On a recent trip to Europe I had the pleasure of softly landing in an Airbus380 at London’s Heathrow airport, racing through France’s highways in a comfortable Peugeot, and enjoying the scenery along the Danube by riding the iconic Nr.2 tramway. The smooth landing, the safe racing, and the comfortable riding were all assured by… the high-quality rubber tires that airplanes, cars, and trams use. Rubber is everywhere. But that also made me wonder: where does all of this rubber come from? Who are the main suppliers and producers? And that made me travel from… highway to hell.

1. From highway to hell: the ESG link
between rubber and Thai forests
Petra Daroczi
ESG Ambassador
Thomson Reuters, Singapore
July 2018
On a recent trip to Europe I had the pleasure of softly landing in an Airbus380 at London’s Heathrow airport, racing through
France’s highways in a comfortable Peugeot, and enjoying the scenery along the Danube by riding the iconic Nr.2 tramway. The
smooth landing, the safe racing, and the comfortable riding were all assured by… the high-quality rubber tires that airplanes,
cars, and trams use. Rubber is everywhere.
But that also made me wonder: where does all of this rubber come from? Who are the main suppliers and producers? And that
made me travel from… highway to hell.
THE LANDSCAPE
When you think of rubber, you probably think of tires, erasers, and elastic bands. However, rubber is actually found in
thousands of products, including swimming suits, medical gloves, adhesives, and so on. Natural rubber is produced from trees
by cutting into the bark and extracting a milky, white product called latex. The largest producers of natural rubber are found in
South-East Asian countries, with Thailand being the biggest grower. About 1.7m people (out of a population of 69m) are thought
to be involved in growing the plantations, manually extracting latex, and selling it to brokers who then ship the product to
factories for further processing. The end product is eventually used by car manufacturers – who consume 70% of the world’s
natural rubber output – to produce tires that end up on our cars and airplanes.
Thailand frequently makes the headlines due to the floods and the heavy, unpredictable monsoon rainfalls it experiences. A
devastating storm completely inundated farmland and industrial areas in 2011, causing disruption in the global supply chain for
auto and tire makers. A direct consequence of such climate issues is the inundation of rubber plantations, which not only hurt
the rubber plantations’ yield, but also affect the livelihood of those 1.7m smallhold farmers. From the industry’s point of view, the
ever growing appetite for rubber to produce tires for cars and airplanes, especially as China’s car sales are exploding, such a
disruption to the supply chain can impact the bottom line severely.
FROM HIGHWAY…
Using the Thomson Reuters industry classification scheme (TRBC) and the INDUSTRY app in Eikon, it looks like the “tires and
rubber products” industry globally is in a good shape: healthy P/E, nice margins, ROE above around 10%, and not too debt
laden.

2. FROM HIGHWAY TO HELL: THE ESG LINK BETWEEN RUBBER AND THAI FORESTS
However, as the industry relies so heavily on a few countries producing their main raw material, rubber, we want to understand
what the repercussions of ESG-related issues, such as climate change, are on company performance. Using the Eikon cross-
content search tool, powered by artificial intelligence, we can spot that Goodyear did indeed suffer from the flooding in Thailand
in 2011. This is mentioned in their annual report under “significant items”. The company pointed out that it was forced to close
some factories in Thailand and that they expected “flood-related costs to impact Asia’s results adversely” well into Q2 2012.
Digging into this further, we uncover a snippet from a transcript where a sell-side analyst squeezed the CFO to discuss the
material impact of flooding. The losses exceeded $ 20m.

3. FROM HIGHWAY TO HELL: THE ESG LINK BETWEEN RUBBER AND THAI FORESTS
TO HELL
One may think that bad events are inevitable, and that every company will face adversity once in a while. However, the issue
here is clear: these adverse events - flooding and natural disasters - are not going away for the rubber and tire industries, simply
because they are human-induced, caused by climate change, deforestation, and unsustainable environmental practices. As
rubber cultivation expands in Thailand, more forests disappear, and the use of chemicals and pesticides increases, causing
pollution.
Climate change will only make farming condition worse, translating into clear, financial impact for businesses, and eventually for
us, highway-riding customers.
The only road from hell back to highway might be by jumping on the ESG bandwagon: taking into consideration material ESG
issues in sound financial analysis, and enforcing your investors & suppliers to implement environmentally sound practices in all
layers of doing business.