EXTRA FINANCIAL CRITERIA AND OTHER RISKS THE COST OF CARBON Dr. Matthew Kiernan, Chief Executive [email_address] Susan McG...
<ul><li>“ Embedded in the challenge of climate change are both dangers and possibilities. Immense dangers for firms and in...
… .FOR INSTITUTIONAL INVESTORS <ul><li>Financial and competitive impacts on portfolio companies </li></ul><ul><li>Kyoto Pr...
CLIMATE RISK VARIES AMONG SECTORS
AND WITHIN THE SAME SECTORS
WHO CARES ABOUT THIS?
THE DEMAND SIDE <ul><li>Carbon Disclosure Project </li></ul><ul><li>Institutional Investors Group on Climate Change </li><...
INVESTOR CONCERNS OF CLIMATE CHANGE IMPACTS IN ASIA  <ul><li>Climate change impacts can have a negative effect on existing...
CARBON RELATED PRODUCTS FOR INVESTORS <ul><li>Carbon Beta TM  Basket </li></ul><ul><li>Climate Enhanced Bond Index </li></ul>
THE INVESTMENT LOGIC <ul><li>SD performance is becoming increasingly critical to competitiveness, profitability & share pr...
ADDING THE CARBON BETA ANALYSIS <ul><li>Energy intensity and fuel source mix </li></ul><ul><li>Geographic locations of pro...
STRATEGY OBJECTIVES <ul><li>Protect fiduciaries from hidden financial risks </li></ul><ul><li>Exploit mis-pricing opportun...
CARBON BETA TM  BASKET <ul><li>Underlying base portfolio: a top-performing  global active equities template from a world-c...
PORTFOLIO CONSTRUCTION <ul><li>Step 1: Stock Ranking </li></ul><ul><li>Step 2: Risk Assessment </li></ul><ul><li>Step 3: I...
RISK CONTROL <ul><li>Risk management is an essential part of the Fund’s investment strategy. </li></ul><ul><li>Portfolio d...
CAPTURING THE CLIMATE DIVIDEND
CLIMATE ENHANCED BOND INDEX <ul><li>Underlying base portfolio: leading investment manager’s index. </li></ul><ul><li>Base ...
RISK CONTROL <ul><li>Risk management is an essential part of the fund’s new index </li></ul><ul><li>Portfolio diversificat...
LOW TRACKING ERROR <ul><li>Extensive back testing of the new climate enhanced bond index has confirmed that the new index ...
 
CONCERNS OVER CLIMATE CHANGE GROWING AMONG INVESTORS <ul><li>Mercer Investment Consulting report:  A Climate for Change </...
<ul><li>“ Over the long term, investments based on sustainability criteria are expected to outperform those based on tradi...
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Presentation by Matthew Kiernan

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Matthew Kiernan, Founder/CEO - Innovest - Canada.

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Presentation by Matthew Kiernan

  1. 1. EXTRA FINANCIAL CRITERIA AND OTHER RISKS THE COST OF CARBON Dr. Matthew Kiernan, Chief Executive [email_address] Susan McGeachie, Director [email_address]
  2. 2. <ul><li>“ 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.” </li></ul><ul><li>Dr. John Holdren, Professor; Harvard University </li></ul><ul><li>Excerpt from Presentation at the 2005 Investor Summit on Climate Risk </li></ul><ul><li>New York City, May 10, 2005 </li></ul>CLIMATE CHANGE AS AN INVESTMENT ISSUE….
  3. 3. … .FOR INSTITUTIONAL INVESTORS <ul><li>Financial and competitive impacts on portfolio companies </li></ul><ul><li>Kyoto Protocol and European Trading System </li></ul><ul><li>Impacts in “low impact” sectors </li></ul><ul><li>Impacts vary widely between sectors </li></ul>
  4. 4. CLIMATE RISK VARIES AMONG SECTORS
  5. 5. AND WITHIN THE SAME SECTORS
  6. 6. WHO CARES ABOUT THIS?
  7. 7. THE DEMAND SIDE <ul><li>Carbon Disclosure Project </li></ul><ul><li>Institutional Investors Group on Climate Change </li></ul><ul><li>Investor Network on Climate Risk </li></ul><ul><li>Investors Group on Climate Change </li></ul>
  8. 8. INVESTOR CONCERNS OF CLIMATE CHANGE IMPACTS IN ASIA <ul><li>Climate change impacts can have a negative effect on existing economic structures in Asia: </li></ul><ul><ul><li>Agricultural productivity likely to suffer severely due to high temperature, severe drought and flood conditions and soil degradation. </li></ul></ul><ul><ul><li>Aquaculture productivity likely to undergo dramatic changes as a result of temperature changes in water. </li></ul></ul><ul><ul><li>Rise in sea level would cause submergence of large tracts of the vast Asian coastline, leading to a recession of flat sandy beaches. </li></ul></ul><ul><ul><li>Ecology of mangroves and coral reefs around Asia likely to suffer severely. </li></ul></ul><ul><ul><li>Impact of warmer weather on the Asian monsoon could lead to high inter-annual variation in rainfall characteristics. </li></ul></ul>
  9. 9. CARBON RELATED PRODUCTS FOR INVESTORS <ul><li>Carbon Beta TM Basket </li></ul><ul><li>Climate Enhanced Bond Index </li></ul>
  10. 10. THE INVESTMENT LOGIC <ul><li>SD performance is becoming increasingly critical to competitiveness, profitability & share price performance. </li></ul><ul><li>Current bond prices do not reflect climate change. </li></ul><ul><li>Scarcity of data creates market inefficiencies that investors can exploit. </li></ul>
  11. 11. ADDING THE CARBON BETA ANALYSIS <ul><li>Energy intensity and fuel source mix </li></ul><ul><li>Geographic locations of production facilities </li></ul><ul><li>Product mix </li></ul><ul><li>Company specific marginal abatement cost </li></ul><ul><li>Technology trajectory </li></ul><ul><li>Company-specific carbon risk management capability </li></ul>
  12. 12. STRATEGY OBJECTIVES <ul><li>Protect fiduciaries from hidden financial risks </li></ul><ul><li>Exploit mis-pricing opportunities </li></ul><ul><li>Generate excess returns </li></ul><ul><li>Send a strong signal to companies </li></ul>
  13. 13. CARBON BETA TM BASKET <ul><li>Underlying base portfolio: a top-performing global active equities template from a world-class asset manager or investment bank, selected by both Innovest and the client </li></ul><ul><li>Base portfolio is then “tilted” using Innovest’s proprietary Carbon Beta™ platform to adjust both sector and individual stock exposures </li></ul><ul><li>Outperformance target of 4% - 5% per annum </li></ul><ul><li>50-100 names </li></ul>
  14. 14. PORTFOLIO CONSTRUCTION <ul><li>Step 1: Stock Ranking </li></ul><ul><li>Step 2: Risk Assessment </li></ul><ul><li>Step 3: Innovest Carbon Beta TM Overlay </li></ul><ul><li>Step 4: Portfolio Construction and Trading </li></ul><ul><li>Step 5: Engagement </li></ul>
  15. 15. RISK CONTROL <ul><li>Risk management is an essential part of the Fund’s investment strategy. </li></ul><ul><li>Portfolio diversification across regions, sector and industries </li></ul><ul><li>Focus on total risk/return profile </li></ul><ul><li>Multiple risk control guidelines </li></ul><ul><ul><li>Active risk: 3-5% </li></ul></ul><ul><ul><li>Region Weights: +/- 1% </li></ul></ul><ul><ul><li>Industry Weight: +/- 3% </li></ul></ul><ul><ul><li>Security Weight: +/- 3% </li></ul></ul><ul><ul><li>Turnover: 100% </li></ul></ul><ul><ul><li>Cash: 0-1% </li></ul></ul>
  16. 16. CAPTURING THE CLIMATE DIVIDEND
  17. 17. CLIMATE ENHANCED BOND INDEX <ul><li>Underlying base portfolio: leading investment manager’s index. </li></ul><ul><li>Base portfolio is then “tilted” using Innovest’s proprietary Carbon Beta platform to adjust both sector and individual stock exposures </li></ul><ul><li>1100 names </li></ul><ul><li>Targeted tracking error: 10 basis points (.1%) </li></ul>
  18. 18. RISK CONTROL <ul><li>Risk management is an essential part of the fund’s new index </li></ul><ul><li>Portfolio diversification across regions, sector and industries </li></ul><ul><li>Investors are fully invested across all industry sectors </li></ul><ul><li>“ Climate tilts”: restricted to high-impact sectors only </li></ul><ul><li>Maximum over/underweight position of any issuer: 25% </li></ul><ul><li>Bottom decile of issues (highest net carbon risk) removed from index </li></ul>
  19. 19. LOW TRACKING ERROR <ul><li>Extensive back testing of the new climate enhanced bond index has confirmed that the new index closely replicates the risk and return characteristics of the mainstream bond index, while better reflecting the impact of climate risk, and also sending a clear message to major corporations about the importance of recognizing and managing this emerging risk successfully. </li></ul>
  20. 21. CONCERNS OVER CLIMATE CHANGE GROWING AMONG INVESTORS <ul><li>Mercer Investment Consulting report: A Climate for Change </li></ul><ul><li>Freshfields report on fiduciary duty </li></ul><ul><li>CalPERS and CalSTRS sustainability and clean tech investment strategy </li></ul><ul><li>Growth potential in renewable energy stocks </li></ul>
  21. 22. <ul><li>“ Over the long term, investments based on sustainability criteria are expected to outperform those based on traditional performance resources.” </li></ul>Roderick Munsters Chief Investment Officer ABP, Netherlands
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