Messages from Outside Directors

Turning Risk into Value Outside Director Shigeru Endo

As the first year of the medium-term business plan, "Building a Sustainable Planetary Infrastructure 2025 (BSP 2025)," fiscal 2021 saw the JGC Group sow various seeds for the future despite challenges such as the ongoing pandemic and the Ukraine crisis. These included starting full-scale production at a plant for high thermal conductivity silicon nitride substrates, demonstrating a supply chain model for SAF sourced from used cooking oil, investing in U.S.-based NuScale, and establishing JGC Asia Pacific. This last achievement epitomizes the company's founding ideal of "local production for local consumption," which I think will become increasingly important in the EPC industry. I look forward to seeing the Group reap the fruits of this labor, and good results will be essential in attaining BSP 2025 goals. Still, a significant loss was recorded from the Ichthys LNG project in Australia. This was regrettable, but success in BSP 2025 requires the Group to redouble efforts to increase margins. Proactive marketing will also be put to the test. To address several years of low ROE, the Board has also been engaged in discussions on increasing capital efficiency.

In April this year, JGC Holdings moved from the First Section to the Prime Market in the newly restructured Tokyo Stock Exchange. Investors expect constant improvement of corporate governance, and the Group's efforts also include taking on sustainability management at a deeper level. This fiscal year saw the first appointment of a non-Japanese as president of the subsidiary JGC Corporation, and besides addressing environmental matters such as establishing the Sustainability Committee, supporting TCFD recommendations, and responding to CDP evaluation, the Board now also discusses human rights policies and similar issues more thoroughly. Further consideration will need to be given to principles upheld by the UN and the international community. Delving more deeply into DX, job-focused employment, reskilling, and the like is no easy task for the Group, and I sense that it calls for company-wide discussions, especially on how to reconcile these things with a corporate culture fostered over many years.

In my message last year, I shared my belief that international geopolitical dynamics would be quite different in the future, and we saw this come to pass in February with the Ukraine crisis. It is unclear how the conflict will be resolved, and we must carefully monitor the impact on the Group. Nature itself may also pose serious challenges to the Group. Although I have so far emphasized the importance of crisis response, this time I should stress the importance of resilience as a corporate group. It's a matter of persevering despite setbacks. All companies must minimize risk, and the JGC Group is no exception. Indeed, JGC has distinguished itself as a corporate group that manages risk well-what they might describe as placing oneself at the core of risk, and address directly from intimate knowledge of it. And the Group shows its true worth by turning risk into value. This is difficult work, but I believe that the Group is called on to manage risk to create economic value, and in turn, social and environmental value, which ultimately enhances planetary health.

Steady Initial Steps in BSP 2025 Outside Director Masayuki Matsushima

Fiscal 2021 brought its share of challenges in the business environment as the pandemic reemerged, conditions in Ukraine deteriorated, and environmental problems worsened.

Ultimately, the JGC Group did fall short of the year's order target, but adversity teaches wisdom. The Group invested in its future in several ways-by strengthening and streamlining Total engineering business, establishing a base for project execution in the Asia-Pacific region, and in Japan, by establishing a CVC fund for start-ups and by founding the cultured-meat enterprise Organoid Farm, among other efforts.

In Functional materials manufacturing, a mechanism to promote group-wide investment in growth fields from the standpoint of planning, funding, and human resources is also beginning to work.

In these ways, the Group has responded to changes in the business environment and flexibly adapted its framework for pursuing sales. I have seen steady progress in establishing the basis for sustainable growth.

Meanwhile, in corporate governance, the Board's main agenda item has been how to monitor and review the medium-term business plan, "Building a Sustainable Planetary Infrastructure 2025 (BSP 2025)." Although much work remains in pursuing the three key strategies of transforming EPC operations, expanding manufacturing business for high-performance functional materials, and establishing future engines of growth, steady initial steps were taken this first year of the plan.

Besides resolutions, Board meetings involve deliberation and reporting. Supplemental study meetings are also arranged. It's clear that these exchanges of opinions are both lively and sincere. An additional outside director has joined us, bringing the total to half of the Board. We are determined to fulfill our vital mission.

As the world targets carbon neutrality by 2050, the Group has also set a target of net-zero CO2 emissions by this date. In business, pursuing the energy transition toward decarbonization is essential, but we should also remember that our offices themselves are hotbeds of GHG emissions. Even taking a stand on clearing out unneeded documents and other material has an added benefit of freeing up office space and enhancing productivity.

The Group's future rests on the shoulders of each employee. I encourage them to take pride in this ambitious role. At the same time, members should do their part in designing the future of the JGC Group.

Faithful Allocation of Management Resources Required, Even with Stronger EPC Demand Outside Director Kazuo Ueda

In last year's report I observed that the market appeared not to have fully appreciated the significance of the Group's long-term management vision (2040 Vision) and medium-term business plan "Building a Sustainable Planetary Infrastructure 2025" (BSP 2025). The share price changed greatly over the next year, however, reaching a low of \885 in August 2021 and at one time more than doubling to \2,088 in June 2022.

Still, market analysts mainly attributed the higher share price to optimism about the JGC Group securing more LNG projects in North America and elsewhere due to higher geopolitical risks and energy prices, rather than investors truly beginning to appreciate BSP 2025.

This market assessment, and the underlying global economic and political conditions, suggest that Group management is still in a difficult phase. In essence, as underway since last year, BSP 2025 calls for the transformation of EPC operations (in LNG projects and others), expansion of manufacturing business for highperformance functional materials, and establishment of future engines of growth. Global EPC business in particular has faced the considerable challenge of low profitability in recent years. The Group continues to pursue greater profitability through extensive use of DX, among other measures, as some management resources are gradually shifted to new growth segments and future pillars of business are developed. This is the basic stance.

Yet while stronger demand for EPC projects is expected due to geopolitical risks that are suddenly more acute, several encouraging developments we have seen in new growth segments have not reached the point of making these segments viable sources of revenue in the near future. Although Functional materials manufacturing business has been performing well amid a global economic recovery that has favored goods over services, we will need to stay vigilant, as a global economic slowdown is expected.

In this environment, the Group faces a dilemma in how management resources should be allocated. Nevertheless, I believe the Group should remain true to their initial position. Specifically, in EPC operations, the Group should continue working toward higher margins during this anticipated period of brisk orders while cutting costs through DX and other means. Over the medium to long term, the Group should strengthen its focus on projects with low environmental impact in this segment. The leeway in management resources this affords should then be channeled into new business segments and Functional materials manufacturing.

Admittedly, steering this course in management will not be easy. Functional materials manufacturing is profitable, but besides the issue of how demand will evolve over the short term, the Group must also be ready to manage the larger scale of the business that investment will create. Amid great changes, it is a pleasure to see how active the EPC segment is, however, human resources should also be invested in new segments.

Many management challenges remain, but I can observe that our discussions are now more often positive. While keeping these points in mind, I welcome the opportunity to continue speaking at Board meetings and other exchanges.

Leveraging Strengths in an Unwavering Transformation Outside Director Noriko Yao

By way of introduction, I was appointed outside director in June 2021, one month after the announcement of the JGC Group's long-term management vision (2040 Vision) and medium-term business plan "Building a Sustainable Planetary Infrastructure 2025 (BSP 2025)." This is my second year as a director.

Fiscal 2021 was the first year of BSP 2025, positioned as the initial phase in the 2040 Vision and expected to be "five years of challenge." This year, the Group implemented an array of specific new measures and projects supporting BSP 2025 objectives, which included establishing the Sustainability Committee, demonstrating a supply chain model for SAF production sourced from used cooking oil, and starting full-scale production at a high thermal conductivity silicon nitride substrate plant.

Regrettably, a dispute over Ichthys LNG plant construction that had been pending for some time ultimately led to the posting of a substantial extraordinary loss. The settlement was made to eliminate uncertainty in future management and move on, as the Group pursues BSP 2025, but it will be imperative to avoid such incidents. To this end, internally, the Company is reexamining and analyzing causes from various perspectives, considering countermeasures, holding many discussions, and strengthening efforts and frameworks to prevent recurrence.

As for the Group's business environment, changes continue to unfold at a rapid pace. We have seen multiple waves of COVID-19 infection, costlier procurement and transport due to the conditions in Ukraine and other factors, developments in the global trend toward decarbonization, and energy security issues, for example. In such uncertainty, there is an even greater need for timely insight and responsiveness to the potential impact of these abrupt environmental changes. Effective monitoring and review of BSP 2025 is also more important.

In organizational transformation supporting transformation of business areas and models, the Group established JGC Asia Pacific, which is expected to strengthen the framework for regional management in the Asia- Pacific region considerably. At the same time, in our role as the holding company of the corporate group that includes this company, we will continue to monitor management of Group governance, ensuring a balance between assertive and defensive positions.

Taking on new challenges presents a variety of risks that the Group has not faced before. No enterprise is entirely free of risk, but risk can be reduced. A turbulent environment calls for prompt decision-making and managerial judgment, but also essential is constant reinforcement of corporate governance. This includes defensive structures and governance systems that support appropriate risk-taking while companies also pursue assertive management.

The business environment remains difficult, but it is precisely in times such as these that I hope to see JGC, in supporting the foundations of industry and society at large, apply its strengths of vision, technical expertise, management capabilities, and risk management as a unified group, boldly take on new challenges, address social issues, and grow and expand as a corporate group.