Transcript Enviro Liability Part 2 (PD May 2007)

Climate Change Risks and Opportunities
for CIBC
ORIMS Professional Development Day
March 29, 2007
Sandra Odendahl, Senior Director
Environmental Risk Management
Corporate Risk and Insurance Services
Outline
• About CIBC
• CIBC’s Environmental Risk Management Group
• Environmental Policy Framework
• Climate Change
• What Next
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About CIBC
• Assets ~ $304 billion; market capitalization $33.6 billion.
• Approximately 37,000 employees worldwide.
• 1,061 branches; more than 3,800 ABMs
• Business areas:
– CIBC Retail Markets (~76% of revenue)
• retail markets (everyday banking, borrowing, mortgages and
investing), wealth management and credit cards
– CIBC World Markets (~24% of revenue)
• wholesale banking arm of CIBC, providing a range of integrated credit
and capital markets products, investment banking and merchant
banking
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Environmental Risk Management Group
• Oversight responsibility for Environmental Management at CIBC
– Oversight of adherence to CIBC environmental policy and other
environmental requirements and commitments
– Corporate environmental footprint
– Environmental credit risk management
• Established in 1992 as part of TRM, Corporate Risk and Insurance
Services
– Originally driven by enactment of environmental legislation in
Canada and the U.S. in the early 1990s that raised the possibility
of significant credit and legal risk to banks associated with lending
activities
• Three full-time permanent staff:
– Sandra Odendahl, Senior Director
– Tony Basson, Senior Manager
– Bill Christmas, Senior Manager
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Risks Arising from Environmental Issues
•
Credit Risk
– Ability of borrower to repay debt is impacted by problems associated with
contaminated property and/or inadequate client environmental management
systems, 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, due to contamination,
financial ratios are adversely impacted, and credit risk is higher
•
Legal Risk
– Direct liability of bank for clean-up costs, possibly exceeding the amount of the
loan or investment, following foreclosure or bankruptcy
•
Operational Risk
– Risk of loss due to inadequate environmental management (fuel tanks, asbestos,
etc) in bank’s own operations
•
Reputation Risk
– Damage to bank reputation caused by association with environmentally damaging
company or issue
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What Reputation Risk Looks Like
4 year ‘Global Finance
Campaign’
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CIBC Environmental Policy Framework
Corporate Policy on the
Environment
Reputation &
Legal Risk Policy
Environmental Credit Risk
Standards & Procedures
Environmental
Review
Checklist
Environment
al Review for
Large
Corporate
Site
Inspection
Checklist
Environmental & Social
Standards for Project
Finance
(Equator Principles)
CIBC Approved
Environmental
Consultants
CIBC Environmental Risk Management
Project
Categorization
Guide
March 2007
Environmentally
Responsible
Procurement Standard
Environmental
evaluation form
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Climate Change:
An Emerging Environmental Risk Issue
•
The Legislative Framework
•
Impact on CIBC
•
Carbon Management Program
•
Study of Risks of Climate Change Regulation to:
– Industries
– Companies
– CIBC loan portfolio
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The Legislative Framework
Kyoto Protocol
•
Objective is to stabilize concentrations of GHGs at levels that will stabilize
human-induced climate change
•
During First Commitment Period of 2008-2012, industrialized nations to
reduce 6 GHGs (CO2,CH4, N2O, HFCs, PFCs and SF6) to 5.2 per cent
below their 1990 levels
•
Starting Jan.1, 2008, participating Nations get allowances based on total
emissions desired in the country
•
Kyoto introduces ‘supply constraint’ on GHGs at the country level
– As a result, GHG reductions, and the right to emit GHGs, become valuable
•
To meet targets, Nations can:
– Reduce emissions in their country
– Buy the right to emit more GHGs (allowances)
– Buy proof that GHGs have been reduced somewhere else (credits)
•
Allowances are allocated, credits are created
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The Legislative Framework
Climate Change Regulation in Canada
?
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The Legislative Framework
Climate Change Regulation in Canada
•
•
•
Canada ratified Kyoto Protocol in Dec. 2002
Committed to reduce annual CO2 emissions 6% below 1990 levels, which
now amounts to almost 300 Mt/year, or 35% reduction
“Project Green” released April 2005
– Total emission levels of greenhouse gases were to be capped for ~ 700 “Large
Final Emitters”
– Ability to create credits was offered through “offset projects”
– Funding for transportation infrastructure improvements, renewable energy, home
energy efficiency, etc.
– National emissions trading scheme would start Jan 2008
•
What Next?
– Canadians expect climate change to be addressed through regulation
– Expect to see short, medium and long term targets. Short term targets will
definitely be intensity-based (i.e. emissions per tonne of production)
– Emission limits on some industrial sectors,
– National emissions trading, possibly international
– Incentives for clean technology
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Impacts of Climate Change on CIBC
Overview
Impacts
People
Assets (Operations) Business Activities
Physical
Aspects
• Adverse health
effects on
employees
• Higher insurance premiums
• Operational Risk: Physical
damage from storms
• Increased credit risk of clients
in certain weather-dependent
sectors
– Business interruption
• Higher cooling needs;
lower heating needs
• Higher business continuity
management costs
Regulatory
Aspects
• Earn tradable offset credits
through projects
• Higher cost for energy
– Capital & operating costs
– Revenues
• Opportunity to finance
infrastructure development
• Increased credit risk if clients
face new costs or penalties
associated with regulations
• New carbon market products
and services
• Renewable energy finance
• Reputational risk
Risks: Operational risk, credit risk, reputational risk
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Impacts of Physical Aspects of Climate
Change on CIBC
Risks
•
Human resources impacts
– Effect of more respiratory problems = absenteeism?
•
•
•
•
Higher insurance costs for CIBC premises in some regions
Increased cooling requirements in summer
Business interruption due to major storms, power availability in Ontario, etc.
Credit risk due to impacts on clients’ sectors
–
–
–
–
(Especially agriculture, forestry, fisheries, tourism, food & beverage, etc)
Increased capital & operating costs to clients
Increased business interruption to clients
Increased cost for (or unavailability of) insurance
Opportunities
•
Participate in project finance for infrastructure redevelopment
– Wind power, clean technology, road replacement, etc
•
Lower heating requirements in northern regions
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Impacts of Regulatory Aspects of Climate
Change on CIBC
Risks
•
•
Increased cost for purchased energy if power producers pass on new
regulatory costs
Credit risk
– Clients face new regulations, new costs, climate change litigation and other
•
Reputation Risks
– Stakeholders increasingly demanding action from banks and other firms to mitigate
emissions, avoid lending to high CO2 emitters, and manage supply chain
Opportunities
•
New products and services
– Green retail products, CO2 trading and brokerage, carbon trust services; carbon
fund, advisory services, etc.
•
Growth in Renewable Energy finance
– renewable energy or GHG credits as a cash flow stream
•
Earn Offset Credits from energy conservation projects
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Carbon Management Program
1. Manage greenhouse gas emissions from CIBC’s Operations (our
own climate change footprint);
2. Assess impacts of Climate Change Regulation on CIBC’s Credit
Portfolio;
3. Track opportunities in emerging North American carbon markets;
4. Develop screening tools for climate change risk in credit risk
assessment; and
5. Develop a study of physical impacts of climate change to CIBC’s
operations, and to our lending & investment portfolio.
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Impact of Climate Change Regulation on CIBC’s
Portfolio
•
The eventual regulation of carbon dioxide and other greenhouse
gases will impact different sectors in different ways
•
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
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1. Impact of GHG Regulations on Industry
Method
• Modified Porter Model to identify key factors that determine how much
a sector will be affected by new regulations:
– Government policy
• Policy can have uneven effects on different sectors
– Energy Intensity
• Input costs likely to rise
– Emissions Intensity (emissions per unit output)
• More emission intense industries may face higher absolute emission
reductions
– Ability to pass along costs
• Can mitigate impacts of new regulation in that sector
– Opportunities to abate
• Are low cost abatement opportunities still be available to sector?
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Impact of GHG Regulations on Industry
Results
Highest Risk
Aluminum
products
Emissions Intensity
Smelting/refining
Oil Sands
Steel
Electricity
Cement
Chemicals
Petroleum
Refining
Pulp & Paper
Oil & Gas
Pipelines
Mining
Lowest Risk
Low
High
Ability to Pass on Costs
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2. Impact of GHG Regulations on CIBC Clients
Method
• Identified companies likely to face GHG regulation
• Forecasted future emissions and compared to probable targets
– Emissions – target = CO2 asset or liability
• Calculated cost of compliance for companies in a liability position (i.e.
unable to meet their regulated target)
– Cost for abatement through new technology
– Cost to buy CO2 allowances in the marketplace under different price
scenarios
– Cost to buy CO2 allowances from federal government at $15/tonne
• Assessed ability of sectors and firms to pass on costs of compliance
to customers
• Determined annual cost of compliance on an absolute and
percentage of net income basis
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Impact of Climate Change Regulation on Clients
Results
• Impacts of new regulations vary among clients within a sector
• GHG regulations, as articulated in Canada’s “Project Green”, would
have placed a fairly modest financial burden on most of CIBC’s large
clients; however, a few clients faced potentially material impacts.
• Clients in coal fired power generation and aluminum faced largest
compliance costs.
• Majority of Single Names faced some costs to meet GHG regulations,
but 18% of firms likely to face no cost to comply with GHG regulations
• For most Single Names, carbon compliance costs were a very small
percentage of annual net income: representing under 1% of profit in
90% of cases
• Analysis must be updated as soon as new federal GHG regulations
are available
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3. Impact of GHG Regulations on CIBC’s Portfolio
Method
• Top-down approach:
– Percentage of loans in portfolio that are to all clients in industrial
sectors likely to be regulated, and that are to sub-investment
grade clients (i.e. clients least likely to have financial means to
meet new regulatory targets for greenhouse gases)
• Bottom-up approach:
– Use client info to determine sector average Loss in Event of
Default (LIED) and Obligor Default Ratings (ODRs). Combine
with loan exposure and apply a stress factor for impact of carbon
regulations
– Determine potential loss in each sector and then as a percent of
portfolio
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Impact of Climate Change Regulation on Portfolio
Results
• Portfolio impacts of proposed GHG regulations would have been very
low, affecting clients representing less than 7% of CIBC’s net loans
and acceptances.
• Almost 90% of the clients that would be regulated were investmentgrade
• Climate change-related loan losses, under our worst-case scenario,
were estimated to be <0.009% of total portfolio
• Analysis must be updated when new regulations are released
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Next Steps
 Integrate climate change considerations into credit risk assessment and
industry analysis
– Environmental Credit Risk Standards and Procedures now include questions about
impacts of climate change legislation on client. Quantitative questions to be added
when regulations are clear
– Industry Reviews include environmental section, which covers climate change
impacts where relevant
 Raise awareness amongst CIBC business and functional units of potential
risks and opportunities presented by climate change.
 Research Physical Risks of climate change to industry sectors including the
banking sector.
 Investigate business opportunities associated with climate change, including:
trading, brokerage, carbon advisory services, carbon funds, and project
finance for emission reducing projects
 Monitor changing policy and market developments on a continuous basis,
and adjust the assessment of risks and opportunities as required.
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…..and engage our stakeholders…
Don’t fund global warming.
Stop investment in all new coalburning power plants.
There are over
150 new coal-burning
power plants currently
on the drawing board.
Let’s keep them there.
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.
(from New York Times, March 23, 2007)
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Thank You!
Any questions?
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Environmental Risk Management Group
Structure and Functions
Strategic Leadership and Oversight
• Oversee enterprise-wide adherence to internal policy requirements, external commitments,
and compliance to environmental regulations
• Provide internal expertise in environmental science & engineering, and corporate
environmental management
• Identify and communicate emerging environmental risks and opportunities
• Benchmark CIBC against other FIs; Communicate internally and to the public; manage
stakeholder relationships
Environmental Credit and Investment
Risk Management
Corporate Environmental Programs
• Manage environmental impacts from CIBC’s own
operations, i.e. CIBC’s “environmental footprint”
• Advocate and support green initiatives
• Manage credit and legal risks arising from
environmental issues in CIBC credit and
investment portfolios
• Ensure legal compliance, cost and risk reduction,
and enhancement of CIBC’s corporate reputation
• Develop and maintain policies, procedures and
guidelines to manage environmental risk
• Advise on environmental donations,
• Expert advice to lenders, risk managers, and
clients on environmental issues
• Monitor and report on environmental performance
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