Pollution in the boardroom

PUBLISHED : Thursday, 29 March, 2007, 12:00am
UPDATED : Thursday, 29 March, 2007, 12:00am

The mainland is becoming as famous for its environmental problems as the economic growth that creates them. In this series, South China Morning Post senior reporter Cameron Dueck examines how companies are having to consider how environmental issues affect their core businesses

Environmental issues are no longer only a public relations concern for corporates. The mainland's pollution problems are sapping profits and raising financial risks. At the same time, they are giving companies a new way to set themselves apart from the competition.

No longer is pollution a concern only to those living in the hinterlands, fishing filthy rivers or trying to grow clean food in dirty soil. Waste - industrial, domestic and agricultural - is now on the agenda in more boardrooms as its economic impact is felt in a myriad of ways by businesses large and small.

More importantly, companies are learning that how they deal with environmental issues can affect their profits, not only their corporate image.

'Environmental issues are becoming more of a fundamental factor for these companies, where it's becoming part of the investment procedure when you look at them,' said Jeremy Higgs, managing director of Bowen Capital Management. 'It also helps to identify where new business procedures, trends, development and evolution are heading.'

Bowen runs an investment fund that bases its stock picks on how well companies address and capitalise on pollution and climate change issues.

Climate change and pollution are related but separate issues. However, when it comes to business, they are both caused by choosing easy, near-term economic gains to the detriment of the environment and long-term sustainability. Both require a conscious change in attitudes and practices by business leaders.

'No longer the preserve of scientists and political activists, it [climate change] has started to occupy the mainstream of everyday discussion,' John Llewellyn, senior economic policy adviser at the Lehman Brothers investment bank, wrote in a recent study on the economic impacts of climate change.

'In the world of business and finance, climate change has developed from being a fringe concern, focusing on the company's brand and its corporate and social responsibility, to an increasingly central topic for strategic deliberation and decision-making by executives and investors around the globe.'

China's leaders are well aware of the problems they face and the impact they could have on their economy.

The State Environmental Protection Agency and the National Bureau of Statistics estimated in a Sepa report published in September last year that pollution cost the country 511.8 billion yuan in economic losses in 2004, or 3.05 per cent of that year's total economic output. A figure for 2005 is due out soon.

Many experts believe it could be much worse, and before the Sepa report was released an agency official estimated that pollution costs the country up to 10 per cent of its GDP per year.

The government missed its targets for 2006 to reduce energy use and cut pollution and is expected to put renewed emphasis on bringing these issues to heel this year.

Stephen Roach, chief economist at investment bank Morgan Stanley, sees China's unrestrained use of energy and its poor environmental regulation as key problems to sustaining its economic growth, and expects the government to take a hold of the problems this year. 'I will be very surprised if there is another failure this year,' Mr Roach said last week.

While macro-economic figures help create a picture of the larger impact of pollution, businesses are affected on a daily basis, and they are under increasing pressure from customers, shareholders and other business partners to address the problem. Responding to that pressure can bring benefits but costs money, while inaction will bring only increased risk.

'The issue in China is still awareness,' said Eric Gan, head of Swiss Re's property and casualty insurance business in Greater China. 'In 2006 pollution and the environment were big issues in China as people became more aware of them and companies realised there were issues and that they needed to consider risk management. Now they're starting to look at insurance, and ways to manage and transfer that risk.'