Download Investor Insights As of 6/30/06

The Risks and Opportunities of Climate
Change in Capital Markets
Bren School Corporate Partners Summit
May 2007
Risk and Reward Drivers
Policy
Economics
Capital Market
Opportunities
Fiduciary Responsibility
Investment Fiduciary
Definition: a person who has the legal responsibility for managing someone else’s
money.
— Members of investment committees of retirement plans, foundations, and
endowments
— For Trustees of private trusts
— Advisors who provide comprehensive and continuous investment advice
Investment Fiduciaries manage more than 80% of the nation’s liquid investable
wealth.
As climate change policy is implemented, fiduciaries will be required to consider
risks and opportunities.
“Maginot Mentality”
Source: www.maginot-line.com
 Traditional investors fail to see that company valuation will need to
incorporate climate change risk and reward
 Will investment fiduciaries recognize the impacts that climate change will
have on their investments?
 New factors must be accounted for in corporate reporting
Policy Response
Future regulatory framework will encompass the following themes:
Policy response to account for externalities
Support for alternative energy (e.g., subsidies and tax breaks) improves the
cost competitiveness of new technology, reduces costs through economies of
scale, and promotes further technological advances
Reduce the dependence of foreign energy sources
Policy Response
 Investment strategies of all types will need to consider the impact of policies
and forces related to climate change and their effect on the future business
and regulatory environment.
— Command and control
— Cap trading system
— Tax incentives
— Voluntary measures
 Corporate leaders are incorporating climate change criteria into their business
plans and strategies in anticipation of policy and regulatory changes.
 Investors are discovering ways to account for the implications of climate
change within their investment process.
Economic Considerations
 Direct exposure
Industries and sectors that produce greenhouse gas emissions as a result
of their processes.
Mitigation Measures: Invest in low-carbon technology, trade emissions rights,
invest in offsetting projects, and lobby to block or challenge regulation.
— Companies with low greenhouse gas exposure within a particular polluting
industry are in a relative strong position.
—
Economic Considerations
 Indirect exposure
Sectors that either manufacture products that emit greenhouse gases
during their use, or offer services that are affected by greenhouse gas
regulations
— Sectors with direct greenhouse gas emissions from point sources bear the
highest regulatory risks, as these sources are easily monitored and
controlled
— Limited ability to adapt
— Increasingly located in developing countries
Mitigation Measures: Effective policies may need to target the sectors with
high indirect emissions and high ability to adapt
—
Economic Considerations
 Physical Exposure
—
—
—
—
Sectors whose operations depend on climate conditions
Estimation of physical impacts involves a high level of uncertainty
Some industries may need to drastically reinvent their business model
While effects may not be realized for quite some time, certain industries
will take a long time to adapt
Physical exposure to climate change and ability to adapt
Ability to Adapt to a
Changing Climate
high
low
By sector or activity
Banks
Manufacturing
n/a
low
Insurance
Healthcare
Tourism
Agriculture
Real estate
Water utilities
Off-shore oil
Fisheries
Physical Exposure to Climate Change
high
Corporate Analysis
 Considerations for corporate success:
—
—
—
—
—
If a company operates in a regulatory environment where greenhouse gas
emissions are regulated, when and in what form is regulation expected?
Has the company’s top management acknowledged that climate change is
a fact and a risk?
Does the company track emissions throughout it’s supply chain? Has the
company set reduction targets and a strategy for how to implement them?
How high are a company’s emissions on an absolute level and relative to
its peers?
Are there business opportunities for climate change mitigation and
increased regulation?
Corporate Analysis
 Increased corporate disclosure will allow company’s to comply with
greenhouse gas regulations and assist investor in making decisions
 Company’s with poor track records relative to their peers will carry a higher risk
of being negatively affected by carbon regulations
 Opportunities for carbon mitigation will emerge
—
—
Improving energy efficiency
Increasing the use of low- and no-carbon fuels
Investment Opportunities
 Political support is currently the most important driver of outcomes
—
—
Which industries will be affected and when?
Financial support? (e.g., subsidies, tax breaks)
 Investors will be focused on a “best in class” approach
 Emerging greenhouse reduction technologies will come and go.
—
—
—
Some will be wildly successful, but most won’t make it
Those that are not yet profitable are at a higher risk
Those that are supported by R&D spending from large corporations will
have a better chance of sustaining themselves
Investment Opportunities
Building
Investment area
Thermal insulation
Producers of insulation materials; high performance materials
Lighting
LED, fiber optics, compact fluorescent light bulbs
Heating, cooling, and ventilation
Integrated systems, IT management, metering devices
Household and electronic goods
Energy efficient appliances, built-in power systems
Transport
Investment area
LIghtweighting
Carbon fiber, composite and lightweight materials
Drive trains
Automotive suppliers with innovative technologies, fuel cells
Technology and electronics
GPS systems, traffic management systems
Electricity production
Investment area
Combined heat and power
Independent power producers
Industrial process and materials us
Investment area
White Biotechnology
Industrial biotechnology, enzyme producing companies
Renewable and low-carbon energies
Investment area
Wind
Turbine manufacturers, wind park developers
Photovoltaic
Entire photovoltaic supply chain
Geothermal
Geothermal project developers
Biofuel
Biodiesel and bioethanol producers
Hydropower
Turbine manufacturers
Investment Products
Equities
Bonds
Private Equity
/ Venture
Capital
Real Estate
Hedging
Instruments
Others
Portfolio
Portfolio
Environmental
Improved
Insurance
Carbon
screening
screening
venture capital
energy
efficiency
within property
portfolios
Thematic
Renewable
funds
energy bonds
SRI funds
SRI funds
Renewable
energy and
efficiency stocks
Green
mortgagebacked
securities
funds
Catastrophe
bonds
Structured
products
Weather
derivatives
Emissions
indexes
Investment Products
Domini 400 Social Index
Index Total Returns As of 04/30/07
April 2007
Last Qtr
YTD
One Year*
Three Year*
Five
Year*
Ten
Year*
Since 5/1/90
Inception*
KLD's
DS400 Index
4.56%
-0.18%
4.37%
13.74%
10.16%
7.60%
8.01%
12.13%
S&P 500
4.43%
0.64%
5.10%
15.24%
12.25%
8.54%
8.05%
11.54%
* Annualized Returns
Investment Products
KLD Global Climate Index 100
Index Total Returns As of 04/30/07
April 2007
Last Qtr
YTD
One Year*
Three Year*
Five
Year*
Ten
Year*
Since 7/1/05
Inception
KLD GC 100
Index
3.61%
5.87%
9.69%
12.02%
N/A
N/A
N/A
23.63%
Russell 3000
3.99%
1.28%
5.32%
14.48%
13.08%
9.25%
8.59%
15.07%
* Annualized Returns
Investment Products
WilderHill Clean Energy Portfolio
Since
Inception
1 Year
3 Year
5 Year
WilderHill Clean Energy
Index
8.64
-13.08
7.23
2.93
Nasdaq Composite Index
8.14
3.50
6.69
5.59
11.83
10.05
6.27
Index History (%)
S&P 500 Index
10.04
* Annualized Returns
Market Wisdom - Benjamin Graham
“The intelligent investor is likely to need considerable
willpower to keep from following the crowd.”
Benjamin Graham
US-R