climate change impacts on banks where sustainability and risk management meet

Climate Change Impacts on BanksClimate Change Impacts on BanksWhere Sustainability and Risk Management MeetWhere Sustainability and Risk Management Meet

June 16, 2007June 16, 2007

Sandra Odendahl, Senior DirectorCIBC Environmental Risk ManagementCorporate Risk and Insurance Services, TRM

2Greening of Industry Network June 2007

OutlineOutline

• Environmental Risk Management at CIBC

• Risks Arising from Environmental issues

• Case Study: Climate Change

– Credit Risk

– Operational Risk

– Reputational Risk

• Lessons Learned


Environmental Risk Management at CIBCEnvironmental Risk Management at CIBC

• 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)

LoansProject FinanceMortgagesMutual FundsInvestment Bankingetc.

Energy and water useSolid wastePaper Useetc

ElectricityFurnitureCarpetPaperServicesetc.

Environmental Aspects of BankingSupply Chain Operations Products &

Services


Risks Arising from Environmental AspectsRisks 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


Some Environmental Issues Facing BanksSome 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


Climate Change Climate Change A Case Study in Applying Risk Management to an A Case Study in Applying Risk Management to an Environmental IssueEnvironmental 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


Physical Aspects of Climate ChangePhysical 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 The climate is becoming more extreme and less predictableextreme and less predictable


Regulatory Aspects of Climate ChangeRegulatory Aspects of Climate Change

• 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:– Reduce emissions internally

– Buy the right to emit more GHGs (allowances)

– Buy proof that GHGs have been reduced somewhere else (credits)

Emitting COEmitting CO22 will now cost money will now cost money

International

National

Regional

Installation

Provincial State


Impacts of Climate Change on Banks

Impacts People Operations & Supply Chain

Products and Services

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

• Increased credit risk of clients in certain weather-dependent sectors

– Business interruption

– Capital & operating costs

– Revenues

Regulatory Aspects

• Higher cost for energy • 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”


Credit and Operational Risk Assessment

Impacts People Operations & Supply Chain

Products and Services

Physical Aspects

Adverse health effects on employees

• Higher insurance premiums

• Operational Risk: Physical damage from storms

• Higher business continuity management costs

• Higher cooling needs; lower heating needs

• Increased credit risk of clients in certain weather-dependent sectors

– Business interruption

– Capital & operating costs

– Revenues

Regulatory Aspects

• Higher cost for energy • 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”


I. Credit Risk Associated with GHG RegulationsI. 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


Credit Risk Associated with GHG Regulations Credit Risk Associated with GHG Regulations

Impact on IndustriesImpact 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


CIBC WM Carbon Cap Vulnerability Index

-1 0 1 2 3 4

Elect.-coalOil sands

Metal smelting/ refiningCrude oilAluminum

SteelCement

ChemicalsPetrol.refiningElect.-nat gas

GlassPulp & paperMetal mining

Oil gas pipelines



Impact on CIBC ClientsImpact 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



Impact on CIBC’s PortfolioImpact 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


II. Operational Risk from Physical ImpactsII. Operational Risk from Physical Impacts


Operational Risk from Physical ImpactsOperational Risk from Physical Impacts Study of Impacts on CIBC OperationsStudy 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


III. Reputation Risk and Climate ChangeIII. Reputation Risk and Climate Change

There are over150 new coal-burningpower plants currentlyon the drawing board.

Don’t fund global warming.Stop investment in all new coal-

burning power plants.

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.

Let’s keep them there.

((from New York Times, March 23, 2007)from New York Times, March 23, 2007)


Reputation Risk and Climate ChangeReputation Risk and Climate Change

A Role for Stakeholder Relations and Genuine A Role for Stakeholder Relations and Genuine ChangeChange

• 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!But don’t get too comfortable!


Summary & ConclusionSummary & Conclusion

What we’ve learned so farWhat 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 riskCredit risk associated with Climate Change regulations (that we have seen so far) is relatively small

• Operational riskOperational risk associated with physical effects of Climate Change will be challenging to quantify because of poor data and changing models

• Reputational riskReputational 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

climate change impacts on banks where sustainability and risk management meet

Documents

risk management meetjune

environmental problems

environmental issuescase

sea levelsthe climate

mitigateclimate change

social impacts

concentrations of ghgs

ghgs allowancesbuy proof