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Transcript of Mark bytheway
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Issues for ESG ResearchWater -
An Australian Perspective
Mark BythewaySustainable Investment Research Institute (SIRIS)
Presentation to TBLI 2010 Workshop 8 – The Future Of ESG ResearchNovember, 2010
www.siris.com.au
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Presentation Outline
• Introduction and context• ESG Research Issues
– Structural• supply & demand models
– Investment proposition
• 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”
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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
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Context and Perspective…
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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
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Time
Values V ReturnTrade Off
Strict Financial Analysis
Ethical Investing
Traditional Investment Process
Values based investing Negative preclusive screening Tobacco / alcohol Gambling etc.
Socially Responsive Investing
Notion of a responsible company generally includes:
Negative screening Positive screening
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
PV Engagement
Values seeking investing
Values enhancing investing
ESG Research Demand “Map”
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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
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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
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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 (short-termism
• ESG risks and opps often structural and invariably longer term, less certain and difficult to $ quantify
– e.g. climate change/carbon risk/water
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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
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• 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?
ESG Research Issues
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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
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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.
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• Investment risk and Opportunity Not generally – by exception! Why?• Historic and current impediments to investment appropriate
investment analysis1. 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 issue4. Mismatch of consumption and listed economy
– Listed economy not a relatively large water user
5. Pricing - water use not a material production cost
6. Poor disclosure
Importance of water to investors in Aust.
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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
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The Environment cont.
Rainfall anomaly - 2004-05
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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
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But….
• unsurprisingly, hitherto water under-considered 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 reportedUnder analysed (most analysts don’t care – ie not ‘spread sheeted
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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.
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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”
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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
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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
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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)
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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
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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
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Summary
• ESG research becoming mainstreamed– ESG research issues
Certainty, measurability & monetisation Materiality Time horizon
– Mainstream research issues Implications for access fees Investment relevance
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Summary cont.
• These issues are challenging analysis of and investment into developing new costs and assets– e.g water
Certainty, measurability & monetisation MaterialityTime 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)