Carbon BetaTM of Securities
                            and their Impacts on Equity Portfolios




                       ...
Climate Change is Driving a Global Industrial Restructuring



    “There will be a large creation and re-distribution of ...
Climate Change: The Logic for Investors

    Companies’ “sustainability” characteristics are becoming increasingly critica...
What Have We Learned So Far?

         The global industrial restructuring towards a “low carbon” future has already
     ...
What are the Investment Risks?


                             Physical
                             Litigation
           ...
What Drives Companies’
     “Carbon Beta”?
         Strategic governance (the extend to which companies integrate climate ...
Multi-factor Carbon BetaTM algorithms integrate over
    multiple data points, including:

                               ...
Carbon BETATM Multidimensional Analysis

  CLIMATE RISK HAS FOUR DIMENSIONS, NOT ONE
  It is sometimes (erroneously) assum...
Carbon BETATM: Compliance Cost

  Elements that integrate the compliance cost model:
  • Weighted Average Country Carbon R...
Sample Carbon BETATM Profile




INNOVEST STRATEGIC VALUE ADVISORS   15 NOVEMBER 07
“Carbon Beta™” Varies Widely –
Both Between and Within Sectors
                                                           ...
-
                                           Ju




                                                            50
       ...
Carbon Beta© Performers vs. Laggards Globally


                                   140%

                                 ...
Carbon Beta© Performers vs. Laggards in North America

                                        100%


                    ...
Carbon Beta© Performers vs. Laggards in Europe



                                 180%
                                  ...
Carbon Beta© Performers vs. Laggards in Asia-Pacific


                                     200%

                        ...
Carbon Beta© Performers vs. Laggards in the Utilities Sector

                                           150%

           ...
The “Disclosure Quality Premium” is Essentially Zero!


          250




          200




          150




          10...
Monetizing Carbon Beta in the Fixed-Income
  Market
   North America Corporate Research
   27 February 2007
   Introducing...
“Embedded in the challenge of climate change are both dangers and possibilities.
   Immense dangers for firms and investor...
Innovest’s Previous Carbon Finance Work


     Carbon Beta Bond Index – Innovest and JP Morgan co-created the world’s firs...
For further information



                                                   Thank you !

                          Pierr...
Upcoming SlideShare
Loading in...5
×

Carbon Beta of Securities and their Impacts on Equity Portfolios.

410

Published on

Pierre Trevet, Managing Director - Innovest Strategic Value Advisors - United States

Published in: Economy & Finance
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
410
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
12
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Carbon Beta of Securities and their Impacts on Equity Portfolios.

  1. 1. Carbon BetaTM of Securities and their Impacts on Equity Portfolios TBLI 2007 Pierre Trevet Innovest STRATEGIC VALUE ADVISORS Toronto •New York • London • Paris • VALUE ADVISORS INNOVEST STRATEGIC Sydney • Tokyo • San Francisco November 15, 2007 Paris - France Managing Director Innovest Strategic Value Advisors 15 NOVEMBER 07
  2. 2. Climate Change is Driving a Global Industrial Restructuring “There will be a large creation and re-distribution of shareholder value in the transition to a low carbon economy – there will be winners and losers at sector level, and within sectors at company level. The winners are more likely to be those businesses that take the time to understand and address this complex area.” Tom Delay, Chief Executive, The Carbon Trust “Climate Change and Shareholder Value” Report March, 2006 INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  3. 3. Climate Change: The Logic for Investors Companies’ “sustainability” characteristics are becoming increasingly critical to their competitiveness, profitability, and share price performance. Sustainability analysis can provide additional insights about companies’ strategic management capabilities, organizational agility, and therefore their financial performance potential Climate change is emerging as the #1 global sustainability risk driver Climate risk exposure varies widely, between and even within industry sectors; yet those exposures are not fully priced into asset values. Robust climate risk/opportunity data and analysis are scarce and difficult to obtain; this can create a major information advantage for investors. Those opportunities can be exploited through a portfolio of major global companies with superior “carbon risk” management, as well as particularly strong exposure to the opportunities being created by climate change. Combining world-class fundamental and/or quantitative analysis with institutional- quality carbon risk research creates optimal portfolio performance. INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  4. 4. What Have We Learned So Far? The global industrial restructuring towards a “low carbon” future has already begun Risks are much more broadly –and unevenly—distributed than previously thought Climate risk has four dimensions, not just one! Analysis must consider: risk; risk management; market-driven upside opportunities Performance improvement vector While more & more investors and corporates are now paying attention, most are a long way from integrating the net climate exposure of their assets into actual investment strategies Investors can make money from climate change – and some are already doing so! INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  5. 5. What are the Investment Risks? Physical Litigation Regulatory Competitive Reputational Each of these can affect: CAPEX Operating Costs Cash Flow Cost of Capital INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  6. 6. What Drives Companies’ “Carbon Beta”? Strategic governance (the extend to which companies integrate climate change factors into their business planning impact overall risk) Product mix – direct, indirect, and embedded carbon intensity (i.e. value chain emissions profile) Energy intensity, consumption patterns and electricity source mix Geographic distribution of production assets relative to specific regulatory and tax-related considerations Business regimes that determine the ability of companies to recoup carbon- driven higher compliance and operating costs from customers Technology trajectory – level of progress achieved towards adapting and replacing production technologies (some companies can reduce emissions at much lower cost than others) Ability to identify and monetize revenue opportunities (manufacturing cost efficiencies, new product/service opportunities, emissions trading and clean technology) INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  7. 7. Multi-factor Carbon BetaTM algorithms integrate over multiple data points, including: Financial Risk Management Capacity: Financial Risk Management Capacity: Core Positioning Liabilities: Core Positioning Liabilities: - - Balance sheet strength - -Issues faced by industry as whole Balance sheet strength Issues faced by industry as whole - - Insurance cover adequacy Insurance cover adequacy - -Geographic location issues Geographic location issues Strategic Management Capacity: Operating Risk Exposure: - Climate change policy - Direct GHG emissions - Mitigation strategy - Indirect carbon risks Carbon BetaTM - Core part of env. management - Other regulatory RATING systems strength issues - 3rd party audit/accounting - Supply chain management risk - Emissions trading work - Baseline measurement Future Sustainability Risk: - Supply chain issues - Energy efficiency practices - Voluntary charters, working grps - Carbon intensity per ton of product/$ sales - Product life-cycle durability and recyclability Sustainable Profit Opportunities: - Exposure to shifts in consumer values - CDM/JI project involvement - Competitive risks related to core business - New products, services based on low carbon profile - Energy efficiency and broader related issues INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  8. 8. Carbon BETATM Multidimensional Analysis CLIMATE RISK HAS FOUR DIMENSIONS, NOT ONE It is sometimes (erroneously) assumed that companies’ “carbon footprint” is the paramount or even the only factor to be assessed in determining their risk for investors. Carbon Management Strategy: Each company is assessed relative to peers on its carbon management strategy. In particular, we look at stated goals and policies top address climate change challenges. Carbon Risk Exposure: Risk exposure trends related to climate change are assessed for the sector as a whole, and the company in particular. Three categories of risk are addressed: direct risk, indirect risk (upstream the Scores supply chain) and market related (GHGs emissions related to product in use) Strategic Carbon Opportunities: Each firm is assessed for its ability to develop and commercialize strategic carbon opportunities relevant for its sector. These may be comprised of anything from direct technical solutions to changes in services and operations management that address climate change and lower emissions. Improvement Trend: The overall trend for the company vis-à-vis climate change risks and opportunities is assessed. INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  9. 9. Carbon BETATM: Compliance Cost Elements that integrate the compliance cost model: • Weighted Average Country Carbon Reduction Target (WACCRT©), represents the aggregate extent of emissions reductions over the full range of a firm’s industrial activities according to applicable legislations, domestically and internationally. • Industry Discount Rate, is calculated from the Weighed Average Cost of Capital (WACC) from each specific industry. • Carbon Cost, is the weighted price for three different scenarios (expected, maximum and minimum price) per emission allowance ($ per ton of CO2 equivalent). • Net Present Value of costs of meeting emissions reduction targets. For calculating this figure we estimate the abatement compliance cost for each year during the commitment period. INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  10. 10. Sample Carbon BETATM Profile INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  11. 11. “Carbon Beta™” Varies Widely – Both Between and Within Sectors CO2 Regulatory Cost of Compliance as Percentage of EBITDA 30.00% 25.24% 25.00% American Electric Power 21.45% Cost of Compliance as EBITDA% Xcel 20.00% 15.94% International 15.00% & Flavours Fragrances Mylan Laboratories 10.49% Eastman 9.72% 10.00% Alcoa Union Pacific 9.09% Chemicals 7.76% Praxair 5.00% CSX Corp. 3.11% Newmont 2.92% Exelon Du Pont Mining Johnson & 1.23% PG & E 1.42% 1.14% Johnson 0.10% 0.04% 0.00% Electric Power Multi-Utilities & Diversified Specialty Chemicals Metals & Mining Surface Transport Pharmaceuticals Companies - N. Unregulated Power Chemicals America INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07 Max case Min case
  12. 12. - Ju 50 100 150 200 250 (50) n2 00 Ju 4 l2 0 Au 04 g2 0 Se 04 p2 0 O 04 ct 20 N 04 ov 20 D 0 ec 4 20 J a 04 n2 0 INNOVEST STRATEGIC VALUE ADVISORS Fe 05 b2 0 CLI Performers M 05 ar 20 MSCI World (Free) Ap 05 r2 Difference Cbeta-CLI 0 M 05 ay 20 J u 05 Innovest Carbon Performers n2 00 Difference Cbeta-MSCI (Free) Ju 5 l2 0 Au 05 g2 0 Se 05 p2 0 O 05 Disclosure is NOT Enough! ct 20 N 05 ov 20 D 0 ec 5 20 J a 05 n2 0 Fe 06 b2 0 M 06 ar 20 Ap 06 r2 0 M 06 ay 20 J u 06 n2 00 Ju 6 l2 0 Au 06 g2 0 Se 06 p2 0 O 06 ct 20 N 06 ov 20 D 0 ec 6 20 J a 06 n2 0 Fe 07 b2 0 M 07 ar 20 Ap 07 r2 0 M 07 ay 20 J u 07 n2 15 NOVEMBER 07 00 7
  13. 13. Carbon Beta© Performers vs. Laggards Globally 140% Difference Above Average Innovest Rating (World) Below Average Innovest Rating (World) 120% 100% Total Return World 80% 60% 40% 20% 0% -20% Jun2004 Sep2004 Dec2004 Mar2005 Jun2005 Sep2005 Dec2005 Mar2006 Jun2006 Sep2006 Dec2006 Mar2007 Jun2007 INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  14. 14. Carbon Beta© Performers vs. Laggards in North America 100% Difference Above Average Innovest Rating (North America) Below Average Innovest Rating (North America) 80% orth A erica 60% eturn N m 40% Total R 20% 0% -20% Jun2004 Sep2004 Dec2004 Mar2005 Jun2005 Sep2005 Dec2005 Mar2006 Jun2006 Sep2006 Dec2006 Mar2007 Jun2007 INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  15. 15. Carbon Beta© Performers vs. Laggards in Europe 180% Difference Above Average Innovest Rating (Europe) Below Average Innovest Rating (Europe) 160% 140% 120% Total Return Europe 100% 80% 60% 40% 20% 0% -20% Jun2004 Sep2004 Dec2004 Mar2005 Jun2005 Sep2005 Dec2005 Mar2006 Jun2006 Sep2006 Dec2006 Mar2007 Jun2007 INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  16. 16. Carbon Beta© Performers vs. Laggards in Asia-Pacific 200% Difference Above Average Innovest Rating (Asia-Pacific) Below Average Innovest Rating (Asia-Pacific) 150% Total Return Asia-Pacific 100% 50% 0% -50% -100% Jun2004 Sep2004 Dec2004 Mar2005 Jun2005 Sep2005 Dec2005 Mar2006 Jun2006 Sep2006 Dec2006 Mar2007 Jun2007 INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  17. 17. Carbon Beta© Performers vs. Laggards in the Utilities Sector 150% Difference Above Average Innovest Rating Below Average Innovest Rating 130% 110% Total Return Utilities Sector 90% 70% 50% 30% 10% -10% Jun2004 Sep2004 Dec2004 Mar2005 Jun2005 Sep2005 Dec2005 Mar2006 Jun2006 Sep2006 Dec2006 Mar2007 Jun2007 INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  18. 18. The “Disclosure Quality Premium” is Essentially Zero! 250 200 150 100 50 - Jun2004 Sep2004 Dec2004 Mar2005 Jun2005 Sep2005 Dec2005 Mar2006 Jun2006 Sep2006 Dec2006 Mar2007 Jun2007 CLI Performers CLI underperformers INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  19. 19. Monetizing Carbon Beta in the Fixed-Income Market North America Corporate Research 27 February 2007 Introducing the JENI-Carbon Beta Index The first corporate bond index to address the risks related to climate change Figure 1: JENI-Carbon Beta vs. JULI (spreads over benchmark Treasuries) bps 92 89 86 83 80 77 25-Jan-06 25-Mar-06 25-May -06 25-Jul-06 25-Sep-06 25-Nov -06 25-Jan-07 JENI Benchmark Spread (Treasury ) JULI Benchmark Spread (Treasury ) Source: JPMorgan. [update on Feb 25] INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  20. 20. “Embedded in the challenge of climate change are both dangers and possibilities. Immense dangers for firms and investors who make bad choices, or no choices, about how to respond to the risks, and are then held accountable in the marketplace, the boardroom, or the courts; and immense possibilities for firms and investors to turn challenge into opportunity.” Dr. John Holdren, Professor; Harvard University Excerpt from Presentation at the 2005 Investor Summit on Climate Risk New York City, May 10, 2005 INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  21. 21. Innovest’s Previous Carbon Finance Work Carbon Beta Bond Index – Innovest and JP Morgan co-created the world’s first “climate risk-adjusted” bond index – 2007. Carbon Disclosure Project – selected as the global research provider in each of the CDP’s five years; wrote each report – 2003-2007 inclusive. Advisory clients have included: U.K. Carbon Trust; U.S. EPA; Natural Resources Canada; U.K. Environment Agency; Australian Greenhouse Office; Electricité de France; Duke Energy; World Wildlife Fund; UN Environment Program. Innovest has the world’s largest, company-specific research database addressing investment risk – 850 global, high-impact companies covered in-depth; outline profiles of 2300. INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  22. 22. For further information Thank you ! Pierre Trevet Perrine Dutronc Managing Director Managing Director - France Innovest Strategic Value Advisors Innovest Strategic Value Advisors 1505 Bridgeway, Ste 106 110 Bd de Sébastopol Sausalito, CA 94965 75003 Paris USA France Tel: +1 415 332 3506 Tel: +33 (0)1 44 54 04 89 ptrevet@innovestgroup.com pdutronc@innovestgroup.com www.innovestgroup.com INNOVEST STRATEGIC VALUE ADVISORS 15 NOVEMBER 07
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×