MARCH 2012 INSIGHT

01 ENERGY ISSUE Foreword from the CEO

I am delighted to announce the launch of RepRisk Insight, our industry e-Zine that focuses on ESG risk issues in the corporate world. RepRisk Insight marks a signifi- cant step in our company’s thought leadership as we increase our contribution to the ongoing debate of ESG issues within public policy, compliance and enterprise risk management and the field of not only responsible investment but also the broader landscape of financial risk management.

In the current economic climate, access to capital becomes increasingly difficult; the need to obtain and maintain licenses to operate is imperative. This e-Zine is de- signed to inform and engage industry leaders with provocative, insightful and be- hind-the-scenes commentary. Our first publication targets the Energy and Extrac- tive Industries and includes contributions from: Dan Plesch, Director of the Centre for International Studies and Diplomacy, Phil Dickie from WWF, Toni Johnson from the Council on Foreign Affairs and many more.

I hope you enjoy this first edition of RepRisk Insight. The team looks forward to bringing you future editions covering other industry sectors. We look forward to receiving your views and comments.

Philipp Aeby CEO RepRisk AG

Mission Statement

RepRisk Insight is RepRisk’s industry e-Zine that deals with environmental, social and governance (ESG) risk issues facing the corporate world.

RepRisk Insight provides informative, analytical and thought provoking pieces from industry experts on various ESG risk issues. Contributors to the magazine will in- clude industry specialists from Multinational Corporations, Academics, NGOs, In- ternational Institutions, Politicians and Trade Associations.

Our editorial mission is to provide readers with informative and engaging commen- tary, analysis, and behind-the-scenes insight into ESG risk issues that will inform their business practices.

About RepRisk AG

RepRisk is the leading provider of dynamic business intelligence on environmental, social and governance (ESG) risks. Our multi-lingual analysts monitor controversial issues on a daily basis to allow clients to identify and assess the ESG issues which may present financial, reputational, and ethical risks across an unlimited universe of companies and projects.

2 INSIGHT Index

4 The latest challenge on the global compliance agenda

6 Controversial Mining Report

8 Lessons learnt from BP’s Gulf of Mexico oil spill

10 The controversy surrounding oil sands

13 The precarious future of Australia’s coal seam gas industry

16 Can the world still go nuclear?

19 The impact of water scarcity on energy and food security

20 The necessary and possible case for alternative energy

22 Prospects for a cleaner coal-powered future in Asia

24 Investment risks and opportunities for Asia’s energy sector

26 Keeping your good name and the cost of losing it

Produced by RepRisk AG Editors and collaborators: Oula Kadhum, Stella Kenway, Alessandra Oglino, Karen Reiner, Leesa Soulodre, Anna Tuson Contributors: Simon Airey, Phil Dickie, Harald Heubaum, Toni Johnson, Robert Klijn, Dan Plesch, Association for Sustainable and Responsible Investment in Asia, Responsible Research Graphic Design: Oskar Linholm, Bounford.com Cover Photo: istockphoto.com: evirgen

All rights reserved with RepRisk AG. No part of this e-Zine may be reproduced, stored in a retrieval sytem, or transmitted, in any form or by any means, without the prior permission, issued in writing, of the copyright holders:

RepRisk AG, Stampfenbachstrasse 42, 8006 Zurich, Switzerland. Tel. +41 43 300 54 40 www.reprisk.com

ISSUE 1 ENERGY l 3 The latest challenge on the global compliance agenda Simon Airey is Head of Corporate Crime, Investigations and Compliance Director, National Tax Investigations at DLA Piper

The regulatory and legal landscape for com- The key features of the Bribery Act are as panies operating in the energy and extrac- Transparency follows: It is an offence to give or receive a tion industry is extremely complex. Many International’s ‘Bribe bribe, which includes promising, offering, companies have global activities and often requesting or agreeing to receive a bribe. operate in difficult geographic and political Payer’s Index 2011’ Both the public and private sectors are cov- environments. This presents a multitude of ered – the Bribery Act is not just about brib- social, regulatory and legal issues concern- ranks utilities, oil ing public officials, commercial bribery is ing ethics, health and safety, environment, also criminalized. sustainability, security, finance, trade and and gas, mining and corporate governance. There is a corporate offense which applies power generation to a “commercial organization” that fails to An effective compliance function is a key prevent bribery. factor in avoiding regulatory, criminal and and transmission civil action, as well as maintaining company amongst the There is a specific offense of bribing a for- reputation. Stakeholders and investors are eign public official with no exemption for fa- also demanding more transparency and businesses most cilitation payments or promotional expens- higher ethical standards. While competing es (unlike the FCPA position). demands often lead to escalating compli- likely to pay bribes ance costs, the high price of major compli- The maximum penalty for individuals will be ance failures can bring even more devastat- 10 years’ imprisonment and/or a fine. The ing consequences. maximum penalty for a company will be an unlimited fine. There are also collateral con- In recent years, many big names have hit In the UK, the Serious Fraud Office is cur- sequences associated with any conviction: the headlines as various law enforcement rently investigating a number of energy in- director disqualification, debarment from authorities around the world have taken dustry cases. The latest prosecution result- public procurement and asset confiscation. action against them. Many of these com- ed in the convictions of four individuals who panies, including Siemens, BP, Shell and had been conspiring to illegally obtain pay- It is the corporate offense of failing to prevent Eni, have been forced to spend millions on ments of around GBP 70 million disguised bribery by an “associated person” and the ex- internal investigations, legal costs, fines, as “consultancy services.” The bribes relat- traterritorial reach of the UK legislation that upgrading their compliance programs and ed to a number of high-value oil and gas en- has put anti-bribery compliance back on the promoting their renewed commitment to gineering projects in Iran, Egypt, Russia, the agenda. The underlying policy reasons are ethical conduct. United Arab Emirates and Singapore. firstly aimed at encouraging more corporates to implement effective anti-bribery compli- The regulatory environment is always In July 2011, the compliance bar was raised ance programs and secondly, to give pros- changing. Currently there is a renewed focus even higher when the UK Bribery Act came ecutors the power to act against those inter- on the sectors that are known to be vulner- into force. Many companies already have national businesses with a presence in the UK able to corruption and bribery. This means Foreign Corrupt Practices Act (FCPA) com- that fail to prevent bribes being paid on their that energy companies are high on the en- pliance programs in place to prevent brib- behalf in the UK or overseas. This includes forcement agencies’ radar. Transparency In- ery of foreign public officials. However for bribes that might be paid by associated third ternational’s ‘Bribe Payer’s Index 2011’ ranks companies with connections to the UK, this parties (agents, employees, subsidiaries etc.) utilities, oil and gas, mining and power gen- may no longer be sufficient as the Bribery to obtain or retain business for the compa- eration and transmission amongst the busi- Act is, in some respects, even tougher than ny, even if those bribes are paid without the nesses most likely to pay bribes. the FCPA. knowledge or involvement of the company.

4 INSIGHT istockphoto.com: Pro-syanov istockphoto.com: istockphoto.com: Michael Fuller istockphoto.com: Pgiam istockphoto.com: Jones David istockphoto.com:

In respect of the corporate offense, if Yet why should it matter to non-UK nation- dening the vast majority of decent, law- a company can prove that it had “ad- als or companies who engage in bribery abiding firms.” equate procedures” in place, it will have outside the UK? The answer lies in the fact a complete defense. In essence, it must that UK prosecutors will have the jurisdic- Nevertheless, overstretched compliance de- show that it has implemented an anti-brib- tion to prosecute offenses where there is partments in high-risk sectors may need re- ery program appropriate for the risk pro- some close connection to the UK, wherever assurance that their anti-bribery measures file of its business and that the bribe was in the world the bribes take place. are sufficiently robust. In this respect, an ex- a rogue act in contravention of its policies ternal and independent review to examine and procedures. Although at first glance this may seem like the scope and efficacy of the compliance yet another compliance burden to add to program can be an invaluable tool in giving As would be expected, the legislation ap- the list, the UK government has empha- peace of mind, justifying the investment in plies to offences committed by anyone on sized that the Bribery Act is “directed at compliance and demonstrating to the rel- UK soil and to offences committed by UK making life difficult for the mavericks re- evant authorities that the company takes its nationals and companies overseas. sponsible for corruption, not unduly bur- obligations seriously.

ISSUE 1 ENERGY l 5 Controversial Mining Report

The mining industry has long attracted un- dust, and greenhouse gases into the atmo- Those that try to survive, living on the mine’s wanted attention due to safety issues and sphere and local environment; damage to periphery following the depletion of their environmental destruction. The sight of the landscape; and the depletion of natural natural resources and the loss of their land, large-scale transformations of the land- food supplies. Poor and indigenous commu- have reportedly faced brutal retribution. In- scape, whether seen in person, in news nities have traditionally suffered the most, truders protesting against the alleged forced footage or in documentaries, often incites due to their heavy reliance on the land and relocation of 10,000 families, the poisoning opposition and protest from communities, natural resources for their livelihoods. Sever- of residents, and the loss of livelihoods were activists and other stakeholders. While these al companies in the MCMCs report have been shot dead at Barrick’s North Mara Gold Mine effects have readily drawn attention from accused of forcibly displacing communities in Tanzania. Meanwhile a Freeport-McMo- the media, in more recent times a range of in order to access their land, without paying Ran subsidiary apparently paid Indonesian less obvious problems associated with min- out appropriate compensation. police to guard its Grasberg Mine, who later ing have become increasingly salient. opened fire on striking workers in October A range of stakeholders, including NGOs, 2011. Furthermore in Ghana, local communi- RepRisk’s Most Controversial Mining Com- communities, employees, governments ties refused to relocate for Newmont Ghana panies (MCMCs) Report captures the wide and shareholders, have joined the debate Gold’s Akyem Project, which resulted in vio- range of criticism leveled at ten of the most about the benefits of mining versus the lent clashes with police forces. controversial mining companies over the economic advantages, and are scrutiniz- sector’s recent history. While the impact on ing those companies seen to put profits To read the full report, please go to: the natural landscape, as well as worker fa- and cost cutting before best practice for http://www.reprisk.com/repriskspecialreports talities continue to feature prominently, the all concerned. They have been success- report outlines many of the more hidden ful in a number of initiatives, such as the risks attached to their operations. suspension of the USD 4.8 billion Conga Mine, owned by Compania de Minas Bue- Mining companies are engaged in activi- naventura and Newmont Mining in Peru af- ties around the globe, often in developing ter several days of violent protests. A local countries and even conflict zones such as community has also challenged the permit Embedding Reputation Risk the Democratic Republic of Congo. In these granted to Alpha subsidiary, Highland Min- into Sustainability Programs countries, regulations regarding the envi- ing’s Reylas mine in West Virginia. Min- ronment and human rights protection are ing opponents have made their presence RepRisk Podcast: often lax, and the companies are also able to felt at the annual general meetings of Rio April 6, 2012: 2pm (GMT) enter into favorable tax agreements, which Tinto and Vedanta and brought attention RepRisk is pleased to welcome reap few benefits for local people. Barrick to alleged human rights and environmental Dr. Robert Pojasek, Harvard Ad- Gold’s Pascua Lama Mine, which straddles abuses by the companies. junct Professor and Sustainability the border of Chile and Argentina, is an ex- Leader of the Shaw Group. ample of this, while Glencore’s operations in The MCMC report highlights cases of al- Zambia have been heavily criticized for al- leged underhand tactics used by mining Dr Pojasek will share a best practice leged tax evasion. companies to hinder opposition and punish approach to creating a proactive risk local people that try to benefit from natural management program through the use of quantitative leading indica- While it is claimed that local communities see resources. Security and police forces em- tors for sustainability. little reward from the wealth created through ployed by mining companies have been ac- the raw materials mined in their regions, they cused of horrendous abuses, including beat- To register, send your name, job must also face the negative impacts of min- ings, rapes and murders. These accusations title, email and contact details to: ing, such as contamination or overuse of lo- have been particularly prevalent at Barrick [email protected] cal water supplies; the release of toxic waste, Gold’s Porgera Mine in Papua New Guinea.

6 INSIGHT istockphoto.com: Alexandr Petrushkov Alexandr istockphoto.com:

ISSUE 1 ENERGY l 7 Lessons learnt from BP’s Gulf of Mexico oil spill Robert Klijn is an ESG specialist and Managing Director of Fair Impact

Robert Klijn from Fair Impact talks to Re- Henderson’s retail SRI funds had sold out of The BP spill has indeed made investors pRisk about the lessons learnt from the BP BP shares in 2003 on the basis of their views more active. Not only with regard to the Gulf of Mexico oil spill. about the company’s ability to deliver strong health and safety checks that relate to their environmental, health and safety performance own workers, but also in relation to contrac- Fair Impact is an environmental, social and across the business. (Today he leads the Cli- tors, like oil services companies Halliburton corporate governance (ESG) consultancy mate Change Centre of Excellence at HSBC.) and Transocean. As many as 52 companies based in the Netherlands. It was founded in (according to the RepRisk database) have 2010 by Robert Klijn, an ESG specialist who At the time Henderson was concerned about been linked to the BP disaster. In a presen- wanted to make a contribution to a more the performance in some of the company’s tation for SRI investors last October, BP sustainable world. Fair Impact works with businesses – for example in January 2002, acknowledged that the injury rate of BP’s an international network of brokers, family the company was fined GBP 1 million follow- contractors is 60 percent higher than for offices, insurers, listed companies, non-gov- ing a prosecution by the Health and Safety employees – leading to recommendations ernmental organizations, pension funds and Executive at its Grangemouth refinery in the for “fewer, deeper, and longer” relation- private banking teams. Fair Impact also has UK. In Alaska too, a 2001 review found a se- ships with contractors. a partnership with Tradeinfo to jointly orga- rious backlog of safety-critical maintenance, nize the Responsible Investment Corporate followed by an outbreak of ‘whistle-blowing’ RR: Have the social, environmental and fi- Access conference in Zurich, which will be by concerned employees, including testimo- nancial consequences of the BP spill had a held on July 2, 2012. Furthermore, it organiz- ny to Congress in March 2002. positive effect on investments in sustainable es a series of thematic round table meetings energy? with Double Dividend about responsible in- RR: Has the BP spill changed the way inves- vestments every year. tors view environmental risk management? RK: It has stimulated investors in non-sus- tainable energy to explore sustainable al- RepRisk: In your everyday business you work RK: High-tech production of oil in deepwa- ternatives, however in the long-term, a high with a number of money managers who in- ter and environmental risk management has oil price is still the most important factor vest in the Oil and Gas industry. What were been highlighted by the spill, especially be- for determining the level of investment in their initial reactions to the BP oil spill? cause it was so close to the US and therefore sustainable energy. Societal pressure and a triggered a lot of media attention. As a result change in subsidies from conventional to al- Robert Klijn: Most mainstream portfolio man- of this issue and many other disasters gaining ternative energy will fuel investment in sus- agers had no idea that BP had been cutting prominence, investors have spent more mon- tainable energy as well. corners on safety procedures to such an ex- ey on screening for, and compliance with, tent and were surprised about the incident. ESG issues. Investors like APG are eager to be RR: What would be your risk management Most ESG specialists already knew about the informed about potential controversial issues advice for investors who finance energy underinvestment in safety. However, espe- at an early stage. Some SRI investors, which projects in the Oil and Gas Industries? cially in the UK, their portfolio management had considered BP to be ‘best in class’ in the colleagues still invested in BP because of oil and gas sector, sold out of the company as RK: Technological improvements will give the high dividend payments. ESG specialist soon as they heard of the spill. access to more fossil energy sources, but Nick Robins was the first to tell me about the it will also accelerate the challenge of risk poor safety records at BP, well ahead of the RR: Considering the accusations leveled management. The industry should accept explosion at BP’s Texas City refinery in 2005 at BP about its commitment to safety pro- that not all innovations are possible without and the series of incidents that happened cesses, do you think the BP oil spill has made proper consideration of the risks associated thereafter. At that time he was Head of So- investors take a more active role in holding with them. To mitigate the risks, investors cially Responsible Investments (SRI) funds corporations accountable for health and should diversify their holdings both in terms at Henderson Global Investors. safety checks? of sector and geography.

8 INSIGHT Shutterstock: Katherine Welles Katherine Shutterstock: Shutterstock: Danny E Hooks Danny Shutterstock: Donald Johansson istockphoto.com:

ISSUE 1 ENERGY l 9 The controversy surrounding oil sands Harald Heubaum is a Lecturer in Global Energy and Climate Policy at the Centre for International Studies and Diplomacy at the School of Oriental and African Studies

The growing global demand for oil, combined We can see this happening in California, RR: Despite the debate in Europe, major mul- with a leveling off of conventional oil produc- which, in early December 2011 decided to tinational oil companies have increased their tion and consistently high oil prices, have pro- back the EU’s plans. Other US states have production of fuel derived from Canadian oil vided rich incentives for the exploration and followed California’s lead on fuel-efficiency sands compared with just a few years ago. development of unconventional oil reservoirs standards in the past and this could lead to What has driven these developments? such as oil sands and oil shale. Although oil a similar situation in other markets. sands have been mined in Canada for de- HH: Continued exploration and production cades, production has been scaled up in re- The Canadian government and multinational are driven mainly by high oil prices and low- cent years. Increased industrial activity has oil companies have been worried that the la- er production costs than in the mid-2000s. created economic growth and employment beling of oil sands coupled with low-carbon It is generally assumed that new oil sand op- opportunities, but it has also fueled growing fuel standards in the EU and other OECD erations require an oil price of USD 70 per opposition to the environmental impact of the countries would make emissions-intensive barrel or more to be economically feasible. large-scale development of unconventional fuels less desirable and cut into profits. The However, technological advances mean that oil deposits. To shed more light on the eco- battle over the EU’s draft fuel law including some existing operations provide a return nomic, regulatory and environmental dimen- Canada’s threats of a “trade war” if the mea- on investment with oil prices as low as USD sions of oil sands production, RepRisk spoke sure goes forward are evidence of that. 50 per barrel. to Harald Heubaum, Lecturer in Global Ener- gy & Climate Policy at the School of Oriental and African Studies’ Centre for International Studies and Diplomacy.

RepRisk: Why is the EU seeking to label oil sand-derived fuel as one of the most carbon- intensive fuel options?

Harald Heubaum: The proposed fuel law as- signed a default GHG value of 107 grams per megajoule to fuel derived from oil sands as opposed to 87.5 grams for conventional sources of oil. However, the EU does not currently import any significant amounts of this fuel so European consumers are not yet affected. There are two other principal rea- sons for the move. First, the Climate Com- missioner and others would like to pre-empt the development of oil sands located within EU member states such as Estonia.

Second, labeling oil sands as highly pollut- ing would not only threaten future access to European markets but could prompt other

jurisdictions into taking action as well. Dan Barnes istockphoto.com:

10 INSIGHT For the last three years, global oil prices have been well in excess of those margins. Brent crude, the global benchmark, has stood above USD 100 per barrel for most of 2011 and it is unlikely that prices will drop dramatically in the near to mid-term future. This means that oil sand projects will remain economically viable for some time to come.

RR: And yet industrial development seems to have been held back by a lack of political support.

HH: The Canadian government under Prime Minister Harper has actually been very sup- portive of continued oil sand development in Alberta’s Athabasca region, despite con- tinued opposition from local environmental groups. Last year it approved Total SA’s Jo- selyn North mining project following a six- year review.

In the United States, oil sand-derived fuel Jones Ryan istockphoto.com: has been a highly contentious issue for the last two years, pitting environmentalists and some landowners against business and Unfortunately, environmental regulation has Carbon capture and storage (CCS) could labor groups. The issue is the Keystone XL had to play catch-up with a comparatively make a significant contribution to cutting pipeline project, which would transport the sudden scaling-up of industrial activity. the carbon footprint further. However, other crude oil from its production sites in Alberta countries such as Venezuela, Russia and Co- to the refineries along the Texan Gulf Coast. In addition, oil sand-derived fuel general- lombia are also endowed with rich uncon- ly emits more CO2 over its entire lifecycle ventional oil reserves and if these are devel- The Obama administration recently rejected “well to wheels” than fuel produced in con- oped without regard to climate change and the pipeline proposal, citing insufficient time ventional ways. However, current GHG emis- appropriate regulation, the global impact to determine whether Keystone XL is in the sions from the oil sands industry in Alberta will be more noticeable. national interest. However, the company be- make up no more than five percent of Cana- hind the pipeline, TransCanada Corp, can re- da’s entire emissions. RR: Opponents of fuel derived from oil sands apply for a permit if the project is rerouted would like to end the practice altogether. Is to avoid passing through the Nebraska Sand- Canada recently left the Kyoto Protocol to this a realistic option? hills which sit atop the Ogallala aquifer, the avoid billions of dollars in fines it would oth- main source of freshwater in the Midwest. erwise have incurred as a result of emitting HH: This could only happen if the world com- The Nebraska legislature recently passed a more carbon dioxide than ever before. How- munity got tough on global climate change proposal to determine such a route. ever, it did not miss its Kyoto targets solely and started to seriously wean itself off its because of mining operations in its western addiction to oil as a transport fuel. However, RR: The routing of the Keystone pipeline is province. neither one is likely to happen anytime soon. one issue but environmental groups have COP-17 in Durban produced an agreement raised concerns about the process of mining RR: If emissions are still comparatively small, for a new legally binding treaty by 2015, oil sands itself. They argue that large-scale en- why are climate change activists pushing this which would come into force by 2020. If this vironmental destruction is too high a price to issue so hard? Should they focus on other, actually happened as planned, a new com- pay for just a few additional barrels of oil. more emissions-intensive processes instead? pliance period would then not start until 2025 or so. This means more than a dozen HH: There is no doubt that the environmen- HH: The climate impact of oil sands should years of largely unmitigated GHG emissions tal impact of a barrel of oil derived from oil be addressed but the question is whether and a continued legislative and regulatory sands is high. The mining process is excep- related emissions will grow, stabilize or even patchwork around the world. Only a suffi- tionally invasive even when using the latest decline over time. Over the past 20 years, ciently high price on carbon could pose a technologies and we cannot yet tell how the technological advancements and efficiency more immediate threat. effects on once pristine lands and local fau- improvements have already reduced the na will play out in the long run. GHG-intensity of oil production in Alberta.

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EITI Eddie Rich- Deputy Head and Regional Director for Call us now on +44 (0) 20 7375 7226 Eastern and Southern Africa and the Middle East or e-mail [email protected] www.ethicalcorp.com/risk-management The precarious future of Australia’s coal seam gas industry Anna Tuson is a freelance journalist based in Melbourne, Australia covering environmental, social and governance issues in the energy, mining and extractives sectors. Tuson

Coal Seam Gas opponents marched to Parliament House in Sydney in protest at the controversial mining practice in Australia.

The fight for the hearts and minds of the The decision-makers are torn between two and even cause explosions when exposed population is fierce, strategic and sophis- powerful incentives. On the one hand the to oxygen. Depletion and contamination of ticated in the debate over coal seam gas companies pushing forward with explora- groundwater are also potentially detrimen- (CSG) mining in Australia. tion and production are dangling the ever- tal impacts, and there are concerns that alluring carrot of economic impetus before toxic pollutants could be brought to the Increasingly viewed as the biggest issue fac- them. On the other side, they must consider surface. ing the country today, public perception of their stakeholders interests. CSG is key in determining how, or if, the mo- Another extraction method is the highly con- mentum of its development will continue. troversial method of hydraulic fracturing, or The Extraction Process ‘fracking’, in which tiny explosions are cre- It is particularly crucial at this stage as gov- CSG can be extracted by drilling into coal ated underground before a massive amount ernments around the world decide how to seams and pumping water through them to of water mixed with sand and chemicals is regulate the practice, which is considered release the gas from the coal. There are sev- pumped in to crack open the rock. by many experts to be the biggest threat to eral risks attached to this method, such as the the mining companies involved and may well potential for methane, a much more danger- Despite what critics say, CSG may still of- be the deciding factor for them to maintain ous greenhouse gas than carbon dioxide, to fer a more ecological alternative than other their licenses to operate. leak into the atmosphere during extraction energy sources.

ISSUE 1 ENERGY l 13 For example, it is claimed that it produces significantly less greenhouse gas emissions than coal when burnt. This however could be outweighed by the risk of methane leaks during extraction.

Activists and grassroots organizations in Australia are campaigning hard against the practice of CSG and are becoming highly efficient at getting their message heard through the clever use of mainstream, in- dependent and social media. They are well organized, with campaigns such as the Lock the Gate Alliance and Stop CSG and associ- ated websites and rallies.

In November, hundreds of Australians Tuson marched to Parliament House in Sydney to hand over a petition signed by 20,000 CSG opponents, where they were met by several projects in Gladstone, Queensland, mostly Uncertain road MPs who promised to table it in Parliament. in the Great Artesian Basin. The basin pro- Gas is a key export for Australia and it also vides the only reliable water source in inland plays a significant role in the domestic mar- The petition demanded an immediate mora- Australia, a drought-prone region where ket. As the country’s abundant coal supply torium on all CSG projects, a Royal Commis- water is an especially precious resource, may be set to lose its position as a favored sion into the full impacts of the practice and meaning contamination or depletion could cheap energy source thanks to new carbon an immediate ban on fracking. be disastrous. tax laws, the time is ripe for a new energy.

“They can’t just do the science as they go,” The potential economic benefits are high- said Drew Hutton, president of the Lock the Divided opinions lighted by the drive with which interested Gate Alliance, an organization that urges Sophisticated engagement and public- companies are pursuing CSG projects. How- farmers to keep their gates locked and gas ity campaigns designed to build trust with ever, the potential risks involved are just as companies off their land. “The government stakeholders have been created by utilities, salient. Therefore, if public unease is not must impose a moratorium until the facts such as Origin Energy. These campaigns are addressed, the industry’s charge could be are known,” said Hutton. a demonstration of just how aware these stopped in its tracks. companies are of the need to proactively construct a good image around coal seam Australians are demanding formal scientific Risky business? gas and to counter the rise of criticism from studies and evidence of how adverse im- Some investors have also been quick to re- their stakeholder opponents. pacts on the land, environment, water and spond. The Australian Ethical Investments their health will be mitigated before any Superannuation fund recently divested Focusing on farmers as the primary audi- more projects are given approval. from Origin Energy due to the company’s ence, who are often used as trust bench- involvement in CSG. The fund’s communi- marks by the media, and who are also the By pushing ahead too quickly, the industry cations manager Paul Smith says that water people often most directly and immediately could face even greater opposition if the management was one of the primary con- affected by mining activity, Origin’s adver- government were to bow to public pressure cerns that led to the decision. Australian tising strategy has been well thought out. for strict regulation or removing CSG proj- Ethical Managing Director Phil Vernon said ect permits. in a press release: “The decision was taken Nevertheless, farmer communities also ap- (Neither Origin Energy nor BHP Billiton had responded following a thorough assessment of the risks pear to be divided over the issue. Some farm- to interview requests by the time of publication.) surrounding Origin’s coal seam gas extrac- ers can be counted amongst the most vocal tion operations. Our conclusion was that, opponents of CSG, fearing the impact on whilst the industry has invested in methods their land, water and livelihoods. Others are to minimize these risks, many of these are happy with their partnerships with the com- untested and there remain concerns about panies and say there are no problems with their long-term impact.” their land so far. “There are ten times more positives than negatives,” said cattle farmer Together with British Gas and Santos, Origin Gordon Allen from Cecil Plains in Queensland. is involved in AUD 50 billion worth of CSG “They’ve brought wealth to the area.”

14 INSIGHT FULL AND PART-TIME MASTERS DEGREES LAW ECONOMICS DIPLOMACY PROFESSIONAL SKILLS CORPORATIONS ENERGY SECURITY CLIMATE CHANGE PROJECT MANAGEMENT Can the world still go nuclear? Toni Johnson is a Senior Staff Writer for Religion, Energy, Environment, & Global Health at the Council on Foreign Relations

The 2011 nuclear accident at the Fukushima From the United States to Germany to Ja- Shale gas has gained interest as a poten- Daiichi power plant in Japan was a devas- pan, many nuclear plants are past their tial source to scale up quickly in many na- tating blow to an industry that has for the original design specifications of about 40 tions once thought to have very small gas past few years been looking at a potential years. Following Fukushima, Germany al- resources. Whether that will have the same “renaissance” after nearly two decades of most immediately announced it was halt- impact on nuclear interest in other countries stagnation. The fortunes of the industry ing an already controversial plan to extend is yet to be seen. post-Fukushima have been the subject of the life of its power plants and instead much discussion. The incident also comes decided to phase out its existing reactors All of these issues are compounded by the as shale gas has emerged as a potential ma- in favor of renewable energy. Japan also tremendous cost and component hurdles jor domestic energy source for countries recently announced that it was moving to faced by countries looking to install new that are currently import dependent, and a shut down reactors after the 40-year mark, nuclear plants, which can take more than a global economic crisis makes nuclear less which would likely shutter more than half decade to build and cost easily USD 10 bil- competitive with other energy sources. its nuclear fleet in the next two decades. lion. There is also a lack of experienced en- The United States has also been asked to gineers to run plants. Nuclear power will likely in the short-term reevaluate its re-commissioning plan of experience a contraction as established mar- extending reactor use to sixty years and kets, such as once stalwart Japan, begin to potentially beyond. The 2011 report from Potential New Markets reduce existing nuclear power. But the two the World Watch Institute paints a dismal Still, many countries with growing econo- factors, which created renewed interest in picture for the nuclear power industry in mies and middle classes are looking at ways nuclear power – emerging-market energy established markets (places with existing to access reliable and diverse electricity demand and climate change – still exist and nuclear power), noting that decommis- production. With fossil fuel use increasingly will likely continue to help the industry. As sioning reactors at the forty year mark less attractive because of climate change, nuclear power expands from largely estab- could become the norm, which would con- nuclear energy, which has a very small car- lished markets, such as Europe, the United siderably decrease nuclear use in the next bon footprint, has gained new attention. States, and Japan into new countries without few decades. Much of the new nuclear power coming nuclear experience and possibly weak regu- online in the next decade will be in Asian latory regimes, experts are concerned about Clearly Fukushima had a deleterious effect emerging markets, particularly China. (This the industry’s ability to protect against Fuku- on Western Europe, which has historically CFR interactive looks at new nuclear power shima and Chernobyl like accidents. had a contentious relationship with nuclear coming online). Nearly half of all reactors power. Germany’s announcement was fol- under construction are being built in China, lowed by moves against nuclear in countries which plans to expand its output from near- Contracting Established Markets such as Italy and Switzerland. A few coun- ly 11GW of power to 80 GW by 2020 and up As of September 2011, nearly 20 new reac- tries such as Britain will continue, but with to 400 GW by 2050. “In China, where en- tors were still in the works in Europe, pri- public opposition so strong it doesn’t bode ergy demand is skyrocketing, the appetite marily in Russia with a handful in Bulgaria, well for nuclear power on the continent. for nuclear power is undiminished,” says a Ukraine and the Slovakian Republic. Only September Discovery Magazine blog post Finland is constructing a new plant in West- Meanwhile, Fukushima likely had little im- on the country’s 20 year plan to pursue mol- ern Europe. Until last year, the United States pact on the decades-stagnant US nuclear ten salt reactors. hadn’t seen a commercial reactor come on- industry, which already faced a competitive line in decades – a country which currently set of other domestic energy sources and As nuclear expert Henry Sokolski notes in has a quarter of the world’s operating reac- tremendous cost and regulatory difficulties. a November article, nuclear prospects look tors. “The industry was arguably on life sup- The shale gas boom in the United States, even brighter when looking at countries such port before Fukushima,” argues energy ex- which saw a growth from 1 percent of pro- as India, Vietnam, Pakistan, Turkey, United pert Mycle Schneider. “When the history of duction to 20 percent in less than a decade, Arab Emirates, Jordan, and Saudi Arabia as this industry is written, Fukushima is likely to was probably an even bigger factor than Fu- the United States, France, Japan, China, and introduce its final chapter.” kushima in dampening nuclear interest. Russia look to secure new nuclear markets.

16 INSIGHT istockphoto.com: Michael Utech istockphoto.com:

“None of these nuclear customers, it should New Nuclear Regime? International governance has largely been be noted, has a nuclear-safety regulatory If the industry can expect to make its biggest focused on preventing the proliferation of system worthy of the name,” Sokolski says. inroads into countries that have little nuclear nuclear weapons. And indeed, that is a nec- “Nor, outside of Pakistan, do any of them experience, the question is can the interna- essary and worthy effort. Little attention has have enough trained technicians to build tional industry devise a regime at the inter- been paid on governance of nuclear power or operate large nuclear-power programs.” country level that will suffice? beyond that realm but maybe it is time to re- China alone will need an estimated 6000 consider this. The world has a treaty for ad- nuclear technicians per year to meet its in- In September 2011, the International Atom- dressing liability issues from nuclear power tended plant growth but is only producing ic Energy Agency (IAEA) endorsed an ac- accidents, but with more than two dozen about 600. tion plan on nuclear safety, which calls on countries looking to enter the nuclear power governments to immediately begin safety business, perhaps what the world needs is a Such disparities matter. Failures in safety assessments of existing plants and allow treaty exclusively governing nuclear power procedures and maintenance at Chernobyl IAEA inspectors access to plants. The plan safety rules – with regular high-level meet- in 1986 and Fukushima plants have caused also calls for countries to work toward bet- ings to adjust to the changing industry. considerable trouble for the industry world- ter international liability regimes. Some wide. “Twenty-five years apart, Chernobyl countries were unhappy the plan did not Some industry actors might see this as an- and Fukushima were events that nuclear contain stricter measures that mandated other potential regulatory hurdle, but since plant designers assumed would never hap- IAEA inspections. However, other coun- one bad apple can easily topple an already pen,” writes Stephanie Cooke of Nuclear tries, such as the United States, India and unstable apple cart, such a regime could ac- Intelligence Weekly in the New York Times. China, stressed that the power to ensure tually lend the industry a new much-need- “Any further major accidents could spell the safety should remain in the hands of na- ed layer of protection, as well as bolstering industry’s doom.” tional authorities. safety for all involved.

ISSUE 1 ENERGY l 17 Heading Sub headingCENTRE FOR INTERNATIONAL STUDIES AND DIPLOMACY Main text startMSc here. in Global Energy & Climate Policy Preparing for an international career

Teaching includes: The School of Oriental and African Studies (SOAS), University of London, is a unique centre for the study s The theory and practice of global energy and of Africa, Asia and the Middle East climate change policy as an intertwined challenge s with the largest concentration of specialist faculty of any multicultural capital s Practical toolkit in policy planning, strategic communication, risk management and s The School offers an unparalleled range of non-European languages, all of which can be negotiation skills studied without prior knowledge s Interaction with policymakers, energy industry s 42% of students from overseas representatives, environmental organisations and other practitioners For more information contact: s Media training and core research skills Centre for International Studies and Diplomacy SOAS, Thornhaugh Street, s Electives from a wide range of courses, Russell Square, London, WC1H 0XG including International Economics, International Tel: 020 7898 4830 Fax: 020 7898 4839 Law and The Theory of Multinational Enterprises www.cisd.soas.ac.uk and their Regulation

Thinking Globally Acting Globally www.cisd.soas.ac.uk The impact of water scarcity on energy and food security Phil Dickie is a longtime author and commentator on environmental issues and is currently Head of News and Issues Management at WWF International. WWF should not be held accountable, for the views expressed in this article.

The rise of rhetorical catch phrases is of- quantum increase in the energy intensity of China and Turkey, and of nations such as the ten a good guide to emerging concerns in our water supplies. US and Israel that benefit from unequal water geopolitics. Right now it is “the food, water, sharing agreements with neighbors. energy nexus,” which is cropping up in con- The intensive use of water in energy produc- texts as far removed from each other as the tion has also been increasing rapidly, and Some companies have performed much bet- Arab Spring and climate policy. droughts and anxiety over river and aquifer ter at positioning themselves in relation to levels have been curtailing production for emerging risk. Again, taking water as the The best way to make sense of it is to con- more than a decade. Nuclear, hydro or coal example, pioneering work by scientific, in- sider the projection that by 2100, the world and gas powered projects have been can- tergovernmental, business and civil society population will reach 10 billion. This is an celled on most continents. Power station institutions have increased stakeholders un- alarming prospect given that a large por- planners and operators are also having to derstanding of water issues, and raised the tion of the existing seven billion people al- cope with more competition and regulation bar on what is considered responsible water ready lack access to adequate food, water over their access to and use of water. The use. Among businesses, it is no surprise to see or energy. Particularly with food, the world passing of “peak oil” means resorting to what that beverage companies such as The Coca- has been throwing money, technology and are sometimes called “unconventional sourc- Cola Company and SAB Miller are among the international agreements at the issue for a es” of which most are water intensive. For most deeply involved on water issues. Yet a long time. There have been periods of prog- example, shale oil not only uses large quanti- recent survey by global environment organ- ress but lately the mildly promising trends ties of water but pollutes much of the water isation WWF and the German development appear to have gone into reverse. One key it does use. Hydraulic fracturing poses similar bank DEG, found that 191 of 300 companies reason is that there is less water for food risks to vital groundwater supplies, while hy- studied were exposed to serious business risk production. Rainfall patterns are changing drogen production is also water intensive. because of environmental, social and gover- and we are approaching or often exceeding nance issues related to freshwater. the diversion limits for many rivers, lakes World leaders will gather in Rio de Janeiro in and aquifers. Another reason is more com- Brazil in June 2012, to review progress and Running out of adequate water supplies is petition for available water from booming chart a new course 20 years after the origi- just one dimension of business water risk. cities and from crops produced for animal nal Rio summit on sustainable development. Others include additional water-related di- feed and bio-energy. Food, water and energy security are all on saster risks, regulatory and reputational the agenda, but on the draft statement the risks and more public and media scrutiny What is increasingly obvious is that it is now proposals for international agreement on of water-related issues. Companies are now impossible to consider food security, water water contain the worst ratio of platitudes to finding they have to be responsible and security and energy security in isolation. In proposals for action. responsive in catchments as well as in the “a hot, flat and crowded” world, we are talk- communities in which they operate. ing about trade-offs as much as choices. The For instance, international systems and na- weakest, most vulnerable link is likely to be tions have a very patchy record concerning Similarly, companies that have responded to freshwater availability. the sharing of water that crosses, forms or what is sometimes known as carbon or cli- lies under international boundaries. A UN mate risk are now appreciating broader ben- Our water – for everything – is increasingly convention on water sharing is setting a new efits in terms of greater energy security. The being obtained from further away, deeper record for the length of time it is taking to switch towards renewables also diversifies down, or even from the sea with one very accumulate enough signatories to come into energy sources with local alternatives, while apt description for desalinated water be- force. Behind the 15-year delay is the behind- the push towards energy efficiency reduces ing “bottled electricity.” There has been a the-scenes lobbying of upstream nations like dependence and thereby risk.

ISSUE 1 ENERGY l 19 The necessary and possible case for alternative energy Dan Plesch is the Director of the Centre for International Studies and Diplomacy at the School of Oriental and African Studies

Fossil Fuel Dependence These will stay the key strategic resources Just for the sake of argument, if we were The greatest risk arising from scarce resourc- as the main areas of supply and demand are to create 150 percent of present electric- es in the modern age concerns oil. A solution separate. Their location and transport routes ity supply from renewable energy over 20 can be found in the type of political leader- will therefore be security drivers for the de- years, the cost at these rates would be GBP ship shown by France in the 1970s, but this veloped and developing nations alike.” 90 billion or just over GBP 4 billion a year. time directed at low risk new technologies. This is a huge sum to the average constitu- The reliance of the industrialized world on ent, but quite a manageable sum in the cur- this single type of fuel for motor vehicles A Strategic Shift rent government’s budget. would not matter if oil was found as easily as The argument I am making is that it is both coal or even trees, but the fact that 60 per- necessary and possible to make a revolu- cent of world reserves are located in the Per- tionary breakthrough in alternative sup- Cost Comparison sian Gulf has resulted in intense and growing plies. Such a strategic shift in technology Renewable energy, including shifting to competition between states for access to it. towards renewable sources for transport, new engines and fuels for cars, presents business and home use is possible and some technical challenges. The problems In addition to its dependence on oil imports, should be made a national security prior- are mainly concerned with driving down Europe is increasingly relying on the impor- ity in the UK, the EU and in the world as costs, through improved economies of scale tation of natural gas to run its electric power a whole. One historical example indicates and from increasing research and develop- generation. As Britain’s Institute for Civil En- that a revolutionary transition is practical. ment. These challenges are far less difficult gineers put it: “This country has been self In the early 1970s France drew less than 10 than those of creating new types of nucle- sufficient in electricity generation for the percent of its energy from nuclear reactors, ar reactors. Given that the capital cost of past 100 years. This is changing dramatical- today it draws approximately 75 percent1. nuclear generation is concentrated at just ly. The (domestic) generation shortfall (80 This shift required massive investment by a few sites, with renewable energy there per cent of current capacity) will be taken the French government and was imple- could be thousands of generation points. up by gas, 90 percent of which will be de- mented to free France from dependence Securing oil supplies also has a large ongo- livered to this country through a very small on oil-fired electric power plants and from ing cost to the industrialized world and to number of pipelines.” the problem of the decline in both its own oil producers themselves and this is rarely and Germany’s supplies of coal. included when traditional energy strategies The mainstream view of the problem of en- are evaluated or when an assessment of the ergy security is summarized in “Strategic The main study on the cost of this transition benefits of shifting to renewables is made. Trends,” a study of Britain’s Ministry of De- was carried out for the French Prime Minister, The security cost of oil – and in the future, fence’s think tank, the Joint Doctrine and Lionel Jospin, in 2000. One of the authors of gas – is counted in the cash required to Concepts Centre: wrote to me saying; “In total, France spent support military forces, and in putting the about FRF 1,189 billion – or roughly EUR 180 concern to secure oil ahead of other priori- “Global demand for energy resources will billion – in the first 21 years of operation of its ties such as democracy and human rights increase significantly due primarily to devel- nuclear fleet, corresponding to an average of in some of the countries concerned. These opment and industrialization in South and EUR 8.6 billion a year.”2 This does not include costs form what we can call a human rights East Asia. There is little prospect of revo- decommissioning costs. and military subsidy required to secure oil lutionary breakthroughs in alternative sup- and gas. In addition, the crises threatening plies. Renewable and nuclear energy sourc- By way of comparison, the UK is seeking to interrupt supplies from the Middle East es will remain of moderate importance but funding of some GBP 6 billion to achieve cause the oil price to go up and down with a fossil fuels, and particularly oil and gas, will around 10 percent electricity production consequent negative impact on the interna- persist to be dominant. from wind by the end of the decade. tional economy.

20 INSIGHT istockphoto.com: TebNad istockphoto.com:

It may seem odd to include these costs be- New fuels and engines include petrol sub- pursued by hawkish governments in Wash- cause they are not normally included in tra- stitutes from plants, electricity-generating ington and London. ditional media analysis. Although the poten- and fuel cells drawing electric power from tial extra costs of developing renewables are wind and solar energy. Major corporations A shift out of oil and gas would be a stra- often dismissed, because it is said that they and governments around the world are al- tegic move that tackles one of the worst- will need a ‘green subsidy’ or ‘green tax’. As ready pursuing some of these options. case scenarios that may be inflicted upon Shimon Awerbuch of Sussex University ob- the industrialized world. The result of the served: “The mystery is why policymakers These new options should be implemented shift would be to remove a major cause of have not exploited the obvious connection rapidly. Doing so makes sense in terms of conflict and to create a stronger strategic between the enormous costs imposed by the realist politics that are supposedly being position. fossil [fuel] volatility and the potential for mit- igating these costs offered by renewables.” 3 Once the costs of price volatility and security 1 International Energy Agency, Key World Energy Statistics 2002, Paris, 2003 are considered, the economics of a shift to re- newables becomes even more attractive. 2 The main study on the costs of this transition was carried out in 2000 for the then Prime Minister of France, Lionel Jospin. The only exercise of that type that was done in France was the mission for Prime Minister Jospin in 2000 of evaluating the economics of the French nuclear option. Dan Plesch was co-author of the main annex report, together with Cost and Risk Mitigation an expert from the French CEA (Commissariat à l’Energie Atomique), on ‘Le Parc Nucléaire Officials in Western governments assume Actuel.’ The purpose was to establish the material and economic balance of the existing nuclear fleet in France. This report only exists in French. It can be downloaded (in three that any major disruptions to supply will be parts) from the web links below: short-lived. If they prove to be wrong in this http://lesrapports.ladocumentationfrancaise.fr/BRP/014000107/0000.pdf assumption, the economic and political con- http://lesrapports.ladocumentationfrancaise.fr/BRP/014000107/0001.pdf sequences would be severe. Fortunately, us- http://lesrapports.ladocumentationfrancaise.fr/BRP/014000107/0002.pdf ing wind and solar power for electric gener- 3 Determining the real cost, why renewable power is more cost competitive than previously ation, new fuels and engines for vehicles can believed, Renewable Energy World March-April 2003 reduce and eliminate these costs and risks.

ISSUE 1 ENERGY l 21 Prospects for a cleaner coal- powered future in Asia Responsible Research is an independent provider of environment, social and governance (ESG) research for global institutional investors. It is based in Singapore and focuses on analysis of Asian companies.

Coal is without doubt known as one of the dirtiest fuels, and its continued widespread consumption is clearly a Faustian bargain. Coal combustion emits particulates, sulphur oxides, nitrogen oxides, mercury and other metals, including radioactive materials at a much higher proportion than any other energy source, causing local pollution and contributing to global climate change.

Coal mining and coal transportation are also responsible for numerous environmen- tal and social ills. Hundreds of thousands of people die early deaths every year due to

coal, some in mines and others because of Kachel Sylwia istockphoto.com: emissions created through burning it. Yet despite growing awareness of its severe consequences, the use of coal is actually on pollution, as well as the difficulties access- ten most significant operators across the the rise. ing enough supplies of sufficient quality. All key jurisdictions of China, India, Indonesia, of which make a rethink increasingly likely. South Korea and Hong Kong. In Asia, coal is the dominant source of pow- er generation and, under current policies, it In order to mitigate some of these ill effects, In each case, the companies are involved is projected to remain so for a number of cleaner coal technologies are being imple- in both implementing and shaping their decades to come. The International Energy mented, offering a wide range of new tech- respective national policies and holding a Agency estimates that in 2008, 68 per- nologies and processes that may help to ad- set of interests that are not always aligned cent of non-OECD Asia’s total power gen- dress some of these issues. with each other or with minority share- eration was derived from coal, which would holders. For investors, the financial op- move to 65 percent in 2030 under current Many cleaner coal technologies can be ap- portunities and risk mitigation offered by policies. Unless there is a dramatic rethink plied as retrofits to existing power plants, al- cleaner coal, is a growing dynamic in Asia around energy infrastructure, coal will re- though the most efficient are best designed that is increasingly set to influence indus- main the lynchpin of energy supply in Asia, at the outset. The outcomes can be broadly try returns. if not globally. categorized as lower CO2 emissions; im- proved local area emissions, which include Of the companies covered in the report, Coal’s current legitimacy is based on the sulphur oxides (SOx), nitrous oxides (NOx), Hong Kong-based CLP Holdings is out in social benefits that low-cost electricity can particulates, and heavy metals including front, having developed strategies to profit deliver, such as helping to bring people in mercury; and improved coal efficiency. from available cleaner coal promotion mea- China out of poverty over the last two de- sures. Afforded by its monopoly rights to cades. These benefits will however be called In a recent report, Responsible Research ex- stable cash flow from its Hong Kong busi- into question if they cannot be sustained or amined the marketplace in emerging Asia ness and by the flexibility of private owner- come at too high a cost. Pressure is already and considered the prospects for cleaner ship, CLP has become an advocate for low mounting due to continued climate change coal technology and processes. The report, carbon energy, including cleaner coal, in the effects, the burgeoning health costs of coal entitled ‘Cleaner Coal in Asia,’ looked at the Asia region.

22 INSIGHT istockphoto.com: Sasha Radosavljevic istockphoto.com:

For CLP, this strategy sets it apart from its All of China’s five large power genera- It could be argued that the cleanest coal competitors while also advancing aware- tional companies have made significant is no coal. The current lack of mechanisms ness of the need to proactively guard the advancement in this area; Huaneng Power to price environmental and social impacts company against environment related repu- International stands out in particular. does not mean that future mechanisms will tation risks. not be developed. Even if societies fail to In India, private power operators are driving implement such measures, the environmen- South Korea, among Asia’s wealthier econo- the construction to fulfill gaps in capacity, tal consequences of coal-fired power gener- mies, has implemented ‘developed world’ but expediency is still trumping long-term ation will, with time, be impossible to ignore. standard regulations. That, and the lack of project viability. Reliance Power and Tata domestic coal resources (and thus reliance Power are two well-connected and well- Should legislation that actually addresses on highly priced imported coal, a major in- funded companies that are rapidly adding environmental risks be enacted, this would centive for greater efficiency) have driven coal-fired capacity at efficiency and emis- pose risks to the asset base of those com- KEPCO to become a leader in cleaner coal sions standards that only just meet accept- panies that are not currently addressing en- technology to the extent that the company able standards. vironmental impacts – and their investors. operates some of the most advanced coal fleets in the world. However, CLP Holdings is an exception, For responsible and mainstream investors and the last plant they built in India in- seeking to comply with ethical and United In China, all new coal plants require the in- cluded Flue Gas Desulphurisation (FGD) Nations Global Compact guidelines there are stallation of SOx removal equipment and equipment to reduce SOx and other harm- significant opportunities to discuss the re- the government has pushed for improved ful emissions. Although this was ahead of turns on cleaner coal investments with com- plant efficiency. Chinese power plant op- current legislation and presented higher panies, as well as highlighting their position erators have complied and they have also upfront costs, the company presented the statements on climate change to national responded to rising coal prices by upgrad- case that it was in the interests of the com- legislators in the region if they are to contin- ing average fleet efficiencies at faster missioning authority to include an FGD ue to retain assets under management and rates than planned or required. management system. to attract greater assets in the future.

ISSUE 1 ENERGY l 23 Investment risks and opportunities for Asia’s energy sector ASrIA is a not for profit, membership association dedicated to promoting sustainable finance and investment in the Asia Pacific region

Asia is expected to play a key role in driv- Companies that fail to develop a positive For example, fund managers at the Climate ing the increase of global primary energy “green” reputation may find it more difficult Advocacy Fund, are issuing shareholder demand over the next 25 years. The Inter- to obtain speedy approval for projects, as resolutions seeking to mandate board dis- national Energy Agency’s World Energy these generally go through a lengthy public closure of the carbon price assumptions for Outlook 2011, forecasts that energy de- review process project evaluation. mand will increase by one third from 2010 to 2035, with China and India making up Energy companies often benefit from gov- approximately 50 percent of the growth. ernment granted franchises at the expense Regulatory Risks Strong economic growth in ASEAN coun- of retail price controls. Companies not seen The 2011 APEC Ministerial Meeting Joint tries will further refocus the global energy to be environmentally friendly could find it Statement showed that government policy landscape towards Asia. (See Figure 1) difficult to obtain consumer and govern- remains a key driver in Asia’s energy sector. ment support and access to capital. Governments view the industry as highly While this emerging market will create new strategic and often intervene, which can opportunities for investors, they will also To mitigate reputational risks and to main- create risks for investors. For example, poli- need to be in tune with the various associ- tain and build trust, energy companies cies that push the sector in a particular di- ated risks. should provide clear messages to investors rection, such as towards lower carbon inten- and other stakeholders on their medium sity as is the current trend, can lead to major and long-term strategies to manage the new taxation and market pricing distortions. Reputational Risk challenge of climate change and on options Sentiment in Asia is shifting in favor of “green- being pursued for diversifying into cleaner Resource and carbon taxes or carbon trad- er” sources of energy, with potentially nega- energy. Due to new local and international ing schemes may raise the cost of carbon- tive implications for the reputation of energy regulations , Asian companies will face in- intensive energy projects. China’s resource companies that remain carbon-intensive. creasing scrutiny from institutional investors. tax reform, effective November 1, 2011, means for instance that crude oil and natu- ral gas will be taxed based on sales rather than on production. Rare earth and cok- Figure 1: Emerging economics driving global Figure 2: Renewable subsidies of USD 66 bn ing coal are now also subject to higher energy demand through 2035 (2010) versus USD 409bn for fossil fuels tax rates. Meanwhile mandatory retrofit need to climb to USD 250bn in 2035 schemes to reduce greenhouse gas emis- sions from energy facilities will incur ad- ditional capital expenses in the short term, although operational costs may be reduced in the longer term.

Energy companies are also heavily depen- dent on governments for their upstream primary energy exploration and develop- ment concessions, and their downstream utilities’ franchises. A shift in government policy toward favoring low carbon primary energy sources could greatly increase the cost of access to high-carbon primary en-

Source: International Energy Agency Source: International Energy Agency ergy sources such as oil and coal.

24 INSIGHT Physical Risks test the structural limits of upstream oil Energy Sector Summary As the United Nations Economic and So- rigs, refineries and power plants. The massive growth expected for Asia’s en- cial Commission for Asia and the Pacific ergy sector will open up major investment outlines, the Asian and Pacific region is opportunities in the coming years. However, prone to various types of disasters, includ- Opportunities they will go hand-in-hand with significant ing floods, cyclones, earthquakes, drought, Opportunities within the energy sector lie risks, both foreseeable and unforeseeable. storm surges and tsunamis. In the last ten in the potential to invest in relatively low- The sector will have to adapt to align with years, on average, more than 200 mil- carbon primary energy sources and elec- public sentiment that is increasingly leaning lion people were impacted and more than tric power generation as well as smart towards a low-carbon future. 70,000 people were killed by natural disas- grids. The investment attractiveness of ters annually. renewable energy sources such as wind, Governments are already changing their pol- solar and biomass is improving over time icies in this vein, which affects the compa- Rising sea levels are also known to be a as government policies increasingly favor nies involved by way of taxes and regulation. threat to the 70 percent of consumers and these sectors and as economies of scale In Asia, the energy sector is also vulnerable businesses located near sea level in Asia, are achieved. (See Figure 2) to the physical risks of a changing climate the highest regional percentage in the and more extreme weather events. Investors world. These consumers and businesses Energy companies leading the shift to low- will need to take all of these factors into ac- are the retail customers of Asia’s energy carbon power are particularly well placed count when determining valuations. companies. Rising sea levels also threat- to profit from these new investment op- en primary energy investments located portunities. There is also the possibility of in low-lying areas. More volatile weather investing in renewable energy equipment patterns brought about by climate change manufacturers, and in climate change miti- may also increase the potential for cata- gation and adaptation measures such as strophic physical threats that will greatly carbon and methane capture.

David and the EU Goliath. A giant gamble

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ISSUE 1 ENERGY l 25 Keeping your good name and the cost of losing it Leesa Soulodre is an Associate Professor in Marketing and Communications, Director of BluePedal Group and Senior Advisor to RepRisk AG. Leesa works with the world’s largest companies in the delivery of reputation risk management in the context of financial and enterprise risk management and compliance.

In an age when trust and corporate ethics staff, retain and increase revenues, deliver of “stake seekers” who also claim to have are so valued, the reputation of companies services and to compete in today’s global a stake in the company’s decision-making needs to be managed with great care. The marketplace. Companies depend on pub- and aim to put new issues on the corporate price of losing your reputation is uncomfort- lic acceptance of their corporate actions agenda. Companies today seek to build re- ably high. Each year, millions of pounds are and therefore position themselves in accor- lationships with such groups to anticipate spent promoting a company and its brands dance not only with legislative standards, and prevent issues that could have an im- to create the perfect image. Yet a single neg- but also in line with public perceptions, ethi- pact on their reputation. This process is ative comment can escalate and destroy a cal standards and etiquette. An effective typically managed through Corporate So- reputation or access to market capital within early warning system can alert executives cial Responsibility (CSR), where critics are days. As a result, reputation management is to reputational risks quickly, and engaging invited to join dialogues and round tables fast becoming more than just a buzzword with stakeholders means resources can be regarding controversial issues. among business professionals. directed to deal with such threats.

Many firms, especially transnational corpo- The role of the Communications A board level priority rations, find it increasingly difficult to man- Department Corporate reputation is now a board level age and handle conflicts with external inter- The Communications team lies at the heart priority, affecting an organization’s ability est groups. In addition to their established of reputation management. When a crisis to source local partners, attract and retain stakeholders, they now face a complex web hits, it is the in-house communications and PR specialists that take the lead in formu- lating the communications strategy. Con- Figure 1: The Issues Lifecycle: From Reactive to Proactive for Competitive Advantage sultation and dialogue with stakeholders is increasingly becoming part of mainstream business practice and is no longer simply an optional means to “touch base” with in- terest groups. Rather, stakeholder engage- ment is now viewed as critical to business strategy; it represents a way of gathering important feedback, anticipating and man- aging conflicts, improving decision-making, building consensus amongst diverse views, strengthening relationships and enhancing corporate reputation.

The Issues Lifecycle When an issue becomes public, the cost to manage it increases and the opportunity to influence the agenda is reduced. As we move into the political and regulatory envi- ronment, the issue becomes even harder to manage and influence.(See Figure 1)

26 INSIGHT New Challenges and Principles The increased volatility of issues in today’s business climate can really challenge Chief Executive Officers. The risks run from poorer press coverage to potentially catastrophic crises and reputational failure. Today’s busi- ness leaders need to enhance both opera- tional and strategic performance, maintain control over costs and at the same time man- age advocacy of key stakeholders across multiple geographies and time zones.

We know that reputation is not what the company thinks about itself, but rather the attitudes and opinions that others have formed, even if not grounded in fact. Stake- holders get their information partly from advertising, annual reports, events and corporate websites. These are elements that the company can largely control. But what about information made public by journalists, investors, community newslet- ters, think tanks, customer and employee personal blogs and political activists? How does one ensure that people have accurate information from which to form opinions and how can an issue be prevented from turning into a crisis?

Energy organizations today need to ensure they have a dialogue with the relevant audi- Figure 2: Battleground for Stakeholder Advocacy ences, with the right information and at the right time. Executive engagement programs Research by the public relations company, which combines reassessment of corporate and communications teams work best when Edelman, found that if you go into a cri- policy and continuous communication. they are connected with the relevant agen- sis as a distrusted company, it takes only cies, departments and programs. 1-2 negative stories for a person to believe This will in itself create better understand- negative news. However if you go in as a ing of stakeholder sentiment, which is criti- trusted company, it takes only 1-2 posi- cal to capitalizing on opportunities and The New Tool of Trade – Trust tive stories for a person to believe positive protecting the organization against repu- Development of advantage-creating re- news. Therefore, trust today can now be tational risks. Hence, corporations must sources such as employee motivation, cus- considered a protective agent and a facili- build relationships across the entire stake- tomer loyalty, influence on sector regulation tator of action leading to tangible benefits holder landscape by engaging them in a and local license to operate are often depen- for a corporation. two-way dialogue, and always listening be- dent on stakeholder instrumental strategies fore communicating. aimed at developing trust. This stakeholder battlefield is where license to operate can The Future be won or lost. (See Figure 2) It is clear that trust has to be earned through a company’s actions, and reinforced by Building an actionable stakeholder strategy transparency and engagement. Corpora- where corporate reputation and behavior tions today have the opportunity to build are aligned is now a critical factor for sus- an enduring foundation of trust if its lead- taining license to operate. The choice be- ers commit to a strategy that brings value tween ignorance and building trustworthi- to both investors and society. However, to- ness as a core capability may well become day they must further explain how profits vital for competitive advantage in a world are made and deliver a new level of trans- looking for institutions it can count on for parency on business practices. Public en- the long term. gagement can be the driver for this change,

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