Copyright© JSE Limited 2008

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Corli le Roux Shameela EbrahimHead of SRI Index Senior Strategist

10 September 2009

Carbon and ESG – What does it mean for portfolio managers?

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The one we know and measure

Source: Presentation by Nelmara Arbex, GRI, 1 September 2009

Introduction: Two crises

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The one we don’t

Source: Presentation by Nelmara Arbex, GRI, 1 September 2009

Introduction: Two crises (2)

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The JSE and sustainability?

Pivotal player in SA economy

Gateway to global markets

Independent, credible

Catalyst for debate

Two perspectives

• SRI Index

• Carbon markets

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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

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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

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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 IndexAnnual assessment• Two-phased process

• External data analysis

Technical construction mirrors FTSE/JSE Africa Index Series

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Current statistics

108 being assessed for 2009

60 constituents from 2008

23 best performers

Who does well?

• Top 40

• Increasingly Mid and Small Caps

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Responsible Investment?

Has not yet hit actual AUM

• Responsible investment experiencing burgeoning growth internationally

• But not yet integrated

• Results, results, results

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What now?

Need fundamental shift

• From the right thing to doo Social complexities in SA, transformation imperatives

o Proliferation of charters and regulatory framework

o Emerging hot topics and best practices

• To doing it righto Integration into business operationso Mainstream investment consideration

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Why is it important?

Where people’s savings meet society’s goals

Stakeholders care

• Investors

o PRI, GEPF, SRI Index

• Public

• Planet

• Business

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What is needed?

Copernican Revolution?

Source: Presentation by Michael Schluter, Relationships Foundation, 1 September 2009

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What is needed? (2)

Information

• Company performance

• Track record

Education

Development

• Criteria

• Investment analysis

Collaboration – how do we help you?

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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

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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

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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

• 500 000 credits a year potentially

• @ 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

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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)

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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

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Dec09-Dec12 Sett Dec10-Dec12 Sett Dec11-Dec12 Sett

Release of actual emissions data showing over allocation of permits

Source: European Climate Exchange

ECX : EUA Futures

Global economic crisis

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Primary CDM and JI Buyers

Source: World Bank, May 2009

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Location of CDM Projects (Sellers)

Source: World Bank, May 2009

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Key findings: Market predictions

Value predictions for 2020 for the compliance market based on various carbon price assumptions

Price pertonne(Euros)

Market Value in Euro(using ‘Main’ scenariovolumes of 40 Gt)

10 400 billion

25 1 trillion

50 2 trillion

100 4 trillion

Source: Point Carbon, May 2008

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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.

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How does this affect the entities we invest in?

Global pressure to start limiting emissionsLocal 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

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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)

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What business needs to drive

Greater involvement in the development of the national strategyInput 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?

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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

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Contact:

Corli le Roux Shameela Ebrahim

E-mail CorliLR@jse.co.za ShameelaE@jse.co.za

Tel: 011 520 7104 011 520 7232