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Climate Change Policy in Canada: Impacts
on Sectors and Firms
U of T Environmental Finance Workshop
May 11, 2007
Sandra Odendahl, Senior Director
CIBC Environmental Risk Management
Corporate Risk and Insurance Services, TRM
Outline
• About CIBC
• The Legislative Framework
• Impacts on Banks
• Impacts on Sectors, Clients and Portfolio
• Opportunity Drivers
• Summary and Conclusion
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About CIBC
• Assets ~ $304 billion; market capitalization $33.6 billion.
• Approximately 37,000 employees worldwide.
• 1,061 branches; more than 3,800 ABMs
• Business areas:
– CIBC Retail Markets (~76% of revenue)
• retail markets (everyday banking, borrowing, mortgages and
investing), wealth management and credit cards
– CIBC World Markets (~24% of revenue)
• wholesale banking arm of CIBC, providing a range of integrated credit
and capital markets products, investment banking and merchant
banking
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About CIBC
Environmental Risk Management Group
• Oversight responsibility for Environmental Management at CIBC
– Oversight of adherence to CIBC environmental policy and other
environmental requirements and commitments
– Corporate environmental footprint
– Environmental credit risk management
• Established in 1992 as part of TRM, Corporate Risk and Insurance
Services
– Originally driven by enactment of environmental legislation in
Canada and the U.S. in the early 1990s that raised the possibility
of significant credit and legal risk to banks associated with lending
activities
• Three full-time permanent staff:
– Sandra Odendahl, Senior Director
– Tony Basson, Senior Manager
– Bill Christmas, Senior Manager
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Risks Arising from Environmental Issues
•
Credit Risk
– Ability of borrower to repay debt is impacted by problems associated with
contaminated property and/or inadequate client environmental management
systems, 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, due to contamination,
financial ratios are adversely impacted, and credit risk is higher
•
Legal Risk
– Direct liability of bank for clean-up costs, possibly exceeding the amount of the loan
or investment, following foreclosure or bankruptcy
•
Operational Risk
– Risk of loss due to inadequate environmental management (fuel tanks, asbestos,
etc) in bank’s own operations
•
Reputation Risk
– Damage to bank reputation caused by association with environmentally damaging
company or issue
U of T Environmental Finance
May 2007
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Climate Change
An Emerging Risk Issue
Risks for a bank:
 Credit Risk
 Operational Risk
 Reputation Risk
Arising From:
 Physical effects
 Regulations to mitigate
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Physical Effects 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
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Climate Change
The Legislative Framework
International
•
Objective is to stabilize concentrations
of GHGs at levels that will stabilize
human-induced 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:
National
Regional
Provincial
State
– Reduce emissions internally
Installation
– Buy the right to emit more GHGs
(allowances)
– Buy proof that GHGs have been
reduced somewhere else (credits)
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Impacts of Climate Change on Banks
Impacts
People
Assets (Operations) Business Activities
Physical
Aspects
Adverse health
effects on
employees
• Higher insurance premiums
• Operational Risk: Physical
damage from storms
• Higher cooling needs;
lower heating needs
• Higher business continuity
management costs
Regulatory
Aspects
• Earn tradable offset credits
through projects
• Higher cost for energy
• Increased credit risk of clients
in certain weather-dependent
sectors
– Business interruption
– Capital & operating costs
– Revenues
• Opportunity to finance
infrastructure development
• Increased credit risk if clients
face new costs or penalties
associated with regulations
• New carbon market products
and services
• Renewable energy finance
• Reputational risk
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Impact on Banks
Physical Effects
Risks
• Human resources impacts
– Effect of more respiratory problems = absenteeism?
•
•
•
•
Higher insurance costs for CIBC premises in some regions
Increased cooling requirements in summer
Business interruption due to major storms, power availability in Ontario,
etc.
Credit risk due to impacts on clients’ sectors
– (Especially agriculture, forestry, fisheries, tourism, food & beverage, etc)
– Increased capital & operating costs to clients
– Increased business interruption to clients
– Increased cost for (or unavailability of) insurance
Opportunities
• New products and services
• Lower building heating costs in northern areas
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Impacts on Banks
Regulatory Aspects
Risks
•
Operational Risk
– Increased cost for purchased energy if power producers pass on new
regulatory costs
•
Credit risk
– Clients face new regulations, new costs, climate change litigation and other
•
Reputation Risk
– Stakeholders increasingly demanding action from banks and other firms to
mitigate emissions, avoid lending to high CO2 emitters, and manage supply
chain
Opportunities
•
•
New products and services
Earn Offset Credits from energy conservation projects
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May 2007
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Impact of Regulations on Industry Sectors
•
•
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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1. Impact of GHG Regulations on Sectors
Method
• Modified Porter Model to identify key factors that determine how much
a sector will be affected by new regulations:
– Government policy
• Policy can have uneven effects on different sectors
– Energy Intensity
• Input costs likely to rise
– Emissions Intensity (emissions per unit output)
• More emission intense industries may face higher absolute emission
reductions
– Ability to pass along costs
• Can mitigate impacts of new regulation in that sector
– Opportunities to abate
• Are low cost abatement opportunities still be available to sector?
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Impact of GHG Regulations on Sectors
As a function of 2 key variables
Highest Risk
Aluminum
products
Emissions Intensity
Smelting/refining
Oil Sands
Steel
Electricity
Cement
Chemicals
Petroleum
Refining
Pulp & Paper
Oil & Gas
Pipelines
Mining
Lowest Risk
Low
High
Ability to Pass on Costs
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Impact of GHG Regulations on Sectors
As a function of 4 variables
Variable
Weighting
Energy Intensity
15%
Emissions Intensity (per dollar output)
30%
Ability to pass along costs
30%
Opportunities to abate
25%
“CIBC WM Carbon Cap Vulnerability Index”
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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
-1
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2. Impact of GHG Regulations on CIBC Clients
Method
• Identified companies likely to face GHG regulation
• Forecasted future emissions and compared to probable targets
• Emissions – target = CO2 asset or liability
• Calculated cost of compliance for companies in a liability position (i.e.
unable to meet their regulated target)
– Cost for abatement through new technology
– Cost to buy CO2 allowances in the marketplace under different price
scenarios
– Cost to buy CO2 allowances from federal government at $15/tonne
• Assessed ability of sectors and firms to pass on costs of compliance
to customers
• Determined annual cost of compliance on an absolute and percentage
of net income basis
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Impact of GHG Regulations on CIBC Clients
Results
• Impacts of new regulations vary among clients within a sector
• GHG regulations, as articulated in Canada’s “Project Green”, would
have placed a fairly modest financial burden on most of CIBC’s large
clients; however, a few clients faced potentially material impacts.
• Clients in coal fired power generation and aluminum faced largest
compliance costs.
• Majority of Single Names faced some costs to meet GHG regulations,
but 18% of firms likely to face no cost to comply with GHG regulations
• For most Single Names, carbon compliance costs were a very small
percentage of annual net income: representing under 1% of profit in
90% of cases
• Analysis will be updated using details of new federal GHG regulations
U of T Environmental Finance
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3. Impact of GHG Regulations on CIBC’s Portfolio
Method
• Top-down approach:
– Percentage of loans in portfolio that are to all clients in industrial
sectors likely to be regulated, and that are to sub-investment
grade clients (i.e. clients least likely to have financial means to
meet new regulatory targets for greenhouse gases)
• Bottom-up approach:
– Use client info to determine sector average Loss in Event of
Default (LIED) and Obligor Default Ratings (ODRs). Combine with
loan exposure and apply a stress factor for impact of carbon
regulations
– Determine potential loss in each sector and then as a percent of
portfolio
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May 2007
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Impact of GHG Regulations on Portfolio
Results
• Portfolio impacts of proposed GHG regulations would have been very
low, affecting clients representing less than 7% of CIBC’s net loans
and acceptances.
• Almost 90% of the clients that would be regulated were investmentgrade
• Climate change-related loan losses, under our worst-case scenario,
were estimated to be <0.009% of total portfolio
• Analysis must be updated when details of new regulations are
released
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May 2007
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Opportunities
Opportunity Drivers
I.
Emissions Trading
II.
Abatement measures
III. Project Development
IV. Adaptation
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May 2007
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I. Emissions Trading Opportunities
•
Governments of Annex 1 Countries that have to meet Kyoto targets
–
•
•
•
Capped Corporations
–
Will have to meet targets under Kyoto or under National emission schemes like the EU ETS
–
Buying allowances from other firms and CERs or offsets from projects
Non-regulated companies
–
Investing in large GHG emission reduction projects and taking credits as output
–
Purchasing "green" credits (buy low, sell high; or retire the credits for good PR)
–
Creating offset credits by making permanent emission reductions; sell the credits
Carbon Funds
–
•
Pools of capital that invest in credit-producing projects
Financial Intermediaries: brokers, banks, hedge funds
–
•
For example, Italy, Denmark and Netherlands active in CDM through investment in World Bank
carbon funds
JP Morgan Chase in 2005; Morgan Stanley in October 2006
Individual traders and investors
–
Directly or indirectly through investment derivative products created specifically to take
advantage of the growth of the CO2 market
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II. Abatement Opportunities (1 of 3)
Abatement Initiative
Resulting Activities &
Opportunities
Building energy efficiency
improvements
• Improved HVAC systems and system
controls
• Insulation upgrading
• Lighting technology and control
• Water heating systems
• Energy management
consulting/advisory servcies
Better vehicle fuel efficiency
• Clean technology add-ons to traditional
technology
• New automobile engine technology
• New manufacturing lines
• Ethanol addition to fuel
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Abatement Opportunities (2 of 3)
Abatement Initiative
Resulting Activities &
Opportunities
Switch to Biofuels
• Increased demand for ethanol and
biodiesel
• Flex fuel engines
• Growth of agri-energy giants
Industrial reductions of non CO2
GHGs
• Technology changes
• Feedstock change
• End-of-pipe treatment
Lower Carbon Energy supply
• Nuclear Power
• “Clean” Coal
• Increased demand for natural gas
• Large Hydro
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Abatement Opportunities (3 of 3)
Abatement Initiative
Resulting Activities &
Opportunities
Carbon Capture and Storage,
Enhanced oil recovery
• Clean coal plant development
• Coal plant conversion
• CO2 Pipelines
• Development of storage sites
Renewable energy
• Run of river hydro development
• Onshore and offshore Wind Power
development
• Landfill gas capture
• Geothermal
• Photovoltaic
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III. Project Development Opportunities
Project Examples
Opportunities
• Landfill gas capture
• Engineering/tech firms
• Biomass to energy (Peru)
• Consulting
• Fuel switch from coal to gas
• Investment funds (to purchase
and aggregate credits)
• CH4 & N2O reductions from
manure management (Brazil)
• Financial advisory services
• PFC reduction by continuous
feeding of Aluminum plant (India)
• Brokerage
• Cogeneration
• Commercial Banking services to
non-traditional sector (LCs,
Escrow, FX, trade advisory
services...)
• Coal-bed CH4 for utilisation in
power generation (China)
• Creation of a pilot corridor with
exclusive bus lanes (Mexico)
U of T Environmental Finance
• Project finance
• etc.
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IV. Adaptation-Related Opportunities
Physical Impact
Adaptation Initiatives and
Opportunities
Shifting permafrost
New roads and pipelines in Northern
Canada
Hotter & drier summers
Increased demand for air
conditioning; upgrades to municipal
water treatment; development of
drought-resistant crops
Lower inland water levels
new irrigation systems; dredging
navigation channels, etc.
Wetter winters
dams, weirs and drainage canals to
manage flooding
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May 2007
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Summary
•
Emitting CO2 and other GHGs will soon bear a price
–
•
•
•
•
•
already does in the EU and some regions of the world
Global and regional markets are being established to trade CO2 emissions
Business response to new legislation and new carbon markets is creating
new risks, but also opportunities for many industry sectors, including
financial services
Adaptation measures (mostly by government) are also sources of risk and
opportunity
To understand risks and realize opportunities and respond, need to:
1.
Understand international emission markets (Kyoto, Kyoto Part II?), regulations
and GHG markets in regions where a company does business, and how
regional and international markets fit together
2.
Follow (or forecast) how governments, firms, and individuals are responding to
new markets and rules
Once regulatory framework is established in Canada, may be possible to
quantify opportunities (and risks)
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