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The Challenge of Water Disclosure in China

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Lucy Carmody, Executive Director - Responsible Research Pte Ltd. - Singapore …

Lucy Carmody, Executive Director - Responsible Research Pte Ltd. - Singapore

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  • 1. The Challenge of
    Water Disclosure in China
    May 2010
  • 2. About Us
    Asian based specialist ESG research for global institutional investors
    Founders have collectively over 70 years experience in Asian supply chains, SRI, CSR,
    investment banking, environmental compliance and human rights law
    Focus on MSCI Asia ex Japan - bespoke, deep sector and thematic approach
    Client base is global: socially responsible, ethical and mainstream
    Focus on opportunities and solutions, not just risk from ESG
    Monthly analysts briefings in HK and Singapore on market relevant sectors and themes
    Asian Sustainability Rating® benchmarking 500 Asian companies on disclosure
    on select material ESG criteria
    RepRisk® – tool to screen portfolios for reputational risk
    Founders:
    Lucy Carmody, MA, Exec Director Responsible Research. Consultant to IFC,
    Founder AsiaIRP, 11yrs Asian investment Banking then CSR Practice , Advisor Impact Exchange Asia
    Melissa Brown, MBA, MD of IDFC, HKSE Listing Committee, Formerly Exec Director ASrIA
    15 yrs Asian Investment Banking, Author ‘Carbon Disclosure & Climate Change Trends Asia’
    Richard Welford, PhD, Professor, HK University. Chairman of CSR Asia, Publisher.
    20 yrs environmental management and sustainability issues
    Stephen Frost, PhD, Asst. Prof. City Uni, HK. Develops CSR modules for Chinese MBA programs.
    15 yrs Asian CSR, supply chains, workplace standards, factory training, stakeholder dialogue..
    Erin Lyon, BA Exec Director CSR Asia, Lecturer SMU on Business Ethics, CSR, CG
    5 yrs Asian CSR consultancy, Ex Solicitor, Freshfields, specialised in CSR “soft” law.
    Melissa Ong, MA Head of ‘Public Roles of the Private Sector Program’, LKYSPP NUS
  • 3. Upcoming Reports: Planned Coverage 2010-11
  • 4. Water in China
    Funded by ADM Capital Foundation
    for thelaunch of the Asia Water Project
    Sectors covered:
    • Household Water and Waste
    • 5. Agriculture
    • 6. Drinking and Bottled Water
    • 7. Beverages *
    • 8. Banking
    • 9. Basic Materials and Construction
    • 10. Hospitality
    • 11. Hydroelectric power
    • 12. Metals and Mining *
    • 13. Paper and Forest Products
    • 14. Textiles, Footwear and Apparel
  • Physical Challenges
    Shortage of surface water has led to nationwide over-exploitation of ground water
    Regional variations in precipitation, population,
    water usage, causes of pollution, water scarcity, water quality (ground and surface)
    Spiraling waste water production
    Poor quality lake ecosystems
    Sea levels rising: State Oceanic Administration PR Jan 2010 ‘Concerns’ for safety of coastal residents
    Late 2009 sea levels at 30 year highs
    Ave. rise 2.6mm p.a. vs. 1.7mm globally
    130 mm p.a. possible for next 30 yrs
    Extreme weather
    storm tides
    coastal erosion
    seawater encroachment
    soil salinization
    Must improve monitoring systems
    Planning must factor in rise in sea level
    Map: Treehugger.com from V.2 NASA Shuttle Radar Topography Mission,
    News source: China Daily, January 2010
    Source: World Trade Press
  • 15. Water Shortages in China: The Facts
    China has around 19.5% of global population but only 7% of its freshwater resources
    Of 660 cities, 65% currently suffer from water shortages
    110 have ‘severe’ water shortages
    By 2015 there will be 110 cities of over 1 million people
    By 2025 more than 220 cities of over 1 million.
    Main challenges:
    Changing lifestyles - leisure, bathing, car washes, golf
    Changing diets - huge demand for drinks, beef and wheat.
    15,000 litres water  1kg beef with intensively reared cattle
    3,300 litres  1kg of rice
    Water efficiency in China is poor compared to G20 nations:
    4X as much water required per US$ of GDP created
    Leakages - China's water supply system leaks an est.10 billion m3 (2005) more than 20% of the total processed
    Source: AP
  • 16. The 2010 Drought
    9 million people face a grain and water shortage due to crop
    failure on 3.1m ha of arable land
    Centres on Yunnan in SE; 125 of 129 counties affected
    RMB20bn agricultural production lost already
    Spring plantings of rice, tobacco and corn failed to germinate
    0.5m ha of natural reserves affected – wildlife and wetland
    In one county an estimated 70% of the pine trees have died
    Rural rice price up from RMB3/kg in February to RMB5 now
    Could be El Nino effect but also:
    Forest cover has been reduced substantially in many areas
    e.g. one prefecture studied in 2003 saw a drop to 3.6% of
    its 1976 cover
    Rubber and eucalyptus now ubiquitous - very water intensive
    Natural lakes polluted and unusable, reservoirs old and poor
    Affecting energy production – more to come from coal as hydro
    dries up
    Source: National Meteorological Center of China (Yunnan-Guizhou Plateau driest in March)
  • 17. Water Pollution in China: The Facts
    50% of cities have polluted groundwater
    90% of aquifers under Northern cities heavily polluted
    30%+ of land mass is affected by acid rain
    70% of rivers and lakes are ‘significantly contaminated’
    75%+ of urban rivers are ‘unsuitable for drinking or fishing’
    30% of river water regarded as unfit even for agricultural or industrial use
    Recent estimates for China:
    700m drink water contaminated with animal and human waste
    190m fall sick due to water pollution p.a.
    60,000 premature deaths p.a. from poor water quality
  • 18. New ‘National Pollution Census’
    Released Feb 2010, to be repeated 2020
    Reveals that water pollution was more than twice as bad in 2007 as previous official figures
    Big step towards greater transparency
    Census took 2 years, 570,000 contributors, 1.1bn data points, 6m pollution sources
    Previously omitted agricultural effluents (fertilizer and pesticides) and fluids from landfill.
    Main concern is level of Chemical Oxygen Demand (COD) – now 30.3mt vs. 13.8mt in 2007
    Ma Jun, director IPE says lakes can handle only around 7.4mt
    Seems agricultural effluents may be even more critical than industrial waste
    Much greater level of data breakdown than before: specifically levels of poisonous discharge of heavy metals - arsenic, mercury, lead
    Zhugao, SW Sichuan Feb 2010.
    Source: NY Times, Feb 2010
    Peter Parks — AFP/Getty Images
  • 19. HK listed companies - poor pollution records in China
    Report on 175 companies = 750 environmental violations from 2004-2010
    Encourages HKEx to require companies to:
    notify the exchange on environmental violations and post on their website
    indicate what follow-up mitigation measures taken
    provide updated monitoring data
    Serial environmental violators:
    Sinopec Guangzhou - US$2.9m fine in 2008
    Datang International - over 20 violations
    China Resources subsidiary in Nantong - factory closing cost RMB300,000/day
    Tsingtao Brewery –solids discharge 45X worse than standards, 36X for phosphates
    Zijin (gold) - many violations regarding discharging toxic waste in local waters
    Shenhua Energy (coal mines) – RMB1m fine in 2008 and in 2009
    Positives:
    Prospectus already contain much info on material violations
    HKEx - CSR code for listed companies in 2011
    Working on proposals to update the Listing Rules for mining companies
    Better disclosure from Tingyi, Want Want, Maanshan Iron & Steel, Tsingtao
  • 20. Water: Fragmented Responsibilities
    The State Council of the PRC
    The highest governmental power
    Holder of the overall water rights
     
    Ministry of Water Resources (MWR)
    A Department of the State Council
    Responsible for water administration
    Controls the massive state water budget
    Leading agency for:
    water-related policies
    development strategies and plans
    water conservation
    demand management policies
     
    Ministry of Environmental Protection (MEP)
    Succeeded the State Environmental Protection
    Agency (SEPA) in March 2008
    Shares responsibilities for water scarcity issues with
    MWR.
    Three new departments created in 2008
    Department for Control of Pollutant Discharge
    Environment Monitoring Department
    Department of Publicity and Education
    Other Ministries with responsibilities in water:
    The Ministry of Housing and Urban-Rural Development (formerly Construction Ministry)
    The Ministry of Agriculture – use and run-off
    The Ministry of Communication - waterways
    The Ministry of Public Health - sanitation
     
    Other Agencies involved in Water Issues
    National Development and Reform Commission (NDRC)
    The NDRC Bureau of Energy
    The State Forest Bureau (SFB)
    The China Guodian Corporation (for Hydro-electric and other Power Projects)
    The National Tourism Administration
    State Flood Control and Drought Relief
    Decision Making for Water Price Hikes
    Source: Syntao
    Elevation to ministerial status of SEPA suggests an increasing emphasis from Beijing and a perceived need to coordinate efforts to control major air and water pollutants based on more thorough research and monitoring.
  • 21. Water price and inflation
    Cities short of water, yet it is still heavily subsidized
    Inflation ‘under control’ but still a major concern
    April CPI up to 2.8% YOY
    CPI 34% weighted to food – drought having an impact on prices
    Living expenses (including water, rent, electricity) 13.6% weighted
    NDRC signals it will push through water price increases by the fall
    Price rises in last year:
    June - Shanghai residential water prices hiked 25% (1st since 2003)
    Oct - “increases could become a ‘powder keg’ for anti-government unrest’ Southern Daily
    Nov - Beijing, commercial water prices raised nearly 50%
    Dec - Beijing residential prices increased 8% (1st rise since 2004) ⌘
    Dec - municipal government adds that prices will rise 24% by 2013
    Dec – Harbin man throws a bottle of mineral water at a hearing
    Jan 2010 - central-government defends recent hearings
    to cynical public and press
    ⌘ 80% of the city’s households use under 10m3/month
    which means additional US$1.32 extra/monthly
    source: Economist, Jan 2010
  • 22. What drives better reporting in China?
    Investors + business + civil society challenge water pollution issues  multi-lateral engagement of government and industry. e.g. The BSR Sustainable Water Group: textiles in Pearl River Delta
    Water shortages named as factor in reduced growth forecasts 
    trade-offs between clean water and growth. Water shortages  direct economic losses of US$35bn p.a. (2.5x average annual losses due to floods)
    3. Industry collaborations face up to challenges as size of fines increase.
    Chinese Pulp and Paper Industry - Sustainable Development Forum
    China Banking Association CSR guidelines Jan 2009
    4. Citizens given more scope to challenge pollution
    local protests against older polluting factories
    e.g. Aug 2009 Fujian protest against tanneries. 10,000 locals vs. 2,000 riot police
    People have rising expectations of the right to clean water.
    Increasing rights to obtain environmental info through MEP
    Local protest in Fujian province Aug 2009
  • 23. What drives better reporting in China?
    5. Top-down reforms + grass roots activism  strengthened regulation
    MEP focused on sophisticated financial regulations and macro level policies
    e.g. screening companies pre-IPO, banks ‘green’ lines of credit.
    Environmental Information Disclosure Regulations (May 2008) to become
    mandatory over time - Placing greater responsibility for the environment with various levels of the administration
     6. Companies more conscious of issues, efficiency initiatives and technologiesCompanies with high ecological and community impacts (and larger, more international companies) will report first and start to
    Measure, and therefore manage, water issues
    Manage supply chains and end-user water use and discharge
    Produce more environmental performance data
    7. Investors will require better data from companies and government
    Company-level water performance data rarely available.
    New global initiatives e.g. CDP, AWP, GRI
    Water foot-printing services will be in high demand
  • 24. The Global Reporting Initiative
    GRI China should be open by summer 2010 and hoping
    to work through partnerships with:
    government agencies
    research institutes
    financial institutions
    companies
    GRI Conference taking place now in Europe
    Many sector supplements being developed
    Updates to Guidelines will be issued by early 2011
    Materials are posted for public comment
    State-owned Assets Supervision and Administration Commission (SACAC)
    No formal policy on use of GRI
    Many State Owned Enterprises use it
    SOEs to have a CSR department by 2012
    all supposed to report by 2012
    CSR is handled by their research department
    Bank of China reporting with GRI this year.
    Investor webinar in June with Chinese Real Estate
  • 25. CDP Water Disclosure Project
    Aim: to encourage transparency in water management and
    provide investors with comprehensive assessment of water risks
    • Independent global non-profit organization based in the UK
    • 26. holds the largest global database of primary corporate climate change info
    • 27. Used by companies to measure and disclose GHG emissions and climate change strategies 
    • 28. Saw that much of the impact of climate change is felt through water
    • 29. Lead sponsors: Norges Bank IM and Molson Coors
    • 30. Support from 140 institutional investors US$16 trillion AUM
    • 31. In April requested info from 300 of the world’s largest water users: e.g. Autos, Construction, Utilities, FMCGs, F&B, Mining, Oil & Gas, Pharma
    • 32. Deadline for responding is 31 July 2010. Results published in Q4 2010
    Ford, L’Oreal, Molson Coors, PepsiCo already committed
  • 33. CDP Water Disclosure Project:Greater Chinese Companies asked to report 2010
  • 34. Questions from CDP Water Questionnaire
    Simplified from CDP Water Questionnaire 2010
  • 35. The Asia Water Project
    A collaborative research project for investors and business funded by ADM Capital Foundation www.asiawaterproject.org
    Provides data and information on the growing water crisis
    Promotes dialogue to encourage better water management
    • Highlight research – e.g. excellent report from CLSA on Water Pricing in China
    Network of water experts and knowledge – includes:
    ASRIA, Business and Human Rights, Business for Social Responsibility, CSR Asia, CDP Water Disclosure, International Rivers, Syntao, UNEPFI, WRI, Institute of Public and Environmental Affairs
    Coming up:
    Report on Water Reporting by Water intensive companies with UBS
    Collaboration with Future500 on fostering dialogue with IT industry to address water risks
  • 36. MNC Best Water Practices in China
    Nike
    uses web-based reporting tool for supply chain to self-report
    The Gap
    strong focus on water usage and effluents, especially in denim processing
    Wal-Mart
    supply chain engagement to reduce energy and water use but also margin pressure from purchasing
    Unilever
    Anhui plant was found to be discharging banned chemicals in 2007 so COD monitors installed. Fined US$22,000. Ma Jun (IPE) now on their sustainability panel
    Coca-Cola
    partnered with WWF on global water conservation project.
    Sugarcane requires 180 litres of water to produce the sugar in 1 litre of Coke
    Nestle
    promoting the use of water saving technologies in the supply chain.
    Developing internal water stress index
  • 37. Emerging Water Management in China
    China Cosco
    ships equipped with desalination devices
    report on total water usage
    China Shenhua Energy
    high impact: coal, rail, ports, power
    ‘best in class’ water reporting for coal mining?
    use desalinated water to remove dust from vessels
    F&C in UK conducts active engagement with China Shenhua
    Kweichow Moutai Distillery
    Chishui River level V pollution
    investing US$150m in environmental protection
    Shanghai Jin Jiang Hotels
    water efficient equipment and recycling rainwater
    Zijin Mining
    mining gold and non-ferrous metals
    bought a stake in a water supply company in Fujian near HQ
  • 38. The Future for Water in China
    Government responses
    Increased pricing
    Incentives and initiatives
    Water Demand Management
    Green Building Codes
    Investment in sewage treatment and water purification
    Improved public participation
    Integrated Water Resource Management
    Improved oversight of EIA process
    Evapo-transpiration quotas
    Non Government Responses
    • Asia Water Project
    • 39. IPE mapping pollution
    • 40. Companies sharing e.g. Swire
    • 41. Investor engagement
    • 42. Investor interest in Chinese water sector
    • 43. ADB & IFC support projects
    • 44. Banks ‘green’ lending
    • 45. Public Private Partnerships
    • 46. New water services and technologies
    • 47. Desalination projects linked to renewable energy
  • Thank You
    info@responsibleresearch.com
    Villagers queue for water in Guandong province,
    Source: Getty Images

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