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ABOUT US
The 2° Inves=ng Ini=a=ve is an interna=onal, non-‐profit think tank working on finance sector issues as they pertain to climate change. We help design metrics and products for investors, challenge mainstream investment processes, and engage with financial regulators and supervisors to integrate climate constraints into financial regula5on and
policy.
Projects:
OUR RESEARCH
Op=mal diversifica=on & the transi=on to a low-‐carbon economy
Financial risk & the transi=on to a low-‐carbon economy
Climate strategies & metrics for
ins=tu=onal investors
KEY MESSAGES
ü Current risk management frameworks are unlikely to capture risks associated with the transi=on to a low-‐carbon economy. The materiality of these risks is s5ll unclear.
ü Managing carbon risk is likely to involve different strategies rela=ve to managing ‘climate-‐friendliness’.
ü Responses can include boWom-‐up assessment or a top-‐down assessment.
ü Top-‐down assessment as part of a porXolio management strategy should focus on both sector and energy technology diversifica=on.
WHAT IS THE PROBLEM? (1)
Uncertainty about the scenario Distribu5on of risk
0
10
20
30
40
50
60
70
80
2010 2020 2030 2040 2050
GtCO2/year
0
0.05
0.1
0.15
0.2
0.25
Normal Distribu5on
Climate roadmaps distribu5on
FAT TAILS & SKEWED RISK
WHAT IS THE PROBLEM? (2)
The technical risk model The ‘tragedy of 5me horizon’
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
Airlines Electric U5li5es
1-‐5 Years 6-‐10 years
11-‐20 years 21-‐50 years
0
10
20
30
40
50
60
70
Physical assets
Fina
ncial assets
Risk m
odels
Asset m
anagem
ent
Asset m
anagem
ent
man
dates
Asset o
wne
rs
Years POTENTIAL
RISK
POTENTIAL RISK
WHAT IS THE PROBLEM? (3)
Diversifica5on of oil & gas company
Diversifica5on of financial ins5tu5ons
Focus on oil & gas
⇒ Comprehensive view needed on por/olio risk
CLIMATE FRIENDLINESS VS. CARBON RISK
…for the automobile sector. …for the O&G sector
$-‐
$3,000
$6,000
$9,000
$12,000
$15,000
$18,000
0
10
20
30
40
50
Porsche
Ferrari / M
asera5
Audi
BMW
Mercede
s
Toyota
Hyun
dai
Chrysler
Ford
Volksw
agen
MPG
MPG (est) (Lhs) EBIT / car (Rhs)
0%
5%
10%
15%
20%
25%
30%
0 20 40 60 80 100 Share of high-‐cost cap
ex
MBOE / $ market capitaliza5on (est.)
TOP-‐DOWN APPROACH: DIVERSIFICATION BY SECTOR & ENERGY TECHNOLOGY S&P 500 exposure to green / low-‐carbon vehicles
European index exposure to O&G
0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
US Sales
S&P5
00 Sales
Non
-‐S&P5
00 Sales
Hybrid Plug-‐in Hybrid Electric
0%
5%
10%
15%
20%
FTSE100
Est. UK listed (1178
CAC4
0 Est. Fran
ce listed
(631
Stoxx600
Est. Eu
rope
listed
S&P5
00
Est. US listed (7777
MSCI W
orld
Est. De
v. Econ. Listed
Dax30
Est. German
listed
..AND FORWARD-‐LOOKING ANALYSIS
0%
20%
40%
60%
80%
100%
S&P500 2013
USA Elec. Gen. 2013
IEA US 450 Scenario 2035
FTSE100 UK Elec. Gen. 2013
DAX30 2013
Germany Elec. Gen.
2013
DB Germany Scenario 2035
Coal Gas & petroleum Nuclear Renewable
KEY MESSAGES
ü Current risk management frameworks are unlikely to capture risks associated with the transi=on to a low-‐carbon economy. The materiality of these risks is s5ll unclear.
ü Managing carbon risk is likely to involve different strategies rela=ve to managing ‘climate-‐friendliness’.
ü Responses can include boWom-‐up assessment or a top-‐down assessment.
ü Top-‐down assessment as part of a porXolio management strategy should focus on both sector and energy technology diversifica=on.
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