Leading Cutting Tool Company OSG Realizes Decarbonization Management with DX

Launched full-scale ESG management in the new medium-term management plan from fiscal 2022

Your company produces many cutting tools that have the top global market share. Please tell us about OSG’s business contents and products.

Taps, which are tools used to make female screw threads, are representative cutting tools which our company has produced ever since it was founded. Our other core products include drills which are used to open holes and end mills which are used to mill metal. We have the No. 1 global market share in taps, and also an extremely high share in drills and end mills.

Specifically what kind of environmental policies was OSG implementing before introducing Sustana?

Because we manufacture many products that drill holes in metal or shave off metal, we generate a lot of cutting waste. From that fact, the momentum of the need to give consideration to the environment has been rising at our company in recent years, starting with our management team including myself.

Subsequently, what we started from fiscal 2022 is our new medium-term management plan “Beyond the Limit 2024.” OSG felt a sense of urgency under the present conditions in which the automobile industry, which is our main customer, and all other industries were advancing initiatives toward achieving carbon neutrality. We thought about what we should do for our company to gain a better positioning in the manufacturing industry around ten years in the future. We formulated our medium-term management plan with that as the starting point.

As for what we are doing specifically, first is the reduction of CO2 emissions. We are advancing the conservation of electric power, which is necessary for manufacturing, and switching over to carbon-free electricity in stages. We are also advancing the introduction of offsite power purchase agreements (PPAs)*1 which create solar panel power stations outside of the company’s property and onsite PPAs*2 which install solar panels on the roofs of our factories, etc. Also, regarding the actual manufacturing of cutting tools, we will not only produce specialized products for the automobile industry and the aviation industry, but also increase the ratio of standard products including those distributed at retail outlets to boost factory production efficiency and reduce power consumption.

*1. Model of locating power generation facilities outside the premises that require electricity and supplying electricity to the demand locations.

*2. Model of locating power generation facilities within the premises that require electricity, with self-consumption of the electricity.

The CO2 emissions of the entire supply chain can also be calculated with Sustana

Please tell us about the reasons for introducing Sustana this time.

The calculation of CO2 emissions has categories from Scope 1 to Scope 3.*3 Scope 1 and Scope 2 can be calculated by our company to some extent, but what becomes an issue is Scope 3. When we were thinking about what to do because the calculation of CO2 emissions in the entire supply chain including upstream and downstream was necessary, we heard about Sustana from SMBC. Sustana comes with formulas that can calculate Scope 1 through Scope 3 and a database of the latest factors, so by just inputting our company’s energy use and other activity data, we can make calculations efficiently. We also thought that this will make it possible to collect data in the future from the 33 countries where our company has bases and to grasp the company’s entire CO2 emissions, and we decided to introduce Sustana.

*3. Scope 1 refers to the volume of CO2 emitted directly by the business, and Scope 2 refers to the volume of CO2 emitted indirectly by using electricity, heat, and steam provided by other companies. Scope 3 refers to the other indirect emissions of CO2 (CO2 emissions in the supply chain linked to the activities of the business).

Scope 3 requires the calculation of the CO2 emissions of the entire supply chain. What kinds of companies are included in your company’s supply chain, and when do they emit CO2?

Dividing the overall supply chain into upstream and downstream, the upstream portion is mostly materials manufacturers. Our company uses somewhat special metals (specialty steel and tungsten carbide) as materials, and CO2 is emitted in the manufacturing and transportation of those materials. Because the downstream comprises the companies that actually use our products, the base is wider. The automobile industry and the aviation industry comprise a large portion. The CO2 emitted in processing and manufacturing actually using our products is included in Scope 3. CO2 is also emitted in the disposal of tools that can no longer be used.

Companies that do not advance ESG will not be chosen by customers

OSG incorporated initiatives toward carbon neutrality in your medium-term management plan from 2022. What kind of reaction has there been from inside the company?

We were advancing initiatives related to the SDGs and ESG inside the company from several years prior, but the medium-term management plan announced this time specifies the promotion of ESG management at its beginning, and I think the morale throughout the company has been boosted because I myself took leadership for this specifically.

So does top management indeed have a major role in CO2 reduction initiatives?

I believe that the role is great. Thinking from the economic aspects, addressing not only CO2 reduction but also the SDGs and ESG incurs costs. Because we have to generate profits as a company, of course, the issue of the balance with that arises. I think how managers think and act is the most important point. For example, although the introduction of carbon-free electricity is preferable, at present electricity from thermal power which emits large amounts of CO2 can be procured more inexpensively. Crude oil costs and natural gas costs have been rising recently, but even with that the slightly higher price of carbon-free electricity affects costs. In that sense, I think that the judgment of the manager is important after all.

So, not just the SDGs and ESG as topics, but rather the perspective of increasing revenues by addressing these is necessary.

How our company is assessed by those around us for being aware of the SDGs and advancing ESG management is also an important point. Because that point tends to become a non-financial item, at present the promotion of ESG and the SDGs is not directly linked to profit. In the future, however, companies that work hard to address this will be recognized worldwide, and consumers will embrace the products and services of such companies.

Because our products are B2B, we have few opportunities for contact with general consumers, but in the future companies without ESG-related initiatives will not be chosen by consumers, and financial institutions may not finance them.

Improving calculation accuracy and achieving carbon neutrality

What sort of effects are you expecting with the full-scale use of Sustana?

OSG has calculated the domestic Scope 1 and Scope 2 up until now, but to expand the calculation range including Scope 3 and raise the calculation accuracy from now on, we need to use a software like Sustana that can efficiently collect data and perform calculations. Our company has around 70 bases in 33 countries overseas, and we are assuming the management of our total global CO2 emissions calculations including overseas bases. We want to operate this as needed while receiving support from SMBC. We also expect all types of support including advice on reduction measures based on the calculation results and the provision of information toward achieving carbon neutrality. Our new medium-term management plan states that OSG will conduct Scope 3 calculations and assessments by fiscal 2030, so we will utilize Sustana in pursuing that.

Please tell us about the outlook for your future initiatives concerning the SDGs and ESG.

To date, OSG has advanced SDGs and ESG initiatives aside from CO2 reduction. Those efforts were recognized, and OSG was chosen as a constituent issue of the Blossom Japan Sector Relative Index,*4 which is an ESG index calculated by FTSE Russell in the UK.

*4. ESG index created by FTSE Russell. Comprised of Japanese companies with a high ESG assessment.

Furthermore, as I mentioned earlier, we are also actively introducing onsite PPAs and offsite PPAs. We will announce whatever initiatives we advance in the future, of course, but I think the fact that we are already taking action in some areas is also important. While many other companies are also advancing onsite PPAs introducing solar power generation within their grounds, offsite PPAs which introduce power generation facilities outside of company property are not that widespread. We are moving forward with plans to introduce this offsite PPA scheme.

We will continue with initiatives to realize carbon neutrality, of course, and with management that champions the SDGs and ESG, as an industry leader.