INTERNATIONAL EFFORTS ON 2 PORTFOLIO ALIGNMENT 4 KWAP conference - - PowerPoint PPT Presentation

INTERNATIONAL EFFORTS ON 2° PORTFOLIO ALIGNMENT

KWAP conference Kula Lumpur, July, 2018

Stan Dupre Founder & CEO – 2° Investing 5° 1.5° 2° 4°

My portfolio BaU Paris Agreement

ABOUT 2° INVESTING INITIATIVE

THINK TANK SPECIALIZED ON CLIMATE & THE FINANCE SECTOR

• Climate-related metrics, data and tools development and policy research
• Paris, London, Berlin, New York
• Non-for profit, no commercial activities, multi-stakeholder board
• Funders (grants): EC, Germany, Switzerland, foundations, a few financial institutions

STAN DUPRE

• Founder & CEO of 2Dii
• Member of the EC High Level Expert Group on Sustainable Finance (drafted ESAs, MIFID)
• Co-chair ISO 14097 (climate-related metrics for the finance sector), with UNFCCC Secretariat
• Co-lead the methodological development of the Science-Based Target Initiative for the

Finance sector, with Ecofys

ORIGIN OF THE 2°C ALIGNMENT CONCEPT

From portfolio carbon footprint to scenario analysis 2006 2012 2015 2018

…but it does not measure the impact of your actions

ORIGIN OF THE 2°C ALIGNMENT CONCEPT

Why portfolio carbon footprint* doesn’t work?

MISLEADING NUMERATOR FLAWED DENOMINATOR

*As applied today by most investors: C02 scope 1+2 / $ of revenues or market cap

ORIGIN OF THE 2°C ALIGNMENT CONCEPT

Why portfolio carbon footprint doesn’t work?

CO2 Investor 1 Company 1 Company 2 Company 3 Investor 2

WALL STREET MAIN STREET

CO2

X

DOESN’T TRACK CHANGES IN THE REAL ECONOMY

ORIGIN OF THE 2°C ALIGNMENT CONCEPT

Why portfolio carbon footprint doesn’t work?

NOT A RELEVANT PROXY TO MEASURE CARBON RISK

SOLUTION: CLIMATE SCENARIO ANALYSIS

Comparing deployment of energy technologies with 2D roadmaps

Energy technology roadmap

IEA 2DS

COMPARISION

Energy-related CO2

Portfolio

Stocks and bonds

Exposure

To real assets & investment plans

Technology roadmaps

(aka climate scenarios)

Data on physical asset & CAPEX / production plans Compared with

For renewable power capacity additions in

SEI Metrics consortium (led by 2° Investing) 2° 4° 6° Academic partnerships

SOLUTION: CLIMATE SCENARIO ANALYSIS

Comparing deployment of energy technologies with 2D roadmaps

APPROACH

Step 1 - mapping physical assets

Acquiring forward looking data on production capacity

22k oil and gas fields, 2k coal mines, >100k power plants, 95M produced cars, 36k airplanes, 10k ships, 2,200 cement factories, 13k steel plants Sources: BI data providers

Owners Parent companies Stock/Bond tickers Physical asset data Climate scenarios Investment portfolios

Matching assets with

• wners and with 2M+

issuers of securities

Sources:

• Economic Intel data
• Ownership data (Orbis)
• Ownership analysis by

the University of Zurich

Owners Parent companies Stock/Bond tickers Physical asset data

APPROACH

Step 2 - matching assets with their owners

Climate scenarios Investment portfolios

Generating ET profiles for 100k+ stocks and bonds in key energy- related sectors

Sources:

• Bloomberg
• S&P cross reference

Owners Parent companies Stock/Bond tickers Physical asset data

APPROACH

Step 3 - Generating Energy Transition profiles for securities

Climate scenarios Investment portfolios

Analysing financial portfolios on demand and matching with 25k+ funds

Sources:

• Supervisory authorities
• Morningstar
• AMBEST
• Freedom of information

Act requests

Owners Parent companies Stock/Bond tickers Physical asset data

APPROACH

Step 4 - Analysing investment portfolios based on their composition

Climate scenarios Investment portfolios

Investment portfolios Owners Parent companies Stock/Bond tickers Physical asset data Climate scenarios

Where the market is today Where your portfolio is today Required growth under 2°C trajectory CAPEX plans of companies in your portfolio

GAP APPROACH

Step 5 - Comparing portfolios trajectories with a 2°C scenario

Investment portfolios Owners Parent companies Stock/Bond tickers Physical asset data Climate scenarios

APPROACH

Step 5 - Comparing portfolios trajectories with other climate scenarios

2020 2019 2021

2°C 4°C 6°C

Portfolio Market

IEA BNEF Greenpeace SBTi

COMPANY INDICATORS

OUTPUTS

Sectors, asset-classes and scenarios covered

2° 4° 6° Power Oil & gas upstream Coal mining Auto manufacturing Cement Steel Aviation Shipping Existing assets Capacity additions / production forecasts Locked-in emissions Stocks Bonds Funds 80-90% of CO2 emissions associated with an index 10-20% of asset value of indices/funds CAPEX plans IEA BNEF Greenpeace SBTi

Scenarios Sectors Metrics Asset classes

Private equity/loans

USE CASES

Comparing portfolios

Portfolio vs. Scenarios 2° 4° 6° Portfolio vs. Carbon budget Portfolio

• vs. peers

Coal Gas Hydro Nuke Renewables

Energy Mix of power capacity in 2022

POWER

USE CASES

Comparing companies and tracking progress

Coal Gas Hydro Nuke Renewables

POWER

USE CASES

Engaging with investee companies on science-based target setting

COMPANY INDICATORS

Planned additions Required retirements by 2020 Required retirements by 2025 GW COAL POWER

Retirement of coal power Addition of renewable power

Planned additions Required additions

USE CASES

Mapping risky assets (company and portfolio level)

50 100

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 CO2 emissions model, MMT

Coal Gas Oil

Related locked-in emissions Location of coal- fired power plants

TOOL

Free open-source online software

UPLOAD YOUR PORFOLIO THE ONLINE SOFTWARE DOWNLOAD A TEMPLATE DOWNLOAD A YOUR REPORT VISUALIZE RESULTS

USERS AND DISTRIBUTION MODELS

250 institutional investors, 2 investor associations, four national authorities

The supervisor do the analysis using regulatory reporting California, 670 insurers A government request domestic investors to perform the analysis on a dedicated platform Switzerland, 70% of insurers and pension funds An investor association invite its members to perform the analysis on a dedicated platform France Insurance Association, UN PRI An asset manager use the model to assess the portfolios of all its clients USA, confidential Financial institutions join the road-testing program 250 investors, 5 banks The UNFCCC tracks progress of capital markets towards 2°C Capital Market Outlook, Dec 2018

INTEGRATION INTO FINANCIAL REGULATION

250 institutional investors, 2 investor associations, four national authorities

Article 173 of the Energy Transition Law (2015) Mandatory scenario analysis and target setting for investors Senate Bill 560 (2015) Mandatory scenario analysis and target setting for public pension funds Tracking Art 2.1.C of the Paris Agreement (2017) Switzerland Regulatory proposal on investors disclosures (2020) Mandatory climate disclosure EC

LINKAGE WITH INVESTORS AND SUPERVISORS MANDATES

250 institutional investors, 2 investor associations, four national authorities

BETTER PRICING OF LONG-TERM RISKS Optimization of long-term returns Orderly functioning of financial markets

1

Horizon of risk analysis

Liquid assets

Illiquid assets

STRESS-TEST

Resilience to a shock

SCENARIO ANALYSIS

Assessing the consequence of a potential mispricing of long-term risks

LINKAGE WITH INVESTORS AND SUPERVISORS MANDATES

250 institutional investors, 2 investor associations, four national authorities

BETTER PRICING OF LONG-TERM RISKS Optimization of long-term returns Orderly functioning of financial markets

1

INTEGRATION OF RETAIL CLIENTS NON-FINANCIAL OBJECTIVES Make a difference with their money Consumer protection

2

THERE IS A NECESSARY TRADE-OFF BETWEEN MAKING A POSITIVE IMPACT AND PROFITABILITY IT IS POSSIBLE FOR MY INVESTMENT DECISIONS TO INFLUENCE THE AMOUNT OF CLIMATE CHANGE CAUSES BY HUMAN ACTIVITIES

Source: Morgan Stanley 2017

LINKAGE WITH INVESTORS AND SUPERVISORS MANDATES

250 institutional investors, 2 investor associations, four national authorities

BETTER PRICING OF LONG-TERM RISKS Optimization of long-term returns Orderly functioning of financial markets

1

INTEGRATION OF RETAIL CLIENTS NON-FINANCIAL OBJECTIVES Make a difference with their money Consumer protection

2

ALIGNMENT WITH POLICY GOALS Support national climate policies Consistency of financial policies

3

Mobilise and orient private capital flows towards sustainable investments. Without prejudice to the

• bjective of financial

stability and orderly functioning of financial markets, implement the regulatory and supervisory framework to support the general economic policies in the Union, contributing to the achievement of the

• bjectives of the Union.

IMMEDIATE NEXT STEPS

Rolling out the concept

Target at portfolio level Target at company level Portfolio scenario analysis Engagement on climate trajectory LINK WITH SHAREHOLDER ENGAGEMENT Linking Investors and investees targets Paris-aligned resolutions

1

IMMEDIATE NEXT STEPS

250 institutional investors, 2 investor associations, four national authorities

…FOR INTEGRATION INTO DCF MODELS TRANSITION SCENARIOS TRANSLATED INTO SECTOR+COUNTRY SPECIFIC RISK PARAMETERS…

LINK WITH SHAREHOLDER ENGAGEMENT

1

PROPER FINANCIAL RISK ANALYSIS Calculate a value-at-risk Establishing the link with capital charges

2

IMMEDIATE NEXT STEPS

250 institutional investors, 2 investor associations, four national authorities

LINK WITH SHAREHOLDER ENGAGEMENT

1

PROPER FINANCIAL RISK ANALYSIS

2

UPGRADING GREEN BONDS Align pledges with climate goals Assess the inflluence on issuers decisions

3

TCFD disclosure TCFD disclosure

Authorities Investors / banks

Analysis based on asset-level data

CONCLUSION

Ensuring consistency across the chain

Issuers

CO2 Actual emission reductions