Evaluating Sectoral Water Risks

More GDP with less water and pollution 29 August 2018 Micro-level water-nomics: evaluating sectoral water risks

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION © China Water Risk, 2018, all rights reserved Mainstreaming water as a financial risk … 2014 2016 Keynote & panelist Recognition by the Water Global policy alongside water International Journal arena with laureates IRENA & Rare Earths

2012 2015

2013

“We off-loaded our entire coal portfolio after sitting down with you” European fund “…when at HSBC, the no water, no power report was one of our signature pieces.” Using WEN to start a water-nomics Nick Robins, Co-Director, conversation in finance & UNEP Inquiry policymaking NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION © China Water Risk, 2018, all rights reserved Macro & micro perspectives …

1. SHADOW PRICING 3 2. EXPOSURE TO WATER STRESS WATER RISK VALUATION 3. REGULATORY RISKS APPROACHES

COAL-5 POWER-5 SHENHUA ENERGY HUANENG POWER INTL 10 CHINA COAL DATANG INTL POWER ENERGY LISTCO’S YANZHOU COAL GUODIAN POWER DEV INNER MONGOLIA YITAI COAL HUADIAN POWER INTL DATONG COAL CHINA POWER INTL >70 14% 19% INVESTMENT THERMAL PROFESSIONALS COAL POWER OUTPUT GENERATION FROM ~50 INSTITUTIONS

Others Others 86% 81%

7979 MINES MINES 135137 POWER POWER PLANTS PLANTS

GLOBAL MAP CHINA MAP

Shenhua 15% Medium to high 83% Shenhua 15% High 83%

High China Coal Extremely high 90% China Coal Extremely high 90%

Yanzhou Extremely high 87% 13% Yanzhou Extremely high 87% 13% COAL-5 Yitai Medium to high 100% OUTPUT Yitai High 100%

Datong Extremely high 100% Datong Extremely high 100%

0% 100% 0% 100%

Huaneng 46% 26% 9% 16% Huaneng 44% 31% 8% 16%

Datang 54% 9% 18% 9% 10% Datang 53% 29% 16%

Huadian 81% 7%6% POWER-5 Huadian 62% 20% 10%

Guodian 51% 12% 34% GENERATION Guodian 41% 8% 12% 7% 32%

CPI 34% 29% 37% CPI 34% 29% 37%

COAL-5 POWER-5

EBITDA / Revenue EBITDA / Revenue

40% 50% 34% 44% Current 39% 30% EBIDTA/Revenue 40% -2% -1% 36% Tool #2 WRM -3% 22% 31% Tool #1 CBWCRT -9% 20% 30% -5% -1% -2% Potential loss of profitability due to -4% -10% -8% 11% 10% 9% 20% 10% water risks 20% -11% -3% -1% -5% -2% -5% -4% 0% 10% -24% -12% -13% -10% 0% Shenhua China Coal Yanzhou Yitai Datong Huaneng Datang Huadian Guodian CPI

3 observations 1. Impact varies across sectors • water use power > water use mining 2. Impact varies across companies • ≠ water use levels & locations 3. Impact varies across tools • ≠ assumptions

. Convenient approach to integrate water in decision making . Shadow water prices too high to be realistic water tariffs (up to 12USD/m3) . Can be thought as a proxy for water risks in general

What investors say: a good first step, but a first step only

Using shadow pricing for water risk valuation is...

Sufficient to screen out companies' exposure to water risks 26% 50% 24%

A good first step but needs complementary detailed analyses 82% 18%

Misleading because it is not a real price 13% 42% 45%

Strongly Agree & Agree Neutral Disagree & Strongly Disagree

Water use targets Water recycling targets

Norm of water use for thermal power Mine water recycling rate Unit: m3/MWh 3,84 4 100% 93% 75-95% depending 80% 3 84% on water scarcity 2,4 60% 2 60% 40%

1 0,72 20% 0,53 0,46

0 0% Air cooling Closed-loop Once-through Shenhua China Yanzhou Yitai Datong 2020 (withdrawal) (withdrawal) (consumption) Coal Target 2002 2012 Source: China Water Risk based on CNIS Source: China Water Risk based on companies reports, NEA

Water quality targets

Mine water recycling rate 100%

93% 80% 84%

60% 60% INCOMPLETE 40% DISCLOSURE 20% ? ? ? 0% Shenhua China Yanzhou Yitai Datong 2020 Coal Target

Source: China Water Risk based on companies reports, NEA

Freshwater use for coal production - mining & processing Mine water drainage associated with coal production Unit: m3/tonne Unit: m3/tonne Companies MEP Standard Companies National average 0,5 2,0 1,88 0,45 1,82

0,4 1,6

0,3 0,3 1,2

0,2 0,2 0,2 0,8

0,34 0,1 0,4 0,04 ? ? ? ? ? ? ? 0,0 0,0 Shenhua China Coal Yanzhou Yitai Datong Grade I Grade II Grade III Shenhua China Coal Yanzhou Yitai Datong 2010 2015 Target

Source: China Water Risk estimates based on companies reports and MEP Cleaner Production Source: China Water Risk based on companies reports and NEA-NDRC Action Plan to Develop Mine Water Standard-Coal Mining & Processing Industry (HJ446-2008). Water use includes coal mining and processing. Utilization, 2013.

The majority of disclosure is only on 1 or 2 of the total 5 indicators analysed, there is still clearly room for improvement

Two mid-performers are electricity and smelting, with lagging disclosure rates of 47% and 48%. Meanwhile, agriculture is the clear laggard

Water 10 3% 11 suppliers

43% 150 suppliers

34% 118 suppliers

Lenders / investors / companies should stress test for China pollution regulations

Collective action within & across industries ?

Jan 2017 ... CWR invited to talk at PBOC & to join ERA task force

400 registeredApr liquor 2018 enterprises... China in Chishui basin publishesin 2013, first as-ever well book as power on ERA … CWR invited plants and paperto write making the water factories risk chapter

Embedding environmental risks into lending = basin level risk assessments

2017 reports & publications

Information provided has been obtained from, or is based upon, sources believed to be reliable but has not been independently verified and no guarantee, representation or warranty is made as to its accuracy or completeness. Information contained in this document is current as of the date specified above and is subject to change without notice. Information contained in this document relating to investments, valuations, unrealised data, and projections is indicative only, and has been based on unaudited, internal data and assumptions which have not been independently verified or audited and are subject to material corrections, verifications and amendments.

This information is not intended to constitute a comprehensive statement of any matter, and it should not be relied upon as such. None of China Water Risk , its sponsors, affiliates, officers or agents provide any warranty or representation in respect of information in this document.

This document is for information purposes only and should not be construed as an offer, or solicitation of an offer, to buy or to make any investment. website.

This document, is strictly confidential. This document, graphics and illustrations must not be copied, in whole or in part or redistributed without written consent. (© China Water Risk, 2018, all rights reserved).