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

Climate Change – challenges and
opportunities for business
How tackling climate change could create
or destroy company value

April, 2009

About the Carbon Trust

An independent company set up in 2001
by UK government

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

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

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

Climate Change – A Business Revolution – September 2008 2

Our activities cover 5
complimentary business areas

Insights Solutions Innovations Enterprises Investments
Explains the Delivers carbon reduction Develops low Creates low Finances clean energy
opportunities solutions carbon technologies carbon businesses businesses
surrounding climate
change


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

CO2e (ppm) ºC Environmental Change Human Impact

1000+ 6  Abrupt, run-away change  Mass loss of life

 Serious acidification of oceans  Flooding of major cities e.g.
800 5  Loss of most glaciers London, New York

700 4  Risk of change to atmospheric  Entire regions no longer
circulations e.g. the monsoon producing food (e.g. Australia)

550 3  On-set of collapse of  ~500m people at risk of hunger
Amazonian rain-forest

450 2  15-40% species extinct (incl.  10m people flooded at coasts
mammals e.g. polar bear)  Sharp declines in Africa crops

350 1  10% species extinct  ~300,000 people die of
 80% coral bleaches/ dies climate related diseases

280 0 Scale and timing of impacts is uncertain
Note: Not to scale
Source: Intergovernmental Panel on Climate Change, Third Assessment, Stern Report, Carbon Trust analysis


Climate change – a business
revolution?

Two key questions Our Approach
• Identify why investors Global study, six sectors:
and business not yet – Aluminium
factoring climate – Automotive
change as a key driver
of investment and – Beer
business strategy – Building Insulation

• Quantify potential – Consumer Electronics
opportunities and risks – Oil & Gas
for company value Joint project team: Carbon Trust
and McKinsey & Co. with
scenarios from Oxera


Investors’ current outlook on climate
change reflects regulatory weakness

Four reasons for current outlook:
• Climate change drivers currently have limited impact on
company cash flows
• Tackling climate change is too uncertain
• A lack of framework to understand the opportunities and
risks associated with climate change
• This is a long term issue with effects in the distant future

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


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

Competitive
Driver Cost Volume
Dynamics

Cost of
Carbon

Targeted
regulations

Technology

Consumer
behaviour

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


We created four ‘success’ scenarios
to test the range of impacts
Variation in GHG emissions by source in 2050
60
Emissions
(GtCO2e)
2050

50 Land use

40

550 ppm Waste / Fugitive
30 Agricultural
Buildings
500 ppm
20 Transport
Manufacturing
450 ppm
10
Power

0
Stretch Market Carbon Targeted Technology Consumption
Belief markets regulations

Source: Carbon Trust and Oxera Analysis


An example: Automotive sector

Vehicle ownership and passenger kilometres to more
than double by 2050, under BAU
Yet, greenhouse gas emissions must reduce by
30-80%
Targeted regulations will likely drive change …
… which will then trigger technology breakthroughs
in the form of ICE efficiency, hybrid, electric,
hydrogen powered cars, and use of bio-fules
potential changes in consumer behaviour

Source: Carbon Trust and McKinsey & Co. analysis


An example: Automotive sector

• Technology scenario
(electric vehicles) has
most ‘upside’ and
‘downside’ (due to
disruption)
• ‘Laggards’ will have a
higher cost base and
less good design
• Well positioned
companies will
proactively invest in
new designs and
power trains (hybrid,
electric)



Automotive value opportunity & risk
Archetype case value: $50bn value

Alternative
scenarios



Tackling climate change creates
significant value creation opportunities
for proactive companies…
Calculated maximum value-creation opportunities for
companies from move to low carbon economy
100%
Low Carbon Opportunity (%)

80%

60%

40%

20%

Minimal
0%
Building Automotive Consumer Aluminium Oil & Gas Beer
Insulation electronics

Source: Carbon Trust and McKinsey & Co. analysis.
Industry

…and puts significant value-at-risk
for companies that fail to adapt
Calculated maximum value-at-risk for companies from
move to low carbon economy
100%

80%
Value at risk (%)

60%

40%

20%

0%
Aluminium Automotive Oil & Gas Building Beer Consumer
Insulation electronics
Industry


Different sectors have different
levels of opportunity and risk
Calculated maximum value-creation opportunities and
transition value-at-risk for companies
opportunity (%)
Value creation

Company value-at-risk (%)


Implications for Business and
Investors

Review the key climate change-related drivers of
value and implications of deep emissions cuts
Business: Implement strategies for the move to a
low carbon economy
Investors: Review the portfolio implications of
climate change related drivers – rebalance
interests
Work closely with regulators, seeking a
collaborative, rather than combative approach


Implications for Policy makers

Avoid delay in taking policy action

create clear signals and strong incentives to
invest in a low carbon economy
Choose policy frameworks that provide a level
playing field for all participants
Maintain consistency of policy


Conclusions

The global economy must tackle climate change
The move to a low carbon economy could have
significant implications for value
Investors should discriminate now between
sectors and companies
Businesses must prepare now
Investors, Business and Policymakers must work
together to create a policy framework to reward
early action


***BACK UP***


The six sectors total approximately
$7 trillion in market capitalisation

Total Global
Sector Sector Value (1)

Aluminium $82

Automobiles $745

Oil & Gas $5,069

Consumer Electronics $207

Building Insulation $463

Beer $337

Total $6,903

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


Carbon Trust Investments

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


Carbon Trust Enterprises

These ventures represent co-investment opportunities to partners
who can bring the necessary skills and capital investment to
complement those of the Carbon Trust Group

Revenue £m
Partnerships Low Carbon Emission Carbon
Connective Insource
for Culture Accreditation Label
Energy Energy
Renewables Company Scheme Company
UK’s leading Assisting
Brokers best Captures Helping
Integrated emission companies to
of breed public sector organisations
carbon and management communicate
partners and renewable engage their
waste accreditation with their
suppliers to asset employees
management scheme with customers on
utilise waste development on climate
solution over 200 climate
heat opportunity change
customers change

Carbon Mt


Key statistics on Carbon Trust

In 2007/8, the Carbon Trust identified annual savings of
4.6MtCO2, of which 1.6MtCO2 implemented
Identified annual cost savings for customers of £495m, with
£207m implemented
Offered 722 loans worth £21.5m, leveraging 23m in private funds
Incubated 60 companies, 42% with private financing (x15
leverage), 3 listed on AIM
Currently running 8 technology accelerators
– (Micro-CHP, low C buildings, biomass heat, marine energy,
small wind energy, offshore wind, advanced bioenergy,
advanced PV)
National Audit Office report of 2007 stated: “the Carbon Trust’s
advice to business has proved value for money and its Innovation
Programme appears to be on course to do likewise”


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

Global GHG emissions projections
100 Scenario 2100 CO2e(1)

90 Business 1000+ ppm
Current range of -as- (~6°C)
Global GHG emissions

80 market belief usual

70
(GtCO2e)

60
Stretch 700 ppm
50 market (~4°C)
belief
40

30 Scenarios
tackling 550 ppm
A change in market sentiment will need to
20 climate (~3°C)
take place
10
change

0
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Note: Equilibrium temperature projections using the 5%-95% climate sensitivity ranges based on the IPCC TAR
Source: Oxera and Carbon Trust analysis


Legal disclaimer

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


60-80% of the value of companies
is beyond the first 5 years
Proportion of company value due to cash flows
generated in the next 5, 10, 15 and 20 years
100%
Proportion of company value

90%
21 + years
80%
created in period (%)

70%
16-20 years
60%
50% 11-15 years
40%
30%
6-10 years
20%
10% 1-5 years
0%
Auto Beer Consumer Oil & gas Aluminium Buildings &
Electronics Materials

Note: Analysis based on discounted cash flow valuations of hypothetical but typical companies, based on typical company discount rates


Aluminium – an industry
transformed by the shift to low
carbon energy sources
Aluminium one of the most carbon intensive materials in
the world, emitting 5-20 tonnes CO2e/ tonne aluminium

Anticipated strong growth would increase greenhouse gas
emissions ~6 fold by 2050 – but they need to be held flat
‘Cost of carbon’ will widen cost differences between power
generation sources
Recycling uses ~95% less energy (<1 tonne CO2e)

Substitute materials (e.g. plastics, biomass) could replace
some uses in packaging, construction, potentially transport
Well positioned companies will obtain access to low carbon
power and develop recycling opportunities


Aluminium
value opportunity & risk

Alternative
scenarios



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

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

Oil & Gas demand likely to reduce compared to BAU
projections – peak demand by 2020?
Exploration & Production players must manage impact of
reducing demand on oil price by managing capital exposure
‘Cost of carbon’ could materially affect production from tar
sands, as well as refining economics
Winning companies will anticipate demand correctly and
make margin from below-average carbon intensity of
operations


Exploration & Production value
opportunity and risk

Excluding oil price shifts

Alternative
scenarios



Oil exploration & production

Including oil price shifts

Alternative
scenarios



Oil refining
value opportunity and risk

Alternative
scenarios



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

Building use is currently the source of ~21% of global
emissions
Long-term growth in construction is forecast to remain
strong in developing regions
Buildings standards likely to drive improved energy
efficiency standards - creating growth and margin
opportunities
A prevailing cost of carbon may increase basic raw
materials prices and poses a downside risk
Winning industry players will position themselves to
capture high growth in developing markets whilst
reducing the carbon footprint of products



Building insulation



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

Recent strong growth and proliferation of devices causing
disproportionate growth in electricity demand
Targeted regulation likely to impose product efficiency
measures - but these will be relatively easy to comply with
Increase in demand for consumer electronic devices could
be a key component of a low carbon economy. They could:
– Manage home energy
– reduce travel
– reduce overall ‘carbon footprint’
Winning companies will invest in reducing their product
emissions whilst designing products that enable a lower
carbon lifestyle


Consumer electronics

Alternative
scenarios



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

50% of the carbon footprint of beer is created in the
packaging
Targeted regulations could mandate a switch in packaging
to lower carbon, more environmentally friendly format
The cost of raw materials (barley, maize) may also be
affected by tackling climate change – in particular by
increased demand for biofuel
Winning companies will be those that anticipate packaging
changes whilst preparing for potential spikes in costs



Beer

Alternative
scenarios



Four key learnings from the study

• Climate change is a key strategic issue for
most of the sectors studied
• Companies that prepare should create value
(and can certainly mitigate risk)
• The greatest value-at-risk and opportunity
may exist in what are niches today
• Regulation is usually the key initiator of
change, but choice of policy framework critical


Implications for Investors

Carry out risk and opportunity analysis based on
climate change-related drivers
Monitor potential triggers of a change in market
sentiment on tackling climate change
Review the portfolio implications of climate
change related drivers – rebalance interests
Engage with companies and policy makers


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

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