Mereja

Author: Dana Krechowicz

  • Three New Reports Examine Financial Impacts of Environmental Risks in Southeast Asia

    Environmental risks in the power, food and beverage, and real estate sectors can pose new challenges for investors.

    What are companies and investors doing about the environmental challenges that will affect their bottom lines? At WRI, we help the financial sector understand environmental risk, be it from climate change, water scarcity, or energy insecurity. We also help companies build resilience in their supply chains and help investors pick the forward-thinking companies that will be good environmental bets in the future.

    To that end, the World Resources Institute and HSBC’s Climate Change Centre of Excellence have released new research analyzing the environmental risks facing the food & beverage, power and building sectors in India, Indonesia, Thailand, Malaysia, Vietnam and the Philippines.

    The reports show that climate change, energy insecurity and water scarcity are strategic risks for investors in the region, and those companies that manage these risks stand to differentiate themselves from their peers in the future.

    Water shortages put the Asian power sector at risk:

    • In India, for example, 74 GW – over half of existing and planned capacity for major power companies – is located in areas considered to be water scarce or water stressed.

    • Also in India, 79% of new power capacity will be built in areas that are already water scare or stressed.

    • Water shortages can cause costly delays and decreases in power production, lowering the rate of return on investment.

    Asian food and beverage sector is vulnerable to climate and water risks:

    • The industry’s dependence on agriculture, aquaculture and water resources for business operations makes it particularly susceptible in a region where climate change is projected to severely intensify water scarcity problems.

    • Edible oils, starches, and sugar sub-sectors will be most vulnerable to increasing agricultural prices, while aquaculture, poultry, and dairy will be vulnerable to disease and contamination.

    • As part of the study, HSBC’s analysis on an Indian sugar company shows that a sugarcane price increase of 1 percent can lead to a decline in profit of up to 10 percent.

    The commercial real estate sector in South Asia benefits from going green:

    • As electricity and water prices are expected to increase, “green” building retrofits or new construction can protect the Asian real estate sector from increasing environmental risks emerging in the region.

    • Most of the energy used by commercial buildings in the region goes toward air conditioning and lighting. In India, for example, lighting accounts for 60 percent of the energy used in commercial buildings while 32 percent goes toward air conditioning.

    • According to a case study, a typical commercial building (300,000 square feet) in Mumbai, a 1 percent increase in electricity costs could increase annual operating costs by approximately Rs 2.8 million, or around USD 60,000.

    About the Reports:

    Weeding Risk: Financial Impacts of Climate Change and Water Scarcity on Asia’s Food and Beverage Sector is the first report in the three-part series. It looks at seven food and beverage sub-sectors in the region. Findings suggest that the edible oils, starches, and sugar sub-sectors will be the most vulnerable to increasing environmental trends, such as climate change and water scarcity, in the region.

    Over Heating: Financial Risks from Water Constraints on Power Generation, analyzes water-related risks facing thermal and hydroelectric power plants in India, Malaysia, the Philippines, Thailand and Vietnam. The analysis found that water shortages pose the highest risk for power generation companies in India compared to the other countries.

    Surveying Risk, Building Opportunity: Financial Impacts of Energy Insecurity, Water Scarcity, and Climate Change on Asia’s Commercial Real Estate Sector, assesses the commercial building sector in the region and the financial impacts it could face from energy insecurity, water scarcity and climate change. The report finds that green building investments can alleviate these risks in addition to achieving a positive return for buildings owners in a few years.

  • Adding Environmental Risk to the Financial Equation

    Despite projections, many financial analysts ignore the risks and opportunities associated with environmental trends. ENVEST seeks to change this.

    Climate change and other environmental trends can have a major impact on companies and industrial sectors. Recently, the SEC advised publicly held companies to inform investors of any potential risks of climate change. This guidance comes at a time when nearly half of global money managers are ignoring climate change risk completely when they make their investment decisions, according to a recent survey. Why?

    Investment and Environmental Risk

    Environmental data, even when available, does not fit neatly into the financial models that investors commonly use. Environmental trends are complex and have a long time horizon, making them difficult to accurately quantify and predict. As one analyst put it, “If it’s going to be a problem in 2025, tell me about it in 2024.”

    Even with these challenges, financial analysts are starting to realize that they will have to change their approach to environmental issues if they want to keep on top of risks facing companies. A better grasp of risk will translate into better (and more sustainable) investment decision-making. That’s why WRI’s ENVEST has been producing research for over 10 years that explores innovative ways of overcoming the inherent challenges in analyzing environmental trends for a financial audience.

    ENVEST Work in the Food and Beverage and Asian Power Sectors

    ENVEST’s upcoming report on the food and beverage sector in Asia uses scientific climate change predictions about projected crop yield to analyze potential risks. For example, a climate change induced crop price increase of 1% would have a sevenfold impact on the profitability of a sugar company.

    In its upcoming report on the Asian Power sector, ENVEST uses geographical information systems (GIS) maps that show the intensity of water scarcity in certain geographic areas overlaid with locations of current and planned power generating facilities. The mapping shows that over half of existing and planned capacity for major power companies, representing 74GW, is located in areas that are already considered water scarce or stressed.

    Both reports also identify the risk factors that would make companies in these two sectors vulnerable to environmental trends, and support investors in engaging with companies about how they are positioned to manage these risks by providing guiding questions.

    From Financial Risk to Opportunity

    ENVEST is constantly exploring new ways to move research forward in this field, both by looking at expanding the traditional focus from equity to debt markets and from risk to opportunity, and by looking at evolving analytical approaches. Past ENVEST work has used techniques such as peer-to-peer exposure ranking within a sector (2004’s Changing Drivers on the automotive sector) and mapping of company assets in environmentally sensitive areas (2002’s Changing Oil on the oil and gas sector).

    Though there is a way to go before environmental trends analysis becomes a mainstream practice in the financial community, we believe that markets that fully account for environmental risks will ultimately shift capital to companies and projects with sound environmental strategies. ENVEST is working to contribute research and ideas to continue the evolution of this vitally important space.