Transcript Low Carbon Investment Solutions

Investors Tackling Climate Change
Low Carbon Investment Solutions: “A free option on a mispriced asset”
April 2015
Executive Summary
 Asset owners’ approach to climate change is paradoxical:
– Wide recognition of climate risk as a long-term threat to their asset
– With very little being done so far
 3 reasons:
– Issue that does not match with investment horizons
– Complexity
– Lack of scalable solutions
 Amundi develops innovative indices:
– Free option on a mispriced asset
– From equity to FI
 Amundi, a thought leader in low carbon investing:
–
–
–
–
Founding partner of the Portfolio Decarbonization Coalition ($100bn commitment)
Academic partnership (with Columbia University)
Partner of the French Government (COP21)
Best practices sharing events: Columbia Workshop, Bellagio Seminar
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Carbon Risk: A World Debate Becoming more Intense
“If that happened, fossil fuel reserves would indeed be
stranded.
Investor beware: the risk of that cannot be zero.”
1
Martin Wolf (17th June 2014)
“We’re staring down a climate bubble that poses enormous
risks to both our environment and economy.” 2
Henry Paulson (21st June 2014)
AP4 (Fjärde AP-fonden) has developed a strategy where it
underweights high carbon assets. “It’s an intelligent way of
motivating behavior than directly divesting out of oil,”
“Divesting out of oil is a bit like a blunderbuss, it doesn’t
give any incentives for companies.
“With the AP4 way you get incentives from companies in
industry to perform better. AP4 has found that
performance has improved in straight vanilla finance.’ 3
 Shift from a risk to
society to a risk to
investors
 Not financially
rewarded risks:
– Fiduciary responsibility to
identify them
– and to reduce them
 Different approaches:
AP4 one is very
compelling
Lord Stern (26th February 2015)
(1) See article from Martin Wolf published in FT 17/06/2014
(2) See article from Henry Paulson published in New York Times 21/06/2014
(3) Hearings at the Bank of England
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Two Major Risks to Investors
Polluting

No taxation:
–
–

No cost for negative externalities:
impact on the planet, assets,
bodies…
But a form of taxation will be
implemented in long term
Direct subsidies:
–
–
Fossil fuel : $480bn 1
Eliminating these subsidies would
result in 4.1% reduction in energy
demand in 2020 (McKinsey)
And
Stranded Assets

Fossil fuels companies:
mainly valued on their
reserves

Reserves exceed the
budget of the planet:
–
–
Reserves : 2,795 GtCO2 2
Budget : 1,437 GtCO2 3
(1). “Energy Subsidy Reform: Lessons and Implications”, IMF (2013)
(2). Carbon budget 2000-2050 for a 50% probability to stay under a 2°C increase over pre-industrial level scenario. Source
“Greenhouse-gas emission targets for limiting global warming to 2 °C”, Meinshausen et al, 2009
(3). For a 50% probability to stay under a 2° increase scenario. Quantity of CO2 trapped in the world’s top 200 fossil fuel
reserves, excluding unconventional sources. Source: Carbon Tracker Initiative
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Climate Change: A Need for Solutions
A major threat
Complex
situation
And
Lack of Action
 Long-term issue
(that does not match with
investment horizons);
 Complexity
(technologies and
incentives);

Lack of scalable
solutions
A Call for Innovation
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A Mix of Different Approaches
Exclusion
Engagement
Risk Management
+ Strong Signal
- Does not fit with
constraints of most
investors
- Scalability?
Limits?
Targeted and dynamic
exclusion*
+ Easy to
Implement
- Possible light
impact
+ Combines Exclusion
and Engagement
+ Fits with investors
constraints & Scalable
+ Competition within
each sector to accelerate
carbon transition 1
- Middle Road Approach
•
•
* Low carbon leaders: exclusion based on transparent rules and with a cap per sector
(1) For polluting companies
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Methodology: Carbon Reduction Constraints
Provider’s
Selection

Index Provider
(MSCI)*

Climate Risk
Reduction
Then
Carbon Data
Provider (MSCI)*

Carbon footprint:
X% reduction of companies with
the highest carbon footprint
(Emission intensity)

TE
Reduction
Then
Stranded assets

Optimization of
the weights

Regular
rebalancing
Z% reduction of carbon reserves
(intensity：reserves divided by
market capitalization)
Simple, Transparent and Rules Based Approach
* For illustration purpose
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Decarbonization: a Free Option on Carbon Repricing
If repricing:
Outperformance
1
2
If no repricing:
same performance
Benchmark
Low Carbon Low TE
Low Carbon Low TE
Benchmark
A Free Option
–
–
Either no climate change impact : same performance
Or a climate change impact : outperformance
NB: Random simulations with annual volatility at 20%, annual expected return 7% and a 0,5% TE.
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Example: MSCI Europe Low Carbon Leaders
MSCI
Europe
MSCI Low
Carbon Leaders
Total Return* ‘(%)
11.1
11,7
Total Risk* (%)
11.7
11.6
Sharpe Ratio
0.91
0.97
Active Return* (%)
0
0.6
Tracking Error* (%)
0
0.7
Information Ratio
NA
0.89
Turnover** (%)
1.9
9.9
Securities excluded
NA
91
Market cap excluded
(%)
NA
23.5
Carbon Emission
intensity reduction
(tCO2/mm USD) (%)
NA
62
Carbon Reserves
intensity reduction
(tCO2/mm USD) (%)
NA
81
Key metrics
Source: MSCI
* Gross returns annualized in EUR for the 11/30/2010 to 08/29/2014 period.
** Annualized one-way index turnover for the 11/30/2010 to 06/30/2014 period.
The cumulative index performance is from MSCI
 Excludes:
– Largest 20% emitters with a maximum
30% by weigh form any sector
– Largest owners’ reserves up to 50%
 A major reduction of:
– Carbon Emissions Intensity (-62%)
– Carbon Reserves Intensity (-81%)
 A low tracking error: 0.7 %
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Example: MSCI Europe Low Carbon Leaders
MSCI Europe
Low Carbon
leaders
 A return over performing
the benchmark:
– 12.1% vs 11.5%
– Even if supposed to be
forward looking
 Regular outperformance
 A concrete one: Nov-Feb
+72bp
MSCI Europe
Source: MSCI
* Gross returns annualized in EUR for the 11/30/2010 to 08/29/2014 period.
** Annualized one-way index turnover for the 11/30/2010 to 06/30/2014 period.
The cumulative index performance is from MSCI
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Products: A Wide Range of Solutions
Equities
Passive
Active
Stock Picking
Overlay
Replication of
Low Carbon
Indices
Fixed Income
Illiquid
Passive
PE
Decarbonization
of Standard
Indices
« EDF »
A Wide Range of Products
•
•
•
(1) Can also include Stranded assets
(2) Hierarchization of objectives, exclusion policy, fine tuning depending of geographical area, etc.
(3) More details in the press release at: http://www.amundi.com/cyp/home_news_pres?lg=en
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Equities: Index Funds and ETF
 Open-ended Index Funds:
– Amundi Index Equity Europe Low Carbon
– Benchmark: MSCI Europe Low Carbon
Leaders
– Launched in France: March 5
– Amundi Index Equity Global Low Carbon
– Benchmark: MSCI World Low Carbon
Leaders
– Launched in France: March 5
– Still under consultation: Chinese A
share is expected to be included in
MSCI major index in June 2015 1
 ETF: to be launched Q2 2015
(1). http://www.reuters.com/article/2015/03/13/msci-china-idUSL4N0WF2KP20150313
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Fixed-Income: Illustration
1
Investment universe/ Benchmark index
# bonds
# issuers
Interest rate sensibility
Bonds sensibility
Carbon intensity
2
Exclusion of 20% of the most polluting issuers (up to 30%
maximum per sector) while having stranded assets
# bonds
# issuers
Carbon reduction
Tracking Error
3
Barclays Euro Corporates
~ 1500
~ 480
498
525
145
~ 1300
~ 380
36%
0.08%
Sampling process
aiming at reducing the amounts lent to polluting issuers
# bonds
# issuers
Interest rate sensibility
Bonds sensibility
Carbon reduction
Tracking Error
~ 110
~ 110
498
525
 Decarbonization of
Barclays Euro Corporate
 Process:
– 58% carbon footprint
reduction
– Same market exposure
(yield/spread)
– Low TE: 0.17%
 Discussions with index
providers to launch:
– ETF
– Mainstream index
58%
0.17%
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Concrete Decarbonization by Institutional Investors
 MSCI Low Carbon indices developed
alongside AP4 and FRR and Amundi 1:
– FRR and AP4 announced they plan to invest
up to EUR 2bn to seed these strategies
 Tailored decarbonization approach with
ERAFP 2:
– Keep the same reference index
– Change portfolio weights to decarbonize
– Announced the decarbonization of EUR 750M
with Amundi
(1)http://www.msci.com/insights/responsible_investing/msci_launches_innovative_family_of
_low_carbon_indexes.html
(2) http://www.lesechos.fr/journal20140923/lec2_gestion_d_actifs/0203782634292philippe-desfosses-lerafp-va-decarboniser-son-portefeuille-dactions-de-la-zone-euro1045591.php
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Rewarded Clients
 IPE Awards 2014:
– AP4:
– Best Public Pension Fund
– Outstanding Industry Contribution
– FRR: Best French Pension Fund
 Environmental Finance 2015:
– AP4: Personality of the Year
 Responsible Award 2014 for the
“positive economy” for ERAFP
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Academic Paper Co-Written with Columbia and AP4
 Andersson, Bolton & Samama (2014)
Methodologies are not ‘equal’:
– Signaling is key to generate right incentives
– And get effective decarbonization on the ground
 One of the 10 most downloaded papers
over January 2015 (available on SSRN):
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=
2499628
 Published (French) in the Revue
d’Economie Financiere (March 2015)
 High visibility:
– “Long-termism, the problems with capitalism and
other holiday reading” (Dec 2014)
– http://www.top1000funds.com/opinion/2014/12/18
/long-termism-the-problems-with-capitalism-andother-holiday-reading/
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Portfolio Decarbonization Coalition
 Target:
– $100bn of assets decarbonized
– $35bn achieved
 Open platform:
– Investors share best practice
 Governance:
– In the hands of UNEP-FI
 Members:
– AP4, FRR, Church of Sweden, Australian
Ethical Investment, University of Sydney,
Toronto Atmospheric Fund
http://unepfi.org/pdc/
“Some of the biggest – and potentially
transformational announcement at my Climate
Summit came from the private sector. A coalition of
institutional investors has committed to
decarbonize $100bn in institutional equity
investments”
Ban Ki-moon, Secretary General
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2015 Sharing of Best Practices among Asset Owners
 March 9th: Columbia University
 Asset owners in the first panel:
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A. Stausboll, CEO, CalPERS
B. Litterman, Investment Committee, WWF
M. Eriksson, Deputy CEO, AP4
P. Desfossés, CEO, ERAFP
E. van Gelderen, CIO of APG
 30 asset owners representing $6tn
“The Decarbonization Portfolio Coalition is
a positive step in this direction. I salute the
mobilisation of its founders Amundi, AP4,
CDP and UNEPFI, and investors that have
signed up since its launch at the Climate
Summit, and encourage all institutional
investors to take these commitments even
further by the COP21.”
Laurence Tubiana
French Representative for the COP21
“We welcome asset owners and managers, such as those
present at this critical gathering at Columbia University, to
become members of the Portfolio Decarbonization
Coalition so as to share, with the public and world
governments, their approaches. PDC will then be able to
make this 'wealth of action' visible to Governments in
the lead-up to COP21 in Paris. This is what, in 2015,
investors can concretely do in order to help us build
an enabling environment towards a successful climate
agreement at the Paris COP."
Janos Pasztor
Assistant SG on Climate Change
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Sharing of Best Practices among Asset Owners
 April 7th: Rockefeller seminar at Bellagio
 Asset owners participants included:
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M. Andersson, CEO, AP4
R. Arezki, Senior Economist, IMF
P. Canfin, Senior Advisor, World Resources Institute
P. Desfossés, CEO, ERAFP
G. Hahn, Head of Responsible Investment, Church of
Sweden
H. Huang, Head of Sales and Trading Department,
CICC
B. Litterman, Treasurer of the Board of Directors,
WWF
E. Mason, Head of Responsible Investment, Church
Commissioners for England
S. Palmer, Head of Ethics, Australian Ethical
Investment
O. Rousseau, Member of the Management Board,
FRR
J. Sefton, Senior Analyst Responsible Investment,
New Zealand Super Fund
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Conclusion
 Climate change is now a real risk for investors
–
–
Analyze and disclose their risks
Consider carbon as an investment opportunity
 In sum: investors can generate a free-option on a mispriced asset
 Such solutions could be a base for further developments:
– Country selection based on political sensitivity to climate change
– Replication on other themes (e.g. water, waste, etc.)
 Possible mobilization of a vast amount of money:
– Investors with a green interest represent $92 trillion 1
– Passive management sums up to $10 trillion 2
 Portfolio Decarbonization Coalition:
– Sharing of best practices to mobilize investment flows toward the low carbon economy
– $35bn commitment already achieved
(1) Source: www.CDP.net as at 2014. “CDP Initiative is backed by more than 767
institutional investors representing an excess of US$92 trillion in assets.”
(2) Boston Consulting Group , Global Asset Management 2014 – Steering the Course to
Growth
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APPENDIX
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Climate Change is a Global Risk for Investors
The Global Risks Landscape 2014
 Climate risk among top 5 global risks:
– As impactful as fiscal crisis
– As likely as unemployment, data fraud or
cyber attacks
Investors are now realizing that:
– Climate change is a threat for society
– Also a risk to their assets
 Investors started voicing concerns
and taking actions:
– Investor representing $70 Trillion AUM
expressed concerns 1
– Bank of England warns of huge financial
risk from fossil fuel 2
– Various Actions: divestment, carbon filter,
green bond, energy efficiency investments,
green real estate, etc. 3
Source: WEF 2014, Global Risks Report 9th Edition
(1). Sources: Ceres, October 2013
(2). Sources: Bank of England, prudential authority, statement in Feb 2015
(3). Sources: UNEP; Financial institutions taking action on Climate change
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China’s Climate Stance, a Game Changer?
 Current Situation
 Commitment
–
Largest contributor to GHGs by
volume, represent 29% in
total(1).
–
Pledge to reduce its carbon
intensity by 40-45% by 2020
from 2005 levels(8).
–
Per capita emission has risen
to 7.2 carbon dioxide metric
tons(1).
–
Pledge to increase its nonfossil fuel-based energy
consumption to 20% by 2020(8).
–
7 of the 10 world’s most Airpolluted cities are in China(7).
–
Achieve the peaking of CO2
emissions around 2030(8) .
 Renewable Energy
–
China is now leading the world
in installation of new
hydropower, wind, solar and
nuclear electricity generation(2).
–
China’s renewable energy
consumption between 1990 and
2010 was as high as all
European countries
combined(3).
Timeline of Chinese Carbon ETS
Time
Progress
2011
Beijing picks seven ETS Pilots to try out emissions trading before deciding whether to launch a national system
from 2015. The national carbon market will start trading in 2016(5).
2013
China become the second largest carbon trading market with 1,115bn tons of allowances(6)
Sep 2013
China and California sign a memorandum of understanding, the agreement includes pledges to work together on
sharing low-carbon strategies and create join-venture on clean technologies(4).
Dec 2014
Hubei ETS tops all 7 pilots with 7M ton of exchange quantification. The rest exchange quantification range from
0,1M tons to 2M tons. The carbon price in 7 pilots ranges from 20RMB to 61RMB in 2014. (6)
Mar 2015
Ministry of finance has proposed the implementation of environment tax to state council in 2013, and the legislation
process is expected to finalize within 2015. Tax is expected to be levied in 2016(9)
Sources: (4) Associated Press, September 24, 2013; (5) Financial Times, June 18,2013 and November 26, 2013; (6) Environmomist (2015), China Carbon Market Research
Report (9) http://www.cfen.com.cn/web/meyw/2015-03/17/content_1172445.htm
1) Global Carbon Project (2014); (2) China’s renewable energy revolution: what is driving it? John A. Mathews and Hao
Tan (2014); (3) IEA Outlook 2013; (7)National Environment Analysis, Tsinghua University and Asia Development Bank
(2013); (8)2014, US-China Joint statement on APEC meeting in Beijing.
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Carbon Regulations around the World
Country
USA
Norway
UK
Denmark
Finland
Carbon regulation
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•
•
•
•
•
•
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Australia •
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Japan
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Switzer-land
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Canada •
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Sweden
Carbon Tax: None
Emission Trading System: Regional Greenhouse Gas Initiative - 2005, market price: USD 2.80/tCO2, floor: USD 2.05 per CO2 allowance,
reserve sale trigger price: USD 6 in 2015, USD 8 in 2016;
Carbon Footprint Disclosure: Compliance entities must report CO2 emissions quarterly.
Carbon Tax : in 1991, USD 4-69/tCO2 for offshore petroleum ;
Emission Trading System: USD (see EU)$/tCO2;
Carbon Footprint Disclosure: environmental reporting (based on EU regulation).
Carbon Tax: in 2013, USD 15.75;
Emission Trading System: price floor USD 30/tCO2;
Carbon Footprint Disclosure: Quoted companies GHG reporting.
Carbon Tax: in 1992, tax rate USD 31/tCO2 ;
Emission Trading System : USD (see EU)$/tCO2;
Carbon Footprint Disclosure : mandatory green reporting (700-1000 companies).
Carbon Tax : in 1990, USD 83/tCO2 for liquid traffic fuels and USD 48/tCO2 for heating fuels ;
Emission Trading System: USD (see EU)$/tCO2;
Carbon Footprint Disclosure: state-owned companies and state majority-owned companies to report their sustainability performance in an
accurate manner.
Carbon Tax : in 1991, USD 168/tCO2;
Emission Trading System: USD (see EU)$/tCO2;
Carbon Footprint Disclosure: None.
Carbon Tax: Repealed in July 2014;
Emission Trading System: Emissions Reduction Fund: purchase of emissions reductions of projects selected through an auction mechanism;
Carbon Footprint Disclosure: Reporting in relative to the Opt-in Scheme.
Carbon Tax: USD2.89/t-CO2;
Emission Trading System: Voluntary Emissions Trading Scheme - USD2.2/t-CO2;
Carbon Footprint Disclosure: Operators shall report their calculated GHG emissions in the designated format.
Carbon Tax: Carbon Tax/Emissions Trading System: in 2008, tax rate of USD 68/tCO2; companies participating in ETS are exempt from tax;
Carbon Footprint Disclosure: None.
Carbon Tax: None nation-wide;
Emission Trading System: None nation-wide;
Carbon Footprint Disclosure: None nation-wide.
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Valuation Impacts from Carbon Regulations
 Theoretical model considering the potential impacts of environmental
regulation, or more specifically emissions costs, on firm profitability and
performance:
𝜋𝑖 = 𝑃 𝑞𝑖 + 𝑞≠𝑖 − 𝐶𝑖 (𝑞𝑖 , 𝜔) + 𝜏𝐴𝑖 − 𝜏𝑟𝑖 𝑞𝑖 , 𝐼𝑖 𝑞𝑖 − 𝑘(𝐼𝑖 )
 An exogenous shock to permit prices affect the profits of firm 𝑖 in the
following way:
∗
∗
𝑑𝜋𝑖∗
𝜕𝑞≠𝑖
𝜕𝑞≠𝑖
𝜕𝐶 𝜕𝜔
∗
′
=𝑃
𝑞𝑖 + 𝑃
𝑞𝑖∗ −
+ [𝐴𝑖 − 𝑟𝑖 𝑞𝑖∗ ]
𝑑𝜏
𝜕𝜏
𝜕𝜔
𝜕𝜔 𝜕𝜏
𝑃 𝑞𝑖 + 𝑞≠𝑖 represents the demand curve
where 𝑞≠𝑖 represents total production by
other firms in this market
𝐶𝑖 (𝑞𝑖 , 𝜔) represents the total cost of
producing 𝑞𝑖 with a vector of input costs 𝜔
𝜏 is the per-unit price of emissions
allowances
Emission rate is 𝑟𝑖 𝑞𝑖 , 𝐼𝑖 , with 𝐼𝑖
representing a given level of abatement
𝜏𝑟𝑖 𝑞𝑖 , 𝐼𝑖 𝑞𝑖 represents the direct compliance
cost with an emission rate 𝑟𝑖 𝑞𝑖 , 𝐼𝑖 , its total
production 𝑞𝑖 and its level of abatement 𝐼𝑖
“Raising rivals’ costs” effects
Net revenue effect
 Under the assumption that firms
would reduce output in the face of an
increase in allowance cost, this term
would be positive:
– Revenues may increase due to
the fact that other firms in the
industry have collectively
responded by reducing output in
direct response to the permit
price.
 Captures the impact of change in
 A large emitter with a low allocation
profits from the indirect effect of
of allowances will have a high cost
permits through input costs
exposure to allowance price
 Environmental regulations may
 A firm holding more allowances than
increase the price of inputs like
it expects to consume in its own
electricity that, in turns, affect the
production, its value will be enhanced
costs of downstream firms and
by higher allowance prices (firm is
therefore the prices in the product
short in allowance, 𝐴 < 𝑟𝑞)
market
 This effect is theoretically ambiguous
Bushnell et alii (2012)
Direct compliance costs
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Carbon Budget Equation in Line with 2°C Goal
World Energy-related CO2 Emissions by Scenario
 2°C objective key figures 2011-2050:
– CO2 concentration limit: 450ppm
Vs. 400ppm (particles per million) in 2015
– CO2 emissions / year limit: 35 GtCO2
Vs. 32.3 GtCO2 in 2014
– Carbon budget: 1,100 GtCO2 (1)
Vs. 300 GtCO2 burnt since 2000
 Growing energy needs:
–
World pop. to reach 8.9bn in 20502
–
3bn more middle class consumers by
2030
–
Growth in electricity demand in developing
countries (e.g. x2 in India over the next
10yr)
–
More than 1bn without access to
electricity in 2013, rising to 2.5bn in 2030
(1) To have at least a 50 per cent chance of keeping warming below 2°C throughout the 21st century , the cumulative
carbon emissions between 2011 and 2050 need to be limited to around 1,100 Gt CO2. See Nature, January 2015 and
IEA, March 2015. (2)United Nations Department of Economic and Social Affairs/Population Division 3, World Population
to 2300
Source : Nature 2009, Meinshausen et alii, Greenhouse-gas Emissions Tragets for Limiting Global Warming to 2°C
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Stranded Assets
Remaining Ultimately Recoverable Resources
 The Carbon Budget Gap:
– Budget for 2011-2050: 1,100 GtCO2
CCS only slightly increases burnable reserves
budget before 2050 (6% for coal, 2% for gas and
oil)
2°C
Oil
Gas
Hard
Coal
Lignite
– Proven fossil fuel reserves: 2,900 GtCO2e
– Estimated fossil fuel reserves: 11,000
GtCO2e
 Low-demand Low-price 450ppm
Scenario:
World Energy-related CO2 Emissions by Scenario
Source graphs: IEA 2013, Redrawing the Energy-Climate Map
(1) Nature, January 2015
(2) Nature, April 2009
– A 450ppm scenario requires energyefficiency measures
– Lowering fossil fuel demand, depressing
prices
– Impacting marginal producers: deepwater,
oil sands, shale oil, thermal coal
– And resource owning countries:
Middle East (owns half of stranded assets)
Canada (very low utilization rate)
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US Coal Crash
Asset Value Depends on Production Costs
and Market Price
 US Coal crisis is caused by shrinking demand
 With a combination of 3 factors:
– Cheap substitute (gas)
– Regulation: Clean Air Act, “Obama’s War on Coal” (1)
– Declining exports (slowdown in China and strong USD)
Share price performance of US coal companies, Jan 06 – Jan 15
Climate Policy Initiative, 2014, « Moving to a Low-Carbon Economy: The
Impact of Policy Pathways on Fossil Fuel Asset Values”
 Equities and bonds of coal companies are
affected:
– Peabody’s stock has lost 87 % of its value in
the past 5 years
– 5 years CDS on Peabody: rose from 707bp to
948bps at the end of 2014
Carbon Tracker, March 2015, The US Coal Crash, Evidence for Structural Change
– Risk premia have surged
(1) Sen. Mitch McConnel of Kentucky, see The New York Times “McConnell Urges States to Help Thwart Obama’s ‘War
on Coal’”
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Carbon Pricing by Economists
 Climate change impacts (negative externalities) will mostly materialize in a distant
future (2050-2100 and after)
 Carbon pricing relies on Cost-benefit analysis (CBA) to maximize intertemporal
welfare:
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–
–
–
Net Present Value of future damages generated by one tonne of CO2
Discount rate is key (reflects elasticity of intertemporal substititution)
Is the discount rate a good proxy for risk aversion?
What is the Beta of reducing emissions? (i.e. Elasticity of monetized damages to the world
GDP)
Nordhaus (2008)
Stern (2007)
US EPA (2013)
Daniel, Litterman, Wagner
(2014)
Discount Rate
Carbon Price ($/tCO2)
Carbon Price ($/tCO2) in
2050
5%
$8 in 2008
$25.9
1,5%
(2000$) 85 in 2007
NA
2,5% // 3% // 5%
(2010$) 57 // 37 // 11 in 2015
$97 // $71 // $26
3% with tail risk (95th
percentile)
(2010$) 109
$220
2.5%
$53
$44 (in 2045), $28 (in 2105)
Low Carbon Low TE Solutions
29
The Issue of Externalities and Market Distortions
Private and social cost:
US$ 1,420 bn in 2013 (1)
Fossil fuel subsidies:
US$ 548 bn in 2013 (2)
– Fossil fuel subsidies have decreased by US$ 25 billion
compared to 2012, in part due to a decrease in international
energy prices
– Subsidies to oil products represent over half of the total
– Total fossil fuel subsidies represent more than four times the
amount invested globally in improving energy efficiency
Renewable energy
subsidies:
US$ 121 bn in 2013 (2)
– More than four times lower than fossil fuel subsidies
Low Carbon Low TE Solutions
Unwind resource
subsidies
(1) IMF 2013
(2) IAE 2013
– Three ways to reduce CO2 output to the socially optimum
level:
 Pigovian Tax
 Regulation
 Creation of a market for polluting rights (e.g.
Emissions Trading Schemes)
Recognize externalities
– The marginal private cost of CO2 emissions is inferior
(usually being nil) to the social cost associated with global
warming damage
E.g.: Adding the social and environmental cost
associated with coal to its actual cost would raise its
price by 175% (Greenstone & Looney 2011)
30
From Shadow Price to Internalization
 Upward trend at sub-national and at national levels:
Pieces of Carbon- and Clean-energy Focused
– 490 pieces of carbon legislation in 2012 Vs. 151 in 2004 Legislation and/or Regulation – Worldwide
– Bottom-up emergence of a global landscape
 Developing countries are taking up the challenge:
– ETS scheduled or implemented: China, South Korea,
Kazakhstan
– ETS under consideration: Brazil, Chile, Mexico,
Thailand, Vietnam, Turkey
 China’s new stance can be a game changer1:
– Coal peak by 2020, CO2 peak in 2030
– Increases zero-emission sources to 20% by 2030
– National ETS to be implemented in 2016
UNEP-FI 2012
 A new global deal is to be reached in 2015:
– All countries to commit themselves to implement their targets (first half of 2015)
– Durban Platform (ADP) to be adopted for an implementation in 2020
– New ways to finance this transition to be found, from the North to the South (Green Climate Fund still
underfunded)
 Concerns about free-riding issues remain high
(1) From the US China Climate deal: China, the biggest emitter of greenhouse gases in the world, has agreed to cap its
output by 2030 or earlier if possible. Previously China had only ever pledged to reduce the rapid rate of growth in its
emissions. Now it has also promised to increase its use of energy from zero-emission sources to 20% by 2030. The
United States has pledged to cut its emissions to 26-28% below 2005 levels by 2025.
Low Carbon Low TE Solutions
31
Comparison of Decarbonization Methods
Target funds (pure reweighting)
Low carbon leaders
Disinvestment
Method
•
Optimization of Carbon
footprint / TE
•
Selection (best-in-class)
+ re-weighting
•
Selection (exclusion of
sub-sectors)
Footprint
impact
•
•
Function of calibration
High
•
•
Function of calibration
High
•
Very high
Performance
impact
•
Positive if carbon risk not
yet priced in
•
Positive if carbon risk
not yet priced in
•
Uncertain, depends on
relative performance of
energy sector
Risk
•
Limited
•
Limited
•
Very strong sectorial
bets
Signaling /
Incentives
•
Weak
•
Strong signaling, strong
incentives
•
Strong signaling, but
weak incentives for
divested companies
Concerns
•
Alignment with climate
performance (Scope 3)
•
Alignment with climate
performance (Scope 3)
•
•
Not commercially driven
Possible tension with
economic development
of poor countries
Low Carbon Low TE Solutions
32
Carbon Footprint Measurement
 Greenhouse Gas (GHG) Protocol sets the global standard for how to measure,
manage, and report greenhouse gas emissions
 GHG protocol defines three categories of carbon emissions:
– Intensity =
–
–
–
–
𝐶𝑎𝑟𝑏𝑜𝑛 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝑠𝑐𝑜𝑝𝑒 1+𝐶𝑎𝑟𝑏𝑜𝑛 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝑠𝑐𝑜𝑝𝑒 2
𝑆𝑎𝑙𝑒𝑠
Scope 1 = Direct GHG emissions
Scope 2 = Indirect GHG emissions from consumption of purchased electricity, heat or steam
Scope 3 = Other indirect emissions
Modelling if necessary
 Stranded assets (Reserves):
– Intensity =
𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑝𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑐𝑎𝑟𝑏𝑜𝑛 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝑓𝑟𝑜𝑚 𝑟𝑒𝑠𝑒𝑟𝑣𝑒𝑠
𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛
– Just a few companies concerned in the oil & gas, metals and mining and utilities sectors
 Carbon Disclosure Project serves as a repository for corporate’s GHG emissions data
 Financial data providers such as MSCI or Trucost fine tune and repackage CDP datas
into comprehensive GHG emissions & stranded assets database
Detailed methodology in Appendix from Slide48 to Slide 54
Low Carbon Low TE Solutions
33
Climate Change Reporting by Companies
CDP Investor Base Continues to Grow
 A growing demand from investors(1):
– 822 investors with $95 trillion in assets have asked
more than 5,000 companies to disclose their carbon
emissions and climate change strategies through
CDP
 Gaps remain in reported emissions (Sc. 1 & 2):
– ACWI: 48% of companies, 70% of market cap
– World: 58% of companies, 75% of market cap
 Caveats:
– Standards / Benchmarking
– Third party verification
– Scope 3
 Climate impact is not always aligned with scope
1 & 2 carbon footprint
 Access to Scope 3 standardized data is the
challenge:
– Scope 3 emissions can account for as much as 90%
of total carbon impact (e.g. automobile, retail, etc.)
Source: CDP 2014, CDP Russia Climate Change Report
(1) www.cdp.net
Low Carbon Low TE Solutions
34
Methodology 2: Decarbonization under TE constraints
Provider’s
Selection

Climate Risk
Reduction
Then
Index Provider
(MSCI)*



Carbon Data
Provider (MSCI)*
Carbon footprint:
Minimized within the portfolio
Stranded assets
Minimized within the portfolio
TE constraints:
Set by the Investor
Simple, Transparent and Rules Based Approach
* For illustration purpose
Low Carbon Low TE Solutions
35
Example 2: MSCI World Low Carbon Leaders
MSCI
World
MSCI Low
Carbon
Leaders
Total Return* ‘(%)
12.7
13.1
Total Risk* (%)
13.2
13.3
Sharpe Ratio
0.95
0.99
Active Return* (%)
0
0.4
Tracking Error* (%)
0
0.6
Information Ratio
NA
0.72
Turnover** (%)
1.7
6.9
Securities excluded
NA
328
Market cap excluded
(%)
NA
17.4
Carbon Emission
intensity reduction
(tCO2/mm USD) (%)
NA
50
Carbon Reserves
intensity reduction
(tCO2/mm USD) (%)
NA
68
Key metrics
Source: MSCI
* Gross returns annualized in EUR for the 11/30/2010 to 08/29/2014 period.
** Annualized one-way index turnover for the 11/30/2010 to 06/30/2014 period.
Cumulative Index Performance from MSCI
 A major reduction of:
– Carbon Emissions Intensity (-50%)
– Carbon Reserves Intensity (-68%)
 A low tracking error: 0.6 %
 A return outperforming the benchmark:
– 13.1% vs 12.7 %
– Even if supposed to be forward looking
Low Carbon Low TE Solutions
36
NBIM Under Pressure?
Reasons for Divestment in 2014
High GHG
emission
3
5
22
 Facts(1) :
–
Under great political pressure from Labor Party and
Environmental groups
–
Feb, 2015: NBIM divested from a total 49 companies
in 2014, 38 were in the mining sector, 2 were in
cement production, 1 from coal industry, and 5 in oil
production. The biggest divestment decision to date
in term of amount of money
–
It still invests in over 100 fossil fuel companies with
total around $40bn, representing over 500 GtCO2
Water
Management
issues
Deforestation
risk
19
other
NBIM: Responsibility investment report (2014)
 Reasons:
–
“We have gradually increased the scope
Companies with high level GHG emission could be
exposed to risks coming from regulatory changes
of risk-based divestments, both
 The “efficient way” ?
geographically and thematically. In total,
– Ministry of Finance Expert Group (Dec, 2014) (2) :
we have divested from 114 companies in
Divestment of fossil fuels is not the most efficient
the past three years.”
way for NBIM. A case-by-case analysis should be
Yngve Slyngstad, CEO of NBIM¹
conduct to choose between divestment or active
ownership
(1) http://gofossilfree.org/fr/norways-divestment-is-great-news-but-this-is-the-last-moment-to-be-complacent/
(2) https://www.regjeringen.no/contentassets/d1d5b995b88e4b3281b4cc027b80f64b/expertgroup_report.pdf
(3) http://www.thelocal.no/20150205/norway-oil-fund-sells-49-unsustainable-companies
Low Carbon Low TE Solutions
37
Equities: Decarbonized Active Quantitative Process
Climate Risk Reduction
 Constraint on aggregated CO2 emissions relative
to Msci Europe
Financial Criteria
 Valuation, profitability, growth, analysts and market
dynamics
APT Tool
 Active TE: 4% max
 Sectors bets: +-2.5%
 Country bets: +-4%
Source : CPR AM.
 Active financial
decarbonization of MSCI
Europe: CPR Europe Low
Carbon
– 100 to 150 stocks
– Minimum carbon reduction:
40%
 Carbon data provider: MSCI
– Quality issues on CO2 data:
multiple counting,
deforestation, carbon market
 A 3 steps process to select
stocks:
– Carbon emissions
constraints
– Financial criteria
– APT (Aptimum risk model)
Low Carbon Low TE Solutions
38
Equities Customized Solutions: Smart Beta Decarbonization
 Decarbonization of Scientific Beta Value Max
Deconcentration Smart Index:
 Carbon emissions:
– Edhec Max Dec : high
carbon footprint (Reason:
small polluting
companies, mostly in the
utilities sector, are
overweighted*).
Edhec Max Deconcentration
600
Carbon emissions intensity
500
400
300
200
100
Carbon Optimizer/Rule Reduction
MSCI World
0
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Edhec Value Max
Deconcentration
Low carbon
“Rule”**
Low carbon
“Carbon Optimizer”***
Annualized Return
16.7%
17.1%
16.9%
Annualized Risk
14.0%
14.0%
14.0%
Sharpe Ratio
1.12
1.15
1.13
Active Return
-
0.4%
0.2%
Ex post Tracking Error
-
0.55%
0.17%
Information Ratio
-
0.71
0.93
Carbon Emission intensity*
-
-50%
-50%
Carbon Reserves intensity*
-
-52%
-53%
Key metrics
 Decarbonization brings
back to MSCI World
carbon intensity level
 With slight
outperformance:
– Rule: +0,4%
– Carbon Optimizer: +0,2%
 With limited TE:
*The difference between the Edhec and the MSCI World carbon intensities is 225 CO2 tons / millions $ of sales* Which 45% can
be explained by the top 10 and bottom 10 contributors
** Low Carbon « Rule » : a proportion of the worst polluters within each sector is excluded before the TE optimization. The benefit
of this approach is the transparency regarding the exclusion rule.
*** Low carbon « Carbon Optimizer »: no companies are excluded ex-ante. The benefit of this approach is its greater efficiency.
– Rule: 55bp
– Carbon Optimizer: 17bp
Low Carbon Low TE Solutions
39
Fixed-Income: Leveraging our Equity Experience
Exclusion of most
polluting issuers


Based on
Carbon Intensity
statistics:
Exclusion of 20% of the
most polluting issuers
with a maximum of
30% by sector in a
classical corporate
index

Then
Reduction in amount
lent to polluters
From 30% to
40% Carbon
Intensity reduction
For the
remaining issuers
the amount lent
depends on the
level of Carbon
Intensity
Optimization to
replicate the
benchmark risk
Then

Globally, by
sector, by maturity
bucket:
Application of our
indexing optimization
(sampling) to map the
benchmark risk
(Spread Weighted
Modified Duration)

20% further
Carbon Intensity
reduction
Consistent and Straight-forward approach
New Fixed-Income Index under Construction
Low Carbon Low TE Solutions
40
Decarbonization of Fixed-Income Portfolios
 Debt decarbonization tackles carbon risk
 Green bonds investments are SRI / Impact-driven
Green Bonds
Debt Decarbonization
Objective
• Impact investing
• SRI policy
• Carbon risk hedging
Functioning
• Bonds with dedicated use of proceeds to
projects generating a direct environmental
benefit-renewable energies, energy efficiency,
climate change adaption or social benefits
• Low carbon fixed income indexing with the
exclusion of most polluting issuers based on
their carbon footprint (and sampling to limit
further the exposure to polluting companies)
Development
• Expected to reach total outstanding amount
of $100bn in 2015
• Beginning of standardization and emergence
of Green bond indices
• Projects underway
Benefits
• Impact-driven (“use of proceeds”)
• Reputation
• No extra financial costs as an investor (so far)
•
•
•
•
Concerns
• « Green-wash » risk
• Low impact risk
• No real standardization and lack of
« greenness » evaluation
• Liquidation concerns
• Lack of accuracy of carbon footprints
• No real value creation via exclusion
Reduction in amount lent to polluters
Diminishing carbon risks
Optimization to replicate the benchmark risk
No extra financial costs as an investor
Low Carbon Low TE Solutions
41
Amundi, a Key Player in Low Carbon Investing
Dual expertise

AUM: €866 bn 1

–
Passive
management: $55bn 1


SRI : $92bn 2
Implementation
–
–

Multiple underlyings:
–
–
–
–

Decarbonization
Index creation
Overlay
–

Rockefeller
Foundation

SWF RI
conferences: Paris,
NYC, Singapore,
Columbia, Bellagio

United Nations (2014)

IIGCC (2014)

PRI (2014)
Clarence House
(2013)

Passive
Active
 Research papers
Smart beta
with Columbia
Fixed income, Equities University
Multi-criteria:
–
International
recognition
Academic
partnership
Array of solutions
Portfolio
Decarbonization
Coalition (2014)


MSCI (2015)
Carbon footprint
Stranded assets
A rare combination of innovation, concrete solutions
Recognition of the central role played to stimulate public awareness and
debate
(1) Amundi Group figures, as of March 31, 2014
(2) Amundi Group figures, as of December 31, 2013, with an exchange rate of 1,35
Low Carbon Low TE Solutions
42
DISCLAIMER
Head office:
90, boulevard Pasteur - 75015 Paris – France
Postal address:
90, boulevard Pasteur – CS 21 564 – 75730 Paris Cedex 15 – France
Tel.: +33(0)1 76 33 30 30 – www.amundi.com
French Société anonyme (joint stock company) with a share capital of €596,262,615 437 574 452 RCS Paris