White Paper_FROM CLIMATE CHANGE TO INVESTMENT STRATEGY_Carlos Joly by Clémence Derennes

From climate change to investment strategy.

Carlos Joly

Chairman of the Scientific Advisory Committee Natixis Asset Management

FROM CLIMATE CHANGE TO INVESTMENT STRATEGY

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CARLOS JOLY

FROM CLIMATE CHANGE TO INVESTMENT STRATEGY

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Contents

Acknowledgements .........................................................

Preface .............................................................................

Introduction ....................................................................

1. Why Climate Change as an Investment Theme? ...........

19 19 22 29 31 32 34 40 42

Some Basic Scientific Facts .............................................. Environmental Implications ........................................... Geographic Implications ................................................. Demographic Implications ............................................. Emission Targets and their Economic Cost .................... Regulatory Trends ............................................................ Sector Implications .......................................................... Conclusion ......................................................................

2. How to Integrate Climate Change into Investment Portfolios? ............................................ Ways of Acting on Climate Change ............................... The Thematic Dimension: Mitigation, Adaptation, and Management of Natural Resources ...................... The Temporal Dimension: Giving Priority to Longterm Factors rather than Short-term Drivers .............. The Geographic Dimension: Why a Global Investment Strategy? ..................................................

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45 46 50 53 57

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Why the Combination of Top-down/Bottom-up for Portfolio Composition? ........................................ Conclusion ......................................................................

60 67

3. Implementing Climate Change in Investment Strategy: Natixis Asset Management’s Approach ......................... Inclusion and Integration ............................................... Active Equity Management Informed by Science .......... Investment Process .......................................................... Responsibility ..................................................................

69 70 76 80 83

Overall Conclusion ..........................................................

References and Selected Bibliography ...........................

Appendix .........................................................................

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Acknowledgments

My sincere and deep thanks to Natixis Asset Management for their trust; for putting a strong team of talented and enthusiastic people to work with me; and for “getting it” when I proposed they needed to bring climate change into investment policy and practice. That was in November, 2008, just after Lehman went bust and the markets imploded. They had other things on their mind; but they listened and, what’s more, took the long view, bringing me on as their external advisor to help make it happen. This booklet puts forth the rationale for why climate change has to be taken seriously in investment policy. It shows a way of doing so that is the product of our joint learning process. Working with such a talented and enthusiastic team has been and is a privilege and a joy. Particular thanks to Philippe Zaouati and Christine Lacoste for their leadership and support, Pascal Voisin and Dominique Sabassier for saying yes, Anne-Laurence Roucher for shepherding the process, and for all they have done to make the Climate Fund real, Wilfred Pham, Maurice Gravier, Suzanne Senellart, Clotilde Basselier, Pierre-Henri Pairault, Nadia Tihdaini, Marie-Lorraine Rouy, Karen Massicot, Frederic Lenoir, Maud Louvrier-Clerc, Lientu Lieu, Céline Carl, Christophe Point and the sales teams. Thanks as well to my friend and legal counsel François Meynot, and to Age Korsvold who has been there from the very beginning. Any faults or mistakes in this booklet are mine. This study began in a way almost twenty five years ago, with my first attempt to integrate environmental matters into portfolio management. I had just moved from a loft in Tribeca in New York City and my job at Citibank Investment Bank to a house on a fjord outside a small town in Norway. There, I started a tiny company on a shoestring to launch Scandinavia’s first pollution control technology fund. Kapital, the local version of Fortune magazine, put me on the cover and called me a Green Gordon Gekko. Their view was that this was sheer investment nonsense,

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just a marketing ploy, so investors beware. You could make money or be green, but not both. The environmental NGOs were likewise skeptical and told the consumer ombudsman my brochures made false claims. Green was good, capitalism was bad; their combination was anathema. As an entrepreneur and born contrarian I was happy to prove them both wrong. My funds showed up on the top quartile of performance rankings year after year, individual investors streamed in, and slowly the NGOs realized I was their friend and the press took a liking to what I was trying to do. Times have changed. The mainstream now acknowledges that sustainable development is not anti-profit; also, that philanthropy is not the solution. There is no substitute for business working in line with the common good, innovating for success – channeled by government through industrial and fiscal policies, stimulus spending, and regulation. But we are not there. The Great Recession we are in was caused by Wall Street and the major money center banks, along with regulators that did not believe in regulating. The ideology of free marketism brought the market to its knees. It took this cataclysm to remind sensible people and the body politic that absent rules, decency, fairness and socio-economic sense no market can survive and that what society needs is finance to serve the economy rather than the economy being held hostage to the finance sector. With the climate and the environment we can’t make that mistake. If we persist in bringing it to its knees, it won’t bounce back. Some things are irreversible. My thanks, then, to all investors who understand this fact and act on it. I also wish to acknowledge the important work done by friends, colleagues and the staff of the UNEP Finance Initiative and the UN PRI. This booklet can be seen to fit in a continuum of UNEP FI studies that include The Materiality of ESG to Equity Pricing, the Fiduciary I and Fiduciary II reports, and the recent Materiality of Climate Change. Credit is due the UN PRI for promoting responsible investment throughout the financial supply chain. I hope this piece helps that effort. Carlos JOLY

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Preface

Dear Readers, As an asset manager, our role is to accompany and serve investors over the long term, not just years but often decades. Many of our clients are increasingly concerned about the impact their investments have on the world around us. Clearly, it is critical for us to strive to anticipate future developments in the real economy and society, and to contribute in ways that may favor sustainable development. Consequently, as a major player in responsible investment, Natixis Asset Management has felt a natural obligation to explore the implications of climate change for investment strategy. Carlos Jolyâ&#x20AC;&#x2122;s insights and his sheer passion for the subject have been decisive in this process. I would like to thank him. The white paper drawn up by Carlos Joly lays the foundation of our thought process and plans regarding climate change. His work helps us understand why climate change has to be taken into account in investment strategy, and how it is already possible to integrate climate impacts when building portfolios today. What does he tell us? Climate change is already a reality, here and now. The increasing frequency and severity of extreme weather events attest to it: hurricanes, floods, droughts, wildfires. Very few geographic areas across the world have been spared. The broad environmental, geographic and demographic consequences of global warming have significant economic and financial consequences. The UNâ&#x20AC;&#x2122;s

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12 â&#x20AC;&#x201C; FROM CLIMATE CHANGE TO INVESTMENT STRATEGY

International Panel on Climate Change has estimated the investment needed to cut greenhouse gas emissions and to deal with their inevitable consequences at between $300 and $400 billion p.a by 2030. The ongoing economic crisis is, in a sense, a catalyst for our awareness of the challenges that lie ahead. The government stimulus plans to kick-start economies out of recession, the Copenhagen Summit, ongoing changes to regulations and the roll-out of green tax policies reflect the major role that States and governments play and will continue to play in this area. No business sector, no industry and no company will be left untouched by climate change. With fossil fuels becoming harder to get and more expensive, oil prices bound to soar once again to levels already witnessed a year or two ago, and the mandatory reduction in carbon emissions, we could be facing a revolution of the same amplitude as the industrial revolutions of the 19th and 20th centuries. We are going to have to rethink and reinvent our forms of production, our lifestyles and our means of transportation. This booklet explains the three key ideas that lie at the core of our management approach and process: First, we have set out to grasp the full dimension and diversity of climate change in terms of industrial sectors and world regions. As regards sectors, we are interested in issues linked to the reduction of greenhouse gas emissions, alternative energies, everything that revolves around the question of energy efficiency and the management of natural resources. We also understand adaptation to climate change is necessary, including behavioural changes by consumers and business, the modernization of infrastructure, and new forms of insurance. As regards regions, we are convinced that an investment process responsive to climate change has to address emerging as well as the mature markets. Second, we seek to be informed and challenged by state-ofthe-art scientific expertise. We have formed a Scientific Advisory Committee to work with our portfolio managers and analysts in order to improve our capabilities in this field. The Committee is made up of experts with accomplished profiles in climate science, climate economics and business.

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PREFACE â&#x20AC;&#x201C; 13

Third, we are committed to reconciling the search for investment performance with responsible engagement on the issue of climate change. We check to verify that companies we select through climate impacts analysis are also respectful of elementary human and labor rights. In short, we believe proper attention to climate change in particular, environmental issues in general, and basic human rights goes hand in hand with our aim to achieve the kind of investment performance our clients expect from us. In this booklet Carlos Joly provides us with exciting insights into the way climate change can be worked into investment strategy. I invite you to read it. Pascal VOISIN Chief Executive Officer, Natixis Asset Management

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Introduction

Man-made climate change is real, present and will have increasingly dramatic consequences in our lifetimes and those of future generations. It is the over-riding environmental challenge of the 21st century. Many of its impacts are to a great extent foreseeable; others will surprise us. The ripple effects will touch whole economies and regions. Water availability, agricultural productivity, infrastructure, transport are just some of the sectors affected. In short, the investment implications extend far beyond the energy sector to other areas of the economy, like construction, materials, insurance and real estate property values. Eventually, the economies of entire regions will be affected. Climate will again become a major factor in human migrations. And geography will again be recognized as a factor in long-term investment allocation 1. * If the wholesale destruction of value from the financial crisis of 2008, the consequent deleveraging, the implosion of mortgagebacked securities, stocks and corporate bonds teaches us anything it is the fallacy of short-term thinking. Too much focus on the short term is a great danger; we need to focus on the underlying and broad forces that determine enduring value. The lesson learned is that foreseeable long-term effects matter in the short 1. This is already beginning. In 2009 the Norwegian Ministry of Finance and Mercer Consulting have announced a forthcoming research project to explore the implications of climate change for long-term strategic asset allocation.

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term as well. The dramatic accumulation of consumer and corporate debt accompanied by declining real incomes of the middle class, and the externalization of this debt beyond those that had any responsibility for managing it is a striking parallel for the similar accumulation of greenhouse gases in the atmosphere accompanied by nature’s declining ability to accommodate them. In both cases what has been going on is the externalization of the consequences. In the one case what has been externalized is debt: mortgage debt, credit card debt, automobile loans, derivatives debt: it has all been pushed out to others, under the assumption that the risk somehow disappears. It does not. The externalization of the damages accumulating from carbon emissions has gone on for several centuries but, within our lifetimes, is reaching its critical limit, its tipping point 2. As with irresponsible lending, when global warming effects catch up with us, they catch up fast and furiously, with ferocity that surprises even those that have been predicting it. Ignoring classic economic relationships like exponentially growing lending ratios versus falling real disposable incomes has led to a catastrophic situation. Similar drama can be expected from ignoring the scientists who are telling us that failure to restrict carbon concentration in the atmosphere to 400 parts per million (we are now at 385 ppm) will create irreparable damage to the natural systems upon which civilization depends. There can be little doubt, then, that failure to actively account for the phenomenon of climate change and its impacts in investment portfolios will in all likelihood eventually result in a fast and furious crisis in the value of investment objects. We cannot divorce climate risks to physical assets like buildings, factories, roads, ports and the like from the valuation of the listed companies that own them. To continue to ignore this is to court disaster. The prudent insurer and the prudent investor will seek protection from climate change-induced portfolio meltdown. 2. The scientific definition of “tipping point” is the point at which no additional GHG amount is required for large climate change and impacts; and “the point of no return” is when the climate system gets to a stage of unstoppable and irreversible impacts (e.g. disintegration of a large ice sheet in the Arctic).

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INTRODUCTION â&#x20AC;&#x201C; 17

Governments recognize that climate change requires regulatory, industrial, and behavioral solutions on a global scale. This acknowledgment is gathering force, is driving policy agendas, and is a key part of the anti-recession stimulus packages being put in place in the US, Europe, China and elsewhere in response to the deep economic and financial crisis. Clearly, environmental protection is no longer being seen as antithetical to economic growth but rather is recognized as one of the solutions for reactivating industrial activity and creating jobs. On the one hand, the circular effects of mankind on nature and nature on mankind are on the verge of materially affecting the economies of countries, regions, business sectors and individual companies, often with very damaging consequences. On the other hand, the problem mankind has created generates an opportunity for preventive and adaptive response on a grand scale. A New Deal on a global scale necessarily involves putting in place infrastructure and technology that serves a greener purpose. The replacement of carbon intensive technologies by low carbon means of production and transportation is identified as a major element of governmentdriven infrastructure development plans to stimulate the world economy. Hybrid cars, ethanol, gas, nuclear, high speed trains, greener cargo ships, energy conservation equipment, new materials â&#x20AC;&#x201C; in short, an array of existing and new technologies will be promoted and stimulated by government spending and subsidy measures and by public-private enterprises. This will require a variety of industries to implement strategies of both prevention and adaptation. Building and infrastructure; agriculture and forestry; water access, distribution and purification; transportation; insurance; and of course lower carbon energies, including gas, wind, solar and nuclear will be favored. The Challenge is clear: governments must provide the global framework, industry must respond actively, and we, the investment community, must channel capital in the right direction.

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This booklet describes the implications of climate change for the global investor concerned with the preservation and growth of capital over the long term. It presents a thematic investment approach that takes into consideration the diversity of impacts throughout the economy, and their consequences for key sectors and companies within these sectors. It explains why the impacts of climate change need to be integrated into a global equity investment portfolio, and how this might be accomplished. Chapter 1 provides a quick summary of climate science, the regulatory trend, and their likely economic implications. Chapter 2 explains, from an analysis of the impacts of climate change on portfolio composition, how to construct a thematic investment approach suited for the global investor concerned with the preservation and growth of capital over the long term. Chapter 3 presents the Natixis Asset Management Climate Change approach, describes its objectives, features and its investment process.

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1 Why Climate Change as an Investment Theme?

Some Basic Scientific Facts The increase in greenhouse gases in the atmosphere correlates closely with the increase of population and economic activity since the start of the Industrial Revolution in the 18th Century. Man-made climate change is attributable to the fact that the energy we produce and consume, the way we live in cities and make things, the distances and ways we transport goods and people, and the ways we use land and produce food result in large quantities of greenhouse gases as byproducts. These result in gases, contained in the atmosphere and reflected back down to earth, cause the man-made continuous warming-up of land and sea estimated at a rate between 2ยบC and 5ยบC in the course of this century. The science of climate change is not new. As the economist Nicholas Stern observes (Stern, 2008), in 1827 the French mathematician Joseph Fourier showed that the atmosphere was trapping heat, in 1861 the Englishman Tyndall identified the gases responsible for the trapping, and in 1896 the Swede Svante Arrhenius gave estimates of the possible effects of doubling of greenhouse gases (GHGs). But it is through the work of the United Nations International Panel on Climate Change (IPCC), of thousands of scientists in different fields working collaboratively throughout the world over the past decade, that the magnitude and potentially catastrophic effects of this heat entrapment is conclusively

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proven to be man-made and that the increasing concentration of greenhouse gases, if not stopped, is bound to have dire consequences for all life on Earth. The latest observations and the scientific consensus is that global warming and its effects are taking place much faster than had been estimated only a few years ago and that we are approaching a step change situation.

“Man-made, or anthropogenic, climate change is attributable to the fact that energy consumption and changes in land use produce large quantities of greenhouse gases as byproducts. The principal greenhouse gas is carbon dioxide, but methane, and certain industrial gases are also powerful greenhouse gases. The volumes of these gases in the atmosphere have risen swiftly and they remain in the atmosphere for decades. The quantities emitted into the atmosphere are huge. For example, currently the annual emissions of anthropogenic carbon dioxide are around 25 billion tonnes (gigatonnes), of which the active component, carbon, amounts to about 6.5 gigatonnes, or roughly 1 tonne per person on Earth, though, of course, the emissions are predominantly from developed countries. The key issue is what proportion of the atmosphere is composed of greenhouse gases. The level of atmospheric concentration is measured in parts per million by volume (ppmv), or parts per billion (ppbv). In 2005 carbon dioxide (CO2) reached 380 ppmv, compared to its natural level between Ice Ages, of around 280 ppmv.” Source : UNEP FI, 2007.

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WHY CLIMATE CHANGE AS AN INVESTMENT THEME? – 21 FIGURE 1

Growth of greenhouse gas concentration in the atmosphere 360

1.5

Carbon Dioxide

CO2 (ppm)

340

1.0

320 0.5

300 280

0.0

260

1750 CH4 (ppb)

Atmospheric concentrations of CO2, CH4 and N2O over the past 1,000 years. Data for several sites in Antarctica and Greenland (shown by different symbols) are supplemented with the data from direct atmospheric samples over the past few decades (shown by the line for CO2 and incorporated in the curve representing the global average of CH4). The estimated radiative forcing from these gases is indicated on the right-hand scale. Source IPCC TAR.

Methane

0.5 0.4

1500

0.3

1250

0.2

1100

0.1

750

N2O (ppb)

310

0.0 0.15

Nitrous Oxide

0.10 0.05

290

0.0 270 250 1000

1200

1400

1600

1800

2000

Year

Source: UNEP Finance Initiative, “Climate Change: Risks and Opportunities for the Finance Sector”, 2007. FIGURE 2

Growth of greenhouse effect from long-lived greenhouse gases (LLGHG) Effect on global warming measured in radiative forcing of Watts per square metre at Earth’s surface Source IPCC AR4 - Chapter 2.

Source: UNEP Finance Initiative, “Climate Change: Risks and Opportunities for the Finance Sector”, 2007.

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The following graph shows CO2 global emissions projected from 1970 through 2030. Existing concentrations are due to the rich industrialized countries (US, Europe, Japan), but future emissions are expected to come disproportionately from China and other emerging economies. FIGURE 3

Projected CO2 emissions 5000

A1 Market Scenario

LBNL/IEA Historical Data

Centrally Planned Asia Other Asia Latin America North America Middle East and N. Africa Western Europe Former Soviet Union Sub Saharan Africa Pacific OECD Central and E. Europe

4500 4000 3500

CO2 (Mton)

3000 2500 2000

> Projected CO2 emissions : 15.6 GT in 2030

1500

> Average annual CO2 emissions growth is 2.5% over the 30-year period

1000 500 0 1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

Source: Levine, M. and Urge-Vorsatz, D. (2007), â&#x20AC;&#x153;IPCC WGIII Assessment Report: Chapter 6. Mitigation options in building-slide presentation.

Environmental Implications The environmental implications of global warming are severe. The trend toward extreme weather events of increasing frequency and severity is no longer a faraway prediction (IPCC, 2007, Munich Re 2007, Pew 2007). Witness Katrina and the series of hurricanes in the Caribbean, the recurrence of damaging floods in Europe and around the globe, droughts of long duration in Australia and the US southwest, desertification in China, heat waves in France, freak snowfalls in the Mediterranean, catastrophic forest and brush fires. During the past twenty years, 30% of the Arctic surface has melted away. The Arctic passage

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WHY CLIMATE CHANGE AS AN INVESTMENT THEME? â&#x20AC;&#x201C; 23

has become navigable for the first time and if this persists in a few years it may transform sea routes and shipping between the Far East, the USA and Europe (Casselman, 2008). Permafrost is melting across the Russian tundra, opening up vast areas that were previously inhospitable and uninhabitable but also potentially releasing methane in huge quantities from an area the combined size of France and Germany (Walter et al, 2006, 2009). The geographic distribution of water availability and agricultural productivity is changing (IPCC, 2007). Perhaps the best way to communicate what is at stake without over-dramatizing is to look at recent quantifications: FIGURE 4

The Consequences of Rising Temperatures Would Be Severe

Current level: 385 CO2 ppm

CO2 (ppm)

Temp. Change (C)

Likely Consequences

290-320

Himalayan glaciers shrink by 80% by 2030 Loss of 8% of North American freshwater fish habitat

315-470

Breakdown of Greenland ice sheet becomes inevitable, causing sea level to rise 7 meters over several centuries Thermal expansion of water submerges about 100,000 square kilometers of dry land 20%-80% loss of Amazon rainforest

350-620

More than 40% of species will inevitably become extinct 10%-50% of arctic tundra replaced by forest

425-790

Breakdown of Antarctic ice sheet becomes inevitable, adding five meters to accelerating sea-level rise; increasing odds of uncontrollable feedback effects; all consequences exacerbated

Source: Adapted from Alliance Bernstein (2009), Display 9, p.16.

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New sea routes will be opening as a result of melting polar ice

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WHY CLIMATE CHANGE AS AN INVESTMENT THEME? – 25

Heat waves result in more forest fire in suburban areas…

…and create droughts and erosion of agricultural land

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Glaciers 50 years ago…

…versus disappearing glaciers today

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WHY CLIMATE CHANGE AS AN INVESTMENT THEME? – 27

Flooding on a new scale…

…is resulting in creative solutions, like these Dutch waterfront houses that rise and fall with water level The direct damages from climate change are here and now. Droughts are causing erosion of agricultural land and poor harvests in the pampas of Argentina and the rich agricultural south of

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Brazil, not to mention the places where droughts have become chronic, like Australia and some regions in the US. Year after recent year, brush fires run easily out of control in California or outside Athens. Turkey gets flash floods like never before. Dengue is spreading, as disease-carrying mosquitoes enlarge their territory due to warming. Melting glaciers are depriving populations of water for drinking and irrigation. The list goes on and on. The frequency and the severity of extreme weather events is increasing: FIGURE 5

Number of natural catastrophes 1980-2007

Source: UNEP Finance Initiative, 2007.

And the economic cost is increasing too: FIGURE 6

Cost of great weather disasters 1950-2005

Source: Munich Re; costs in USD billion, 2005 values.

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WHY CLIMATE CHANGE AS AN INVESTMENT THEME? – 29

Unfortunately, and as the UNEP Finance Initiative sums it up: “Recent observations confirm that the worst-case scientific trajectories presented by the Intergovernmental Panel on Climate Change are being realized – or even exceeded – for some key parameters such as global temperature, sea level, ice sheet shrinkage, ocean acidification and extreme climatic events. There is a significant risk that many of the trends will accelerate, leading to an increasing risk of abrupt or irreversible climatic shifts” (UNEP FI, 2009). Think of hurricane Katrina as just one event in what is a clear trend of increasing frequency and severity of Caribbean storms. Consider the range of its impacts to the city of New Orleans, its people, the political landscape, commerce, and the severe systemic consequences that were avoided (this time around) to grain and cereals transport along the Mississippi from the Midwest great plains. Think what might have happened to the offshore oil and petrochemical industries of Texas, and to the retirement and tourist centers of Florida. Bad as Katrina was, it could have been much worse, and it is clear the US has yet to reach adequate preparedness for future Katrina type events hitting major productive areas and cities. Preparedness requires infrastructure renewal and retrofitting, but also new defenses. This work forms part of the economic stimulus package of the Obama administration and it will need to continue far beyond these appropriations.

Geographic Implications The geographic location of fixed assets will become increasingly material as the range of adaptations and the investments to implement them become more clearly appreciated. With each hurricane season, each heat wave, each drought, each flood, each freak weather event, the public and government learn that the unusual is becoming the rule, and that worse is to come. Business has for the most part had a free ride so far, being able to externalize the societal costs of climate onto government or onto

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future generations. But in seeking to contain carbon emissions, governments will increasingly internalize the macroeconomic and social costs of climate change to businesses and consumers. A number of studies have already been done on the midcentury and late-century regional implications of climate change for the US, for different parts of Europe, for Asia and Australia. We expect these to be updated periodically with a greater degree of sophistication and precision. For example, industries, businesses, real estate and infrastructure located on the coast of the Gulf of Mexico and the SE coast of the US will be increasingly at risk from hurricanes. Increased heat waves and droughts would affect crop and livestock production while more frequent heavy downpours of rain would reduce crop yields. Climate change would also result in greater demand for cooling energy, leading to significant increases in electricity use and higher peak demand in most regions (National Oceanic and Atmospheric Administration, 2009). An investor will also need to take particular care when analyzing insurers or real estate companies with sizeable exposure in areas at risk. On the opportunity side, some geographic regions will be favored by climate and this will help stimulate economic development. Parts of Northern Europe, for example, are expected to benefit from better weather. Northern Norway may benefit from the potential opening of the Northern Sea Route, as well as from accessibility to new gas reserves. Better management of natural resources, of water resources and agricultural lands, will represent an opportunity to adapt in the face of changing patterns of rainfall, receding glaciers, and atypical temperatures. Previously inhospitable regions will become the sites of new urban and industrial centers. Societyâ&#x20AC;&#x2122;s adaptation to changed geography will therefore create new business and investment opportunities. Some of these can now be visualized, others will emerge as events unfold.

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Demographic Implications Climate change is likely to provoke population migrations of two kinds. Affluent people will leave areas that tend to overheat, that suffer repeated extreme weather events, or where weather impacts exacerbate poverty to the point of causing social unrest and high levels of crime. For instance, affluent retirees from northern Europe can be expected to loose their appetite for the Spanish Mediterranean coast as the climate becomes hotter and drier, water availability gets scarcer leading to rationing, and electricity rates make air conditioning much more expensive. This may turn into a trend to remain back home in Scandinavia or Germany, or to spend more time there, particularly if weather patterns turn sunnier and more agreeable in northern Europe. The implications for the Spanish economy would extend beyond the real estate and leisure sectors and affect the entire regional economy of southern Spain, with negative ripple effects on the whole Spanish economy. At the very least, this would place increased demands on government transfer payments and government finances. An investor will need to be alert to trends of this type, not only for equity investments but also for investments in local and national government bonds. On the other hand, the implications for the economies of Northern Europe would be positive, creating more demand for all types of goods and services that cater to the growing population of retirees. The second type of migration will be of people whose livelihoods become increasingly difficult as a result of climate events exacerbating already harsh political and economic conditions. The current desperate migration of people from Africa to Italy and Spain crammed on rudimentary boats can be seen as an indication of the demographic pressures to come. It is hard to tell what the political response will be and what humane adaptation measures might be available then, but if attitudes continue along the path they are on now, it is unlikely that Europe will develop a welcoming response, and it is more likely that efforts will be made to keep populations where they are. This might mean climate

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refugee camps along the lines of the war refugee camps of today. One hopes, however, that the political will and the capital will be available to invest in the kind of economic development, food production and water resources in Africa and Asia that will reduce the need for palliative humanitarian assistance (Reinert, 2009).

Emission Targets and their Economic Cost The IPCC advises that emissions should be stabilized so as to remain at less than 550 million ppm CO2 equivalents in the atmosphere, and possibly far less. Some leading scientists, like Jim Hansen who is the chief climate scientist of NASA, argue that the level should not exceed 350 CO2 ppm if we are to preserve civilization as we know it (Hansen, 2008). Accumulations in the atmosphere are now at about 385 CO2 ppm and 430 CO2 equivalents ppm (which includes the other GHGs like methane) and growing at 2.5ppm per year (Stern 2007, 2008). With the increase in CO2e emissions from China and other industrializing countries, it is estimated that if we do not implement effective global ceilings but pursue a business as usual path, we could reach 4-5 ppm rise per year, or 750m CO2e ppm by the end of the 21st century, which could mean a very high probability of catastrophic changes to the planet. Very large damages with very large probabilities: average global temperature increase of 5ºC over pre-industrial times, which has not occurred on Earth since the Eocene period 35 million years ago, when alligators rather than polar bears roamed the North Pole, while the melting of most ice would result in a sea level rise of 10 meters (Stern, 2008). These estimates, dire as they are, do not include the case of destruction of the carbon sink of the Amazon, saturation of the absorptive capacity of the oceans, and the release of large quantities of methane from melting of the Arctic permafrost. Stabilization at 500-550ppm CO2e starting at today’s 430 ppm corresponds to cuts in emissions flows by at least 30% and possibly by 50% by 2050. These are the limits roughly although somewhat ambiguously agreed to at the G8 meeting chaired by Germany

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at Heiligendamm in June 2007. The economic cost of achieving such reductions is estimated at 1% of world GDP, which is relatively low compared to the damages that are otherwise expected to occur (Stern, 2008). However, the longer governments delay, the greater the challenge and the costs of stabilization as well as the risks of not being able to achieve the desired goal. The United Nations Framework Convention on Climate Change indicates that investment in the order of USD 300-400 billion per year will be required by 2030 to fund minimum requirements to reduce emissions and deal with the impacts of climate change. This amounts to 1% to 2% of anticipated global investment for all purposes, or less than 1% of global GDP at that date. This level of commitment is therefore doable, and the role of private sector investments is paramount as they will comprise 86% of the future investment and financial flows (UNEP FI, 2009). Particularly important is the observation that such investment has benefits not only for containing climate change and adapting to it, but also for job creation, economic growth and quality of life. Alliance Bernstein corroborates these figures in a recent study (ABA, 2008): “We model a fairly comprehensive set of efforts to significantly reduce emissions of carbon dioxide (CO2), the main man-made greenhouse gas. These efforts will be expensive, costing an estimated US$5 trillion in aggregate by 2030 just to reduce the CO2 emissions from stationary sources. Nonetheless, we believe the cost is manageable financially: Our model projects incremental spending related to mitigating climate change (including expenses related to carbon capture and storage) rising to approximately $500 billion in 2030. This number, while certainly large, represents less than 2% of forecasted global capital spending in the same year. As a further point of comparison, in 2006 global military spending exceeded $1 trillion.” One might also add as a further point of comparison the trillions of dollars spent on bailing out banks and insurers. The IMF’s estimates of the cost of the bailout range up to a total of $11.9 trillion – less than what dealing with climate change could cost over the next 20 years! A recent EC report (EC, 2009) puts the total bailout cost to Europe at anywhere between 2.75% and 16.5% of EU GDP depending on the veracity of underlying assumptions

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and the ability of governments to recover capital injections and loans. Clearly, if the political will is there, the world can afford to mitigate emissions and adapt to climate change. In the words of the Chairman of UK’s Financial Services Authority: “The key point about the economics of climate change, as the Stern review shows, is how little it costs to cut emissions sharply” (Turner, 2006).

Regulatory Trends In the latter part of the 20th century, the polluter pays principle has been applied to the chemical and petrochemical industries, to asbestos manufacturers, waste management sites, underground fuel storage facilities, and emitters of toxic waste. In the early part of the 21st century, the polluter pays principle has started to be applied to carbon emitters, and this is bound to become more extensive. Investment analysis will therefore have to become increasingly knowledgeable about the fiscal, industrial and social policy responses aimed at reducing carbon emissions as well as adapting to the consequences of climate change. At this writing it is premature to try to predict the climate change policies that are to be adopted at the Conference of Parties in Copenhagen in December, 2009, when the framework of a treaty to follow the Kyoto Protocol is supposed to be agreed upon. In an interview at end August 2009 (cop15news.dk, 2009), Yvo de Boer, executive secretary of the United Nations Framework Convention on Climate Change (UNFCCC), and chief negotiator of the COP15 Conference in Copenhagen, said that the four essentials of an international agreement in Copenhagen are: 1. How much are the industrialized countries willing to reduce their emissions of greenhouse gases? 2. How much are major developing countries such as China and India willing to do to limit the growth of their emissions?

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3. How is the help needed by developing countries to engage in reducing their emissions and adapting to the impacts of climate change going to be financed? 4. How is that money going to be managed? The specific regulations implementing the answers to these questions will probably not be forthcoming at Copenhagen, but the targets and policies to achieve them should be. In any event, the US, China, European countries and Japan are taking steps on their own regardless of a global treaty, so, important as it is, not all progress is dependent on it. The following two boxes provide Nicholas Sternâ&#x20AC;&#x2122;s list for key elements of a Global Deal. Since they represent the distillation of a great number of exchanges with policymakers around the world they provide an indicative guidepost. Governments are likely to use the entire range of policy mechanisms: 1. Carbon taxation. 2. Tight limits on the issuance of carbon permits so as to create scarcity and expensive pricing. 3. Transfer payments and technology transfer to developing countries from rich countries. 4. Standards. All these ways are aimed at internalizing climate change costs in order to reorient the economy to lower emissions.

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36 – FROM CLIMATE CHANGE TO INVESTMENT STRATEGY FIGURE 7

Nicholas Stern’s list for key elements of a Global Deal

Source: Stern 2008, expanded in Stern 2009.

Jørgen Randers of the Center for Climate Strategy, BI Norwegian School of Management, similarly says that any post-Kyoto global agreement that seeks to include China and other developing countries will need to contain the following elements: 1. focus on emissions per capita, not on emissions per country; 2. countries with the highest emissions per capita will have to agree to cut first (i.e. US, Europe, Japan); 3. stepwise, the next country follows when the dirtier nations have reduced emissions to that country’s level. (Randers, 2009)

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The following chart shows what will happen under a business as usual scenario without a global agreement. By 2050, CO2 tons per person-year will continue at about the same in developed countries but double or triple in developing nations, causing CO2 concentrations in the atmosphere to rise to about 550ppm (and to 700ppm by 2100), resulting in an average global temperature increase of over 4.5 C in 2100.

FIGURE 8

Simulation of CO2 emissions and concentrations under a business as usual scenario

Scenario 1: Business as usual 15

Ton CO2 per person-year

Global emissions in BAU (in GtCO2/yr)

4.5

70 60

Industrial countries

4.0

50 40

3.5

30 20

3.0

1950 1975 2000 2025 2050 2075 2100

800

Temperature increase in 2100 in ÂşC

2.5

CO2-concentration in BAU (in ppm)

700 600

2.0 1.5

500

400 300

China

200

1950

Other developing countries 2000

100 2050

2100

1.0 0.5 0.0

1950 1975 2000 2025 2050 2075 2100

Source: From Randers (2009); Bjart Holtsmark, Statistics Norway.

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38 â&#x20AC;&#x201C; FROM CLIMATE CHANGE TO INVESTMENT STRATEGY

The following charts show the effect on the same variables if a post-Kyoto deal follows the principles for agreement put forth by Randers: CO2 emissions per person-year decline first in developed countries, China starts cutting in 2025, other developing countries in 2035, causing CO2 concentrations in the atmosphere to rise to about 450ppm, resulting in a containment of global temperature rise by 2C by 2100.

FIGURE 9

Simulation of CO2 emissions and if a post-Kyoto deal is agreed Scenario 2: All countries cut 5 % annually 15

Temperature increase in 2100 in ÂşC

Ton CO2 per person-year

70 60

Industrial countries

4.5

Global emissions in BAU (in GtCO2/yr)

40 Industrial countries cut 30 emissions with 5 % annually 20

3.5

1950 1975 2000 2025 2050 2075 2100

800 700

3.0 2.5

CO2-concentration in BAU (in ppm)

600

In 2025: China starts cutting

4.0

2.0

500

In 2035: Also other 400 development countries start cutting 300

China

1.5 1.0

200 Other dev. countries 1950

2000

100 2050

2100

0.5

1950 1975 2000 2025 2050 2075 2100

0.0

Source: Bjart Holtsmark, Statistics Norway.

Source: From Randers (2009); Bjart Holtsmark, Statistics Norway.

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Green stimulus packages The US, Europe and China are responding to the current financial crisis and economic recession with large stimulus plans on a country by country basis. An integral part of these plans are measures to create growth and jobs by government investments in energy conservation, energy efficiency, new energies, buildings retrofitting, and infrastructure, much of it related to remediation and adaptation strategies concerning climate change. In some cases, these plans consist in moving forward and implementing now ideas that were meant to be phased in at a later date as part of longer-term plans. In other cases, the plans reflect new thinking. On the one hand, the unavailability of credit creates delays to energy conservation, alternative energy power plants, water infrastructure and other similar projects financed wholly or partly by local government. On the other hand, national stimulus packages will generate guaranteed demand and be backed by financial incentives. As regards energy efficiency, energy conservation, alternative energy, and green infrastructure generally, the expectation is that the stimulus plans will be a countervailing force to the negative timing impacts of the credit crunch and of the recession 3. From an investment standpoint, massive government-driven programs provide a dimension of expectability and reliability often lacking in ventures that do not have the supportive framework of regulations, standards, and taxes around them. Climate change provides the imperative for an industrial transformation the likes of which we have not seen since the advent of the steam engine, trains and ocean steamers in the 19th century and of the petrol-driven automobile in the 20th century. The size of required investments is on a truly large scale, hundreds of billions of dollars worldwide, which is why a significant share of current anti-recession stimulus plans in developed economies are targeted to climate change mitigation and adaptation measures.

3. For a summary of government green stimulus plans, see Appendix II.

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Add to this a thoroughgoing transformation in energy, production processes, products, and services and we may be looking at the early stages of a new industrial revolution. We all know that excessive consumerism and consumer indebtedness are not the answer to job creation and economic wellbeing. The demographics of advanced industrialized societies, the aging of their population, means that overall demand will not grow as it has for the past 50 years. Financial speculation and planned product obsolescence are also not sustainable answers. By contrast, the climate change imperative creates a real and long-term need for infrastructural renewal, new jobs and new economic activity with true scale. For the investor and the investment manager, it calls for imaginative thinking into the broad industrial and service industry requirements of a new low carbon economy that governments are impelled to promote, partly to save their economies from obsolescence, partly in response to pressure from civil society. For government, programs to combat climate change are supportive of and integral to re-stimulate economic growth. For politicians, aligning themselves with these efforts has become an avenue towards office re-electability. For the consumer, in many instances it will mean going over to more energy efficient products and changing behavioral patterns of consumption.

Sector Implications Some sectors of the economy will be favored by opportunities created by climate change and the regulatory responses it provokes. Others will be challenged and only those companies in them that are able to adapt will be able to flourish. The following graph from the IPCC indicates economically feasible emissions reductions by major economic sector (each vertical box represents a different sector) and by economic bloc (each shade of blue represents a different economic bloc, such as OECD, EIT, etc).

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WHY CLIMATE CHANGE AS AN INVESTMENT THEME? – 41 FIGURE 10

IPCC (WGIII) Estimates of Economically Feasible C02 eq/yr Reductions in 2030 by Sector

Source: IPCC Fourth Assessment Report, 2007. Note : this figure represents sectoral economic potential for global mitigation for different regions as a function of carbon price in 2030 from bottom-up studies, compared to the respective baselines assumed in the sector assessments.

Within the scope of what is economically viable, and in conjunction with how the regulatory framework is likely to evolve, it makes sense to assume policies will be enacted so as to reap the “low lying fruit”. Various studies have been done to identify what the first, most effective and economically efficient measures should be, or how to get the most “bang for the buck”. A good example is summarized in the well-known McKinsey diagram below. It shows that in the chemical industry 6Gt CO 2e savings from energy efficiency is achievable by 2030, through strategies that involve low or negative costs. This diagram shows the economic efficiency of measures that can be taken by the chemical industry to reduce carbon emissions. It places on a continuum from left to right the most efficient and less costly ways of reducing emissions. On the right are the least efficient and most costly and towards the left on the diagram are the most efficient and cost efficient, to the point of yielding positive returns.

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42 â&#x20AC;&#x201C; FROM CLIMATE CHANGE TO INVESTMENT STRATEGY FIGURE 11

Mc Kinsey diagram of bottom up approach to abatement costs

Source : Enkvist, 2007.

Other studies point to similar results in other industries. The specific climate themes and sub-themes will impact industry sectors and sub-industry sectors in different and significantly material ways.

Conclusion The effects of climate change include increased frequency and intensity of extreme weather events, like storms, floods, droughts, heat and cold waves; changing rainfall patterns; degradation of agricultural land; spread of epidemics; melting arctic ice and glaciers; rising sea levels; threats to food production and biodiversity. This has large demographic, social and macroeconomic

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implications, including infrastructure impacts, business interruption, product obsolescence, food scarcity and pricing, migrations, risks to government finances, new risks and opportunities in business. The current economic crisis acts as an accelerator of awareness, translating into government stimulus packages with strong green components. Financial markets have not yet, in general, factored climate change into investment decision-making or the price of equities, or long-term government bonds. The prudent management of pension funds, insurance reserves, and private patrimony requires increasing attention to the investment implications of climate change throughout the economy and consequently, the development of methods for integrating these implications into asset allocation, portfolio composition and stock and bond-picking. The next chapter describes how to integrate climate change in a global portfolio and argues for a particular way of doing so.

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2 How to Integrate Climate Change into Investment Portfolios?

In recent years many studies have been conducted on the macroeconomic and sectoral consequences of climate change, including The Stern Review on the Economics of Climate Change (Stern, 2006), The McKinsey GHG Abatement Cost Curve (McKinsey, 2007), the Center for Integrative Environmental Research climate change macroeconomic impact reports for US states (CIER, 2008), and various studies by Deutsche Bank (DB Advisors, 2007 and 2009) and Goldman Sachs (GS, 2004), to name a few. The implications are only just beginning to get integrated into the strategic planning of forward-looking businesses. Investors are also beginning to take notice; but so far the investment community has not gone much beyond signing up to statements of concern like the UNEP Finance Initiative, the UN Principles of Responsible Investment, or the Statement on Climate Change by IIGCC (see Appendix I). Insurers, while expressing interest and concern, have yet to develop and implement strategies to take climate change risks into account in their mainstream investment portfolios (CW and FFF, 2008). A number of asset management firms have moved forward by creating sector products, such as alternative energy sector funds and funds that trade in carbon permits. This is a good beginning, but it only deals with one slice of the pie. There are obviously many ways of taking climate change into account in an investment portfolio. Here we describe several ways that are beginning to get traction in the marketplace.

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Ways of Acting on Climate Change Engagement The first way of integrating climate change into an investment portfolio is through engagement activities. This means behaving as an active owner, having an active dialogue with companies so as to influence them to continuously reduce their carbon emissions and to develop products that do so as well. This is important as a complement to making changes in portfolio composition as a result of climate impacts, but it is no substitute for changes in portfolio allocation and stock picking because, on its own, engagement does not protect investors against likely losses due to climate events, nor does it permit them to gain investment performance from companies that have products and services better aligned with climate mitigation and adaptation.

Carbon Footprint Indexation The second way is to introduce a formula for overweighting those sectors that have lower carbon footprints (i.e. lower carbon emissions 4) and underweighting those that have higher carbon footprints (i.e. higher carbon emissions). There are two reasons for so doing: first, the assumption that higher carbon emitting sectors will be penalized by carbon taxes and emissions quotas, that they will not be able to fully pass these new costs on to consumers and their growth prospects and profit margins will consequently suffer. The second reason reflects an activist and ethical intent: to “penalize” the high emission sectors by disinvesting in them, thereby eventually causing their cost of capital 4. More precisely, the Kyoto Protocol defines carbon footprint as “the total set of greenhouse gas (GHG) emissions caused directly and indirectly by an individual, organization, event or product”. For simplicity of reporting, it is often expressed in terms of the amount of carbon dioxide, or its equivalent of other GHGs emitted.

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to increase; consequently giving them an incentive to adapt low carbon technologies or eventually causing them to fade away. This reasoning is similar to why some investors chose to exclude tobacco companies from their portfolios. The shortcoming of this method is that it fails to differentiate between companies within carbon intensive sectors. Some are much more carbon efficient than others, or may have a geographic advantage; thus some may merit being an investment object while others in the same sector may not. More importantly, the strategy of weighting according to size of carbon footprint ignores that some high emission sectors are absolutely necessary for adaptation to climate change and will necessarily grow in response to adaptation needs â&#x20AC;&#x201C; in particular the steel industry, the cement industry, and mining companies that supply iron ore and nickel for steel. How else will railroads, bridges, flood-resistant defenses, seawalls, storm-resistant buildings, ports and similar infrastructure be built to replace vulnerable infrastructure? Furthermore, if country carbon ceilings in a post-Kyoto Treaty will be set on a basis that reflects per capita emissions, as seems to be increasingly likely if China, India, Brazil and others are to sign up to it, then most emerging market economies will be able to afford, from a carbon point of view, industrialization for economic growth. This will include growth of their steel, cement and mining industries. Such industries are essential for building roads, bridges, ports, airports, sea defenses, dams, housing, schools, hospitals and local industry, all of which are part of raising the material conditions of life of their poor. One cannot on the one hand be in favor of the UNâ&#x20AC;&#x2122;s Millennium and Agenda 21 goals and on the other prevent developing countries from industrialization by seeking to impose unfair carbon constraints on them. This may lead to the transfer of some industries from developed to developing markets, which means that sector investment weightings on their own are not an appropriate response. The geographic dimension of development needs to be considered. Because of these factors, in our view, sector overweighting and underweighting based solely on carbon footprints does not make much sense for a global investment portfolio. Too many

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other economic, financial, environmental, political and social considerations are at play to be able to resort to such simplistic reductionism.

Specialist Funds Another way in which market participants seek to integrate climate change is by investing in specialist funds that buy shares in alternative energy companies (solar, wind, biofuels, refuseto-energy, geothermal), and by investing in funds that trade in carbon permits. These are perfectly sensible strategies with the proviso that these stocks are exceedingly volatile. The crowdingin and subsequent rush-to-the-door effect when too much money is placed in too few wind and solar companies can lead to severe and unhappy losses.

A Better Way: Integrative Sustainable Development Approach A more comprehensive approach will seek to avoid the drawbacks of these ways of taking climate change into account by identifying the implications of climate change at different levels of portfolio structure and in context of the other significant economic variables that create value and opportunity. Two critical decisions in the top-down construction of a global equity portfolio are country selection and sector selection. A growing body of work on the economic consequences of climate change helps decide which sectors are most impacted. Ideally, an investment process should capture the sector, geographic, and company dimensions of climate impacts. An approach to doing so follows. Step One The first step in the analytic process is to identify the salient and different types of climate impact. Letâ&#x20AC;&#x2122;s call this Climate Impact Analysis. It should be applied to all sectors of the economy. Its output is the identification of those sectors that will be affected

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the most –positively or negatively – by climate change 5. Sector allocation decisions should not be made solely on climate grounds. In line with an integrative approach, climate impacts should be put into context of the other factors affecting a sector’s growth and profitability prospects when making sector allocation decisions. A geographic perspective also must be brought to bear, as explained below. Step Two Once Climate Impact Analysis identifies the salient Industry and Sub-Industry Sectors, Stock Selection within sectors will be based on an evaluation that combines: first, the degree of a company’s responsiveness to the climate impacts that will affect it and its markets and, second, the company’s financial attractiveness given its fundamental attributes, such as product characteristics, competitive strength, financial strength, and management quality. An important dimension in company analysis concerns the manner in which a climate impact or trend may affect a company in a given sector.

5. In this view, impacts include the economic, social, opinion-forming and political effects of a climate event or climate trend, in addition to the environmental event. The effects are often damaging effects, as evidenced by: – Changes of natural capital: degraded agriculture and forests, exhaustion of water supplies, erosion of coastlines, etc. – Loss of real capital: damage to infrastructure, production and transportation facilities, commercial buildings and housing, roads, bridges, etc. – Loss of human capital: deaths, epidemics, impoverishment. But the preventive and adaptive responses to such effects can give rise to positive contributions to economic growth: – Supply side changes in required inputs of energy, materials, goods, transportation – Demand side changes in energy, materials, transportation, machinery, agricultural inputs, etc And in some regions, the effects might be positive; for example agriculture and forests may be favored in parts of Northern Europe, as might resorts on the Baltic Sea to the detriment of the Mediterranean. Note that this concept of Climate Impact is much more comprehensive than the metric of Carbon Footprint; it thus serves as a building block for a very different type of investment process than a carbon-indexed fund.

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– A climate event can directly affect the price of an asset or class of assets, making it more or less valuable, more if it replaces or substitutes for a damaged or obsolete asset, less if it is the damaged or obsolete object. Think of the potential loss of value of port terminals serving the Suez and Panama canals if and when the North West Passage in the Arctic becomes navigable year round. – Climate trends can create the basis for a political response by government in the form of fiscal, industrial or regulatory measures. Think of government support for wind and solar; of the deteriorated value of gas-guzzling US car manufacturers, and the advantages to Toyota from the demand for hybrids. Or demand for energy efficiency in buildings and home appliances. Or finance industry business servicing carbon emissions trading. Consider the green components of the hundreds of billions of dollars being deployed by the anti-recessionary stimulus programs funded by governments around the world. Step Three Finally, in constructing the Model Portfolio one will then apply an explicit set of portfolio composition guidelines that reflect geographic diversification, relative country attractiveness, capitalization size, liquidity, and potential for gain. In Sum An integrative approach will take into account three dimensions of analysis: thematic, temporal, and geographic. This implies a Top-down/Bottom-up approach of portfolio composition within an active management strategy, as explained below.

The Thematic Dimension: Mitigation, Adaptation, and Management of Natural Resources The scientific community, governments, and civil society coalesce around the understanding that three major strategies should channel society’s response to the buildup of GHG in the

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atmosphere and what to do about it : mitigation, adaptation and better management of natural resources. These strategies are a good starting point for designing an integrative thematic investment approach. The approach presented here aims to be responsive to the range of developments and opportunities for positive business intervention, seeking out good investment objects in each of these three themes. To do so, it makes sense to classify the opportunity universe into specific sub-themes. These sub-themes then serve to identify the sectors of the economy most affected by climate change and their concomitant risks and opportunities. Mitigation means reducing the amount of GHG emissions into the atmosphere. That is the objective of the Kyoto Protocol and other international efforts such as EU Carbon Emission Trading Scheme (EU-ETS) or regional cap and trade climate efforts in the US. The mitigation response includes the following strategies to lower carbon emissions into the atmosphere: • Energy substitution by lower carbon forms of energy: such as natural gas and ethanol instead of coal, fuel oil and gasoline; or alternative energies (solar, biomass, wind, hydropower, geothermal, nuclear power, etc). Also included in this category are new and experimental technologies such as carbon capture and storage that would make coal use in electricity generation more acceptable. • Energy efficiency and conservation: – Modernization of power plants: more efficient transmission systems. – Building efficiency: retrofitting buildings (insulation, energy efficient light bulbs, and energy efficiency automated control systems). – Transport efficiency: mass transit rather than individual, rail freight rather than trucking, coastal shipping. – Better logistics planning: new technologies to produce more output with less greenhouse gas emissions, in addition to the technologies named under substitution and efficiency.

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Adaptation. The physical processes triggered in nature as a result of the existing huge increase in CO 2e atmospheric concentrations will continue for many centuries, some argue millennia (Solomon, 2008). This is reason why we need to maintain emissions down to the level required for stabilization of CO2e concentrations at no more than about 500 ppm to avoid catastrophic damage. However, even with stabilization, we will still be faced with climate change and its range of effects for a very long time. Most of the effects will be damaging, although some of them will be beneficial; and we will need to adapt to them in order to control the risks and take advantage of the opportunities. The adaptation response includes the range of measures required to prevent and control the extent of damages or react to the unpreventable and uncontrollable damages resulting from climate events such as storms, floods, droughts, freezes, heat waves, disappearing glaciers, changing rivers, changing soil productivity, infectious diseases in farm animals and humans, and so forth. This means strengthening buildings against storms and hurricanes, re-siting production, work and residential facilities, rebuilding roads and bridges, strengthening dams or building new sea defenses, dredging, retooling, pharmaceuticals R&D and stocking vaccines, and so forth. Another element of adaptation is the growth of new forms of consumer and business behavior, such as internet shopping, bicycle riding, and teleconferencing, triage of wastes, and the like, which are at least partly in response to environmental and climate change. Better management of natural resources, in particular water, soil, forests, and fisheries. This implies more careful exploitation of the resources themselves, a saner approach to urbanization and agriculture, and a better management of industrial, agricultural and urban wastes. Response. An important focus is the preservation of the productive capacities of existing agricultural land and forests through sustainable agriculture and sustainable forestry practices. Another is the preservation of fisheries and the sea habitat through sustainable fishing practices. Water resources in many parts of the

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world are at risk from the demands of irrigation and urbanization versus changing rainfall patterns and due to disappearing glaciers that feed rivers. Wholesale access to good drinking water has to become broadly and cheaply available. Bottled water or soft drinks is not the answer. Mining, industrialization and urbanization create huge amounts of waste as byproducts, taking up land, degrading land, and often polluting water sources. Though not directly the result of climate change, these developments will be increasingly driven by adaptive responses, which is why consideration has to be given to the intersection of Adaptation with Natural Resource Management. Having defined the major themes and sub-themes of analysis, the next step is to understand how they play out in investable sectors of the economy. Some examples are provided in Chapter 3. This brings us to another aspect of the discussion, the time dimension, particularly crucial when dealing with climate change. Why and how to give priority to the long term when the market is biased to short-term drivers of investment performance?

The Temporal Dimension: Giving Priority to Long-term Factors rather than Short-term Drivers Climate change is here to stay. Even if we were to succeed in reducing carbon emissions by 80% over the next 40 years, as scientists recommend, the already existing high concentrations and the built-in inertia in biosphere systems will propel global warming and extreme weather events throughout the 21st century. The stabilization of emissions would mean we might be reaching a tipping point sometime late this century. The drastic reduction in emissions would mean society could avoid irreversible conditions and life-changing catastrophe to civilization as we know it. But in any event, the conditions of the game are set in foreseeable ways in our lifetime and that of our children. Large institutional investors such as pension funds and insurance companies are long term investors. They need to meet obligations 10, 20, 30 years in the future and plan their

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investment strategies as a function of their obligations. Most people who seek to build up savings or manage their patrimony also take a long-term view. For a long term investor, valuation and performance measurement on a weekly, monthly, even quarterly basis makes as much sense as valuing an art galleryâ&#x20AC;&#x2122;s inventory as if it were a vegetable stand, or a forestry company as if it were a florist shop. Benchmarking to an index is also problematic. All indices reflect the past. The capitalization weights of their constitutive names reflect company valuations that are based on traditional metrics and analysis. Indices are not forward-looking. Thus, investing passively or in near index strategies is like driving while mostly looking in the rear view mirror. If the road doesnâ&#x20AC;&#x2122;t turn much, no accidents. But when it comes to sustainable development investing, or investing with a view on how the world is changing due to climate change, the focus has to be forward-looking and necessarily divorced from slavish attention to the stock market indices that reflect how the world was or presently is. The dilemma asset managers are faced with is the incongruity of having long-term good investment results as an overriding objective but being forced to measure the risk of obtaining this goal by short-term volatility measurements that have nothing to do with systemic and macroeconomic risks like those created by climate change. The technology of index-relative investment ends up determining portfolio composition and investment strategy, which is putting the cart before the horse. The relative capitalization weights of companies as these weights are reflected in the indices simply mirror the structure of the economy as it is and not as it is changing in order to sustain wealth creation in the future. We know the world economy is not working within the limitations imposed by its natural resources. We are faced with a systemic environmental risk that is insufficiently recognized by the stock and bond markets, although citizens around the world recognize it and are in some countries as concerned about it as they are about the recession (HSBC, 2008). Most Europeans are convinced climate change poses serious risks and that it is normatively unethical not to act so as to mitigate this risk or to prepare

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for its impacts. This conviction provides the democratic basis of an “overlapping consensus of values” 6 upon which funds like the Dutch PGGM, Norway’s Government Pension Fund, and France’s ERAFP and Fonds de Reserve de Retraites base their socially responsible investment approaches. Although investors conceptually understand these deep trends need to be attended to, the customary result of our modus operandi is that stock picking and buy, sell or hold decisions end up largely being driven by short-term considerations. As the saying goes, “in the long term we are all dead”, so in the short term everybody acts as if life ends tomorrow. But of course it doesn’t; and so this mismatch between the inability of markets players to prioritize underlying long-term drivers of the economy over short-term price movements has led to the crisis we are in, as George Soros (Soros, 2008) and others have convincingly argued 7. Think of the speed and ferocity with which the current financial crisis spread throughout the world. There is a lesson here to be drawn for climate change risk as well. Conventional thinking is, by definition, comfortably within the norm. Climate change is outside the norm, which is why we have to step out of our habitual allocation, sector, and stock-picking strategies. As already noted, the impacts of nature on a range of basic industrial and real estate assets are generally not yet reflected in the pricing of equities. However, one can legitimately ask: How long until they are priced in? Isn’t it too early to take positions on this assumption? Our answer is an emphatic No. Being part of a herd that continues to dance its way to the precipice is too risky 8. The benefit of the marginal gains to be made in the last stages of a market that ignores the inevitable are far smaller than 6. The concept of an overlapping consensus of values is invoked explicitly by Norway’s Ministry of Finance in its “Evaluation of the Ethical Guidelines of the Norwegian Government Pension Fund” available at www.regjeringen.no/upload/ FIN/etikk/h_uttalelser. It derives from the work of the Harvard philosopher John Rawls (1975), A Theory of Justice, Harvard University Press. 7. G. Soros, A New Paradigm for Financial Markets, 2008. 8. Charles Prince III, the former CEO of Citibank, a few weeks before being ousted as the bank’s stock price collapsed infamously said: “We’ll keep dancing while the music’s playing”.

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the losses incurred in a meltdown, as proven by the fall in world stock markets that started in late 2007 and continued during 2008, with severe meltdown in October and November. No doubt the effects of climate impacts on asset valuations will be fully seen only over the long term. But many impacts are foreseeable today, are beginning to act on assets today and are beginning to get internalized. Governments are preparing to make huge investments in energy infrastructure and will have to do so for damage repair and containment. The prudent investor can already today in the short term begin to take appropriate investment measures to protect patrimony and earn money on this basis. This is simply taking the inevitable for granted. The first steps in this direction have been the alternative energy investments and the carbon funds, but as with any new sector, investor demand can easily outstrip the supply of investable names, creating a series of short-lived boom and bust cycles for the funds investing solely in these businesses. The multi-sector approach avoids the pitfalls of narrow emphasis on immature market segments while permitting exposure and flexibility. Thus, a precautionary forward-looking approach to climate change does not require investing in companies that will only pay off in the long term and will underperform in the short term. It is well known that the biggest gains in active investment are made when correctly anticipating the future valuation of equities. If one has the conviction that sustainable development is a precondition for the health of the economy in the future and that new environmental treaties and laws, changing consumer attitudes, and the inevitable impacts of climate change will have material effects on the competitiveness of countries and the profitability of companies, then the prudent investment philosophy is to be anticipatory and have a suitable early adopter process in place so as not to be caught with large holdings that will be impacted. Just as the market made a gigantic mistake in mispricing mortgage backed securities, it is likely the market is making a gigantic mistake failing to recognize unsustainable companies and consequently pricing them with a deep discount. In protecting capital,

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pension funds, insurers, caisses de retraites and family offices will not want to find themselves saddled with chunks of overvalued assets.

The Geographic Dimension: Why a Global Investment Strategy? Man-made climate change has primarily been caused by the developed countries â&#x20AC;&#x201C; the US, Europe, and Japan; but as developing countries like China, India and Brazil industrialize, they are becoming more important in the equation. Thus, emerging markets have to be a key element in any global investment strategy that pays attention to climate. The global character of climate change is well recognized, as well as the fact that emissions in one country affect conditions in others. Less recognized, perhaps, are the responsive steps countries like China and Brazil are already taking and the investment opportunities this represents. China, Brazil, India and Russia are the greatest contributors to global growth and their economic significance will only increase throughout the 21st Century. They have rapidly developing internal markets that create demand and scale for new technology and new businesses; and they leverage this demand to compete internationally. An investor who fails to allocate sufficiently to emerging markets risks inferior investment performance in the future and has probably already sacrificed investment performance during the past decade. Climate Change and Emerging Markets are each investment themes that embody a fundamental shift in the world. Putting them together in one investment approach makes for a particularly promising dynamic for investment performance. Following are a few examples of world-class emerging market multinationals that have developed competitive advantages versus their developed market competitors, as regards climate change adaptation, mitigation or the management of natural resources.

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Vale, Brazil. Vale is the world’s largest iron ore miner, and second largest in nickel. Both these raw materials are key to steelmaking and therefore for infrastructure transformation. Vale distinguishes itself by its environmental and social records that are among the most responsible in the industry. For example, by withholding selling iron ore to gross violators of environmental laws and human rights, Vale has forced the closure of some steel mills. No other mining company has done this. Many third world steel mills buy coking coal from producers that keep their workers in near feudal conditions. Vale has forced the closure of those that depended on its delivery of iron ore. Vale is a direct beneficiary of the growth of China and is its major supplier of iron ore. Aracruz, Brazil. Is among the world’s top five pulp and paper producers with its own fast growth eucalyptus plantations. Brazil’s paper pulp and paper makers do not cut down virgin Amazon forests. They grow their trees in other areas. They also have stateof-the-art plants built to reduce pollution to rivers, land and air. If and when tree plantations are recognized as carbon sinks, the valuation of Brazilian forest and paper companies will reflect not just their papermaking but also the value of the tradable carbon offsets they generate. This is an example how the policy responses to climate change may lead to the re-pricing of assets and the revaluation of companies.

A new perspective on geography in global investing More generally, then, how should the geographic dimension get factored into a climate fund? It creates both risks and opportunities. On the risk side, an investor will seek to avoid owning businesses that are in particularly exposed locations – subject to storms, floods, business interruption, or interruption of their supply lines. Real estate owners, and local banks and insurers in locations that are likely to suffer from extreme heat, insufficient water supplies, or repeated storms or flooding, for example, are to be avoided. They will become unattractive relative to those in areas that are not at risk.

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Focus on China China, along with other developing countries, has repeatedly underlined that rich industrialized nations bear the main responsibility for existing greenhouse gas concentration in the atmosphere. However, since 2007 China has been the world’s largest emitter of greenhouse gas emissions, overtaking the United States, and now recognizes it has to deal with this problem. The country’s leaders have put an ambitious national plan in place to fight against climate change that includes wider use of nuclear and renewable energy coupled with development of more efficient coal-fired plants. China is committed to building world-class companies with state-of-the-art environmental technology to successfully compete with their US and European competitors. “China has emerged in the past two years as the world’s leading builder of more efficient, less polluting coal power plants, mastering the technology and driving down the cost. While the United States is still debating whether to build a more efficient kind of coal-fired power plant that uses extremely hot steam, China has begun building such plants at a rate of one a month... With greater efficiency, a power plant burns less coal and emits less carbon dioxide for each unit of electricity it generates. Experts say the least efficient plants in China today convert 27 to 36 percent of the energy in coal into electricity. The most efficient plants achieve an efficiency as high as 44 percent, meaning they can cut global warming emissions by more than a third compared with the weakest plants. (…) China is making other efforts to reduce its global warming emissions. It has doubled its total wind energy capacity in each of the past four years, and is poised to pass the United States as soon as this year as the world’s largest market for wind power equipment. (…) “It now can cost a third less to build an ultra-supercritical power plant in China than to build a less efficient coal-fired plant in the United States (…) China aims to turn the country into the world’s largest producer of electric cars, (…) In short, China is creating world-class companies with state of the art technology that may outcompete mature market multinationals. How can an investor choose to ignore this?” New York Times, 2009

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On the opportunity side, location may create a particular competitive advantage. A paradigmatic example of geographyinfluenced competitive advantage is Dutch engineering and construction companies specialized in sea defenses. The expertise and specialized equipment they have developed locally to solve Dutch sea invasion and river flooding serves to make them competitive global leaders in their field. Another example is pulp and paper companies in Brazil who benefit from ample natural resources and favorable climate for fast-growth plantations. We could also allude to the Nordic-based shipping infrastructure and service companies that will benefit from the potential opening up of the North Sea Passage as the Arctic ice sheets recede. These kinds of investment opportunities are not usually identified by standard investment screening processes but naturally fall within the scope of climate analytics. A caveat is in order. Although climate science is able to make predictions on a global scale with 95% certainty, it is unable to provide reliable enough and specific enough predictions on a country or regional basis for the time being. Therefore, a geographic overlay on investment decisions can, at present, only be applied in a limited way and in certain salient cases. As climate science gains greater predictive power concerning country-specific impacts, its findings will become more relevant to portfolio composition.

Why the Combination of Top-down/Bottom-up for Portfolio Composition? So far, we have concentrated on explaining the top-down aspect of the integrative approach: we have identified broadly understood climate impacts in order to define themes and subthemes that serve to identify the sub-industry sectors on which to focus. We will now explain the bottom-up aspect â&#x20AC;&#x201C; that is, climate impacts in relation to fundamental company analysis, and the factors that need to be taken into consideration in this regard. As mentioned earlier, climate change is generally not factored into the price of equities. This is true insofar as the market does

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not seem to be good at integrating long-term and complex issues into valuation metrics. Having said this, certain questions follow: What should be priced in? How should it be measured? And, tactically crucial, how far ahead of the market’s pricing does it make sense to take strong positions with conviction? History provides a warning. Bubbles and their implosions are somewhat common when it comes to “the next big thing” in equities. Take, for example, information technology. Most of the revolutionary technologies forecasted in the late 90s actually happened in the following decade, but valuation metrics used then proved dramatically wrong. The IT revolution is real enough, but equity prices in early 2000 targeted paradise, and the result was paradise lost. It is commonly believed that profits and their evolution are the main drivers for equity prices. All else aside, reasonably sustained earnings determine the valuation of stocks. As regards the equity markets in general, profits are primarily driven by global and regional GDP prospects, and secondarily by a collection of factors such as interest rates, tax regimes, currency fluctuations and so on. To this extent, it is clear that the macro impacts of climate change are one factor among many. Climate change generates long-term effects, but to the extent that they will materialize progressively, their valuation effects for the market as a whole do not come as a big bang, nor are they the most watched driver for valuation. We can reasonably assume that in a business as usual scenario the macro component of aggregated profits is not dramatically affected by climate change on the short to medium term, and that it is, in any case, encapsulated within usual metrics. We must also keep in mind that if the dire climate scenarios come about, with global warming accelerating faster and to higher levels, then business as usual will not apply. Unfortunately, this eventuality does not have a low probability. Investors who are unprepared or asleep at the helm will loose lots of money. From this point of view, the approach advocated here can function as the “canary in the mine”, providing early warning for strategic re-allocation of invested funds. This is not an argument for a “just in time” investment strategy. On the contrary, just in

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time is usually too late. Most investors who expected a financial crisis but kept dancing to the music got caught up in it during 2007-2009 and have lost big. The point is that an early adopter attitude is prudent, precisely because of the market’s tendency to be wrong-footed. Bill Gross, Managing Director of PIMCO, has a nice way of putting it: “Get your facts straight, apply them to the current valuation of the market, take decisive action, and then hold on for dear life as the mob hopefully comes to the same conclusion a little way down the road.” Climate impact analysis is particularly relevant at the company or sector-specific level. This is easily understandable when we look at the variety of economic consequences. Some are negative, of course, from the high frequency of extreme weather events like storms, floods and droughts to degradation of natural resources and viable land for agriculture and other uses. Broadly speaking, more robust regulation, rising environmental taxes, and higher commodity prices also increase corporate costs. But climate change also generates positives: the need for solutions favors investment and research and generates new business opportunities. The anti-recessionary stimulus packages act as catalysts, accelerating these trends. Some assets become critical and new competitive advantages emerge. As a result, market valuation as a whole cannot capture this complexity in different sectors and companies. As we currently understand it, climate impact analysis is more relevant to sector analysis than to country analysis, as long as one understands that it has to be geographically relativized. The prospects of the cement industry in India or China may be much better than the prospects of the same industry in the US, if a post-Kyoto Treaty will set emissions ceilings based on per capita country emissions. The most evident material impacts are already being taken into account. Superior growth for renewable energy as compared with legacy oil majors is, of course, factored into the former’s valuation premium, although we know that implied growth rates are questionable on both sides. Carbon compensation costs for European utilities are material, and thus identified in company profits,

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guidelines, strategy and some analyst forecasts. In the investment world it is wise to remember that the devil is in the details. If a sector valuation takes into account a key climate change impact, it doesn’t tell us anything about the fact that some European utilities are also world leading renewable energy producers. When impacts are relatively certain, but have not yet materialized, sector valuations simply reflect the market’s conservatism. This provides less conservative but patient investors with good opportunities. The evolution of transportation or automotive companies’ market prices, for example, is driven much more by medium-term demand prospects and balance-sheet structure than anything else, despite the fact that these sectors are among the most affected by the need for carbon emission mitigation. So, what about uncertain impacts? From a pragmatic investment point of view, these should be kept in mind, albeit on a back burner, so as to be able to react in good time if and when the uncertain becomes certain. In sum, then, this approach emphasizes fundamental company analysis, after having determined which sub-industry sectors are most likely to be affected by climate impacts from now on and into the medium term.

Company Analysis Having narrowed down the investment universe to select subindustry sectors that derive from the climate sub-themes, analysis at the company level proceeds by attending to the positive and negative impacts of climate change on particular companies in the framework of classical fundamental analysis, focusing on what would make a material difference in the medium term, and assessing whether a premium or discount is justified. Profitability Analysis Profits result from sales volumes and margins. It is obvious that companies that provide solutions to climate change and its impacts may be favored with superior growth prospects. In addition to classic factors, analysis of such companies focuses on how their products and activities fit into mitigation or

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adaptation strategies or as regards the better management of natural resources, the three major themes identified earlier. This analysis is quite straightforward for the pure plays in insulation, solar, wind, car batteries, and the like; but it gets complicated when assessing industries whose products are not only targeted at solving climate issues. For instance, different building materials have different energy profiles, both as regards their production and their usage. No large cement company is a pure play on energy efficient cement, yet one can differentiate those whose product mix and production process result in far lower carbon emissions. Similar differentiations can be made regarding home appliances, fertilizers, heavy machinery, pulp and paper plants, and so forth. In such cases, it is not the product category as such that defines a company’s congruence with mitigation or adaptation goals but rather the carbon performance of the company’s product mix and its production processes relative to its competitors. The difference in favor of lower carbon emissions can result in significantly higher sales prospects and/or margins. As already discussed, a company’s geographic exposure and the government stimulus packages from which it may benefit can also play a significant role. In response to current and prospective government regulations, as well as corporate social responsibility policies, actors all along supply chains are adopting green purchasing guidelines. For all these reasons, corporate leaders who are able to position themselves favorably in light of these trends can harvest obvious advantages over laggards. Innovative solutions may demand heavier investments and force higher costs for a while, but they usually lead to brand strength, and a stronger franchise and pricing power when they are successful. The early mover advantage can apply to margins as well as sales. Clearly, not all attempts at innovation pan out, which is why specific industry knowledge is necessary for wellinformed analysis. Asset Values Climate change changes the world. Clearly, it consequently impacts the value of tangible and intangible assets. A few examples will illustrate this.

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Oil platforms and petrochemical plants in Louisiana and Texas are in the path of increasingly frequent and severe hurricanes in the Gulf of Mexico. Katrina spared them and hit New Orleans. It could have been the other way around. It is surprising that for quite a few very capital-intensive industries with obvious long-term climate physical risks to their asset base, stock market data do not yet show material differences between those companies most at risk and those less at risk, even as some insurance underwriters have taken steps to protect themselves. Unusual droughts have recently affected cereals production in the Argentine Pampas. Should this become frequent, it will affect land asset prices, with ripple effects throughout the Argentine economy and potential effect on world soy and wheat prices. Plantation forests in Brazil today have one economic purpose: pulp for paper. Should a post-Kyoto Treaty provide incentives and transfer payments for forestation, these assets will take on new value as carbon sinks. Should the Arctic Northwest Passage become navigable for much of the year, it will quickly become commercially exploited by shipping companies (Arctic Council, 2009), leading to revaluation of existing port facilities, of certain types of vessels and of selected shipping companies. It will also lead to major public and private sector infrastructure investment. New regulations will come into effect favoring energy efficiency in office buildings. Though location is paramount, energy will become a factor in commercial real estate valuation as lower electricity costs play a bigger role in pricing lease agreements. More generally, given prospective eco-taxes and emission standards, the eco-efficiency of all fixed plant and equipment will need to be taken into account to assess present value as well as replacement cost. As regards intangible assets, consider the value of goodwill in corporate valuation. As public concern for climate change grows, companies whose brand gets strengthened by their positive actions and corporate profile will benefit.

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Value-added and Societal Values The market price of a stock is the result of supply and demand. One of the factors driving the supply and demand of a stock is what investors believe is its theoretical “fair value”, the result of discounting its forecasted future cash flows. Economic value added is the difference between the return on invested capital and the cost of this capital. Returns are forecasted through business analysis, as is the asset base, invested capital and their prospects. Markets are somewhat self-realizing as regards the cost of capital: the demand for stocks lowers the cost of equity. Greater access to capital reflects a better risk/reward profile perception from investors. Other important elements in stock price dynamics are psychology, crowd behavior, technical factors such as computerized trading, passive investing and index composition, and the reflexivity mechanism between actuality and expectations (Soros, 1987 and 2008). The growing visibility of climate change in the public’s mind and in the political arena cannot but influence stock market perceptions. As already mentioned, Climate Change ranks as high as The Great Recession among the things people worry about. More and more people want to act responsibly on climate and other environmental matters, recognizing their future is intertwined with what society does and what they themselves do. The stock market is far from insulated from the values and opinions of its participants. Thus, when it comes to climate change, value-added and societal values might come to point in the same virtuous direction. We believe that we are at the early stage of a very real climate change driven alteration of the perception of risk/return from market participants. There are those who do not share our belief. They question whether this might not be another case of a quick bubble leading to an equally quick burst. We agree with them that exuberance can happen, has happened, and will happen again. We disagree, however, that it is the case in this situation, because of the scale, durability, reality and visibility of the climate problem, as we have explained above.

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The prudent investor should therefore put capital to work buttressed with: – A robust understanding of climate change and society’s responses to it, – A strong sectoral and company analysis capability, and – A first-class active management expertise for valuing stocks, and buying and selling at appropriate times. The Climate Premium In general, and for all the above reasons, we expect that a P/E Climate Premium (Joly, 1990 and 1992) will emerge for companies that, though not pure plays, satisfy our classical and climate selection criteria. Relative valuations for such companies do not show any evidence so far of The Climate Premium versus their sector and country peers; which is what we mean when we say that climate change is generally not in the price of equities. This fact provides ample space for stock price appreciation in the selected universe and is therefore good news for investors in an integrative approach.

Conclusion We have seen that climate change satisfies six critical elements for a major enduring investment theme: – Scale: it is a worldwide phenomenon opening up worldwide investment opportunities – Durability: it will (unfortunately) be with us for many generations – Broad scope: it affects practically all sectors of the economy, thus providing broad diversification potential – Real need: it creates real needs for emissions mitigation, impact adaptation and better management of natural resources – Visibility: it is becoming increasingly top of mind in the public consciousness and in the political arena

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â&#x20AC;&#x201C; Timing: it cannot be postponed or ignored, its impacts are already operating on economic sectors, and the investment opportunities are just being recognized or just beginning to take shape. Chapter 1 presents the nature of the challenge. Chapter 2 proposes a method and its rationale. Chapter 3 takes up the challenge how to implement the method in practice.

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3 Implementing Climate Change in Investment Strategy: Natixis Asset Managementâ&#x20AC;&#x2122;s Approach 9

In response to the nature of the problem as described in Chapter 1: The Science of Climate Change, and following the rationale and method described in Chapter 2: How to Integrate Climate Change into Investment Portfolios? Natixis Asset Management has developed a proprietary approach to implement climate change into investment strategy. This chapter describes the objectives, features, and investment process of Natixis Asset Managementâ&#x20AC;&#x2122;s approach. It also provides illustrative examples of the application of thematic climate analysis to a few sectors in order to show the deductive thread from climate analysis to sector analysis and stock picking. For proprietary and commercial reasons, the full scope of the investment procedure is not revealed, but what is presented provides an insight into the inner workings of this approach

Objectives The primary purpose of this approach is to achieve competitive investment performance over the long term by responsibly taking into account the impacts of climate change on the economy and companies, within the context of the variety of other forces and trends affecting company valuation. 9. This chapter has been written by Carlos Joly in collaboration with Natixis Asset Management.

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In accomplishing this objective, Natixis Asset Management believes it is fulfilling its fiduciary duty 10 to preserve and grow the capital of its investors over the long term in a way that helps solve one of the most important challenges facing society and the investment community in the first part of the 21st Century.

Inclusion and Integration Comprehensive Inclusion of Sectors and Sub-Industry Sectors The first differentiating factor of the Natixis Asset Management approach to climate change is its comprehensiveness; it includes a much broader spectrum of sectors and sub-industry sectors than most other asset managers concerned with this theme 11. As demonstrated in Chapter 1 and Chapter 2, climate change will not only impact sectors like energy, water availability or waste 10. When drafting the UN Principles for Responsible Investment (UN PRI – see Appendix I) among a diverse group of institutional investors from the US and Europe, two contrasting views of the concept of fiduciary duty came into relief. On one side are adherents to a narrow interpretation that views fiduciary duty as requiring and allowing inclusion of environmental, social and governance issues (ESG) if and only if this is “material” to stock price performance, in practice meaning if it is likely to impact equity price movements in the near term. Holders of this view usually believe the sole objective of a fund manager is profit maximization. On the other side are adherents to a broader view that claim that the financial interest of principals cannot be divorced from nor can it trump their deepest environmental, social and ethical interests; that there is no necessary conflict between good or competitive long-term returns and ethical constraints on investment. The later recognize a longer-term time dimension of materiality and understand that the process whereby environmental, social and governance issues become material means – that what may not be material today may well be strongly material tomorrow (witness the history of materiality of asbestos, tobacco, contaminated land, and, in the making, carbon emissions and climate change impacts.) For a state-of-the-art discussion see UNEP FI and Freshfields, “The legal framework for the integration of ESG in institutional investment” (2005), a groundbreaking legal study by Freshfields commissioned for UNEP FI. www.unepfi. org/publications/investment. For an expansive view of fiduciary duty see Joly, C., “Ethical Demands and Requirements in Investment Management”, Business Ethics: A European Review, 1997, Vol.2 Issue 4. Natixis Asset Management is a signatory to UN Principles for Responsible Investment. 11. Source : FERI – European Competitor Analysis as of 31st December 2008, comparing open-ended funds with an environmental theme (environmental/ ecological funds, climate change, water, alternative energy).

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management. The investment implications extend far beyond to other areas of the economy, like construction, materials, agriculture, insurance and real estate property values. Therefore, Natixis Asset Management has built a comprehensive approach which includes sub-industry sectors that are generally not understood to be climate-related yet definitely are. We do so for two main reasons: – firstly to deal with the range of climate change impacts, and not only with one slice of the pie; – secondly to diversify the sector opportunities, to avoid the bubbles that are often involved with a monothematic approach. Natixis Asset Management’s portfolio managers have thus identified 39 sub-industry sectors as falling within the scope of the 3 macro-themes: mitigation, adaptation, and better management of natural resources. Each one contains 3 to 4 sub-themes, as highlighted in the following diagram. FIGURE 12

Natixis Asset Management’s Climate Change sub-themes 1. Mitigation : reduction in greenhouse gas emissions Energy substitution (lower carbon energy, alternative energy)

Building efficiency

Transport Efficiency

Modernization of power plants

2. Adaptation to the inevitable consequences of climate change

Cover against extreme events Adaptation of infrastructure Changing consumer behaviour

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3. Better management of natural resources

Water management

Soil management

Waste management

Source: Natixis Asset Management.

The equity team attends to the following drivers for sector and sub-industry selection 12: – severity and likelihood of climate impacts/economic and financial impact; – carbon-related regulations, existing and foreseeable; – political, budgetary realities/government stimulus plans. For company selection within each of the 39 sub-industry sectors, the equity team applies the following criteria: – relevance for mitigation; – relevance for adaptation; – relevance for better management of natural resources; – investability. How are sectors, sub-industry sectors and companies are identified within each theme? We illustrate with an example in the land management sub-theme. Deforestation and agriculture/farming represent respectively 18.2% and 14.9% of greenhouse gas emissions (WRI, 2005). Agriculture is responsible for the emission of three kinds of greenhouse gases: Carbon dioxide (C02), methane (CH4) and nitrous oxide (N20). These emissions can be reduced by better 12. Note: When we speak of sectors we refer to the MSCI Barra Global Industrial Classification Standard (GICS) and we refer, in particular, to the categories called “sub-industry sectors”. Though our initial coverage of sub-industry sectors is more extensive than most if not all other climate funds, we foresee that over time Natixis Asset Management’s climate change universe may add sub-industry sectors as our research uncovers new information and in light of new business developments.

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management practices, with improved productivity and the use of technology (irrigation, innovative equipment, transport, etc). Certain producers of fertilizers position themselves on this field for sustainable land management practices. These products seek to maximize farm yields while reducing their own environmental impacts. For example: the Norwegian company YARA, which produces mineral fertilizers that offer an optimum dosage in nitrate and avoid ammonia emissions. This company could be included in Natixis Asset Management thematic investable universe. Forest assets could also be acknowledged as a source of carbon credits by post-Kyoto agreements following the COP15 Conference at Copenhagen. Thus, Natixis Asset Managementâ&#x20AC;&#x2122;s portfolio managers search for companies that manage their forest patrimony sustainably (careful logging techniques, new plantations, preservation of oldest trees, etc). DURATEX, a Brazilian wood manufacturer that owns 110,000 ha of eucalyptus plantations could in the future also represent a carbon credit source.

FIGURE 13

From thematic analysis to the identification of sectors and companies: several examples 1. Mitigation : reduction of greenhouse gas emissions E.g. : Energy efficiency (buildings, transport), energy substitution (lower carbon energy, alternative energy)...

Favoring non-CO2 -producing _ energies, cleanest natural resources, energy efficient construction materials, business efficiency solutions etc...

2. Adaptation to the inevitable consequences of climate change E.g. : Changing behavior of households and businesses

Search for technologies able to meet a need while limiting CO2 emissions

Search for solar or wind energy producers, natural gas suppliers, efficient building materials producers, etc...

Replacing carbon-heavy travel

Examples*: IBERDROLA, Wind farms BG Group, Gas & Consumable Fuels

Examples* : CISCO System, telecommunications SHIMANO, Bicycles

3. Better management of natural resources

Management of soil

_ Reconciling the fight against soil exhaustion with the maintenance of agricultural yields

Example*: YARA, producer of nitrogen fertilizer

Source: Natixis Asset Management, examples as of September, 15th 2009.

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For indicative purposes, the following diagram shows some examples of stocks in the investment universe, by climate subtheme and noting the sub-industry sector to which it belongs: FIGURE 14

Illustrative examples of stocks by theme 13 As of September, 15th 2009 MITIGATION

ADAPTATION

Energy substitution

> Insurance and management of risks linked with Climate Change Munich Re - Insurance - Germany

> Lower Carbon Energy BG Group - Gas & Consumable Fuels - UK Iberdrola - Electric Utilities - Spain > Alternative Energy Suntech Power - Solar Equipment - China EDF - Electric Utilities - France Energy efficiency > Building efficiency Saint-Gobain - Building products - France Zumtobel - Electrical Equipment - Austria > Transport efficiency Bombardier - Tramways & mass transit - Canada SAFT - Electrical Equipment - France China Shipping Development - Marine – China > Modernization of power plants ABB - Electrical Equipment - Switzerland Andritz -Machinery - Austria

> Infrastructure spending Posco - Metals & Mining - South Korea Bouygues - Construction & Engineering - France > Change of consumer behaviours. Cisco - Communications Equipment - US Amazon - Internet & Catalog Retail - US

BETTER MANAGEMENT OF NATURAL RESOURCES > Water management Veolia Environnement - Multi-Utilities - France Nalco Water - Chemicals - US > Land management Yara, Fertilizers - Norway Stora Enso - Paper & Forest Products - Finland > Pollution control Séché Environnement - Commercial Services & Supplies - France Hera - Multi-Utilities - Italy

Source: Natixis Asset Management.

Global geographic coverage, with emerging market exposure As previously mentioned, climate change is a global issue that impacts the economy of entire regions. Geography is increasingly recognized as a factor in long-term investment allocation. That is why Natixis Asset Management has decided on a global equities approach rather than one circumscribed to Europe or any single region. The investment process includes companies in more than 35 developed and developing countries. Up to 25% is 13. These examples are communicated for illustrative purposes. They correspond to companies that would be eligible on a thematic basis in Natixis Asset Management’s investable universe as of 15th September 2009, but would not necessarily be selected for actual portfolios.

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invested in Emerging Markets, thus ensuring exposure to countries that will be gaining increasing importance in economic and climate-related terms. Flexible exposure to emerging markets represents the second key differentiating factor in Natixis Asset Management’s climate change approach.

FIGURE 15

A global equities universe, including emerging markets

Source: Natixis Asset Management. Countries in color are represented in the investment universe.

In sum, Natixis Asset Management’s approach results in a more comprehensive inclusion of sectors and sub-industry sectors than is generally true of other climate funds, as well as a broader global geographic coverage including emerging countries.

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Active Equity Management Informed by Science Active management The key premise of active management is the fact that inefficiencies and mispricing occur constantly in equity markets. Appropriate buying and selling can generate outperformance. This is in contradistinction to passive investment approaches that seek to replicate an index. As discussed in Chapter 2, we believe index investing reflects the past and cannot possibly capture the kind of future developments that are implicit when integrating climate change impacts in an equity portfolio. Stock selection, driving country and sector allocation, determine outperformance. Natixis Asset Management’s portfolio managers select stocks based on fundamental company analysis taking into account climate impacts and on their view of the attractiveness of a stock’s current price in relation to its potential, upside or downside, all things considered. The core of Natixis Asset Management’s equity team is the Portfolio Manager/Analyst (PMA). The PMA is responsible for decisions on a given portfolio; but, as a specialist in a particular sector, industry or market segment, he or she is also responsible for doing research in that particular field and sharing it with the rest of the team. Natixis Asset Management has 35 PMAs who work in this dual role. They have an average of 10 years equity investment experience; seniors have up to 25 years experience in a specific sector. The PMAs produce stock recommendations and research material for the entire team based on direct contact with company management, selected sell-side research and independent valuation and screening tools. In our experience, this form of organization has several strong advantages: it forces better, more realistic and more actionable analysis; it results in a more effective use of analysis in composing actual portfolios; it is a very effective way of generating and challenging investment ideas; and, not least, it helps build team spirit and camaraderie among a group of strong and talented individuals.

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Active management requires four distinct abilities: 1. Being able to have firm convictions about companies and holding onto positions; 2. Having the ability to modulate the level of risk taken by adjusting exposures between sectors or countries; 3. Having the discipline to take profits or accept a mistake by getting out of a position. In sum, this means being attuned and able to adapt to changing market conditions; 4. Part of the job is timing: on the one hand having the patience to wait for corrections in price and on the other hand being prepared do act quickly when necessary. Portfolio managers will not invest or maintain a position in an overpriced company just because it fits into Natixis Asset Management’s climate themes. Companies in the actual portfolio must satisfy three necessary criteria: 1. Fit into a climate sub-theme; 2. Be attractive on a fundamental basis; 3. Be attractive on a stock market pricing basis. The equity management team keeps a clear distinction between trading ideas and trading stocks. Ideas are shared and challenged within the team, though within the limits and objectives of each portfolio strategy; each portfolio management team is solely responsible for buying, selling or holding decisions within its respective portfolios. Firstly, this ensures timely decisions. Secondly, the emphasis on individual responsibility maximizes involvement, professionalism, and performance – and in so doing, it also improves collective skills. The Natixis Asset Management equity team has been successfully managing active thematic portfolios 14 for several years. A key factor of its success has been the ability to successfully adapt to market conditions. As regards climate change, its ample resources provide for in-depth comprehensive analytic sectoral capability. The fact that Natixis Asset Management is a major asset manager gives it ready access to the senior management of companies as 14. “Foncier Investissement” has been managed by Natixis Asset Management since 1972; “Fructifonds International Or” since 1980; “AAA Actions Agro Alimentaire” since 1985; “; “Natixis Impact Life Quality” since 2007.

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well as the best sell-side research. Besides, the input from the Scientific Advisory Committee (see below) means the equity team is up to date with the latest research on climate, climate economics, and regulatory trends. This serves Natixis Asset Management’s goal, which is to steward its clients’ capital safely through time and help meet their financial objectives.

Scientific approach Although the changes to the global climate due to man-made global warming can already be foreseen to a large degree over the course of the 21st century, the determination of what will happen and when in particular regions of the globe is far less certain. In coming years, advances in climate science and empirical data on the economic effects of the actual changes will be able to provide more reliable predictions of the nature, extent, and timing of impacts on a country and regional basis. Economists will be better able to estimate the economic implications, and investment managers will have a better basis for their decisions. Conscious that no asset manager has in-house senior scientific expertise spanning the range of environmental issues, Natixis Asset Management has established a Scientific Advisory Committee composed of leading researchers in climate change and in climate change economics. In constituting this Committee, Natixis Asset Management has sought to bring together scientific excellence with business experience in environmental matters. Its purpose is to maintain state-of-the-art competence. This combination of talent and experience will result in challenging discussions, fresh insights and new ideas for Natixis Asset Management’s investment practice. This Committee has multiple roles: – First and foremost, it is to inform Natixis Asset Management of the latest developments in climate science and in the socioeconomic impacts of climate change. – Second, the Committee validates or provides constructive critique of Natixis Asset Management’s thematic analysis of the impacts of climate change on various sectors. – Third, it brings to its attention environmental and social issues that may not be considered or assessed adequately.

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– Fourth, it reviews the selected stocks to see if any are not properly responsive to Natixis Asset Management’s three main themes and its specific sub-themes. – Fifth, through seminars, publications, and press briefings, it will support Natixis Asset Management’s efforts in raising the awareness and knowledge of climate change and its consequences among the investment community and the public. – It should be noted that the Scientific Advisory Committee does not have any responsibility for investment decisions, which are solely the responsibility of Natixis Asset Management’s equity management teams. The following diagram shows the composition of Natixis Asset Management’s Scientific Advisory Committee. (Biographies of members are in appendix III.) FIGURE 16

Natixis Asset Management’s Scientific Advisory Committee Philippe Zaouati Business development Head

Pascal Voisin CEO

Dominique Sabassier CIO

Carlos Joly Suzanne Senellart Portfolio manager

Chairman of the SAC Co-founder of UNEP FI / UN PRI*

Richard Klein Adaptation and vulnerability

Clotilde Basselier Portfolio manager

SCIENTIFIC ADVISORY COMMITTEE Natixis Asset Management

Stéphane Hallegate socio-economic Impact of climate change

Miklos Konkoly Thege Certification, shipping

Blaise Desbordes

Pierre Radanne Energy efficiency

Green building Yves Le Bars Waste Natural disasters

Natixis AM members

Anne Gouyon Forestry and agro forestry

Experts (examples of their specialties)

Source: Natixis Asset Management.

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Investment Process Natixis Asset Managementâ&#x20AC;&#x2122;s Climate Change investment process combines a top-down with a bottom-up approach. The top-down procedure consists in narrowing down the thousands of listed companies in the world, and the dozens of sub-industry sectors in the Global Investment Classification Standard, regarding the climate change-related sub-themes defined by Natixis Asset Management. The objective is to focus on the sectors considered most materially impacted by climate change in the medium and long term. This first step leads to the identification of an investable universe of over 300 to 500 companies within 39 sectors in more than 35 developed and developing countries, including Brazil, Russia, India, China, and a number of other emerging markets. Once the investable universe is defined with only companies that are positively responsive to one or more of our climate sub-themes, the next step aims at selecting those that are most financially attractive. This bottom-up procedure consists of analyses with the sector specialists to identify preferred companies based on financial, regulatory, management quality and climate criteria. This procedure assures that companies will be selected if and only if they are properly responsive to the climate subthemes and meet portfolio managersâ&#x20AC;&#x2122; conditions for financial attractiveness. For this reason, the equity team seeks to meet with the senior management of all companies in the portfolio for an in-depth assessment of their business strategy and, in particular, how it relates to climate change. A screen is also applied to short-listed companies to make sure any Worst Offenders on fundamental human rights criteria are not included. The chosen companies make up the final selection which contains approximately 80 stocks. This high conviction list constitutes a basis for a concentrated portfolio.

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Overview of Natixis Asset Management’s investment process

As regards market risk, Natixis Asset Management’s approach follows a non-benchmarked strategy, relying on high conviction stock selection, based on both thematic and financial inputs. However, a global index such as the MSCI World could be used for performance comparisons. Moreover, the broad sector and geographic diversification of this approach results in a lower volatility as compared with monothematic funds. As already mentioned, this is an important differentiating element compared with most existing climate change related funds.

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To conclude Natixis Asset Management’s climate change approach is performance oriented: – High Alpha Active Management with the goal of superior investment performance over the long term, due to its investment philosophy to avoid becoming constrained by index-relative controls and its focus on fundamental trends with long-term impact. – Scientific input to stay abreast of the latest findings in climate science and their economic, social, political and regulatory implications. – Broader, more inclusive investment universe than is the case with other climate funds, due to Natixis Asset Management’s comprehensive understanding of climate impacts throughout the diversity of economic sectors affected and its inclusion of Emerging Markets. – Lower Volatility, as compared to narrowly-defined green technology or alternative energy funds. – Flexible exposure to Emerging Markets, due to its positive inclination for investing in Brazil, Russia, India, China and a few other selected Emerging Markets. Natixis Asset Management’s climate change approach is an extension of its experience applying thematic analysis to investment opportunities in other actively managed funds. These thematic funds have achieved efficient risk/return profile over the long term.

In addition to its investment advantages, it is appropriate to ask in what way the Natixis Asset Management climate change approach can be considered a Responsible Investment. The litmus test in this regard is whether this approach can be expected to have a positive environmental impact.

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Responsibility Does Natixis Asset Management’s Climate Change approach have a positive environmental impact? In what way is it a Responsible Investment? A question on the minds of NGOs and many investors is whether investing in an environmental fund can have a positive environmental impact, leaving aside the fact the investment strategy is expected to provide competitive investment performance. This is a very appropriate concern because investors are motivated by the hope that investing in an environmental fund is not only good for their patrimony but also good for the environment. How, then, can investment in Natixis Asset Management’s approach serve a positive environmental purpose? First, from a purely financial perspective, as climate funds get larger they may contribute to reducing the cost of capital for the companies that serve to significantly reduce CO2e emissions and create adaptation solutions. This occurs as demand for these companies’ shares increases and their prices go up. An important ripple effect leads to emulation by other companies who see the valuation benefits of implementing progressive corporate actions on climate change. Natixis Asset Management hopes its Climate Change approach and other sustainable development investment approaches will gain traction so that this effect can take place. Secondly, investors can sometimes influence corporate behavior in ways that are unavailable to NGOs or even governments. Investment managers can make it clear to company managements that they consider real action on the climate agenda as critical for their company’s success and its investment attractiveness. We expect this has some effect. Thus, from a corporate social responsibility perspective, Natixis Asset Management equity teams will seek to actively engage with companies on their carbon and adaptation strategies, unequivocally expressing the team’s interest inseeing a company and its products achieve large reductions in absolute C02e emissions. Eco-efficiency (that is,

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improving the ratio of output of goods and services to the output of emissions) is a necessary first step, but the proper objective is to limit absolute emissions. In this, Natixis Asset Management’s interest mirrors the goals set by the UK’s legally binding legislation 15, the most stringent country standard as of the writing of this paper. Moreover, Natixis Asset Management’s climate change investment process includes a screen applied to the short-listed companies to make sure the final stock selection does not include any Worst Offenders on human rights criteria. This is a qualitative determination applied to the companies selected through climate thematic and investment analysis, and it is taken on the basis of assessments by the internal SRI specialists. As a change agent, Natixis Asset Management participates and contributes in industry fora with three specific goals: • To contribute to raising awareness of climate change and the financial industry’s responsibilities in this regard; • As a member of UN PRI, EUROSIF and similar organizations, to support a progressive legislative agenda in favor of climate mitigation, adaptation and better management of natural resources; • To promote best practices in the investment supply chain concerning climate change. The industry initiatives in which Natixis Asset Management is active include: the Carbon Disclosure Project, the UN Principles of Responsible Investment, the Observatoire de la Responsabilité Sociétale des Entreprises (ORSE), and Eurosif.

Natixis Asset Management Fiduciary Duty as regards Climate Change In general, then, and along with many of our institutional and individual clients, Natixis Asset Management recognizes that we have a shared responsibility to resolve the challenges 15. UK Climate Change Bill of 2009.

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brought about by man-made climate change. It believes it is within its duty of corporate citizenship to provide investors with investment solutions that align with emissions reduction and are strategically in synch with society’s need to adapt to the consequences of climate change. This includes developing and offering new products such as this Climate Change approach, as well as doing research and devising tools that will permit its clients to be responsive to the risks and opportunities posed by climate change. Its role is not just to remain passive. Natixis Asset Management would rather make its climate research public and encourage its clients to look at the impact of their investments. It will seek to convince its clients to redirect their investments towards those sectors of the economy and those companies that contribute to preventing the negatives of climate change from becoming catastrophic. An essential element of Natixis Asset Management’s fiduciary duty as investment managers is to protect the financial interests of its clients. It considers it is implicit in its fiduciary duty to promote and support sustainable development and a healthy economy. Without a healthy economic fundament, no investment strategy can preserve capital for long. As argued in Chapter 1, society risks global economic collapse if we do not succeed in preserving nature from a climate tipping point. This is a condition for securing a healthy economy in our lifetimes and for those to come. As one of the world’s twenty largest asset managers for a broad range of institutions and individuals, Natixis Asset Management has an abiding interest in taking this aspect of its fiduciary responsibility seriously. Its global equities approach focused on climate change is one way of putting this interest into practice, and provides a pragmatic approach to reconciling responsibility with a performance-oriented investment strategy.

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Overall Conclusion

The prudent investor seeks to preserve capital from climaterelated risks and to make it grow in light of climate-related business opportunities. An investment strategy in line with this goal will minimize the risk of climate change-induced portfolio meltdown by focusing on mitigation opportunities in greenhouse gas emissions, adaptation to climate impacts, and better management of natural resources. The responsible investor wishes to meet his or her financial goals while acknowledging that a healthy economy requires respect for natureâ&#x20AC;&#x2122;s limits and for basic human rights. Natixis Asset Managementâ&#x20AC;&#x2122;s approach is designed to help accomplish these objectives. It is a responsible, long-term, conviction-based investment for institutional and individual investors who take their fiduciary and social commitment seriously.

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About Natixis Asset Management Natixis Asset Management is the European expert of Natixis Global Asset Management. Based in Paris, it is among the top European asset managers with around 300 billion euros under management and 600 employees as of June 30, 2009. Natixis Asset Management offers a full range of investment solutions in all asset classes and provides notably strong expertise in general and thematic equity management. Recognized as a pioneer with 25 years experience, Natixis Asset Management is also one of the leaders in France and in Europe in SRI. Natixis Asset Managementâ&#x20AC;&#x2122;s offer in SRI is one of the most comprehensive on the market, deployed on all asset classes and on the main SRI approach.

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References and Selected Bibliography

Aldy, J., and Stavins, R. N. (Eds.) (2007), Architectures for Agreement: Addressing Global Climate Change in the Post-Kyoto World, Cambridge University Press, Cambridge, UK. Alliance Bernstein Advisors (2009), Abating Climate Change: What Will Be Done and the Consequences for Investors, N.Y. Arctic Council, “Arctic Marine Shipping Assessment 2009 Report”, AMSA, available at http://arcticportal.org Bosetti, V., Carraro, C., Sgobbi, A., and Tavoni, M. (2008), “Modelling Economic Impacts of Alternative International Climate Policy Architectures: A Quantitative and Comparative Assessment of Architectures for Agreement,” CEPR Discussion Paper 6995. Bosetti, V., Carraro, C., Sgobbi, A. and Tavoni, M. (2008), “Pay Less, Get Less: An Economic Assessment Of Post-2012 Climate Policy Proposals”, available at www..voxEU.org California Environmental Associates (2007), Design to Win, available at www.climateworks.org Casselman, A., “Will the Opening of the Northwest Passage Transform Global Shipping Anytime Soon?”, Scientific American, Nov. 10, 2008. Center for Integrative Environmental Studies (CIER) (2008), Climate Change Economic Impact Reports, available at www.cier.umd.edu ClimateWise and Forum for the Future (2008), Review of Insurance Industry, London. Committee on Climate Change (2008), Building a low carbon economy – the UK’s contribution to tackling climate change, UK Government, London Davis, G. (2008), “The Current Status of New Nuclear Plants in the US”, Westinghouse. DB Advisors (2007), Investing in Climate Change: An asset management perspective, Deutsche Bank.

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DB Advisors (2009), Investing in Climate Change 2009: Necessity and Opportunity in Turbulent Times, Deutsche Bank. DB Research (2008), Building a cleaner planet: the construction industry will benefit from climate change, Deutsche Bank. De Boer, Y. (2009) “The Essentials at Copenhagen”, Cop15news, available at http://en.cop15.dk/news/view+news?newsid=876 DOE/EIA (2007), “Greenhouse Gas Emissions in the United States 2007”, Report #DOE/EIA-0573 DOE (2008), “Insulation Fact Sheet”, US, DOE/CE-0180 Ecologic (2007), “EU Water Saving Potential”, EC, Brussels. Enkvist, P. et al, “A Cost Curve for GHG Reduction”, McKinsey Quarterly, Vol. 1. 2007. European Climate Change Programme, Working Group II, “Impacts and Adaptation: Agriculture and Forestry Sectoral Report”, EC, Brussels. European Economic and Social Committee and the Committee of the Regions (2007), “Green Paper from the Commission to the Council: Adapting to climate change in Europe – options for EU action”, European Parliament, Brussels. European Environment Agency (2005), “Vulnerability and adaptation to climate change in Europe”, Technical Report No 7, Brussels, EU. European Short Sea Network, “Freight by Water”, www.seaandwater.org Garz, H. and Volk, C. (2003), Carbonomics, West LB. Garz, H. and Volk, C. (2004), Playing with Fire, West LB. German Cabinet (2007), “Report on implementation of the key elements of an integrated energy and climate programme adopted in the closed meeting of the Cabinet on 23/24 August 2007 in Meseberg, Germany”. Goldman Sachs (2004), “Energy: Social and Environmental Issues Count”, UNEP FI, available at www.unepfi.org/publications/investment Gramlich, R. (2008), “20% Wind Energy by 2030”, American Wind Energy Association. Hall, D. and Lobina, E., “Water companies in Europe 2007”, Public Services International Research Unit (PSIRU), University of Greenwich, available at www.psiru.org Hansen, J. (2008), “Global Warming 20 Years Later: Tipping Points Near”, Testimony to the House Select Committee on Energy Independence and Global Warming. Hansen, J. et al (2008), “Target Atmospheric CO 2: Where Should Humanity Aim?”, Open Atmospheric Science Journal, 30 October 2008, 2, 217-231. HSBC (2008), “World Survey on Citizens Concerns”, October 2008. Hudson, J. (2008), “UBS Climate Change Update”, UBS.

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REFERENCES AND SELECTED BIBLIOGRAPHY – 91

Innovest (2003), “Geographical Factors Affect Risk Profiles”, Carbon Disclosure Project, London. IPCC (2007), Fourth Assessment Report, UN, Geneva, available at www. ipcc.ch Joly, C. (1990), “The Green Premium and the Polluter Discount”, chapter in The Greening of Enterprise, ICC Publication 487E, Paris. Joly, C. (1992), “Green funds, or just greedy?”, chapter in Koechlin, D and Muller, K. (Ed.), Green Business Opportunities: The Profit Potential, Financial Times/Pitman Publishing, London, pp. 131-153. Joly, C. (1997), “Ethical Demands and Requirements in Investment Management”, Business Ethics: A European Review, Wiley, Volume 2 Issue 4, Pages 199-212. Joly, C. (2003) “Climate Change and the Investor”, Speech at Royal Institute for International Affairs, Chatham House. Kutscher, B. (2008), “Biomass Power Potential”, Renewable National Energy Lab, US. Levine, L.B. (2008), “Intensity of Energy Use”, Lawrence Berkeley National Lab. Mazria, E. (2008), The 2030 Blueprint. Munich Re (2007), “Topics Geo: Natural catastrophes 2007 Analyses, assessments, positions”, available at www.munichre.com National Development and Reform Commission (2007), China’s National Climate Change Programme, People’s Republic of China. National Oceanic and Atmospheric Administration (2009), “State of the Climate”, June, 2009. Pew Center on Global Climate Change (2004), “Observed Impacts of Global Climate Change in the US”, available at www.pewclimate.org Pew Center on Global Climate Change, “Climate Change 101: Adaptation”, www.pewclimate.org Pew Center on Global Climate Change (2007), “Regional Impacts of Climate Change: Four Case Studies in the United States”, www.pewclimate.org Ponssard, J.P., and Walker, N., “EU emissions trading and the cement sector: a spatial competition analysis”, Climate Policy 8 (2008) 467-493. Randers, J. (2008), “Global Collapse: Fact or Fiction”, Futures. RBC Capital (2007), “Investing in Uranium Companies”, RBC. Reinert, E. (2008), How Rich Countries Got Rich and Why Poor Countries Stay Poor, Constable, London. Sea and Water (2006), “The case for water: Why transporting freight by water is good for the environment and good for the economy”, www. seaandwater.org

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Solomon et al (2008), “Irreversible climate change due to carbon dioxide emissions”, http://www.pnas.org/content/106/6/1704.full Soros, G., (1987), The Alchemy of Finance, John Wiley, N.Y. Soros, G. (2008), G. Soros, A New Paradigm for Financial Markets, PublicAffairs/Perseus. Speth, G. (2008), The Bridge to the End of the World, Yale University Press. Stern, N. (2006), The Stern Review: The Economics of Climate Change, HM Treasury, London, available at www.hm-treasury.gov.uk Stern, N. (2008), “The Economics of Climate Change”, American Economic Review, Papers & Proceedings, 98.2, pp. 1-37. Stern, N. (2009), A Blueprint for a Safer Planet, Bodley Head, London. Turner, A. (2006), “Change of Climate”, Prospect, Issue 129. UNEP FI (2009), The Materiality of Climate Change, Report by the Asset Management Working Group, at www.unepfi.org/publications/ investment. Union of Concerned Scientists (2007), “Confronting Climate Change in the US Northeast, Science, Impacts and Solutions”. Walter, K., Zimov, S. and Chanton, J. “Methane bubbling from Siberian thaw lakes as a positive feedback to climate warming”, Nature 443, September 2006. Also see studies at www.terranature.org/ methaneSiberia WBCSD (2008), “Greenhouse Gas Mitigation in the Cement Industry”, www.wbcsdcement.org WBCSD (2008), “Energy Efficiency in Buildings: Transforming the Market”, www.wbcsd.org World Resources Institute (2005), “Navigating the numbers”, 2005.

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Appendix

I. Financial Industry Statements on Climate Change The Principles for Responsible Investment (sponsored by the United Nations) As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognise that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following: 1. We will incorporate ESG issues into investment analysis and decision-making processes. Possible actions: – Address ESG issues in investment policy statements. – Support development of ESG-related tools, metrics, and analyses. – Assess the capabilities of internal investment managers to incorporate ESG issues. – Assess the capabilities of external investment managers to incorporate ESG issues. – Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis. – Encourage academic and other research on this theme. – Advocate ESG training for investment professionals.

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2. We will be active owners and incorporate ESG issues into our ownership policies and practices. Possible actions: – Develop and disclose an active ownership policy consistent with the Principles. – Exercise voting rights or monitor compliance with voting policy (if outsourced). – Develop an engagement capability (either directly or through outsourcing). – Participate in the development of policy, regulation, and standard setting (such as promoting and protecting shareholder rights). – File shareholder resolutions consistent with long-term ESG considerations. – Engage with companies on ESG issues. – Participate in collaborative engagement initiatives. – Ask investment managers to undertake and report on ESG-related engagement. 3. We will seek appropriate disclosure on ESG issues by the entities in which we invest. Possible actions: – Ask for standardised reporting on ESG issues (using tools such as the Global Reporting Initiative). – Ask for ESG issues to be integrated within annual financial reports. – Ask for information from companies regarding adoption of/adherence to relevant norms, standards, codes of conduct or international initiatives (such as the UN Global Compact). – Support shareholder initiatives and resolutions promoting ESG disclosure. 4. We will promote acceptance and implementation of the Principles within the investment industry. Possible actions: – Include Principles-related requirements in requests for proposals (RFPs). – Align investment mandates, monitoring procedures, performance indicators and incentive structures accordingly (for example, ensure investment management processes reflect long-term time horizons when appropriate). – Communicate ESG expectations to investment service providers. – Revisit relationships with service providers that fail to meet ESG expectations. – Support the development of tools for benchmarking ESG integration.

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– Support regulatory or policy developments that enable implementation of the Principles. 5. We will work together to enhance our effectiveness in implementing the Principles. Possible actions: – Support/participate in networks and information platforms to share tools, pool resources, and make use of investor reporting as a source of learning. – Collectively address relevant emerging issues. – Develop or support appropriate collaborative initiatives. 6. We will each report on our activities and progress towards implementing the Principles. Possible actions: – Disclose how ESG issues are integrated within investment practices. – Disclose active ownership activities (voting, engagement, and/or policy dialogue). – Disclose what is required from service providers in relation to the Principles. – Communicate with beneficiaries about ESG issues and the Principles. – Report on progress and/or achievements relating to the Principles using a ‘Comply or Explain’1 approach. – Seek to determine the impact of the Principles. – Make use of reporting to raise awareness among a broader group of stakeholders. The Comply or Explain approach requires signatories to report on how they implement the Principles, or provide an explanation where they do not comply with them. The Principles for Responsible Investment were developed by an international group of institutional investors reflecting the increasing relevance of environmental, social and corporate governance issues to investment practices. The process was convened by the United Nations Secretary-General. In signing the Principles, we as investors publicly commit to adopt and implement them, where consistent with our fiduciary responsibilities. We also commit to evaluate the effectiveness and improve the content of the Principles over time. We believe this will improve our ability to meet commitments to beneficiaries as well as better align our investment activities with the broader interests of society. We encourage other investors to adopt the Principles.

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UNEP Finance Initiative: Declaration on Climate Change by the Financial Services Sector As heads of some of the largest financial service organisations in the world, we acknowledge that: Unequivocally, human activity is a fundamental driver of climate change, as confirmed in the IPCC Fourth Assessment Report. Unless action is taken now to set in motion a worldwide transition to a low carbon economy, some scenarios suggest that by 2040, the world could experience annual economic losses as high as USD 1 trillion; and grave social and environmental harm from climate-related disasters. Climate change could result in a reduction in global GDP equivalent to the economic impacts of the 20th century’s major conflicts, as predicted by the Stern Review to the UK Prime Minister. The most severe impacts of climate change, including extreme weather events, drought, crop failure and disease will fall most harshly on those regions and people least able adapt to the impacts of climate change – the world’s poor. In 2002, the UNEP Finance Initiative Climate Change Working Group, made up of some of the largest financial institutions from around the globe, alerted the finance and business communities, governments and public at large, to a number of the major risks posed by climate change to the world economy. In the 5 years since the landmark report, Climate Change and the Financial Services Industry: Threats and Opportunities, UNEP FI and its members have urged governments to take greater and more concerted action, and have pushed for effective market-oriented solutions in tackling the problem. More recently, there has been a seismic shift in how climate change is perceived, and is widely considered to be the greatest market failure ever. This is in part due to the fact that many of the effects of climate change are beginning to manifest, and that the threats posed by continued warming will affect – and even possibly disrupt – the operation of markets, societies, ecosystems and cultures. Many of the world’s politicians and business leaders are already taking action and proposing solutions. These efforts, however, can only be regarded as a modest beginning, given the scale of the climate change problem. A global effort involving all nations, governments, business and industry is required to address a problem considered one of the greatest threats to humanity and the future well being of the planet. Our actions will be made much more effective by adequate political and economic frameworks created by government. Against this

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background, we recognise that there is an important role to be played by the financial services sector in tackling this crisis. We commit to: Advance our knowledge and understanding of both climate change risks and opportunities. Quantify and integrate those risks and opportunities into our core financial operations. This includes working with our clients and investments – through engagement and product development – to reduce their carbon emissions. Similarly, assist our clients to manage the risks and opportunities of climate impacts, by assessing their exposure and providing products and services that improve their adaptive capability. Reduce our own direct impacts and carbon footprint and report and assess our annual emissions transparently. Incorporate the issue of climate change into our investment decision-making process to promote and protect asset growth in the companies and sectors in which we invest. This includes cooperation to encourage and harmonise disclosure of climate-related items in regular financial reporting, to more accurately assess the impacts of climate change on company performance. [Emphasis added.] Despite the pressing nature of the challenges posed by climate change, we believe that there is still time to act, and that government leaders and policymakers need to take action forthwith to design the policy and market frameworks to facilitate this process. We call for and urge government leaders to: Set clear and mandatory, medium and long-term emission reduction targets in industrial nations, building on the existing framework, such as the proposals presented by the UK and EU for a mandatory emissions reduction target in the industrial nations of 20-30% by 2020 and 60-80% by 2050. Set ambitious emission targets to be formally adopted by 2009 as part of the post-2012 regime, in order to build confidence in the process and ensure time-sensitive carbon market continuity. Expand use of market instruments such as emissions trading and those established through the Kyoto Protocol’s Clean Development Mechanism (CDM) and Joint Implementation (JI) to produce a carbon price and help drive low carbon investment. As part of the new international post-2012 agreements, simplify, standardise and streamline the CDM/JI process by 2009, such that these instruments can maximise their role in delivering environmental and sustainable development objectives.

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Adopt ambitious goals and incentives for renewable energy production, such as the target proposed by the EU to increase the share of renewable energy in European supply to 20% by 2020. Take steps to enable and encourage developing nations to adopt a climate-friendly path for their economic development. Implement energy efficiency programmes and Research and Development initiatives that include public- private partnerships and support the deployment of low carbon technologies. At the same time, we call for a systematic approach to adaptation that integrates climate change into existing and new programmes on disaster reduction and management, and sustainable development.

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II. Government Stimulus Plans: The Political Shift towards Green Infrastructure Major market countries and countries in the developing world are putting government programs in place to stimulate their economies out of the current recession, seeking to avoid a 1930s type depression or a deflationary decade like Japan suffered after its equity bubble collapsed. The EU’s plan is of the order of m200bn, China’s nearly $600bn, the US nearly $800bn. A common element is investment in infrastructure: in railroads, roads, bridges, electricity distribution grids, hospitals, schools; and education. Many of the programs proposed have a green element to them, increasing energy efficiency, energy conservation, and reducing greenhouse gas emissions. In what follows we quote from a variety of sources to present a representative compendium of plans, programs, and commentaries of government-led initiatives. In our view, these initiatives translate into business for the sectors and companies in our investment universe.

1. US Plan The Obama Biden comprehensive New Energy for America plan will: • Provide short term relief to American families facing pain at the pump. • Help create five million new jobs by strategically investing $150 billion over the next ten years to catalyze private efforts to build a clean energy future. • Within 10 years save more oil than we currently import from the Middle East and Venezuela combined. • Put 1 million Plug In Hybrid cars – cars that can get up to 150 miles per gallon on the road by 2015, cars that we will work to make sure are built here in America. • Ensure 10 percent of our electricity comes from renewable sources by 2012, and 25 percent by 2025. • Implement an economy-wide cap and trade program to reduce greenhouse gas emissions by 80 percent by 2050. Source: Obama Campaign Website, www.barackobama.com, 2008

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The Center for American Progress, the think tank that has provided President Obama with much of his platform, has made the following recommendations.

Source: Center for American Progress, Political Economy Research Institute, “Green investments and jobs”, 2008.

In President Obama’s own words: 6 December 2008 “Today, I am announcing a few key parts of my plan. First, we will launch a massive effort to make public buildings more energy-efficient. Our government now pays the highest energy bill in the world. We need to change that. We need to upgrade our federal buildings by replacing old heating systems and installing efficient light bulbs. That won’t just save you, the American taxpayer, billions of dollars each year. It will put people back to work. Second, we will create millions of jobs by making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s. We’ll invest your precious tax dollars in new and smarter ways, and we’ll set a simple rule – use it or lose it. If a state doesn’t act quickly to invest in roads and bridges in their communities, they’ll lose the money. Third, my economic recovery plan will launch the most sweeping effort to modernize and upgrade school buildings that this country has ever seen. We will repair broken schools, make them energy-efficient, and put new computers in our classrooms. Because to help our children

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compete in a 21st century economy, we need to send them to 21st century schools.”

Supreme Court Decision in Massachusetts et al vs. Environmental Protection Agency: EPA is responsible for regulating GHG emissions On April 2, 2007 the Supreme Court released its ruling in the case of the state of Massachusetts vs. the Environmental Protection Agency. Massachusetts and eleven other states, along with several local governments and non-governmental organizations (petitioners), sued the EPA for not regulating the emissions of four greenhouse gases, including carbon dioxide (CO2), from the transportation sector. The petitioners claimed that human-influenced global climate change was causing adverse effects, such as sea-level rise, to the state of Massachusetts. In a 5-4 decision, the court ruled in favor of Massachusetts et al, finding that EPA has the authority to regulate CO2 and other greenhouse gases. The decision was written by Justice Stevens and was signed by Justices Kennedy, Souter, Bader Ginsburg, and Breyer. Chief Justice Roberts and Justices Alito, Scalia, and Thomas dissented. This opinion is important for national and local climate change policy. Not only does it open the door to regulation of greenhouse gases under the Clean Air Act, but is also likely to catalyze calls for more comprehensive federal climate change legislation (pdf) – legislation that covers sectors other than transportation as well as non-CO2 greenhouse gases. This ruling could lend support for state efforts such as the California legislation intended to regulate greenhouse gases as a pollutant in the transportation sector. In turn, expanded state activity will likely build even more pressure for a more uniform federal program. Source: Pew Center, 2008.

2. EU Plan European Union: In January, 2008, the European Commission released the Climate Action and Renewable Energy Package, which set out European climate change policy. The package stipulates: – A commitment to unilaterally reduce overall emissions to at least 20% below 1990 levels by 2020, and to 30% if other developed countries make comparable efforts; – A target of increasing the share of renewable energy use to 20% by 2020;

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– A goal of increasing the share of biofuels in transport to 10% – since then, the target has been halved, to 5%, in light of food vs. fuel debates; – A framework to allow additional state aid for carbon capture and storage (a technology that can capture carbon dioxide emitted in powergeneration and industrial processes and store it underground where it cannot contribute to global warming) demonstration plants; – The EU has also proposed capping carbon dioxide emissions from new vehicles to an average of 130g/kilometer by 2012, compared to the current 158g/kilometer. In October, 2008, the European Parliament’s Environment Committee voted to cut the EU greenhouse gas emissions from most industrial sectors by 21% from 2005 levels by 2020 and to phase out the free allocation of emission permits, leading to full auctioning, with the exception of energy-intensive sectors. The Parliament voted to replace the current free distribution of carbon-dioxide permits with a mandatory auction system between the 2013-2020 timeframe in a bid to help cut European greenhouse gas emissions. MEPs stated that 85% of all emission allowances for the manufacturing sector should be allocated free of charge in 20134 and that after 2013 the free allocation should decrease each year resulting in full auctioning of all allowances in 2020 – excluding sectors with a risk of carbon leakage.

UK Plans The government’s Committee on Climate Change set a series of tough carbon budgets which will, if adopted, require greenhouse emissions cuts of 42% by 2020. Aviation and shipping emissions will not be included in the calculations until 2012. Only then will they be integrated into the EUETS due to their international dimensions and the difficulty in providing data comparable to other sectors. A key focus is on decarbonised electricity supplies, mainly through a renewable energy strategy. This includes a 30% contribution from wind, or a greater proportion of nuclear generation, together with carbon capture and storage, energy efficiency measures and development of electric vehicles. New coal-fired power stations would have to be fitted with carbon capture and storage, or agree to fit it in the near future. The committee’s report came shortly after the Climate Change Act 2008 passed into law, the first national legislation anywhere in the world to set a policy framework with binding interim and long term emissions reduction targets. Source: ENDS Report 406, 2008, pp 54-55.

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German Plans The Integrated Energy and Climate Program of the German Government The challenge ahead and the goals of energy and climate policy. The challenges posed by global climate change are inextricably linked to how, as the international demand for energy grows, we manage to achieve energy security at affordable prices and thereby ensure a sustainable energy supply. An ambitious strategy for increasing energy efficiency and pressing ahead with the expansion of renewable energies is the correct response if we are to reduce greenhouse emissions. In time for the 13th Conference of Parties to the UN Framework Convention on Climate Change from 3 to 14 December 2007 in Bali, the German government is publishing an integrated energy and climate program that will set global standards and set out an appropriate response for a modern economy. Before the negotiations about the future of international climate protection have even begun, Germany is adopting a concrete program of action to implement strategic EU decisions at national level. After all, energy and climate policy is only credible if ambitious targets are backed by practical measures. Germany is living up to its pioneering role in international climate protection. At the same time, this policy is taking up the challenges posed by trends in the world’s energy markets, especially the price of oil and gas. The German government has identified two particular keys: energy must be used far more efficiently than it is today and we need more low – CO2 forms of energy. The European Council of heads of state and government meeting in spring this year under the German Presidency laid the foundations for an integrated European climate and energy policy up until 2020 and pointed the way forward until 2050. This vision includes ambitious climate protection targets along with targets for the expansion of renewable energies and an increase in energy efficiency. The package presented here aims to make fighting climate change efficient. This implies making climate protection affordable and keeping pace with economic development – something that applies in equal measure to industrialized and newly industrializing countries. Consequently, the German government has opted for action that promises a favorable CO2 balance and optimum cost efficiency so as not to impair the competitive potential of companies or demand too much of consumers. As a German contribution towards an international convention on climate protection after 2012, the government is offering to cut emissions by 2020 to a level 40% below that of 1990. This offer assumes that

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the European Union will, over the same period, reduce its emissions by 30% compared with 1990 and that other countries will adopt similarly ambitious targets. The package of acts, ordinances and reports that has been adopted here amounts to a major advance towards achieving these goals and sends a clear message to the international climate negotiations in Bali. The government’s energy policy continues to be guided by the triple objective of supply security, economic efficiency and environmental acceptability. Part of this means ensuring that the energy sector and industry in general enjoy dependable, competitive conditions for making investments. At the same time, consumers need cost-efficient solutions and transparent, dependable conditions for their own decisions about consumption and investment. The legislative measures described here provide that dependability. Each of them defines targets in its own field for the period until 2020 and backs them up with concrete measures. The Integrated Energy and Climate Program will also serve Germany as a location for productive activity. Cutting the consumption of coal, oil and gas for transport, spatial heating and hot water, and power generation, thanks to greater efficiency and the use of renewables, will reduce Germany’s dependence on energy imports. The key lies in innovative energy technologies, both on the supply side where energy is produced (e.g. in power stations and renewable energy technologies) and on the demand side where the energy is consumed (e.g. appliances, vehicles and buildings). Those who make low-energy buildings, machinery and pumps, renewable energy generators and lowfuel products or vehicles will find they have a competitive edge as energy prices rise in the domestic market, but also in export markets. Greater energy efficiency reduces our dependence on energy imports and lessens the financial strain on consumers and the economy. That, too, is the right response to rising energy prices. The program also injects vital momentum into the modernization of energy and climate protection technologies, a field where Germany is already a global market leader. The rewards are growth in manufacturing and employment, a high domestic value-added quota and a constant stream of new product innovations in these areas. Another hallmark of a modern energy and climate policy is that society as a whole feels committed to its aims and contributes to its achievement. The government’s Integrated Energy and Climate Program establishes the foundations for energy and climate policies ready to take on the future. The government will be reporting on progress towards these targets and the impact of the action it has taken. In November 2010 and every

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second year thereafter, the government ministries involved in implementing the Integrated Energy and Climate Program will submit a report to the Cabinet with a detailed account of the impact that the program as a whole and its various lines of action have had. Above all, it will show how targets have been met in each field and how cost-efficient delivery has been. The report will be founded on independent expert surveys commissioned by the government. If it turns out that the action to date has not been sufficient or cost-effective, the government will either supplement its existing policies or propose and implement new ones. Source: Report on implementation of the key elements of an integrated energy and climate program adopted in the closed meeting of the Cabinet on 23/24 August 2007 in Meseberg, Berlin, 5 December 2007

France´s Plan France’s strategy in the fight against climate change – Speech by Nicolas Sarkozy, President of the Republic (excerpts) (…) Grenelle Environment Forum (…) With the Grenelle Environment Forum, France has given herself the goal of cutting energy consumption in buildings and homes by nearly 40% by 2020. A big drop in energy consumption means everyone immediately gets extra money to spend. (…) We have decided to help our fellow citizens install solar heating systems, heat pumps and wood-fired heating systems. And we have created a zero-interest loan to finance insulation, available to everyone, up to a ceiling of m 30,000 over 10 years. In barely three months, nearly 25,000 zero-interest eco loans have already been taken out. This year, we will exceed our initial objective of providing m 1.2 billion for new works to improve the energy efficiency of homes. With the Grenelle Environment Forum, France has set herself the goal of becoming the world leader for zero or near-zero emission energy production by developing renewable energies and drawing on French industry’s nuclear power know-how. In the coming years, we are going to devote as much money to research into renewable energies as to nuclear power: m 200 million more, every year, to give our country a technological advance in the key sectors of energy storage, marine energies, second-generation biofuels and solar energy. There’s nothing coincidental about the recent announcement of the establishment in France of a world leader in solar panels.

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Infrastructure building/Eu/Copenhagen summit Finally, with the Grenelle Environment Forum and the economic stimulus plan, France has launched a unique programme for building sustainable infrastructures. For the first time since the Second World War, a canal will be built in France linking the Seine with Northern France and Europe. Work on four high-speed rail links is just about to start. By 2020, Paris and the regions will be getting nearly 2,000 km of new dedicated lanes for public transport vehicles [such as buses and trams] which the State is going to support. Everywhere, for people and goods, the aim is to create viable and regular alternatives to road transport. After investing in the infrastructures, we’re also going to invest massively in rail freight. We have to open up new lorry-rail schemes, create, at last, the means of carrying freight at high speed, bringing railway services into our major ports, guaranteeing priority track access for freight trains. Driven by these commitments, France promoted the Grenelle ambition throughout her European Union presidency. There was the negotiation of the “climate energy package”: the most tremendous plan ever adopted for cutting CO2 emissions. As a result of this decision, Europe has become the greatest laboratory for inventing tomorrow’s “green” technologies. It’s because we were the first to set ourselves unparalleled objectives that European technologies will tomorrow be the most advanced. Next December, in Copenhagen, the conclusion of a global agreement on the climate will be at stake. Between then and now, France intends going on relentlessly pressing all the world’s nations to commit proactively to cutting their carbon dioxide emissions. Our message is simple: we, Europeans, have taken on board the consequences of our responsibility for climate change. We have pledged to cut our emissions by 20% between 2005 and 2020 and are ready to go further, up to 30% if every member faces up to its responsibilities. At the same time we are asking the rest of the world to move in the same direction. The rest of the world means Asia, the United States and also the emerging countries. Environmental tax/Carbon tax Confronted with the climate emergency, the threats presented by our dependency on oil and need to transform our growth model, it’s time France radically adapted her system of tax incentives and created a genuine environmental tax system. (…)

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Last spring, I committed to do this: a new environmental tax, the carbon tax will be created: in 2010 it will be levied on oil, gas and coal, depending on the level of their carbon dioxide, the main gas responsible for climate change. This new tax will have only one goal: to encourage households and companies progressively to modify their behaviour and cut consumption of fossil energies which emit CO2. This tax will stimulate energy savings, reduce the oil and gas bills of both the country and families and create an incentive to step up development of green technologies. Here let me point out that there will be no carbon tax on electricity. Electricity production in France emits very little CO2 thanks to our nuclear, hydro-electric and biomass power plants and also, increasingly, thanks to the new renewable energies. In Europe we are the country with the most renewable energies. How coherent would it be on one side to encourage the French to run electric cars and fit solar panels, and, on the other, tax them more for doing so? (…) To continue cutting our emissions, set France on the post-oil path, it’s become essential to change our behaviour. And today this is achievable: for nearly two years now, the car bonus-malus scheme 16 has shown how even a limited financial incentive could make a big difference to our fellow citizens’ consumer choices: at the end of 2007 barely 15% of cars sold were clean cars. At the end of August 2009, 54% of sales were of cars below the 130gm CO2/km threshold. Conversely, the proportion of big CO2 emitters in total car sales dropped from 30% to 10% between the end of 2007 and last month. So the French are ready to commit to the essential change in their energy consumption provided they receive clear signals and are offered a fair contract. I want to commit myself here to the major principles which will govern the introduction of the carbon tax. Carbon tax/Progressive introduction First principle: the carbon tax will be introduced progressively. (…) In the market where emissions quotas are traded between major companies, the value of a tonne of CO2 has, since its creation in February 2009, been around m 17. (…) So I have decided that the starting point for 16. A financial reward (bonus) for purchasers of environmentally-friendly new cars and a financial penalty (malus) for those buying cars emitting high levels of CO2. The aim of the scheme is to speed up the removal from French roads of old polluting vehicles and their replacement by new green ones and encourage vehicle manufacturers to develop ever greener vehicles and concentrate their sales efforts on these.

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this new tax would be set by reference to the value of the CO2 emission quotas on the carbon market. I intend the introduction of the carbon tax to be a success for our country. This is why I tell all the most ardent defenders of the carbon tax that this measure’s success would be endangered were we to ask our fellow citizens to adapt to too brutal a change in energy prices. m 17 per tonne of CO2 will already be a significant effort: nearly 4.5 euro-cents per litre of heating oil, 4 euro-cents per litre of petrol and about 0.4 euro-cents per kWh of gas. (…) So let me make it quite clear that the level of the carbon tax will rise gradually over time. Here too, I shall not evade my responsibilities. We will just need to find the right rate at which to increase it. In any case, I want to make it clear: however much the carbon tax rises in the future, whatever increases there are in environmental taxation, the compensation the French receive will also have to increase, and do so commensurately. Same total fax take/Green cheque Second principle which I deem especially important: creating the carbon tax won’t increase the total tax take in our country. This for me is an absolutely sacrosanct rule. It means that the creation of the carbon tax is going to be accompanied by a simultaneous and equivalent drop in or disappearance of other taxes. The aim of the environmental tax isn’t to fill the State coffers, but to encourage the French and the companies to change their behaviour. So – and I make a very firm pledge here – the creation of the carbon tax won’t reduce the purchasing power of the French or penalize our companies’ competiveness. More specifically, I want, for French households, the creation of the carbon tax to be accompanied either by a reduction in income tax for all households subject to it, or receipt of a “green cheque” for an equivalent sum for all households who aren’t. (…) So the product, not far short of m 3 billion, of the tax will be refunded to household through an income tax rebate or a green cheque. Of course, every family will pay the carbon tax on their energy consumption, which will encourage them to reduce it. This is the polluter-pays principle. But cutting consumption will be that much easier since every family will be compensated by a cheque or fixed reduction in tax so that the carbon tax doesn’t eat into their purchasing power. So at the end of the day, those deciding to reduce their energy consumption will be double winners: they will pay less carbon tax but will receive under the offsetting scheme the same sum as if they hadn‘t economized. This is how, thanks to a bonus-malus mechanism, we’re going to give the French the means to

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change their behaviour in order to cut energy consumption and CO2 emissions. The malus is the carbon tax. For families, the bonus is the green cheque, or income tax rebate for the same amount. As regards companies, when the carbon tax comes in 2010, they will benefit from the removal of the proportion of the taxe professionnelle [business tax based on capital and turnover] impacting on investment. Through this ambitious reform, our companies will be compensated for the cost of the carbon tax and, simultaneously, at last be able to invest without being fiscally penalized. (…) Border carbon tax However, we won’t combat climate change more effectively if the carbon tax ends up benefiting agricultural and fishery imports or disadvantaging French transport firms compared with competitors with less exigent environmental standards. This is why, when I had the honour of being president of the European Council, I got the adoption of the possibility of bringing in a carbon tax on our borders. It would be intolerable if, just when we’re striving to produce and consume green products, we get imports from firms which have a competitive advantage because they aren’t complying with international commitments to reduce carbon tax emissions. Everyone would then lose out: the climate and jobs in our countries. I note that a few weeks ago the United States House of Representatives passed a bill also proposing a border carbon tax. I note too that the World Trade Organization has deemed such a mechanism perfectly compatible with its rules. This is a battle I’m going to lead. A carbon tax at the border is the natural complement to a domestic carbon tax. Far more importantly: a carbon tax at the borders is vital for our industries and jobs. It demands first of all the creation of the carbon tax in France. Our battle against pollution and climate change mustn’t be fought to the detriment of our industries. Transparency Third principle: transparency! I want an independent commission to guarantee total transparency on offsetting the carbon tax. As you will have understood, I want clear rules for compensating households and companies for the carbon tax. So I propose the creation of a permanent independent commission to monitor French environmental taxation. (…) Grenelle incentives/Transport Fourth principle: the State will continue providing a great deal of support for households’ efforts to cut their energy consumption and

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move towards renewable energies. All the incentives developed in the framework of the Grenelle Environment Forum will be maintained and prolonged. (…) In the crucial transport sphere, thanks to technological advances the next few months will see the arrival of rechargeable electric or hybrid vehicles on the market. On 23 September Jean-Louis Borloo will present the electric and hybrid vehicles plan I announced at the last Motor Show. This will mean, in 16 months’ time, car manufacturers will be able to offer all the French the possibility of buying an electrical or hybrid vehicle at an acceptable price by benefiting from the super bonus of m 5,000 (for vehicles with an emission level of below 60g CO2/km). Carbon tax/Economic growth Ladies and gentlemen, the creation of a carbon tax is anything but an insignificant decision. It is a carefully thought-out strategic choice and major fiscal change as well as an economic decision of primordial importance. (…) By bringing in an environmental tax on fossil energies, we’re going to get the ball rolling in the whole area of green growth. Because the carbon tax is going to encourage our fellow citizens to “go green”, it will offer new massive and promising outlets for all our manufacturers capable of producing “green products”. With the carbon tax and Grenelle Environment Forum measures, the State is going to create the conditions for a huge increase in the size of our country’s “green market”. France will be the first country of this size to go this far. The aim, for all our manufacturers, is not to miss this opportunity. (…) You see, ladies and gentlemen, the same applies to environmental taxation as to many other things: there are those who talk and those who do. For me, it’s basically a question of responsibility. Responsibility towards our children and the generations to come, since this measure will help create a better world for them. Responsibility towards the French of today. I gave them my word two and a half years ago by signing the ecological pact proposed by Nicolas Hulot 17, which had the creation of a carbon tax as its second objective, behind establishing a huge sustainable development ministry, the one Jean-Louis Borloo heads today. The situation is too serious for us to fool ourselves or pretend. All my life I’ve wanted to restore the reputation of politics. To put it plainly, restoring the reputation of politics means believing that nothing is ever 17. All the presidential candidates were asked to sign an environmental pact, committing them to several green objectives.

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inevitable. Believing that there’s no problem, however big, that a nation like ours can’t resolutely tackle if it decides to, be it raising the moral standards of global capitalism or fighting climate change. Restoring the reputation of politics means believing that what political leaders say has to remain meaningful. And in no way is it inevitable that the passage of time, difficulties of the moment or prevailing demagoguery will overcome the finest ideas, the most essential commitments or be victorious in the most noble battles. (…)./. Source: French Embassy Website, “France’s strategy in the fight against climate change” – Speech by Nicolas Sarkozy, President of the Republic (excerpts), 10 September 2009.

3. China´s Plan In 2009 a package of laws will come in to force containing targets to underpin the government’s climate strategy. They include: – Goals to create a ‘recycling economy’ by reducing energy consumption and doubling renewable energy capacity; – Cutting pollution by 10% on 2005 levels by 2010; – Environmental monitoring of carbon intensive industries; – The National People’s Congress (NPC) has also approved the new legislation and is promoting clean technology in support, including tax beaks on energy efficient and renewable technologies. Source: DB. National Climate Change Program of China To control GHG emissions: China will achieve the target of about 20% reduction of energy consumption per unit GDP by 2010, and consequently reduce CO2 emissions. To raise the proportion of renewable energy (including large-scale hydropower) in primary energy supply up to 10% by 2010, the extraction of coal bed methane up to 10 billion M3. The emissions of nitrous oxide from industrial processes will remain equal to those of 2005. To promote the adoption of new technology; promote biogas utilization to control the growth rate of methane emissions and increase the forest coverage rate to 20%. To enhance capacity of adaptation to climate change: increase the improved grassland by 24 million hectares, restore the grassland suffering from degradation, desertification, and salinity by 52 million hectares, and strive to increase the efficient utilization coefficient of agricultural

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irrigation water to 0.5. 90% of typical forest ecosystems and national key wildlife are effectively protected and nature reserve area accounts for 16% of the total territory; and 22 million hectares of desertified lands are under control. The anti-flood engineering systems in large rivers and the high standard for drought relief in farmland will be completed. the capability to resist marine disasters will be raised remarkably, and the social influence and economic losses caused by sea level rise will be reduced in maximum. In energy production and transformation sector, it is expected that the GHG emissions can be reduced by about 500 Mt CO2 by 2010 through the proper development of hydropower; Through the active promotion of nuclear power, it is expected that the GHG emissions can be reduced by about 50 Mt CO2 by 2010; Through energy conservation, advanced power transmission, utilization of wind, solar, geothermal, tidal, bio-energy, nuclear power and distributed thermal power generation based on level of coal consumption, it is expected that a total of 90 million tons of coal can be saved per year in 2010, and CO2 emissions can be reduced by 216 million tons; Through the expedition of technology advancement in thermal power generation and phasing out small-scale backward units, it is expected that the GHG emissions can be reduced by about 110 Mt CO2 by 2010. Vigorously develop coal-bed methane (CBM) and coal- mine methane (CMM) industry. encourage the cooperation of CDM (clean development mechanism) projects. It is expected that the GHG emissions can be reduced by about 200 Mt CO2e by 2010. Promote the development of bio-energy. It is expected that the GHG emissions can be reduced by about 30 Mt CO2e by 2010. Actively support the development and utilization of wind, solar, geothermal and tidal energy. It is expected that the GHG emissions can be reduced by about 60 Mt CO2 by 2010. Realizing the increase of carbon sink by 50 million tons over the level of 2005 by 2010. Source: presentation by GAO Guangsheng, Director General Office of National Coordination Committee on Climate Change, National Development and Reform Commission, P.R. China September 26, 2007, Washington.

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Leading the Renewable Energy Revolution The trend in China’s renewable energy technology industries has been one of rapid growth. Some technologies, including small wind turbines, solar water heaters, small hydro turbines, and solar panels, are already being exported overseas. Chinese policies to promote renewable energy utilization over the past decade have had the ancillary goal of promoting renewable energy industry development, which has been realized successfully across most technologies. As China continues to grow and its demand for energy increases, the domestic market for these technologies is substantial. China’s domestic market opportunity gives indigenous producers the testing ground they need to develop the technology and production scale that permits them to become global technological leaders. Consequently, the emergence of more and more Chinese companies in global renewable energy technology markets appears to be inevitable. The effect that this emergence will have on lowering technology costs worldwide is still somewhat uncertain, but early evidence from the wind and solar industries suggests that it could be significant. In addition to cost savings that may be specific to the Chinese labor market or to domestic innovations, the entry of new manufacturers that play a significant role in increasing global technology production will drive down technology costs as they move further down the learning curve. China’s role in manufacturing many small-scale renewable energy technologies has already made the technologies more accessible to less developed countries where small-scale renewables have played an important role in rural development initiatives. In addition, China is rapidly expanding its nanotechnology research programs, which current studies indicate is likely to be a key area for new solar power technologies. Renewable energy technologies are not likely to displace conventional electricity technologies in the near term, but in certain regions, the penetration could be significant. Denmark gets about 20 percent of its electricity from wind power, and some German states as much as 15 percent. Offshore wind farm development, if it can overcome some technological and social obstacles, could make wind’s share increase even further. As energy security becomes an increasingly important issue, displacing fossil fuels has benefits beyond purely environmental ones. Many U.S. states are adopting renewable portfolio standards to force utilities to invest in renewable energy, not just for the environmental benefits, but also recognizing that a diverse portfolio can be the best hedge against volatile fuel price fluctuations.

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It is clear that there is an increasing role for renewables, and that much of this new demand will be met by technology manufacturers in emerging markets. Until now, the most advanced renewable electric technologies have come from Europe, the United States, and Japan, but these countries risk losing market share if emerging economy-based manufacturers are successful in producing comparatively lower cost technology. India is already technologically ahead of China in manufacturing utility-scale wind turbines, and Brazil is looking to expand its use of renewables with new national legislation. China’s national renewable energy law may provide its existing renewable energy technology manufacturers with a signal of regulatory stability that is crucial to facilitating investments in new technologies. China’s prior experience with small-scale renewables, combined with a domestic policy framework that supports indigenous manufacturers in the newer technology industries, makes it especially well positioned to expand into these emerging markets. In summary, there are many signs that China’s renewable energy markets may be just starting to mature, and this is a phenomenon that other countries should be watching closely. Source: Joanna Lewis, Science&Technology Summer/Fall 2006 [153], Georgetown Journal of International Affairs.

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III. Members of Natixis Asset Management’s Scientific Advisory Committee Carlos Joly is the Chairman of the Scientific Advisory Committee of Natixis Asset Management. He was the founder and CEO of MiljøInvest AS, which developed a range of SRI funds; and Senior Vice-President of Storebrand, where he launched the Storebrand Environment Fund. He was a co-founder and the Chairman of UNEP-FI. He co-chaired the Experts Group which drew up the UN Principles for Responsible Investment. Carlos Joly is a visiting Professor in Finance and Climate Change at the École Supérieure de Commerce de Toulouse and teaches Finance and Sustainable Development for the MBA at BI-Norwegian School of Management. He is an associate researcher at the Centre for Development and the Environment of the University of Oslo. Carlos Joly has published a large number of research and press articles on the subject of responsible investment and the environment. He holds a Master’s degree in philosophy from Harvard. Blaise Desbordes is Director of Sustainable Development in the Finance, Strategy and Sustainable Development Department of Caisse des Dépôts et Consignations. He has specialized in public and corporate sustainable development policies for around 15 years and in particular established the “Eco-District” initiative in France. He takes part in several market working groups, particularly within the UNEP-FI (Finance Initiative of the United Nations Environment Program), where he co-chairs the Responsible Property group. He has participated in the “Town Planning” group 9 of the “Grenelle de L’Environnement” forum. He is an administrator of Effinergie and AEW Europe. Blaise Desbordes is a graduate of the Institut d’Études Politiques in Paris. Anne Gouyon worked as a permanent researcher in socioeconomics in the Department of Perennial Cultures in the CIRAD (International Co-operation Centre in Agronomic Research for Development), where she carried out fieldwork in South-East Asia and West Africa. She was a founder and director of Idé-Force, a consulting firm specializing in assessing the socioeconomic and environmental impact of rural development and plantation culture projects. The firm’s clients include the World Bank, the Asian Development Bank, the European Union, the World Agroforestry Center, various NGOs and private companies. She is also responsible for audits of the FSC and CCB (Carbon, Conservation

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and Biodiversity) standards for the Rainforest Alliance. She is currently a founding partner of Becitizen and an expert in forestry and agroforestry. She is co-author of the best-seller “Réparer la Planète, la Révolution de l’Économie positive”™ (“Repairing the Planet: the Positive Economy Revolution), which offers solutions to global environmental problems and was awarded the “Prix du Livre Nature et Environnement” in 2008. Anne Gouyon has a doctorate in agro-economics. Stephane Hallegatte is a researcher in environmental economics and climate science at the Ecole Nationale de la Météorologie, Météo-France and the CIRED (International Centre for Research on the Environment and Development). He participated in the IPCC in 2007. His research covers three areas: study of the economic consequences of natural disasters; assessment of the socioeconomic impacts of climate change; design of public or private strategies for adaptation to climate change. In 2008 he was awarded the Special Jury’s Prize from the International Transport Forum in recognition of his innovative work in his publication: “Time and space matter: how urban transitions create inequality”. Stephane Hallegatte is a graduate of the École Polytechnique, the École Nationale de la Météorologie and the EHESS (École des Hautes Études en Sciences Sociales) and has a doctorate in economics. Richard Klein has specialized in the methodological aspects of climate risk, vulnerability assessment and climate adaptation processes in society for over 15 years. He is now concentrating on the integration of climate issues in development policy: he is a researcher at the Stockholm Environment Institute, where he co-ordinates research on climate policies across seven research centers, and is a professor at the University of Linköping in Sweden. He has been working with the Intergovernmental Panel on Climate Change (IPCC) since 1993. More recently, he has co-ordinated the Fourth Assessment Report, in which he drafted the conclusions on interactions between adaptation and the reduction of greenhouse gases. He has also contributed to the Millennium Ecosystem Assessment Report and to the Stern Review on the Economics of Climate Change. He is Editor-in-Chief of the international journal “Climate and Development” and the author of numerous publications. Richard Klein has a doctorate in geography. Miklos Konkoly-Thege has occupied a number of senior executive posts in international companies. In particular, he has served as Chairman and Chief Executive Officer of Tandberg AS (Norway) and as a financial analyst at ITT Europe Inc. (Belgium). In 1984 he joined

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Det Norske Veritas, the world’s major certification agency, where he was appointed Chairman and Chief Executive Officer in 2002, a post he occupied until 2006. He is currently a member of the boards of directors of the shipping companies Wilhelmsen Maritime Services AS, Wilhelmsen Ship Management AS and Danaos Corporation and of the certification company Moody International. Miklos Konkoly-Thege is a specialist in the shipping industry and certification, both on a sector level and with regard to financial and risk control aspects. He has an in-depth knowledge of the environmental issues in numerous business sectors. Miklos Konkoly-Thege holds an MBA from the University of Minnesota (United States) and a Master of Science degree from the University of Hannover in Germany. Yves Le Bars has occupied various posts in the French civil service, particularly as a director of research bodies: Director-General of Cemagref (agricultural and environmental research institute), Director-General of the BRGM (geological and mining research bureau) and Chairman of the ANDRA (National Agency for the Control of Radioactive Wastes). He is currently Chairman of GRET, the most important secular NGO for international solidarity, and is completing a term of office as Vice-Chairman of the French Association for the Prevention of Natural Disasters. He is a director of the IHEST (Institute of Advanced Studies in Science and Technology), one of the new instruments specified in the “Research Pact” in 2006. He is assisting the Minister of the Environment on the reduction of pesticide use in France and the IRD (Institute of Research for Development) as Chairman of a College of Experts on energy in the development of New Caledonia. His areas of expertise cover the relationships between research, innovation and society, and in particular the issues associated with sustainable development. Yves Le Bars is a general engineer in agricultural engineering for water and forestry. Pierre Radanne is Chairman of the 4D association (Dossiers et Débats pour le Développement Durable) and a founder of the company “Futur Facteur 4”, which he formed in 2004 and which combines activities of consulting, research, training and communication on energy management, combating climate change and sustainable development. He has served as Chairman of the ADEME (the French Environment and Energy Management Agency. In 2003, he was tasked with conducting a longterm study in the Interministerial Mission on the Greenhouse Effect for the Prime Minister’s office. He is currently an independent consultant and an expert for various institutions and a speaker at numerous public meetings. He has published many works, in particular “L’énergie dans

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l’économie” in 1988 (“Energy in the Economy”). Since 2006, he has worked with the IEPF (Institute of Energy and the Environment for the French-speaking Countries) and the French Ministry of Foreign Affairs to support and train African negotiators for United Nations conferences on climate change.

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Registration of copyright, October 2009 This document may not be used for any purpose other than that for which it was intended and may not be modified, reproduced, disseminated or disclosed to third parties, whether in part or in whole without proper attribution. No information contained in this document may be interpreted as being contractual in any way. Information and opinion contained herein are provided for informational purposes only and do not constitute and should not be construed as an offer or subscription or solicitation or basis for any contract for the purchase or sale of any securities or other investment products or instruments (in particular, collective investment schemes) or any advice or recommendation from Natixis Asset Management. Information contained herein is obtained from sources considered to be reliable. Information may be modified at any time without notice, and in particular with regard anything relating to the description of the investment process, which under no circumstances constitues a commitment from Natixis Asset Management. Opinion set forth in this document reflects only the personal view of its author, and in no case shall it be regarded as the opinion or responsibility of Natixis Asset Management. Natixis Asset Management will not be held liable for any decision taken or not taken on the basis of information and/or opinion nor for any use that a third party might make of the information.

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Designed by DV Arts Graphiques in La Rochelle. Printed in October 2009 by Imprimerie Sagim in Courtry. Printed in France Copyright : October 2009 – Print number : 11413 Sagim is labeled by Imprim’vert® Printed on recycled paper

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From climate change to investment strategy

If the wholesale destruction of value from the financial crisis teaches us anything it is the fallacy of short-term thinking. The lesson learned is that foreseeable long-term effects matter in the short term as well. The dramatic accumulation of consumer and corporate debt accompanied by declining real incomes of the middle class, and the externalization of this debt beyond those that had any responsibility for managing it finds a striking parallel to the accumulation of greenhouse gases in the atmosphere accompanied by nature’s declining ability to accommodate them. In both cases what has been going on is an externalization of the consequences. In the former case what has been externalized is debt. It has been pushed out onto others, under the assumption that the risk somehow disappears. It does not. The externalization of the damages from carbon emissions has gone on for several centuries but, within our lifetimes, is reaching its critical limit, its tipping point. As with irresponsible lending, when global warming effects catch up with us, they catch up fast and furiously. Failure to actively account for the phenomenon of climate change and its impacts in investment portfolios will result in a crisis of even greater proportions than today’s credit crisis. The prudent investor will seek to preserve capital from climate change-induced portfolio meltdown and to increase capital by investing in solutions to this challenge. This booklet explains how.

Carlos Joly is Chairman of the Scientific Advisory Committee of Natixis Asset Management. As an investment manager, he has pioneered the integration of environmental and social factors in institutional investment. He is a co-founder and former Chair of the UNEP Finance Initiative and Co-Chair of the Expert Group that drafted the UN Principles for Responsible Investment. He is Visiting Professor of Finance and Climate Change at the Ecole Supérieure de Commerce, Toulouse and at BI-Norwegian School of Management. He has a Masters in Philosophy from Harvard and is the author of numerous publications on investment and environment.