculate Scope 1 emissions based on the procurement amount. In FY2022, emissions in Category 1 increased due to the inflationary pressures that led to higher costs for purchased products (materials and consumables) as well as service expenses. Consequently, the emissions in Category 1 contributed to an overall increase in Scope 3 emissions. Going forward in the upcoming fiscal years, we are committed to implementing measures to reduce emissions. Additionally, we plan to undergo third-party verification by an external audit agency for the emissions data of FY2022, covering all business operations within The CITIZEN Group.

• Greenhouse Gas Emissions Verification Report