Climate Risk Management<br />Investment Perspectives on a Carbon-Constrained Economy<br />TBLI Asia<br />May 27 2010<br />...
ESG is a Core Business for RiskMetrics<br />Proxy Analysis<br />Proxy Voting<br />RiskManager<br />Accounting Research<br ...
Goals for Today<br /><ul><li>Addressing two key challenges in evaluating corporate climate change performance
Discuss some of our solutions to these challenges
Measuring risk and management
New methodology for the financial sector</li></li></ul><li>Why Climate Risk Management?  <br />Climate change is reconfigu...
Climate Risk Management  <br />Key Challenge  <br />Understanding who will win and lose from climate change… <br /><ul><l...
 Who is effectively managing climate-related regulatory, physical, reputational risk?
 Who is well-positioned to reduce operational GHG emissions or even sell surplus credits?
 Who is integrating climate change into core business strategies?</li></ul>Who is prepared for a carbon-constrained econom...
Evaluating Corporate Climate Change Performance:<br />Key challenges, (some) solutions<br />Balancing GHG footprint and ma...
Evaluating Corporate Climate Change Performance:<br />Key challenges, (some) solutions<br />All ratings derived from risk ...
Key challenges, (some) solutions<br />Evaluating Corporate Climate Change Performance:<br />Electric Power North America <...
Evaluating Corporate Climate Change Performance:<br />Key challenges, (some) solutions<br />Measuring risk:<br />Carbon Be...
Evaluating Corporate Climate Change Performance:<br />Measuring Risk<br />RiskMetrics WACCRT:Calculates the cost of compli...
Evaluating Corporate Climate Change Performance:<br />Carbon-Intensive Sectors<br />Significant change:<br />US and Canada...
 Increased exposure with Canadian oil sands investment</li></ul>Integrated Oil and Gas<br />
Evaluating Corporate Climate Change Performance:<br />Key challenges, (some) solutions<br />Challenge 2:<br />Moving beyon...
 Various points of impact:  </li></ul>  supply chain, products, energy use<br />Carbon-intensive: <br /><ul><li> Direct re...
 Impact primarily in operations</li></ul>Oil and Gas<br />Financials<br />v.<br />
Carbon-Intensive Sectors<br />Evaluating Corporate Climate Change Performance:<br />Murphy: 40% refining capacity currentl...
Non-Intensive Sectors<br />Evaluating Corporate Climate Change Performance:<br />Banks are exposed to climate risk through...
Methodology: Attributing Borrower’s Emissions to Bank<br />100 tonnes CO2e<br />Borrower<br />Bank<br />10tonnes CO2e<br /...
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Investment Perspectives on a Carbon-Constrained Economy

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Emily McAteer, Analyst, Climate Risk Management - RiskMetrics Group - USA

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  • Everything risk v. management. Carbon footprint falls under risk.
  • Mention refining capacity – specifically occidental!
  • Carbon beta model works great with carbon-intensive but tougher to deal with non-intensive…
  • Transcript of "Investment Perspectives on a Carbon-Constrained Economy"

    1. 1. Climate Risk Management<br />Investment Perspectives on a Carbon-Constrained Economy<br />TBLI Asia<br />May 27 2010<br />Emily McAteer <br />Emily.Mcateer@riskmetrics.com<br />
    2. 2. ESG is a Core Business for RiskMetrics<br />Proxy Analysis<br />Proxy Voting<br />RiskManager<br />Accounting Research<br />Legal<br />Sustainable investing is at the tipping point<br />An emergent driver of asset growth and retention<br />ESG factors have a material impact on the economy, earnings and people’s lives.<br />RiskMetrics is at the heart of this transformation<br />Acquisitions of established leaders in ESG research: KLD and Innovest <br />The most comprehensive and reliable product suite in the industry<br />A dedicated staff of 99 people worldwide, including 75 analysts <br />Pioneering research to measure the ESG impact of companies and industries<br />More than 30 years of sustainability expertise<br />ESG analysis that sees past green-washing<br />RiskMetrics Group<br />RiskMetrics ESG Analytics enables investors to monitor corporate management of ESG issues before they affect the bottom line.<br />
    3. 3. Goals for Today<br /><ul><li>Addressing two key challenges in evaluating corporate climate change performance
    4. 4. Discuss some of our solutions to these challenges
    5. 5. Measuring risk and management
    6. 6. New methodology for the financial sector</li></li></ul><li>Why Climate Risk Management? <br />Climate change is reconfiguring the financial landscape<br />Climate risks and opportunities:<br />Regulatory<br /> Legal<br /> Physical<br /> Competitive<br /> Reputation<br />Measurable impacts:<br /> CAPEX<br /> Operating Costs<br /> Cash Flow<br /> Credit ratings<br /> Cost of Capital<br />
    7. 7. Climate Risk Management <br />Key Challenge  <br />Understanding who will win and lose from climate change… <br /><ul><li> Who will benefit from being first movers in technology development and investment?
    8. 8. Who is effectively managing climate-related regulatory, physical, reputational risk?
    9. 9. Who is well-positioned to reduce operational GHG emissions or even sell surplus credits?
    10. 10. Who is integrating climate change into core business strategies?</li></ul>Who is prepared for a carbon-constrained economy?<br />
    11. 11. Evaluating Corporate Climate Change Performance:<br />Key challenges, (some) solutions<br />Balancing GHG footprint and management of climate risk/opportunity<br />Challenge 1:<br />Footprint alone doesn’t tell the whole story – ignores:<br />1. Companies’ ability to manage or reduce climate risk<br /> 2. Companies’ regulatory risk exposure<br /> 3. Company and sector improvement over time<br />Ability to manage and reduce climate risk exposure<br />Carbon footprint and potential risk exposure<br />CarbonBeta<br />Asdfasdfa<br />Asdf<br />Rate of improvement or regression<br />Ability to take advantage of opportunities<br />Rate of improvement or regression<br />Net carbon rating defined as function of four key variables at company level<br />
    12. 12. Evaluating Corporate Climate Change Performance:<br />Key challenges, (some) solutions<br />All ratings derived from risk exposure v. risk management analysis<br />Carbon Beta Rating<br />Carbon Risk Exposure<br />Climate Change Governance<br />Strategic Profit Opportunity<br />Management<br />Risk<br />
    13. 13. Key challenges, (some) solutions<br />Evaluating Corporate Climate Change Performance:<br />Electric Power North America <br />
    14. 14. Evaluating Corporate Climate Change Performance:<br />Key challenges, (some) solutions<br />Measuring risk:<br />Carbon Beta Rating<br />Carbon Risk Exposure<br />Climate Change Governance<br />Strategic Profit Opportunity<br />Carbon Footprint Data<br />
    15. 15. Evaluating Corporate Climate Change Performance:<br />Measuring Risk<br />RiskMetrics WACCRT:Calculates the cost of compliance with carbon regulations as a percentage of EBITDA and market cap, based on:<br /> company-specific carbon footprints<br /> distribution of emissions across jurisdiction<br /> level of regulation in each country/region<br />
    16. 16. Evaluating Corporate Climate Change Performance:<br />Carbon-Intensive Sectors<br />Significant change:<br />US and Canada: 17% reduction by 2020<br />Greatest potential change:<br />Brazil 39% below BAU scenarios by 2020: roughly 32% below 2005<br />Extensive downstream operations in Europe (more than half of current emissions) – currently exposed<br /><ul><li> Exposure will grow with tightening of EU regs
    17. 17. Increased exposure with Canadian oil sands investment</li></ul>Integrated Oil and Gas<br />
    18. 18. Evaluating Corporate Climate Change Performance:<br />Key challenges, (some) solutions<br />Challenge 2:<br />Moving beyond carbon-intensive sectors…<br />Non-intensive:<br /><ul><li> Indirect risk;
    19. 19. Various points of impact: </li></ul> supply chain, products, energy use<br />Carbon-intensive: <br /><ul><li> Direct regulatory risk
    20. 20. Impact primarily in operations</li></ul>Oil and Gas<br />Financials<br />v.<br />
    21. 21. Carbon-Intensive Sectors<br />Evaluating Corporate Climate Change Performance:<br />Murphy: 40% refining capacity currently exposed in United Kingdom, 60% in US – compliance costs increase to nearly 4% of EBITDA with US regulation and stringent UK targets<br />Hess: More than 75% of emissions in Malaysia, Algeria, Equatorial Guinea – no public targets and flaring of methane allowed. Only 20% of emissions are associated with operations in US and EU – low exposure<br />
    22. 22. Non-Intensive Sectors<br />Evaluating Corporate Climate Change Performance:<br />Banks are exposed to climate risk through the activities and companies they finance, rather than through their operations<br />We map each bank’s syndicated loan portfolio to RiskMetrics’ in-house carbon data and analytics to build a picture of each bank’s carbon risk exposure, including:<br />Carbon emissions financed<br />Carbon performance ratings of borrowers<br />Carbon regulatory risk exposure and country reduction targets<br />Overlaps between climate and financial risk is particularly significant to banks<br />
    23. 23. Methodology: Attributing Borrower’s Emissions to Bank<br />100 tonnes CO2e<br />Borrower<br />Bank<br />10tonnes CO2e<br />Loan : 10% of borrower’s total assets<br />Carbon : 10% of borrower’s emissions<br />Notes:<br />+ carbon emissions refer to Scope 1 emissions as disclosed by the borrowing firm<br />+ where necessary industry and regional averages supplemented missing data<br />+ 29,000 syndicated loans were analyzed through 2008 and 2009, representing USD 6.9 trillion in volume<br />+ bank’s cut of each loans is estimated according to bank’s role in the deal, whole loan split between participants<br />
    24. 24. Why Look at Carbon Exposure? Comparing Absolute Emissions Through Financing vs. Operations<br />“Financed” Emissions of a Bank are 1000x Larger than Scope 1 Emissions<br />
    25. 25. Footprint Analysis: Carbon-Intensity of Loan PortfolioTonnes CO2e per USD mm Financed, Contribution by Sector<br />Notes:<br />+ carbon emissions refer to Scope 1 emissions as disclosed by the borrowing firm<br />+ 29,000 syndicated loans were analyzed through 2008 and 2009, representing USD 6.9 trillion in volume<br />
    26. 26. More Important than Footprint: Carbon PerformanceComposition of Portfolio by Carbon Rating<br />RiskMetrics carbon ratings <br />(‘AAA’ through ‘CCC’):<br />% of Loans with Poor Climate Change Performances <br />(below BBB)<br />Several banks lend to a disproportionately high proportion of companies with poor climate change performance<br />+ High intensity industries in syndicated loan portfolio only<br />+ Syndicated loan activity over two years ending December 31, 2009<br />
    27. 27. Footprint Analysis: Carbon-Intensity of Loan PortfolioTonnes CO2e per USD mm Financed, Contribution by Sector<br />Notes:<br />+ carbon emissions refer to Scope 1 emissions as disclosed by the borrowing firm<br />+ 29,000 syndicated loans were analyzed through 2008 and 2009, representing USD 6.9 trillion in volume<br />
    28. 28. More Important than Footprint: Carbon PerformanceComposition of Portfolio by Carbon Rating<br />RiskMetrics carbon ratings <br />(‘AAA’ through ‘CCC’):<br />% of Loans with Poor Climate Change Performances <br />(below BBB)<br />Several banks lend to a disproportionately high proportion of companies with poor climate change performance<br />+ High intensity industries in syndicated loan portfolio only<br />+ Syndicated loan activity over two years ending December 31, 2009<br />
    29. 29. Key Takeaways and Next Steps<br /><ul><li>1. Most global banks have significant exposure to carbon risk through their financing activities, but risk management strategies remain underdeveloped
    30. 30. Many climate risk management and due diligence strategies focused on reputational risks, limited to specific asset classes (e.g. Project Finance). Focus on a few high-profile loans.
    31. 31. No global banks have robust systems in place to measure and manage aggregate carbon risk exposure across assets</li></ul>2. This is just the first step<br /><ul><li>Syndicated loan activity only a part of company’s total financing activities
    32. 32. Exploring links between climate performance and credit quality
    33. 33. Correlation between ESG risk management in core business and broader integrated risk management at the bank, room for quantitative studies</li></li></ul><li>For More Information, Contact:<br />Emily McAteer<br />Climate Risk Management<br />emily.mcateer@riskmetrics.com<br />(646) 778-4183<br />www.riskmetrics.com<br />
    34. 34. Regulatory Exposure: % of Portfolio Subject to Carbon Regulation, Present and Future Scenarios <br />Currently 47% of loans (USD 2.9 trillion) face carbon regulations<br />Expected to rise to 84% (USD 5.1 trillion) by 2013<br />Notes:<br />+ based on geographic operations of borrowers, measured by % of assets, revenues or operations in each geographic segment<br />
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