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

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.

　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.

　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