2° investing · equity porfolio owners listed parent companies stock tickers data on physical...

2°INVESTINGSTRESSTESTINGPORTFOLIOSINA2°CSCENARIO

2°C

WHOAREWE?

•  Thinktankcreatedin2012.$3.3Mbudgetin2016

•  Connectthedotsbetween:•  Climate-relatedfinancialmetrics•  Financialpolicies•  Investmentprocesses

•  Groupof3affiliatedlegalenIIes(NYC,Paris,Berlin):•  Not-for-profit,noncommercial•  MulI-stakeholdergovernance•  CollaboraIveapproach:re-granIngto+15partners

Staff:20+6

NewYorkDC

LondonParisBerlin

PARTNERS,FUNDERS&GRANTEES

FINANCIALANALYSTS(par=cipantsin2Diiresearchprojects)

GOVERNMENTS(funding+technicalpartners)

FINANCIALINSTITUTIONS(fundingourprojectsandtechnicalpartners)

RESEARCH(par=cipantsin2Diiresearchprojects)

NGOs(par=cipantsin2Diiresearchprojects)

INVESTCOALITIONS(co-authors)

CORE CONCEPT

•  “ConnecIngthedotsbetweenclimategoals,investmentprocessesandfinancialregulaIon”

•  ‘MasterPlan’waslaidoutin2012-13:

1.ASSESSMENT

•  DecarbonizaIontargetsforinvestors•  Useofphysicalassetsdata•  2Dstresstestsforstocks&bonds•  2Dstresstestsforbanks

2.DISCLOSURE

•  Mandatoryclimatedisclosureonclimate-relatedrisksandimpactforcompanies,banksandinvestors

•  Labellingoninvestmentproducts

3.INCENTIVES

•  AligntaxincenIvesoninvestmentproducts

•  TransparencyonImehorizonsmismatch•  Climateriskintroducedintocapital

requirements

RESEARCH REGULATION FINANCIALTOOLSCONVENING

Advancedindicators

CLIMATE-RELATEDMETRICSFORINVESTORS

LimitsofcarbonfootprintDifferentusecases

Useofphysicalassetdata

FINANCIALRISKMANAGEMENT

Definingclimate-relatedrisksforthefinancesectorIntroducingtheconceptof2Dstresstest

ImplicaIonsofarIficialshorteningofhorizons

FINANCIALPOLICIES

MappingchangesrequiredinfinancialpoliciesinEurope,France,ChinaRecommendaIonsonmonetarypoliciesRecommendaIonsontaxpolicies


KEYPARTNERS:FrenchParliament,EuropeanCommission,OECD,BanquedeFrance,S&P,Moody’s,MSCI,…

CITIES:Paris,London,Brussels,Frankfurt,Berlin,Zurich,NewYork,SanFrancisco,Montreal,Toronto,Tokyo

FORMAT:workshops,conferences,webinars,TEDxtalks


KEYPARTNERS:FrenchGovernment,EuropeanCommission,GermanGovernment,SwissgovernmentNEXTSTEPS:SupporIngothercountries+taxbreaksoninvestmentproducts,informaIonofretailinvestors

FIRSTACHIEVEMENT:Mandatoryclimate-relateddisclosureforinvestors(France)

Law ImplementaIondecree Governmentalaward Guidanceforinvestors


FIRSTACHIEVEMENT:Frameworktoassessthealignementofporfolioswith2Dscenarios

Forward-lookingphysicalassetsdata

2Dscenario(IEA)

Investmentporjolio

MatchingwithsecuriIes

ForwardlookingemissionsC02

C02

C02

Freetestfor+100investors(+1000porfolios)

Securitydatabase

OnlineporUoliorisk&alignmentanaly=cs

Fundsdatabase

Regulatormonitoringtool

STEP1:TESTINGREALASSETSALIGNMENT

Backgroundwithwindfarmsandpowerplants

SEIMETRICSPROJECT

BEYONDCARBONFOOTPRINTING

OBJECTIVES

PRIMARYUSERS&USECASE

2DALIGNMENTMisalignmentofinvestmentsandassetsintherealeconomywithclimategoals

2DSTRESSTESTResilienceofporjoliosandfinancialinsItuIonstoacceleratedEnergyTransiIon(2Dstresstest)

BETTERVALUATIONBelerpricingofETrisks(assumingbaselinescenario)

POLICYMAKERS/REGULATORSMonitoringprogressonParisagreementandpotenIalbuild-upoffinancialrisks/economicinefficienciesthatmaytranslateintorisksforfinancialmarkets

PRUDENTIALAUTHORITIESAnIcipaIngtheimpactofclimateacIononfinancialstabilityandfinancialinsItuIons

LONGTERMINVESTORSImprovinglong-termreturnsofInsItuIonalinvestors(e.g.pensionfunds,Insurancecompanies)

1

2

3

TESTING2DALIGNMENTOFREALASSETS

EnergytechnologyroadmapIEA2DS

COMPARINGTHEROADMAPWITHREALASSETS

2Dporjoliocheck

Energy-relatedCO2

LINKINGREALASSETSTOFINANCIALPORTFOLIOS

Assetleveldata:•  97,000powerplants•  22,000Oil-andGasfields•  95millionproducedcars

•  36,000Airplanes•  10,000Ships•  2,200Cementfactories•  13,000Steelplants

EQUITYPORFOLIO

OWNERS

LISTEDPARENTCOMPANIES

STOCKTICKERS

DATAONPHYSICALASSETS

SCENARIOS


EQUITYPORFOLIO

OWNERS


STOCKTICKERS


SCENARIOS

Compz Compw Compq

Compx Compy

Comp

Compt

Security

S&PCross-referenceservices/Orbisdatabase


EQUITYPORFOLIO

OWNERS


STOCKTICKERS


SCENARIOS

Bloomberg,S&P….


EQUITYPORFOLIO

OWNERS


STOCKTICKERS


SCENARIOS

Databases(e.g.Morningstar,AMBEST,SECMutualfundholdings),Investorsdirectly(+100investors),and/

orFinancialSupervisoryAuthoriXes(e.g.BankofEngland)

TESTING2DALIGNMENTFORREALASSETS(SAMPLEPORTFOLIO)

CHANGESINCAPACITY(MW)

EMISSIONSBEYONDBUDGET

(KtofCO2enext5years)

CAPEXvs.NEEDS

($Mnext5years)

REVENUEGAP

($Mnext5years)

0

1

2

3

4

5

6

7

8

9

10

2015 2020 2025

Actualplans

2°Ctarget

0

1

2

3

4

5

6

7

8

9

10

2015 2020 2025

Actualplans

2°Ctarget

COALPOWER RENEWABLEPOWER

Gap:2.1MW

Gap:2.7MW





CAPEXvs.NEEDS

($Mnext5years)

REVENUEGAP

($Mnext5years)

0

1

2

3

4

5

6

7

8

9

10

2015 2020 2025

Actualplans

2°Ctarget

0

1

2

3

4

5

6

7

8

9

10

2015 2020 2025

Actualplans

2°Ctarget


Gap:52.2ktCO2

Gap:35.2ktCO2





CAPEXvs.NEEDS

($Mnext5years)

REVENUEGAP

($Mnext5years)

0

1

2

3

4

5

6

7

8

9

10

2015 2020 2025

Actualplans

2°Ctarget

0

1

2

3

4

5

6

7

8

9

10

2015 2020 2025

Actualplans

2°Ctarget


Gap:$4.1M

Gap:$10.5M





INVESTMENTvs.NEEDS

($Mnext5years)

REVENUEGAP

($Mnext5years)

0

1

2

3

4

5

6

7

8

9

10

2015 2020 2025

Actualplans

2°Ctarget

0

1

2

3

4

5

6

7

8

9

10

2015 2020 2025

Actualplans

2°Ctarget


Gap:$3.3M

Gap:$2.2M

OTHERSECTORSCOVERED

Plansd’inves=ssement

Cible2°C

Plansd’inves=ssement Plansd’inves=ssement

Cible2°C

Cible2°C

COAL OIL GASFOSSILFUELS

Capexplans Capexplans2°CTarget

2°CTarget 2°CTarget

OTHERSECTORSCOVERED


Cible2°C



ELECTRIC HYBRIDS ICEsAUTOMOTIVE


PORTFOLIOALIGNMENTANALYSIS

5°C

2°C

FUNDSCOMPARISION

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

TOWARDS5°C

BELOW2°C

RENEWABLEPOWER

NEXTSTEP:MAPPINGFINANCIALMARKETSVSPARISTARGET

Searchcompany,index…

Scenarios

Period

Indicators

GLOBALTRANSITIONCAPITALMONITOR

Investmentcategories

Technologies

Makingfinancialflowsconsistentwiththegoalofkeepingglobalwarmingwellbelow2°C

FranceannouncedmandatoryclimatedisclosureExxonMobilereleased2DstresstestresultsNews

Economyasawhole

AllequiIes

Listedequi=esonly

Corp.debtissuance

Corp.bondissuance

…

STEP2:STRESSTESTINGFINANCIALASSETS

BackgroundwithstockmarketcurveandWallstreetskyline

ETRISKPROJECT

TOWARDSVALUEATRISKASSESSMENT

CURRENTBESTPRACTICES

ASSET-CLASSLEVELANALYSIS(MERCER)

CURRENTBESTPRACTICES

ASSET-CLASSLEVELANALYSIS(AXA)

AXA

UNIVERSE

NEXTSTEP:STANDARDIZEDSCENARIOSTRANSLATING2DROADMAPSINTOFINANCIALPARAMETERS

MORE

LESS

OUTCOMESINTHE2DROADMAP RESULTSFROMTHE2DSTRESSTEST

IMPACTONCASHFLOWS

PARAMETERSOFA2DSTRESSSCENARIO

TAXONFUELS

FUELEFFICIENCYSTANDARD

NEGOTIATEDAGREEMENTONFLEETEFFICIENCY

TAXONVEHICLES

CONGESTIONCHARGES

NEXTSTEP:SECURITYLEVELANALYSISOPTIONSAVAILABLE

Source:2diifromsampleMorningstarindustrialscompanyDCFModel,2014:Datawillbeupdatedpendingfurtherindustryengagement

Op=on2:‘adjusttheriskpremium’

NETPRESENTVALUE

EFFECTOFTHERISKPRE

MIUM

Forecastperiod

EFFECTOFTHEDISCOUNTRATE




Op=on1:‘extendtheforecastperiod’

NETPRESENTVALUE

EFFECTOFTHERISKPRE

MIUM

Forecastperiod





Op=on2:‘Acceleratethe

risk’

NETPRESENTVALUE

EFFECTOFTHERISKPRE

MIUM

Forecastperiod


ExtrapolaIon




Op=on3:Increasetheriskpremium

NETPRESENTVALUE

EFFECTOFTHERISKPRE

MIUM


STEP3:OVERCOMINGTHEOBSTACLES

Backgroundwithtradingfloor

TRAGEDYOFTHEHORIZON

ADDRESSINGTHETRAGEDYOFTHEHORIZON

CHALLENGE#1:RISKCONCENTRATEONLONGTERM

34

ElectricU=li=esNPV(cashflowbyperiod)

Naturalcoalcapacityre=rements(byage)

IEA450Scenariore=rements

2015-2020 2020-2025 2025-2030 2030-2035 2035-2040 Post2040

ReXrementgap

AnalysisgapEquityresearchanalyst

RealeconomyXmehorizon

Analystshorizon


35




2015-2020 2020-2025 2025-2030 2030-2035 2035-2040 Post2040

ReXrementgap



Analystshorizon


36




2015-2020 2020-2025 2025-2030 2030-2035 2035-2040 Post2040

ReXrementgap



Analystshorizon


37

0%

5%

10%

15%

20%

25%

30%

35%

1 2 3 4 5 6 7 8 9 10 11

Percen

tageofR

espo

nses

ConsumerDiscre=onary ConsumerStaples Energy

HealthCare Industrials Informa=onTechnology

Materials Telecommunica=onServices U=li=es

Bloombergissuesasurveytoequityresearch

analystsonearningsesGmates.Theresponseslisted

intheirdatabasetailoffaLer5yearsofforecasts,

with74%ofanalystresponsescominginthefirst

threeyearsand94%cominginthefirst5years.

POTENTIALFORMISPRICINGOFLONGTERMRISKSLISTEDEQUITIES

38

41to50years

31to40years

26to30years

20to25years

6to7years

8to9years

10to11years

39

POTENTIALFORMISPRICINGOFLONGTERMRISKSBONDS

CHALLENGE#2:LACKOFDEMANDFORLONGTERMANALYSIS

0

0,05

0,1

0,15

0,2

0,25

0,3

0,35

0

50

100

150

200

250

300

10,0

5,0

3,3

2,5

2,0

1,7

1,4

1,3

1,1

1,0

0,9

0,8

0,8

0,7

0,7

0,6

0,6

0,6

0,5

0,5

Num

bero

fFun

ds

PorUolioTurnoverPeriod(Years)

PorUolioTurnoverofLong-OnlyMutualFundManagers(Source:2diiandMercer,Forthcoming)

Turnover AUM%ofTotal

Average

PorUolioturnoveroflong-onlymutualfundmanagers(Source:2dii,Mercer&TheGenera=onFounda=on,Forthcoming)

100%annualp

orjolio

turnoverimpliesa

Ime

horizonof1ye

ar.

NYSEAverageHoldingPeriodforstocks,1940-2005(Source:Haldane,2010)

STEP4:INTEGRATIONINTOFINANCIALPOLICIES&SUPERVISION

REGULATORYPARTNERSHIPS

REGULATORYINITIATIVESINEUROPEPartnershipsinSwitzerland,France,UK(forthcoming),Germany(forthcoming)

Source:2°InvesXngIniXaXve

KPIrepor=ngtoregulators.Financial ins=tu=ons should use adefinedmethodology.

Holdingsrepor=ngtoregulators.Regulatorsperformtheassessment

Holdingsdisclosuretothepublic.NGOsperformtheassessment.

KPIdisclosuretothepublic.Flexibleguidanceprovidedonapplicablemethodologies

INTERNATIONALTASKFORCES

DGFISMAHIGHLEVELEXPERTGROUP

G20GREENFINANCESTUDYGROUP

IDEASFLOTTINGINTHEAIR

TweakingcapitalrequirementscalculaIon

Mandatoryclimatedisclosureforinvestors

Climate‘stresstests’forissuers

Mandatoryclimate‘stresstests’forfinancialins=tu=ons

TaxincenIveongreenassetsissuanceor/andholding

NegoIatedclimatecommitmentsforinvestors

AnalysisbyCentralBanksdirectly

New York 205 E 42nd Street, 10017 NY (�Grand Central) Paris 97 rue LafayeGe, 75010 Paris (�Gare du Nord) London: 40 Bermondsey Street, London SE1 (�London Bridge) Berlin: Am Kufergraben 6A, 10117 Berlin (�Am Kupfergraben)

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