09 04 28 Icíar Vaquero Climate Change, Challenges and Opportunities for Business

Climate Change – challenges and opportunities for business

April, 2009

How tackling climate change could create or destroy company value

2Climate Change – A Business Revolution – September 2008

About the Carbon Trust

An independent company set up in 2001 by UK government

Our mission is to accelerate the move to a low carbon economy

To deliver our mission we bring together public and private funding and encourage cross sector partnerships

As a Company Limited by Guarantee any profits we make are reinvested to help deliver our mission


Our activities cover 5 complimentary business areas

Insights

Explains the opportunities

surrounding climate change

Innovations

Develops lowcarbon technologies

Investments

Finances clean energy businesses

Solutions

Delivers carbon reduction solutions

Enterprises

Creates lowcarbon businesses


Scale and timing of impacts is uncertain Scale and timing of impacts is uncertain 0

1

2

3

4

5

6

Note: Not to scaleSource: Intergovernmental Panel on Climate Change, Third Assessment, Stern Report, Carbon Trust analysis

280

350

450

550

700

800

1000+

CO2e (ppm) ºC

Temperature is estimated to increase in range 1.1-6.4C by 2100

Environmental Change Human Impact

10% species extinct 80% coral bleaches/ dies

15-40% species extinct (incl. mammals e.g. polar bear)

Risk of change to atmospheric circulations e.g. the monsoon

On-set of collapse of Amazonian rain-forest

Serious acidification of oceans Loss of most glaciers

Abrupt, run-away change

~300,000 people die of climate related diseases

10m people flooded at coasts Sharp declines in Africa crops

Entire regions no longer producing food (e.g. Australia)

~500m people at risk of hunger

Flooding of major cities e.g. London, New York

Mass loss of life

BAUTarget



Climate change – a business revolution?

Two key questions

1. Identify why investors and business not yet factoring climate change as a key driver of investment and business strategy

2. Quantify potential opportunities and risks for company value

Our Approach

Global study, six sectors:

– Aluminium

– Automotive

– Beer

– Building Insulation

– Consumer Electronics

– Oil & Gas

Joint project team: Carbon Trust and McKinsey & Co. with scenarios from Oxera


Investors’ current outlook on climate change reflects regulatory weakness

1. Climate change drivers currently have limited impact on company cash flows

2. Tackling climate change is too uncertain

3. A lack of framework to understand the opportunities and risks associated with climate change

4. This is a long term issue with effects in the distant future

Our methodology uses a comprehensive set of drivers and scenarios to tackle uncertainty over long term

Our methodology uses a comprehensive set of drivers and scenarios to tackle uncertainty over long term

Four reasons for current outlook:


We identified 4 key drivers of value on the move to a low carbon economy

Driver Cost VolumeCompetitiveDynamics

Technology

Targeted regulations

Consumer behaviour

Cost of Carbon

Tackling climate change involves much more than a ‘cost of carbon’

Tackling climate change involves much more than a ‘cost of carbon’


We created four ‘success’ scenarios to test the range of impacts

Variation in GHG emissions by source in 2050

20

50

Em

issi

ons

(GtC

O2e)

Source: Carbon Trust and Oxera Analysis

Waste / Fugitive

Agricultural

Land use

Buildings

TransportManufacturing

Power

0

10

20

30

40

50

60

Stretch MarketBelief

Carbon markets

Targetedregulations

Technology Consumption

550 ppm

500 ppm

450 ppm


An example: Automotive sector

Source: Carbon Trust and McKinsey & Co. analysis

Vehicle ownership and passenger kilometres to more than double by 2050, under BAU

Yet, greenhouse gas emissions must reduce by 30-80%

Targeted regulations will likely drive change …

… which will then trigger technology breakthroughs in the form of ICE efficiency, hybrid, electric, hydrogen powered cars, and use of bio-fules

potential changes in consumer behaviour


An example: Automotive sector


• Technology scenario (electric vehicles) has most ‘upside’ and ‘downside’ (due to disruption)

• ‘Laggards’ will have a higher cost base and less good design

• Well positioned companies will proactively invest in new designs and power trains (hybrid, electric)


Automotive value opportunity & risk

Alternative scenarios


Archetype case value: $50bn value


Tackling climate change creates significant value creation opportunities for proactive companies…

0%

20%

40%

60%

80%

100%

BuildingInsulation

Automotive Consumerelectronics

Aluminium Oil & Gas Beer

Industry

Low

Carb

on O

pport

unit

y (%

)

Source: Carbon Trust and McKinsey & Co. analysis.

Minimal

Calculated maximum value-creation opportunities for companies from move to low carbon economy


…and puts significant value-at-risk for companies that fail to adapt

0%

20%

40%

60%

80%

100%

Aluminium Automotive Oil & Gas BuildingInsulation

Beer Consumerelectronics

Industry

Valu

e a

t ri

sk (

%)

Source: Carbon Trust and McKinsey & Co. analysis.

Calculated maximum value-at-risk for companies from move to low carbon economy


Different sectors have different levels of opportunity and risk


Calculated maximum value-creation opportunities and transition value-at-risk for companies

Valu

e c

reati

on

opport

unit

y (

%)

Company value-at-risk (%)


Implications for Business and Investors

Review the key climate change-related drivers of value and implications of deep emissions cuts

Business: Implement strategies for the move to a low carbon economy

Investors: Review the portfolio implications of climate change related drivers – rebalance interests

Work closely with regulators, seeking a collaborative, rather than combative approach


Implications for Policy makers

Avoid delay in taking policy action

create clear signals and strong incentives to invest in a low carbon economy

Choose policy frameworks that provide a level playing field for all participants

Maintain consistency of policy


Conclusions

The global economy must tackle climate change

The move to a low carbon economy could have significant implications for value

Investors should discriminate now between sectors and companies

Businesses must prepare now

Investors, Business and Policymakers must work together to create a policy framework to reward early action


***BACK UP***


The six sectors total approximately $7 trillion in market capitalisation

SectorTotal Global

Sector Value (1)

Aluminium

Automobiles

Oil & Gas

Consumer Electronics

Building Insulation

Beer

$82

Total

(1) Sector value is estimated as total equity value of company sectorsSource: World indices, Datastream, Sept 07-Aug08

$745

$5,069

$207

$463

$337

$6,903


Carbon Trust Investments

Invested £8.8m Leveraged £83.4mm Exits 2 Aim IPOs


Connective Energy

Brokers best of breed partners and suppliers to utilise waste heat

Insource Energy

Integrated carbon and waste management solution

Captures public sector renewable asset development opportunity

Revenue £m

Carbon Mt

Carbon Trust Enterprises

These ventures represent co-investment opportunities to partners who can bring the necessary skills and capital investment to

complement those of the Carbon Trust Group

Low Carbon Culture

Company

Emission Accreditation

SchemeUK’s leading emission management accreditation scheme with over 200 customers

Helping organisations engage their employees on climate change

Partnershipsfor

Renewables

Carbon Label

CompanyAssisting companies to communicate with their customers on climate change


Key statistics on Carbon Trust

In 2007/8, the Carbon Trust identified annual savings of 4.6MtCO2, of which 1.6MtCO2 implementedIdentified annual cost savings for customers of £495m, with £207m implementedOffered 722 loans worth £21.5m, leveraging 23m in private fundsIncubated 60 companies, 42% with private financing (x15 leverage), 3 listed on AIMCurrently running 8 technology accelerators– (Micro-CHP, low C buildings, biomass heat, marine energy,

small wind energy, offshore wind, advanced bioenergy, advanced PV)

National Audit Office report of 2007 stated: “the Carbon Trust’s advice to business has proved value for money and its Innovation Programme appears to be on course to do likewise”


Stretch market belief

Investor and business assumptions are not yet aligned to a low carbon economy

0

10

20

30

40

50

60

70

80

90

100

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Year

Glo

bal G

HG

em

issi

ons

(GtC

O2e)

Global GHG emissions projections

Business-as-usual

Scenario

1000+ ppm(~6°C)

2100 CO2e(1)

Scenarios tacklingclimate change

Note: Equilibrium temperature projections using the 5%-95% climate sensitivity ranges based on the IPCC TARSource: Oxera and Carbon Trust analysis

700 ppm(~4°C)

550 ppm(~3°C) A change in market sentiment will need to

take place A change in market sentiment will need to

take place

Current range of market belief


Legal disclaimer

This presentation and any accompanying documents has been distributed for information only. It addresses some issues for consideration in relation to investment policy planning and analysis. Information in it does not relate to any particular company or security and case studies and archetypical examples should not be taken to relate to any particular company. This presentation is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, strategy or investment product. The Carbon Trust does not provide investment advice in any jurisdiction in which it is not registered or exempt from registration and any reader who requires advice should obtain it from an appropriately authorised firm. This presentation does not take into account the particular investment objectives, financial situations, or needs of individual investors. Charts and performance information portrayed in this report are not indicative of the past or future performance of any particular security. Past performance is not a reliable indicator of future results. This presentation contains the current opinions of the author(s) and such opinions are subject to change without notice. Information contained in it has been obtained from sources believed to be reliable, but not guaranteed.


60-80% of the value of companies is beyond the first 5 years

Proportion of company value due to cash flows generated in the next 5, 10, 15 and 20 years

Note: Analysis based on discounted cash flow valuations of hypothetical but typical companies, based on typical company discount ratesSource: Carbon Trust and McKinsey & Co. analysis.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Auto Beer ConsumerElectronics

Oil & gas Aluminium Buildings &Materials

21 + years

16-20 years

11-15 years

6-10 years

1-5 yearsPro

port

ion o

f co

mp

an

y v

alu

e

create

d in p

eri

od (

%)


Aluminium – an industry transformed by the shift to low carbon energy sources


Aluminium one of the most carbon intensive materials in the world, emitting 5-20 tonnes CO2e/ tonne aluminium

Anticipated strong growth would increase greenhouse gas emissions ~6 fold by 2050 – but they need to be held flat

‘Cost of carbon’ will widen cost differences between power generation sources

Recycling uses ~95% less energy (<1 tonne CO2e)

Substitute materials (e.g. plastics, biomass) could replace some uses in packaging, construction, potentially transport

Well positioned companies will obtain access to low carbon power and develop recycling opportunities


Aluminium value opportunity & risk




Oil & Gas – facing a downward shift in demand due to substitution and efficiency

Oil & Gas is ~60% of fossil fuel related CO2; industry alone emits ~5% of global CO2e

Oil & Gas demand likely to reduce compared to BAU projections – peak demand by 2020?

Exploration & Production players must manage impact of reducing demand on oil price by managing capital exposure

‘Cost of carbon’ could materially affect production from tar sands, as well as refining economics

Winning companies will anticipate demand correctly and make margin from below-average carbon intensity of operations



Exploration & Production value opportunity and risk

Excluding oil price shifts




Oil exploration & productionvalue opportunity & risk


Including oil price shifts



Oil refiningvalue opportunity and risk




Building insulation – likely upward demand shift due to improved building standards

Building use is currently the source of ~21% of global emissions

Long-term growth in construction is forecast to remain strong in developing regions

Buildings standards likely to drive improved energy efficiency standards - creating growth and margin opportunities

A prevailing cost of carbon may increase basic raw materials prices and poses a downside risk

Winning industry players will position themselves to capture high growth in developing markets whilst reducing the carbon footprint of products



Building insulation value opportunity & risk



Consumer Electronics – potential upward demand shift to reduce home energy demand


Recent strong growth and proliferation of devices causing disproportionate growth in electricity demand

Targeted regulation likely to impose product efficiency measures - but these will be relatively easy to comply with

Increase in demand for consumer electronic devices could be a key component of a low carbon economy. They could:

– Manage home energy

– reduce travel

– reduce overall ‘carbon footprint’

Winning companies will invest in reducing their product emissions whilst designing products that enable a lower carbon lifestyle


Consumer electronics value opportunity & risk




Beer – potential volatility from increased input costs and regulation of packaging


50% of the carbon footprint of beer is created in the packaging

Targeted regulations could mandate a switch in packaging to lower carbon, more environmentally friendly format

The cost of raw materials (barley, maize) may also be affected by tackling climate change – in particular by increased demand for biofuel

Winning companies will be those that anticipate packaging changes whilst preparing for potential spikes in costs


Beer value opportunity & risk




Four key learnings from the study

1. Climate change is a key strategic issue for most of the sectors studied

2. Companies that prepare should create value (and can certainly mitigate risk)

3. The greatest value-at-risk and opportunity may exist in what are niches today

4. Regulation is usually the key initiator of change, but choice of policy framework critical


Implications for Investors

Carry out risk and opportunity analysis based on climate change-related drivers

Monitor potential triggers of a change in market sentiment on tackling climate change

Review the portfolio implications of climate change related drivers – rebalance interests

Engage with companies and policy makers