The Challenge of Water Disclosure in China


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

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The Challenge of Water Disclosure in China

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