Sustainability | TDK Group's Sustainability | Key CSR Issues |
Key CSR Issues (Materiality) and Finalization ProcessOpinions of Experts (CSR Report 2015 Review)

Materiality

I think the areas to focus on for TDK have been broadly identified – human capital, the supply chain including controversial sourcing, environmental impact and the opportunities created in a number of sectors (you have highlighted autos, industrial and energy equipment and future society). As standard however I would always look for a section on corporate governance including the corporate structure and responsibilities as we believe this is one of the most important aspects to assessing the sustainability of an organisation.

What do we look for from CSR reporting?

• We want to understand the corporate vision and strategy and how CSR fits into this We want to see targets and ambitions articulated with clear milestones set out We want to understand where responsibility for CSR lies – we would expect it to be at board level – if there is a link to remuneration that should be made clear as it is a powerful message
• We want to get a sense of how much CSR is part of a companies DNA – integrated reporting may also be helpful in this respect where CSR and standard financial reporting are integrated
• We want to see that a company has identified the material issues (as you have) We then want to understand how a company is addressing / mitigating potential risks or embracing opportunities and how this fits into the corporate strategy
• We will expect to see the key metrics the company uses to assess progress on risk mitigation / opportunities
• Assurance – it is always helpful to see third party assurance as you have done

Material issues

Human capital

as a company driven by innovation this is incredibly important but you also face the additional challenge that a large part of your workforce is overseas. I want to get a sense of why TDK is very attractive as an employer, what opportunities are offered for development and training, what feedback is sought from the workforce, the policies that in place e.g. diversity, health etc. – it is very good to have some examples of perspectives from staff as you have done here.

Supply chain

this is perhaps the biggest challenge as it is complex. I want to understand how you manage your supply chain, what standards you require of you suppliers, what reporting you require from your suppliers, the audit process for your suppliers and are there examples (not named) of the consequences of not meeting your required standards.

Environmental impact

the key here is the direct impact and how this is measured and managed and any requirements on the indirect impact set for the supply chain. I would expect to see current impact and targets with a timeline attached.

Opportunities

how the company contributes to a better society.

In terms of social issues many companies will report on their activities in the wider community – education programs, environmental programs, charity sponsorship etc.

What TDK initiatives or programs do you evaluate highly?

TDK TDK’s 2015 CSR report covers a broad range of corporate activities, including its technologies, human resources, supply chain, and environmental impacts. The report also provides an in-depth look at the CSR function within the company, including notes on governance and organizational structure, internal processes, and perspectives of internal and external stakeholders. As such, TDK can be commended for presenting a thorough understanding of the business’s relationship with society.

Relevant Societal Issues.

TDK has identified at least six societal concerns that it can address: digital divides, disabled people, aging, climate change, energy consumption, and traffic accidents. Alongside each issue, TDK identifies specific metrics that could be measured to understand progress toward addressing the need (e.g., number of traffic fatalities worldwide).

Impact to Date.

While many activities are underway, it may be too soon to report results. The following exception should be noted: It is impressive that TDK has achieved carbon neutrality across the enterprise.

Potential for Future Impact.

Proposed future contributions through technology promise significant societal value:

• Technologies that meet the health needs of a global aging population
• Technologies that support more efficient local and regional energy use and conveyance

Based on activities described in the report, TDK is behaving as a good corporate citizen, meeting current expectations for ethics, diversity, and responsibility.

What TDK initiatives or programs require improvement?

Prioritize Activities within a Portfolio.

In response to GRI guidelines, TDK is reporting on many diverse CSR activities and goals. However, there does not seem to be a coherent strategy underlying the company’s activities. Prioritization in the next phase (scheduled in FY 2015) can help address this concern. TDK should view the prioritization exercise as a strategic review, incorporating both stakeholder perspectives and key business constraints or growth opportunities that will be prioritized in the medium- to long-term. We see companies typically differentiate compliance activities (e.g., responding to audit requests), corporate responsibility activities (e.g., diversity or ethical supply chain), and strategic initiatives (e.g., innovating new health solutions). Furthermore, leading companies will evolve their portfolio of activities over time, increasing resources and focus toward strategic initiatives over compliance. TDK should aim to focus commitments to addressing only those societal needs that create the greatest opportunities for social impact and business growth or competitive advantage.

Link Business Success to Specific Societal Needs.

While TDK has identified several relevant societal needs, the 2015 report does not indicate how TDK’s medium- to long-term business growth strategy is linked to these needs or what strategies will help the company contribute and make progress toward addressing these needs. We believe it’s important for companies to commit to specific goals or aims that directly connect business success to addressing a societal need. For example, TDK could more clearly illustrate how its self-driving vehicle technology will create safe, secure, and comfortable automobile-based lifestyles, and reduce the number of traffic fatalities worldwide. The opportunities for business and social impact could address a market of 1.24 million people and reach some amount of revenue for TDK.

Create Organizational Structures that Support Strategic CSR and Social Innovation.

TDK’s governance structures are consistent with other diversified corporations. We have seen other leading companies create facilities that raise the profile and performance of shared value activities within the company, such as:

• Centers of Excellence,staffed with senior leaders and staff with expertise in areas that are particularly relevant to societal issues, e.g., cross-sector partnerships, public health, or environmental science.
• Social Innovation Labs,supported by design teams and social impact experts to strengthen a pipeline of new product innovations that specifically address unmet needs of underserved populations.

What issues should TDK address proactively and why?

We agree that TDK should disclose nonfinancial information to investors and other stakeholders. From a shared value perspective, companies should focus on material social and environmental impacts of their business operations, and where possible, link their financial performance to positive societal impacts. Setting measurement standards is also useful to bring about greater understanding across an enterprise, industry, or market.

As TDK looks ahead to prioritizing issues that are material to the company’s growth and success, we would recommend three key areas of focus:

1. Pursuing shared value innovations with technology,in particular seeking competitive advantage through new products that serve the needs of the disabled, aging, and those at greatest risk of traffic accidents.
   Why?Each of these sizable markets can be a key driver of growth for TDK.
2. Continuously improving efficiency and productivity in the value chainand seeking new ways to reduce costs and energy consumption throughout the company’s operations.
   Why?TDK has demonstrated strong early progress in achieving efficiencies and should continue to drive incremental improvements to sustain its business in the long-term.
3. Invest in strengthening the supply chainbeyond audits, such that TDK builds the capacity of suppliers and buyers and plays a role in aligning partners around shared material social and environmental goals.
   Why?Unfortunately, there are many examples of companies in TDK’s industry that have found themselves vulnerable to risks caused by supply chain partners. By working closely with these partners, TDK can add value and leverage the resources of others.

Summary of the positive CSR initiatives undertaken by TDK:

[Human Resource Development]

• Unifying Educational Tools and Programs:TDK has been utilizing and enhancing the group’s synergy by sharing best practices, educational tools and programs across its sites and subsidiaries in Europe, the United States and ASEAN countries. Additional plans for including China and Japan are also underway.
• Building a Group-wide Human Resource Management System:TDK has been consolidating its human resource management system throughout the group. This system was set up not only to bring the right people to the right place but also to promote and achieve transparency and diversity throughout the group.
• Expert Study Meetings:Initiatives to invite experts from non-financial information disclosure field as well as diversity field for study meetings were also undertaken for strategy setting and senior level human resource development.
• International Management Development (IMD) Training, Cross-cultural Communication Training & Overseas Trainee Program:Various programs were organised to enhance group synergy and to install the “One TDK” spirit.

[Supply Chain Management]

• Clearly stated efforts as a supplier and a buyer:TDK has clearly elaborated its dual roles as a supplier and buyer respectively due to the midstream nature of its business.
• CSR Internal Auditor Training:TDK’s CSR Internal Auditor Training program is an effective initiative to raise its own CSR standards. This initiative also took into account of local conditions and adjusted accordingly. For example, many such audits in China were carried with emphasis on case studies for a better understanding of the local conditions.
• Proactive Self-criticism:TDK Group is proactively engaged in its own CSR management system as evidenced through the voice of Shelly Chen (p. 27) who mentioned "the maturity of our CSR management system has increasingly come into question, including topics such as the tasks of people in charge, assessment methods, and the sharing of audit results, so we must respond appropriately, including the revision of our conduct guidelines."

[Others]

• Environment:TDK’s President & CEO, Mr. Takehiro Kamigama has demonstrated TDK’s commitment to the environment with his strong message of “promoting monozukuri techniques that focus on materials from the viewpoint of reducing environmental impact.” This commitment is complemented with its various concrete initiatives (p.17 – 20, p.30 – 33).
• Global Reporting Initiative (GRI) indicators:TDK’s efforts in taking concrete and structured steps to report in accordance with the GRI-G4 Guidelines to identify material issues shows its seriousness to respond to various stakeholders.

Improvement Recommendations

[Human Resource Development]

• Cross-cultural communication training:while overseas operations account for more than 90% of both sales and the number of employees, the number of participants for cross-cultural communication training to date remained at 426. The training should be made more common through e-learning or “Train The Trainer” system to enhance cultural sensitivity to realize the aim of TDK as a truly global company.
• Standard Code of Conduct / Corporate Governance training:With 117 consolidated subsidiaries and group number of employees exceeding 88,000 throughout the world, a standard Code of Conduct translated into the relevant local languages, as well as stage by stage Code of Conduct / Corporate Governance training (including human rights) across all subsidiaries is highly recommended.
• Employee Volunteer Programs:An initiative to empower employees through employee volunteer programs is highly recommended as this would not only empower employees but also gain the trust of the local communities where TDK operations are located.

[Supply Chain Management]

• Standard Code of Ethics and the Supplier Code of Conduct:As a socially responsible international company, it is recommended for TDK to assess its supply chain based on their social performance, environmental management systems, compliance with labor and human rights laws and international standards, and workplace safety and overall business practices.
• Human Rights:Even though the term “Human Rights” is mentioned in the relevant sections, the elaboration is general and vague. Principals and concrete examples of how TDK deals with the issue, the existence of Human Rights Policy which applies to TDK as well as throughout its supply chain, how it engages and protects workers throughout the supply chain are not known through the report. As TDK uses raw materials involving conflict minerals which are particularly exposed to human rights risks and operates in countries renowned for human rights violations such as Malaysia, it is vital that human rights be given more attention and proper elaboration.
• Traceability and Due Diligence:These two terms also suffer from the same issue as the term “human rights” where they are not sufficiently elaborated. As they concern quality, human rights and environmental issues, it is recommended that they are given further elaboration.
• Set Clear Numerical Goals:Clearly defined numerical goals would help in showing TDK’s seriousness in managing its supply chain. Some examples of clear numerical goals are: audit n% of procurement spend, audit additional n suppliers each year and reissue audits in n years, train n more employees receiving CSR internal auditor training.

[Others]

• Water Footprint:When talking about business sustainability, water crisis has been gaining attention recently in addition to CO₂ emission reductions. Measuring water footprint and setting water consumption reduction target is highly recommended.

Social issues that TDK should primarily address and their reasons:

Among the six (6) social issues that TDK addresses (p.10), the top three (3) issues that TDK should primarily address and their respective reasons are as follows:

• (1) Digital divide:As an Information and Communications Technology Company, the digital divide where the mobile broadband use of developing countries is only 1/4 of developed countries should be addressed by TDK, with the possibility of contributing to social issues such as poverty reduction and human resource development.
• (2) Climate Change & (3) Energy Consumption:Through TDK unique and state-of-the-art technology, more energy or fuel efficient products could be developed and marketed to achieve multifold impact in mitigating climate change and reducing energy consumption.

In future, I am looking forward to TDK’s initiative to tracks its impact across the entire value chain, especially in terms of human rights and the environment.

As a major manufacturer of components, TDK is to be commended for producing this CSR report. The report clearly sets out the company's commitment to responsible operation and sustainability governance. It also shows how the company takes account of its role within the value chain - including both suppliers and customers.
TDK's products are to be found within many electronic and electromechanical devices. This means that it has the potential to influence the sustainability performance of a wide range of everyday objects, as the report makes clear. In turn that has led to a focus by TDK on innovation with environmental performance in particular in mind. However the report does not explain clearly enough what its various products (rather than the objects into which they are incorporated, such as cars) actually do. To do so, perhaps by referring to a website, would help the reader better appreciate the sustainability potential within TDK.

CO₂Carbon performance

From an environmental perspective, TDK focuses on 'carbon neutrality' by balancing its production emissions against in-use product savings. This is an important measure to disclose as it should tend to drive energy-efficiency innovation in TDK's product line. And it is good to see the positive trend in the company's performance in this respect. Yet it is not clear from the report what detailed protocols this key carbon figure is based upon or whether it been verified in any way. Verification would add to the reader's confidence.
It would also be interesting to complement the current carbon neutrality analysis with an assessment of the carbon produced in the supply chain as this would give a life-cycle view of TDK's products' contribution and a more rounded assessment of its carbon neutrality. Moreover it would be helpful to see the direct energy consumption figures in the report, as carbon, while perhaps the most significant, is certainly not the only consequence of the use of energy.

Wide impacts and their analysis

However carbon and energy use are far from the only environmental issues that TDK - and the world - faces. Water use and emissions from production are also important. Future reports should disclose the company's performance in these areas too. The systematic materiality process that TDK is implementing in connection derived from the GRI G4 Guidelines should not be used to justify the exclusion of a wider set of environmental performance figures.
A further area of global concern is the consumption of rare earth minerals and conflict minerals. Currently the report is almost silent on these issues. Although the report does provide some information about how these issues are managed, it is not clear how much TDK's business relies on these materials or what their total consumption figures are.
Whatever the scope of the environmental information disclosed, its breakdown by product should be shown. This will enable many key questions to be addressed: are some product lines performing better than others in terms of carbon emissions reductions, for example? And how is TDK reacting to this by prioritising investment and innovation in particular product lines?

Supply chain performance

In terms of supply chain impacts, TDK's auditing program looks comprehensive and the overall findings are given, but it would be helpful to know more details of the audit findings for suppliers. What is done well? What are the main areas for improvement? The reader should know what the key issues facing TDK suppliers are. For example, health and safety is the single biggest category of CSR Audit observations, comprising nearly half the total number of observations: but what was the nature of these incidents and how serious were they? There are widely accepted standard ways of reporting health and safety performance which TDK should follow. Again, the results should be analysed by product line and perhaps also by supplier where relevant.

Intensity metrics

Finally, the reporting of TDK's absolute environmental performance should be accompanied by reporting of relevant intensity metrics. Carbon performance per unit revenue, for example, would help relate TDK's sustainability performance to its business performance. There may well be other appropriate metrics that could show how well TDK is performing in addressing the global sustainability challenges it has identified. And also where it needs to boost its performance further.