Climate change and water scarcity will pose serious threats to countries in South and Southeast Asia over the next several decades. These threats, which range from more extreme weather events (like typhoons, floods, and droughts) to more limited water availability, are likely to have significant impacts on the region’s economies and industrial sectors. Gaining a better understanding of how and when environmental risks may impact company performance will help the region’s financial community accurately assess corporate value.
To that end, WRI and HSBC partnered to identify and quantify environmental risks facing key sectors in South and Southeast Asia, culminating in the recent release of three reports on the power, food and beverage, and real estate sectors.
Why is it so difficult to analyze the financial impacts of environmental trends in Southeast Asia? Today WRI releases Analyzing Environmental Trends: Taking the Pulse of Asia’s Financial Community, a working paper that looks at this question and draws on insights gained from the sector reports, as well as feedback from the region’s financial community. The paper frames the key challenges:
A lack of publicly available data relating to both environmental trends (for example, localized water scarcity data) and company-specific exposure to potential environmental risks (for example, the number of corporate facilities in water scarce areas);
Limited contextual analysis –- including examinations of social, economic and political drivers – for framing the complex connections between environmental trends and their financial impacts;
The highly unpredictable nature of environmental trends which limits analysts’ ability to forecast their likelihood and their magnitude.
Lack of Data
The lack of reliable environmental data raises particularly serious concerns in Asia, because this region is predicted to be among the highest impacted by environmental risks such as climate change. There is an urgent need for investors to engage with companies to obtain key data points, such as the specific location of key facilities and the security of a company’s access to key resource inputs such as water. Better information in these areas will help investors fully understand the extent to which environmental risk will impact companies.
Data alone are not sufficient if they are not accompanied by contextual analysis. Contextual analysis entails understanding the extent to which a company or its facilities are: (1) exposed and (2) vulnerable to environmental impacts. A company’s geographical location (or that of its plants/facilities) determines its exposure to physical environmental trends, while the nature of a company’s operations determines its vulnerability to these trends.
To evaluate exposure to environmental trends, the WRI/HSBC research project used geographical information system (GIS) maps. The maps plotted the location of company operations (including facilities and plants) on areas of environmental exposure. In India, for example, 74 GW—over half of existing and planned capacity for major power companies—are located in areas considered to be water scarce or water stressed, which is significant because traditional power plants typically use significant amounts of water.