E S G (Environmental, Social & Governance)
In this section, the advisors of this firm propose some issues to ponder over in Q&A format. As IR covers topics of strategic importance, companies must recognize changes in their operating environment that may have a direct or indirect impact on their business model. Investors will, at all times, assess companies’ preparedness and steering policy in light of such market forces at work (referring to Darwin’s theory). The dates for uploading are as shown.
Japan at a Crossroad:
Path to Sustainable Economic Growth
- What lessons can we learn from Japan in the wake of the 2011 nuclear disaster ?
- The need for clarity, transparency and proper disclosure. The Japanese government has failed on all these counts and has not given simple explanations about the country’s future, including energy policy. Global stakeholders perceive Japan as a country with higher political and economic risks than in the recent past, and as one with high health risks from radiation. The state should see the nuclear accident as a wake-up call to enhance its control of the environment and boost its oversight function.
- Looking ahead, how should Japan repair its reputation ?
- Through ongoing and proactive publicity. Following the Fukushima accident, overseas media continue to paint a negative picture and few foreigners wish to locate to Japan. As a starting point, it is vital that Japan regains self-confidence. With the help of scientists worldwide, the Japanese government must enlighten the world and regain trust. It must explain there are minimal risks of increased cancer from radiation exposure with the help of objective independent studies***. When the world is convinced, overseas demand and interest should return to at least pre-Fukushima crisis levels, and this will be a factor contributing to sustainable growth. (***Refer to studies by Robert Peter Gale, British hematology expert, and F. Owen Hoffman, US expert on radiation risk assessment)）
- What is the next step after Japan regains a positive image ?
- Drawing up a grand vision for sustainable growth and energy security. Without priority on economic growth, nothing else will matter. The Japanese government must enlighten global stakeholders by setting the country’s course 5, 10, 30 and even 50 years from now. Japan must define clear goals for economic growth, and then fine-tune its policies for energy, global trade, environmental protection and budget issues. Without clarity, the country could drift and enter another “lost decade” at least.
- What should the grand vision focus on ?
- Exports, both visible and invisible. As Japan is a country with few natural resources, exports are the lifeline for the economy. Certain sectors must be earmarked as the key engines, including: high-tech, pop culture-related, tourism, medical services, farm produce and so on. These potential growth areas could attract global money. The profits generated from exports could then pay for imports, especially crucial resources.
- How about energy policy ?
- The government needs to propose the best energy mix to achieve the vision of sustainable growth. Disclosure would alert the public and local governments about the pros and cons of various choices. Factors include: jobs created or lost; positive or negative domino effect on local economies; and, the cost, safety and stability of energy sources. So the consequences of accepting or rejecting nuclear power, for example, should become much clearer. Stakeholders can then see how the country could move forward. At the moment, nothing is clear, so policymakers are deadlocked and moving around in a vicious circle.
- What should Japan consider in arriving at the best mix ?
- Clarification on how the country should capitalize, first, on indigenous resources (geothermal, hydro, wind, biomass, solar and ocean) and then others (nuclear, oil and gas). Monetary cost, geopolitical risks in sourcing, efficiency and payback, and environmental sustainability need to be weighed against each other. A constant supply of energy that suffers minimal disruption from outside crises would then lead to true energy security.
- In detail, what kind of factors are there at arriving at a best mix ?
- At one extreme, there is oil from the Middle East: it is efficient and reasonable, but emits the most CO2 and is subject to the risks of supply disruptions and extreme price volatility. At the other extreme, solar is eco-friendly. But it is very inefficient, one of the most costly, and needs high-tech equipment to capture and store the energy. As intermediaries between the extremes, geothermal, coal, gas and nuclear may offer a compromise when balancing environmental impact with cost. A system for carbon capture and storage could help to address the release of more CO2, if more hydrocarbons are sourced with the onset of the shale gas revolution.
- Despite the hype, renewable sources are not efficient ?
- Some experts say green energy is a delusion. As renewable sources are inconstant, stabilizing the energy needs lithium ion batteries and other complex equipment. Another problem is sourcing key elements. Lithium, cobalt and rare metals are difficult to mine, and are concentrated in a few countries. For example, 50% of the world’s reserves for lithium are in Bolivia. Clearly, any export restrictions due to resurgent nationalism will push up global prices. Thus, overdependence on renewable sources could lead to much higher prices of key elements due to a supply squeeze. Ironically, countries that have such resources tend to have a high political risk. So, renewable sources alone will not be enough. Strong policies to conserve energy and reduce usage will be the key to sustainability.
- What happens if nuclear power reactors are abandoned ?
- Japan would suffer a huge financial loss and global investors would shun the country. If all reactors are stopped for ever, electricity charges could almost double within the next 10 years. Also, their shutdown would still leave hidden financial costs. First, the huge depreciation costs on the disused nuclear reactors. Taxpayers will need to bear an extra burden, if power companies are partially nationalized. Second, the additional costs for feed-in tariffs, where utilities must buy electricity from renewable sources at predetermined rates that are uncompetitive, if there is a partial shift to green energy. Again, users must pay higher charges that the utilities have passed on. Third, the additional costs from thermal power generation, which tends to have higher variable costs. A surge in hydrocarbon imports will rapidly erode the country’s wealth with dire consequences eventually for the currency’s purchasing power, stock and bond values, and most importantly the standard of living.
- What are the non-financial costs of abandoning nuclear power ?
- Social, economic and environmental costs. In the transition phase to reduce or eliminate nuclear sources, power rationing or outages can be expected. Such uncertainties only suppress new business investment and accelerate the shift of industrial capacity overseas to locations with cheaper, more stable and reliable power. Blackouts also depress consumer and business psychology, dampening economic growth potential. All of this could lead to a negative domino effect, namely a further hollowing out of industry and the loss of many jobs. Also, thermal power generators emit far more CO2, so it will be almost impossible to achieve reduction targets agreed under the Kyoto Protocol by 2020 (that is, by 25% from 1990 levels). Finally, the country will be extremely vulnerable to global shocks, as LNG reserves last only 2 weeks and oil stockpiles about 3 months.
Significance of ESG Related Factors:
- What can we learn from the recent financial crises ?
- The need for better governance. Looking at the subprime mortgage crisis, in retrospect there was clearly a problem in assigning top ratings on financial products that were essentially junk. The credit rating agencies failed in their duty to convey the risks properly. Turning to the debt crisis in southern Europe, the countries needed to restrain spending beyond their means from a long time ago. Also, an external party should have checked country data to ensure their authenticity. So whether at the country or company level, proper governance could have prevented these crises.
- Will labor policy become important ?
- Yes, very important. At one extreme, we have societies that are graying rapidly, and at the other, societies that have an abundance of youth. Looking ahead, in the former case, companies will need to address the labor shortage by extending the working life beyond 65 years of age, bringing in more women and creating a more fluid and flexible working environment. In the latter case within regions where the young are plentiful, organizations will need to take care not to take advantage of child labor. Also, in certain politically oppressed areas, companies and their suppliers, etc., need to be careful of forced labor, torture and related problems. So these issues must be considered not just inside the corporate group, but also among vendors, suppliers and other stakeholders.
- How about corporate social responsibility ?
- Companies must practice this, as global initiatives to conserve the environment and recycle gain more force. These days the expression is being replaced by environmental, social and governance (ESG) actions. Corporate governance will have to jump to the next level for companies to attract global money. The days when a company could limit itself to the standards of its home market are long gone. So companies must now consider how to reduce carbon dioxide emissions, how to contribute socially and economically to both its home country and the wider world, and how to elevate corporate morality.