P.60 Investment risk management

60 02. Foundations for Accelerating Transformation

Investment Risk Management

We have adopted an integrated investment management framework that oversees the entire investment process from origination to exit, with the aim of building “No. 1 in Each Field” under Medium-Term Management Plan 2026. Depending on the size and strategic importance of an investment opportunity, management deliberations are conducted at both the consideration and execution stages through the Management Council and its advisory body, the Company Investment Committee*1, or the Group Management Council*2 (see Figure 1). Following confirmation of the relevant SBU strategy discussed at the GIPC*3, we then conduct in-depth discussions from an early stage on the investmentʼs strategic rationale and alignment, the assumptions and feasibility of post-investment value-up initiatives, economic evaluations based on our investment criteria, and other key success factors, including ESG considerations (see Figures 2 and 3). In addition, based on lessons learned from past large-scale investments, we have also established investment selection guidelines that are systematically applied to the evaluation of new investment opportunities. Through this disciplined decision-making process, we carefully select investments that leverage our core strengths and contribute to sustainable growth. Furthermore, we have introduced COMPASS, an AI-powered platform that leverages insights from past investment cases to support the identification of key risks and investment considerations (see Note 4). By leveraging digital technologies and AI, we are enhancing the quality and consistency of our investment decision- making process. Moreover, to strengthen our commitment for value creation at portfolio companies, we have implemented a performance-based evaluation/compensation system linked to portfolio company performance (see Note 5).

Phase I. Strategy formulation → Consideration of individual investment opportunities → Investment execution Figure 1: Decision-making process

• Strategy formulation Strategy formulation for individual investment opportunities: Consideration → Execution
• Management Council
• GIPC*3 Company Investment Committee*1
• Group Management Council*2
• Group CEOs
• SBU heads

Figure 2: Two-stage review process and evaluation criteria for major investment projects Deliberation at the “consideration phase”

• Alignment with strategy; validation of hypotheses in investment thesis
• Set discount rates based on business risk and conduct initial assessment of economic viability
• Negotiation policy on price/conditions
• Consideration of material risks and countermeasures

Deliberation at the “execution phase”

• Conduct detailed economic evaluations and validation (including stand-alone value and synergy potential)
• Review final contractual terms and conditions
• Confirm PMI and governance/monitoring structure
• Conduct risk analysis from an ESG perspective
• Final decision on whether to make an investment

Key investment evaluation item

• Strategic alignment
• Market potential and competitive environment
• Appropriateness of investment thesis
• Competitive strengths and differentiators
• Growth strategy and value creation story
• Management and governance structure
• Pricing appropriateness
• Downside risks and mitigation measures
• JV partner
• Key contractual terms and conditions
• PMI plan and execution structure Investment selection guidelines: Principles based on lessons learned from past investment failures

Figure 3: Investment criteria (quantitative criteria by investee category)

• Discount rate used for NPV calculations WACC*4 or cost of capital, taking into account the investeeʼs business characteristics and country or regional risks
• Investment evaluation based on project NPV*5 NPV based on the investeeʼs free cash flow (investeeʼs business plan is closely reviewed by Sumitomo Corporation and,

where appropriate, stress-tested)

• Investment evaluation based on equity NPV NPV based on dividend income

Note 4: Introduction of COMPASS, a generative AI–powered investment decision support tool

In 2025, we developed an AI-powered platform that leverages approximately 30 years of data, including around 1,500 Company Investment Committee meeting minutes, to support the identification of key risks and discussion points. When evaluating new investment opportunities, we seek to enhance the quality of investment decision- making by drawing lessons from comparable past investments and failed cases.

Note 5: Introduction of a new remuneration system linked to the performance of investment

In 2021, we introduced a performance-based evaluation and compensation system linked to portfolio company performance in order to strengthen accountability for the achievement of investment plans and the realization of value creation in new investment projects. The program primarily applies to managerial-level personnel who are accountable for the execution of business plans and the achievement of performance targets at portfolio companies.

• *1 Advisory body to the Management Council that gives recommendations on investment decisions for individual investment opportunities
• *2 Decision-making bodies within the business groups
• *3 GIPC (Global Innovation & Portfolio Committee): Advisory body to the Management Council that reviews, from a Group-wide perspective,

strategies that should be prioritized for allocating management resources, as well as cross-organizational strategic initiatives

• *4 WACC: Weighted average cost of capital
• *5 NPV (Net present value): Investment value calculated by discounting future cash flows to their present value