Emerging Risks

Synopsis

This report is the first in a series establishing the link between issues like climate change, air pollution, water supply, and natural resource depletion and traditional financial analysis on corporate value and financial strength for companies in six key Asian economies – India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

The report lays the groundwork for analysts to understand environmental issues as financially material, and for companies to see the financial benefits of reducing their environmental impacts.

Executive Summary

The health of the planet is becoming a significant issue for the financial and corporate world. Powerful global trends around the environment, sustainability, business, and investment have converged to a point that certain environmental issues have become material financial matters for publicly traded companies and their investors. Financial markets that are attuned to these trends are likely to create strong incentives for companies to improve their environmental performance.

The relevance of environmental sustainability to investment is not limited to London, New York, and Tokyo. Emerging markets have grown at an unprecedented rate in the last two decades as large institutional investors have increasingly looked to these markets as investment destinations.

Emerging Risk is an introduction to a series of sector reports on the financial materiality of key environmental trends in India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam. It forms part of a research collaboration between the World Resources Institute (WRI) and the International Finance Corporation (IFC) to give investors in emerging Asian countries the information and tools they need to link the materiality of issues such as climate change, air pollution, water scarcity, and deforestation to traditional financial analysis.

Emerging Risk sets the scene with an overview of the principal players, main stock exchanges, selective environmental trends affecting emerging Asian nations, and the impacts of the trends on critical sectors in the six focus countries. This report is intended for international and local investors as well as analysts, policymakers, and researchers who cover this region. It should be useful to any investor-related audience seeking to understand the business impact of environmental trends on publicly listed companies in emerging South and Southeast Asian countries.

Because this report addresses an investment-oriented audience with varying degrees of knowledge about environmental issues, we have framed the issues in terms of broad environmental themes or trends, reflecting those typically identified in reports by the World Bank, Asian Development Bank, and the like.

The six Asian economies on which we focus—India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam—all have rapidly growing industrial, commercial, and financial sectors, and all are susceptible to environmental risk. For example, all six are particularly vulnerable to the physical risks associated with climate change. The region’s rapid economic growth has fueled the world’s highest increases in the commercial and domestic demand for energy. In 2008, the six countries together contain approximately 1.6 billion people, or about 25 percent of the world population.

The box to the right summarizes the main environmental trends we explore and the main types of risk they engender. Physical impacts are likely to be the most pronounced and can directly affect a company’s daily operations, for example disruption in production due to a lack of water or severe weather-related damage to company assets.

Our research shows that resource-dependent sectors—like forestry products, food and beverage, and oil and gas—which are important to these emerging Asian economies, are precisely those that will be affected by the physical impacts of environmental trends. The construction and real estate sectors also have become significant economic players and are highly dependent on the availability and cost of raw materials. The manufacturing sectors range from low value–added goods, such as textiles, to high value–added goods, such as software, and they often are highly resource (labor, energy, and water) intensive. India, Malaysia, and the Philippines have a thriving service sector, such as business process outsourcing, which is highly dependent on a skilled workforce.

To illustrate the environmental challenges facing companies operating in this region, we use three case studies: supply chain pressures on Staples, the office supplies giant; the effects of water scarcity in India on Coca-Cola’s manufacturing process; and the physical effects of flooding in Indonesia on sectors ranging from automobiles to telecommunications.

In the years ahead, investors and asset owners, particularly large institutional investors, will have a role to play in redirecting capital toward more environmentally sustainable economic activities, which can reduce investment risk and support the region’s long-term prosperity. This report is intended to help them take the first steps in that direction.