Climate Change and Sustainability Services

Dear Readers,

Greetings from EY’s CCaSS team! We hope that this edition of the newsletter finds you well and enjoying a nice transition of seasons. This autumn, for us in the northern hemisphere, has started off well from a business perspective but we can’t help but be affected by the havoc, disruption and loss of life that are a direct result of a great deal of storm activity globally. The weaknesses in our disaster preparedness and future planning become evident when such disasters happen and affected areas are often forced into reactive actions to ease suffering and return to business as usual as soon as possible.

With these concerns in mind the CCaSS team continues our good work to help companies plan for a more sustainable future – financially, environmentally and socially. We have seen bright spots of activity from Japanese corporates and strong leadership from the Abe administration that recently called for global support in making changes that save our planet . Sustainability truly is a journey and we are proud to support our clients every step of the way.

This month, in line with recent climate issues, we tackle an important issue of the relationship between climate change risks and financial impacts by way of an article on what the TCFD recommendations may mean for you. In addition we delve into the concept of ‘human rights defenders’ and what role they take in sustainable business. Finally, we have a report from this year’s High-Level Political Forum (HLPF) on Sustainable Development which was help over the summer in NYC.

We always strive to bring you business relevant information and have also shared with you the 2018 EY Growth Barometer survey report.

Thank you for your continued support of our team and of sustainable business! We look forward to speaking with you soon.

Heather McLeish
EY Japan CCaSS, Senior Manager

Have you heard the phrase ‘human rights defender’ before? Since human rights defenders were one of the topics of discussion at the UN Forum on Business and Human Rights, held annually at the UN Europe headquarters, awareness of the phrase and its significance has grown in the business and human rights field. In this newsletter, we will introduce the meaning of the term, trends in its use, and the relationship between human rights defenders and business.

1. What are human rights defenders?

The phrase ‘human rights defender’ originates from the Declaration on Human Rights Defenders, adopted in 1998 at the UN General Assembly. Human rights defenders can be any individual or organization that operates at the regional, national or international level to protect and promote human rights^※1. Challenges addressed by human rights defenders may include various issues related to political and civic rights, economic rights, social rights and/or cultural rights (e.g. protection of freedoms of expression, protection of labour rights, and protection of rights of children, women, indigenous people, or minorities).　In the business and human rights field, human rights defenders may include: labour unions; human rights campaign organizers; activists for protection of rights of workers; and/or peripheral communities impacted through business activities.

2. Businesses and human rights defenders

One of the international frameworks underlying the discussion of human rights defenders in the context of business activities is the Guiding Principles on Business and Human Rights (‘Guiding Principles’). The Guiding Principles are the authoritative global standard for businesses to address the risk of adverse impacts on human rights linked to business activities. With regards to Principle 18 of the Guiding Principles, companies must consult with stakeholders that are negatively affected in terms of human rights, when implementing human rights impact assessments. When a company is unable to directly engage with stakeholders, it is encouraged to consult “credible, independent expert resources, including human rights defenders”.

A credible human rights defender can play a critical role in assisting companies to fulfil their human rights responsibilities, yet, in the business and human rights field they are considered to be one of the most vulnerable stakeholder groups. According to an investigation by the Business & Human Rights Resource Centre, since 2015 there have been over 1,200 attacks on human rights defenders working on business and human rights issues, including more than 400 killings. The report notes cases of workers, trade unionists and journalists exposed to physical violence, threats, imprisonments and even killings across 65 countries in 2018^※2. During 2015 alone, a total of 185 people were killed defending land rights and environmental protection across 16 countries. The highest number of cases were in Latin America (122 cases), followed by Asia (49) and Africa (13) ^※3.

In Thailand in 2013, a researcher published a report on migrant worker labour issues in Thailand’s poultry industry^※4. He was later sued for defamation by the companies that were the subject of the report and sentenced to a fine and imprisonment for criminal libel and other charges in September 2016^※5. Subsequently, corporate industry groups in Europe, the United States and several other businesses in Thailand, all of whom had corporate interests in Thailand, expressed concern for this situation and emphasized the importance of protecting the researcher’s freedom of expression. For instance, the Thai Tuna Industry Association and the Thai Frozen Food Association posted his bail as a show of support, expressing their concerns of his arrest^※6. The Foreign Trade Association (FTA), which has more than 2000 affiliated European-based companies, issued an open letter seeking a settlement outside the lawsuit^※7. The United Nations Working Group on Business and Human Rights also expressed concern ^※8.

3. Company examples on human rights defenders

Below we list some examples of companies that have disclosed their position and policy on human rights defenders.

Case 1: adidas Group
The adidas Group released its policy regarding human rights defenders, ‘the adidas Group and Human Rights Defenders‘. In the policy, the company refers to the definition of human rights defenders, the relationship between business and human rights defenders, and the importance for business to not directly or indirectly infringe defenders’ rights to freedom of expression, association and assembly. The company notes their “longstanding policy of non-interference with the activities of human rights defenders” and “engagement with human rights defenders is constructive, especially where we identify areas of shared concern”. In addition, the company expects their business partners to follow the same policy.

Case 2: The Coca-Cola Company
The Coca-Cola Company publicized its Human Rights Policy, referring to engagement with the community as an important issue, and the need to respect the rights of human rights defenders who actively engage in community protection activities^※9. The company recognizes that there are an increasing number of cases in which human rights defenders are attacked economically, socially, or physically. As such, their policy requires that the company does not “interfere in the lawful activities of human rights defenders and urge our independent bottlers to do the same”. In the case where the rights of a human rights defender with whom they engage are impinged on, they “reserve the right, either alone or in collaboration with others, to speak out” dependent on the situation and the extent of their leverage.

4. Guidance of Companies on engagement with human rights defenders

In August 2018, guidance for corporations in how to support human rights defenders, was released by BHRRC (Business & Human Rights Resource Centre) and ISHR (International Service for Human Rights), titled Shared space under pressure: business support for civic freedoms and human rights defenders^※10. The guidance shows four main elements of the business case for engagement and action; 1) Securing the shared space, 2) Managing operational and reputational risk, 3) Building competitive advantage, and 4) Overcoming mistrust and securing the social license to operate. It also provides companies with the framework to help them make decisions on how to respond to various situations, with case studies from multiple countries. Furthermore, certain ESG rating agencies have added indicators to evaluate performance based on whether a company has a policy or activities in place related to human rights defenders .^※11。

5. Conclusion

Human rights defenders exist all over the world and concerns regarding the infringement of their rights, in the context of business and human rights, is increasingly being raised. As referenced in the Guiding Principles, credible human rights defenders can play an important role in, for example, human rights risk assessments. As such, companies need to consider how they build meaningful relationships with human rights defenders in order to fulfil their responsibilities of respecting the rights of their related stakeholders.

EY has experience providing human rights policy development and due diligence for private companies. For more details, please contact us.

Recently, natural disasters such as torrential rains, hurricanes and typhoons are widespread around the globe, and the impacts are becoming so prevalent and significant that no organizations can rule them out. For instance, the record rainfall hitting the western part of Japan this summer severely damaged the infrastructure including transportation and water supply systems across the region, and business activities were devastated due to suspension of production, delays in supply-chain delivery and damaged facilities.

It is presumed that one of the causes for such devastating natural disasters is global warming, i.e., a phenomenon of an increase in the earth’s average temperature caused by greenhouse gas emissions. According to the International Panel on Climate Change (IPCC), the projected increase in temperature is within the range of estimates anywhere from 0.3 to 4.8 degrees Celsius. Many concerns have been raised about risks related to climate change. In fact, it was chosen as one of the top 5 risks most likely to happen and having the biggest impact according to the World Economic Forum’s Global Risks Report for 2018 released at the annual meeting in Davos.

Risks related to climate change are increasingly important globally and investors are more than ever demanding disclosure of climate-related risks.

With this background, recommendations by Task Force on Climate-related Financial Disclosure (TCFD) were issued in June 2017.

Outline of TCFD Recommendations

As stated earlier, investment activities are affected by rapidly increasing climate-related risks. Divestment due to concerns about stranded assets is one example of action against these risks. Stranded assets refer to the assets that have suffered from significant devaluations due to rapid change in market environment or social trends and the invested funds become unrecoverable, accordingly. In a society where zero-carbon is a requirement in response to climate change, assets related to fossil fuels creating a greenhouse effect are considered as no-value and thus fall under stranded assets catagory. As such, pension funds and financial institutions started to divest globally. The same move applies to Japanese investors primarily among life insurers.

Given investors’ decisions are largely influenced by how the organizations respond to climate change, the TCFD was established in 2015 by Financial Stability Board (FSB) at the request of Communique from the G20 Finance Ministers and Central Bank Governors to design recommendations for consistent “disclosure that will help financial market participants understand their climate-related risks.”

After a year and a half discussion, recommendations issued by TCFD in 2017 was reported at the G20 Summit Meeting held on the same year by FSB.

Followings are the main features of the recommendations:

• 1. All issuers of bonds and securities are within the scope, including companies, public-/private-pension funds and foundations.
• 2. Supplemental guidance is provided for the financial sector and for certain non-financial sectors potentially most affected (e.g., energy, transportation, materials and buildings, and agriculture, food, and forest products) which are required to take specific actions.
• 3. It is required to disclose risks and opportunities related to climate change. The climate related risks are categorized into transition risks and physical risks.
• 4. It is required to disclose information in financial documents and as such appropriate internal control and quality management in the disclosure should be in place.
• 5. To provide forward-looking information to stakeholders, it is recommended to analyze the long-term scenario that can assume how your company may be impacted by climate change.

The TCFD highlights the importance of incorporating the identification and management of climate-related risks into existing risk management system as shown in the Figure 1.

Recommendations by TCFD are structured around “governance”, “strategy”, “risk management” and “metrics and targets”, providing what information should be disclosed in each thematic area.

Reports designed to incorporate climate-related risks and opportunities as core elements of business activities will help inform shareholders and investors nature and volume of financial impacts by climate change, and how the company understands and manages such risks during the course of running business.

Conclusion

As of August 2018, more than 390 companies, governments and international organizations expressed support for TCFD, including 11 financial institutions, 12 non-financial institutions and 3 governmental organizations based in Japan.

TCFD is making efforts to expand its supporter base to 500 organizations; this goal appears to be achievable in the foreseeable future given the current pace of increase. Information disclosures in line with framework recommended by TCFD will require changes in existing governance structure and risk management process, and accordingly, various costs from time and labor may incur. However, climate-related risks and opportunities are already the areas of focus among not only the ESG and SRI investors but also mainstream investors, and the move is expected to be accelerated as the transition to the low-carbon economy progresses. It is desirable to start working well advance to be ready for the future.

The High-Level Political Forum (HLPF) on Sustainable Development was held from July 9th to July 18th at the UN headquarters in New York. In this year's HLPF, "Transformation towards sustainable and resilient societies” was set as the central theme. Thematic reviews were held on six of the SDGs, as well as 46 country Voluntary National Reviews (VNRs). EY dispatched one representative to the Forum for two weeks, and investigated the latest trends and future prospects of the SDGs.

Based on the United Nations Conference on Sustainable Development (Rio +20), the High-Level Political Forum (HLPF) is a conference on the "2030 Agenda", unanimously passed by the General Assembly in 2015, and its constituent 17 goals, focusing on the sharing of each country’s initiatives, progress, and methodologies. The Forum is extremely important as it accelerates and supports the achievement of the SDGs. This year’s Forum was the third of its annual holdings.

According to the UN reports, more than 125 government ministers, cabinet secretaries and deputy ministers alongside more than 2,200 registered stakeholders took part in the event, which included 260 official sub-events, held in addition to the main conference^※1. Many topics and issues were brought up and discussed among SDGs researchers, experts, company representatives, NGOs, government officials and ministers, engaging in events, introducing new reports and activities and discussions in and around the United Nations HQ.

HLPF, a place where all the information of the SDGs gather

This year represented the 3rd annual since the adoption of Agenda 2030 and the SDGs in 2015, and has become a place to showcase initiatives, reports, tools and platforms for the SDGs, and this change is one of significant differences from last year.

Last year, the number of sub-events was about 150, and it has expanded to 260 this year. These events were held in and around the United Nations headquarters. Most of these events were to introduce initiatives, case studies, reports, tools and platforms for many SDGs practitioners including member governments, politicians, UN agencies, business, researchers, NGOs / NPOs, and this trend is expected to continue next year. Therefore, it is no exaggeration to say that HLPF has become the most suitable event in the world to collect information related to the SDGs and it is the most effective place for companies and governments in order to show and advocate their own activities related to the SDGs.

From the goals of the country, to the goals of cities and individuals

Participation of cities was one of the key topics at this HLPF. This year, NYC, Kitakyushu City, Toyama City, Shimokawa Town released Voluntary Local Review (VLR) for the first time. Besides introducing these VLRs, Cordoba in Argentina, Flanders in Belgium, South Denmark region, Bonn in Germany, etc., introduced their unique initiatives related to the SDGs and discussed the importance of regional activities and their contributions towards the SDGs^※2. The SDGs have been recognized as goals not only for the country-level, but concrete ideas for municipal-level contributions. These have not previously been reported to the HLPF, so this was promising to see. We are seeing the SDGs are transforming into "the goals for locals", and many cities have their own initiatives and contribution for the SDGs.

Considering Goal 12, focused on “Sustainable consumption and production" being the target of this year's review, much attention was paid on how to unlock the limitations of individual contributions. For instance, even if individuals want to work on the SDGs, because the goals are too far from our daily life, it is still hard to envisage what individuals can do to support or make headway towards the goals. The discussion has been exchanged more than ever in how we can tackle such issues and encourage the individuals more to be engaged with the SDGs.

Another example is the problem of ocean plastic waste, which is now drawing much public attention. Plastic waste is caused mainly by littering of many individuals and it is very hard to regulate and control individual's littering. In order to solve the problem, understanding and changing individual consumption pattern is vital. For that purpose, raising awareness of the problem, such as consumption education for consumers is one key, but the discussion focused more on a stricter approach. It was shared in the session that it is necessary to have a better and innovative approach rather than the conventional approaches, otherwise we are not going to make it before 2030.

Business-Related Movements at the HLPF: UN Global Compact (UNGC) / Keidanren / World Business Council for Sustainable Development (WBCSD)

Business Forum 2018, one of the most popular events this year, and several business-related sub-events were held.

UNGC business forum 2018

UNGC business forum 2018 attracted many participants in HLPF this year again. Aside from business people, delegates from the United Nations, researchers and government officers attended the event. This year, H.E Amina J. Mohammed, Deputy Secretary-General of the United Nations served as a opening speech, requesting each company to make their commitment to the SDGs and realize business in line with the 10 principle of UNGC. Lise Kingo, CEO & Executive Director of the United Nations Global Compact emphasized that company should measure the contribution of its activities, and also introduced tools and reports to support companies. It was also impressive that many speakers also touched on involvement of small and medium enterprises in the supply chain of in order to accelerate progress.

Mr. Fitamiya, representative of Nippon Keidanren participated the session, explained efforts of Japanese companies for the SDGs together with Society 5. In addition, the Keidanren special website, which stores many practices for the SDGs of Japanese companies, was announced on that day. These are also translated into English, so it will function as a place of information dissemination to the global. ^※3。

Sub-event organized by WBCSD

WBCSD held another sub-event of the same size as other sub events where about 50 people gathered, with mainly corporate representatives. Due to a small sub-event, practitioners who work on the SDGs in companies gathered and focused on exchanging concrete information such as sharing their efforts, achievements and challenges.

For example, the question of how to implant long-term thinking for sustainability in the top management of the company, rather than short-term thinking, was raised several times. Many companies seemed to be struggling to educate management, as the importance of activities tends to be seen not significant, and a lot of management thinks their company has already achieved sufficient levels for sustainability. This type of attitude is very common among Japanese companies and this challenge seems to be continuously unresolved.

In another session, a wide range of practical opinions were given, including allocating not only budgets to the team but also resources to training management groups to help support initiatives, internal structures, and communication in order to implement activities.

From Japan, Mr. Ikuta of Fujitsu Research Institute participated in this event, and presented Fujitsu's efforts on the SDGs. In the presentation, it was explained that Fujitsu's main clients are in government, finance and medical sectors and by offering their own services to these clients, Fujitsu is contributing to the SDGs.

The Next move towards 2019

Next year 2019 will be the fourth year since adoption of SDGs and reviews will be planned, including the ministerial level to examine the progress of the SDGs and its approach throughout the United Nations.

The next review is said to be held on a similar scale as at the time of SDGs adoption in 2015 and it is expected that short presentations from each country will be made on the progress over the past four years.

The Japanese government implemented VNR in 2017 and SDGs action plan was released in 2018 . Since the HLPF in 2019 is expected to be utilized as an interim report of this action plan, it is expected that various efforts will be implemented by next May 2019. In addition, since Japan will host the G20 next year, it is also necessary to look attentively to the entanglement in the SDGs there.

It is recognized that the first cycle of the SDGs will be completed in 2019. Nowadays, many companies already have made a commitment to the SDGS, and similar initiatives are beginning to line up.

What will be demanded of a company as a next step will be to demonstrate logically how company efforts leads to contributions to the SDGs. Many companies are claiming SDGs contribution using legacy activities that they already implemented, such as waste reduction activities, global warming countermeasures and training activities for occupational safety and health, as their contributions towards the SDGs based on their very simple assumption. For the next step, company need to establish a logical framework to show how those activities and the SDGs are connected, and whether it is possible to measure the contribution quantitatively.

Eyes are on the companies who are taking further steps. Companies are encouraged to recognize the opportunities presented by the SDGs and to make next year, 2019, a time to demonstrate and advance initiatives.