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Water risk strategy


Keiichi Kubo
Visiting Professor, Chuo Graduate School of Accounting
Areas of Specialization: Risk management, Internal Control and CSR

Blue Earth

The earth is a water-dominated planet. Gagarin, the first human to journey into outer space, reportedly said “the earth was blue.” This is because the earth is covered with seawater.

Most of the water on the earth is salt water. 97.5% of the water on the earth is salt water, and freshwater accounts for only 2.5%, out of which, approximately 70% is composed of glacier, snow, and ice. Only 30% of freshwater can be directly used. Accordingly, the water that can be used for drinking, agriculture, and factories is less than 1% of the water on the earth.

Serious Global Water Shortage

Recent research indicates that the percentage of people suffering from water shortage increased from 2% of the global population at the beginning of the 20th century to 9% in 1960 and 35% in 2005. This was caused by the growth of population and the advance of industrialization.

When population increases, we need more water not only for living, but also for agriculture and livestock for food. In addition, water is essential for manufacturing products. As society becomes affluent, more water is required. Such water cannot be substituted with seawater.

Global population exceeded 7 billion in 2011, and is expected to reach 9 billion in 2050. In the world, the shortage of water is worsening.

Uneven Distribution of Water

The first and third verses of the well-known Japanese song “Furusato (Hometown)” end with the famous phrases “that river where I fished for small crucian carps” and “hometown with clean water”, respectively. Most rural landscapes in Japan include water. From the global viewpoint, water shortage is grave, but in Japan, it seems to be someone else’s problem. Since we have a lot of rainfall in Japan, some regions are devastated by flood. Japan is sometimes plagued by the excessive amount of water.

The water resource in the United States per person is twice larger than that in Japan. Plenty of water exists in the Great Lakes, but there are some desert areas. In the summer, some regions become so dry and hot that wildfire occurs due to spontaneous ignition.

It was reported that Chinese people were buying the water resources in Hokkaido, Japan. This can be said to be the proof that Chinese people are aware of the importance of water.

Actually, China is a country where water often becomes lacking. The water resource per person in China is about half of that in Japan. If industrialization further progresses and urban population increases, the shortage of water will worsen. Accordingly, China is proceeding with the national project titled “South–North Water Transfer Project” to channel water from the Yangtze River to Beijing and Tianjin. In countries where population is rapidly increasing, including China, water strategies are indispensable. If water is in short supply, industrialization will be hindered.

The water issue is similar to global warming in that it cannot be solved by a single country. However, water is unevenly distributed as mentioned above, while the concentration of greenhouse gases is homogeneous on the earth. Therefore, international understanding is very important for solving the water issue.

Japan, a Huge Importer of Water

There are many people who know that water brings business to Japan, but there are few people who know that Japan is one of the major water importers. It can be understood easily that Japan imports mineral water and beverages, but there are other imported items.

The import of goods such as agricultural products and meat is equivalent to the import of water to produce these products. It is said that 3,700 liters of water is necessary for producing 1 kg of rice, 3,200 liters for chicken, and as much as 20,600 liters for beef.

Water is also used for manufacturing industrial products. For example, a large amount of water is necessary for producing semiconductors. Chemical factories and ironworks require a large amount of water for cooling and controlling temperature. An enormous amount of water is necessary for extracting shale gas, although it has not been exported to Japan yet.

The waste water in the manufacturing industry, for example, is not “consumed”, but pollutes clean water. Polluted water cannot be used for tap water or agriculture.

The Virtual Water is an estimate of necessary amount of water for producing imported agricultural and industrial products. Taking Virtual Water in perspective, Japan can be considered as a huge importer of water.

Japanese Technologies for Overseas Water Business

In Japan, many companies recognize global water shortage as a chance for “water business.” Bookstores display many books pertaining to this issue. The reverse osmosis membrane technologies for converting seawater into freshwater, which were developed by Toray Industries and others, and the water pumps of Ebara Corporation can be used as Japanese technologies.

On the other hand, there are French companies dubbed “Water Barons”, such as Veolia and Suez. They not only construct water plants, but also manage and operate water business comprehensively. Emulating them, many Japanese companies cooperatively make efforts to be entrusted with overseas water business.

For Japanese companies, the meanings of water are not limited to business opportunities. It is necessary to become aware of the fact that Japanese companies are using water overseas in various ways.

Supply Chains of Water

As mentioned above, water is abundant in Japan, but Japan actually imports several times larger amount of water from overseas than that found in Japan. What if Japan imports water from the water-scarce countries and regions. This would mean that Japan is depriving local people of their water.

In this light, it is necessary for Japanese companies to fully check whether each supplier production site has the problem of water shortage, when importing agricultural products and industrial products.

When Japanese companies start manufacturing business overseas, they must check whether they can obtain water to be used at factories. This is not enough, and they need to discuss how much the use of water there would affect the region. They also need to make efforts to minimize water consumption.

As an actual case, a famous beverage manufacturer consumed a large amount of water, worsening the shortage of water, which became a significant social issue, resulting in the boycott of the company’s products. Even in regions where water for factories can be secured, we need to be careful not to reduce the available water for local residents’ living.

The above mentioned story illustrates the upstream of supply chain. There also exists the downstream part water use. That is the water when the products are used. The sanitary ware manufacturer TOTO cares for the downstream supply chain. This company concentrates on the development of water-saving toilets, which can be flushed with a smaller amount of water.

Actively Contribute to Replenish Water

We also need to engage in activities to return the water used for factories, agriculture, and livestock outside Japan.

Suntory, a brewing and distilling company makes efforts to recharge groundwater by conserving the forests in water source areas, through its project titled Natural Water Sanctuary. Suntory conserves 18 forests, whose total area is 8,000 hectares (as of April 2015) and which store a larger amount of groundwater than that pumped by the factories of Suntory.

Suntory, which recently acquired Jim Beam, a well-known bourbon distiller in the United States as one of its oversea acquisitions, is now a global company. They have started researching how they can expand their water projects globally.

Overseas, companies including Coca-Cola and Molson Coors conserve forests, offer funds to water supply projects in water-scarce areas, and engage in activities for purifying water. As Intel consumes a lot of water for manufacturing semiconductors, it purifies used water to the drinkable level, and returns it to nature as groundwater.

Corporate Strategies for Water Risks

Needless to say, water is indispensable for human lives and corporate activities. The Japanese companies that plan to start overseas business are expected to be cautious while planning to use water in their activities. Also for the Japanese companies which do not conduct overseas business, a large amount of water is consumed for the production of imported food and industrial products. These are the water risks of companies.

Japanese companies have increased their environmental awareness, but it seems that they do not yet fully understand that water issue should be separated from other environmental issues. For example, purifying polluted water and returning it to the river are environmental measures, but when it flows into the sea, it cannot be used as water for drinking, agriculture, and livestock.

Although there is the pioneering case of Suntory, Japanese companies are lagging behind global companies in Europe and the United States in efforts for saving water in production, recharging groundwater, and tackling problems in the countries with water scarcity.

Today, we need to recognize that water risks should be included in corporate strategies, beyond the activities for fulfilling corporate social responsibility.

Keiichi Kubo
Visiting Professor, Chuo Graduate School of Accounting
Areas of Specialization: Risk management, Internal Control and CSR
Keiichi Kubo was born in Osaka, Japan in 1953.
In 1976, graduated from Osaka University, and joined Tohmatsu Aoki & Co. (currently Deloitte Touche Tohmatsu LLC).
Registered as a Certified Public Accountant in 1979.
Registered as a Chartered Accountant in Canada in 1982.
Retired from Deloitte Touche Tohmatsu LLC in 2014.
Visiting Professor of the Chuo Graduate School of Accounting (2012 - present).
Keiichi Kubo teaches “Internal Control and Compliance” in the Graduate School. His major works include “Water Risk-Corporate Strategies for Surviving the Age of Water Scarcity” (edited and co-authored, Nikkei Publishing Inc., 2015), “U.S. Conflict Minerals Regulations” (edited and co-authored, Nikkan Kogyo Shimbun, Ltd., 2013), and “Risk Intelligent Company” (edited and co-authored, Nikkei Publishing Inc., 2010) .