More Green, More Money?

By Ronald Leung 18 December, 2019

How can companies build climate resilience & access to more capital at the same time? CWR's Leung expands

Corporate water management does not show any improvement - F&B and garment performed poorly while mining made improvement; also industrial conglomerates has the worst performance
Asia & Central/South America's regions delivered unsatisfactory performance - with HK, China & the Philippines being the bottom 3; this is worrying as HK & China are already water-stressed
Active investor engagement can advance companies' public disclosure on water-related risks plus increase their access to capital by promoting communication & trust - investor is more than financer!

With Greta Thunberg and climate emergency being named the person/word of the year by TIME and Oxford dictionary respectively, there is no doubt that 2019 is the year where climate change, and by default water security, have finally entered the global agenda. A long-waited progress given the dire consequences it will bring to our economy and lifestyle.

Yet, the global movement to combat climate change will not succeed without the participation of the private sector as companies are the major emitter of greenhouse gases (e.g. 100 companies are responsible for 71% of greenhouse gas (GHG) emissions). Unfortunately, recent studies show that firms, particularly in Asia and Central/South America, are still lagging in climate and water management.

Fortunately, these same studies revealed compelling evidence that active engagement of investors can help companies better manage risks and water stewardship as well as gaining better access to capital at the same time. Here are some key takeaways…

Little progress on water management globally

“Water Management And Stewardship: Benchmarking Corporate Practices” is a report co-authored by Sustainalytics (a leading independent ESG and corporate governance research, ratings and analytics firm), AP7 (the Seventh Swedish National Pension Fund) and CDP. This report is an update on the 2017 benchmarking exercise, examining water risk exposure and stewardship of 299 companies in three sectors – food and beverage (F&B), garment and mining through 8 KPIs.

Corporate water management does not appear to show any signs of improvement

The research warned that corporate water management does not appear to show any signs of improvement. Companies’ performances were particularly detrimental regarding water intensity (one of the KPIs) – 75% of them have consistently increased water use in the past 3 years or did not disclose any information at all.

F&B was the worst performer…

Among the two laggard sectors, F&B was the worst performer while garment slightly outperformed F&B and mining did significantly better. The report ranked sectors & subsectors performances as per the graph below:

In addition to sectoral findings above, the study discovered that industrial conglomerates has the worst or second-worst performance across all KPIs, showing that management of operations in multiple sectors dilutes their focus on water stewardship.

Want to know more about the garment sector? Check out Sustainable Fashion Today.

China, HK and Philippines lag in water management

The Sustainalytics’s study also analysed companies geographically. Those from Asia and Central/South America generally delivered unsatisfactory performance. As evident from the graph below, Mainland China and HK are the 2nd and 3rd worst performing regions, scoring lower than less developed regions such as Malaysia and Mexico.

Asia & Central/South America generally delivered unsatisfactory performance…

…with Mainland China & HK being the 2nd & 3rd worst performing regions

Surely HK and Mainland China should perform better especially when HK & GBA are already water-stressed. However, given the lack of make-sense climate strategies, both private and public sectors in HK and Mainland China are failing to manage their climate and water risks properly. So take action please!

Investors help advance climate-risk management

Fortunately, there is a silver lining. Besides observing significant progress within the garment sector, the research found evident impact from investor engagement.

65% companies showed improved performance in public disclosure on water-related risks

By selecting 17 companies to participate in a 2-year engagement with investors (AP7 & 5 investors), the study found that 65% of them showed improved performance in public disclosure on water-related risks compared to 2017, with 3 of them doing significantly better. In general, they outperformed the wider group.

The fact that investors participated in the study tells us that this is also what investors want – to obtain pertinent information from more communications with the management while securing their investment by helping companies to manage water risks.

More disclosures = more access to capital

If better water management and stewardship is not compelling enough to persuade companies to engage their investors more actively, a better access to capital will certainly do.

A recent research note “The Role of CDP Disclosure to Improve Access to Capital” by Millani compares the impact of climate-related disclosure through the voluntary CDP disclosure that requires much more information, and the mandatory but weakly enforced SEC (U.S. Securities and Exchange Commission) disclosure on a firm’s access to capital.

Firms disclosing through CDP rank better than average by 19% on their ability to access capital

Surveying over 5,000 America & Canada publicly listed firms, the study found that firms disclosing through CDP rank better than average by 19% on their ability to access capital while those opting for SEC-only disclosure are worse off 4%. These findings are still statistically significant after controlling for firm size, financial performance and ESG ratings.

To make sense of the above results, researchers also interviewed 21 investors and corporate sustainability professionals to find out why climate-related disclosures affect capital transactions. It subsequently found two reasons:

  1. It signalled to a subset of investors that the firm has a strong management team and is capable of managing the risks and opportunities of complex issues (i.e. climate change); and
  2. It enabled climate-related dialogue between investors and firms and established new channels for two parties to discuss other material issues

The above actions will broker trust between investors and firms

Most importantly, the above actions will effectively broker trust between investors and firms – with more confidence in companies’ management, investors will be willing to bet more on the company’s future.

So given the rising climate & water risks plus increasing interests in active engagement by investors, businesses and companies need to step up their efforts to decarbonise and build resilience. Therefore this Christmas, we wish for companies and HK to get off the “naughty” list and do better next year.

As for investors, you can do more than just financing – start by pushing companies to do more. We can all head to a more resilient future if only we dare to imagine a zero-carbon economy by 2050.

Further Reading

  • CWR’s report: “Are Asia’s Pension Funds Ready For Climate Change?” – Brief on imminent threats to asset owners’ portfolios from climate and water risks
  • 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
  • No-Sense Climate Strategies: From DSD To HSBC – Hong Kong’s shortsighted & unrealistic climate plans will leave key assets & infrastructure exposed that mean the government, companies, investors and the public are even more exposed. China Water Risk’s Dharisha Mirando & Debra Tan expand
  • More Bad Climate News This Christmas – Want to stay in blissful ignorance this festive season? If not, get your head out of the sand to receive a quick dose of “real news” on our climate future

More on Christmas

  • Sustainable Fashion Today: A Sweet But Short High – 2019 has been a busy year for sustainable fashion but with sweet but short highs as CWR’s Dawn McGregor highlights. Given fashion’s huge climate impact, McGregor laments the need for more strategic solutions
  • The Hidden Cost Of Our Christmas Cards & Crackers – Thinking of sending Christmas cards? Think again as our Yuanchao Xu expands on the hidden costs and argues that it’s time to go circular with our festive paper habits
  • Think Before You Bake! – Mince pies, gingerbread men, Christmas pudding… all delicious Christmas foods! Yet, did you know baking them is highly water-intensive? Our Dharisha Mirando ponders and asks us to rethink our recipes
  • Pets – Cute But Are They Green? – Did you know that the water footprint of a golden retriever’s diet is 80% that of a China diet? CWR’s dog lover Chien Tat Low explores the environmental impacts of rising pet ownership
Ronald Leung
Author: Ronald Leung
Hailing from Hong Kong, Ronald’s interest in geopolitical and economic issues led him to understand that climate change is one of the most pressing challenges of our times, yet politically, the topic lacked urgency and societal attention. This motivated him to join CWR upon graduation from the Master of Global Political Economy at The Chinese University of Hong Kong. He assists the team in research across various focus areas and sectors that CWR covers and works on the publication of CWR’s monthly newsletter. He also helps manage and expand our network of contributors plus keeps the content on our website updated. Prior to CWR, Ronald focused on market and competitor research in a property conglomerate and a travel tech start-up. Besides, he conducted country analysis and co-published geopolitical articles with his professor in CUHK. He hopes to use his experiences as a debate team captain in the University of Hong Kong (where he obtained a Bachelor in Accounting & Finance) to raise public awareness towards climate change in Hong Kong.
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