Climate Change Investing through Private Equity. 27 September PDF Free Download

Climate Change Investing through Private Equity 27 September 2012

Agenda Climate Change investing through PE The Responsible Investment Context Why Climate Change Investment? A Broader Theme Climate Change Investment through Private Equity Appendix 2

Section I The Responsible Investment Context 3

Responsible Investment: a taxonomy Ethical Funds Thematic Funds Negative exclusion on the basis of unacceptable activities Positive selection on the basis of fundamental sustainability themes Criteria may include: Tobacco Alcohol Gambling Animal Testing Military Themes may include: Resource Scarcity Population Growth Infrastructure Development Health Sustainable Energy Climate Change 4

Responsible ownership Incorporating engagement on ESG issues Engaging with companies on: Environmental Social Governance Climate change is one of the key ESG issues today It s not just about how companies manage the risk of climate change but also about how they look at the opportunities borne out of the change it brings 6

Climate Change: a pivotal theme Demographics Pressure Points Constraints Growing population Rising wealth Rising food prices Traditional energy systems under pressure Natural resources in critical state More volatile climate Limits on greenhouse gas emissions Natural resource constraints Energy security Demand for Solutions 7

Section II Why Climate Change Investment? 8

F&C s Climate Change Credentials At Forefront of Public Policy Debate Active member of the Institutional Investors Group on Climate Change (IIGCC) Seeking regulatory clarity as a pre-requisite for companies to make long-term investments into low carbon technologies One of a group of founder members of the Carbon Disclosure Project Founder signatory to United Nations Principles of Responsible Investment (UNPRI) Our Governance & Sustainable Investment (GSI) team and fund managers not only analyse climate change risks but encourage companies to develop climate change strategies 9

A key risk to the economy The story so far Global land ocean temperature index Average monthly Arctic sea ice extent August 1979-2012 Higher temperatures over sea and land...rising sea levels...and shrinking sea ice Source: NASA, University of Colorado, National Snow and Ice Data Center 10

A key risk to the economy Future warming will have material economic impact Average global temperature rise Costs of adaption and physical damages Source: Mercer, Climate change scenarios: Implications for strategic asset allocation, 2011 11

Transformation of the Global Economy To stabilise GHG concentration at 450ppm IEA estimates additional investment needed to be $15trn between now and 2035 12

Policy Momentum Continues Japan: Adopts new renewable energy feed-in tariff scheme US: Sets ambitious vehicle mileage standards for 2025 Mexico: Introduces comprehensive package of climate change measures including emissions targets Brazil: Accelerates deployment of smart meters UK: Establishes Green Investment Bank South Africa: Announces carbon tax India: Renewable Energy Certificates start trading Australia: Carbon tax comes into force China: South Korea: Passes bill to establish cap and trade system Releases new 2015 targets for renewable energy generation 13

Renewable energy A strong growth story if investors avoid the pitfalls Global New Investment in Renewable Energy Developed vs. developing countries 2004-2011 $bn Source: Bloomberg, New Energy Finance 14

And Set for Further Growth GW 10,000 8,000 6,000 4,000 2,000 Total installed capacity 2010 capacity Capacity additions: Renewables Nuclear Oil Gas Coal 0 2010 2015 2020 2025 2030 2035 Global installed power generation capacity and additions by technology in the New Policies Scenario, IEA WEO (2011) 15

Will shale gas spell the end for renewables? Shale gas has been transformational for energy politics and economics in North America, and has driven the gas price to historic lows. Electricity generation by fuel US, 1990-2035 Price risks are now on the upside, as demand grows and conventional gas sources go into decline Gas and renewables can be highly complementary: gas can be switched on and off to balance out fluctuations in wind and sun Official US forecasts show both gas and renewables taking a growing share of generation capacity, with coal and nuclear diminishing in importance Source: US Energy Information Administration, Annual Energy Outlook 2012 Early Release Overview 16

Section III A Broader Theme 17

Climate change encompasses a range of themes Mitigation Alternative energy solar, wind, geothermal Energy efficiency insulation, energy demand management Sustainable mobility alternative fuels, efficient cars Waste recycling, landfill, gas capture Advanced materials bioplastics, silicon Forestry and agriculture forestry projects Adaptation Water desalination, water purity testing Acclimatisation new crop varieties, crisis response Supporting Services Supporting services carbon trading, consultancy 18

Investment theme: Energy Efficiency Cuts across the economy The potential is huge: $1.2trn in the US alone 1 Government action is accelerating, driven by political imperative to keep energy prices low Energy Efficiency Directive India s energy efficiency trading scheme But companies are going further than governments. Most major corporations have formal energy management strategies in place 2 The Energy transition entails an Evolution in energy supply and a Revolution in energy use Peter Voser, CEO, Royal Dutch Shell Source: 1 McKinsey, 2009. 2Ernst & Young, 2012 Survey found 70% of major corporations have formal energy management strategies in place including energy demand management and building energy management 19

Investment theme: Water Climate change is interacting with broader global supply and demand imbalances US drought raising awareness of water risks: power outages, crop failures, public health implications Major risks related to urbanisation and industrialisation of emerging economies Agriculture represents 70% of all global water demand structural rise in demand as population and incomes rise New energy technologies are highly water-intensive: fracking, carbon capture and storage Demand for water could outstrip supply by 40% by 2030; closing this gap could cost as much as $50 to $60 billion a year for twenty years (2030 Water Resources Group) 20

Investment theme: Sustainable Mobility Mandatory greenhouse gas emissions standards, and high oil prices, have led to rapid improvements in vehicle efficiency EU had led the way but US policies also toughening up, with a 54.5 fleet average target set for 2025 Evolution of CO 2 emissions from new passenger cars by fuel (EU-27) Source: European Environment Agency, Monitoring CO 2 emissions from new passenger cars in the EU: summary of data for 2011 21

Section IV Climate Change Investment through Private Equity 22

Investing Through Private Equity Why Invest in Climate Themes Through Private Equity Private equity offers access to a much larger universe of pure plays on the climate change theme New companies being formed specifically in response to this opportunity Ability to invest in companies at earlier, high growth stage Private equity backed management are focused and motivated Talent is moving this way A range of strategies is available 23

Investing Through Private Equity The Opportunity Set Project-Focused Funds Private Equity Funds Project finance Infrastructure (e.g. renewable energy, water, forestry) Buy-outs Growth Equity Venture/ Cleantech Risk/Reward Spectrum 24

Risks of Investing in Private Equity The Usual Caveats Apply Plus Some Additional Risks to Consider As with all private equity Illiquidity Lack of easily discoverable market price Smaller, less mature companies Strength of investor rights varies J-curve Issues specific to climate change themed investment Untested business models Many first time funds, first time managers Lack of directly applicable track records Relative importance of government policy 25

Why Private Equity Fund of Funds Diversification and Fund Selection even More Important Wide range of fund performance FoF manager s job is to weed out potential poor performers and select best of breed Risk is reduced substantially through a fund of funds structure as a result of diversification Standard deviation for fund of funds is lower than for individual funds Addition of a climate change fund of funds to an already diversified private equity programme increases diversification benefits due to the low correlation Fund selection Time consuming, costly and difficult at the best of times Harder still within the climate change investment universe Portfolio construction Manager can add value through balancing different risk/reward profiles between funds as well as ensuring the widest possible exposure to the theme 26

The Fund of Funds Approach Diversification is Achieved on a Number of Levels The fund of funds manager can add value by diversifying across; Climate change sub-theme Manager Vintage year Industry Investment stage Investment strategy Geography The manager has the potential to enhance returns through; Co-investing directly at the company level Buying secondary positions Commitment management and gearing 27

Responsible ownership in the private equity context Concept is gaining momentum fast ESG issues can have a material impact on public and private companies alike Responsible ownership concept relatively new in PE ESG issues can be incorporated into the due diligence process and during ownership Various codes exist to guide GPs and LPs UNPRI Guide for Limited Partners Private Equity Council Guidelines for Responsible Investment BVCA Responsible Investment Report 28

Section V Appendix 29

F&C s Responsible investments services and products 1 2 Engagement on ESG issues Advise on client strategy & priorities Engage companies through high level meetings Report - customised and regular reporting on progress Voting Vote on holdings globally using F&C s region-specific policies Write to companies informing them of votes against management Tailored & regular reporting on voting 3 Screening Screen universe of ethical funds e.g. Stewardship range of funds Undertake ethical exclusion research e.g. cluster bombs Provide Research for themed funds e.g. Climate Change 30

UN Principles of Responsible Investment Signatories commit to: Incorporate ESG issues into investment analysis and decision-making processes Be active owners and incorporate ESG isues into our own ownership policies and practices Seek appropriate disclosure on ESG issues by the entities in which we invest Promote acceptance and implementation of the Principles within the investment industry Work together to enhance our effectiveness in implementing the Principles Report on our activities and progress towards implementing the Principles 31

Disclaimer This document has been prepared for the Canadian Institute of Actuaries and may not be circulated to other investors. The document has been produced specifically for information purposes only and should not be construed as investment advice. This document is not, and under no circumstances is to be construed as, an advertisement, solicitation or a public offering of the Shares described in this document. No securities commission or similar authority in Canada has reviewed or in any way passed upon this document or the merits of the Shares described in this document and any representation to the contrary is an offence. Past performance should not be seen as an indication of future performance. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. The information, opinions estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time. F&C Group Companies may from time to time deal in investments mentioned herein on behalf of their clients. F&C Management Limited is authorised and regulated by the Financial Services Authority (FSA) FRN:119230. Limited by shares. Registered in England and Wales, No. 517895. Registered address and Head Office: Exchange House, Primrose Street, London, EC2A 2NY, United Kingdom. F&C Asset Management plc is the listed holding company of the F&C group. F&C Management Limited is a member of the F&C Group of companies and a subsidiary of F&C Asset Management plc. F&C, the F&C logo, REO and the reo logo are registered trade marks of F&C Asset Management plc. F&C Investments and the F&C Investments logo are trade marks of F&C Management Limited. Copyright F&C Management Limited 2012. All Rights Reserved. F&C225 CAN 09/12. 32

Contact United Kingdom F&C Management Limited Exchange House Primrose Street London EC2A 2NY Tel: +44 (0) 20 7628 8000 Fax: +44 (0) 20 7770 5487 Website: www.fandc.com Authorised and regulated in the UK by the Financial Services Authority United Kingdom F&C Management Limited 80 George Street Edinburgh EH2 3BU Scotland Tel: +44 (0) 20 7628 8000 Authorised and regulated in the UK by the Financial Services Authority. United Kingdom F&C REIT Property Asset Management Plc 5 Wigmore Street London W1U 1PB Tel: +44 (0) 20 7499 2244 F&C REIT Property Asset Management Plc is a wholly owned subsidiary of F&C REIT Asset Management LLP and is authorised and regulated by the Financial Services Authority. United Kingdom Thames River Capital LLP 51 Berkeley Square London W1J 5BB Tel: +44 (0) 20 7360 1200 The Funds business of the F&C Group. Authorised and regulated in the UK by the Financial Services Authority. Netherlands F&C Netherlands B.V. Jachthavenweg 109 e 1081 KM Amsterdam Netherlands Tel: +31 (0) 20 582 3000 Regulated in the Netherlands by the Autoriteit-FM. Portugal F&C Portugal, Gestão de Patrimónios, S.A. Rua de Campolide,372 1st floor 1070-040 Lisboa Portugal Tel: +351 (0) 21 003 3200 Regulated in Portugal by the CMVM and the Bank of Portugal. Germany F&C Management Limited Oeder Weg 113 60318 Frankfurt Germany Tel: +49 (0) 69 597 99 080 Authorised and regulated in the UK by the Financial Services Authority Ireland F&C Ireland Limited Block 5 Harcourt Centre Harcourt Road Dublin 2 Tel: +353 (0) 1 436 4000 F&C Ireland is regulated by the Central Bank of Ireland United States F&C Management Limited 265 Franklin Street 16th Floor Boston MA 02110 USA Tel: +1 (0) 617 426 9050 Authorised and regulated in the UK by the Financial Services Authority Hong Kong F&C Management Limited 66th Floor, Suite 01 The Center 99 Queen s Road Central Hong Kong Tel: +852 3965 3160 Authorised and regulated in the UK by the Financial Services Authority. India Indiareit Fund Advisors Pvt. Limited Piramal Tower, Ground Floor Peninsula Corporate Park G.K. Marg, Lower Parel Mumbai 400 013 India Tel: +91 (0) 22 61513440 Indiareit Fund Adivsors Pvt. Limited is a strategic partner to F&C REIT Property Asset Management LLP. Part of the F&C Asset Management Plc Group Germany F&C REIT Property Asset Management GmbH & Co. KG Oberanger 34-36 80331 München Germany Tel: +49 (0) 89 61 46 51 0 F&C REIT Property Asset Management Plc is a wholly owned subsidiary of F&C REIT Asset Management LLP and is authorised and regulated by the Financial Services Authority. Past performance should not be seen as an indication of future performance. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. The information, opinions estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time. F&C Group Companies may from time to time deal in investments mentioned herein on behalf of their clients. The source of information in all graphs is F&C unless otherwise stated. F&C Management Limited is authorised and regulated by the Financial Services Authority (FSA) FRN:119230. Limited by shares. Registered in England and Wales, No. 517895. Registered address and Head Office: Exchange House, Primrose Street, London, EC2A 2NY, United Kingdom. F&C Asset Management plc is the listed holding company of the F&C group. F&C Management Limited is a member of the F&C Group of companies and a subsidiary of F&C Asset Management plc. F&C, the F&C logo, REO and the reo logo are registered trade marks of F&C Asset Management plc. F&C INVESTMENTS and the F&C INVESTMENTS logo are trade marks of F&C Management Limited. Copyright F&C Management Limited 2011. All Rights Reserved. Neither this document nor any part of it may be reproduced by any party whether by photocopying or storing in any medium by electronic means or otherwise without the prior approval of F&C Management Limited. CN: CM00679

Climate Change Investing through Private Equity. 27 September 2012