Global Warming: Winners and Losers in Asia

Recent warnings sounded at the Copenhagen Climate Change Conference highlighted the severity of global warming’s effects on various communities, including businesses around the world. For many, climate change can put property and other physical assets at risk, particularly those situated near shorelines and in locations vulnerable to typhoons and flooding. Other companies may see sharply higher liability for causing damage to the environment and other perceived sins, and suffer as well from investor, bank credit and employee flight.

 
But while there are losers, global warming can also create potential winners. Most obvious are companies in alternative energy, such as wind power, natural gas, solar cells and other ‘green’ technologies. The dredging and reclamation industry, though niche, is also now in high demand. Flemish dredging companies Deme and Jan De Nul, having led projects on the coasts of Dubai and Abu Dhabi, are being consulted for reclaiming coastlines in threatened areas, such as Brussels.
 
Other industries that could see a demand for their services include those in insurance and carbon trading, says Stephen Tsang, senior project officer at the University of Hong Kong’s environmental and sustainability research arm, the Kadoorie Institute.
 
Here’s a look at the ways climate change can affect businesses and industries, both positively and adversely, and how the potential losers can mitigate the downside and even turn their fortunes around.
 
Winning With Insurance
Weather insurance is common in the U.S. While the product has a bigger market amongst the agricultural industry in Asia, it is only now that insurance providers are increasingly recognising the opportunities to offer businesses a way to mitigate or pass on weather-damage risk.
 
Providers currently offering such protection services include HSBC, through its real estate insurance in the UK, and Tokio Marine Newa in Taiwan, which covers typhoons. Meanwhile, Japan-based Mitsui Sumitomo Insurance handles weather derivatives. 
 
Other risk plans offer a green theme. For example, the Fireman’s Fund (a subsidiary of Allianz) in the U.S. offers ‘green upgrade coverage’ for commercial buildings. The policy covers rebuilding and replacements with specific non-toxic paint and insulation installation. Should the building be destroyed, coverage includes rebuilding to certified green standards.  
 
Insurance companies can win from higher sales and premiums, provided they correctly gauge the risks and insurability of the businesses they choose to protect. What about the companies buying climate-change insurance products?
 
They can win, too, so long as they know exactly what they’re buying. The small print in basic coverage plans for businesses rarely cover climate-change events. For example, Hang Seng’s generic Office Protection Plan clearly excludes damage caused exposure to weather conditions. For risks related to climate change, a separate insurance plan may be needed altogether.
 
Leaky Ceilings
Global warming is blamed for unusually strong typhoons and other extreme weather conditions. They can cause structural damage to buildings, especially older properties. Even a leaky ceiling, progressing to indoor flooding, can be detrimental to manufacturing equipment, data and IT systems, and other office equipment.
 
In colder climates, such as in China’s north and part of Korea and Japan, major disruptions and delays caused by snow storms can affect manufacturing and local infrastructure, not to say transportation and logistics. Lloyds TSB reported a 15% increase in claims in the UK earlier this year, with the average value per claim at around £1400, and one claim in excess of £40,000.
 
Weather insurance is especially important if your property is located in a coastal area that may be facing the threat of rising sea levels. Research from the World Bank shows that out of five developing regions, the urban areas of East Asia will be the most affected by rising sea levels. Ranking highest in risk is Vietnam, followed by Taiwan.
 
In China, areas under threat include the Bohai Rim, Yangtze River Delta and Pearl River Delta. The major cities at risk include Tokyo, New York, Mumbai, Shanghai, Jakarta and Dhaka.  
 
The obvious solution would be to move to higher ground before rising sea levels inundate low-lying areas – and preferably before real estate prices skyrocket due to decreases in available land. Don’t forget back-up plans to relocate warehouses and inventory.
 
Carbon Trading
Carbon trading is a big deal, literally. “I’m estimating carbon markets could be worth US$2 trillion in transaction value – money changing hands – within five years of trading [starting in the U.S.],” says Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission (CFTC), and chairman of its energy and environmental markets advisory committee. “That would make it the largest physically traded commodity in the U.S., surpassing even oil.” 
 
China, says Kadoorie Institute’s Tsang, will be one of the developing countries that will drive that trade. This is partly because it is moving fast to build wind turbines to generate clean electricity, amongst other alternative energy and green projects. While China has been accused of ‘holding to ransom’ a new global treaty on climate change, it has allocated 38% of its nearly US$600 billion economic stimulus spending on green projects.
 
But the mooted trillion-dollar carbon trade can happen only if the U.S. enacts a cap-and-trade law, which U.S. President Barack Obama supports but many in the U.S. Congress oppose. The proposal has two components: a cap that sets limits on the carbon emissions of a company or group of companies, and trade, which allows organisations that have exceeded their cap to buy carbon ‘offsets’ from other organisations that are below their own cap.    
 
In essence, the buyer pays a charge for polluting, while the seller can profit for having reduced emissions by more than the required amount. Companies that can sell carbon offsets will be one of global warming’s winners.
 
Companies that must buy carbon offsets will be able to do so through carbon trading brokers, which act as a middleman between buyers and sellers. They act as consultants, may perform carbon audits, and can suggest areas for businesses to reduce carbon footprints as well as implementation methods, which could cut back on the carbon offsets they need to by or eliminate the expense altogether.
 
In terms of pricing, some agencies, such as the Melbourne-based Brokers Carbon, require an upfront commitment fee to engage their services, and may require a minimum transaction (measured in tonnes). As a reference, the price listed on the Brokers Carbon website says that companies can expect to pay between A$9-27, €8-32, or US$7-25 per credit/tonne.
 
Europe and Japan already have a cap-and-trade market in place under the Clean Development Mechanism (developed under the Kyoto Protocol). It should be noted, however, that the effectiveness of carbon offsetting has been questioned, with allegations those that purchase credits will see only one-third of the money actually go towards environmental projects.
 
Around one-third was purportedly spent on the project’s set-up and maintenance costs, and the rest was claimed to be lost to brokers, consultants, investors and other intermediaries. Not that these are likely to be a deterrent to the trade, since polluting enterprises will have to buy carbon offsets whether or not they believe in its effectiveness.
 
Regulatory Teeth
Although carbon offsets are not yet a requirement for businesses in many countries, other regulations are coming into force that could determine whether your company will be a global warming winner – or loser. 
 
In China, for example, establishing a green track record could mean the difference between being able to float an initial public offering – or being banned. That was the case for the Gold East Paper (Jiangsu) Company. The affiliate of Indonesian logging giant Asia Pulp and Paper did not make it past the first stage of the IPO review by China’s Ministry of Environmental Protection. The MEP investigated the company’s alleged breaches of pollution laws and illegal forest destruction in Indonesia and China.
 
The State Environmental Protection Administration or SEPA has cracked down on corporate loan applications submitted by known polluters. Its green credit policy requires banks and financial institutions to grant loans only to companies that have passed environmental assessments. Mainland banks refer to a database of over 40,000 incidents of pollution when they assess corporate loan applications.
 
One chemical company in Anhui province not only saw a drying up of bank loans. Its banks even recalled the 5 million yuan it had already been granted. According to SEPA, 12 companies judged to be heavy polluters have had their bank loans recalled, suspended or rejected since the green credit policy was enforced.
 
However, the green credit policy is far from being fool proof. Some provinces are not following the plan, and some of those that do so are aligning themselves only superficially.
 
“High polluting and energy-consuming companies are protected by local governments,” conceded SEPA Vice Minister Pan Yue. “Some of them make a lot of money very quickly, so it's hard to cut their credit.” There is also no incentive for banks to join the campaign. Pan says SEPA is working to solve these and other problems.
 
Green Financing
In laissez faire Hong Kong, some in the private sector are dipping their toes in global warming water. Hang Seng Bank, Bank of China and HSBC have started offering loans for investments in eco-friendly equipment that reduce energy consumption, increase efficiency of production materials consumption, or eliminate noise production.
 
At HSBC, the average loan size is HK$5 million, with the largest deal so far at HK$80 million. Loans in Hang Seng’s Green Financing Scheme are capped at HK$1 million. All three banks require an environmental review by either the Hong Kong Productivity Council or the Business Environment Council.
 
But the government may have to step in more aggressively. A recent study commissioned by the Green ICT Consortium found that 42% of Hong Kong companies had neither a green IT strategy nor plans to implement one, versus 35% in the U.S. and Canada. Only 38% of the firms in Hong Kong say they are rolling out a green strategy, compared with 81% in North America.
 
And while every North American company surveyed had a green IT budget, nearly a third of the Hong Kong companies had none at all.
 
Whether from fear of government regulation or grudging acceptance that long-term survival depends on being green (or both), many companies in North America are looking to switch to an environmentally sustainable business model. Enterprises in Asia will have to decide whether following suit, despite the upfront costs, will really make them a global warming winner.
 
About the Author
Angie Mak is online editor at CFO Innovation. 

 

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