www.innovestgroup.com Uncovering Hidden Value Potential -  Electric Power Companies & The Climate Change Challenge Nationa...
Agenda <ul><li>Innovest  </li></ul><ul><li>Why Should We Care? Emerging Indicators  of Competitive Advantage - Key Drivers...
Innovest Background <ul><li>Innovest is an international equity research firm focusing on non-traditional drivers of inves...
What We Do <ul><li>Research coverage: reports on  2200 companies globally, 60+ sectors: North America, Europe, Asia-Pacifi...
<ul><li>An increasing number of academic and business studies show a positive correlation between environmental and stock ...
<ul><li>Environmental issues  represent one of the most complex challenges facing management </li></ul>Why Should We Care?...
What We Do “… The bulk of the value (60%) of any company is determined by its long-run or sustainable returns, the next 20...
<ul><li>Four Key Intangible Value Drivers </li></ul>The “Iceberg” balance sheet Financial Capital 30% <ul><li>Sustainable ...
The Findings–Analysis of Stock Performance Based on Environmental Ratings  ( May 1997 – Nov. 2005)  TOP HALF BOTTOM HALF S...
Superior Environmental Management – Benefits <ul><li>Reduce regulatory risk and litigation exposure </li></ul><ul><li>Impr...
<ul><li>ABN-AMRO Bank </li></ul><ul><li>ABP Investments </li></ul><ul><li>Aeltus Investment Management (ING) </li></ul><ul...
<ul><li>Historical Liabilities </li></ul><ul><li>Operating Risks (Toxic Emissions, Haz. Waste Disposal, Waste Disch.) </li...
Human Capital Recruitment/retention strategies Employee Motivation Innovation Capacity Knowledge Development & Disseminati...
Innovest Rating Model A rating from  AAA – CCC  is assigned to company based on total  Analyst assesses company against 10...
(60-80 Companies) Standard & Poors 500 Universe  <ul><li>Financial Screens </li></ul><ul><li>Valuation measures: P/E, Pric...
Enhanced Fixed Income Enhanced Index Equities, e.g. SSgA, ING  Investments,  Active Plus Equities, e.g.  ABP, Credit  Lyon...
Across a Number of Investment Styles. . .   1.30
The Green Planet Fund (IDEAM)
Focus: US Electric Power Sector and The Climate Change Challenge
Key Drivers <ul><li>Tightening global, regional, and domestic regulatory pressures  </li></ul><ul><li>Accounting-based num...
Electricity Industry  - Key Drivers Limited ability of companies to recover operating and compliance costs through regulat...
Downside Issues – Risk Metrics <ul><li>Air Emissions  Regulations : SO 2 , NO X , Hg and increasingly CO 2 </li></ul><ul><...
<ul><li>Projected changes in climates worldwide will affect the frequency and severity of extreme natural events with the ...
<ul><li>Investors have been filing shareholder resolutions demanding disclosure of the climate change risks and opportunit...
<ul><li>Legislation to cap CO 2  emissions  is inevitable </li></ul><ul><li>Question of “when and what form”, rather than ...
Exposure to Carbon Regulations Some States Are Moving Beyond Federal Standards
<ul><li>Electric power plants account for 40 percent of U.S. CO 2  emissions </li></ul>Downside Issues – Potential Carbon ...
<ul><li>Major C0 2  emitters may face higher debt charges from air quality conscious lenders </li></ul>Carbon Caps- Implic...
<ul><li>Financial impacts are highly differentiated across  companies, creating potential winners and losers: </li></ul><u...
<ul><li>Financial impacts are highly differentiated across  companies, creating potential winners and losers: </li></ul><u...
<ul><li>Develop GHG hedging strategy as critical component of risk    management to anticipate mandatory GHG emission caps...
<ul><li>Reduce GHG emissions through internal energy efficiency </li></ul>Industry Carbon Mitigation Practices  <ul><li>Of...
Benefits of Investments in  Green Power and Distributed Power Generation   <ul><li>Allow companies to gain expertise and s...
<ul><li>The EU’s Emissions Trading Scheme started in Jan 2005-Price of CO 2  is €26.5 per ton (March 2006) from €7 in Apri...
Identifies potential hidden risk and profit opportunity factors Risk Control Enhances reputation with internal (employees)...
For Further information Carla Tabossi Senior Research Analyst  Innovest Strategic Value Advisors 675 Third Avenue, Suite 4...
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  1. 1. www.innovestgroup.com Uncovering Hidden Value Potential - Electric Power Companies & The Climate Change Challenge National Renewable Energy Laboratory, 2006 Innovest STRATEGIC VALUE ADVISORS New York . Toronto . London . Paris . San Francisco
  2. 2. Agenda <ul><li>Innovest </li></ul><ul><li>Why Should We Care? Emerging Indicators of Competitive Advantage - Key Drivers </li></ul><ul><li>Implications for Investors </li></ul><ul><li>Innovest Rating Model- </li></ul><ul><li>Findings – The Electric Power Sector </li></ul><ul><li>Climate Change – A Key Emerging and F inancially-Relevant Value Driver </li></ul><ul><li>Conclusion- Q&A </li></ul>
  3. 3. Innovest Background <ul><li>Innovest is an international equity research firm focusing on non-traditional drivers of investment risk and return </li></ul><ul><li>Specializes in analyzing companies’ performance on intangible values with a focus on their impact on share price performance and the bottom line </li></ul><ul><li>Founded in 1995 and has grown to over 50 professionals </li></ul><ul><li>International presence with offices in San Francisco, New York, London, Paris, Toronto and Melbourne </li></ul><ul><li>Strategic investors include State Street Global Alliance and ABP, the largest European pension fund </li></ul>
  4. 4. What We Do <ul><li>Research coverage: reports on 2200 companies globally, 60+ sectors: North America, Europe, Asia-Pacific, global emerging markets </li></ul><ul><li>Best-in-class rating: from AAA (top) to CCC (Bottom) within each industry sector </li></ul><ul><li>Innovest’s perspective: AAA companies are those which supply the goods and services which we demand, with the lowest environmental impact relative to their peers and in a socially equitable manner </li></ul><ul><li>Over $1 billion currently invested based on Innovest’s research platform (e.g. State Street Global Advisors, T.Rowe Price, Crédit Agricole AM (IDeAM) and ABP) </li></ul>
  5. 5. <ul><li>An increasing number of academic and business studies show a positive correlation between environmental and stock market performance </li></ul><ul><li>Correlation exists because environmental performance is an excellent proxy for superior management quality </li></ul><ul><li>Management quality is a leading determinate of stock market performance </li></ul>Why Should We Care? Indicators of competitive advantage are changing…
  6. 6. <ul><li>Environmental issues represent one of the most complex challenges facing management </li></ul>Why Should We Care? Indicators of competitive advantage are changing… <ul><li>Many complex issues, stakeholders and non-financial measures to address </li></ul><ul><li>High level of technical, market and regulatory uncertainty </li></ul><ul><li>Success in this high complexity area implies ability to excel in other business areas, and thereby earn superior returns </li></ul>
  7. 7. What We Do “… The bulk of the value (60%) of any company is determined by its long-run or sustainable returns, the next 20% by secular or cyclical change observed in the coming 12 months; and the remainder by longer term growth or other issues.” Goldman Sachs, February 24, 2004 Innovest’s Intangible Value Assessment Model is designed to derive information on that 60%
  8. 8. <ul><li>Four Key Intangible Value Drivers </li></ul>The “Iceberg” balance sheet Financial Capital 30% <ul><li>Sustainable Governance </li></ul><ul><li>Strategy </li></ul><ul><li>Capability/ Adaptability </li></ul><ul><li>Traditional governance practices </li></ul><ul><li>Stakeholder Capital </li></ul><ul><li>Regulators & Policymakers </li></ul><ul><li>Local communities </li></ul><ul><li>NGOs </li></ul><ul><li>Customer relationships </li></ul><ul><li>Alliance partners </li></ul><ul><li>Supply chain </li></ul><ul><li>Social benefits of products & services </li></ul><ul><li>Human Capital </li></ul><ul><li>Recruitment retention strategies </li></ul><ul><li>Employee motivation </li></ul><ul><li>Labor relations </li></ul><ul><li>Innovation capacity </li></ul><ul><li>Knowledge Development & Dissemination </li></ul><ul><li>Health & Safety </li></ul><ul><li>Progressive workplace practices </li></ul><ul><li>Eco-Value </li></ul><ul><li>Quality of environmental management </li></ul><ul><li>Environmental risks & Eco-efficiency </li></ul><ul><li>Strategic profit opportunities </li></ul>Intangible Capital 60-70%
  9. 9. The Findings–Analysis of Stock Performance Based on Environmental Ratings ( May 1997 – Nov. 2005) TOP HALF BOTTOM HALF SPREAD Top Half Outperforms by 76%
  10. 10. Superior Environmental Management – Benefits <ul><li>Reduce regulatory risk and litigation exposure </li></ul><ul><li>Improve operations (reduced energy and materials costs) </li></ul><ul><li>Improve relations with regulators and other stakeholders </li></ul><ul><li>Enhance ability to attract, retain and motivate workforce </li></ul><ul><li>Increase competitive position </li></ul><ul><li>Enhance market access in difficult countries and regions </li></ul><ul><li>Lower cost of capital and insurance </li></ul><ul><li>i.e. Sustainable competitive advantage </li></ul>
  11. 11. <ul><li>ABN-AMRO Bank </li></ul><ul><li>ABP Investments </li></ul><ul><li>Aeltus Investment Management (ING) </li></ul><ul><li>Baillie Gifford </li></ul><ul><li>Bank Sarasin </li></ul><ul><li>Bank Julius Bear </li></ul><ul><li>BNP Paribas </li></ul><ul><li>BP Investments Management </li></ul><ul><li>Brown Brothers Harriman </li></ul><ul><li>CalPERS </li></ul><ul><li>Cazenove Fund Management </li></ul><ul><li>Collins Stewart (CI) Ltd </li></ul><ul><li>Contra Costa County Employees’ Retirement Association </li></ul><ul><li>Daiwa Securities </li></ul><ul><li>Dreyfus Investment Advisors </li></ul><ul><li>Friends, Ivory & Sime </li></ul><ul><li>Frontier Capital Management </li></ul><ul><li>Glenmede Trust </li></ul><ul><li>Henderson Global Investors </li></ul><ul><li>IDeAM (Crédit Agricole AM) </li></ul><ul><li>Hermes </li></ul><ul><li>HSBC Asset Management </li></ul><ul><li>IBK Capital Corp. </li></ul><ul><li>Insight Investment </li></ul><ul><li>John A. Levin & Co. </li></ul><ul><li>Legg Mason Funds Management </li></ul><ul><li>Lombard Odier & Cie </li></ul><ul><li>Mellon Capital Management </li></ul><ul><li>Mellon Equity </li></ul><ul><li>Morley Fund Management </li></ul><ul><li>Neuberger Berman </li></ul><ul><li>Rockefeller & Co. </li></ul><ul><li>Schroders Investment Management </li></ul><ul><li>Société Générale AM </li></ul><ul><li>SNS Asset Management </li></ul><ul><li>Swiss RE Asset Management </li></ul><ul><li>State Street Global Advisors </li></ul><ul><li>Threadneedle Asset Management </li></ul><ul><li>T. Rowe Price </li></ul><ul><li>UBS Investment Bank </li></ul><ul><li>Wellington Management </li></ul><ul><li>World Bank </li></ul>Partial Client List Financial Institutions
  12. 12. <ul><li>Historical Liabilities </li></ul><ul><li>Operating Risks (Toxic Emissions, Haz. Waste Disposal, Waste Disch.) </li></ul><ul><li>Product Risk Liabilities </li></ul><ul><li>Market & Regulatory Risks </li></ul><ul><li>Health and Safety </li></ul><ul><li>Climate Change </li></ul><ul><li>Social “License to Op.” </li></ul>Multi-factor EcoValue’ 21 algorithms integrate over 60 key data points, including: <ul><li>Policy & Strategy </li></ul><ul><li>Governance Capability </li></ul><ul><li>Environmental Mgt Systems </li></ul><ul><li>Env. Auditing, Accounting and reporting </li></ul><ul><li>Value Chain Mgt </li></ul><ul><li>Stakeholder Capital </li></ul><ul><li>Ability to profit from environmentally driven industry and market trends </li></ul><ul><li>Sustainability of earnings </li></ul><ul><li>Eco-compatibility of product portfolio and R&D initiatives </li></ul>Eco Value 21® Environmental Research STRAT. PROFIT OPPORTUNITIES + MGT QUALITY + Past Present Future RISKS FACTORS EcoValue’21 =
  13. 13. Human Capital Recruitment/retention strategies Employee Motivation Innovation Capacity Knowledge Development & Dissemination Health & Safety Progressive workplace practices Intangible Value Assessment Social Research IVA ™ Products & Services Intellectual Capital Product Safety Stakeholder Capital Labour relations Regulators and Policymakers Local communities & NGOs Customer relationships Supply Chain Partnerships/alliances Sustainable Governance Strategic Scanning Capability Agility/Adaptability Performance indicators/ monitoring/reporting International “best practice” Emerging Markets Economic Development Human Rights Oppressive Regimes
  14. 14. Innovest Rating Model A rating from AAA – CCC is assigned to company based on total Analyst assesses company against 100+ factors by assigning a score of 0 – 10 (10 = best in class) Model computes all scores to generate a normalized figure for the company Example: Pharmaceutical Sector Note: Figures in table above are indicative and not actual.
  15. 15. (60-80 Companies) Standard & Poors 500 Universe <ul><li>Financial Screens </li></ul><ul><li>Valuation measures: P/E, Price/Free Cash Flow </li></ul><ul><li>Momentum Factors: Earnings growth & consistency </li></ul><ul><li>Historical Returns: ROE etc </li></ul><ul><li>Intangible Value Overlay </li></ul><ul><li>EcoValue </li></ul><ul><li>Human Capital </li></ul><ul><li>Corporate Governance </li></ul><ul><li>Stakeholder Capital </li></ul>Sustainability-Enhanced Portfolio Innovest Portfolio Construction: Integrating the Innovest Signal ( 150 Companies) Sector Views Portfolio Risk Control/ Optimization
  16. 16. Enhanced Fixed Income Enhanced Index Equities, e.g. SSgA, ING Investments, Active Plus Equities, e.g. ABP, Credit Lyonnais /ABF Return Risk The Risk/Return Continuum HIGH HIGH Private Equity Funds, e.g. Carbon, Renewables, Forestry The me Funds, e.g. T. Rowe Price “Clean Future Fund” Long/Short Hedge F unds , eg . Green Cay Enhanced Fixed Income Enhanced Index Equities, e.g. SSgA, ING Investments, Active Plus Equities, e.g. ABP, IDeAM (Crédit Agricole AM) Return Risk The Risk/Return Continuum HIGH HIGH Private Equity Funds, e.g. Carbon, Renewables, Forestry The me Funds, e.g. T. Rowe Price “Clean Future Fund” Long/Short Hedge F unds , eg . Green Cay Portfolio Construction: Integrating the Innovest Signal
  17. 17. Across a Number of Investment Styles. . . 1.30
  18. 18. The Green Planet Fund (IDEAM)
  19. 19. Focus: US Electric Power Sector and The Climate Change Challenge
  20. 20. Key Drivers <ul><li>Tightening global, regional, and domestic regulatory pressures </li></ul><ul><li>Accounting-based numbers are telling less and less of the story </li></ul><ul><li>Tougher requirements for disclosure of “non-financial” risks for both companies and institutional investors (e.g. Sarbanes-Oxley, SEC) </li></ul><ul><li>Increasing market pressures -e.g. shareholder activism, institutional investors’ awareness on hidden environmental liabilities, public scrutiny </li></ul><ul><li>Changing consumer demographics: Greater sensitivity to social/environmental issues in tandem with greater availability of information on corporate performance </li></ul><ul><li>Broadening interpretation of fiduciary responsibility to include social, environmental and governance issues </li></ul>
  21. 21. Electricity Industry - Key Drivers Limited ability of companies to recover operating and compliance costs through regulated rates The burden of environmental expenditures continues to shift from customers to investors Need to differentiate their products (commodity) and diversify revenue streams Need to improve efficiency rates, retain customers and attract investors Increasing Pressures Growing pressures to incorporate negative externalities into market prices from regulators, shareholders and customers Restructuring towards more competition Some states move beyond federal rules Evolving industry model
  22. 22. Downside Issues – Risk Metrics <ul><li>Air Emissions Regulations : SO 2 , NO X , Hg and increasingly CO 2 </li></ul><ul><li>Other Operating Risks associated with coal mining, water and waste management </li></ul><ul><li>Resource Usage & Efficiency </li></ul><ul><li>Site Remediation Liabilities </li></ul><ul><li>Nuclear Management (long-term waste disposal, pot. radiation releases, decommissioning, public acceptance and security concerns ) </li></ul><ul><li>Other Sustainability Risk/Climate Change </li></ul>$ $
  23. 23. <ul><li>Projected changes in climates worldwide will affect the frequency and severity of extreme natural events with the potential of causing physical damage to power assets </li></ul><ul><li>Unpredictable weather patterns will impact the availability of water for power plant cooling and cause unpredictable variabilities in power consumption </li></ul>Climate Change- Physical Impacts
  24. 24. <ul><li>Investors have been filing shareholder resolutions demanding disclosure of the climate change risks and opportunities with 20-30 percent of shareholders support </li></ul><ul><li>The potential influence of institutional investors over corporate boards and management is substantial controlling 60 percent of the shares in the 1,000 largest US companies </li></ul><ul><li>Signatories to the 2006 CDP, which has combined assets under management of $31 trillion, have demanded the chairmen of the 500 largest quoted companies in the world to mandate corporate disclosure of the risks posed by climate change </li></ul>Climate Change- Financial Impacts
  25. 25. <ul><li>Legislation to cap CO 2 emissions is inevitable </li></ul><ul><li>Question of “when and what form”, rather than “if”? </li></ul><ul><li>What will be the impact on the Utility sector? </li></ul><ul><li>Debate has moved from policy to technology - Global focus is on technology solutions </li></ul>Potential Carbon Caps- The Electric Power Industry
  26. 26. Exposure to Carbon Regulations Some States Are Moving Beyond Federal Standards
  27. 27. <ul><li>Electric power plants account for 40 percent of U.S. CO 2 emissions </li></ul>Downside Issues – Potential Carbon Caps <ul><li>Current, proposed or impending CO2 caps will require substantial investments -50% of the 1000 US coal plants are older than 30 years and will be replaced in next 20 yrs </li></ul><ul><li>The industry is likely to become a prime target under future GHG emissions regulations </li></ul><ul><li>Even more so in a deregulated marketplace, in which cost recovery is uncertain </li></ul><ul><li>Delayed climate change response may result in higher cost response actions including impairment of generating assets or early retirement </li></ul>
  28. 28. <ul><li>Major C0 2 emitters may face higher debt charges from air quality conscious lenders </li></ul>Carbon Caps- Implications for Investors <ul><li>Insurance premiums may be imposed on companies unprepared to take carbon risk management steps </li></ul><ul><li>Credit risk ratings may become impaired due to exposure to weather changes and future regulations </li></ul><ul><li>Ability to negotiate rates with regulators may be impaired </li></ul><ul><li>Access to capital markets may be limited as institutional investors increasingly consider carbon profiles as part of their fiduciary obligation </li></ul>
  29. 29. <ul><li>Financial impacts are highly differentiated across companies, creating potential winners and losers: </li></ul><ul><ul><li>Prevailing power market dynamics and competitive environment in operating states </li></ul></ul><ul><ul><li>Pace of carbon regulations in operating states </li></ul></ul><ul><ul><li>Ownership of generating assets and geographic diversification </li></ul></ul><ul><ul><li>Fuel mix of generating assets </li></ul></ul>Carbon Caps- Innovest Analytical Approach
  30. 30. <ul><li>Financial impacts are highly differentiated across companies, creating potential winners and losers: </li></ul><ul><ul><li>Flexibility to diversify the existing generation portfolio away from carbon- intense fuels </li></ul></ul><ul><ul><li>Ability of passing on costs to consumers, and access to less-carbon-intensive technologies </li></ul></ul><ul><ul><li>Strength of the corporate carbon governance, management systems and mitigation strategies </li></ul></ul><ul><ul><li>Positioning to pursue and profit from emerging business opportunities in new less carbon-intense technologies </li></ul></ul>Carbon Caps- Innovest Analytical Approach
  31. 31. <ul><li>Develop GHG hedging strategy as critical component of risk management to anticipate mandatory GHG emission caps </li></ul>Leading Carbon Management Practices <ul><li>Follow third party GHG inventory and reporting protocols </li></ul><ul><li>Incorporate risks in asset and investment planning decisions (better capital allocation) </li></ul><ul><li>Set quantitative GHG reductions targets and monitoring </li></ul><ul><li>Monetize external impact of fossil fuel generation </li></ul><ul><li>Allocate formal management and board responsibility </li></ul><ul><li>Engage in carbonless business or products </li></ul><ul><li>Conduct sensitivity analysis and e missions trading simulations </li></ul>
  32. 32. <ul><li>Reduce GHG emissions through internal energy efficiency </li></ul>Industry Carbon Mitigation Practices <ul><li>Offset GHG emissions through emission trading, i.e., offset purchases </li></ul><ul><li>Engage in renewable power </li></ul><ul><li>Avoid GHG emissions by increasing operation of low carbon emitting generation </li></ul><ul><li>Switch towards less CO2-intensive fuel </li></ul><ul><li>Pursue “clean” coal technologies </li></ul><ul><li>Participate in efforts to sequester carbon </li></ul>
  33. 33. Benefits of Investments in Green Power and Distributed Power Generation <ul><li>Allow companies to gain expertise and strategic positioning in a niche market </li></ul><ul><li>Protect companies from grid disruptions (on-site projects) </li></ul><ul><li>Reduce operating costs due to avoided potential carbon related charges </li></ul><ul><li>Create additional assets from tradable certificates generated during project </li></ul><ul><li>Align with potential national security energy goals to reduce fossil fuel dependency </li></ul><ul><li>Lower exposure to fluctuating fossil fuel prices </li></ul><ul><li>Enhance access to capital- About 66% of total investment in energy generation were in clean technology (Cleantech Venture) </li></ul><ul><li>Target of fast-growing clean technology funds </li></ul>
  34. 34. <ul><li>The EU’s Emissions Trading Scheme started in Jan 2005-Price of CO 2 is €26.5 per ton (March 2006) from €7 in April 2004 </li></ul><ul><li>The value of the EU carbon emissions trading market is about €58.3 billion per year (US$ 73.4 bn) based on March 2006 prices </li></ul><ul><li>Further standardization is expected to increase liquidity </li></ul><ul><li>Price drivers include policy events, fuel/other commodity prices, CDM/JI supply, and weather </li></ul><ul><li>Japan, Canada and New Zealand as well as some US states have considered similar trading schemes </li></ul><ul><li>The US Chicago Climate Exchange provides for a voluntary spot market platform. </li></ul><ul><li>Financial institutions increasingly engage in carbon trading-Bloomberg expands coverage </li></ul>Carbon Is A New Asset Class
  35. 35. Identifies potential hidden risk and profit opportunity factors Risk Control Enhances reputation with internal (employees) and external stakeholders (regulators, suppliers, consumers) Better access to capital markets as a growing number investors consider companies’ individual carbon risk exposure and management capabilities as part of their fiduciary obligation Reputation Funding Source of differentiation and competitive advantage Strategic Pos. Benefits of Carbon Management Leadership-CONCLUSION
  36. 36. For Further information Carla Tabossi Senior Research Analyst Innovest Strategic Value Advisors 675 Third Avenue, Suite 400 New York, NY 10017 Phone: 212-421-2000 x211 Fax: 212-421-9663 [email_address] www.innovestgroup.com

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