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Mark bytheway 

Mark bytheway

 

 
 
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Published:  January 29, 2012
 
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Slide 1: Issues for ESG Research Water An Australian Perspective Presentation to TBLI 2010 Workshop 8 – The Future Of ESG Research November, 2010 Mark Bytheway Sustainable Investment Research Institute (SIRIS) www.siris.com.au
Slide 2: Presentation Outline • • Introduction and context ESG Research Issues – Structural – Investment proposition • supply & demand models • Water Investment Issues – Structural • Social & economic issues – Use – Ownership (pricing) » Price cf cost – Scarcity and access cf cost – Regulation/Disclosure – Investment Proposition •   Summary Adapted from SIRIS research Report; “Water Investment Risks and Opportunities in Asia”. Photos courtesy of ”Beyond Reasonable Drought”
Slide 3: Context & Perspective SIRIS • Dedicated, Asian regional specialised investment research and advisory group – Provides sustainable sustainability and governance research across > 1100 companies across Asian-Pac region – 15 analysts – Established in 2000 – Independent – Melbourne based – www.siris.com.au
Slide 4: Context and Perspective…
Slide 5: ESG Research Issues • ESG research hitherto largely followed a dichotomised model; • i.e separation of ESG from other (mainstream) investment research – i.e ESG research & ESG researchers • In part, a function of early demand;  specific SRI and ethical funds    screening and ratings processes (SRI and ethics) Created specific demand for SRI data and info Limited overlap with mainstream investment research production • More recently seen move to integrate ESG analysis into investment process and limited demand for new SRI/ethical funds – facilitated by initiatives such as PRI and Enhanced Analytics Initiative
Slide 6: ESG Research Demand “Map” Values seeking investing Sustainability Investing • Notion of risks/ opportunities • Generally low priority on negative screening • Strong positive screen perspective Thematic Investing • Changing regs and consumer prefs generating new products services and asset lasses • Renewable energy/clean tech/leisure Socially Responsive Investing Time • Notion of a responsible company generally includes: ­ Negative screening ­ Positive screening Values enhancing investing PV Engagement Ethical Investing • Values based investing • Negative preclusive screening ­ Tobacco / alcohol ­ Gambling etc. Traditional Investment Process Strict Financial Analysis Values V Return Trade Off
Slide 7: ESG Research Issues Supply • In response, have seen development of separate/boutique ESG research providers e.g. EIRIS, KLD etc. – Focus had been on definition compliance/fulfillment eg ethical, socially responsible – More recently, rising demand for research focus on investment risk and opportunity i.e “integration into mainstream investment” – Rise in integration of ESG seen heightened interest from mainstream investment research and data providers; • Thompson Reuters, Bloomberg, MSCI etc • GS, Citi, Deutche, ML etc
Slide 8: ESG Research Issues • Implications of changes – ESG research increasingly subject to same issues as non-ESG investment research  Investment imperative/pressure on research to demonstrate investment insight/alpha (cf compliance) i.e to provide a discrete value  Fee pressure
Slide 9: ESG Research Issues Investment imperative •From an investment risk and opportunity, perspective depends upon several issues; • Certainty, measurability & monetisation – incl ease of monetisation of risks, including ‘internalisation/ privatising externalities’ • Materiality • Time horizon – issue of traditional investment horizon (shorttermism • ESG risks and opps often structural and invariably longer term, less certain and difficult to $ quantify – e.g. climate change/carbon risk/water
Slide 10: ESG Research Issues Implications of Changes cont. • Fees – moving away from subscription based fees, which reflected specific fund/product relationships  fees for investment analytical contribution  Moving towards traditional investment research and financial data fee models Issues: – Service bundling/cross subsidisation(i.e broker and financial data providers)  Traditional investment research fee issues  marginal revenue allocation  incremental fee for incremental coverage
Slide 11: ESG Research Issues • And finally… – The social/sustainability merits accruing from ESG research? • Is it reasonable for investors to expect some demonstrable env./social/governance benefit?  How is ESG facilitating ESG benefit(s)?  What are these benefits?  What is the value of these benefits?
Slide 12: Water • Why water? – Reflects some of the issues and systemic challenges for ESG research (and indeed investment research more generally)  important/vital resource (asset/cost)  Scarce (very) But; – Undervalued • Immaterial cost – Difficult to access asset
Slide 13: Water in Australia = perfect economic and environmental ‘storm’ – Environmental • • Worlds flattest and driest continent Natural climate cycle (drought) – Anthropocentric  • Increasing population • Human activity and non-sustainable economic systems (misuse) Climate change Profound “resource scarcity” – Economic & Structural Issues • • • • Use Ownership/pricing – Price cf cost Scarcity and access cf cost Regulation/Disclosure As a result, a considerable proportion of Australia’s consuming population and many other regions continue to facing severe and transformational water shortages.
Slide 14: Importance of water to investors in Aust. • Investment risk and Opportunity  Not generally – by exception! Why? • Historic and current impediments to investment appropriate investment analysis 1. Climate change understandings 2. Structural • • • • • Misplaced view of scarcity Water pricing relatively easy and abundant access ownership of water in public hands fragmented & uncoordinated regulatory environment 2. Not short term issue 4. Mismatch of consumption and listed economy – Listed economy not a relatively large water user 5. Pricing - water use not a material production cost 
Slide 15: The Environmental Dimension • Australia is the driest inhabited continent on Earth. • Rainfall is variable and droughts are common, and water resources in many areas are very scarce • However, Australia is a continent of extremes with respect to water resources; – relative abundance in the tropical north where few people live and – relative scarcity in the more populated, temperate south. • The Australian continent and the south, in particular, is reflecting increasing climate variability marked generally by declining rainfall • as a whole has shown a consistent drying trend over the past 50 years
Slide 16: The Environment cont. Rainfall anomaly ­ 2004­05
Slide 17: Social and Economic Dimension • Australia is confronted with a major challenge.  There is increasing competition for water from irrigators, urban/domestic, industrial and mining users  Change the way we think about water – Increase water productivity; – Improve water governance; – Change they way we value water (cost and price) • The response lies in; – Good science – Changed paradigm incl • Ownership (social) and value/valuation of water (economic) • use
Slide 18: But…. • unsurprisingly, hitherto water underconsidered as a cost and asset undervalued • Limited risk consideration of investment risk to listed companies • offered limited investment opportunities, Water –Under valued –Under priced –Under reported Under analysed (most analysts don’t care – ie not ‘spread sheeted
Slide 19: Water Ownership • Key features of institutional regulatory arrangements in Australia: – The management of (control and use) water is vested in the Crown - the States and Territory governments; – The (mains) water supply industry is (with a few exceptions) publicly owned; and – Various govt regulatory bodies administer an array of regulation over matters such as water resource management, water quality, pricing, ect.
Slide 20: Water Pricing • Price still does not meet full production cost • Not to mention scarcity value  Water relatively minor cost of production, despite its importance and increasing scarcity  Limited economic incentive to ‘reduce’ • Access variously bigger driver than cost i.e the “cost of none”
Slide 21: Issue of Price v Cost Pricing – Current water crisis generating view that water has been and is mis and undervalued in Australia. – public ownership of water supply sector  water has historically been viewed as and priced as a free (public) good  until late 80’s h/hold water bill based on property values. Industrial users paid a fee Demand not able to be managed via price signal. – More recently, there has been a recognition that water must be priced to reflect the principles of consumption-based pricing and full cost recovery – starting to drive change 
Slide 22: Water Use  The biggest industry users not widely represented on the stock market (agriculture)  The largest listed sectors are not relatively large users of water  Not particularly relevant to a large part of the investment universe
Slide 23: Corporate Disclosure • Limited in scope and range and inconsistent – Reflects • • • • fragmented regulatory regime Relatively immaterial cost Limited investment risk/opportunity SIRIS Study - only 38/200 even ‘mention’ water • In Australasia, disclosure not from cost perspective – Never seen cost of water set out as expense item in P/L – Material cost by exception • Access variously a risk management (access) issue – eg Newmont Mining, BHP Billiton, Elders Limited (agriculture) – Are starting to see it as a Balance Sheet item (water licenses – Indeed, seeing rural properties (businesses changing hands ostensibly for the value of licenses)
Slide 24: Investment Implications: • Regulation of water access, quality and pricing is; – Not uniform across the country and – Not coordinated  Unclear and inconsistent investment • Currently are limited opportunities to develop a significant investment strategy in response to the current water shortage – Risk and opportunity • Still limited value in modeling water use • Listed water = approx. 100m AUD
Slide 25: Investment Implications ● This is changing an intergovernmental reform agreement called the National Water Initiative – Included a package of reforms covering; • Infrastructure, • water pricing, • allocations and trading, • environmental and water quality – – Direct investment opportunities • Distribution • Water entitlements (trading) • Alternative water supply – Desalination – water mining – Recycling
Slide 26: Summary • ESG research becoming mainstreamed – ESG research issues  Certainty, measurability & monetisation  Materiality  Time horizon  Implications for access  fees  Investment relevance – Mainstream research issues
Slide 27: Summary cont. • These issues are challenging analysis of and investment into developing new costs and assets – e.g water  Certainty, measurability & monetisation  Materiality  Time horizon  unsurprisingly, hitherto water under-considered as a cost and asset undervalued  Limited risk consideration of investment risk to listed companies  offered limited investment opportunities, – Cant be solved by market alone – Require regulatory change (externalities)

   
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