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From Toxic Waste to Toxic Assets: Investors Flee from a Lead-Acid Battery Producer

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Update time : 2013-09-11 13:11:00

On Friday, August 2nd, China’s state-media network CCTV aired a special report detailing Tianneng Power’s (HKG:0819) dumping of waste lead into communal lands and water supplies that surround the company’s largest lead-acid battery factory. The investigation, titled ‘“Hide and Seek” Lead Pollution’ (躲猫猫的铅污染), found that lead toxicity levels in blood samples taken from local residents could be up to a hundred times higher than national public health and safety standards. Following fears that the facility in question, responsible for producing almost half of Tianneng’s battery products, might be shut down by government authorities, the company experienced a one-day 20% trading loss before share-sales were suspended by the Hong Kong Stock Exchange (HKEx).

 Tianneng’s most recent controversy highlights the need for investors and regulators alike to pay much closer attention to how companies implement their publically disclosed ESG risk-management strategies. The material impact lead pollution issues have on a business have long been known in a country that hosts a wide-range of environmentally intensive industries. While Tianneng and its industry peers periodically release information concerning their compliance with China’s environmental laws, the absence of substantive ESG and CSR reporting standards means that existing disclosures require far greater scrutiny to ensure core business risks are fully accounted for.

 ESG Risks and IPO Disclosures
 The underlying environmental challenges of the lead-acid battery industry become immediately clear when reviewing individual prospectuses from SynTao’s IPO Database. Tianneng and Chaowei Power Holdings Ltd. (HKG:0951), two of the top global manufacturers of electric bike batteries, both disclose the potentially material health and safety hazards associated with the production process, along with the difficulty of containing lead-based pollutants.

 

Company

ESG Factors

IPO-P Pg.#

Description

Tianneng Power

Ground Waste and Pollution

28-29

In May 2005, village residents in Changxing County alleged that the elevated blood lead levels of their children was cause by lead waste discharged by  Tianneng Battery. This resulted in demonstrations, production halts,  and a payment of RMB 1 million to  a local commission.

Occupation Health and Safety

34

Impossible to eliminate the entire risk of exposing to lead dust or particles so that employees may be found to have medium elevated blood lead level during routine medical checks.

Ground Pollution and Waste

69-72

Details the environmental standards applicable to the operations with the specific limits of lead concentration; pH in microgram per cubic meter per period for air quality, surface water condition, underground water condition, soil condition, and other water condition relating to agricultural standards.

Ground Waste and Pollution

Appendix IV-3

MWH Inc. (Independent assessment group) recommends specific action to remove lead in the event water was discharge directly into the environment (not through the municipal waste water system). These include installation of new equipment at an estimated USD 750,000 to USD 1,500,000.

Chaowei Power Holdings Inc.

Ground Pollution and Waste

64

Lead pollution a clear challenge to environmental sustainability, even with nearly 100% recycling . Pollution is emitted in various forms of solid, liquid, and airborne waste, resulting from the small-scale, informal lead-producing operations that are difficult to regulate or monitor.

Ground Pollution and Waste

146

Installed ventilation systems at all the production plants to collect lead powder, lead fumes and acid fumes for treatment and disposal pursuant to the applicable environmental laws and regulations in China.

Occupational Health and Safety

147

80% of employees affected by lead-poisoning were engaged in production processes with close contact to lead , and were found to have excessive lead levels in the year immediately after they joined the group

 Taken at face value, these disclosures suggest that both companies take their non-financial risks seriously, openly describing the main ESG challenges the two single-product manufacturers typically encounter. Tianneng went a step further in its prospectus in discussing its response to a contentious incident in 2005, when it was revealed that hundreds of children had suffered from lead poisoning after local water sources were contaminated by one of its factories.

 Building on Disclosure Analysis
 For investors and other stakeholders, ESG disclosures at IPO mark only the beginning of a research process focused on a company’s ability to continually manage their stated environmental business obligations. To prevent future incidents from reoccurring during and after the IPO processes, Tianneng hired an independent consulting group to assess its facilities.

 In its first report, MWH Ltd. stated that, should wastewater be discharged directly into the environment, Tianneng would be subject to the most stringent environmental standards, and could be at risk of government regulators fining or shutting down its operations. An additional USD 1.5 million worth of investments into new treatment facilities was deemed necessary to ensure additional pollutants did not enter public water supplies.

 Since 2007, Tianneng has relied upon MWH’s assessments in its annual reports to bolster its environmental safety credentials, maintaining that the company continues to abide by all applicable national environmental standards. In none of these documents, however, does the company indicate whether it acted upon MWH’s additional pollution control recommendations.

Annual Report

Page

Description

2008

22

“..Following the identification of immaterial non-compliance issues at the five plants during the last environmental audit conducted by MWH in March 2008, corrective actions have been taken to become in compliance with the applicable Chinese environmental laws and regulations.

 

According to the report issued by MWH dated 25 February 2009, a review of the monitoring data for the Tianneng Power sites indicates that no additional corrective actions would be required for the five sites with respect to the status of their environmental discharges to the environment in light of the relevant applicable international environmental standards.”

2010

29

“According to the report issued by MWH dated 17 February 2011, a review of the monitoring data for the Tianneng Power sites indicates that no additional corrective actions would be required for the five sites with respect to the status of their environmental discharges to the environment in light of the relevant applicable international environmental standards.”

2012

35

“According to the report issued by MWH dated 7 March 2013, a review of the monitoring data for the Tianneng Power sites indicates that no additional corrective actions would be required for the twelve sites with respect to the status of their environmental discharges to the environment in light of the relevant applicable international environmental standards”

 As the CCTV report detailed, many local environmental certifications for Tianneng’s factories were either outdated or had never been made. Reporters walking around the perimeter of the company’s newest battery facility found untreated waste water being pumped directly into surrounding streams, the same issue MWH identified in its original report.

 ESG and Financial Performance
 Tianneng’s recent scandal may be a sign that Chinese companies are struggling to balance multiple business commitments amidst increasingly difficult market conditions. Faced with large short-term debt obligations, a consolidating domestic market, dividend commitments, and slowing demand growth for its main product, Tianneng may have opted to cut planned expenditures on pollution controls in order to maintain its bottom-line.

 Assuming a company will perform based solely on a limited reading of financial indicators, however, chances negative returns. Several months before the current controversy, Moody’s Investment Research service upgraded Tianneng’s credit rating to BA3 for improved financial performance, despite stating that increased environmental scrutiny by regulators could cut into its already thin profit margins. Similarly, Ipsos Research presented Tianneng with an industry award as the best overall battery producer hours before CCTV released its investigation.

 The modest capital expenditure required to have prevented this incident now seems considerably small in the face of the USD 100 million in market value Tianneng has lost since August 5th; subsequently erasing gains made against a six-month slump in share-prices. Chaowei Power, on the other hand, has continued to release significant information on the development of its environmental safety protocols since its 2010 IPO, and posted a 5% gain following news of Tianneng’s pollution scandal.

 Investor Activism
 In a market where many listed companies face material ESG risks, the lesson is clear. IPO prospectuses and continuous monitoring efforts can offer useful insights into baseline industry risks. The main remaining question is how the investment community should build on the insights gained from existing disclosures. In Tianneng’s case, the company’s focus on aggressive expansion in an environmentally-intensive product segment appears to have overwhelmed its fundamental environmental management obligations.

 This should suggest to investors that greater emphasis on material environmental capital expenditures are needed to sustain ongoing compliance needs. As markets have demonstrated throughout August, Tianneng’s poor ESG performance has ultimately had a significant material impact on its shareholders. Fundamental investors will be well advised to carefully crosscheck stated prospectus challenges against ongoing disclosures to avoid similar compliance gaps in the future.

 Written by Taylor Brown, Tsinghua IUP Student and SynTao ESG Intern