Kao TNFD Report
- Report on Financials Impact in the Area of Biodiversity

We conducted additional research into the apparent and potential risks of the issues extracted from ENCORE (Exploring Natural Capital Opportunities, Risks, and Exposure)^*3 , and analyzed them using various GIS (Geographic Information System) data^*4 . As a result, we identified hotspots, including the countries of origin for palm (kernel) oil (Indonesia and Malaysia), operational sites located in regions experiencing water stress or water pollution, and countries where sales take place.

We identified key dependencies and impact factors related to nature across the value chain, including upstream, direct operations, and downstream. These factors were organized along two axes: the degree of impact on the business activities, and the degree of impact on nature and society, as well as the degree of concern among stakeholders. The themes listed below are particularly important to Kao, and each of them scored highly on both evaluation axes.

For the four risks that have significant impacts on both business activities and nature, society, and stakeholders, we created two scenarios, a “coexistence of nature and the economy scenario” and a “business as usual scenario,” to estimate the projected financial impact in 2050.

Kao’s ESG Strategy, the Kirei Lifestyle Plan (KLP) include many themes strongly related to biodiversity. Following the mitigation hierarchy (avoidance, minimization, and Genba restoration/recovery), Kao is taking on the challenge of reducing and restoring biodiversity loss.
It was confirmed that potential financial impact could be avoided or mitigated by promoting ongoing initiatives to address the identified risk factors. Additionally, as an example of new business opportunities, expansion in the agrochemicals sector—such as soil improvement technology—was identified as a potential area for development.

Matters concerning key themes related to biodiversity are reported and decided upon by the ESG Managing Committee, which is chaired by the President and CEO and is the highest ESG authority. Within the ESG Managing Committee, approvals are made for various policies related to biodiversity, along with reports on nature-related dependencies, impacts, and risks and opportunities. Additionally, scenario analysis is used to assess the effects on business activities and guide future actions and strategic direction. Four ESG Steering Committees—decarbonization, plastic packaging, human rights and DE&I, and chemical stewardship—are also discussing themes related to biodiversity, with directors, audit & supervisory board members, and executive officers serving as their owners. More specific activities are led by the ESG Division, which advances initiatives in collaboration with the relevant departments. Kao has also established the following policies as guidelines for daily operations and decision-making to implement its biodiversity strategy across the entire supply chain.

As stated in our corporate philosophy, The Kao Way, Kao’s purpose is “To Realize a Kirei World in Which All Life Lives in Harmony.” This purpose explicitly reflects the concept of coexistence of nature and the economy.
Through the promotion of biodiversity-related initiatives within KLP, Kao aims to achieve a nature-positive future. Among the KLP themes, those closely related to biodiversity include Responsibly Sourced Raw Materials, Decarbonization, Zero Waste, Water Conservation, Air & Water Pollution Prevention, Responsible Chemicals Management, and Respecting Human Rights.

To refine existing initiatives and further strengthen its strategy, Kao conducted an analysis based on TNFD’s LEAP approach. This involved identifying nature-related dependencies and impact factors across the value chain, including upstream, direct operations, and downstream activities. The findings were organized along two axes: the impact on business activities and the effects on nature, society, and stakeholders. The analysis utilized ENCORE, GIS data, publicly available frameworks, guidelines, reports, and case studies.

The particularly high-priority themes are as follows:

For these items, we have developed two scenarios—a “coexistence of nature and the economy scenario” and a “business as usual scenario”—to estimate the projected financial impact of anticipated risks in 2050. The “coexistence of nature and the economy scenario” is the vision of the world and of Kao and is a world where nature and the economy coexist, although major social change is required. It is a world view that depicts a world where products and services that are environmentally friendly as well as high quality are concentrated, and where the supply chain is becoming more centralized. In this world, both the climate and ecosystems have recovered, regulations related to nature conservation have become stricter, and the necessary technological innovations have progressed. In addition, consumers will choose products that are environmentally friendly. In the “business as usual scenario,” the current approach is followed, and the natural environment continues to deteriorate. It is assumed that political and regulatory intervention is limited even if the natural environment deteriorates due to self-interest and that consumers’ environmental awareness does not improve much, and that mass consumption behavior that prioritizes price continues.
In order to estimate the impact of the business, we established a path for the realization of risk and estimated the impact of the business for those for which we were able to collect the parameters necessary for the estimate. It is difficult to collect parameters related to nature with a consistent time axis, but for those for which there is forecast data for 2050, we estimated the impact by aligning the values with those for 2050.

One of the significant financial impacts, regardless of the scenario, is the expected fluctuation in palm oil and palm kernel oil prices. Meanwhile, in the “coexistence of nature and the economy scenario,” we identified additional risks, including potential penalties for non-compliance with EU Deforestation Regulation (EUDR^*5 ) (under the assumption that similar regulations will expand globally) and taxation on plastic packaging.

These financial impacts can be mitigated or avoided through appropriate measures taken by Kao.
We are prioritizing initiatives based on key themes and regions. For example, Kao is enhancing traceability down to oil palm landholders and using satellite-based forest footprint assessments to achieve deforestation free while ensuring compliance with EUDR. We are also working to reduce cost burdens associated with certifications and raw material price fluctuations by transitioning to alternative raw materials that do not rely on palm and promoting natural resource savings in product design.
Furthermore, through Innovation for Reduction and Innovation for Recycling, Kao aims to minimize financial impacts related to plastics.
The results of these risk-addressing efforts and activities will lead directly to an improvement in market competitiveness, an expansion of business opportunities, and greater profitability.

Therefore, Kao collaborated with external organizations to undertake an assessment of soil health using satellite data. The Riau, North Sumatra, West Kalimantan, Aceh, and Jambi provinces in Indonesia are regions with many mills that have transactions with Kao. As a result of evaluating the soil conditions of farms around mills, it was found that there were differences in soil moisture content^*6 and organic matter content *6 depending on the farm, with soil moisture content varying by about ±15% and soil organic matter content varying by about ±3% from the median. In general, areas with low soil moisture and organic matter are disadvantageous for plant growth, so these sites are considered potential candidates for initiatives aimed at risk reduction and opportunity creation. However, plant growth is not determined solely by soil moisture content and organic matter content, and we intend to engage in dialogues with the local area and conduct additional investigations to lead to the next actions.
Below are the results of an assessment of soil health in Indonesia using observational data from satellites and other sources.

Because the ingredients used in cosmetics and UV care products are diverse, it is not efficient to analyze all of them. Therefore, we narrowed down the analysis to ingredients that are particularly important to Kao (those with high usage volumes, or materials that characterize performance or product concepts, or are difficult to substitute). Furthermore, we organized these raw materials from the perspective of commodity raw materials (those listed in HICL^*7 ) and non-commodity raw materials (those not listed in HICL), as well as whether they are organic or inorganic, selecting five raw materials as the subjects of analysis.

We conducted an analysis across the entire value chain, from the major production areas of the raw materials to the manufacturing sites and the countries of sale. The risks identified can already be attributed to the risks obtained from the analysis of detergents, and no new risks unique to cosmetics that need to be additionally included were found. Although a detailed analysis of sanitary products has not been conducted, the raw materials that make up sanitary products are pulp and plastics, which are believed to be integrated into the analysis results for detergents (such as deforestation and waste as materiality).

Kao has applied the LEAP approach as recommended by TNFD to its major products in multiple business domains, including detergents, cosmetics, and UV care products to identify the touchpoints between its business and nature. Through this process, we have assessed our dependencies and impacts on biodiversity across the value chain as well as the associated risks and opportunities.

By promoting KLP, Kao is committed to reducing and restoring biodiversity loss.

At each site of the Kao Group, we promote initiatives aimed at biodiversity conservation and restoration that are tailored to the characteristics of each country and region. Additionally, we provide opportunities for our employees to deepen their understanding of biodiversity by organizing related events and participating in external programs. Among our offices in Japan, three offices in Wakayama, Kawasaki, and Kashima have been certified as “Nature Symbiosis Site” by the Ministry of the Environment.

Currently, Kao is working on introducing more precise and sustainable monitoring methods. Kao’s proprietary environmental RNA evaluation technology can comprehensively and sensitively detect the presence and living conditions of species in aquatic environments, as well as the stress status of organisms and ecological changes, without capturing the organisms themselves. Currently, a pilot study using environmental RNA technology is being conducted at the Wakayama Office, where on-site applicability evaluation, detection accuracy verification, and comparative studies with existing survey methods are underway. This technology is considered to complement conventional surveys and contribute to the advanced verification of recovery efforts and impact assessments.

As part of our efforts to create nature-positive business opportunities, we have conducted research into potential fields based on market potential, the competitive landscape, and synergies with our existing businesses. For example, biodiversity-friendly agriculture, represented by regenerative agriculture, has significant market potential and is one field in which Kao’s agro-related technologies and businesses can be applied. Additionally, as a B2C company, we have identified opportunities to promote planet-friendly consumption and the building of circular and resource-efficient models.

We conduct activities using the following indicators for the materialities identified through our LEAP analysis:

Kao is engaged in a variety of initiatives with the commitment to achieving deforestation & conversion free. According to TNFD’s core disclosure indicator, disclosing “the volume of high-risk commodities and their certified amounts” is recommended, and For Kao, palm oil and palm kernel oil are applicable. The amount of certified oil we purchased in the fiscal year ended December 31, 2024 (including Book & Claim) was 200,000 tons.
With respect to other core disclosure indicators (areas of land we manage and changes in areas of land used for various purposes), we are proceeding with ensuring traceability to farms and have also started analyzing forest footprints using satellites (conducted in the Riau province of Indonesia) and will therefore be able to determine quantitative figures in the future.
For information on Kao’s initiatives for sustainable palm oil procurement, please refer to the Palm Oil Dashboard.

Kao is advancing technological development to maximize the use of palm oil and palm kernel oil, which are valuable resources, while minimizing their consumption. Palm oil contains solid components unsuitable for food applications, and these solid components have had limited uses until now. Therefore, Kao has been creating a high-quality surfactant called “Bio IOS” by applying interfacial chemistry and surfactant synthesis technology. “Bio IOS” has been in practical use since 2019 in the concentrated liquid laundry detergent Attack ZERO.

For disclosure indicators relating to wastewater discharge (wastewater contamination), TNFD recommends
disclosing the amount of wastewater discharged into the environment and the concentration of major contaminants in the discharged wastewater. As part of our efforts to manage the wastewater discharged into the environment at each site, we have established internal control standards that are stricter than the legally mandated regulatory limits. In 2024, we had no discharge of wastewater discharge that violated a law, regulation, or standard at any of our production sites. With the KLP water conservation initiative, we aim to reduce water usage by 10% (primary sales unit) compared to 2017 at all sites of the Kao Group throughout the entire product lifecycle by 2030. In addition, TNFD recommends that targets be set with regional characteristics reflected. We have finished identifying the production sites (direct operations) in drought-prone areas that are important from the perspective of water resource use. Moreover, we accumulate withdrawal data at each site. We are currently in the process of setting water management targets (related to water intake) that are tailored to the characteristics of each production process, and we plan to announce the targets in 2026.

TNFD uses the amount of plastic packaging used and the amount of plastic recycled as indicators. Using the roadmap for Zero Waste as a KLP, we aim to reduce the total amount of plastic used for packaging and recycle 50% or more of the amount of plastic used by 2030 to achieve Zero Waste (the state where the amount of plastic in packaging used by Kao is equal to the amount of plastic recycled by Kao) by 2040 and become Waste Negative (the state where the amount of plastic in packaging containers used by Kao is less than the amount of plastic recycled by Kao) by 2050. In 2024, while the amount of plastic in packaging used by Kao was 86 thousand tons, the amount of recycled plastic used was 6.4 thousand tons.