Future proof
Mining - exploring greener seams?
Nuclear future post Fukushima
Supply chains: rights and wrongs
Future proof
A visit to Scottish & Southern Energy's 'Greenwatt Way' residential development provided Jupiter with a glimpse into the future of UK housing. Home to Scottish & Southern Energy (SSE) employees, Slough Borough Council staff and local families, the ten properties in Berkshire are each compliant with 'Level 6' of the UK Code for Sustainable Homes - the highest standard attainable.
The trial development features rainwater harvesting, 'grey water' recycling, triple-glazed windows and enhanced insulation. Moreover, the homes receive electrical power from solar PV tiles covering the entire roof, while heating and hot water is supplied from a district heating system powered by a combination of renewable sources. With the UK government having reiterated within its 'Plan for Growth' - the requirement for all new homes to be built to the Level 6 criteria by 2016 - the project is providing SSE with practical insights into the likely effects on household energy demand and related opportunities for new services.
Jupiter too seeks to understand the indirect impacts of climate policies on company prospects. This includes assessing the impact of mandatory carbon reporting on companies in which we invest. Our conclusions have informed our dialogue with the Department for Environment, Farming, and Rural Affairs as part of their recent consultation on the issue. Our support for mandatory reporting by all large UK organisations was stated in an open letter to the UK government in July last year, which was also signed by companies such as Centrica and Microsoft. We support this policy as it is designed to increase transparency and provide a greater understanding of material climate risks and opportunities.
Mining - exploring greener seams?
The metals and mining sector is not typically thought of as a leading proponent of sustainability. The extraordinary pace of development in emerging economies has triggered a boom in demand for commodities such as coal and iron ore in recent years, causing prices to jump and reaping substantial returns for energy investors. Over the past decade, for example, mining giant BHP Billiton has risen to become the 6th largest company in the world with a market capitalisation in excess of $247bn.*
However, this massive growth rate has made it difficult for these large companies to ignore the need to ensure their activities are sustainable over the longer term and that limiting harm to the environment is just as important as focusing on revenue generation. This change in focus is driven in part by governments' determination to tackle global emissions and, with some companies, strong leadership from the Chief Executive. In recognition of this, Jupiter has met and engaged with representatives from a number of major international mining companies over the past few months, including BHP Billiton, Anglo American and Xstrata. We have discussed with these companies a number of key areas of interest and concern regarding the sector.
Safety continues to be a major concern for what remains a potentially hazardous business. As well as the safety of employees, the safety of the large numbers of third party contractors remains an area which we monitor. A key trend in the mining sector is the push into new markets in Africa and the Middle East, where the international mining companies will need to work hard to introduce a culture of safe working. In addition, as existing mining facilities mature, companies are pushing their activities deeper underground into more hazardous areas in order to maintain production volumes.
As the global mining sector has become increasingly visible and profitable, so governments have sought to protect their domestic industries and increase the state's share in their global success. Australia, Brazil and Peru have recently increased the tax rate on mining operations within their borders. Colombia is considering raising its mining tax rates, and there has been talk in South Africa of nationalising the industry.
Carbon taxation is a concern for mining companies with Australian operations, as the country looks set to adopt a carbon tax including the mining sector from 2012. Details of the scheme are yet to be finalised, but impact on the industry will be substantial if Australia adopts an ambitious carbon emissions reduction plan.
Water is also a critical factor for the global mining sector. Mining operations require large amounts of water and nearly all mines have water problems: pumping either too much or too little; or being at risk of flooding. BHP Billiton's production facilities in the Australian state of Queensland have still not recovered from the floods they endured in December 2010. By contrast, at BHP Billiton's Escondida facility, water needs to be pumped a great distance and 3kms of that is vertical, at substantial expense.
Overall, the international miners that Jupiter has engaged with have made great strides particularly in terms of safety over the past decade. They are also aware of the wide variety of other sustainability issues they face, such as water and 'resource nationalism' i.e. countries nationalising their commodity revenues. However, concerns remain over how the sector will cope with these growing challenges, particularly while the global economy remains fragile and emerging markets seek to rein in inflation.
*Financial Times, 25th June 2011, FT Global 500. Data as at 31st March 2011
Nuclear future post Fukushima
Since disaster struck Japan's north-eastern shores in early April there has been much public debate about the safety and future of nuclear power. Germany has said it will turn the nuclear taps off by 2022; China has halted nuclear development pending a security review of its 13 current nuclear plants and the 28 under construction; India has followed suit and called for a review and 94% of Italians recently voted against resuming nuclear development. Across the world there have been calls to switch from nuclear to other energy sources.
But the question is: switch to what? Filling the nuclear gap with more fossil fuels threatens both the environment and governments' chances of meeting climate change targets. Renewables, at least in the short and medium term, still need substantial development, particularly for the energy-thirsty developing world which needs reliable sources of power. Nonetheless, one of the consequences of the tragic aftermath of the Great Tohoku earthquake appears to be a substantial boost for 'green' development. Having shut down several nuclear power plants, Japan is only able to meet 85% of its power needs, prompting companies to turn to energy-saving and alternative technologies to fill the gap. There has also been a growing public interest in improving energy efficiency and adopting alternatives such as solar panels.
As a result of public pressure, we may well see the amount of nuclear-generated power decrease in the short-term as governments postpone building more plants and the current aging generation of nuclear facilities is decommissioned. In spite of its unpopularity, however, nuclear power seems unlikely to disappear in the long term. It is simply too good a solution to the problem of clean energy generation to dismiss. It is neither weather dependent, like most renewables, nor carbon-emitting, like gas and coal. The drawbacks to nuclear energy are waste disposal and public perceptions about its safety, which were naturally heightened by the incidents at Fukushima and, of course, Chernobyl. Yet Fukushima was unusual: an aging plant, by an earthquake fault. For generations, the UK has sourced almost a fifth of its power from nuclear, while in France that proportion is three-quarters. Unless a similarly reliable alternative can be found, nuclear energy looks set to stay.
Supply chains: rights and wrongs
Problems and opportunities stemming from different labour standards in clothing supply chains have been high on the agenda for a number of companies Jupiter has engaged with. Issues such as working conditions, forced labour, and payment of a 'living wage' continue to drive scrutiny of clothing brands and high-street retailers. Set within a context of supply chains that can rapidly shift towards the cheapest locations, we believe that an informed understanding of related risks on behalf of investee companies can help protect and enhance investor value.
As part of our recent dialogue on this subject, Jupiter attended a multi-stakeholder event hosted by Adidas to discuss the company's efforts to meet stakeholder expectations and reduce related risks towards its brand value. As the official sportswear partner to the London Olympics, its efforts can help enable the company to deliver successfully on its brand positioning.
Beyond reputational risk management, discussions with Marks & Spencer highlighted the benefits that ensuring payment of a living wage for workers employed within its supply chain can bring to its operations. Initial studies from its pilot scheme in collaboration with UK NGO ActionAid indicate that productivity levels have risen substantially when they are able to ensure that suppliers maintain the local benchmarked wage rate.