sustainable performance strategies: asian environmental solutions strategy

Fortis Investments 19 February 2008 | 1

30 May 2008 Designator | author 1

Sustainable Performance Strategies:Asian Environmental Solutions Strategy

Stewart Armer, Head of SRI, Fortis Investments

TBLI AsiaBangkok

May 2008

Fortis Investments | 2

Why Asia Environmental Focus Now?


Asia Environmental Context

ENVIRONMENTALPRESSURES

ENVIRONMENTALINFRASTRUCTURE

ENVIRONMENTAL STRESS

ENVIRONMENTALPOLICY

CHINA VERY HIGH VERY POOR EXTREME EMERGING

INDIA VERY HIGH POOR VERY HIGH DEVELOPING

JAPAN HIGH EXCELLENT MODERATE VERY DEVELOPED

AUSTRALIA HIGH GOOD MODERATE DEVELOPED

WIDER ASIA HIGH POOR GROWING EMERGING


What are the key Sustainability issues in Asia?

Social

! Rising Food Prices

! Social Access & Poverty

! Human / Labour Rights

! Product Safety

! Urbanisation

! Demographic Change

Environment

! Water Scarcity

! Air Pollution

! GHG Emissions

! Natural Resource Depletion

! Waste Problem

! Eco-Toxicity

Governance

! Transparency & Disclosure

! Shareholder protection

! Non compliance with environmental and social regulation

! Bribery & Corruption

Sources: Fortis Investments


Fortis Sustainability RadarHow do sustainability issues develop?

EMERGING MOMENTUM ESTABLISHED

Legislation in place

Voluntary Codes

Calls for tighter

legislation

Growing Political/ Media

Attention

Strong Scientific EvidenceSome

Scientific Evidence

Sustainability Issues

Fortis Sustainability Radar™



Fortis Sustainability RadarSustainability dynamics: Developed Asia




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Fortis Sustainability RadarSustainability dynamics: Emerging Asia




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INCENTIVES

PENALTIES

Transition to SustainabilityApplication of different policy instruments

SubsidiesGrants, Feed-in-tariff, etc


EMERGING ESTABLISHED

Fiscal IncentivesTax credit, sales tax, etc

Procurement Public investment, loans, etc

Consumer ChoiceLabels, product info.

Mandatory targetsTargets, tradable certificates

Mandatory StandardsSpecifications, bans, etc

Effective EnforcementEffective penalty regimes

Japan

China


Fortis Sustainability RadarCompany response

PRODUCTSTRATEGIC

WORSTPRACTICES

BESTPRACTICES

Companies who achieve competitive advantage through

better practices

Companies with a defensive or minimalist approach

Companies with products or services that solve the

problem INcluded

EXcluded




PRODUCTSTRATEGIC

WORSTPRACTICES

BESTPRACTICES

Business Response

Sustainability IssuesEMERGING MOMENTUM ESTABLISHED

PARAMETERS ARE NOT CLEAR –

TOO EARLY

PARAMETERS ARE VERY CLEAR –

TOO LATE

SustainableWinners

UnsustainableLosers

INVESTMENTOPPORTUNITY ZONE

Fortis Sustainability RadarThe Investment Opportunity Zone





PRODUCTSTRATEGIC

WORSTPRACTICES

BESTPRACTICES

Business Response


Asian Environmental Strategy


AsianEnvironmental

Strategy



SRI Investment Centre


40 dedicated Investment Centres:

JapanChina,

Indonesia,Emerging Equities, etc.,

SRI Investment CenterLeverages on Fortis Investments´ global platform

International SRI Committee


Asian Environmental Strategy


Water Focus: ChinaSevere water crisis

! China is facing a water crisis of daunting scale as a result of water scarcity, pollution linked to rapid industrialisation, urbanisation, and a poor record in enforcing local environmental regulations.

! Although China ranks sixth in the world in terms of water resources, its per-capita water resources are only 28% of the world’s average ranking it among the 13 lowest countries in the world.

! More than 70% of the water in five of China’s seven major river systems is unsuitable for human contact, according China’s State Environmental Protection Agency (SEPA). Less than 50% of the Chinese population is connected to sewerage systems.

Sources: Fortis Investments, www.china.org.cn, C iti Group, Credit Suisse


! The government has made the securing of drinking water resources a top priority and plans to significantly raise fines for water polluters. The security of drinking water and purificationof key rivers and lakes, were highlighted in the country's 11th F ive-Year Plan (2006-10) of Environmental Protection. Key highlights include:

– The Chinese government has pledged to make safe drinking water available to 160 mn rural residents by 2010 and clean drinking water to all of China’s rural residents by 2015.

– A total investment of Rmb1 trn (EUR 92 billion) has been set aside to address the water issues including water supply, waste water treatment, water reusage, sewage, and water environment protection over 2006-10 (see graph).

– A steady increase in tariff rates to promote awareness of conservation and efficiency of water and wastewater treatment fees.

! Another draft regulation released in November 2007 saw the maximum fines for individuals or companies that discharge highly toxic pollutants into drinking water resources raised by five times to Rmb 500,000 (source: Xinhua News Agency).

Sources: Fortis Investments, www.china.org.cn, Credit Suisse

Water Focus: ChinaRadical policy shift to ensure clean water

Investment by Chinese Government Rmb 1tn between 2006-10

Drinking water quality survey of 118 cities in China

Source: Ministry of Water Resources Chine


Water Focus: IndiaIncreased demand for water technology! India has 16 percent of the world's population, 2.5 percent of

the land mass and 4 percent of the world's water resources. These limited water resources are depleting rapidly while the demands on them are increasing.

! Drinking water supplies in many parts of India are intermittent.Transmission and distribution networks for water are generally old and badly maintained, and as a result, are deteriorating. Estimates reveal that by 2020, India's demand for water will exceed all sources of supply.

! India is heavily dependent on ground water resources, which has led to extraction levels creating water shortages. These resources have also reached unhealthy contamination levels as a result of the pollution associated with the region’s economic development and dependence on fossil fuels. As result, there is an increasing demand for water technology that can help improve the supply, distribution and quality of India’s water.

Source: Fortis Investments


Water Focus: AustraliaCoping with increased water scarcity

! Australia is vulnerable to climate change because of its naturalwater scarcity. Following a number of years of well below average rainfall, much of Australia is officially classed as “drought”. This can be seen in the graph which highlights water levels in the Murray-Darling Basin Catchment, which accounts for about 40% of Australia’s agricultural production.

! Agriculture and food & beverage industries are negatively impacted by increased water scarcity. Water infrastructure and technology (e.g. desalination) companies benefit from increased government action to tackle the water problem.

! Beginning 2007, the Australian government launched a ten year plan to ensure water security totalling A$ 10 billion (see graph). Recently, the new elected government in Australia has committed a further A$ 1bn for investment in desalination projects, stormwater harvesting, and increased wastewater recycling and this will be linked to a series of tax credits, rebates and loans.

Sources: Fortis Investments, JP Morgan, Australian Federal Government


Air Pollution Focus: China Deadly air pollution in urban centres! World Bank research has found that 16 of the world’s 20

most polluted cities are in China and about 750,000 people die prematurely in China each year as a result of air pollution in large cities.

! The Chinese government is concerned that the environmental crisis will lead to social unrest. The 2008 O lympics in Beijing is adding international pressure to the situation.

! The Government’s five years environmental protection plan targets that by 2010 75 percent of China's large cities will enjoy more than 292 days of good air quality (air quality level II or better) every year. In 2005, the percentage was 69.4. Measures include stricter emission standards for industry and cars.

! Beijing is leading the way amongst Chinese cities. By 2006, Beijing had spent Rmb 9.7 billion, 3 percent of its GDP, on environmental protection since it won the bid to host the Games in 2001. According to the monitoring results on air pollutants, the density of nitrogen oxides, carbon monoxide and dust particles in 2006 had dropped by 23 percent, 8 percent and 19 percent compared with that of five years ago.



C lean Energy Focus: JapanG lobal leader in solar technology

! Japan has established iteself as world leader in environmental technology including clean air / water technology, eco-efficient materials, and renewable energy.

! Japan has become the world leading exporter of solar technology. With Sharp as the global leader Kyocera, Sanyo, and Mitsubishi are all positioned amongst the top ten cell manufactures (see graph)

! The photovoltaic industry has been growing by more than 40% p.a. over the last five years driven legislation to promote renewable energy as response to climate change and energy security concerns.

Sources: Fortis Investments, Deutsche Bank estimates 2007 (Graph), Cheuvreux


C lean Energy Focus: ChinaRapid growth in renewable energy

Sources: Fortis Investments, DB Research

! China’s energy consumption has risen by 11.2% CAGR during the past five years, making China the second-largest energy consumer after the US. China is set to overtake the US to become the world’s largest energy consumer soon after 2010, and even earlier is set to become the world’s largest carbon emitter.

! China’s renewable energy expansion is driven by energy security concerns, the climate change challenge, and providing access to energy in remote areas.

! On 4 September 2007, the Chinese government published its guideline for Renewable Energy expansion. It aims to increase the use of renewable energy sources (including hydropower) to account for 10% of total energy consumption by 2010F (from about 7.5% at present) and further to 15% by 2020F .

China’s development plan for renewable energy


C lean Energy Focus: ChinaMain beneficiary from growing CER market

! China is the main producer and beneficiary of Certified Emission Reductions (CER) trade. Verified emission reduction projects undertaken within developing countries that have ratified the Kyoto Protocol are able to claim CERs for sale into various emissions trading schemes.

! While the cost of producing a CER can be as low as a couple of euros, the sale prices achieved within the global Kyoto or regional European trading schemes have reached more than €20. This creates a significant margin opportunity for many operators of GHG-emitting plants within China to participate in emissions abatement, despite the lack of local incentives to take part in efforts to tackle climate change.

! In May, the World Bank and IETA estimated an overall carbon market size of $30 billion 2006. More recently IETA has commented that carbon emissions trading will probably double to at least $60 billion this year.

Sources: Fortis Investments, C iti Group


C lean Energy Focus: India Growing global player wind energy

! India has a goal of installing 10% of all added electric power from renewable energy sources, or at least achieving an installed capacity of around 10 GW by 2012.

! India is already one of the top global players in terms of installed wind capacity, with around 4,200 MW in 2005. Further capacity of 2200 MW are planned until 2010. India has also become one of the leading manufacturers of wind turbines.

! India plans 5000 MW capacity addition through “non-conventional” energy sources under the XI plan (2007-2012). As part of this India is focussing on deployment of its hydro energy potential through both large and small scale schemes. Providing access to energy in rural areas is a key priority in terms of reaching India’s development goals. The government is focussing on both solar and biomass energy generation.

! India is also behind China the second largest beneficiary of CERs(Certificate of Emission Reduction).

Sources: Fortis Investments, Goldman Sachs, SustainAsia


! Prime Minister Rudd’s first act as new leader was to announce immediate ratification of the Kyoto Protocol which followed at the UN C limate Change conference in Bali (December 2007).

! Australia has the highest per-capita C O2 emissions in the world and expanding the cost effectiveness of clean energy will be critical to meet targets to cut greenhouse gas emissions by 60% by 2050. Specific election pledges were: A$500 million Renewable Energy Fund - to develop, commercialise and deploy renewable energy in Australia. A$240 million C lean Business Fund – to help business and industry deliver energy and water efficiency projects, with a focus on productivity and innovation.

! This change of the political landscape will benefit Australia’s emerging biofuels industry and innovative green product solutions such as bioplastics (see pictures).

C lean Energy Focus: Australia New political momentum



C lean Energy Focus: Wider AsiaPolicy Infrastructure for Renewable Energy

Feed-in-tariff Tax reductions or credits

Public loans / financing

Renewable Energy Target

Indonesia " "Indonesia seeks to generate 5% of its energy from

renewable sources by 2020.

Korea " " "Korea has a renewable target for electricity generation

of 5% by 2010.

Malaysia " "Malaysia seeks to generate 350 MW renewable energy by 2010. Main potentia l is biomass based on palm oil.

Philippines " "Main goal is to increase self-sufficiency to 60% and to double renewable energy capacity to around 5GW by

2013.

Singapore " "Government focuses on waste to energy, biomass cogeneration, and solar power offering up to 50%

public financing for innovative projects.

Taiwan " " "Taiwan has a target of achieving 10% from renewable

energy by 2010.

Thailand "5% of all new capacity must come from renewable sources. Main projects are using b iomass, such as

sugar cane and rice husks.

Sources: Goldman Sachs Research, Fortis Investments


C lean Energy Focus: Wider Asia Forecasted solar and wind capacity additions

Solar Energy -Forecasted capacity additions until 2010

Wind Energy -Forecasted capacity additions until 2010

Indonesia Rooftop solar has potentia l as the island’s geography means that grid connection is difficult.

Total wind potential estimated at just 448 MW. No c lear government guidance or targets available.

Korea628 MW

Government has budgeted W1.9tn for R&D, subsidies, and feed-in tariffs until 2012.

2250 MW (by 2012)Government has budgeted W1.6tn for R&D, subsidies, and

feed-in tariffs until 2012.

Malaysia Energy Commission state limited grid connection for solar, but rooftop programs could be important.

Energy Commission state that wind potentia l is not high due to low average wind speed.

Philippines But plans to become key manufacturer. Cypress Sunpoweropened a US$ 300 mn plant in 2004.

392 MWDepartment of Energy estimates a total 76,000 MW of

potential wind energy.

Singapore Has plans to install 50,000 m2 of solar thermal capacity by 2012. Seeks to become a solar manufacturing hub. Wind is not considered a viable source of energy.

Taiwan20 MW

Actively promoting innovate solar PV systems.

2,049 MWStrong potentia l in Taiwan Strait: Taipower plans a further

546 offshore turbines between 2010 and 2020.

Thailand142 MW

Environmental groups believe Thailand has potential to provide 30% of energy needs from solar by 2020.

52 MWGovernment does not consider wind as priority due to low

wind speeds.



Installed and expected geothermal capacity


C lean Energy Focus: Wider AsiaGeothermal potential in Indonesia and Philippines

! Geothermal resources range in temperature and depth and are used mostly for direct heating and electricity generation.

! The Philippines and Indonesia have great geothermal potential due to their geological context. The Philippines already has a lot of geothermal capacity, so most of the growth is planned in Indonesia. Taiwan also plans to develop additional geothermal capacity, but this is very small in comparison.

! Asia’s major suppliers of geothermal generating equipment are based in Japan (Fuji, Sumitomo).


Energy Efficiency Focus: Australia Rich in coal seam gas (methane)

! Australia has one of the largest supplies of coal seam gas. Coal seam gas (predominately methane) is a natural gas found in coal deposits and is one of the cleanest burning fuels. In Australia, coal seam gas is predominantly used by gas-fired power stations to generate electricity and it creates less than half of greenhouse gas emissions of equivalent coal fired power stations.

! The Australian government is increasingly supporting clean coal solutions. The new government announced it will commit A$50 million from the existing C lean Coal Fund towards the establishment of a pilot gasification plant in Queensland, supporting the development of integrated coal gasification and combined cycle power generators

! China and India are the world’s second and fifth biggest energy consumers, and both see coal seam gas as key to long-term energy needs.



Energy Efficiency Focus: TaiwanGrowing Demand for LED Technology

White LEDs: Expected market development by application! G lobal energy consumption is forecasted to grow by 53% until 2030. Rising energy prices and tighter regulation on greenhouse gas emissions will key drivers for energy efficient technologies in different industry sectors.

! White LEDs make the production of lighter and leaner electronic equipment possible, and can be used to illuminate larger surface areas for longer periods. LEDs have lower power consumption, longer lifespans, and a lower environmental impact than conventional lighting.

! Many of the leading players in the LED value change are based in Japan and Taiwan.

Sources: N ikko C itigroup Limited , Fortis Investments


Eco-Efficient Materials Focus: Japan Leaner, Lighter, Stronger …

! There is an increased demand for eco-efficient materials triggered by the search of industry to reduce their environmental impact – e.g. insulation and lightweight materials.

! Japanese companies are well positioned in this growing market. For example, Japan is the world leader in the carbon fibre market which provides ultra strong and lightweight solutions to the airline, automotive, and wind blade industry.

! Toray Industries and Mitsubishi Rayon are global leaders in the carbon fibre market, which is forecasted to grow by 20% p.a. to 2010 for the automotive and airline industry.

Sources: Fortis Investments, Contrium Consulting, Freedonia Group


Waste & Recycling Focus: Japan Recycling high on the domestic agenda

! Measures taken by the Japanese government have set the stage for a move away from a society built around high-volume production, consumption and waste to a more recycling-friendly society.

! This has been a positive driver for recycling companies, which are not only benefiting from the enhanced policy framework, but also from rising oil prices (e.g. industrial waste oil recycling, plastic recycling) and high metal prices (e.g. precious metal recycling).

! Another positive driver is the high awareness of environmental issues in Japan’s private sector. Japanese companies have one of the highest uptakes of ISO14001 (certified environmental management standard) and this has led to increased recycling volumes for a range of different materials.

Sources: Fortis Investments, Goldman Sachs

Japan’s legal framework aimed a forming a recycling-friendly society


Waste & Recycling Focus: China Growing demand for waste management solutions

! China has surpassed the US as the world’s largest waste generator driven by rapid urbanisation and rising GDP per capita. Annual Municipal Waste Generation has grown 8% pa per capita between 1980-2000 compared to 1% in the US. In 2004, 190 million tonnes were generated, and the World Bank predicts 484 million tonnes by 2030.

! Over 90% of waste is still dumped or land filled. In its 11th

five year plan the Chinese government states that it plans to invest Rmb 51.6 billion in sold waste treatment pants between 2006-2010. Incineration will play a key role in Chinese waste management strategy.

! The SARS incident in 2003 triggered the first national regulation for medical waste resulting in setting up 300 medical waste disposal centers (EUR 700 million budget) and 31 hazardous provincial waste centers.



Asia Environmental Investment Opportunities

ENVIRONMENTAL STRESS

ENVIRONMENTALPOLICY

INVESTMENTOPPORTUNITIES

CHINA EXTREME EMERGING " " " " "

INDIA VERY HIGH DEVELOPING " " " "

JAPAN MODERATE VERY DEVELOPED " " "

AUSTRALIA MODERATE DEVELOPED " " "

WIDER ASIA GROWING EMERGING " " "


Why Asia Environmental Focus Now

! The Asian region is facing growing environmental challenges as a result of population growth, rapid industrialisation, and natural environmental constraints.

! Governments across Asia have started to act realising that the growing environmental problem is beginning to undermine economic growth and social stability.

! The global climate change debate is adding additional international political pressure. These developments create a whole range of environmental investment opportunities.

! The Asian environmental investment opportunity is already sizeable and is growing fast


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sustainable performance strategies: asian environmental solutions strategy

Business

water focus

clean water

water polluters

key sustainability issues

result of water scarcity

china severe water crisis

capita water resources

terms of water resources