Carbon and ESG What does it mean for portfolio managers?

Transcription

1 Carbon and ESG What does it mean for portfolio managers? Corli le Roux Head of SRI Index Shameela Ebrahim Senior Strategist 10 September 2009 Copyright JSE Limited 2008

2 Introduction: Two crises The one we know and measure Source: Presentation by Nelmara Arbex, GRI, 1 September 2009

3 Introduction: Two crises (2) The one we don t Source: Presentation by Nelmara Arbex, GRI, 1 September 2009

4 The JSE and sustainability? Pivotal player in SA economy Gateway to global markets Independent, credible Catalyst for debate Two perspectives SRI Index Carbon markets

5 SRI Index: Setting the scene Conscience- / Cause-based SRI has always been around South Africa catalyst for evolution and momentum of many global SRI movements Today CSR, CSI, part of corporate lexicon Rewards from investors? Evolution to Responsible Investment Maximise returns, reputation management? Challenged thinking SRI Index

6 JSE SRI Index Launched May 2004 Crystallise debate Recognise companies Facilitate responsible investment Global alignment and local relevance Steep learning curve, taking time and resources A lot has been achieved Growing understanding that sustainability can deliver good results Message: Integrated risk management

7 Construction of index Triple bottom line and governance Policy, management and reporting Environmental impact classification Positive and aspirational No exclusions Encourages enhanced performance and reporting Eligible universe FTSE/JSE All Share Index Annual assessment Two-phased process External data analysis Technical construction mirrors FTSE/JSE Africa Index Series

8 Current statistics 108 being assessed for constituents from best performers Who does well? Top 40 Increasingly Mid and Small Caps

9 Responsible Investment? Has not yet hit actual AUM Responsible investment experiencing burgeoning growth internationally But not yet integrated Results, results, results

10 What now? Need fundamental shift From the right thing to do o Social complexities in SA, transformation imperatives o Proliferation of charters and regulatory framework o Emerging hot topics and best practices To doing it right o Integration into business operations o Mainstream investment consideration

11 Why is it important? Where people s savings meet society s goals Stakeholders care Investors o PRI, GEPF, SRI Index Public Planet Business

12 What is needed? Copernican Revolution? Source: Presentation by Michael Schluter, Relationships Foundation, 1 September 2009

13 What is needed? (2) Information Company performance Track record Education Development Criteria Investment analysis Collaboration how do we help you?

14 Climate Change A carbon constrained future is a reality Almost all sectors face some degree of change Opportunity to encourage new the growth of new sectors and the investment therein Green job security growing

15 Carbon Market U.S. carbon futures market expected to be worth $2 trillion in 5 years Commodity Futures Trading Commission (Commissioner Bart Chilton), June 2009

16 Climate Change, the global response and carbon markets Market mechanisms are recognised as a tool to encourage private sector and developing country participation move to cleaner technology Carbon markets worth approx. $126 billion in 2008 ($63 billion in 2007) Lets firms or nations buy and sell greenhouse gas emissions offsets to meet both voluntary and mandatory targets CDM: companies in developing countries can qualify to sell carbon credits, known as Certified Emission Reductions (CER s), in global commodity markets when they reduce their output of environmentally harmful substances. Example: Omnia credits a year 18 Euro* per credit = 9 million Euros a year = R112.5 million per year for 5 year *Source: ThomsonReuters - average price of Exchange traded Dec. 08 CER s on 22 October 2008

17 Key findings: Government initiatives/sentiment No legislation limiting GHG emissions Strong indication from July 2008 that limits will be imposed: release of the LTMS and the approach adopted by cabinet Need for a clear negotiating position for a post-kyoto framework as a developing country Already a carbon tax of sorts in the form of the 2c/kwh levied on electricity from non-renewables Press statements on a carbon tax starting at R100 per ton of CO2e Tax position on primary CER s announced by NT (2009 Budget speech)

18 Key findings: International market activity Carbon market tending towards being a truly global market Mitigation happens when carbon is priced i.e. internalisation of an externality Boosted by the Kyoto Protocol s recognition of market mechanisms i.e. putting a price on carbon Well intermediated market Dominated by OTC trade but increasing on-market volumes Private sector (exchanges) providing the platforms, tools and instruments to support regulatory objectives

19 Dec05 Sett Dec06 Sett Dec07 Sett Dec08 Sett Dec09 Sett Dec10 Sett Dec11 Sett Dec12 Sett Dec13 Sett Dec14 Sett Dec09-Dec12 Sett Dec10-Dec12 Sett Dec11-Dec12 Sett 40.0 ECX : EUA Futures Global economic crisis Release of actual emissions data showing over allocation of permits 22/04/ /06/ /07/ /08/ /10/ /11/ /12/ /02/ /03/ /05/ /06/ /07/ /09/ /10/ /11/ /01/ /02/ /03/ /05/ /06/ /07/ /09/ /10/ /11/ /01/ /02/ /04/ /05/ /06/ /08/ /09/ /10/ /12/ /01/ /02/ /04/ /05/ /07/ /08/2009 Source: European Climate Exchange

20 Primary CDM and JI Buyers Source: World Bank, May 2009

21 Location of CDM Projects (Sellers) Source: World Bank, May 2009

22 Key findings: Market predictions Value predictions for 2020 for the compliance market based on various carbon price assumptions Price per tonne (Euros) Market Value in Euro (using Main scenario volumes of 40 Gt) billion 25 1 trillion 50 2 trillion trillion Source: Point Carbon, May 2008

23 Key findings: Local market activity Comparatively low number of CDM projects in SA No natural buyers locally Few credits freely available for trading Credits being banked or forward sold Low incidence of voluntary credits Market feels that a transparent price discovery mechanism is critical (also consider the impact of the financial crisis and the call for greater transparency in financial instruments) All project owners seeing a high demand for their credits from compliance buyers Project owners cautious due to lack of certainty around regulation and lack of government support via incentives etc.

24 How does this affect the entities we invest in? Global pressure to start limiting emissions Local companies already exposed in certain sectors (export industries) Revenue impact Penalties for high emitters/energy intensive users Carbon credit trading revenue Increasing governance and reporting requirements

25 The risks? Project risk Type of technology and methodology Duration of project (value of credits increase the more certain they become) Experience of the project developers Global agreement uncertainty Will the mechanism be recognised in future? What will the obligation of developing countries be? To what extent will developed countries take on targets (impacting demand for compliance credits)

26 What business needs to drive Greater involvement in the development of the national strategy Input to government as to what the key issues are Transparent and efficient registries Timeous and accurate reporting Clarity regarding tax, and incentives to give greater certainty to investment decisions What business thinks is the optimal way to tackle the issue Voluntary emissions trading?

27 The Role of the JSE An exchange provides the platform/s to facilitate the trading, clearing and settlement of tradable instruments and commodities. SA market trusts the JSE brand and positive at the prospect of JSE involvement in the market Has the interest in providing relevant support services Ready to consider using our platforms to support the trade in carbon or other environment-related goods and instruments e.g. renewable energy certificates Would like to be involved in the market development process and willing to serve on related forums and committees Has already begun exposing investors to carbon as an asset class Has established relationships with most large emitters by virtue of their listing on the JSE

28 Contact: Corli le Roux Shameela Ebrahim Tel: