Download Climate Change Impacts

Climate Change Impacts on Banks
Where Sustainability and Risk Management Meet
June 16, 2007
Sandra Odendahl, Senior Director
CIBC Environmental Risk Management
Corporate Risk and Insurance Services, TRM
Outline
• Environmental Risk Management at CIBC
• Risks Arising from Environmental issues
• Case Study: Climate Change
– Credit Risk
– Operational Risk
– Reputational Risk
• Lessons Learned
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June 2007
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Environmental Risk Management at CIBC
Environmental Aspects of Banking
Supply Chain
Operations
Products &
Services
Electricity
Furniture
Carpet
Paper
Services
etc.
Loans
Project Finance
Mortgages
Mutual Funds
Investment Banking
etc.
Energy and water use
Solid waste
Paper Use
etc
•
Environmental Risk Management (ERM) Group has oversight responsibility
for Environmental Management at CIBC
– Corporate Environmental Affairs (policy, external liaison, opportunities…)
– Environmental footprint (supply chain, facilities and operations)
– Environmental credit risk management (lending and other products and services)
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Risks Arising from Environmental Aspects
• Credit Risk
– Ability of borrower to repay debt is impacted by environmental problems,
for example:
• Revenue or net income affected by clean up costs, fines and penalties
• Business operation curtailed due to regulatory orders
• Value of collateral security much lower than appraised value,
• Operational Risk
– Risk of loss due to inadequate environmental management in bank’s own
operations
• Reputation Risk
– Damage to bank reputation caused by association with environmentally
damaging company or sensitive environmental issue
• Legal Risk
– Direct liability of bank for clean-up costs, possibly exceeding the amount
of the loan or investment, following foreclosure or bankruptcy
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June 2007
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Some Environmental Issues Facing Banks
• Boreal forest and biodiversity conservation
• Urban brownfield redevelopment
• Greening the Supply Chain
• Environmental and social impacts from project finance
• Climate change
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June 2007
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Climate Change
A Case Study in Applying Risk Management to an
Environmental Issue
Climate Change will impact banks, their suppliers and
clients as a result of:
•
Physical effects
•
Regulations to mitigate
Climate Change impacts give rise to risks:

Credit Risk

Operational Risk

Reputation Risk
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June 2007
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Physical Aspects of Climate Change
In general:
•
Extreme temperatures
•
Change in precipitation
•
Increased storm frequency and
intensity
•
Rising sea levels
In Canada:
•
Shifting permafrost,
•
Hotter & drier summers,
•
Wetter winters,
•
Stormier coastline,
•
Rising sea levels
 The climate is becoming more
extreme and less predictable
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June 2007
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Regulatory Aspects of Climate Change
•
International
•
National
•
Regional
•
Provincial
State
•
Objective is to stabilize concentrations of
GHGs at levels that will stabilize humaninduced climate change
Targets at international, national,
regional and/or provincial level
Most systems embrace emissions
trading, which allows reduction targets to
be met at lowest cost
Participants are issued allowances to
cover targeted amount of emissions
To meet targets, participants can:
– Reduce emissions internally
– Buy the right to emit more GHGs
(allowances)
Installation
– Buy proof that GHGs have been reduced
somewhere else (credits)
 Emitting CO2 will now cost money
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June 2007
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Impacts of Climate Change on Banks
Impacts
People
Operations &
Supply Chain
Products and
Services
Physical
Aspects
Adverse health
effects on
employees
• Higher insurance premiums
• Increased credit risk of clients
in certain weather-dependent
sectors
• Operational Risk: Physical
damage from storms
• Higher cooling needs;
lower heating needs
• Higher business continuity
management costs
Regulatory
Aspects
• Higher cost for energy
– Business interruption
– Capital & operating costs
– Revenues
• Increased credit risk if clients
face new costs or penalties
associated with regulations
• Reputational risk if bank lends
to client perceived as not
meeting regulations or
“community standards”
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June 2007
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Credit and Operational Risk Assessment
Impacts
People
Operations &
Supply Chain
Products and
Services
Physical
Aspects
Adverse health
effects on
employees
• Higher insurance premiums
• Increased credit risk of clients
in certain weather-dependent
sectors
• Operational Risk: Physical
damage from storms
• Higher business continuity
management costs
• Higher cooling needs;
lower heating needs
Regulatory
Aspects
• Higher cost for energy
– Business interruption
– Capital & operating costs
– Revenues
• Increased credit risk if clients
face new costs or penalties
associated with regulations
• Reputational risk if bank
lends to client perceived as
not meeting regulations or
“community standards”
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June 2007
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I. Credit Risk Associated with GHG Regulations
•
•
Client companies will need to select one or a combination of
strategies to meet carbon dioxide targets, including:
–
investment in internal abatement measures,
–
the purchase of credits on national or international carbon markets,
and
–
investment in projects that will offset carbon dioxide emissions
Completed a study in 2006 to look at the impacts of GHG
regulations on 3 levels:
1. Industries
2. Clients
3. Portfolio
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June 2007
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Credit Risk Associated with GHG Regulations
Impact on Industries
Key factors that determine how much a sector will be affected by new
regulations:
1. Government policy
2. Energy Intensity
3. Emissions Intensity (emissions per unit output)
4. Ability to pass along costs
5. Opportunities to abate
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June 2007
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CIBC WM Carbon Cap Vulnerability Index
Elect.-coal
Oil sands
Metal smelting/ refining
Crude oil
Aluminum
Steel
Cement
Chemicals
Petrol.refining
Elect.-nat gas
Glass
Pulp & paper
Metal mining
Oil gas pipelines
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Credit Risk Associated with GHG Regulations
Impact on CIBC Clients
• Identified companies likely to face GHG regulation
• Forecasted Emissions – Probable target = CO2 asset or liability
• Calculated cost of compliance for companies in a liability position (i.e.
unable to meet their regulated target)
– abatement through new technology
– buy CO2 allowances in the marketplace under different price scenarios
• Assessed ability of sectors and firms to pass on costs of compliance
to customers
 Majority faced some costs to meet GHG regulations, but 18% of firms
were likely to face no cost to comply with GHG regulations
 Carbon compliance costs represented under 1% of profit in 90% of
cases
 Analysis will be updated using details of new federal GHG regulations
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June 2007
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Credit Risk Associated with GHG Regulations
Impact on CIBC’s Portfolio
 Risk assessment showed very, very small impacts on portfolio
 Exposure to sub-investment grade clients facing GHG regs is less
than 0.7%
•
Percentage of loans in portfolio that are to all clients in industrial sectors
likely to be regulated is less than 7%
•
90% of these loans are to investment grade clients (i.e. clients likely to
have financial means to meet new regulatory targets for GHGs)
 Climate change-related loan losses, under our worst-case scenario,
were estimated to be <0.009% of total portfolio (9 ¢ on $1000)
 Analysis must be updated when details of new regulations are
released
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June 2007
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II. Operational Risk from Physical Impacts
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Operational Risk from Physical Impacts
Study of Impacts on CIBC Operations
•
Completed a literature review in November 2006 as first step in risk
assessment of physical impacts on our 100 locations in Caribbean
– Damage from storm events or flooding;
– Business interruption;
– Increased insurance costs; or
– Additional cooling requirements
•
Impacts of climate change on the Caribbean will likely include:
– Infrastructure damage, coastal erosion, more frequent flooding, landslides, and
reduced availability of freshwater
•
Sparse information on island or sub-region-specific impacts, but several
initiatives underway in Caribbean to improve predictions
•
CIBC developing an island-by-island physical risk database
•
Will need to use insurance company models to predict the magnitude of
financial losses or additional costs in each sub-region.
•
Assessment of impact of physical risk on loan portfolio also contemplated
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III. Reputation Risk and Climate Change
Don’t fund global warming.
Stop investment in all new coalburning power plants.
There are over
150 new coal-burning
power plants currently
on the drawing board.
Let’s keep them there.
Coal-burning power plants are the world’s largest
greenhouse gas polluters and a direct threat to our
future. Yet prominent financial institutions, including
JPMorgan Chase, Goldman Sachs, Citigroup,
Morgan Stanley, Merrill Lynch, Credit Suisse and
Lehman Brothers, are eager to finance their
construction. The truth is, every dollar invested in coal
is a dollar that could be invested in energy efficiency
and wind and solar power. Help us make sure these
coal-burning power plants are never built. Tell Wall
Street that investing in coal is simply too risky.
Visit www.ran.org to join the fight.
(from New York Times, March 23, 2007)
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June 2007
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Reputation Risk and Climate Change
A Role for Stakeholder Relations and Genuine
Change
•
Proactive meetings and consultation with environmental NGOs
– Rainforest Action Network, Forest Ethics, WWF, Canadian Boreal Initiative
•
Consultation with shareholder activists
– Ethical Funds Company, Carbon Disclosure Project
•
Demonstrable progress
– Green power purchasing
– Reductions in direct and indirect CO2 emissions
– Policy updates and revisions
• Environmentally responsible procurement Standard
• Environmental credit risk management Standard
•
How do we measure success?
– Shareholder resolutions = 0
– Targeted campaigns against CIBC = 0
 But don’t get too comfortable!
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June 2007
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Summary & Conclusion
What we’ve learned so far
•
•
Global climate change is a pressing environmental issue that poses risks and
opportunities for business
CIBC and its clients will be affected by:
– Physical impacts of unpredictable and extreme weather, and
– Costs to comply with new policies intended to help mitigate climate change
– The actions of stakeholders who expect us to take certain actions
•
•
•
•
•
Step #1 in thorough risk assessment is to understand how climate change
(physical and regulations) impacts business inputs, operations, and outputs
Credit risk associated with Climate Change regulations (that we have seen
so far) is relatively small
Operational risk associated with physical effects of Climate Change will be
challenging to quantify because of poor data and changing models
Reputational risk management requires multi-pronged approach, but most
important is to (1) listen to external stakeholders, (2) make some real changes
Risk assessment and risk management approaches must be constantly
revised as regulations evolve, physical impact data improves, and
stakeholders ask new questions
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