2018 Progress Report

Kao had been striving to purchase only sustainable palm oil that is traceable to the mill for use in Kao Group consumer products by the end of 2015.
Through these efforts, by 2015 we became able to trace palm kernel oil and its derivatives, which are used in Kao Group consumer products, to the palm kernel crushing mill based on tier 1 supplier information (Fig.1).

As for traceability to the palm oil mill, which supplies palm kernel and palm oil, by the end of 2018 we were able to confirm traceability of approximately 98% (quantity basis) (Fig.2).
Continue confirming traceability to the palm oil mill in 2019 as well.

However, as of the end of 2018, we have not been able to confirm the traceability of some of the derivatives that we had no choice but to purchase from other companies. We will continue to ask suppliers to prove traceability of these derivatives, and will also take measures to compensate for the lack of information, such as by purchasing RSPO certified products.

Kao aims to achieve zero deforestation at the source of raw materials as early as by the end of 2020 at the latest, through cooperation with plantations, suppliers and third-party organizations. Kao will not participate in developing high-conservation-value (HCV) forests, high-carbon-stock (HCS) forests, or peatlands.
Since 2016, we have using a third party to map risks for palm oil mills for which we have confirmed traceability. This risk mapping determines the possibility of deforestation by checking for the presence of a protected forest, traces of fire, peatland, etc. within a range of 50 km from a palm oil mill. Together with a team of experts, we are conducting a on-site investigation for each mill determined as carrying a high risk, request such a mill to improve, and monitor their progress (Fig.3).
Continue on-site investigations in 2019 as well.

Kao also aims to purchase only sustainable palm oil traceable to plantations for use in Kao Group consumer products as early as by the end of 2020 at the latest.
In addition to proving traceability to the palm-oil mill based on tier 1 supplier information (Goal 1), we verify tier 1 supplier information using a third-party organization as well as the palm kernel crushing mill supply chain (Fig.3).
Aiming to establish traceability and transparency to smallholder plantations, we began participating in Bluenumber^*1 in 2017. We conducted a pilot program in 2018 and confirmed its efficacy. Meanwhile, we also learned that there were issues in implementing the program at smallholders. Additionally, in September 2018 we joined in SUSTAIN^*2 as a founding member.
We will collaborate with the NPOs and NGOs that are the implementing body as well as the other participating companies so that these programs can be used to achieve traceability to smallholders. (Fig. 3)

Kao is working to build a traceable supply chain with a view to obtaining RSPO SCCS certification for our group factories and offices as early as by the end of 2020 at the latest.
Starting from the derivative factories upstream from our supply chain and gradually moving toward downstream factories that manufacture consumer products, we obtained SCCS certification for a total of 35 sites by the end of 2018. We have completed obtaining certification from all of the initially planned factories and offices.

By 2020, Kao aims to purchase only recycled paper or sustainably sourced paper for use in its products, including paper, pulp, packaging materials and office paper. When using pulp that is not recycled (i.e., virgin pulp), we aim by 2020 to purchase only pulp traceable to the source of wood fiber for raw materials.
Progress as of December 2018 is as follows.
Traceable paper and pulp: 100%^*1
Of this, ratio of certified products: 86%^*2

In July 2018, we announced the "FSC certified procurement declaration 2020" together with six Japanese companies and groups.

We are encouraging suppliers to be Sedex members, respond to questionnaires, and set access rights to data.
As of the end of 2018, access rights to 1,474 sites of global suppliers were set, which covers 53% of the amount purchased. In Japan, access rights to 503 sites were set, which covers 62% of the amount purchased.
Further, we conducted risk assessments using the Sedex assessment tool for the suppliers that set access rights (as of September 2018).

For suppliers who cannot feasibly join Sedex, we also use our original self-assessment questionnaire (Kao's SAQ) as a tool to supplement Sedex. We fully revised items pertaining to social responsibility including legal compliance, human rights, and trading practices as well as items pertaining to environmental conservation including environmental policy encompassing pollution prevention (air, water, etc.), environmental targets, and various management systems. We began implementing Kao's SAQ for some suppliers in 2018.
When designating a new supplier, we conduct an equivalent assessment.

We have provided the results of the Sedex assessment to suppliers as feedback. We request modifications for items needing improvement so that suppliers will be able to receive an overall assessment of A or better. In particular, we visited suppliers that received an overall assessment of B and have a Sedex risk assessment of high to share concerns about the issues and request measures to achieve improvement.
In 2018, we visited 10 suppliers deemed to have issues in our monitoring based on the questionnaire before its revision and discussed improvement measures.

Kao joined CDP programs for climate change, water and forest. We were evaluated by list A- for climate change, A for water and A- for forest in 2018. The evaluation for forests covered our traceability initiative for palm oil, paper and pulp.

In 2018, we began including forest program in addition to climate change and water, and also expanded this to suppliers of Kao group companies outside Japan. In Japan, we held supplier briefings for some 153 companies.
The supplier response rate in 2018 reached 78% for climate change (189 companies responding out of requests to 241 companies), 76% for water (75 companies responding out of requests to 99 companies), and 91% for forests (29 companies responding out of requests to 32 companies).
We will continue these three programs in 2019 as well.

Some 243 suppliers participated in the 2018 vendor summit in Japan. We shared information about our business circumstances and requested their active cooperation in the CDP supply chain program promoting sustainable and responsible procurement as well as requested that they join Sedex. In addition, we started a supplier commendation system in 2016 and during the summit commended suppliers that excelled in quality, cost, delivery, information shearing and company management and sustainability.
We also held a vendor summit attended by 230 suppliers of Kao group companies outside Japan, and commended outstanding suppliers.

In 2018, we hold quality improvement meetings with five packaging materials suppliers for the purpose of reduction of discrepant materials.
When a quality issue occurs, we take a corrective action and discuss a radical quality improvement with supplier in cooperation with our R&D division.

These surveys are conducted every 3 years.
Applying the 2016 survey results, we improve the ordering process and conduct making "Compliance Hotlines" well-known to all suppliers.

Procurement Division employees have taken the Certification Test for Environmental Specialists ("Eco Test"), the Business Compliance Test and the Japan Business Law Examination as the education to understand the relationship among our business, society and environment, and change their actions. The cumulative passing rate in 2018 for employees in the Procurement Division was 77% for the Eco Test, 69% for the Business Compliance Test, and 73% for the Japan Business Law Examination.

We place high priority on purchasing environmentally conscious products, and achieved 87% of the levels set in the standards in 2018. We will promote our program with the aim of reaching 100% as soon as possible.

Glycyrrhizinate derivatives used in cosmetics and quasi drugs are produced from glycyrrhiza (licorice root), a leguminous plant. In the past we have used glycyrrhizinate derivatives produced from wild glycyrrhiza. Since 2016, we have promoted using glycyrrhizinate derivatives produced from cultivated glycyrrhiza from specified plantations to achieve biodiversity preservation and sustainable use.