Title: FRATER ASSET MANAGEMENT
1GLOBAL CLIMATE CHANGE Risks for South African
InvestorsFebruary 2005
2CONTENT
- The South African financial sector
- Climate impacts and market vulnerability-
global and SA context - International investor initiatives
- Climate change as a portfolio risk
- The role of the financial sector
3- Every truth passes through three stages before it
is recognised. In the first it is ridiculed, in
the second it is opposed, in the third it is
regarded as self-evident" Arthur Schopenhauer
4CLIMATE CHANGE IN SOUTH AFRICA
- Other socio-economic priorities
- No emissions reduction obligations
- Low levels of communication
- Government response strategy released, but not
strong on action - Low media coverage relative to international
5THE SA FINANCIAL SECTOR ON CLIMATE CHANGE
- If there is pressure from government to meet
emission targets, industry would respond. CEO of
an asset management division of a large SA
financial services company - Some commentary from the domestic insurance
industry
6FUND MANAGERS AND NON-FINANCIAL ISSUES
- Fiduciaries have a responsibility to their
beneficiaries - What is the time horizon of the investor?
- Examples of impacts on shareholder value
- Leak of the Draft Mining Charter
- Undisclosed asbestosis liabilities at Gencor
- Non financial refers to those issues not
traditionally reflected in the financial
statements -
7OPTIONS AND COSTS .
Options
Range of options
Total Costs
Costs
Latency
Awareness
Activism
Regulation/litigation
Time / Impacts
8CLIMATE CHANGE VULNERABILITY GLOBAL AND SOUTH
AFRICAN CONTEXT
9THE CLIMATE CHANGE IMPACTS FOR SOUTH AFRICA
- We no longer have a normal climate.
- Prof B Hewitson, UCT, Weekend Argus, 15
/01/2005 - Increasing aridity and change in weather
characteristics
10GLOBAL WARMING
- Climate change hits the headlines January 2005
- Severe impacts anticipated should average
temperatures rise above 2oC from pre-industrial - At current rates of emission release, a 2oC
increase will be reached within 10 years Source
International Climate Change Taskforce, 2005.
Widely reported by international media 25 January
2005 - Impacts are linked
- Warming changes in weather characteristics,
changes in water availability, loss of ecosystem
productivity, loss of agricultural land and
reduction in crop yields, increase in vector
borne disease, increased demand for energy
11IMPACTS HERE IS ONE EXAMPLE
- European 2003 heat wave
- Severely reduced grain production (cutting 20
million tons off world harvest) Source The
Independent - Nuclear power stations forced to shut due to
cooling logistics - Heat related deaths
- Forest fires in France
- Insurance industry reports close to 400 million
in subsidence claims Source Association of
British Insurers - By 2060, temperatures such as the 2003 European
summer will be unusually cool. Source UK Hadley
Centre Met Office, 2004
12WHATS IN STORE FOR THE FINANCIAL MARKET
- Uncertainty!
- Global temperatures will continue to rise
- Impacts will grow in scale
- Depth of economic structural change required is
significant - All sectors affected
13TIME HORIZONS
- These vary depending on the type of climate risk
associated with an investment portfolio - Regulatory risk is the most proximate and certain
- Reputation and competitive risks may occur in the
near to medium term - Timing of physical risk is the most uncertain
14KYOTO
- The Protocol has led to development of market
based instruments - Emissions Trading Scheme (ETS)
- Carbon energy taxes
- Incentives for renewables
- Removal of perverse subsidies
- A framework for factoring financial impacts of
climate change -
15SOUTH AFRICA - CARBON INTENSIVE
- When developing countries are called to act,
reductions based on status quo, will be
challenging
16SOUTH AFRICAS - VULNERABILITY
- SA coal-based economy is vulnerable to carbon
regulation in the rest of the world - Coal demand fluctuations
- Investment, trade and aid patterns
- Non-tariff trade barriers
- Global sourcing of inputs (reduced demand for
high CO2 footprint goods)
17CLIMATE CHANGE AND SHAREHOLDER VALUE
18FINANCIAL RESEARCH ADDRESSING CLIMATE CHANGE
- Different analytical processes use predominantly
three methods - Corporate governance.
- Management systems to plan for risk
- Emissions
- Emissions profiles in the context of regulatory
environment - Financial analysis
- Financial impacts (predominantly relating to
emissions)
19GOVERNACE BASED RISK ASSESMENTS
- Examples
- Ceres/IRRC
- Corporate Governance and Climate Change, 2003
- Assesses 20 of the worlds largest emitters.
Checklist of 20 specific governance actions - Carbon Disclosure Project
- Climate Change and Shareholder value, 2002 and
2004 - 95 Institutional investors representing 10
trillion - Targeting FT500 asking for investment relevant
information concerning emissions. Includes a
Climate Leadership Index. - Analysis of sector risk
- Preliminary analysis of changing input costs and
impacts on share price
20EMISSIONS BASED RISK ASSESSMENTS
- Examples
- JP Morgan
- CO2 Emissions No windfall for European
Utilities, 2003 - Ranks utilities based on variety of inputs
including pollution content - Standards and Poors
- Emissions Trading Carbon will become a taxing
Issue for European Utilities, 2003 - Ranking of emissions from 25 largest EU
utilities, and indicates those most at risk under
the ETS
21FINANCIAL ANALYSIS
- Examples..
- ABN AMRO
- Climate Change and Analysis, 2003
- A framework for analysts
- Assess the environmental, regulatory and climate
change opportunity for sectors including metals
and mining, construction, real estate and
chemical and insurance industries - West LB
- Carbonomics Value at Risk through Climate
Change, 2003 - Modelling of macroeconomic risks both direct
impacts and regulatory impacts - Up to 915 billion of the worlds equity markets
are at risk
22FINANCIAL ANALYSIS PUT FORWARD BY WEST LB
23FACTORS AFFECTING SHAREHOLDER VALUE
- Asset mix
- Position in the value chain
- Location of operations and sales
- Management foresight
24INVESTORS TAKING INITIATIVE
- Carbon Disclosure Project
- Third campaign launched 1 February 2005
- 143 institutional investors with assets of 20
trillion - Pension funds urge SEC to issue a clarification
that climate change is a material risk (Section
20F) - Increasing number of shareholder resolutions
- 28 resolutions filed in the US in 2004
- Doubling of resolutions raised by public pension
funds
25SA COMPANIES
- Little disclosure
- Impossible to know the levels to which this is
being factored into risk management - Shareholders do not communicate the interest
- Exception
- Those companies with offshore listings and strong
international shareholder base
26SASOL
- A significant emitter in global terms
- 80 million tonnes CO2 per annum
- Sasols disclosure on the issue reflects
- An ability to manage
- Awareness of the materiality of the issue
27SASOL DISCLOSURE
- Kyoto Protocol noted as a material sustainability
related risk and opportunity - Greenhouse gas position statement with specific
goals, actions and targets - 17 reduction of CO2 equivalent per ton of
production in 2004 compared with 2002
28SASOLS EXPOSURE TO CLIMATE CHANGE RISK AND
OPPORTUNITY
- Ability to respond
- Efficiency improvements, alternative energy
sources, technology flexibility, carbon storage - Business mix
- Oil-gas-coal mix, strategic market opportunities,
erosion of fossil fuel market - Location of operations and sales
- Exposure to GHG emission regulations, CDM
opportunities, access to natural gas reserves - Source G Barker, 2004 Research Project UCT GSB,
Methodology put forward by West LB
29.EXAMPLES OF SECTOR INITIATIVES
30METALS AND MINERALS
- Responsive practices reported by the Carbon
Disclosure Project - Carbon shadow pricing incorporated into
investment decisions - Factoring carbon regulation into demand and
supply forecasts for coal - Forecasting impacts of carbon taxes
- Location of operations is a key risk factor
(short term) - High input costs vulnerable to water and energy
pricing
31BANKING AND FINANCE
- Responsive practices reported by CDP
- Interviewing corporate clients to analyse
potential climate impacts - Incorporating carbon risk into risk assessments
- Mapping economic effects
- Exploring structural finance market for renewable
energy
32INSURANCE AND REINSURANCE
- Responsive practices reported by CDP
- Integrating climate change risk as a
supplementary criteria for investment mandates - Researching potential risk-transfer load from
sectors such as agriculture, real estate and
tourism - Integrating carbon finance into a range of
insurance and financial functions - Exploring increased coverage and lending
opportunities.
33CONSTRUCTION AND WEATHER RISK
- Extreme weather leads to delays
- Additional resources, penalties, delayed cash
flow, impact on operating results - Weather derivatives and insurance
- Define exact type of weather that effects a
project - Quantify the relationship in monetary terms
- Identify relevant weather variable's (strike
value) - Define incremental cost associated with
incremental weather variable (tick value)
34- INVESTORS
- WHAT COURSE OF ACTION?
35PROTECT INVESTMENTS
- Improve understanding of impacts
- Assess physical and policy risks of climate
change in company, sector and portfolio holdings - Network with others
- Communicate issues pertaining to climate risk /
Ask companies to identify material risk - Reduce climate risk exposure
36RESPONSIBILITY OF FINANCIAL SECTOR
- Companies are accountable to shareholders
- Response (and disclosure) from companies will be
limited as long as this issue is not understood
to be a shareholder concern
37THE WAY FORWARD
- Look to the results achieved by the Carbon
Disclosure Project - A collaborative communication from investors
- Companies made aware
- Disclosure improves
- This in turn provides enhanced understanding for
financial community - Scope for collaboration and joint engagement
within South Africa
38DISCUSSION