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  • Look at ESG research issues as we perceive them in/from Aust Take water to out issues into context
  • Servcie bundling; Notion of execution, distrbution and research for brokerage And brokerage a proxy for FUM or AUM
  • Includes ingredients for perfect storm
  • The 2004-05 period was preceded by more than five years of below-average rainfall across large parts of Australia, particularly the eastern states and south-west Western Australia. While both 2006 and 2007 saw an Australia-wide average rainfall slightly above the long-term average, conditions have remained relatively dry in the south-east and south-west of the country However, Australia is a continent of extremes with respect to water resources; relative abundance in the tropical north where few people live and relative scarcity in the more populated, temperate south. Australia has significant water resources, but the populations and agricultural activities are concentrated where water resources are most limited. Australia has approximately .+-,*** gigalitres (GL) of water available annually,). The best estimate of how much water can be diverted and turned to human use is approximately +*/,*** The Australian continent as a whole has shown a consistent drying trend over the past 50 years While rainfall in the tropical north-west has actually increased, in the more populated areas of Australia there has been a decline[2
  • The Institutional arrangements for water supply planning and delivery vary substantially across Australia but There are three key features of institutional regulatory arrangements in Australia: However, the single unifying feature, is that these functions remain under government control. The rights to control and use water are vested in the Crown - in particular the States, who then determine the conditions on which it is made available to others (e.g. licenses to irrigators); The rights to manage natural resources (including water) have historically been clearly vested in the states and territories, rather than the Commonwealth. Each state and territory government is responsible for regulating water management in Australia, including the allocation of right to access and use water, which is typically managed via water licensing. The water supply industry is (with a few exceptions) in public ownership; and Various bodies administer an array of regulation over matters such as water resource management, water quality, pricing, and environmental impacts. Major urban water supply businesses are typically state-owned or government-owned corporations operating under corporate law. Thus, the supply and delivery of water to Australia’s major urban centres remains, for the most part, wholly owned by the State or Territory government. The exceptions are Queensland, Tasmania and some regional centres in NSW, where the water businesses are owned by local government. Currently, there is little or no competition for customers in the water sector
  • Indeed, substitution affect as factor of production
  • Until the 1980s, urban water bills were determined by the value of the property at which the water was used. Most ratepayers used less than their water allowance and effectively faced a zero price for their additional consumption. Consequently, water agencies were unable to manage water demand, responded to increasing water use, (partly brought about by a zero or low water price) by expanding supply, which was then paid for by an increase in rates. In view of the relatively easy and abundant access and the historically low cost of water, which has arguably reflected neither the full cost of necessary infrastructure investment and maintenance, nor a full risk adjusted scarcity value, unsurprisingly water has neither featured as an investment opportunity nor a significant investment risk to listed companies More recently, there has been a recognition that water must be priced to reflect the principles of consumption-based pricing and full cost recovery and that this will need to consider a changed rainfall pattern with moves in urban water to demand management through pricing and metering. Consequently, water agencies were unable to manage water demand, responded to increasing water use, (partly brought about by a zero or low water price) by expanding supply, which was then paid for by an increase in rates. More recently, there has been a recognition that water must be priced to reflect the principles of consumption-based pricing and full cost recovery and that this will need to consider a changed rainfall pattern with moves in urban water to demand management through pricing and metering.
  • to ensure environmentally sustainable and productive river systems
  • historically low cost of water which has arguably reflected neither the full cost of necessary infrastructure investment and maintenance, nor a full risk adjusted scarcity value
  • Transcript

    • 1. Mark Bytheway Sustainable Investment Research Institute (SIRIS) Presentation to TBLI 2010 Workshop 8 – The Future Of ESG Research November, 2010 www.siris.com.au
    • 2. Presentation Outline
      • Introduction and context
      • ESG Research Issues
        • Structural
          • supply & demand models
        • Investment proposition
      • Water Investment Issues
        • Structural
          • Social & economic issues
            • Use
            • Ownership (pricing)
              • Price cf cost
            • Scarcity and access cf cost
            • Regulation/Disclosure
        • Investment Proposition
      • Summary
      •  Adapted from SIRIS research Report; “ Water Investment Risks and Opportunities in Asia”.
      •  Photos courtesy of ”Beyond Reasonable Drought”  
    • 3. Context & Perspective
      • SIRIS
      • Dedicated, Asian regional specialised investment research and advisory group
        • Provides sustainable sustainability and governance research across > 1100 companies across Asian-Pac region
        • 15 analysts
        • Established in 2000
        • Independent
        • Melbourne based
        • www.siris.com.au
    • 4. Context and Perspective…
    • 5. ESG Research Issues
      • ESG research hitherto largely followed a dichotomised model;
      • i.e separation of ESG from other (mainstream) investment research – i.e ESG research & ESG researchers
      • In part, a function of early demand ;
        •  specific SRI and ethical funds
          •  screening and ratings processes (SRI and ethics)
          •  Created specific demand for SRI data and info
          •  Limited overlap with mainstream investment research production
      • More recently seen move to integrate ESG analysis into investment process and l imited demand for new SRI/ethical funds
        • facilitated by initiatives such as PRI and Enhanced Analytics Initiative
    • 6. ESG Research Demand “Map” Time Values V Return Trade Off Strict Financial Analysis Ethical Investing Traditional Investment Process
      • Values based investing
      • Negative preclusive screening
      • Tobacco / alcohol
      • Gambling etc.
      Socially Responsive Investing
      • Notion of a responsible company generally includes:
      • Negative screening
      • Positive screening
      Sustainability Investing
      • Notion of risks/ opportunities
      • Generally low priority on negative screening
      • Strong positive screen perspective
      Thematic Investing
      • Changing regs and consumer prefs generating new products services and asset lasses
      • Renewable energy/clean tech/leisure
      PV Engagement Values seeking investing Values enhancing investing
    • 7. ESG Research Issues
      • Supply
      • In response, have seen development of separate/boutique ESG research providers e.g. EIRIS, KLD etc.
        • Focus had been on definition compliance/fulfillment eg ethical, socially responsible
        • More recently, rising demand for research focus on investment risk and opportunity i.e “integration into mainstream investment”
        • Rise in integration of ESG seen heightened interest from mainstream investment research and data providers;
          • Thompson Reuters, Bloomberg, MSCI etc
          • GS, Citi, Deutche, ML etc
    • 8. ESG Research Issues
      • Implications of changes
        • ESG research increasingly subject to same issues as non-ESG investment research
          •  Investment imperative/pressure on research to demonstrate investment insight/alpha (cf compliance) i.e to provide a discrete value
          •  Fee pressure
    • 9. ESG Research Issues
        • Investment imperative
        • From an investment risk and opportunity, perspective depends upon several issues;
          • Certainty, measurability & monetisation
            • incl ease of monetisation of risks, including ‘internalisation/ privatising externalities’
          • Materiality
          • Time horizon
            • issue of traditional investment horizon (short-termism
      • ESG risks and opps often structural and invariably longer term, less certain and difficult to $ quantify
            • e.g. climate change/carbon risk/ water
    • 10. ESG Research Issues
      • Implications of Changes cont.
      • Fees
        • moving away from subscription based fees, which reflected specific fund/product relationships
          • fees for investment analytical contribution
        • Moving towards traditional investment research and financial data fee models
        • Issues:
        • Service bundling/cross subsidisation(i.e broker and financial data providers)
        • Traditional investment research fee issues
        • marginal revenue allocation
        • incremental fee for incremental coverage
    • 11.
      • And finally…
        • The social/sustainability merits accruing from ESG research?
          • Is it reasonable for investors to expect some demonstrable env./social/governance benefit?
            • How is ESG facilitating ESG benefit(s)?
            • What are these benefits?
            • What is the value of these benefits?
      ESG Research Issues
    • 12. Water
      • Why water?
        • Reflects some of the issues and systemic challenges for ESG research (and indeed investment research more generally)
        •  important/vital resource (asset/cost)
        •  Scarce (very)
        • But;
        • Undervalued
          • Immaterial cost
        • Difficult to access asset
    • 13. Water in Australia
      • = perfect economic and environmental ‘storm’
        • Environmental
          • Worlds flattest and driest continent
          • Natural climate cycle (drought)
        • Anthropocentric
          • Increasing population
          • Human activity and non-sustainable economic systems (misuse)
        •  Climate change
        •  Profound “resource scarcity”
        • Economic & Structural Issues
          • Use
          • Ownership/pricing
            • Price cf cost
          • Scarcity and access cf cost
          • Regulation/Disclosure
        • As a result, a considerable proportion of Australia’s consuming population and many other regions continue to facing severe and transformational water shortages .
    • 14.
      • Investment risk and Opportunity
      • Not generally – by exception!
      • Why?
      • Historic and current impediments to investment appropriate investment analysis
      • 1. Climate change understandings
      • 2. Structural
          • Misplaced view of scarcity
          • Water pricing
          • relatively easy and abundant access
          • o wnership of water in public hands
          • fragmented & uncoordinated regulatory environment
      • 2. Not short term issue
      • 4. Mismatch of consumption and listed economy
            • Listed economy not a relatively large water user
      • 5. Pricing - water use not a material production cost
      • 6. Poor disclosure
      Importance of water to investors in Aust.
    • 15. The Environmental Dimension
      • Australia is the driest inhabited continent on Earth .
      • Rainfall is variable and droughts are common, and water resources in many areas are very scarce
      • However, Australia is a continent of extremes with respect to water resources;
        • relative abundance in the tropical north where few people live and
        • relative scarcity in the more populated, temperate south .
      • The Australian continent and the south, in particular, is reflecting increasing climate variability marked generally by declining rainfall
      • as a whole has shown a consistent drying trend over the past 50 years
    • 16. The Environment cont. Rainfall anomaly - 2004-05
    • 17. Social and Economic Dimension
      • Australia is confronted with a major challenge.
      •  There is increasing competition for water from irrigators, urban/domestic, industrial and mining users
      •  Change the way we think about water
        • Increase water productivity;
        • Improve water governance;
        • Change they way we value water (cost and price)
      • The response lies in;
        • Good science
        • Changed paradigm incl
          • Ownership (social) and value/valuation of water (economic)
          • use
    • 18. But….
      • unsurprisingly, hitherto water under-considered as a cost and asset undervalued
      • Limited risk consideration of investment risk to listed companies
      • offered limited investment opportunities ,
        • Water
        • Under valued
        • Under priced
        • Under reported
        • Under analysed (most analysts don’t care – ie not ‘spread sheeted
    • 19. Water Ownership
      • Key features of institutional regulatory arrangements in Australia:
        • The management of ( control and use) water is vested in the Crown - the States and Territory governments ;
        • The (mains) water supply industry is (with a few exceptions) publicly owned ; and
        • Various govt regulatory bodies administer an array of regulation over matters such as water resource management, water quality, pricing , ect.
    • 20. Water Pricing
      • Price still does not meet full production cost
      • Not to mention scarcity value
        •  Water relatively minor cost of production, despite its importance and increasing scarcity
      •  Limited economic incentive to ‘reduce’
      • Access variously bigger driver than cost i.e the “cost of none ”
    • 21. Issue of Price v Cost
      • Pricing
        • Current water crisis generating view that water has been and is mis and undervalued in Australia.
        • public ownership of water supply sector
        •  water has historically been viewed as and priced as a free (public) good
            • until late 80’s h/hold water bill based on property values. Industrial users paid a fee
        •  Demand not able to be managed via price signal.
        • More recently, there has been a recognition that water must be priced to reflect the principles of consumption-based pricing and full cost recovery – starting to drive change
    • 22. Water Use
      • The biggest industry users not widely represented on the stock market (agriculture)
      • The largest listed sectors are not relatively large users of water
      •  Not particularly relevant to a large part of the investment universe
    • 23. Corporate Disclosure
      • Limited in scope and range and inconsistent
        • Reflects
          • fragmented regulatory regime
          • Relatively immaterial cost
          • Limited investment risk/opportunity
          • SIRIS Study - only 38/200 even ‘mention’ water
      • In Australasia, disclosure not from cost perspective
        • Never seen cost of water set out as expense item in P/L
        • Material cost by exception
      • Access variously a risk management (access) issue
        • eg Newmont Mining, BHP Billiton, Elders Limited (agriculture)
        • Are starting to see it as a Balance Sheet item (water licenses
        • Indeed, seeing rural properties (businesses changing hands ostensibly for the value of licenses)
    • 24. Investment Implications:
      • Regulation of water access, quality and pricing is ;
        • Not uniform across the country and
        • Not coordinated
      •  Unclear and inconsistent investment
      • Currently are limited opportunities to develop a significant investment strategy in response to the current water shortage
        • Risk and opportunity
          • Still limited value in modeling water use
          • Listed water = approx. 100m AUD
    • 25. Investment Implications
        • T his is changing an intergovernmental reform agreement called the National Water Initiative
        • Included a package of reforms covering;
          • Infrastructure,
          • water pricing,
          • allocations and trading,
          • environmental and water quality –
        • Direct investment opportunities
          • Distribution
          • Water entitlements (trading)
          • Alternative water supply
            • Desalination
            • water mining
            • Recycling
    • 26. Summary
      • ESG research becoming mainstreamed
        • ESG research issues
          •  Certainty, measurability & monetisation
          •  Materiality
          •  Time horizon
        • Mainstream research issues
          •  Implications for access
          •  fees
          •  Investment relevance
    • 27. Summary cont.
      • These issues are challenging analysis of and investment into developing new costs and assets
        • e.g water
          •  Certainty, measurability & monetisation
          •  Materiality
          • Time horizon
      • unsurprisingly, hitherto water under-considered as a cost and asset undervalued
      •  Limited risk consideration of investment risk to listed companies
      • offered limited investment opportunities ,
        • Cant be solved by market alone
        • Require regulatory change (externalities)

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