This presentation looks at what institutional investors should do to ensure we keep to 2 degrees or as close as we can. It compares what investors - even what the best in class - are doing and shows there is a big gap. And it looks at what can close that gap.

1. How Should Investors
Manage the Risk of
Runaway Climate Change?
BMW
Founda+on
Raj
Thamotheram,
CEO,
Preventable
Surprises
(with
thanks
to
Howard
Covington
&
Robert
Schwarz)
23rd
October
2014

3. Ignorance is not bliss!:
“If we were told - in any sphere - that we
had at least a 90% chance of averting
disaster through changes we ourselves
could make, wouldn’t we take action?”
- Olympia Snow - former U.S. Senator representing Maine
Climate Change (CC) threatens the core business model of investors:
The consequences for collective inaction will be very serious

4. Climate scientists agree:
Temperature Rise Relevance Tangible Negative Outcomes
0 Pre-industrial base level None
0.8°C (1.4°F) Current level Local & sporadic
1°C (1.8°F) Maximum Climate Scientists say is prudent Local & sporadic
2°C (3.6°F) Maximum gov'ts have vowed to permit Regional & sporadic
3°C to 4°C (5.4°F to 7.2°F) Likely to occur by 2100 Regional & persistent
Inflection Point - Inflection Point - Inflection Point - Inflection Point - Inflection Point - Inflection Point
4°C (7.2°F)
Likely to trigger rolling collapse of
regional economies, societies and states
Global, persistent and material as a
fraction of gross world product
5°C to 6°C (9.0°F to 10.8°F)
Upper-end projections in the absence of
immediate mitigation measures
Global, persistent and large as a
fraction of gross world product

5. Security specialists agree:
Climate change is…
“a ‘threat multiplier’ because it has
the potential to exacerbate many of
the challenges we are dealing with
today – from infectious disease to
terrorism….. Politics or ideology
must not get in the way of sound
planning.”
- Chuck Hagel, US Defense Secretary

6. “ABC” investor imperatives:
A. Understand the nature of Climate Change
B. Evaluate the associated investment risks
C. Determine how to avoid portfolio losses
Change is possible
Like most other corporate pension funds – incl
sustainability leaders – Unilever used to have many
reasons why it could not invest sustainably. That has
now http://www.changed reversethefuture.with org/discussions/its pension 47/resource-fund efficiency-joining shareholder-PRI value/ and (29:15)
it
is now reporting out-performance from its ESG
investing.

7. De-carbonise the global economy:
² Low carbon development paths are possible
² ~ 50 year timeline demands beginning within 10 years
² Technology has a large role in adaptation & mitigation
² Valuations will adjust as CC plays out for better or worse
² Proactive policy and economic and social stability are key

8. A paradigm change is needed:
Investors must actively demand de-carbonisation, a shift to RE and
Future
Transition state:
10 – 50 years
Uncertainty
High volatility
Present
BE POSITIONED TO CAPITALIZE
Tough decisions:
Balance risk & return
Technology bets
(CCS & geo engineering)
Value alignment

9. 2015 Paris climate conference is critical:
² A robust policy agreement to keep warming < 2 degrees will
result in FF “stranded assets”
² FF’s power renders such an agreement is quite unlikely
² An agreement that keeps warming <4 degrees is more likely
² But that kind of policy creates a high risk of “rolling
collapses” and virtually certain “delay & panic” scenarios
² Current choices appears to be either: put at risk ~ US $10
Tn in FF in the short-term or put at risk ~ $70 Tn in non FF
sectors in the medium to long term
² There are no non-radical options left to consider; the
“procrastinators penalty” has well and truly kicked in

10. Likely responses to climate change:
Scenario Defining Characteristic
Rapid Decarbonization Climate Change effects peak in the 2020s
Lucky Break Climate Change is not as bad as we expected
Delay and Panic Climate Change is worse than we expected, which results frantic
acts of adaptation and mitigation
Rolling Collapse 4°C or more of warming disrupts economic, social, and political
systems while global asset values crash

11. Prognosis for investors:
² ‘BAU +’ is the norm despite growing investor appreciation for CC
² IEA figures show that only 5 -10% of US $1 Tn/yr needed to de-carbonise
has been committed
² Investors haven’t acknowledged that emissions per unit of world
GDP have to fall 6%/yr. through 2100 to stay within 2 degrees
² Few are actively supporting political efforts to hold warming to
2°C (vested FF interests have much greater influence)
² A “delay then panic” scenario accompanied by economic, social,
and political turmoil remains the most likely outcome

12. Market realities demand new thinking:
² FFs are needed for a
transition to REs
² FF company push back
against deep change &
have captured politics
² Investor engagement so
far has been ineffectual
² And investors continue
to take baby-steps
A simple
“divestment –
reinvestment”
strategy won’t, by
itself, work!

13. Practical issues get in the way:
Do the Math: The Alternative Energy Matrix
Mind the gap!
Many practical
considerations:
Blue (+1) Yellow (0) Red (−1)
NB: FFs beat alternatives:
• Rough adjustment ahead
• Lots of electricity sources
• Few transportation options
Chart created for “Do the Math”
each topic has its own blog page
Thanks to Tom Murphy, UCSD

14. The ONLY realistic solution is to catalyse an
energy sector transformation:
1. Raise FF’s cost of capital by opposing investments
that have a high risk of stranded assets
2. Demand FF companies de-carbonise at needed
pace (how is up to companies to decide)
3. Lower RE’s cost of capital by encouraging viable
new companies and projects
4. Push regulators, legislators, and leaders to
facilitate a transition from FF to RE

15. Raise FF’s cost of capital:
http://www.abc.net.au/news/2013-11-13/bhp-criticised-for-backing-carbon-change/5088774
Divested from coal and oil sands companies and
speak out against projects likely to be stranded.
Coordinated research that resulted in 50% of participants
committing to consider climate risk in its asset allocations.

16. Lower renewables’ cost of capital:
Mobilizing US $100 trillion bond market to support of a
rapid transition to a low-carbon an economy

17. Lobby companies & legislators:
“The longer we take on achieving final clarity on policy, the more the risk
goes up for investors and it is in the investor community interest to have
policy sooner rather than later.”
“A key first step in support of the UN Secretary-General’s Summit would
be for asset owners and managers to request that all companies within
their portfolios end the practice of spending shareholder funds on
opposing government clean energy policies and action nationally and
globally on climate change.”
Christiana Figueres, Executive Secretary

18. Now we need to grow our ambitions:

19. ESG professionals, themselves, agree:
² Integration of FF and CC risks is weak
² Investors are poor stewards of corporate & market health
² More criticism of investors is needed to trigger change
http://www.responsible-investor.com/images/uploads/articles/RI_Divestment_Survey_.pdf
“Talking about climate change in terms of [US] averages is like
saying, ‘My head is in the refrigerator, and my feet are in the
oven, so overall I’m average.” - Tom Steyer

20. ESG staff: an honest self audit:
² 98% say investors are not doing enough to evaluate and integrate the risk
of FF exposure and CC into valuations and buy-sell decisions [Q2]
² Stewardship: 94% say investors are not doing enough to safeguard
corporate and market health [Q3]
² 3 of the top 4 things that investors should do to have maximum impact
are about lobbying (ie where funds are weakest in practice) [Q8]
² Is the criticism of investors fair? 53% say yes. 40% say the criticism is
too light! [Q4]
² Strong support for public reporting & accountability (which contrasts
with organisational views) - 93% partially or fully agreed that “public
accountability with a methodology independent of investor control is a
good thing” [Q10]
http://www.responsible-investor.com/images/uploads/articles/RI_Divestment_Survey_.pdf

21. ESG staff: an honest self audit:
² Even though they are divided about whether divestment will help in the
real world [Q6], 49% agreed fully and 34% agreed partially that
campaigns gives ESG professionals more internal space to manoeuvre
[Q7]
² Very bullish about climate bonds: 88% strongly or partially disagreed with
the comment that there’s nothing new about climate bonds or
fundamentally flawed [Q18]
² NGOs and the media are the most effective agent for change, whilst
investment CEOs the least [Q9]
² Biggest block to stronger action is investor short-termism and how
performance is measured and rewarded [Q5]
² Long-termism ranks highly in solutions [Q8]
http://www.responsible-investor.com/images/uploads/articles/RI_Divestment_Survey_.pdf

22. Biggest challenge = weak stewardship:
Issues:
² Short-termism and a focus
on relative returns cause
‘preventable surprises’
² Responsibility is delegated
to roles with little influence
on traditional investment
processes and practices
² Risk management is more
about CYA than about
managing members’ risks

23. Shockingly negligent pockets:

24. Serious enough for systemic risk
regulators to engage

25. NGOs are now really targetting finance :

26. Social entrepreneurship isn’t a panacea:
http://oxfamblogs.org/fp2p/why-social-entrepreneurship-has-become-a-distraction-its-mainstream-capitalism-that-needs-to-change/

27. More INTRA-preneurship is what’s needed:
“In short, it's in the mainstream economy that many of our next generation
impact leaders should be training. It's in the mainstream economy where
most of the current jobs reside. And it's from the mainstream economy that
the next impact leaders might emerge. Now, we just have to start teaching
those intra-preneurial skills.”

28. What needs to be done now:
1) Much better top-down support - including “aircover”, project funding
etc. – from trustees, directors, CEOs, and CIOs of institutional investors,
starting now and maintained for at least 10 years.
2) Much more assertive and collaborative stewardship – possibly a
dedicated “engagement overlay provider” – to deliver necessary
corporate change. Enough corporate tummy tickling! Think hedge funds!
3) Much stronger push to get credit rating agencies, sell side research,
investment consultants, auditors, and lawyers to mainstream climate
risk as part of their “day job,” i.e. no more “bolt-ons”!

29. “Hidden” information intermediaries:
Companies
Pension
Funds
Investment
Consultants
Investment
Managers
Sell-side
Analysts
Credit Rating
Agencies
Fees
Deals
Selection
Returns
Fees
Brokering
Lawyers
&
Auditors
Information
Lawyers
&
Auditors
Lawyers
&
Auditors
Lawyers
&
Auditors
Lawyers
&
Auditors
Lawyers
&
Auditors
Lawyers
&
Auditors

30. A question for us all:
As social entrepreneurs, ESG
professionals, consumers, and
citizens, what can we do to
encourage institutional investors to
rise to this challenge so they are
more “fit for purpose”?

31. If you want more info….

32. Thank you.
Any questions?