75

TOKYO CENTURY CORPORATION76

INTEGRATED REPORT 2023

Major Risks, Management Frameworks, and Risk Management
During the period of the previous medium-term management plan, the need to reinforce risk management was highlighted throughdevelopments such as the deterioration of macroeconomic conditions that stemmed from the impacts of the COVID-19 pandemic
and the massive losses centered on the aviation business that were a result of Russia’s invasion of Ukraine. Going forward, Tokyo
Century will continue to develop its risk management framework while enhancing its investment management framework to facilitate the efficient allocation of management resources based on a comprehensive enterprise risk management (ERM) approach.
These frameworks will be used to support the ongoing growth of the Company.

Relationship between Major Group Companies and Main Risk Categories
Risk Category

Tokyo
Century

Nippon Car
Solutions

FLCS

NipponRentA-Car
Service

Orico
TC
Auto
KobelcoLeasing* Real Estate

ShunanPower

High-weight risk category
Orico
IHI FinanceBusiness
SupportLeasing*

Aviation
CapitalGroup

General­residual value

Aircraft

CSI
Leasing

Tokyo
Century(USA)

TC
Skyward
Aviation

Credit risk
Country risk
Market risk
Interest rate risk
Foreign exchange risk

Major Risks and Management Frameworks

Liquidity risk
Investment risk

Management Meeting and Board of
Directors
Management of policies and status ofinvestments in equities, etc.
Comprehensive Risk Management
Committee
Measurement andmanagement of risks

Investment Management Committee
Established in fiscal 2021Investment screening, progress management, and continuation/withdrawal
decision-making

Credit Risk Management Committee
Credit risk measurement and analysis
Transaction Evaluation Meeting
Review of large projects and new scheme
projects, etc.
Internal Rating System

Equity investment risk
Business­investment risk
Asset risk

Automobile

GeneralAutomobile
residual value

Automobile

Real estate

Biomass
co-firing power
generation

GeneralGeneralresidual value residual value

AircraftOperational risk

Investment risk

Country Risk* (Added in fiscal 2023)
Country risk exposure management

Credit risk

Collection and sharing of country risk information
 esignation of countries not eligible for financing orDinvestment

Asset risk

Seven Risk

Note: The scope of management extends to all consolidated subsidiaries. The table above only lists Tokyo Century’s significant subsidiaries subject to internal control under Japan’s
Financial Instruments and Exchange Act.
* Effective October 1, 2023, Orico Auto Leasing and Orico Business Leasing were excluded from the scope of management following a transference of equity in these companies to a
non-Group entity resulting in their conversion into equity-method affiliates.

Country risk

Categories

Liquidity risk

Revised in fiscal 2022

Disaster risk
Regulatory and system change risk
Climate change risk
Reputational risk
Administration Risk and System Risk

Asset Liability Management Committee
Management of market risks, such as fluctuations in interest rates andforeign exchange rates, and liquidity risk
Introduction of risk management tools such as hedge ratio, maturity
ladder, gap analysis, GPS (grid point sensitivity), and VaR (value at risk)*C ountry risk, which was previously included under credit risk, waschanged to an independent risk category in April 2023 to reflect recent
geopolitical risks. Based on this new categorization, the Company istaking steps to accelerate the collection and internal sharing of country
risk information, enhance monitoring of country risk exposure, designatecountries not eligible for financing or investment, and implement more rigorous risk assessments of overseas business entities from the perspective of information security and anti-corruption measures.

IT and Administration Strategy Management Committee
Preparation and implementation of IT strategies, IT investment policies, administrative system, etc.
Information Security Risk
Information Security Committee
Operation based on ISO 27001

The Tokyo Century Group will continue to practice comprehensive ERM in accordance with its management guidelines forcapital use rates based on quantitative risk control on a consolidated basis. The capital use rate is used to assess risk resilience, an important criterion for rating financial institutions. We have therefore sought to keep the risk amount within a certain level of capital buffers by adhering to the aforementioned management guidelines. As our business domain continues
to expand, the relationship between the amount of capital and level of risk receives greater attention from investors andother interested parties. For this reason, the capital use rate has become a key indicator for objectively determining prospects for our sustainable growth and investment capacity.
We refer to the targeted level of the capital use rate only as a guideline, since the regulations regarding capital use levels
for financial institutions are not applied to us. In operating a business, seizing business opportunities, such as the opportunity to take part in M&A activities, is also an important factor considered under the risk management framework. Rather
than adopting a passive approach to the soundness of corporate management, we pay due consideration to the magnitudeof increase in the amount of risk over a medium-term period of about three years, the projection for organic increases in theshareholders’ equity ratio from profit growth, and the level of tolerance of our capital policy.
Medium-Term Management Plan 2027 prescribes the enhancement of our risk control framework aimed at the efficient

Establishment and Operation of CSIRT Office in the IT
Promotion Division

allocation of management resources through an ERM approach. In fiscal 2023, the first year of the plan, we will introduce,

Disaster Risk (Large-Scale Natural Disasters and Other
Crises)(aviation, investment, and real estate). These guidelines will be used to drive the diversification of the Company’s business

Establishment of Crisis Management Rules, BusinessContinuity Plan (BCP) Rules, etc.

on a trial basis, risk exposure guidelines (soft limits) for the categories that account for a large portion of our risk profile
portfolio and otherwise enhance portfolio management (portfolio transformation).
The main objective of risk management at the Tokyo Century Group is to support growth and value creation by allowing

Preparation and Implementation of BCP Manual, Safety
Confirmation System, etc.

for bold risk taking. We will continue to control the capital use rate to maintain it at the appropriate guideline level. At the

Other Operational Risks

same time, we will constantly improve on the level of our risk management framework in conjunction with the expansion ofComprehensive Risk Management Committee
Analysis and measurement of risks and countermeasureplanning
Non-financial key risk indicator monitoring, etc.

our business domain and changes in the operating environment in order to sustainably improve corporate value.

C HA PT E R 6

Operational risk

Comprehensive Enterprise Risk Management​

Enhancement of Risk Management

Market risk

Following 11 non-financial risk categories identified formonitoring
Administration risk
Fraud risk
System risk
Information security risk
Legal risk
Personnel and labor risk Revised in fiscal 2022
Human rights and workplace environment risk

Risk Management

77TOKYO CENTURY CORPORATIONINTEGRATED REPORT 2023

78

Major Risks, Management Frameworks, and Risk Management

Capital Use Rate Guidelines

A
Consolidated economic
capitalB
Total risk amount

Maintain financial discipline while carefully assessing business environment to take necessary risks

100

As our business domain grows and we branch out from the financial sector to provide business services, it is becoming increasingly
important to account for non-financial operational risks that cannot be measured quantitatively. Based on this recognition, Tokyo(%)

Century has established key risk indicators (KRIs) for non-financial risks. Regular monitoring of these KRIs is performed, and the results

Guideline target

are reported to the Board of Directors and other relevant bodies. KRIs have been set pertaining to human resources, information secu-(%)

VaR amounts(consolidated) for
credit risk, asset risk,
investment risk,
market risk,
operational risk, etc.

Non-Financial (Non-Quantitative) Risks

rity, accidents, compliance, climate change, legal affairs, and corruption. We are also expanding our range of environmental KRIs in relation to renewable energy, CO2 emissions, and the portion of our portfolio accounted for by fuel-efficient aircraft and electrified vehicles

B/Aand have broadened the scope of personnel and labor risk (from non-consolidated to consolidated) amid the rising importance of
tracking and managing human rights and climate change risks. Nevertheless, stakeholder concern for non-financial risks is constantly
rising. From the perspective of sustainability, Tokyo Century will continue to bolster its range of effective indicators related to human
2019

2020

2021

2022

2023

(Forecast)(FY)

Visual Risk Information Tracking at the Management Level
In addition to measuring risks on a consolidated basis and controlling the capital use rate, we implement a visual management

rights and climate change risks as well as to other environmental, social, and governance (ESG) factors and to the United Nations
Sustainable Development Goals (SDGs).

Environmental and Climate Change Risks

information system (MIS). Under the system, the Credit Risk Management Committee and the Comprehensive Risk Management

The Tokyo Century Group recognizes that responding to climate change is an important task. We have therefore endorsed theCommittee take the lead in regularly monitoring risk information on multiple criteria and report the results to the Management

recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and are advancing climate change response

Meeting and the Board of Directors.*measures including scenario analyses and information disclosure based on these recommendations.

In our global operations, we pay particular attention to Aviation Capital Group LLC (ACG) and CSI Leasing, Inc. (CSI), our U.S.based subsidiaries that specialize in leasing and for which the scale of investments and assets is quite large. ACG has achieved
success as a textbook example of a resilient company made so through a unique risk management approach that includes introducing a risk appetite framework to clarify the risks to be accepted, such as aircraft asset risks, and the risks to be avoided (mitigated or transferred), such as interest, liquidity, and foreign exchange rates. In light of the extraordinary losses recorded in relation
to operations in Russia, ACG has implemented a new risk management framework to be used in dispersing previously concentrated risks on a country and airline bases and ensuring an appropriate risk and return balance based on the characteristics of agiven project. This framework will be introduced for managing individual projects on a trial basis in fiscal 2023.
* For information on the monitoring activities by the Company’s committees, please refer to P.75 “Major Risks and Management Frameworks.”

Risk Tolerance

Low

Risks to be­mitigated ortransferred

Risks to be avoided

Risk Category*2

Risk Management Method

Asset acquisition risk 1•F ocus on investments in widely applicable assets that promise
reliable leasing rates and residual value

NeutralResidual value risk 2
Country/geopolitical risk
Credit risk
Aviation market risk•P ortfolio management based on defined risk management indicators to address potential impacts from difficult-to-control
operating environment factors (hard limits on level of geographic region exposure concentration, control of average ageof fleets, etc.)•D iscussion and assessment as part of internal approval flow
with regard to transactions with airlines in countries exposed toconflict and other risks

Positive

Remarketing risk 3
Model risk 4
Operational risk•P ortfolio management based on defined risk management indicators (diversification of lease maturities and new aircraft delivery timings)

Positive

Capital management risk
Interest rate risk
Liquidity risk
Currency risk
Reputational risk

• Hedging within a predefined range based on stringent risk management indicators (interest rate duration mismatch, debt-toequity ratio limitation, etc.)• Upper limits for ratio of loans with variable interest rates• Regular stress tests in preparation for potential operating environment changes

Positive*1 Proactive and autonomous management made possible by ACG’s high level of expertise*2 Examinations underway with regard to feasibility of introducing new category of ESG risk and related risk levels and risk management methodologies

1. Asset acquisition risk:
2. Residual value risk:
3. Remarketing risk:
4. Model risk:climate change risks and comparative analyses of the greenhouse gas emissions and asset portfolios of different operating segments. To date, scenario analyses have been conducted targeting the environment and energy businesses (solar power generation),
the aviation business (aircraft leasing), and the automobility business (auto leasing for individuals and companies). Going forward,
the Company will continue to examine the appropriate risk countermeasures and related opportunities by expanding the scope ofbusinesses subject to scenario analyses and improving the accuracy of said analyses based on risk materiality assessments.

 isk that appropriate portfolio management cannot be practiced in relation to aircraft acquisition methods, selectedRmodels, etc.
Risk that aircraft cannot be sold or disposed of at the residual value anticipated at the time of leasing
Risk that lessees cannot be found for new or re-lease aircraft due to declines in aircraft demand, etc.
Risk that sufficient returns cannot be generated by projects due to inability to appropriately reflect interest rate or aircraft value trends into lease rates in pricing models

Importance for stakeholders• Assessment of industries with high climate change risks as determined by ESG rating institutions

Importance forTokyo Century• Measurement of greenhouse gas emissions by operating segment• Assessment of earnings, expenses, assets, and other aspects of portfolios by operating segment• Assessment of risks (transition risks and physical risks) and opportunities by operating segment

Selection through risk materiality assessment
Businesses subject toscenario analyses

Environment and energy businesses (solar power generation)
Aviation business (aircraft leasing)Automobility business (auto leasing for individuals and companies)

Risks and Opportunities Based on Scenario Analyses
Environment andenergy businesses(solar power generation)

Tokyo Century recognizes the potential for the emergence of physical risks requiring urgent attention related toabnormal weather events, such as typhoons and heavy rain, and transition risks including the introduction ofcarbon taxes and strengthening of laws and regulations. Conversely, solar power generation and other renewableenergy businesses are expected to see a wider range of opportunities.
The aviation business may be impacted by the emergence of physical risks associated with the increasing severityof extreme weather events and transition risks such as the implementation of carbon emissions reduction targets
in various countries and regulations specific to the airline industry. At the same time, increased earnings opportunities are anticipated from the transition to low-emission aircraft with higher fuel efficiency and lighter weights andthe adoption of next-generation aircraft that are powered by alternative forms of fuel, electricity, or hydrogen.

Aviation business(aircraft leasing)Automobility business(auto leasing forindividuals andcompanies)

For the automobility business, physical risks could include impacts from the increasing severity of extreme
weather events, such as vehicle production delays due to flooding and heavy rainfall, while potential transition
risks might include the shift from gasoline and diesel vehicles to electric vehicles (EVs), which would entail aswitch from fueling to charging. Meanwhile, earnings opportunities related to charging service and secondhand
EV battery reuse businesses are projected to emerge amid the shift toward EVs.

Detailed Disclosure

For more information on governance, strategies, risk management, and metrics and targets pertaining to disclosure based on

Based on TCFD

TCFD recommendations, please refer to the following website.

Recommendations		https://www.tokyocentury.co.jp/en/sustainability/esg/environment/tcfd.html

C HA PT E R 6

MediumRisks to be
accepted

scenario analyses entailing risk materiality assessments. These assessments involve industry-specific evaluations of the impacts ofEnhancement of Risk Management

High

Given that it operates in five business fields, the Tokyo Century Group has chosen an approach for selecting businesses subject to

Risk Materiality Assessments

ACG’s Risk Appetite Framework
Ability to
Influence*1

Scenario Analyses through Risk Materiality Assessments

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INTEGRATED REPORT 2023

Major Risks, Management Frameworks, and Risk Management and Response to Expansion of Business Domain

Environmental Impact Assessments
Tokyo Century aims to make contributions to the environment through its business activities. Thus, we believe it is impor-

Overview of Investment Management Frameworktant to understand the positive and negative impacts on the environment of the projects we undertake. Accordingly, environ-

Investment
Screening

Verification of Investment Risks and Profitability

Investment
Standards

Confirmation of Conformity to Investment Standards

Progress
Management

Monitoringmental impact assessment worksheets are used to assess the environmental risks and opportunities of candidate projects
to be submitted to the Management Meeting and Transaction Evaluation Meeting.

Climate Change Risks
Preliminary measurements of exposure to transition risks and physical risks are conducted and the results are reported regularly to the Comprehensive Risk Management Committee to determine the potential impact of climate change risks on• Confirmation of conformity to investment management framework standards• Quantitative standards (profitability versus risks with consideration for cash flows, etc.)• Qualitative standards (compatibility with management policies, strategies, etc.)• Definition of triggers for withdrawal decisions

Tokyo Century’s credit portfolio.
Exposure to transition risks is quantified through Monte Carlo simulations targeting sectors chosen based on TCFD recommendations after accounting for the potential impact of these risks on debtor ratings and asset value.
Physical risk exposure is measured as the maximum loss projected to be incurred based on statistical simulations ofspecific business assets (solar power generation businesses, etc.) that have suffered damages from natural disasters.
For more information on the following topics, please refer to the Company’s corporate website.
• Environmental Management System Organization• Acquisition of ISO 14001 Certification for Environmental Management Systems
Continuation /Withdrawal Decisionhttps://www.tokyocentury.co.jp/en/sustainability/esg/environment/management.html

Investment Management Framework
Century Group has instituted an investment management framework. Primary focuses of this framework include clarifying
investment screening, continuation, and withdrawal standards and developing standardized monitoring processes.

anticipated level of profitability after considering capital costs based on the inherent risks (quantitative standards) and thecompatibility with Tokyo Century’s strategies (qualitative standards). In addition, multifaceted evaluations are conducted bybusiness divisions with regard to business plans, investment structures, and projected risk exposure and environmental
impacts. Shared standards for determining when withdrawal from an investment should be discussed (withdrawal standards) are applied to all projects, and clear numerical values for financial indicators are defined on an individual projectbasis to serve as the trigger for commencing the withdrawal process. By clarifying the standards for withdrawal in thismanner, the Company is practicing effective portfolio management.
After investment, projects will continue to be monitored through standardized processes, and the status of projects andtheir conformity to the scenarios formulated at the time of their selection will be confirmed regularly. Should a project
become applicable under withdrawal standards, the Investment Management Committee will provide opinions and assess

Common Withdrawal Standards
Loss of conditions deemed necessary for implementation of initialbusiness plan, etc.
Individual Withdrawal Criteria
Project-specific trigger figures set
for P&L, balance sheets, cash
flows, etc.

Withdrawal

ROIC Monitoring in Operating Segments
Tokyo Century regularly monitors the return on invested capital (ROIC) spread (ROIC less weighted average cost of capital[WACC]) as a cost-of-capital-based indicator of the risk-and-return balance of specific business areas. Business and risk
characteristics are accounted for in this monitoring. Moreover, this timing-based monitoring approach is used to promotemanagement that emphasizes cost of capital along with sound financial discipline. Factors examined through this monitoring include whether an appropriate balance is being maintained between risks and returns in different operating segments
and whether the necessary risks are being taken to generate value and stimulate growth. Under Medium-Term Management
Plan 2027, the Company will continue its approach toward managing risks and returns with an emphasis on cost of capital.
At the same time, enhancements to this approach will be pursued by reviewing methods for managing the ROIC spread by
operating segment and incorporating this indicator into performance evaluations and portfolio allocation.
Management of ROIC Spread by Operating Segment Figure
ROIC

WACC

ROIC spread (ROIC – WACC)

1. Operating Segment A

2. Operating Segment B

3. Operating Segment C

the appropriateness of continuation, and the Management Meeting will determine whether or not investment should be continued based on a comprehensive evaluation of such factors.

1st FY

2nd FY

3rd FY

1st FY

2nd FY

3rd FY

1st FY

2nd FY

3rd FYC HA PT E R 6Management Meeting as part of the process for screening investments of a predetermined scale, in order to confirm the• Confirmation of changes in strategic importance,
market growth potential, etc.
• Assessment of withdrawal impacts

Enhancement of Risk Management

Under this framework, meetings of the Investment Management Committee are held prior to discussions by theInvestment Continuation Judgment

Continuation

Response to Expansion of Business Domain

For the purposes of effectively controlling diversifying investment risks and optimizing its business portfolio, the Tokyo• Confirmation of conformity to quantitative (cost of capital, etc.) and qualitative standards• Verification of business plan progress

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TOKYO CENTURY CORPORATIONINTEGRATED REPORT 2023

82

Compliance and Information Security

Human Rights Consultation Contact Points

ComplianceAs part of its efforts to promote respect for human rights in its business activities, the Tokyo Century Group has establishedcontact points for human rights consultations. These contact points can be used by business partners and external stakeholders to receive consultation regarding human rights violations by Group officers or employees. Remedies are instituted

Compliance Structure

to rectify the damages caused to the victims of any verified violations.

At the Tokyo Century Group, the Compliance Office promotes compliance measures under the supervision of the chief com-

Provisions are in place to protect people submitting reports and other involved parties using these contact points.

pliance officer (CCO) appointed by the president & CEO, who is also the chief compliance executive.
The heads of each business division and branch office of the Company, along with the presidents of Group companies,
act as compliance officers (COs) with the responsibility of coordinating with the Compliance Office to guarantee compliance with all relevant laws and regulations and ensure that business activities are kept in line with social norms.

For more information on the following topics, please refer to the Company’s corporate website.
• Compliance Structure of the Tokyo Century Group• Compliance Education
• I nternal Reporting System•C ompliance Handbooks• Initiatives for Preventing Corruption

https://www.tokyocentury.co.jp/en/sustainability/esg/governance/compliance.html• Human Rights Initiatives

Compliance Activitieshttps://www.tokyocentury.co.jp/en/sustainability/esg/social/humanrights.html#anc_humanrights-efforts

Compliance activity plans are formulated through discussions by the Management Meeting at the beginning of each fiscal
year, and these plans are reported to the Board of Directors. The adequacy of the progress of these plans is reviewed every
six months by the Management Meeting and the Board of Directors.
Specific compliance activities include e-learning programs, face-to-face and online training sessions, distribution ofcompliance‐related information, and compliance awareness surveys. We also arrange Groupwide forums for sharing compliance information.

Internal Reporting System
In response to the revision of Japan’s law regarding the protection of whistleblowers that went into effect in June 2022, theTokyo Century Group has taken steps to reinforce and clarify the already stringent whistleblower protection measures of its
internal reporting system. We will continue to adhere to the highest standards in operating our internal reporting system
based on the belief that it is an important tool for exercising compliance management.
In addition, we are working to expand use of our internal reporting system by broadening the scope of compliancerelated consultations that can be processed through all internal and external consultation venues, conducting regularawareness surveys regarding the system, and disclosing information pertaining to its implementation status. The ratios ofreports and reports from domestic and overseas Group companies indicate that this system is well entrenched and func-

The Tokyo Century Group views information security as a crucial issue affecting corporate management. The Company has
accordingly obtained certification under ISO 27001, the international standard for information security management systems. Under the leadership of the Information Security Committee, we periodically revise regulations and rules regarding
information management, conduct regular risk assessments to address information security risks, and carry out security
training for employees and officers.
The TC-CSIRT (computer security incident response team) has been set up within the IT Unit as a dedicated cybersecurity organization. Under normal circumstances, the TC-CSIRT will take steps to prevent the recurrence of past incidents andthe occurrence of new incidents by monitoring security systems, assessing the security of cloud services, and educating
officers and employees. As cyberattacks grow more sophisticated and complex, we endeavor to enhance our response
external partners through membership in the Nippon CSIRT Association, and participating in drills for exercising the knowl-

Compliance Structure for the Tokyo Century Groupedge acquired in this manner.

Board of Directors

Developing a global business means that actions must be taken to protect personal information and strengthen information security measures considering various cultures and regulatory environments. In 2022, the services of external

Chief compliance executive of the Group (the president & CEO)Appointment

Compliance officers (COs)
Heads of Tokyo Century businessdivisions and branch offices
Strict compliance observanceCompliance education

Tokyo Century employees

ies are performed to identify issues and implement response measures. In addition, we encourage closer collaboration with
Internal reporting system(Consultation / whistleblowing system)

Compliance-related reports, etc.

Compliance OfficeCorporate lawyer / law firm (Externalroute)

Compliance representatives
Presidents of Group companies

Standing corporate auditors
Independent of management

Reports / consultations on compliance issues
Standard reporting line
Reports on compliance violations

Employees of Group companies

experts were enlisted to revise the security guidelines that act as the minimum standard for security at Group companies
with the aim of reinforcing global security governance. Based on the revised guidelines, assessments of overseas subsidiar-

Appointment

Chief compliance officer (CCO)
President, Risk Management Unit (Secretariat: Compliance Office)Compliance-related promotion, instruction, etc.

Management MeetingGroup companies by strengthening management of outside subcontractors, providing information on information security,and holding regular liaison meetings.
In addition to these efforts, we conduct email drills targeting the Company and domestic and overseas Group companies with emails in Japanese, English, and Chinese several times a year. These drills have proved to be an effective training
method for improving the information security awareness of officers and employees.
For more information on the following topics, please refer to the Company’s corporate website.
• ISO 27001 Certification • Basic Information Security Policyhttps://www.tokyocentury.co.jp/en/csr/governance/security.html

C HA PT E R 6

capabilities by periodically having our cybersecurity measures assessed by third-party institutions, sharing information with

Enhancement of Risk Managementtioning appropriately.

Information Security