WRI Publications Feed: ENVEST: Environmental Intelligence for Tomorrow's Markets

How U.S. Federal Climate Policy Could Affect Chemicals’ Credit Risk

admin — Fri, 11 Feb 2011 12:25:04 -0500

Any significant federal action to address climate change would likely be most relevant for subsectors of the U.S. chemicals industry that have significant greenhouse gas (GHG) emissions or a high dependence on natural gas- or oil-derived raw materials. Almost half of the 2007 value of shipments of the $724 billion U.S. chemicals manufacturing industry—mostly commodity chemicals—fit this description.

These include the following 13 manufacturing subsectors, which comprised more than 90% of the U.S. chemicals industry’s direct GHG emissions in 2006:

Alkalies and chlorine,
Carbon black,
Cyclic crude and intermediates,
Ethyl alcohol,
Industrial gas,
Nitrogenous fertilizer,
Noncellulosic organic fiber,
Other basic inorganic,
Other basic organic,
Petrochemical,
Phosphatic fertilizer,
Plastic material and resin, and
Synthetic rubber

In the first part of the analysis, WRI describes scenarios under two types of potential federal climate policy—an economy-wide market-based system (specifically, cap-and-trade legislation) and Environmental Protection Agency (EPA) regulation of GHGs. In the second part, WRI and, in certain discrete issues, Standard & Poor’s look at how these policy scenarios could influence credit risk factors in 13 greenhouse gas-intensive chemicals subsectors. In the final, third part, Standard & Poor’s applies these findings.

Key Findings

Credit impact under cap-and-trade scenarios

If passed, the American Power Act (APA) would require companies to hold permits to emit GHGs for all emissions from facilities emitting more than 25,000 tons of carbon dioxide (CO2) or equivalent greenhouse gas. Most large U.S. chemical facilities would meet this threshold.(iv) By limiting the supply of these permits—known as emissions allowances—in the market, the government would be able to cap economy-wide emissions. The APA also includes provisions that would rebate free emissions allowances to facilities in select subsectors. Eligibility for these free allowance rebates is at the subsector level, and depends on a subsector’s energy intensity and trade exposure.(v) WRI has calculated that the APA provides enough free allowances to energy intensive, trade exposed manufacturing industries that any eligible subsector—as a whole—will receive enough free permits to cover all emissions in that subsector for 2016 and several years beyond (see WRI’s accompanying technical document). However, the risk remains that the supply of free permits relative to demand may decline over time and at a faster rate than originally envisaged.

Predicting how the APA would affect the economy is challenging. For their analysis, Standard & Poor’s and WRI have each relied on the U.S. Government’s Energy Information Administration’s (EIA) projections of APA’s impact on GDP, energy prices, and GHG emissions permit prices.(vi) As with any forecasting, these projections indicate what could happen, rather than what would happen.

Subsector-level evaluation

Standard & Poor’s and WRI based their respective analyses on EIA projections using three GHG permit price scenarios—low, medium, and high—under the APA. Based on these projections, most of the chemicals subsectors we examined would only see modest energy and compliance effects in the first year of assumed compliance (2016).

The EIA projects only modest changes relative to no policy for most natural gas and oil-derived energy inputs in 2016 under the APA. Only well-head natural gas prices increase significantly—from 4% to 25% higher relative to no policy in the three scenarios Standard & Poor’s and WRI considered— while petroleum and coal prices decrease modestly—from 1% to 9% lower relative to no policy.

These projections are premised on the assumption that users across the economy will likely switch away from emissions-intensive fuel/feedstock sources (i.e., petroleum and coal) and demand lower emissions fuel/feedstock sources (including natural gas) because of the price signal cap-and-trade policy creates. APA provisions require utilities to pass any free allowances they receive to industrial consumers, including chemicals manufacturers, in the form of lower electricity prices, which mutes electricity price changes.

WRI estimates that facilities in 10 of the 13 chemicals subsectors (as a whole) would be eligible to receive free allowance rebates under the APA. For these eligible subsectors, WRI expects no net compliance obligations—at the subsector level—in 2016 and through as far as 2033 (see WRI’s accompanying technical document). WRI expects only facilities in three of the 13 subsectors examined— the industrial gas, ethyl alcohol, and phosphatic fertilizer— would not be eligible to receive free allowances since these subsectors don’t meet the legislation’s threshold for trade exposure and or energy-intensity.

WRI compared the 13 GHG-intensive subsectors’ relative policy-related energy and compliance costs (based on EIA projections in 2016) against Standard & Poor’s ranking of relative competitive risks for each subsector (see Figure 1). WRI assumed that the ratio of these subsectors’ emissions and their energy-related fuel/feedstock purchases to their size, as measured by value of shipments, is the same in 2016 as in 2006 (the most recent data available for emissions estimates). This comparison appears to indicate the following:

While large energy-intensive commodity chemical subsectors (like the petrochemical, plastic material and resin, and other basic organic chemical subsectors) may have limited ability to pass along costs depending on market conditions, WRI doesn’t expect these subsectors to face significant compliance costs because of their eligibility for free allowances. At the same time, these subsectors also depend heavily on natural gas-derived feedstocks so they could face higher production costs. Standard & Poor’s expects higher production costs could make some of these subsectors less competitive in their markets, lower their export opportunities, and ultimately weaken their credit metrics.
The nitrogenous fertilizer subsector is likely to face moderate energy-related risks because of their natural gas purchases.
The industrial gas subsector may have the greatest compliance costs relative to its size, but it should also be in the best competitive position to pass along these costs to customers.

Figure 1: Estimated Relative Impacts on Select Manufacturing Subsectors under the American Power Act

Company-level evaluation

Under the APA, companies in eligible subsectors receive free allowances based on their market share (by output) in a subsector, multiplied by the whole subsectors’ GHG emissions. As a result, companies with a lower ratio of GHG emissions to output than those of their peers would receive more free allowances than required to cover their facilities’ compliance requirements. These companies can sell their extra free allowances for cash or bank them for future use. Companies with a higher ratio of GHG emissions to output than their peers still receive free allowances, but these free allowances would only offset a portion of their compliance requirements and may put them at a cost disadvantage.

WRI and Standard & Poor’s expect that the credit impact at a company-level would likely vary within each subsector based on the following:

Current and projected emissions and the ability to reduce emissions. For companies eligible to receive free allowances, emissions data should be compared with the subsector average, since net compliance costs would depend on emissions intensity relative to the subsector average.
Current and projected fuel and feedstock mix. Dependence on GHG-intensive fuels like petroleum products and coal (and to a lesser extent, natural gas) increase compliance costs because GHG emissions are released upon combustion. Natural gas dependence, whether through direct purchases or natural gas-derived feedstocks, may result in higher energy purchase costs.
Competitive position, both domestic and international, including the ability to pass along costs.

Standard & Poor’s examined the potential credit impact on two hypothetical companies in energyintensive subsectors in 2016, using EIA projections of the APA and WRI’s analysis of free allowances:

Company A is a large carbon black producer with lower GHG emissions than most of its peers. WRI estimates that the value of free allowances Company A would receive under the APA would be greater than the costs of its compliance obligations, resulting in net revenue of $0.01 to $0.03 per dollar of U.S. sales in the first year of regulation—a negligible positive impact. Standard & Poor’s also expects the implications of raw material costs to be manageable for Company A because it focuses its energy purchases on refined crude oil products, which are expected to decline in cost relative to the no-policy case. Even in the downside case, where its energy outlays increase more than what the EIA projects, energy costs appear manageable because of the company’s geographic diversity and the expectation that Company A would retain sufficient pricing power due to the valueadded- nature of its products and favorable industry structure. Thus, under the EIA projections, Standard & Poor’s would not expect Company A’s profitability and leverage metrics to deteriorate.
Company B, as a large industrial gas producer, would not be eligible to receive compliance-related subsidies. As a result, WRI estimates Company B would face $0.06 to $0.17 in compliance costs per dollar of U.S. sales. The substantial costs of compliance could raise some uncertainty on future capital spending, and the EIA’s projection for slightly lower economic growth could affect demand growth. But we expect Company B to be able to pass through some costs to downstream customers as a result of the strength of its business model and lack of lower-cost substitutes. Here, Standard & Poor’s expects Company B’s profitability and leverage metrics to deteriorate modestly under the EIA projections.

The subsectors that are most likely to face EPA regulation

WRI believes that 2016 is likely the earliest year that future EPA regulation would cover GHGs from existing chemical facilities. The form of regulation is unclear. Previously, the EPA has used both market-based and command-and-control regulation to limit pollutants.

WRI believes that absolute emissions and emissions reduction potential are among the factors that the EPA will consider when regulating GHG emissions; other key criteria include cost feasibility and the remaining useful life of facilities (see Figure 2). Nitric acid and adipic acid production—part of the nitrogenous fertilizer and all other basic organic subsectors, and an input into fiber manufacturing—are also likely to come under regulation as a significant source of nitrous oxide (N2O) emissions (a potent GHG). (Because of data limitations, Figure 2 does not reflect cost feasibility, the remaining useful life of facilities, and nitric acid and adipic acid production.) Figure 2: Relative Likelihood of Future EPA Regulation for Select Chemical Manufacturing Subsectors

The credit differences between policy scenarios

Assuming the EPA does not use market-based mechanisms, WRI and Standard & Poor’s believe the key credit-related differences between the cap-and-trade and EPA regulatory scenarios include:

Cash flow flexibility. Cap-and-trade legislation provides companies with greater flexibility to choose between up-front capital expenditure and the purchase of emissions allowances, allowing companies to more easily manage cash flows in a given year.
Compliance-related revenue. Under the APA, companies that are both eligible for rebates and emit less GHGs than their peers (per unit of output) would presumptively receive more free allowances than required, and could bank or sell these allowances for cash. A non-market-based EPA regulatory approach would not provide a similar opportunity to gain compliance-related revenue.
Management strategy. Implementing an effective management strategy to comply with climate policy becomes more important in a cap-and-trade scenario. Benchmarking emissions reductions against peers and participating in GHG permit trading (“carbon”) markets will likely be a complex undertaking for any company, requiring input and coordination from all business segments. In contrast, meeting EPA regulatory standards is likely to be easier to manage within existing company operations.

As climate policy evolves, key policy variables to watch for include:

Stringency. How aggressively do policies target greenhouse gas emissions reductions?
Coverage. Which subsectors in the chemicals value chain do the regulations cover? And how and when do those regulations apply?
Transition provisions. What provisions are available to ease the economy and companies into reducing GHG emissions and minimize competitive pressures (for example, free allowances)?

Green Investment Horizons: Effects of Policy on the Market for Building Energy Efficiency Technologies

Maggie Barron — Tue, 30 Nov 2010 11:19:50 -0500

Executive Summary

This Working Paper:

Informs the investment community by providing information and context on the potential market growth of energy-efficient technologies in buildings.
Explores how different policies on energy efficiency and climate change may impact demand for energy efficiency technologies in buildings, within certain markets.
Provides market growth forecasts based on two policy scenarios for the following technologies and markets:
- Insulation in the European Union: to reduce energy use and loss;
- Lighting worldwide: to develop new efficient lighting technology;
- Building controls in the European Union and United States: to optimize the use of air-conditioning, and lighting appliances.

Energy used in commercial and residential buildings accounts for 40 percent of global energy consumption and approximately 24 percent of the world’s greenhouse gases (GHGs). Heating, cooling, and lighting make up a large proportion of this energy use.

As governments around the world devise policies to reduce energy consumption and GHGs, and minimize dependence on foreign sources of energy, they are increasingly focusing on technologies that can improve the energy efficiency of buildings. Insulation, lighting, and building controls are the three energy efficiency technology categories that have emerged as having the most impact on improving energy use.

Setting the Scene

This paper develops policy scenarios to forecast the market size of key energy efficient technologies for buildings over the next 20 years (2010-2030). The objective is to provide information and context for those planning to invest in business opportunities in these growing markets.

The paper identifies the most important energy and climate change policies in three large markets – the European Union, the United States, and China.
Within those markets, referred to as “focus markets,” the analysis concentrates on three key technologies – insulation, lighting, and building controls. (Refer to Annexes 2 to 4 to get quick facts on each of these technologies.)
The potential future markets for these technologies are forecast based on specified assumptions about current and planned policies and market conditions.
Forecasts are developed for two time frames: the short-term (2010-2020) and the long-term (2020-2030).
The paper focuses primarily on buildings within the commercial and residential sectors.

Public policy actions to counter climate change and reduce greenhouse gas (GHG) emissions are increasingly focused on improving energy efficiency in buildings. This strong trend presents an opportunity for investors.

Emerging policies are likely to increase the uptake rate for energy efficient technologies. Policies of varying stringency and scope have been introduced in the featured markets to save energy and reduce GHGs. For example, the European Union and China have mandated the phase-out of incandescent lamps within the next decade, while the United States has imposed lighting efficiency standards and will likely pursue phase-out as well. This creates a major market opportunity for more energy efficient compact fluorescent light bulbs (CFLs) and Light Emitting Diodes (LEDs) which consume 75 and 66 percent less energy than incandescent bulbs respectively.
The most common policy mechanisms use a combination of requirements and incentives. For example, in the European Union, the Energy Performance of Buildings Directive (EPBD, 2010) sets a mandate encouraging member states to take measures to make all new buildings low or net-zero energy by 2020. Also, under the EPBD, an energy performance certificate must be displayed in all public and commercial buildings. This measure is designed to improve transparency between tenant and building owner on the energy efficiency of every building. In addition, the EPBD encourages member states to set up rebates, tax credits, and information on energy efficient technologies to help ease the burden of initial capital investment in building energy improvements. At present, the EPBD is primarily being interpreted as a guidance tool by member states where it fits into their national priorities. Nevertheless, the Directive sends a clear signal endorsing active policies for improving energy efficiency of buildings.

Approach

Given the trends above, this paper constructs two plausible policy scenarios based on expectations of how specific focus markets may grow in the next 20 years as a result of newly introduced and planned legislation promoting energy efficiency in buildings. Data on CO2 emissions, rate of technology uptake, and projected market growth of technologies were acquired from market research and annual company reports. These were used to project future developments of market sales and demand. The following policy scenarios were chosen based on the assumption that their implementation will have different impacts on market growth of insulation, lighting, and building controls. (Explanations of the methodology can be found in Section II and Annex 1.)

An “incremental” scenario that focuses on the impact of current and planned policies.
An “aggressive” scenario that assumes more ambitious public policy is enacted, further spurring technological advancements.

The main difference between the incremental and aggressive scenarios is that growth is expected to accelerate under the latter if existing policies become more stringent and if new policies help to reduce financing barriers. The differential between the two scenarios is clearer in the lighting and building controls sectors, where growth is expected to be slower in the short-term but accelerate in the long-term as technological innovation improves and products become more affordable.

Key Findings

The study findings suggest notable growth in market valuea, under both scenarios, across all three technologies from 2010-2030. Generally, growth in the short-term (2010-2020) in all three technologies in both scenarios is robust, suggesting a compelling investment opportunity. Although there is a slight decline in growth in the long-term (2020- 2030), market size of the three technologies remains significant.

Forecast highlights under the “incremental” scenario.

Insulation (EU-15b): forecast to grow in the short-term with a compound average growth rate (CAGR) of 3.9 percent; and a 4 percent CAGR in the long-term.

Short-term growth is expected to be driven by the Energy Performance Building Directive (EPBD 2010), which sets minimum building energy efficiency performance standards for existing buildings undergoing major renovations. In addition, a stronger commitment to reduce CO₂ emissions under the Kyoto Protocol may serve as a driving force to make buildings zero or low energy consuming.
In the long-term, growth is projected to stay at modest levels since no new policies are introduced.

Lighting Markets (Global): forecast to grow at a CAGR of 6 percent in the short-term slowing to 5.7 percent CAGR in the long-term.

In the short-term, the growth trend is expected to be attributed to an increase in popularity of fluorescent lamps, particularly CFLs in households. More efficient fluorescent and halogen lamps may dominate the lighting market through 2025.
In the long-term, growth may slow without government intervention encouraging the uptake of energy efficient products or promoting research and development into advanced lighting technologies.

Building Controls (EU and U.S.): forecast to grow at a CAGR of 7 percent in the short-term and 6 percent in the long-term.

In the short-term, growth is expected to be driven by increased government incentives for the installation of more sophisticated building controls in more buildings. This dynamic has the potential to attract new manufacturers of the technology into the sector and spur development of more affordable building control options.
In the long-term, growth is expected to be driven by enforced energy consumption monitoring and disclosure throughout commercial and multi-unit residential buildings. Increased uptake of building controls technologies has the potential to attract new manufacturers into the sector.

Forecast highlights under the “aggressive” scenario.

Insulation (EU-15): forecast to thrive short-term, resulting in a CAGR of 8.4 percent, then decline sharply to 3.3 percent CAGR in the long-term.

In the short-term, growth is expected to be driven by an extension of energy performance requirements for residential buildings under the EPBD (2010).
In the long-term, growth will taper off if GHG reduction targets for buildings are achieved in the early stages of policy implementation.

Lighting Markets (Global): forecast to grow substantially at 8 percent CAGR then decrease to 6 percent CAGR in the long-term.

In the short-term, growth is expected to be driven by countries that pledge to phase out energy inefficient lighting and switch to energy efficient alternatives over the next decade.
In the long-term, growth will likely continue as incandescent and fluorescent markets shift production/market focus to LED technology.

Building Controls (EU and U.S.): forecast to grow rapidly at 10 percent CAGR in the short-term but slow to 7 percent CAGR in the long-term.

In the short-term, growth will be determined by government programs that continue to subsidize the cost of new building control technologies and set specific regulatory standards for the installation of equipment to connect to smart grids.
In the long-term, regulations that require monitoring and reporting of building energy performance are likely to continue to lead to an increase in control applications.

Greening Supply Chains in China: Practical Lessons from China-based Suppliers in Achieving Environmental Performance

Maggie Barron — Thu, 21 Oct 2010 14:37:52 -0400

Leading corporations all over the world are making environmental performance part of their core business strategy. As part of their efforts, international companies are implementing green supply chain initiatives, under which they require their suppliers to meet certain environmental performance standards. While these green supply chain requirements are starting to have global ramifications, the impacts are particularly significant for Chinese industry because of China’s role as the world’s factory and leading global exporter – accounting for as much as 10 percent of the world’s total exports. Chinese suppliers therefore face new challenges: If they do not meet the environmental requirements of green supply chain buyers, they risk losing their international customers.

The purpose of this report is to highlight examples of five companies operating in China by illustrating the approaches they have adopted to address environmental problems. The report focuses on water pollution within China’s challenging business landscape.

The five case studies presented specifically illustrate:

Management processes adopted by China-based suppliers.
Low-cost solutions that lead to effective results.
Companies that improved their performance after environmental violations.
The role of multistakeholders and independent third parties as drivers for supplier environmental performance.

All five companies highlighted in the best-practice case studies were independently reviewed and selected by the Green Choice Alliance (GCA), a consortium of Chinese environmental experts and nongovernmental organizations (NGOs). The five companies were among the 290 suppliers that were prepared to communicate with NGOs and the public about their environmental performance.

The cases featured in this report were chosen based on the following criteria:

1) the representative nature of the environmental problem; 2) the practicality and effectiveness of the management processes used to solve the environmental problem; and 3) the potential for management processes to be widely adopted by Chinese suppliers in various industries.

It is the authors’ hope that through these case studies Chinese suppliers will gain insights into how they can become green suppliers, enabling them to strengthen their relationships with international buyers and achieve business success.

Mine the Gap: Connecting Water Risks and Disclosure in the Mining Sector

Maggie Barron — Tue, 14 Sep 2010 14:49:46 -0400

Water issues are becoming a considerable factor affecting growth and profitability of companies in many regions of the world. This paper outlines potential water-related risks facing the mining industry and highlights important gaps in water-related disclosure. The purpose is to provide information, questions, and tools to help the financial community better evaluate water-related risk facing mining companies.

This research focuses on global hardrock minerals operations and does not cover industrial or fuel minerals.

Key Findings

Water risks span the minerals production cycle and occur in diverse operating environments.

Water quality problems are among the most serious environmental impacts associated with mining. Toxic waste and mine effluents can be mobilized by water, resulting in regulatory, legal, and reputational risks for companies.
Work stoppages or mine shut downs can occur if water resources become unavailable. Mining—particularly for precious metals, diamonds, copper, and nickel— requires significant volumes of water.

Mining companies have long been conscious of water risks, as evidenced by their ongoing efforts to address them and related corporate reporting. Indeed, recent analysis has shown that the mining sector is a leader in terms of water reporting. However, corporate disclosure often does not provide a comprehensive picture of water risk. Current reporting frameworks do not guide companies to disclose the full scope of potential water risks.

Water quality data is not sufficiently reported. Data on water effluents and waste management practices are either not reported or not detailed enough to understand risk. The impact of mining activities on other water users is also rarely reported.
Water consumption data lacks context. All water is local, thus water usage data is only relevant when placed in the context of local water availability. Competing demands from communities, agriculture, and other industrial users must be factored into assessments of local water availability.
Water reporting is not consistent. Most Asian mining companies report little or no water-related information, even though Chinese and Indian companies account for an increasingly significant share of mining equities and may face serious water constraints. Companies that do report water-related metrics use different approaches to calculating and reporting data, making it difficult to compare performance across companies.

The financial community does not currently have adequate information about the water risks facing mining companies. This paper aims to address this problem by explaining how water issues and trends may create potentially costly water-related risk for companies and by providing tools, questions, and information to help the financial community better evaluate water risks in the mining sector.

Funding for this research was provided by APG Group.

2010 Global Ecolabel Monitor

Maggie Barron — Thu, 01 Jul 2010 12:34:06 -0400

How do consumers and institutional buyers know if something is ‘green’ or ‘ecofriendly’? As environmental qualities are often imperceptible in the final product, producers need to make them visible to consumers.

Many ecolabels and eco-certification schemes have been launched to validate green claims, guide green purchasing, and improve environmental performance standards. Done well, ecolabels and eco-certifications can provide an effective baseline within industry sectors by encouraging best practice and providing guidelines that companies must meet in order to meet a certified standard.

Demand for products with ecolabels is growing, though confusion about which companies are truly environmentally responsible persists. For example, the numbers of ecolabeled organic food products and forestry practices have grown at 20-30% per year since the late 1990s and early 2000s (USDA, 2007). A 2009 Mintel study showed that the green market outperformed the US economy as a whole in 2009 and grew by over 40% from 2004 to 2009.

More than a third of US consumers now say they are willing to pay a premium for eco-friendly products (according to a March 2010 Mintel study). In some cases this is even higher, for example 53% of US consumers would be willing to pay a premium for a greener television, according to the Consumer Electronics Association. In the UK, according to a 2009 Carbon Trust study, 44% of UK consumers want more information on what companies are doing to be green, but 70% do not feel confident about identifying which companies are environmentally responsible.

Several large companies and government agencies have recently announced or improved their green- or eco-purchasing policies, notably Wal-Mart5, Office Depot, Mars, Dow, Dell and the US Federal Government. In order to meet their policies, these large-scale institutional purchasers need standards, detailed information, and proof that a product is green.

The ecolabel and eco-certification landscape is currently fragmented and often confusing to institutional buyers as well as individual consumers. Marketplace confusion has grown and continues to grow due to competing claims on what makes a product ‘green’, especially when there are two or more competing schemes for the same sector or product.

Some ecolabels are regionally specific, while others are global; and some have stricter criteria than others. Compounding the problem is a lack of good quality standardized and comparable information worldwide. According to a European market research study (OECD, 2006), marketing, consumer confusion and competition between similar schemes has caused low market penetration for some ecolabels.

In late 2007, Big Room Inc., a Vancouver based company, surveyed around 270 ecolabels and published the results to a website, www.ecolabelling.org (now www.ecolabelindex.com). Two years later, the World Resources Institute, a Washington DC-based environmental think tank, and Big Room Inc. began discussing how to expand and update the data on ecolabelling. org into a more comprehensive ‘global ecolabel monitor’. In October 2009, with support from companies involved with WRI’s Green Supply Chain Project, the effort was launched and was sponsored by Wal-Mart, UPS and UTC with additional support from Dell, Nike, PepsiCo, Dow and Johnson & Johnson. This report summarises our findings.

Analyzing Environmental Trends: Taking the Pulse of Asia’s Financial Community

Maggie Barron — Thu, 24 Jun 2010 09:53:32 -0400

Executive Summary

In 2008, a unique research collaboration between The World Resources Institute (WRI) — a leading environmental think tank —and HSBC — a major global financial institution — was formed to better understand the financial materiality of environmental trends affecting selected sectors in Asia. This research collaboration produced in-depth, peer-reviewed research on the impacts of climate change and water scarcity in South and Southeast Asia’s power, food and beverage, and real estate sectors.

This working paper draws on insights gained from the research as well as feedback from the region’s financial community, to frame the key challenges that analyze the financial impacts of emerging environmental trends in the region.

These challenges can be summarized as:

A lack of publicly available data relating to both environmental trends (for example, localized water scarcity data) and company-specific exposure to potential environmental risks (for example, the number of corporate facilities in water scarce areas);
Limited contextual analysis for framing the complex connections between environmental trends and their financial impacts;
The highly unpredictable nature of environmental trends which limits the ability to forecast their likelihood and their magnitude.

While these challenges are not specific to South and Southeast Asia, this report provides examples of analysis that incorporates environmental trends in the region and suggests practical steps to enhance and expand how Asian (and other emerging) financial markets are responding to emerging environmental issues.

Surveying Risk, Building Opportunity: Financial Impacts of Energy, Water and Climate Risks on Real Estate in Asia

Maggie Barron — Fri, 16 Apr 2010 13:24:59 -0400

Energy insecurity, water scarcity, and climate change pose growing risks for the real estate sector in South and Southeast Asia, yet the connections between these trends and financial impacts are not well understood by analysts, investors, companies, and governments in the region. This report presents a framework to assess risks associated with these trends, and also discusses financial opportunities in the region’s growing green building market. The analysis considers current and planned commercial office buildings in India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam, with a particular focus on the Indian market given the large size of its real estate market and data availability. The report’s lessons and the risk framework may also be applied and adapted to other countries and building types. Although other resource scarcity, demographic and/or environmental trends may be relevant to the region’s buildings (for example, air pollution, waste, or ecosystem degradation), the report’s scope extends only to specific aspects of energy insecurity, water scarcity, and climate change as defined in this report.

Key Points

Emerging energy insecurity, water scarcity, and climate change trends in South and Southeast Asia will affect the risk and return associated with investments in (1) commercial building projects and (2) companies involved in commercial real estate development and investing.
The focus countries’ limited energy and water infrastructure; rapidly growing demand for energy and water resources; and physical exposure and vulnerability to climate change impacts, all increase the likelihood and magnitude of financial impacts.
Green building investments can minimize energy and water-related risks while achieving net positive returns in as few as three years.

Over Heating: Financial Risks from Water Constraints on Power Generation in Asia

Tim Herzog — Fri, 16 Apr 2010 13:23:38 -0400

Key Findings and Context

Water-related risks are receiving more attention than in the past, yet the connection to power sector development is not well understood by investors, governments, and companies in South and Southeast Asia. This report presents a framework for investors and analysts to assess the risk of impacts from water-related issues, including growing water scarcity and declining water quality, on thermal and hydroelectric power generation plants. While this analysis focuses on publicly listed power generation companies in India, Malaysia, Philippines, Thailand, and Vietnam, the risks outlined may apply to listed power generation companies operating in other water scarce regions.

Emerging Asia is projected to have the fastest growth rate of power consumption in the world.

The drivers behind this power appetite – economic and population growth – are also increasing demands on limited freshwater resources.
The power sector requires a steady supply of water for cooling and generation to maintain loads and avoid disruptions.

The availability and quality of freshwater is rapidly declining in many parts of South and Southeast Asia due to demographic pressures and climate change.

India in particular faces critical water shortages in the next decade.
Malaysia, Thailand, the Philippines, and Vietnam are expected to face localized water pollution and shortages, with climatic patterns shifting towards longer dry seasons with more concentrated rainfall periods.

Investors are taking on more water risk.

The power sector is being liberalized in many countries in the region to attract the investment necessary to meet economic goals, with higher risk-reward propositions for investors.
Deregulated power markets may offer little or no protection to shareholders in the event of an outage or load loss resulting in lost revenues or increased costs (if stipulated by operating license).
New thermal and hydro power development places long-term bets on water availability – yet future water supplies are often uncertain and potentially oversubscribed in the most electric power hungry and water scarce regions.

Technology will play a key role in mitigating water risk yet at a price and efficiency tradeoff.

Advanced cooling systems for thermal power such as dry cooling can reduce or eliminate freshwater dependency yet increase carbon emissions per unit power output through efficiency losses.
Likewise there are water penalties for carbon dioxide emission reducing technologies such as carbon capture and storage.
These competing priorities make it difficult for investors and companies to anticipate the impact of future climate change and water policies on investments.

Water risk has been obscured to date by regulatory protections.

Examples of water-related load losses or outages have occurred throughout South and Southeast Asia yet the financial impact has been limited due in part to heavy governmental support that minimizes shareholder risks.
Shareholder protections will become more costly to sustain and may drive regulatory change as freshwater scarcity increases over the longer term.

74 GW – over half of existing and planned capacity for major power companies – is located in areas that are considered to be water scarce or stressed.

WRI mapped water scarcity data with plant locations for the largest publicly listed power generation companies in the region.

In India, 79% of new capacity will be built in areas that are already water scarce or stressed.

NTPC, Tata Power, and Reliance Infrastructure’s (including Reliance Power’s) new capacity is increasingly located in water scarce or stressed areas.
Water scarcity is expected to intensify in the future as the impacts of climate change and demographic pressures decrease renewable water supplies.

Weeding Risk: Financial Impacts of Climate Change and Water Scarcity on Asia’s Food and Beverage Sector

Maggie Barron — Tue, 13 Apr 2010 14:35:39 -0400

This report identifies the potential financial impacts arising from climate change and water scarcity on the publicly listed companies in the USD1 $40 billion food and beverage (F&B) sector in South and Southeast Asia. It focuses on domestic companies that process and package foods and non-alcoholic beverages in India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

The report examines the potential impact of climate change and water scarcity on three key value drivers (agricultural inputs, operating efficiency, and reputation) for each of the seven most important F&B subsectors — aquaculture, beverages, confectionary, dairy/poultry, edible oils, starches, and sugar.

This report offers a road map for analysts and investors seeking to factor environmental trends and their potential financial impacts into their assessments of companies’ strategic positioning in this sector and region.

In a case study, HSBC examines the financial implications of climate change and water scarcity on an Indian sugar company, Balrampur Chini Mills.

Key Findings

This report draws on consultations with experts and the best available literature to assess the financial implications of climate change and water scarcity on the F&B sector in South and Southeast Asia. Our analysis and findings focus on three commonly-accepted value drivers: agricultural inputs, operating efficiency, and reputation.

The most financially material impacts of climate change and water scarcity on the F&B sector are increased agricultural input prices and increased processing costs.

The impact of climate change and water scarcity on agricultural input prices and processing costs affects all F&B subsectors examined in this report.
The significance of the impact depends on a number of factors, including location of suppliers and factories, ability to pass costs onto consumers and the sustainability of supplier cultivation practices.

Climate change and water scarcity can raise agricultural commodity prices and increase price volatility by decreasing yields.

Climate change and water scarcity can have a direct impact on the availability, quality and price of key food commodity inputs by negatively impacting animal and crop yields.
Food commodity prices are particularly vulnerable to the shocks of unpredictable extreme weather events, while animal yields are most at risk from increased water temperatures (aquaculture) and access to clean water supplies.

Climate change and water scarcity can increase processing costs through operational disruptions and treatment costs.

Water scarcity can create operational disruptions since water is 1) a base ingredient and 2) integral to production processes. Water pollution, which contributes to scarcity, requires investments in filtration technology.
Climate change can create operational disruptions by damaging manufacturing plants and infrastructure.

Climate change and water scarcity can create food safety and stakeholder challenges.

Climate change and scarcity of clean water can increase exposure to diseases and contamination, especially for animal-based products, increasing food safety risks.
Competition for water is a source of tension between food processors and stakeholders, creating reputational risks.

Accounting for Risk: Conceptualizing a Robust Greenhouse Gas Inventory for Financial Institutions

Camilo Ramirez — Fri, 28 Aug 2009 14:16:38 -0400

Report Contents

Executive Summary
The Business Case for Robust GHG Emissions Accounting
Primer on Corporate GHG Accounting
Applications for Financial Institutions
Scope of Products and Services
Calculating and Reporting Emissions, and Using the Inventory
Final Thoughts and Next Steps

Executive Summary

Compiling greenhouse gas (GHG) emissions inventories is no longer the province of only first-mover corporations: Approximately two-thirds of Fortune 500 companies now use the standards developed by the Greenhouse Gas Protocol — an initiative of the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) — to compile their GHG emissions inventories. While the standards set forth by the Greenhouse Gas Protocol Initiative are broadly applicable, the diverse, complex, and service-focused nature of financial services has triggered discussion about the appropriate application methods for financial institution users. Accordingly, financial institutions and their stakeholders are seeking additional clarification on developing and evaluating GHG inventories for financial institutions.

In response, this issue brief draws from the widely used WRI/WBCSD Greenhouse Gas Protocol’s Corporate Accounting and Reporting Standard, Revised Edition, to discuss objectives, options, and challenges for financial institutions and stakeholders to consider when creating and evaluating a GHG emissions inventory.

Approach

Because emissions related to investments and services may contribute to a significant portion of financial institutions’ GHG inventories and potential business risk, this brief discusses such options as

Using an equity share approach to capture emissions from relevant proprietary investments.
Reporting relevant indirect emissions (i.e., emissions that are a consequence of business activities but occur at sources owned or controlled by another entity) related to debt and equity investments and other products, services, and financial contracts.

Given the practical and conceptual complexity in creating an inventory that includes emissions from investments and services, we encourage financial institutions to keep the following business objectives in mind during the development process:

Demonstrating environmental stewardship to stakeholders (i.e. managing reputational risks).
Informing risk management practices for proprietary and managed investments (i.e., helping manage GHG risks in an institution’s own portfolio and fulfilling its fiduciary duty to its clients).

The inventory ultimately should facilitate positive environmental outcomes, namely, the reduction of GHG emissions, and serve a business imperative. To achieve these business and environmental objectives, setting GHG reduction targets as well as tracking and reporting on progress are critical.