No-Sense Climate Strategies: From DSD To HSBC

By Dharisha Mirando, Debra Tan 20 September, 2019

Hear from CWR's Mirando & Tan on current shortsighted climate plans that leave key assets & infrastructure exposed

GBA is vulnerable to water & climate risks yet some of its cities are not building enough resilience; case in point is HK is still planning for 2°C future but globally we are on a path to 3°C-4°C
Casinos, airports, and ports could be exposed to extreme storm tides by as early as 2030; such risks could bring supply chain & economic disruptions plus lead to declining property values
Climate & water risks are still overlooked by financial sector; lack of action from the financial regulator and no-sense climate strategies threatens HK’s status as a global finance hub

CWR’s latest report “Thirsty and underwater: Rising risks in the Greater Bay Area” (CLSA-CWR GBA report) highlights how material water and climate change risks are for the Greater Bay Area’s (GBA) economies, people, businesses and investors. For a quick review of this report, click here. Even though there is plenty of publically available information about the detrimental impacts of water and climate change, it is clear the risks are not being dealt with.

It’s exasperating to see this continued lack of action, or wilful ignorance in no-sense climate strategies. Here are eight examples of these:

1. Hong Kong’s DSD building resilience to a “low-and-medium case” = planning to fail?

Hong Kong’s future is going to be “Hot, Thirsty, Sweaty & Wet” as we head to a future of 3°C-4°C. In a recent forum on “Climate Risk, Coastal Preparedness, Financial Implications for Hong Kong and Greater Bay Area” held in March 2019, panel discussions with officials revealed that the government is using the “low-and-medium case” in its new projects and development sites. This is definitely worrying as globally, we are now on a path to 3°C-4°C.

Even more worrying is that the levels used by the Drainage Services Department (DSD) for future drainage design planning to deal with coastal flooding. Its “mid-21st century (2041-2060)” projection is only 0.23m whereas the HKO’s low-case RCP2.6 projections are 0.23m-0.46m. Surely, the DSD should be preparing drainage to manage seawater levels at the high end of the range and not the low end? This discrepancy widens for 2081-2100 where the DSD is preparing for 0.49m when HKO is projecting a range of 0.41m-0.81m.

DSD is preparing drainage to manage seawater levels at the low end of HKO’s low case projections…

 

…which are a far outcry from the HKO’s RCP8.5 projections (e.g. 1.16m by 2100)

DSD’s current preparations are a far outcry from the HKO’s RCP8.5 projections (which we recommend to now be used as the new base given the current emissions path) which has a high of 1.16m by 2100. Hong Kong is clearly not prepared.

Also, if the DSD is so far off protecting against the HKO’s projections, you have to ask the question – is the rest of the Hong Kong government also in denial when it comes to preparing Hong Kong for climate impacts?

2. Blindsided! Vegas brands sunk by Macao storm tides?

The global nature of business means that companies may be more exposed than you think. Key Vegas staples make a significant percentage of their revenue in Macao as can be seen in the chart below. Every typhoon in the GBA thus has repercussions for global companies and stock exchanges. Such risks are briefly touched on in the Annual Reports of these companies, but no information is provided about adaptation plans – are they banking on the Macao government’s resilience actions?

All casinos of these brands could likely be affected by extreme storm tides by as early as 2030.

Analysis in “Thirsty and Underwater” shows all casinos of these brands could likely be affected by extreme storm tides by as early as 2030. Beware that plans for current tidal gates may not be high enough and more importantly they leave Cotai and the airport exposed.

3. HKIA might be safe, but if the roads and trains are not, can the airport still function?

Hong Kong International Airport (HKIA) is carrying out a number of initiatives to reduce its environmental footprint, whether it is carbon, waste or water and has been named the third greenest large airport in the Asia Pacific region by Airports Council International. It has also developed a system to prepare for and respond to potential weather disruptions leading to rapid response and recovery.

The +6.5m sea walls just protect the airport, not the transport links that feed HKIA…

…but by 2100 all will be affected by extreme storm tides of 7.81m

In addition, it is now building a sea wall to a height of +6.5m above sea-level which it believes will adequately protect the runways. However, the sea walls just protect the airport, not the transport links such as roads and railways that feed HKIA. These are not protected and could be flooded by as early as 2030. So even if the majority of the runway and terminal buildings are flood resilient, disruptions in transportation will still prohibit the airport from being fully operational. However, by 2100 even the runway and buildings will be affected according to the estimates in the CLSA-CWR GBA report.

The risks are being dealt with at an asset level instead of taking into account all the linkages. Therefore, there must be multi-stakeholder dialogue, which includes the government to ensure cohesive adaptation plans. This should include the Mainland as much of the roads are for cross border transportation. Such disruptions could also trigger disruptions for “just in time” supply chains.

As can be seen from the CWR base case scenario for 2100 – is a 6.5m sea wall enough? Singapore’s Prime Minister has announced that critical infrastructure such as Changi Airport’s new Terminal 5 must be built 5 meters above sea level because as a “low-lying island, Singapore is especially vulnerable to one grave threat, and that is rising sea levels”. Unlike Singapore, Hong Kong is in the path of typhoons so 6.5m won’t be enough. Does the type of action being taken also matter, with Singapore raising its airport runways and Hong Kong building a sea wall?

4. Logistics disruptions can trigger cascading risks across supply chains yet still not recognised

Some of the world’s busiest container ports are in the GBA, with Shenzhen, Hong Kong and Guangzhou in the top 10. As ports are extremely vulnerable to rising sea levels and storm surges from typhoons, they need to adapt as these risks are only getting worse with climate change. Hong Kong’s Civil Engineering and Development Department (CEDD) has recognised this and commissioned a consultant to undertake a feasibility study; however, no detail has been provided if CEDD is planning for a 2°C/3°C/4°C future.

If HPH is not resilient, then neither is HK & Shenzhen as major supply chains could be affected

Hutchison Port Holdings Trust (HPH) manages more than half of all volume moved through Hong Kong’s ports and almost half in Shenzhen. The company discloses very little on its actions to tackle these risks and is vulnerable to extreme storm tides according to the CLSA-CWR GBA report. Furthermore, as the GBA economy is highly reliant on these ports (trade makes up 22% of Hong Kong’s GDP), if HPH is not resilient then neither is Hong Kong and Shenzhen as major supply chains could be affected – please see the report for more detail on HPH.

This is not just an issue for Hong Kong and Shenzhen, but also to the rest of Asia as many economies have export-led growth models. Find out more here.

5. Tycoons, delay no more; ever declining property value?

Hong Kong has one of the most valuable real estate markets in the world. According to CBRE Hong Kong continues to be the most expensive market for leasing office space and has the “highest average house price at US$1,235,000 as well as the highest average prime property price at US$6,873,000”.

Property sector accounts for >26% of HK’s GDP yet much of them are highly vulnerable to climate change

The property sector in total also makes up more than 26% of Hong Kong’s GDP. However, much of this expensive and lucrative real estate can be found close to sea level, making them highly vulnerable to climate change.

This begs the question: should they be revalued if companies and governments are not doing enough to protect assets and livelihoods? The same question can be applied for all vulnerable investments, not just real estate.

So tycoons start assessing your portfolio’s exposure and ensure it is resilient. If not, you will have to write down the value of these assets. If you don’t know how to do this call us; we’ve already done this for property companies.

6. It’s still all about carbon, not water – a look at HSBC

The financial sector continues to overlook water and climate risks, which are financially material. Take HSBC as an example, it now has one page on TCFD in its 2018 Annual Report and climate related risks are in its “Top and emerging risks”. Physical risks are mentioned but it does not disclose how exposed the loan book is to these risks. Instead, the focus is on carbon emissions; the bank identifies and quantifies its loan exposure to six sectors that are vulnerable to such carbon transition risks.

Physical risks are sector agnostic and are thus likely to be much larger than carbon transition risks. Our analysis shows that even the HSBC head office in Hong Kong could be affected by extreme storm tides by as early as 2030; as will most of its mortgage loan book in Hong Kong – see infographic on upper right – click on it to expand. Therefore viewing and disclosing climate risks solely along sector lines will under-estimate risks embedded in the loan book; causing both management and investors to be blindsided as these risks continue to escalate.

7. Exchanges and companies still focus on disclosure compliance/green certificates instead of understanding the actual risks

We need to move beyond considering ESG disclosure as being solely about how companies impact the environment through carbon emissions etc. and start considering the impacts that the environment will have on company operations. These are real risks and disruptions that are happening today yet this lack of disclosure continues to lead to real blindspots.

Cos. should move beyond ESG disclosure on carbon emission & start thinking the environmental impacts on businesses

Let’s take green certificates for example because having multiple certificates does not mean a company/asset is safe; climate and water risks don’t work that way unfortunately. Hongkong Land (HKL) is a good example as it has been awarded a number of different awards and certificates for its efforts in sustainability. These include its Central Hong Kong portfolio, which received the “Carbon Less” Certificate under the Hong Kong Awards for Environmental Excellence.

In addition, it is reducing its water use with a 4.6% reduction in water consumption over 2017 in Singapore and Hong Kong. Although these are commendable and the least it should do to help accelerate decarbonisation, it is still exposed to clustered risks. One future typhoon can adversely affect the majority of its Hong Kong portfolio by as early as 2030. Is it disclosing what is being done to ensure these properties are safe?

Both HKEX and SGX currently regulate sustainability reporting on a “comply or explain” basis, which sets out a “number of ‘principles’ followed by code provisions and recommended best practices” to which listed companies can either comply and if they do not, can explain why. SGX explains that listed companies must identify and explain material ESG factors because “what is material in sustainability reporting would also be considered material in financial terms, if not in the immediate period, then over time that are material”.

Potential risks from water & climate change are material to all cos. but they are not reporting this…

…even HKEX is not complying with its own listing rules

However, even though potential risks from water and climate change are material to the bottom line of all companies they are not reporting this, yet currently they face no repercussions. The CLSA-CWR GBA report shows that even the HKEX is not complying with its own listing rules. So should we be shifting to mandatory disclosure on material ESG issues with sufficient enforcement to ensure company management and boards take these issues seriously? Only then will investors be better informed about how potentially risky their investments are. Currently it appears that they are all blind to such risks.

The regulations on this reporting might be getting stronger; HKEX carried out a consultation that ended in July 2019 on shifting towards mandatory disclosure on ESG issues, including the impacts of climate change. In addition, The China Securities Regulatory Commission is planning to require all listed companies and bond issuers in China to disclose environmental disclosure by 2020.

8. Lack of action from the financial regulator and no-sense climate strategies threatens Hong Kong’s status as a global finance hub

Hong Kong continues to be one of the most important financial centres in the world and was ranked among the top 3 global financial hubs, following New York and London, according to the 25th edition of the Global Financial Centres Index. With the expansion of the GBA and China’s Belt and Road Initiative (BRI), this is set to grow.

However, Hong Kong and the rest of the GBA are particularly vulnerable to water and climate threats. Yet very little action is being taken by the financial sector to build resilience even though not only will loan books and investment portfolios see devaluations, but the physical locations of banks, insurers and investment funds will face the impacts of climate change.

In the report we co-authored with Manulife Asset Management and the Asia Investor Group on Climate Change earlier this year we already warned that if stocks are not resilient, pensioners will likely feel a double whammy impact from their flooded homes and a loss of savings. Thus, the report urged the financial sector to start incorporating water and climate risks into its operations to ensure its resilience and long term success.

If stocks are not resilient, pensioners will likely feel a double whammy impact from their flooded homes & a loss of savings

It’s not all risks, opportunities also lie ahead with green finance, as Dr Ma Jun commented at the launch of the Hong Kong Green Finance Association (HKGFA) in 2018, “Green finance has become the major trend in the development of the global financial sector”, and Hong Kong is in a unique position to be at the leading edge of global developments in green finance.

However, Hong Kong’s financial sector needs to take more action to adapt to the risks and take advantage of the array of potential opportunities. If not, it will be left behind as other financial centres take the lead.

Clearly there is much at stake

It’s time to stop making no-sense climate strategies! Water needs to be embedded into all decision making and planning, not just carbon. More investment into adaptation to deal with impacts that are already baked-in is a start. Indeed, a new report by the Global Commission on Adaptation finds that “investing $1.8 trillion globally in five areas from 2020 to 2030 could generate $7.1 trillion in total net benefits”. Now, that’s a good investment return!

If you are not ready to do that, then map your water and climate exposure. Whether you work within government, business or finance, it’s hard to take action to reduce emissions and adapt until you see just how much is at risk. If you don’t know how to do this, call us! And let’s start making climate strategies that actually makes sense!


Further Reading

  • Too Big To Fail! Protect At All Costs – Multiple policy innovations have been unleashed to protect the Yangtze River as it is too big to fail – corporates and investors need to get on top of the YREB to avoid regulatory shocks
  • Yangtze River: Actions Toward Ecological Compensation – With RMB5bn already allocated to supporting ecological compensation along the Yangtze River, what’s next? Chinese Academy for Environmental Planning’s Dr Zhanfeng Dong highlights what needs improving
  • Capital Two Zones: Protecting Beijing’s Upper Watershed – The Capital Two Zones plan is set to protect Zhangjiakou, upstream of water stressed Beijing & host of the 2022 Winter Olympics – how will this impact industry and development? China Water Risk’s Yuanchao Xu explores
  • Blue City Water Quality Index – Building on their successful Blue Map mobile app, IPE takes it up another notch with the new Blue City Water Quality Map. Hear from their Shen Sunan on which cities are leading and which are lagging
  • Thirsty And Underwater: Rising Risks In Greater Bay Area – How will water & climate risks, including rising sea levels & droughts, threaten the already water-stressed Greater Bay Area (GBA)? CWR’s Tan & Mirando explain in their latest CLSA report and highlight companies’ failure in climate risk disclosures
  • Are Asia’s Savings Exposed To Water & Climate Risks? – Asian asset owners have portfolios skewed towards domestic markets that will bear the brunt of climate change. Find out about these risks and what to do as our Dharisha Mirando shares key takeaways from the new report China Water Risk co-authored with Manulife Asset Management & the Asia Investor Group on Climate Change
  • 3°C Transition Risks: It’s H2O, Not Just CO2 – 3°C is happening. This means we need to invest so we are ready for longer droughts, more intense & frequent floods, more damaging typhoons, as well as changing monsoon patterns and river flows. China Water Risk’s Dharisha Mirando & Debra Tan warns.
  • Banking On Granularity To Reduce Climate Blindspots – Climate & water risks are locational but most financial institutions are flying blind, not having mapped their assets. Until they do, they & our savings are exposed. CWR’s Dharisha Mirando expands
  • Confronting Storms & Climate Risk In HK – Typhoons Hato and Mangkhut have wreaked havoc in the Greater Bay Area but Dr. Faith Chan from the University of Nottingham Ningbo believes these climate risks can be confronted, with Hong Kong leading the way
  • Have Investors Incorporated Climate Risks Into Portfolios? – Hear from WWF HK’s Jean-Marc Champagne & Sam Hilton on their new report that introduces climate change & financial risks to institutional investors, focusing APAC & the energy sector

Dharisha Mirando
Author: Dharisha Mirando
Dharisha Mirando hails from the finance industry and joined CWR as she believes that climate and water factors are downplayed by the sector despite being significant investment risks. To tackle this, her ambition is to help build consensus, bridge the gap between finance and science, and engage with investors to incorporate these risks into their due diligence and portfolio management. This could in turn lead to innovative Green Finance instruments becoming more prevalent.She has already made strong headway as the lead author of a recently published report with Manulife Asset Management and the Asia Investor Group on Climate change, which highlights the imminent threats to Asian asset owners' portfolios from climate and water risks. Dharisha has also undertaken a number of speaking engagements on these pressing issues at investor and insurance conferences.Prior to joining CWR, Dharisha worked for a long-only public equities fund. She has also worked in the impact investment space in London and Singapore where she provided technical assistance to social enterprises, helped them raise equity investments, and managed a debt portfolio.
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Debra Tan
Author: Debra Tan
Debra heads the CWR team and has steered the CWR brand from idea to a leader in the water risk conversation globally. Reports she has written for and with financial institutions analyzing the impact of water risks on the Power, Mining, Agricultural and Textiles industries have been considered groundbreaking and instrumental in understanding not just China’s but future global water challenges. One of these led the fashion industry to nominate CWR as a finalist for the Global Leadership Awards in Sustainable Apparel; another is helping to build consensus toward water risk valuation. Debra is a prolific speaker on water risk delivering keynotes, participating in panel discussions at water prize seminars, numerous investor & industry conferences as well as G2G and academic forums. Before venturing into “water”, she worked in finance, spending over a decade as a chartered accountant and investment banker specializing in M&A and strategic advisory. Debra left banking to pursue her interest in photography and also ran and organized philanthropic and luxury holidays for a small but global private members travel network She has lived and worked in Beijing, HK, KL, London, New York and Singapore and spends her spare time exploring glaciers in Asia.
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