July 31, 2007


Risk Management Service Facilitate Sustainability -- Engineering & Risk Services Corp.

Keywords: Newsletter 

JFS Newsletter No.59 (July 2007)
Toward a Sustainable Japan--Corporations at Work Article Series No.61 Japanese)

Engineering & Risk Services Corp. (ERS) is a Japanese company that offers risk management services to real estate investors. Founded in 1998, ERS's corporate philosophy is "Permanent prosperity for companies, sound asset management for investors, and a safe living environment for citizens." One of its objectives is to educate the public, including companies and investors, about the results ERS has already obtained using advanced technology to inspect the safety of buildings and land.

Around the same time as ERS was established, a movement to securitize real estate followed in the wake of the adoption of Japan's Law Related to Liquidation of Certain Assets by Special-Purpose Companies. One result of this law was that investors began to feel the need for information about buildings and land, particularly about soil contamination and other risks. At that time, no other firms provided this kind of information in Japan, so the establishment of ERS was a response to the needs of the market.

"When ERS was founded, however, not even the seven founding members may have fully believed in its sustainability," says Vice President Akira Ando, one of the founding members.

They now attribute these doubts to the atmosphere of the Japanese economy at the time, when people believed that producing goods was the only way to make a profit, and few people were willing to pay for information even when they felt the need for it. Japanese people also tended to believe that the national government should be the one to protect companies and citizens from risks.

While the founding members were confident of ERS's future direction, an environment in which the company could sustain itself was not immediately apparent, and they thought that ERS could go under anytime. Nine years later, ERS is now steadily growing instead. It employs 50 people, who continue to provide various services to clients in accordance with the corporate philosophy.

The Core Business - Research and Communication

ERS is Japan's first risk management company that specializes in real estate and finance. Since its establishment, the company has been providing three services: Due Diligence Engineering Reports (building condition assessment, seismic risk analysis, long-term repair planning, and legal compliance assessment); Environmental Site Assessments (Phase I and Phase II); Disaster Risk Management (earthquake, wind, flood, fire, etc.).

Due Diligence refers to a "fair process of evaluation" undertaken during real estate transactions including securitization. ERS conducts physical inspections of real estate, in which they inspect, analyze and evaluate a site to draw up a building condition assessment or seismic risk analysis; it also performs consulting work.

Environmental Site Assessments are services that provide information necessary for the client's environmental management program. The services are offered to facilitate asset management and real estate transactions, securitization or appraisal, and range from environmental site assessments (Phase I assessment of soil contamination risk, and Phase II, soil assessment through on-site sampling and lab analyses) to suggesting appropriate measures and estimated costs.

Disaster Risk Management assesses and reports on potential risks from earthquakes, fire and other disasters to infrastructure facilities such as roads and railways, and to commercial buildings such as office buildings and factories. It also includes a consulting service.

Katsunori Banno, General Manager of ERS's Environmental Service Department, says, "Simply put, our business is research and communication." The company offers services to nearly half of Japan's publicly-listed real estate investment trusts. When real estate securitization started in Japan, overseas companies considering Japan as an investment destination already took it for granted that paying for information was necessary to prevent risks, and thus regarded ERS's services inevitable and employed them without resistance. Real estate investment has now gained momentum to the point where the market is reportedly worth 30 trillion yen (U.S. $244 billion). At the same time, the idea of buying information to prevent risks is gradually becoming accepted in the Japanese market, although it has taken some time for the idea to catch on.

"This market has expanded so rapidly that the social system has not caught up with it. Laws and other rules are out of date. We seek to learn from the experiences of western countries, which are 10 to 15 years ahead of Japan in this field. Based on this information, we hope to make a contribution in a neutral way to establishing rules and creating a cultural system in which people can make decisions and take action on their own responsibility based on correct information. Such a system is fundamental to this business," says Ando.

Brownfields Revitalization Initiatives Required

In addition to its core businesses, ERS has studied and sought to share information about brownfields since 2005, on the initiative of Banno and Toshiko Sato of the Environmental Service Department.

The term "brownfield," was coined to describe a certain level of land contamination status in the U.S. and came into use there over ten years ago. In the U.S. it is defined in the Small Business Liability Relief and Brownfields Revitalization Act, or the Brownfields Law, enacted in 2002, as "Real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant." In Japan, the term was not defined until March 2007.

Land contamination involves not only the soil and land owners; it can also cause social problems in surrounding areas. Cleaning up brownfields and making them productive also increases the security of local citizens and society.

Western countries have been taking steps to deal with this kind of land contamination as a well-defined social problem longer than Japan has, and have accumulated experience in the process. Banno and Sato believe that researching current brownfield issues in western countries to determine who solved the problems and what technologies were used will help Japan address its own land contamination problems. Since 2005, they have participated in the annual National Brownfield Conference held in the U.S. and communicate what they learn through websites, email newsletters and seminars. (English)
(National Brownfield Conference)

Banno says, "The Tokyo Metropolitan Government and Japan's Ministry of the Environment have recently paid more attention to our information; this may be because the Soil Contamination Countermeasures Law enacted in 2002 has not produced all the desired outcomes. Because of cost issues, it is difficult for small and medium-sized companies and individuals to clean up brownfields, although they may be well aware that cleaning them up can make them productive again. A better understanding of brownfields and a system of laws and policies to support economic commitments are needed, before these problems become severe. Our newsletters have introduced some successful case studies of Japanese municipalities and other organizations to the world. I hope this will be helpful."

Information Service Linking Needs with Engineering Technologies

To create a healthy market in the rapidly growing real-estate investment business, ERS has continued its business in a strictly neutral way, based on scientific approaches, abundant information in its database and precise judgments by its technicians.

ERS has also helped establish a marketing format that meets both domestic and overseas needs by actively sharing its technologies and information. For example, ERS has participated in a project to revise the guidelines of Japan's Building and Equipment Life Cycle Association (BELCA), as well as a project to translate into English a report by the Ministry of the Environment on land contamination countermeasures.

The risk management needs of the real estate market are expected to grow and diversify. "We already possess sufficient technology to search for the information required meet these needs," Ando said proudly. "However, it is a pity that the public is still largely ignorant of this kind of technological information. As an information service company, ERS will commit itself to linking the need to reduce risks with the engineering technologies for understanding those risks."

The desire to live in a clean place is common to all people of the world. Western countries have faced and dealt with problems of real estate investment and brownfields for a longer period than Japan; this time lag is said to be 10 to 15 years. Because of this difference, Japan may have lower risk awareness and may not be able to see what is coming in the future.

That is why ERS has focused hard on the job at hand. Every member of ERS is aware of the importance of this work, and this no doubt acted as a driving force that helped secure the company's sustainable growth.

(Written by Reiko Aomame)