AVCJ Awards 2020: Responsible Investment: Canvest Environment

One smells a waste-to-energy (WTE) plant before seeing it, often from miles away. It’s the familiar but repulsive rotten-eggs stench of garbage, and it wouldn’t make sense to remove it too far from residential areas. WTE plants must stay close to their source of fuel, household rubbish, for practical economic, logistical, and environmental reasons.

Controlling WTE odor pollution is mostly a simple matter of plant design and spraying down trucks and nearby roads to keep the area clean. It’s not rocket science, but it’s not always done well. As with many corporate environmental, social, and governance (ESG) issues, it’s a question of how detailed the management is and whether the situation is being monitored systematically.

This is the philosophy behind much of the ESG-related upkeep and progress at Canvest Environmental, a Chinese WTE operator backed by Olympus Capital. The GP acquired an approximately 7% interest in the company in 2014 prior to its Hong Kong IPO and has made a number of follow-own investments over the years. It currently holds about a 5.6% interest and a seat on the board. 

Olympus requires a yearly ESG report and visits every new plant upon its completion. Each site is required to have a public exhibition hall to maximize community understanding of what goes on inside, as well as garden-like landscaping that softens the industrial goings-on for visitors and staff alike. Since 2014, the Canvest footprint has grown from two to 32 plants across China.

Open door policy

“One of the common challenges in WTE is the not-in-my-backyard problem. People like the idea, but they don’t want it built next to their homes,” says Alex Lui, a managing director at Olympus and a director on the Canvest board. “The exhibition hall is the best way for the company to engage on ESG issues directly with the public and just get people comfortable with the fact that this is being done in a very controlled, high-quality way.”

Canvest acquired what is now its flagship plant in Guangdong in 2011, transforming it from a polluting underperformer into an industry trendsetter using these techniques. Olympus was joined by RRJ Capital and BOCI Private Equity in a $48 million investment ahead of a HK$1.2 billion ($155 million) IPO in 2014. The company is now the largest non-state-owned WTE player in China with a market capitalization around HK$8.3 billion.

“That kind of garden-like design and open-door policy was uncommon in the early 2010s, and I think we set the standard for the industry in those areas,” says Jessica Jook, Canvest’s chief strategy officer and head of ESG. “That was part of the reason Olympus was interested in us. A lot of the private equity firms that visited us when we were doing our pre-IPO funding were wowed by the plant.”

The International Finance Corporation (IFC) was one of these investors. As an Olympus LP, IFC came for a site visit with the sole intention of perusing the latest investment of one of its portfolio managers. The development finance institution was impressed sufficiently to forge its own relationship with Canvest, going on to provide $110 million in loans to date.

More than 32,600 institutional and community visitors were received at Canvest’s various exhibition halls last year alone, and virtual tours kept the service running during COVID-19. These facilities have also served the dual purpose of showcasing best-practice WTE for government officials in neighboring regions who might be interested in bringing the technology to their communities but remain wary of the not-in-my-backyard factor.

“Everyone in this industry goes through China’s Environmental Protection Department to get licensing and zoning approvals – what sets Canvest apart is the dialogue with town representatives and transparent community consultation workshops,” Lui says. “You have to alleviate those concerns because just having the right papers for construction doesn’t mean there won’t be protestors at the building of the plant.”

Olympus’ key contributions on sustainability have been in the areas of reporting, policy, and culture. This has included encouragement to follow the UN’s Sustainable Development Goals (SDG) Compass guidance and integrate 12 SDGs into the business strategy and operations. The private equity firm also works with Canvest on reviewing ESG reports from various non-governmental organizations and conducting peer benchmarking against Chinese companies.

Compliance by numbers

Meanwhile, there has been a strong push toward sustainable supply chains, with 69% of procurement in 2019 coming from local suppliers in the company’s core provinces of operation. In addition, per request from Canvest, 58% of suppliers have received International Organization for Standardization (ISO) certification for environmental management systems, and 53% have been certified to ISO occupational health and safety management standards.

Site visits by Olympus have a strong safety focus; there were no work-related injuries in 2020. The investor also supported the establishment of social responsibility management and occupational health codes, including non-discriminatory recruitment standards and workers’ rights around collective bargaining.

Staff-focused initiatives include arrangements for social activities such as birthday parties and sports competitions, as well as a “caring fund” to provide financial support to employees in need.  There are several stipulations specific to female employees, especially in terms of ensuring safety at work during pregnancy.

“A lot of times, employee polices are incorporated in a company, but they are not fully implemented in day-to-day operations,” Lui says. “Canvest takes worker rights and occupational health and safety very seriously, and with two women in senior management – the CFO and the chairwoman – practical policy implementation gets full support. The standard is so strict, it covers all areas of worker safety whether or not it is a real and immediate issue.”

Five WTE plants have been awarded AAA grading – the highest ESG certification by local authorities – in recognition of zero-complaint operations and significant emissions reduction progress. Between 2017 and 2019, the amount of carbon dioxide equivalent offset increased 124% to 2.8 million tons. Long-range emissions targets are modeled on stricter EU standards rather than Chinese requirements.

“We told them to think forward in terms of standards because these are long-term utility projects and what was the standard in China five years ago would not be applicable anymore,” Lui says. “The idea is to set higher standards at the very start so that even if regulations are tightened, the company will not be affected. Of course, that’s exactly what has happened in China, and we think that will continue to happen in the future.”

A number of technology plays have supported these efforts. In the early 2010s, Canvest was an early adopter of the “moving grate” incineration system, which allows more efficient combustion and therefore lower emissions than the traditional approach. This is now essentially the industry’s de facto methodology.

Automation, digital, and online tools are also in the mix, interestingly more for purposes of transparency than efficiency. Truck weighing stations are automatically connected to local authorities to avoid dispute in the tonnages processed and therefore fees collected. Emissions data is maintained in real-time on LED displays at the plant gate for public inspection. This information is also continuously relayed and monitored online and available on government websites.

Getting creative

Perhaps the unifying theme around Canvest’s use of technology may be that while the company is not in the business of R&D, it remains technologically innovative. Only well-established science and systems are deployed – but they are often deployed in creative or unique ways. 

For example, the plant in Laibin, one of two in the Guangxi Zhuang Autonomous Region, has been combining “white mud,” the byproduct of a nearby paper mill, with its regular municipal waste fuel as a deacidifying agent. Canvest’s engineering team conceptualized this novel exploitation of known chemical properties to create a win-win in the form of a cleaner and cheaper incarnation process.

“The most important thing for our plants is to have a harmonious relationship with our neighbors and the local government but also with a competitive mindset,” says Jook. “To discover and realize a project like the white mud project, you need to have continued engagement with the local government to gather information and actually take the initiative.”

Canvest has experienced massive growth in overall business development under Olympus’ guidance, with treatment capacity growing from only 6,900 tons of waste a year in 2014 to 45,640 tons in 2020. Power generated climbed 62% between 2017 and 2019 to 2.4 megawatt hours a year, 88% of which is grid-connected.

Revenue increased 234% between 2015 and 2019, reaching about HK$3.9 billion, while net profit grew from HK$289 million to HK$892 million during the same period. These figures amounted to HK$2 billion and HK$452 million, respectively, in the first half of 2020.

“People in industries like this do skim a little bit on maintaining equipment so they can get higher cost savings. Canvest does not,” Lui says. “We’ve found that operating at high standards has actually proved to be beneficial to the bottom line – quite the contrary to what people who cut corners think.”

Pictured: Alex Lui (left) of Olympus Capital receives the Responsible Investment award from AVCJ's Allen Lee

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• Topics
• Greater China
• Cleantech
• Expansion
• China
• ESG
• Olympus Capital Holdings Asia
• AVCJ Awards