tony campos
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© FTSE LIMITED 2004. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
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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
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© FTSE LIMITED 2010. ALL RIGHTS RESERVED. DO NOT COPY OR PUBLISH THE CONTENTS OF THIS PRESENTATION WITHOUT THE PRIOR AGREEMENT OF FTSE.
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:
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© FTSE LIMITED 2010. ALL RIGHTS RESERVED. DO NOT COPY OR PUBLISH THE CONTENTS OF THIS PRESENTATION WITHOUT THE PRIOR AGREEMENT OF FTSE.
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.
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© FTSE LIMITED 2010. ALL RIGHTS RESERVED. DO NOT COPY OR PUBLISH THE CONTENTS OF THIS PRESENTATION WITHOUT THE PRIOR AGREEMENT OF FTSE.
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• 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 LIMITED 2010. ALL RIGHTS RESERVED. DO NOT COPY OR PUBLISH THE CONTENTS OF THIS PRESENTATION WITHOUT THE PRIOR AGREEMENT OF FTSE.
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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
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Carbon Risk Models (Material Risk Sectors)
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Each material sector is calculated by a dedicated framework, based on two broad approaches towards risk
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Cost of Carbon Model: www.ftse.com/Carbon
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Page 10 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
© FTSE LIMITED 2010. ALL RIGHTS RESERVED. DO NOT COPY OR PUBLISH THE CONTENTS OF THIS PRESENTATION WITHOUT THE PRIOR AGREEMENT OF FTSE.
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
© 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. 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