The research, entitled The Hidden Costs of China’s Coal-to-Chemical Sector: A Framework to Stress Test Investments for Environmental Risks, seeks to provide insights for policy makers and investors to facilitate sustainable business decision making. Energy Foundation China commissioned the research.
The research presents an assessment framework to measure the hidden costs from one physical and six regulatory risk factors under various scenarios. Through the assessment, the findings show that future costs in China’s coal-to-chemical sector could increase by up to two-thirds as a result of environmental risks. The potential loss of production from regulatory compliance accounts for most of the total costs and water is the most prominent driving factor of risks with about 45 percent of the total environmental risk.
Application of China’s 13th Five-Year Plan (13FYP) growth target for coal to oil and coal to gas implies these risks will likely intensify as capacity grows in high-risk areas and spreads across regions. Environmental risks tend to have adverse impacts on the financial performance of projects, such as lower internal rate of return (IRR), higher breakeven threshold and higher risk of projects becoming stranded assets.
Lijian Zhao, Program Director of Environment Program at Energy Foundation China, said: “Water and energy are two basic resources to support the social and economic development, and it’s critical to achieve sustainable development for both water and energy. Water risk evaluation has become a core component for green finance, and could be a major driving force for clean energy and low carbon development. The water risk evaluation framework is a tool that aims to test the hidden environmental risks and to support policy makers and investors to quantify and internalize the real costs. China’s coal-to-chemical industry, one of the most important sectors that face water and energy challenges, was used as an example to test the tool, but the tool could be expanded to other industries to promote sustainable development for water and energy.”
Dr. Richard Mattison, CEO, Trucost, part of S&P Dow Jones Indices, said: “Green finance guidelines published last year by the Chinese government and the People’s Bank of China called on market participants to incorporate ESG factors into risk analysis. This research provides a robust analytical framework for market participants to stress test their investments for exposure to environmental risks. Market participants currently seeking to understand the financial implications of ESG issues are more likely to take advantage of the opportunities of China’s transition to a low-carbon economy.”
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