"TOWARD A SUSTAINABLE JAPAN - CORPORATIONS AT WORK" ARTICLE SERIES Article No. 38
Enhancing Information Reliability (AZSA Sustainability Co., Ltd.)
http://www.kpmg.or.jp/english/azsus/index.html

In recent years, many companies have started publicizing their corporate initiatives and achievements in their business processes, for example, in terms of percentages or amounts of carbon dioxide (CO2) or hazardous substance emission reductions compared to the previous fiscal year. Information of this sort is always received favorably. But, please wait a minute. In large companies, thousands of workers deal with numerous processes in hundreds of offices and factories, and this entails uncertainties in monitoring and measuring environmental performance, either due to technical difficulties or simply the sheer complexity of production processes.

What if information about such companies' environmental protection initiatives were not accurate? Lack of credibility about information released by companies undermines the very foundations of confirmation of the effectiveness of economic-sector mechanisms such as emissions trading and Socially Responsible Investment (SRI). Just as financial information is critical to the stock exchange, reliable environmental information is critical in judging a company's environmental performance. Accurate information is also important from the ecological point of view, because releases of hazardous substances beyond the acceptable levels could lead to disastrous ecosystem damage.

If companies do not disclose reliable environmental data, sustainability cannot be achieved. AZSA Sustainability Co. is one of the companies working to increase credibility and transparency in environmental management, and has expertise in both environmental and business management. The information credibility and environmental management of their clients are supported by nearly 30 staff members with various qualifications, including environmental management system auditors, certified environmental measurement experts, industrial sanitation administrators, pollution control managers, hazardous materials managers, attorneys and certified public accountants.

With headquarters in Tokyo and Osaka, AZSA Sustainability Co. is part of a global network as a member of the KPMG group, an international firm of audit, tax and advisory services with about 90,000 employees in 148 countries and over 400 professionals in the social and environmental fields.

AZSA Sustainability Co. provides advisory services in establishing environmental management systems, introducing environmental accounting, and compiling environmental and CSR reports, as well as assurance services such as independent review on environmental and CSR reports, verification of greenhouse gas emissions and auditing. In this article, we will introduce the initiatives being taken by AZSA, focusing on recent developments.

Independent Review on Environmental/CSR Reports

One of AZSA's major services is independent review on environmental or CSR reports compiled by client companies. It already possesses expertise in auditing from its history as an accounting firm, and it also gained various types of know-how from its experiences in providing advisory services. With these strengths, the company aims to provide its clients with efficient and effective review services. It reviewed the environmental or CSR reports of 18 companies and three municipalities in 2004.

In the course of doing this kind of business, it faced one general problem in environmental auditing as a third party - discrepancies in auditing methods and abilities of individual auditors among the several auditing firms doing business, including AZSA.

In June 2005, some environmental report reviewing firms, including AZSA, jointly formed the Japanese Association of Assurance Organizations for Environmental Information (J-AOEI), with the aim of establishing a standard method for independent review on environmental reports. J-AOEI will manage its own examination and registration system for environmental reports that are issued after January 1st, 2006. Japanese Association of Assurance Organizations for Environmental Information (J-AOEI) http://www.j-aoei.org (Japanese Only)

In this system, J-AOEI will select and designate eligible firms and individuals for the review of environmental and other reports according to original guidelines. Based on procedures set up by J-AOEI, designated firms and individuals will review reports that have been tendered to J-AOEI by applicant companies. When a designated auditor looks at a report and determines that it contains all the information required by the original specifications with a certain level of accuracy, the report is permitted to carry a J-AOEI mark on it that identifies the report as having been reviewed and registered. Finally, J-AOEI also lists the titles of reviewed and registered reports on its website.

As the end of September 2005, J-AOEI consisted of 10 auditing companies, including AZSA Sustainability. If a report carries the J-AOEI mark, readers understand at a glance that the report is highly reliable. J-AOEI also holds that an external review increases the company's employees' awareness about the environmental reporting, improves its environmental management using quantitative data, and allows it to grasp environmental risks more precisely.

Verifying Greenhouse Gas Emissions

AZSA also verifies greenhouse gas emissions. For applicant companies and local governments trying to reduce greenhouse gas emissions, for example by adopting renewable energy sources or through energy conservation, AZSA validates the methodologies of calculating the reduction of greenhouse gas emissions and verifies the reduced amount. AZSA also verifies emission reduction for in-house emissions trading and for a product group or individual project. In April 2006, the latest amendment of the Law concerning the Rational Use of Energy will go into effect, and some companies will be obliged to report their greenhouse gas emissions. This is expected to further increase the importance of this kind of auditing system.

In providing these services, the company makes maximal use of its accumulated financial auditing know-how. For example, monitoring the each CO2 emission process is physically impossible, so representative samples from all activities must be extracted - an audit method known as "sampling." In checking samples, AZSA looks at records or other evidence; it does not physically monitor actual emissions. This process includes checking invoices and receipts issued in purchasing each type of fuel, confirming if they have been transcribed correctly and calculated using the appropriate coefficients. However, sometimes data collection is insufficient due to missing records, as is also the case in corporate accounting. In this situation, the company employs the theory of judgment by importance as is seen in financial auditing.

AZSA Sustainability is also now working on validation, verification and certification services in relation to the clean development mechanism (CDM) and joint implementation (JI) under the Kyoto Protocol. The CDM is a system in which industrialized countries provide funds for projects in developing countries that reduce their greenhouse gas emissions, and the reductions achieved can be credited to the industrialized country. As Japan is already one of the world's leading countries in energy conservation, it is expected that the same amount of expenditure will achieve more CO2 emission reduction in developing countries than in Japan. In terms of CDM, the company is applying to the United Nations for accreditation as a designated operational entity (DOE).

How Is Information Used?

Information is more reliable when auditing frameworks are well-developed. "Think how significant it is to make information reliable. Its significance depends on how much the information actually affects decision making," says Ryuta Uozumi, Chief Executive Officer of AZSA Sustainability, Osaka, Japan. The number of companies that publish environmental or CSR reports has been steadily increasing in Japan, but fewer than 30 percent of listed companies produce such reports. Also, only a limited number of people read these reports. Uozumi says, "For example, some people decide to buy a company's stock because the company has reduced its emissions of CO2 or hazardous substances by a certain amount. When more and more people begin to make this kind of decision and evaluate the company from such a point of view, our job of enhancing information reliability will be awarded more importance."

The company also promotes the introduction of the Environmental Policy Priorities Index for Japan (JEPIX), an index that helps domestic and foreign stakeholders easily evaluate the environmental performance of companies, which functions to support environmental decision-making. This method, developed by a research team led by Professor Nobuyuki Miyazaki at International Christian University with support from the Japan Science and Technology Agency and the Sustainable Management Forum of Japan, assists in the choice of more environmentally friendly corporate activities in a comprehensive manner by integrating different types of environmental impacts in a single index. A free JEPIX report is available from the following website: http://www.jepix.org (Japanese only). AZSA Sustainability has cooperated in promoting JEPIX by creating an Excel sheet that enables simplified calculations of values in the index. The company provides this sheet free of charge on its website: http://www.kpmg.or.jp/profile/azsus/jepix.html (Japanese only).

An increasing number of companies around the world are now making efforts to practice environmental management, but society has not reached the threshold at which environmental burdens and impacts, such as greenhouse gas emissions, are actually being significantly reduced. The crux of the matter involves how people's decision-making processes come to differ from those in place, supporting support of environmental management of companies. AZSA Sustainability's role of enhancing information reliability is sure to become an integral part of solving these problems.

(Staff writer Kazunori Kobayashi)

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