DISCLOSURE INSIGHT ACTION CDP Japan 500 Water Report 2017 On behalf of 639 investors with assets of US$69 trillion CDP Report 2017 | November 2017 Report writers Contents CEO Foreword 3 Message from QUICK ESG Research Center 4 Message from KPMG 5 Global Summary 6 Scoring 10 The Water A List 2017 11 Executive Summary 12 Japanese company response to CDP Water 2017 14 Institutional Investors Focus on Corporate Water 20 Risk and Related Business Opportunities Appendix: CDP 2017 Water Japan 500 26 Important Notice The contents of this report may be used by anyone providing acknowledgement is given to CDP Worldwide (CDP). This does not represent a license to repackage or resell any of the data reported to CDP or the contributing authors and presented in this report. If you intend to repackage or resell any of the contents of this report, you need to obtain express permission from CDP before doing so. CDP have prepared the data and analysis in this report based on responses to the CDP 2017 information request. No representation or warranty (express or implied) is given by CDP as to the accuracy or completeness of the information and opinions contained in this report. You should not act upon the information contained in this publication without obtaining specific professional advice. To the extent permitted by law, CDP do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this report or for any decision based on it. All information and views expressed herein by CDP is based on their judgment at the time of this report and are subject to change without notice due to economic, political, industry and firm-specific factors. Guest commentaries where included in this report reflect the views of their respective authors; their inclusion is not an endorsement of them. CDP, their affiliated member firms or companies, or their respective shareholders, members, partners, principals, directors, officers and/or employees, may have a position in the securities of the companies discussed herein. The securities of the companies mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates. 'CDP Worldwide’ and ‘CDP’ refer to CDP Worldwide, a registered charity number 1122330 and a company limited by guarantee, registered in England number 05013650. © 2017 CDP Worldwide. All rights reserved. 02 CEO Foreword Seventeen years ago, CDP set out to transform capital markets by making environmental disclosure and risk management a new business norm. The Paris Agreement, Sustainable Development Goals and evolving market forces, from shareholder and customer requirements to the rapidly improving cost curves of clean technology, are moving us towards a tipping point that will help protect us from climate change, water insecurity and the effects of deforestation. To reach that point we need critical shifts in financial capital and policy, as well as strong leadership, innovation, measurement, transparency and accountability. Our vision is for a thriving economy that works for people and planet in the long term. Our mission is to focus investors, companies and cities on taking urgent Our research shows action to build a truly sustainable economy by measuring, understanding and more large corporations reducing their environmental impact. rising to the challenge with the number of A List companies nearly The stakes are high as we assess the progress companies have made to tripling in a year and date in supporting the realization of a water-secure world. almost 8% using internal accounting to assess the true value of water to their business. Paul Simpson Congratulations to those CEO, CDP organizations leading the way. 03 Message from QUICK ESG Research Center Water risk is not well recognized in Japan. This is in Among others, public pension funds in Norway, the part because of Japan’s abundant natural resources. Netherlands, and Canada, substantial asset owners Forests make up around two thirds of the country’s of the corporate entities, take water issues as a key national land area and numerous rivers and lakes aspect of investment, and publically disclose their exist throughout Japan. This can make water quality water policies. Additionally, these funds evaluate and availability easy to take for granted. corporate efforts and approaches from both a risks and opportunities perspective, incorporating Water covers 70% of the Earth’s surface and its them into investment decisions and taking tangible volume is estimated at roughly 1.386 billion km3. shareholder actions, such as engagement and proxy However, only 2.5% of this volume is fresh water. voting. Excluding underground water and glaciers, this number is further reduced, narrowing the total These movements are spreading globally via amount of water accessible to humans to roughly collaborative engagement. 100,000 km3, a meager 0.01% of the world’s total For corporate entities, on the other hand, responding water. to the CDP water survey will help them recognize global water issues and quantify risks and Water is a valuable yet limited resource that is opportunities in their own business. essential for life. In January 2012, the 2030 Water Disclosure will also demonstrate companies’ Resources Group reported that 894 million people, sustainable corporate values to stakeholders 12.7% of the world's population, do not have access including investors. Both corporate to safe drinking water. Drought also brings significant entities and negative economic consequences, resulting in 12 Of note, both corporate entities and investors investors trillion JPY in lost income, or 0.15% of the world's accurately and precisely recognize and understand GDP. Furthermore, water consumption will increase the issues and continue engaging on water issues. accurately due to population and economic growth; by 2030, These actions will help address global water risk and and precisely fresh water demand will exceed its supply by 40%. create a sustainable world and society, which is the recognize and The world is faced with serious water risk. true significance of the CDP. understand Institutional investors globally, mainly in Europe and As a gold data partner of CDP, QUICK ESG Research the issues the U.S., have taken action as responsible investors Center has provided investors and companies and continue with a belief that water risk, following climate change with a wide range of information on qualitative and risk, is a material issue affecting the risk and return of quantitative water risks. From now on, we would like engaging on long-term investment. to convey the essence of risk to you by utilizing our water issues. knowledge as a scoring partner and support the These actions The number of institutional investors signing the process of strategy building and implementation, CDP Water Program comes to 639, approximately verification, evaluation, and information disclosure. will help address a fivefold increase from when the program was global water risk launched in 2010, and the total AUM has quadrupled, and create a now representing US$69 trillion. CDP represents Etsuya Hirose these investors by surveying, evaluating, and Managing Director sustainable reporting corporate efforts on water risk. Head of ESG Research Center world and QUICK Corp. society, which is the true significance of the CDP. 04 Message from QUICK ESG Research Center Message from KPMG In June 2017, the Government Pension Investment Due to the progress of water-related efforts and Fund (GPIF) of Japan, the world’s largest pension information disclosure of Japanese companies, the fund, started managing assets based on selected number of Japanese companies selected for the A ESG indices for Japanese stocks. Amid this global List increased from 6 to 12 companies and 64% of growth and rapid expansion in Japan of ESG Japanese companies scored were rated as being at investment, there has been a rising interest among the Leadership or Management level. institutional investors and ESG rating agencies concerning corporate water risk management, Going forward, I believe Japanese companies will adopt policies, goal setting, and performance. This is due to a more systematic and comprehensive approach to the understanding that there is a need to analyze the water risk assessments and countermeasures, which impact of water risk on companies as water-related will not only help provide more useful information to natural disasters such as droughts and floods grow investors but will also bolster water risk management more frequent each year. practices at companies. The process of responding to CDP’s water questionnaire should be instrumental Before the launch of the CDP Water Program, the for companies themselves in understanding their own means for investors and other company stakeholders water-related risks and opportunities. to understand individual companies’ water risks were limited. CDP’s water program has now become KPMG leverages its professionals’ expertise and a valuable source of information for institutional experience to assist companies in responding to investors to obtain an understanding of companies’ sustainability challenges, such as water and climate The process water-related risks and opportunities. CDP’s global change, through its Sustainability Services network. of responding water program is in its eighth year, and the CDP Japan As the Sustainability Services practice in Japan, we to CDP’s water water program, targeting Japanese companies, is in will provide Japanese companies with assistance in its fourth year. We at KPMG Japan are honored to be identifying and evaluating water risks, establishing questionnaire able to contribute to the realization of CDP Japan’s and implementing water policy and strategy, and should be water program for the fourth consecutive year. reporting on performance, while providing continued instrumental support to CDP’s water program. This year, responses were obtained from 176 for companies companies (51%) out of the 342 companies invited to themselves in respond to the questionnaire. The response rate fell Kazuhiko Saito understanding by 13 points from the previous year, as the number Managing Partner of companies invited to respond increased from KPMG AZSA Sustainability Co., Ltd. their own 150 companies to 342 companies. On the other water-related hand, voluntary responses were obtained from 12 risks and companies. As a result, despite this year’s decrease in the response rate, the total number of respondent opportunities. companies has increased from 123 companies to 188 companies. This additional information on Japanese companies’ water risk management is now available for investors and stakeholders to factor into decision making. 05 Global summary This year we asked 4,653 of the largest global companies to provide data about their efforts to manage and govern freshwater resources. In total 2,025 companies responded, up from 1,432 last year. This data is used by 639 institutional investors, representing US$69 trillion in assets, to engage with portfolio companies, inform investment decisions and catalyze change. In addition, 34 purchasing organizations with a combined spend of US$1 trillion use CDP water data to drive greater insight, accountability and action throughout their global supply chains. This report is aimed at companies and investors seeking to understand how they can play their part in delivering a water-secure world. It presents analysis of the 2017 CDP water response data from a sample of 742 of the world’s largest publicly-listed companies. It sets out what a water-secure world looks like, the private sector actions that will contribute to its achievement, and how companies are overcoming the barriers to water security – most importantly, the failure to properly value our fresh water resources in today’s economy. Key findings There is more data than ever before More than 2,000 companies reported water data via CDP in 2017 Company boards have woken up to water security Water security now has a firm seat at the table of more than 70% of the most significant corporate boards Money is now flowing into solutions Companies are committing US$23.4 billion across more than 1,000 water projects 1,432 2,025 companies companies (2016) (2017) 06 Today, CDP’s work drives water action at scale: 2 025 US$1 , companies trillion Companies representing nearly US$20 trillion in 34 purchasing organizations with a combined market capitalization and 59% of heavily water- annual spend of US$1 trillion motivate their dependent companies on the MSCI ACWI suppliers to disclose water information, enabling publicly disclose their progress in managing the management of water impacts through water-related risks and impacts through CDP. global supply chains. This represents a near twelve-fold increase on the 175 companies that disclosed in 2010. 5.6 639 billion ML investors Around 5.6 billion megaliters worth of water From the original 137 investors, today more withdrawals are reported through CDP – more than 639 investors, with combined assets under than the total volume of Lake Michigan. These management of US$69 trillion, drive companies disclosures enable essential tracking of the to both disclose their impacts on water security progress of the global economy towards a and take action to reduce them. water-secure world. 360 91 cities countries 360 cities with a combined population of 634 CDP is motivating companies to take ambitious million people now disclose to CDP to build water action in 91 countries, from Afghanistan resilience and protect themselves from water to Zimbabwe and from Argentina to Zambia. risks. 07 Companies are taking ambitious action A growing number of companies are beginning to invest significant money, time and effort into addressing the risks they face. In 2017, companies have committed US$23.4 billion across more than 1,000 projects to tackle water risks in 91 countries around the world. The US power company AES Corporation is investing US$1.1 billion to mitigate risk The China Steel Corporation has across its hydropower plants in Panama invested US$147 million in measures by rebalancing its generation portfolio, and to mitigate the risk of droughts and constructing a new power plant and Liquid water shortages. The measures Natural Gas terminal. include investing in desalination technology R&D, working with local governments to reclaim municipal wastewater for industrial use, expanding water storage and reuse, and raising employee and partner awareness of water efficiency. US mining company Alcoa invested US$115 million in their Australian operations for a filtration system that US$23.4 reduces freshwater use by 317 million gallons annually, Taiwanese technology company simultaneously decreasing AU Optronics has invested discharge. US$1.5 billion in improving its billion water use efficiency across all sites by increasing water recycling to 90%, aiming for zero discharge of processing water and securing its supply in case of drought. Danone is engaging suppliers and spending US$59 million on projects to secure sustainable access to key raw materials, such as milk supplies in Sub-Saharan areas and fruit supplies in China. The projects US beverage giant Brown-Forman Corporation focus on sustainable agriculture is investing US$208 million in short- and long- and farmer empowerment. term drought-mitigation solutions in its California operations. The projects aim to connect its operations with tertiary sources of water as well as provide frost protection and irrigation at vineyards. 08 Companies are also setting ambitious targets and goals to reduce their impact on water resources. CDP generally defines a target as a specific measurable output within a clear timeline, while a goal aims to achieve a longer-term qualitative outcome or a specific change in behavior or circumstances. Most common targets and goals Target Goal Number of companies Reduction in consumptive 166 volumes Watershed remediation and habitat restoration, ecosystem 157 preservation Reduction of product water 145 intensity Absolute reduction of water 136 withdrawals Water pollution prevention 96 Engagement with suppliers to help them improve water 93 stewardship Engagement with public policy makers to advance sustainable 90 water policies and management Strengthen links with local 88 community Sustainable agriculture 64 Providing access to WASH in 45 workplace 09 Scoring: a measure of a company’s environmental performance Scoring at CDP is mission-driven, focusing on CDP’s Awareness which intends to measure the extent principles and values for a sustainable economy and to which the company has assessed environmental as such scores are a tool to communicate the progress issues, risks and impacts in relation to its business; companies have made in addressing environmental Management which is a measure of the extent to issues, and highlighting where risks may be unmanaged. which the company has implemented actions, policies CDP has developed an intuitive approach to presenting and strategies to address environmental issues; and scores that highlight a company’s progress towards Leadership which looks for particular steps a company leadership using a 4 step approach: Disclosure which has taken which represent best practice in the field of measures the completeness of the company’s response; environmental management. A Leadership 80-100% A Leadership A- 0-79% A- B Management 45-79% B Management B- 0-44% B- C Awareness 45-79% C Awareness C- 0-44% C- D Disclosure 45-79% D Disclosure D- 0-44% D- F = Failure to provide sufficient information to CDP to be evaluated for this purpose1 1 Not all companies requested to respond to CDP The scoring methodology clearly outlines how many Public scores are available in CDP reports, through do so. Companies who are requested to disclose points are allocated for each question and at the end Bloomberg terminals, Google Finance and Deutsche their data and fail to do so, or fail to provide sufficient information to CDP to be evaluated will of scoring, the number of points a company has been Boerse’s website. CDP operates a strict conflict of interest receive an F. An F does not indicate a failure in environmental stewardship. awarded per level is divided by the maximum number that policy with regards to scoring and this can be viewed at could have been awarded. The fraction is then converted https://www.cdp.net/scoring-confict-of-interest 2 CDP’s methodology aims to incentivize continuous improvements as reflected by the state of to a percentage by multiplying by 100. A minimum score the market and the improvement of scientific knowledge around the environmental issues it of 80%2, and/or the presence of a minimum number Future of Scoring evaluates. The methodology thus evolves over time of indicators on one level will be required in order to As part of its ‘Reimagining Disclosure’ initiative, CDP and the weight of some questions might change or some previously unscored questions might start be assessed on the next level. If the minimum score developed a series of sector-specific questionnaires being scored. As part of these improvements for threshold is not achieved, the company will not be scored integrating the recommendations by the Financial 2017 scoring, CDP has modified the thresholds from last year. on the next level. Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD) and stakeholder feedback The final letter grade is awarded based on the score collected via two rounds of consultations. Each sector obtained in the highest achieved level. For example, questionnaire will have a corresponding sector-specific Company XYZ achieved 88% in Disclosure level, 82% in scoring methodology which will be released in the first Awareness and 65% in Management will receive a B. If quarter of 2018. a company obtains less than 44% in its highest achieved level (with the exception of Leadership), its letter score will have a minus. For example, Company 123 achieved 81% in Disclosure level and 42% in Awareness level resulting in a C-. However, a company must achieve over 80% in Leadership to be eligible for an A and thus be part of the A List. 10