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
3Climate Change – A Business Revolution – September 2008
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
4Climate Change – A Business Revolution – September 2008
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
5Climate Change – A Business Revolution – September 2008
6Climate Change – A Business Revolution – September 2008
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
7Climate Change – A Business Revolution – September 2008
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:
8Climate Change – A Business Revolution – September 2008
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’
9Climate Change – A Business Revolution – September 2008
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
10Climate Change – A Business Revolution – September 2008
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
11Climate Change – A Business Revolution – September 2008
An example: Automotive sector
Source: Carbon Trust and McKinsey & Co. analysis
• 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)
12Climate Change – A Business Revolution – September 2008
Automotive value opportunity & risk
Alternative scenarios
Source: Carbon Trust and McKinsey & Co. analysis
Archetype case value: $50bn value
13Climate Change – A Business Revolution – September 2008
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
14Climate Change – A Business Revolution – September 2008
…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
15Climate Change – A Business Revolution – September 2008
Different sectors have different levels of opportunity and risk
Source: Carbon Trust and McKinsey & Co. analysis
Calculated maximum value-creation opportunities and transition value-at-risk for companies
Valu
e c
reati
on
opport
unit
y (
%)
Company value-at-risk (%)
16Climate Change – A Business Revolution – September 2008
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
17Climate Change – A Business Revolution – September 2008
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
18Climate Change – A Business Revolution – September 2008
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
19Climate Change – A Business Revolution – September 2008
***BACK UP***
20Climate Change – A Business Revolution – September 2008
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
21Climate Change – A Business Revolution – September 2008
Carbon Trust Investments
Invested £8.8m Leveraged £83.4mm Exits 2 Aim IPOs
22Climate Change – A Business Revolution – September 2008
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
23Climate Change – A Business Revolution – September 2008
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”
24Climate Change – A Business Revolution – September 2008
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
25Climate Change – A Business Revolution – September 2008
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.
26Climate Change – A Business Revolution – September 2008
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 (
%)
27Climate Change – A Business Revolution – September 2008
Aluminium – an industry transformed by the shift to low carbon energy sources
Source: Carbon Trust and McKinsey & Co. analysis
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
28Climate Change – A Business Revolution – September 2008
Aluminium value opportunity & risk
Alternative scenarios
Source: Carbon Trust and McKinsey & Co. analysis
29Climate Change – A Business Revolution – September 2008
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
Source: Carbon Trust and McKinsey & Co. analysis
30Climate Change – A Business Revolution – September 2008
Exploration & Production value opportunity and risk
Excluding oil price shifts
Alternative scenarios
Source: Carbon Trust and McKinsey & Co. analysis
31Climate Change – A Business Revolution – September 2008
Oil exploration & productionvalue opportunity & risk
Alternative scenarios
Including oil price shifts
Source: Carbon Trust and McKinsey & Co. analysis
32Climate Change – A Business Revolution – September 2008
Oil refiningvalue opportunity and risk
Alternative scenarios
Source: Carbon Trust and McKinsey & Co. analysis
33Climate Change – A Business Revolution – September 2008
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
Source: Carbon Trust and McKinsey & Co. analysis
34Climate Change – A Business Revolution – September 2008
Building insulation value opportunity & risk
Source: Carbon Trust and McKinsey & Co. analysis
35Climate Change – A Business Revolution – September 2008
Consumer Electronics – potential upward demand shift to reduce home energy demand
Source: Carbon Trust and McKinsey & Co. analysis
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
36Climate Change – A Business Revolution – September 2008
Consumer electronics value opportunity & risk
Alternative scenarios
Source: Carbon Trust and McKinsey & Co. analysis
37Climate Change – A Business Revolution – September 2008
Beer – potential volatility from increased input costs and regulation of packaging
Source: Carbon Trust and McKinsey & Co. analysis
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
38Climate Change – A Business Revolution – September 2008
Beer value opportunity & risk
Alternative scenarios
Source: Carbon Trust and McKinsey & Co. analysis
39Climate Change – A Business Revolution – September 2008
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
40Climate Change – A Business Revolution – September 2008
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