Tony campos

© FTSE LIMITED 2004. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.

Tony CamposSenior Executive, Responsible Investment, FTSE Group

11th November 2010, Grange St. Paul's Hotel, London

TBLI Europe 2010

Climate Change Risk and Reward: Protecting and Enhancing Investments

© FTSE LIMITED 2010. ALL RIGHTS RESERVED. DO NOT COPY OR PUBLISH THE CONTENTS OF THIS PRESENTATION WITHOUT THE PRIOR AGREEMENT OF FTSE.

Integrating Climate Change into Investment Strategies

Growth opportunity. Increasing exposure to environmental technology/solution companies.

Challenges: Definitions, investability, volatility

Reducing risk. Varying exposure to companies across the portfolio based on risks to profitability due to climate change and cost of carbon.

Challenges: Re-appraisal of core assets, Complexity

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Two approaches


Making Allocations into Environmental Markets

Global Picture:FTSE Global All Cap = $28.9 trnCarbon Intensive Sectors = $8.9 trn (31%) FTSE EO All Share = $1.8 trn (6%)

(Note that figures are after free float adjustments)Source: FTSE

Carbon intensive sectors

Environmental Opportunities

Annual revenue generated by environmental markets is estimated to be US$500 billion and is expected to grow 12-15% p.a. over the next five yearsSource: Impax Asset Management

Equity allocation: increasing the wedge

Growing the Wedge:


FTSE Index

Relative Performance to

FTSE Global All Cap

Absolute performance

FTSE EO Energy Efficiency Index +32.7 44.2FTSE EO Waste and Pollution Control Technology Index

+21.9 33.4

FTSE EO Water Technology Index +19.9 31.4FTSE EO Renewable and Alternative Energy Index

+ 6.4 17.9

FTSE Global All Cap - 11.5

Growth Opportunity in Environmental Markets

5 Year Performance

Source: FTSE Group, data as at 30 June 2010

Companies providing products and services that provide solutions to environmental challenges will need to grow very rapidly over the next two decades and are already showing

strong long term performance.


• By Carbon Footprint (last years carbon emissions data):One approach to incorporating carbon risk is to reduce the carbon intensity of the portfolio. This can be done by taking operational carbon emissions of each company, dividing this by revenues, and then assuming those with lower carbon intensities are better positioned.

• By Future Carbon Risk:This approach uses sector specific models to project forward a company’s carbon risk. This is a more holistic approach that may take into account: business model, carbon regulations, product and supply chain emissions.

• The rise of “strategy” or non-market cap indices• Balancing the need to replicate benchmark returns

How to integrate carbon risk – evolving practice


FTSE CDP Carbon Strategy Index Series

Tracking Error (GBP Total Return)

3YR

(%pa)*FTSE CDP Carbon Strategy 350 Index

0.45

FTSE CDP Carbon Strategy All-Share Index

0.44

* Based on weekly annualised total returns , using 52 weeksSOURCE: FTSE Group, data as at 31 August 2010

• Designed for core equity holdings• Tilted based on future-oriented carbon risks• Same constituents as benchmark• Sector neutral, low tracking error• Transparent, clear assessment models• Focus on material risk sectors

Performance and Tracking Error

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Carbon Scorecard Model(25% weight)

Carbon Scorecard Model100% Weight

Carbon Risk Model(75% weight)

i Cost of Carbon Approach

ii Reserves Intensity Approach

Lower Risk SectorsMaterial Risk Sectors

Electric Utilities, Airlines, Oil and Gas, Mining

All other sectors

Focus on Material Carbon Risk


Carbon Risk Models (Material Risk Sectors)

Each material sector is calculated by a dedicated framework, based on two broad approaches towards risk


Cost of Carbon Model: www.ftse.com/Carbon


Do not distribute without permissionNational

Grid

Air Partner

BG

Rio Tinto

Int. Power

Centrica

Cost of Carbon Model: Findings

• Power Generation most vulnerable, earnings exposure mixed• Aluminium less at risk – geography, diversified conglomerates• Airline example


Four Key Risk Factors

Explanation Implications

Exposure to carbon pricing

Airlines will only have to pay for emission in some regions (e.g. EU ETS)

e.g. American Airlines will need permits for 10% of emissions, Easyjet for 100%

Emissions growth from baseline

Airlines get free permits based on historical emissions, so only need to pay to cover growth

BA growth is flat so will buy few permits. Easyjet has rapid growth so lots of permits required (70% vs 45% for BA).

Emissions efficiency improvements

Efficiency gains reduce need to by extra permits

Efficiency gains limited and reasonably similar (1.2% BA vs 1.3% Easyjet)

Pass through Airlines can pass through some costs of permits to customers

Low cost airlines less able to do this, due to price sensitive customers. (Assume a 65% pass through rather than 95% for network airlines)

Cost of Carbon Model: Airlines


Integrating Climate Change into Investment Strategies

Growth opportunity. First step thematic approach; satellite portfolios; moving beyond Renewables.

Reducing risk. Evolution towards more meaningful integration with new, more sophisticated tools that are suitable for core equity allocation.

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Tony Campos - Senior Executive, Responsible Investment

[email protected]

Tony campos

Economy & Finance

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