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La décarbonisation des portefeuilles d'investissement

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Présentation de Frédéric Samama, de chez Amundi, aux Ateliers du Shift Project du 9 juin 2015, questionnant les manières d'investir en réduisant son impact environnemental.

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La décarbonisation des portefeuilles d'investissement

  1. 1. Investors Tackling Climate Change June 2015 Frederic Samama Deputy Global Head of Institutional & Sovereign Clients Risk Management Approach
  2. 2. Executive Summary  Asset owners have recognized climate change as a risk but have done little so far.  Things are now rapidly changing for three main reasons.  Straightforward message: – Markets do not price coming taxations on polluting companies (leading to a non rewarded risk); – Investors’ fiduciary responsibility to identify and reduce these risks.  Simple and transparent products: – Reduce climate change related risks without impacting market exposure over the short term; – MSCI Low Carbon Indexes (developed jointly with AP4, FRR and Amundi); – Can be extended to the FI world.  Sharing of best practices: – Portfolio Decarbonization Coalition ($100bn commitment); – Hedging Climate Change paper (AP4/Columbia University/Amundi); – Events: Columbia Workshop, Bellagio Seminar, webinars, etc.  Amundi, N1 European asset manager, plays a pivotal role in this field. 2
  3. 3. Climate Change Hedging 3
  4. 4. Climate Change : Global Risk for Investors Source: WEF 2014, Global Risks Report 9th Edition (1). Sources: Ceres, October 2013 (2). Sources: Bank of England, prudential authority, statement in Feb 2015 (3). Sources: UNEP; Financial institutions taking action on Climate change 4  Climate risk among top 5 global risks as: – Impactful as fiscal crisis – Likely as unemployment, data fraud or cyber attacks Concern among regulators as well: – Bank of England warns of huge financial risk from fossil fuel 2 – IMF, G20,… The Global Risks Landscape 2014
  5. 5. Carbon Risk: A Shifting Debate (1) See article from Martin Wolf published in FT 17/06/2014 (2) See article from Henry Paulson published in New York Times 21/06/2014 (3) Hearings at the Bank of England 5 “If that happened, fossil fuel reserves would indeed be stranded. Investor beware: the risk of that cannot be zero.”1 Martin Wolf (17th June 2014) “We’re staring down a climate bubble that poses enormous risks to both our environment and economy.” 2 Henry Paulson (21st June 2014) AP4 (Fjärde AP-fonden) has developed a strategy where it underweights high carbon assets. “It’s an intelligent way of motivating behavior than directly divesting out of oil,” “Divesting out of oil is a bit like a blunderbuss, it doesn’t give any incentives for companies. “With the AP4 way you get incentives from companies in industry to perform better. AP4 has found that performance has improved in straight vanilla finance.’ 3 Lord Stern (26th February 2015)  Shift from a risk to society to a risk to investors  Not rewarded risks: – Fiduciary responsibility to identify them – And to reduce them – If long-term investment horizon  Among different approaches, AP4 methodology is promoted.
  6. 6. Two Major Risks to Investors Polluting And Stranded Assets  Fossil fuels companies: mainly valued on their reserves  Reserves exceed the budget of the planet: – Reserves : 2,795 GtCO2 2 – Budget : 1,437 GtCO2 3  No taxation: – No cost for negative externalities: impact on the planet, assets, bodies… – But a form of taxation will be implemented in long term  Direct subsidies: – Fossil fuel : $480bn 1 – Eliminating these subsidies would result in 4.1% reduction in energy demand in 2020 4. 6(1). “Energy Subsidy Reform: Lessons and Implications”, IMF (2013) (2). Carbon budget 2000-2050 for a 50% probability to stay under 2°C increase over pre-industrial level scenario. Source “Greenhouse- gas emission targets for limiting global warming to 2 °C”, Meinshausen et al, 2009 (3). For a 50% probability to stay under a 2° increase scenario. Quantity of CO2 trapped in the world’s top 200 fossil fuel reserves, excluding unconventional sources. Source: Carbon Tracker Initiative (4). McKinsey (2010): Energy Efficiency: a compelling global resource
  7. 7. Climate Change: Need for Solutions A major threat And Complex situation 7 Call for Innovation Lack of Action  Long-term issue (that does not match with investment horizons);  Complexity (technologies and incentives);  Lack of scalable solutions
  8. 8. Methodology: Carbon Reduction Constraints 8 Provider’s Selection Then Climate Risk Reduction  Carbon footprint: X% reduction of companies with the highest carbon footprint (Emission intensity)1  Stranded assets Z% reduction of carbon reserves (Reserves intensity)2  Index Provider (MSCI)*  Carbon Data Provider (MSCI)* Then TE Reduction  Optimization of the weights  Regular rebalancing Simple, Transparent and Rules Based Approach 1 Carbon footprint divided by sales 2 Reserves divided by market cap
  9. 9. Decarbonization: Free Option on Carbon Repricing NB: Random simulations with annual volatility at 20%, annual expected return 7% and a 0,5% TE. 1 2 Benchmark Low Carbon Low TE Benchmark Low Carbon Low TE If no repricing: same performance If repricing: Outperformance 9 Free Option – Either no climate change impact : same performance – Or a climate change impact : outperformance
  10. 10. MSCI Europe Low Carbon Leaders 10Source: MSCI * Gross returns annualized in EUR for the 11/30/2010 to 08/29/2014 period. ** Annualized one-way index turnover for the 11/30/2010 to 06/30/2014 period. The cumulative index performance is from MSCI Key Metrics MSCI Europe MSCI Europe Low Carbon Leaders Total Return* ‘(%) 11.1 11,7 Total Risk* (%) 11.7 11.6 Sharpe Ratio 0.91 0.97 Active Return* (%) 0 0.6 Tracking Error* (%) 0 0.7 Information Ratio NA 0.89 Turnover** (%) 1.9 9.9 Securities excluded NA 91 Market cap excluded (%) NA 23.5 Carbon Emission intensity reduction (tCO2/mm USD) (%) NA 62 Carbon Reserves intensity reduction (tCO2/mm USD) (%) NA 81  Excludes: – Largest 20% emitters with a maximum 30% by weigh form any sector – Largest owners’ reserves up to 50%  Major reduction of: – Carbon Emissions Intensity (- 62%) – Carbon Reserves Intensity (- 81%)  Low tracking error: 0.7 %
  11. 11. MSCI Europe Low Carbon Leaders 11Source: MSCI * Gross returns annualized in EUR for the 11/30/2010 to 08/29/2014 period. ** Annualized one-way index turnover for the 11/30/2010 to 06/30/2014 period. The cumulative index performance is from MSCI  Return vs. benchmark: – 12.1% vs 11.5% – Even if supposed to be forward looking  Regular outperformance  Concrete investment: – Nov ‘14-April ‘15 – 100bp of outperformance MSCI Europe Low Carbon leaders MSCI Europe
  12. 12. Two Main Approaches 12 Target (optimizer) Leaders (rules based) Method • Optimization of Carbon footprint / TE • Selection (best-in- class) + re-weighting Footprint impact • Function of calibration • High • Function of calibration • High Performance impact • Positive if carbon risk not yet priced in • Positive if carbon risk not yet priced in Risk/TE • Very low TE • Concentrated remaining TE • Low TE • Diversified remaining TE Signaling / Incentives • Weak • Strong signaling, strong incentives  Both Target and leaders are achieving a very good balance low TE/Risk reductions  Target is based on an optimizer that reduces even more the TE  Leaders is based on rules that send clear messages to companies
  13. 13. Mix of Different Approaches • * Low carbon leaders: exclusion based on transparent rules and with a cap per sector • (1) For polluting companies 13 Exclusion Engagement + Easy to Implement - Possible light impact Risk Management + Strong Signal - Does not fit with constraints of most investors - Scalability? Limits? Targeted and dynamic exclusion* + Combines Exclusion and Engagement + Fits with investors constraints & Scalable + Competition within each sector to accelerate carbon transition 1 - Middle Road Approach
  14. 14. Existing Investment Vehicles 14  Open-ended Index Funds: – Amundi Index Equity Europe Low Carbon – Benchmark: MSCI Europe Low Carbon Leaders – Launched in France: March 5 – Amundi Index Equity Global Low Carbon – Benchmark: MSCI World Low Carbon Leaders – Launched in France: March 5  ETF (already launched): – Amundi Index Equity Global Low Carbon
  15. 15. Concrete Decarbonization by Institutional Investors  MSCI Low Carbon indices – Developed alongside AP4 and FRR and Amundi 1 – FRR and AP4 plan to invest up to EUR 2bn  Tailored decarbonization – ERAFP 2: – Keep the same reference index – EUR 1.1bn (1) https://www.msci.com/documents/10199/447d3ba7-e215-45c9-8b14-74031a80f4bc (2) http://www.lesechos.fr/journal20140923/lec2_gestion_d_actifs/0203782634292- philippe-desfosses-lerafp-va-decarboniser-son-portefeuille-dactions-de-la-zone-euro- 1045591.php 15
  16. 16. Rewarded Clients 16  IPE Awards 2014: – AP4: – Best Public Pension Fund – Outstanding Industry Contribution – FRR: Best French Pension Fund  Environmental Finance 2015: – AP4: Personality of the Year  Responsible Award 2014 – ERAFP: Positive economy
  17. 17. Wide Range of Solutions 17 From liquid to illiquid assets Illiquid PE « EDF » Fixed Income Passive Stock Picking Decarbonization of Indices Overlay Equities Active Passive
  18. 18. Fixed-Income Barclays Euro Corporates # bonds ~ 1500 # issuers ~ 480 Interest rate sensibility 498 Bonds sensibility 525 Carbon intensity 145 # bonds ~ 1300 # issuers ~ 380 Carbon reduction 36% Tracking Error 0.08% # bonds ~ 110 # issuers ~ 110 Interest rate sensibility 498 Bonds sensibility 525 Carbon reduction 58% Tracking Error 0.17% Investment universe/ Benchmark index 3 Exclusion of 20% of the most polluting issuers (up to 30% maximum per sector) while having stranded assets Sampling process aiming at reducing the amounts lent to polluting issuers 18 2 1  Decarbonization of Barclays Euro Corporate  Process: – 58% carbon footprint reduction – Same market exposure (yield/spread) – Low TE: 0.17%  Discussions with index providers to launch: – ETF – Mainstream index
  19. 19. Portfolio Decarbonization Coalition 19  Commitment to decarbonize: – $45bn achieved up to now  Open platform: – Investors share best practice – Governance: UNEP-FI  Members: – AP4, Australian Ethical Investment, ERAFP, Fonds Francais de Retraites, Church of Sweden, Environment Agency Pension Fund, Legal Government Super, University of Sydney, Toronto Atmospheric Fund “Some of the biggest – and potentially transformational announcement at my Climate Summit came from the private sector. A coalition of institutional investors has committed to decarbonize $100bn in institutional equity investments” Ban Ki-moon, UN Secretary General http://unepfi.org/pdc/
  20. 20. 2015 Sharing of Best Practices among Asset Owners 20  March 9th: Columbia University  Asset owners in the first panel: – A. Stausboll, CEO, CalPERS – B. Litterman, Investment Committee, WWF – M. Eriksson, Deputy CEO, AP4 – P. Desfossés, CEO, ERAFP – E. van Gelderen, CIO of APG  30 asset owners, $6tn “The Decarbonization Portfolio Coalition is a positive step in this direction. I salute the mobilisation of its founders Amundi, AP4, CDP and UNEPFI, and investors that have signed up since its launch at the Climate Summit, and encourage all institutional investors to take these commitments even further by the COP21.” Laurence Tubiana French Representative for the COP21 “We welcome asset owners and managers, such as those present at this critical gathering at Columbia University, to become members of the Portfolio Decarbonization Coalition so as to share, with the public and world governments, their approaches. PDC will then be able to make this 'wealth of action' visible to Governments in the lead-up to COP21 in Paris. This is what, in 2015, investors can concretely do in order to help us build an enabling environment towards a successful climate agreement at the Paris COP." Janos Pasztor Assistant SG on Climate Change
  21. 21. Sharing of Best Practices among Asset Owners 21  April 7th: Rockefeller seminar at Bellagio  Sharing of best practices (including): – Asset owners M. Andersson, CEO, AP4 G. Hahn, Head of RI, Church of Sweden E. Mason, Head of RI, Church Commissioners for England B. Litterman, Treasurer of the Board of Directors, WWF P. Desfossés, CEO, ERAFP S. Palmer, Head of Ethics, Australian Ethical Investment O. Rousseau, Management Board, FRR J. Sefton, Senior Analyst RI, New Zealand Super Fund – Policy makers R. Arezki, Senior Economist, IMF P. Canfin, Senior Advisor, World Resources Institute H. Huang, Head of Sales and Trading, CICC – Academics P. Bolton, Columbia University J. Svejnar, Columbia University
  22. 22. Academic Paper Columbia/AP4/Amundi 22  Andersson, Bolton & Samama (2014) – Signaling is key to generate right incentives; – Risk analysis.  Top 10 most downloaded papers 1  Published in Revue d’Economie Financiere  High visibility: – “Long-termism, the problems with capitalism and other holiday reading” (Dec 2014) 2 (1) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2499628 (2) http://www.top1000funds.com/opinion/2014/12/18/long-termism-the-problems-with-capitalism-and-other- holiday-reading/
  23. 23. Conclusion (1) Source: www.CDP.net as at 2014. “CDP Initiative is backed by more than 767 institutional investors representing an excess of US$92 trillion in assets.” (2) Boston Consulting Group , Global Asset Management 2014 – Steering the Course to Growth  Climate change is now a real risk for investors – Analyze and disclose their risks – Consider carbon as an investment opportunity  In sum: investors can generate a free-option on a mispriced asset  Such solutions could be a base for further developments: – Country selection based on political sensitivity to climate change – Replication on other themes (e.g. water, waste, etc.)  Possible mobilization of a vast amount of money: – Investors with a green interest represent $92 trillion 1 – Passive management sums up to $10 trillion 2  Portfolio Decarbonization Coalition: – Sharing of best practices to mobilize investment flows toward the low carbon economy – $45bn commitment already achieved 23
  24. 24. APPENDIX 24
  25. 25. Climate Change: China Tackling Climate Change (1) http://www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1194544.shtml (2) http://www.theguardian.com/environment/2015/mar/05/china-vows-to-fight-pollution-with-all-our-might (3) http://www.yicai.com/news/2015/02/4575974.html 25 “Tackling climate change is the intrinsic requirement of China's sustainable development as well as the international obligations of a responsible major country.” 1 President of People’s Republic of China, Jinping Xi (December 2014) “China expects to reduce Carbon Emission further by more than 3.1% this year, adding it aims to stop coal consumption growing in key areas.” 2 Premier of People's Republic of China, Keqiang Li (March 2015) “The PBOC highly valued the development of green finance, and aims to promote the attractiveness of green projects and investments in green industries.” 3 Deputy Governor of PBOC, Gongsheng Pan (February 2015)
  26. 26. Climate Change: China Tackling Climate Change 26  Commitment by 2030: – Cap carbon emissions (earlier if possible) – Increase the share of non-fossil fuels to 20% 1  Actions: – Domestic ²: – One of main policy focus: China’s Policies and actions on Climate change – 7 ETS Pilots; National ETS in 2016 – International corporation: – Widely involved in multilateral corporations: UNFCCC, G20, etc. – Bilateral corporations: US, EU, etc.  Moving forward… – COP 21: Reduction target to be submitted in June – PBOC: Green Finance Development Project to be included into the 13th FYP ³ (1). http://www.yicai.com/news/2015/02/4575974.html, (2). http://www.theguardian.com/environment/2015/mar/05/china-vows-to-fight-pollution-with-all-our-might, (3). http://www.baidu.com/link?url=BX8K8Tpgvzigew5H0Tpig4lnlpk-IJa4G4GI_was8GmHNqDxP-6hJ7JuGtIUZ4RE5teZpn- PfJygtcj9oJR-4t3ubTrp-84V8cWylVCS1ce
  27. 27. Carbon Budget Equation in Line with 2°C Goal (1) To have at least a 50 per cent chance of keeping warming below 2°C throughout the 21st century , the cumulative carbon emissions between 2011 and 2050 need to be limited to around 1,100 Gt CO2. See Nature, January 2015 and IEA, March 2015. (2)United Nations Department of Economic and Social Affairs/Population Division 3, World Population to 2300 Source : Nature 2009, Meinshausen et alii, Greenhouse-gas Emissions Tragets for Limiting Global Warming to 2°C 27  2°C objective key figures 2011-2050: – CO2 concentration limit: 450ppm Vs. 400ppm (particles per million) in 2015 – CO2 emissions / year limit: 35 GtCO2 Vs. 32.3 GtCO2 in 2014 – Carbon budget: 1,100 GtCO2 (1) Vs. 300 GtCO2 burnt since 2000  Growing energy needs: – World pop. to reach 8.9bn in 20502 – 3bn more middle class consumers by 2030 – Growth in electricity demand in developing countries (e.g. x2 in India over the next 10yr) – More than 1bn without access to electricity in 2013, rising to 2.5bn in 2030 World Energy-related CO2 Emissions by Scenario
  28. 28. Remaining Ultimately Recoverable Resources Stranded Assets Source graphs: IEA 2013, Redrawing the Energy-Climate Map (1) Nature, January 2015 (2) Nature, April 2009 28  The Carbon Budget Gap: – Budget for 2011-2050: 1,100 GtCO2 CCS only slightly increases burnable reserves budget before 2050 (6% for coal, 2% for gas and oil) – Proven fossil fuel reserves: 2,900 GtCO2e – Estimated fossil fuel reserves: 11,000 GtCO2e  Low-demand Low-price 450ppm Scenario: – A 450ppm scenario requires energy- efficiency measures – Lowering fossil fuel demand, depressing prices – Impacting marginal producers: deepwater, oil sands, shale oil, thermal coal – And resource owning countries: Middle East (owns half of stranded assets) Canada (very low utilization rate) World Energy-related CO2 Emissions by Scenario Oil Gas Hard Coal Lignite2°C
  29. 29. US Coal Crash (1) Sen. Mitch McConnel of Kentucky, see The New York Times “McConnell Urges States to Help Thwart Obama’s ‘War on Coal’” 29 Asset Value Depends on Production Costs and Market Price Climate Policy Initiative, 2014, « Moving to a Low-Carbon Economy: The Impact of Policy Pathways on Fossil Fuel Asset Values”  US Coal crisis is caused by shrinking demand  With a combination of 3 factors: – Cheap substitute (gas) – Regulation: Clean Air Act, “Obama’s War on Coal” (1) – Declining exports (slowdown in China and strong USD)  Equities and bonds of coal companies are affected: – Peabody’s stock has lost 87 % of its value in the past 5 years – 5 years CDS on Peabody: rose from 707bp to 948bps at the end of 2014 – Risk premia have surged Share price performance of US coal companies, Jan 06 – Jan 15 Carbon Tracker, March 2015, The US Coal Crash, Evidence for Structural Change
  30. 30. Carbon Pricing by Economists 30  Climate change impacts (negative externalities) will mostly materialize in a distant future (2050-2100 and after)  Carbon pricing relies on Cost-benefit analysis (CBA) to maximize intertemporal welfare: – Net Present Value of future damages generated by one tonne of CO2 – Discount rate is key (reflects elasticity of intertemporal substititution) – Is the discount rate a good proxy for risk aversion? – What is the Beta of reducing emissions? (i.e. Elasticity of monetized damages to the world GDP) Discount Rate Carbon Price ($/tCO2) Carbon Price ($/tCO2) in 2050 Nordhaus (2008) 5% $8 in 2008 $25.9 Stern (2007) 1,5% (2000$) 85 in 2007 NA US EPA (2013) 2,5% // 3% // 5% (2010$) 57 // 37 // 11 in 2015 $97 // $71 // $26 3% with tail risk (95th percentile) (2010$) 109 $220 Daniel, Litterman, Wagner (2014) 2.5% $53 $44 (in 2045), $28 (in 2105)
  31. 31. The Issue of Externalities and Market Distortions (1) IMF 2013 (2) IAE 2013 31 Unwindresource subsidies Recognizeexternalities Private and social cost: US$ 1,420 bn in 2013 (1) Renewable energy subsidies: US$ 121 bn in 2013 (2) Fossil fuel subsidies: US$ 548 bn in 2013 (2) – The marginal private cost of CO2 emissions is inferior (usually being nil) to the social cost associated with global warming damage E.g.: Adding the social and environmental cost associated with coal to its actual cost would raise its price by 175% (Greenstone & Looney 2011) – Three ways to reduce CO2 output to the socially optimum level:  Pigovian Tax  Regulation  Creation of a market for polluting rights (e.g. Emissions Trading Schemes) – More than four times lower than fossil fuel subsidies – Fossil fuel subsidies have decreased by US$ 25 billion compared to 2012, in part due to a decrease in international energy prices – Subsidies to oil products represent over half of the total – Total fossil fuel subsidies represent more than four times the amount invested globally in improving energy efficiency
  32. 32. From Shadow Price to Internalization (1) From the US China Climate deal: China, the biggest emitter of greenhouse gases in the world, has agreed to cap its output by 2030 or earlier if possible. Previously China had only ever pledged to reduce the rapid rate of growth in its emissions. Now it has also promised to increase its use of energy from zero-emission sources to 20% by 2030. The United States has pledged to cut its emissions to 26-28% below 2005 levels by 2025. 32 Pieces of Carbon- and Clean-energy Focused Legislation and/or Regulation – Worldwide UNEP-FI 2012  Upward trend at sub-national and at national levels: – 490 pieces of carbon legislation in 2012 Vs. 151 in 2004 – Bottom-up emergence of a global landscape  Developing countries are taking up the challenge: – ETS scheduled or implemented: China, South Korea, Kazakhstan – ETS under consideration: Brazil, Chile, Mexico, Thailand, Vietnam, Turkey  China’s new stance can be a game changer1: – Coal peak by 2020, CO2 peak in 2030 – Increases zero-emission sources to 20% by 2030 – National ETS to be implemented in 2016  A new global deal is to be reached in 2015: – All countries to commit themselves to implement their targets (first half of 2015) – Durban Platform (ADP) to be adopted for an implementation in 2020 – New ways to finance this transition to be found, from the North to the South (Green Climate Fund still underfunded)  Concerns about free-riding issues remain high
  33. 33. MSCI World Low Carbon Leaders 33  Excludes: – Largest 20% emitters with a maximum 30% by weigh form any sector – Largest owners’ reserves up to 50%  Major reduction of: – Carbon Emissions Intensity (- 50%) – Carbon Reserves Intensity (- 68%)  Low tracking error: 0.6 % Key metrics MSCI World MSCI World Low Carbon Leaders Total Return* ‘(%) 12.7 13.1 Total Risk* (%) 13.2 13.3 Sharpe Ratio 0.95 0.99 Active Return* (%) 0 0.4 Tracking Error* (%) 0 0.6 Information Ratio NA 0.72 Turnover** (%) 1.7 6.9 Securities excluded NA 328 Market cap excluded (%) NA 17.4 Carbon Emission intensity reduction (tCO2/mm USD) (%) NA 50 Carbon Reserves intensity reduction (tCO2/mm USD) (%) NA 68 Source: MSCI * Gross returns annualized in EUR for the 11/30/2010 to 08/29/2014 period. ** Annualized one-way index turnover for the 11/30/2010 to 06/30/2014 period. The cumulative index performance is from MSCI
  34. 34. MSCI World Low Carbon Leaders 34Source: MSCI * Gross returns annualized in EUR for the 11/30/2010 to 08/29/2014 period. ** Annualized one-way index turnover for the 11/30/2010 to 06/30/2014 period. The cumulative index performance is from MSCI  Return vs. benchmark: – 13.1% vs 12.7 % – Even if supposed to be forward looking  Regular outperformance MSCI World Low Carbon leaders MSCI World
  35. 35. Comparison of Decarbonization Methods 35 Target funds (pure re- weighting) Low carbon leaders Disinvestment Method • Optimization of Carbon footprint / TE • Selection (best-in-class) + re-weighting • Selection (exclusion of sub-sectors) Footprint impact • Function of calibration • High • Function of calibration • High • Very high Performance impact • Positive if carbon risk not yet priced in • Positive if carbon risk not yet priced in • Uncertain, depends on relative performance of energy sector Risk • Limited • Limited • Very strong sectorial bets Signaling / Incentives • Weak • Strong signaling, strong incentives • Strong signaling, but weak incentives for divested companies Concerns • Alignment with climate performance (Scope 3) • Alignment with climate performance (Scope 3) • Not commercially driven • Possible tension with economic development of poor countries
  36. 36. Carbon Footprint Measurement Detailed methodology in Appendix from Slide48 to Slide 54 36  Greenhouse Gas (GHG) Protocol sets the global standard for how to measure, manage, and report greenhouse gas emissions  GHG protocol defines three categories of carbon emissions: – Intensity = 𝐶𝑎𝑟𝑏𝑜𝑛 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝑠𝑐𝑜𝑝𝑒 1+𝐶𝑎𝑟𝑏𝑜𝑛 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝑠𝑐𝑜𝑝𝑒 2 𝑆𝑎𝑙𝑒𝑠 – Scope 1 = Direct GHG emissions – Scope 2 = Indirect GHG emissions from consumption of purchased electricity, heat or steam – Scope 3 = Other indirect emissions – Modelling if necessary  Stranded assets (Reserves): – Intensity = 𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑝𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑐𝑎𝑟𝑏𝑜𝑛 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝑓𝑟𝑜𝑚 𝑟𝑒𝑠𝑒𝑟𝑣𝑒𝑠 𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 – Just a few companies concerned in the oil & gas, metals and mining and utilities sectors  Carbon Disclosure Project serves as a repository for corporate’s GHG emissions data  Financial data providers such as MSCI or Trucost fine tune and repackage CDP datas into comprehensive GHG emissions & stranded assets database
  37. 37. Climate Change Reporting by Companies Source: CDP 2014, CDP Russia Climate Change Report (1) www.cdp.net 37 CDP Investor Base Continues to Grow  A growing demand from investors(1): – 822 investors with $95 trillion in assets have asked more than 5,000 companies to disclose their carbon emissions and climate change strategies through CDP  Gaps remain in reported emissions (Sc. 1 & 2): – ACWI: 48% of companies, 70% of market cap – World: 58% of companies, 75% of market cap  Caveats: – Standards / Benchmarking – Third party verification – Scope 3  Climate impact is not always aligned with scope 1 & 2 carbon footprint  Access to Scope 3 standardized data is the challenge: – Scope 3 emissions can account for as much as 90% of total carbon impact (e.g. automobile, retail, etc.)
  38. 38. Equities Customized Solutions: Smart Beta Decarbonization 38  Decarbonization of Scientific Beta Value Max Deconcentration Smart Index: 0 100 200 300 400 500 600 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Carbon emissions intensity Key metrics Edhec Value Max Deconcentration Low carbon “Rule”** Low carbon “Carbon Optimizer”*** Annualized Return 16.7% 17.1% 16.9% Annualized Risk 14.0% 14.0% 14.0% Sharpe Ratio 1.12 1.15 1.13 Active Return - 0.4% 0.2% Ex post Tracking Error - 0.55% 0.17% Information Ratio - 0.71 0.93 Carbon Emission intensity* - -50% -50% Carbon Reserves intensity* - -52% -53%  Carbon emissions: – Edhec Max Dec : high carbon footprint (Reason: small polluting companies, mostly in the utilities sector, are overweighted*).  Decarbonization brings back to MSCI World carbon intensity level  With slight outperformance: – Rule: +0,4% – Carbon Optimizer: +0,2%  With limited TE: – Rule: 55bp – Carbon Optimizer: 17bp *The difference between the Edhec and the MSCI World carbon intensities is 225 CO2 tons / millions $ of sales* Which 45% can be explained by the top 10 and bottom 10 contributors ** Low Carbon « Rule » : a proportion of the worst polluters within each sector is excluded before the TE optimization. The benefit of this approach is the transparency regarding the exclusion rule. *** Low carbon « Carbon Optimizer »: no companies are excluded ex-ante. The benefit of this approach is its greater efficiency. Edhec Max Deconcentration MSCI World Carbon Optimizer/Rule Reduction
  39. 39. Decarbonization of Fixed-Income Portfolios 39  Debt decarbonization tackles carbon risk  Green bonds investments are SRI / Impact-driven Green Bonds Debt Decarbonization Objective • Impact investing • SRI policy • Carbon risk hedging Functioning • Bonds with dedicated use of proceeds to projects generating a direct environmental benefit-renewable energies, energy efficiency, climate change adaption or social benefits • Low carbon fixed income indexing with the exclusion of most polluting issuers based on their carbon footprint (and sampling to limit further the exposure to polluting companies) Development • Expected to reach total outstanding amount of $100bn in 2015 • Beginning of standardization and emergence of Green bond indices • Projects underway Benefits • Impact-driven (“use of proceeds”) • Reputation • No extra financial costs as an investor (so far) • Reduction in amount lent to polluters • Diminishing carbon risks • Optimization to replicate the benchmark risk • No extra financial costs as an investor Concerns • « Green-wash » risk • Low impact risk • No real standardization and lack of « greenness » evaluation • Liquidation concerns • Lack of accuracy of carbon footprints • No real value creation via exclusion
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