5° BaU INTERNATIONAL EFFORTS ON 2° PORTFOLIO ALIGNMENT 4° KWAP conference My portfolio Kula Lumpur, July, 2018 2° Stan Dupre Founder & CEO – 2° Investing 1.5° Paris Agreement
ABOUT 2 ° INVESTING INITIATIVE THINK TANK SPECIALIZED ON CLIMATE & THE FINANCE SECTOR • Climate-related metrics, data and tools development and policy research • Paris, London, Berlin, New York • Non-for profit, no commercial activities, multi-stakeholder board • Funders (grants): EC, Germany, Switzerland, foundations, a few financial institutions STAN DUPRE • Founder & CEO of 2Dii • Member of the EC High Level Expert Group on Sustainable Finance (drafted ESAs, MIFID) • Co-chair ISO 14097 (climate-related metrics for the finance sector), with UNFCCC Secretariat • Co-lead the methodological development of the Science-Based Target Initiative for the Finance sector, with Ecofys
ORIGIN OF THE 2°C ALIGNMENT CONCEPT From portfolio carbon footprint to scenario analysis 2006 2012 2015 2018 …but it does not measure the impact of your actions
ORIGIN OF THE 2°C ALIGNMENT CONCEPT Why portfolio carbon footprint* doesn’t work? MISLEADING NUMERATOR FLAWED DENOMINATOR *As applied today by most investors: C02 scope 1+2 / $ of revenues or market cap
ORIGIN OF THE 2°C ALIGNMENT CONCEPT Why portfolio carbon footprint doesn’t work? DOESN’T TRACK CHANGES IN THE REAL ECONOMY CO 2 WALL STREET Investor 2 Investor 1 Company 3 Company 1 Company 2 MAIN STREET CO 2 X
ORIGIN OF THE 2°C ALIGNMENT CONCEPT Why portfolio carbon footprint doesn’t work? NOT A RELEVANT PROXY TO MEASURE CARBON RISK
SOLUTION: CLIMATE SCENARIO ANALYSIS Comparing deployment of energy technologies with 2D roadmaps Portfolio Stocks and bonds Exposure To real assets & investment plans COMPARISION Energy-related CO 2 Energy technology roadmap IEA 2DS
SOLUTION: CLIMATE SCENARIO ANALYSIS Comparing deployment of energy technologies with 2D roadmaps Data on physical asset & Technology roadmaps Compared with CAPEX / production plans (aka climate scenarios) For renewable power capacity additions in 2° 4° 6° SEI Metrics consortium (led by 2° Investing) Academic partnerships
APPROACH Step 1 - mapping physical assets Investment Climate portfolios scenarios Acquiring forward looking data on production capacity Stock/Bond tickers 22k oil and gas fields, 2k coal mines, >100k power plants, Parent companies 95M produced cars, 36k airplanes, 10k ships, 2,200 Owners cement factories, 13k steel plants Sources: BI data providers Physical asset data
APPROACH Step 2 - matching assets with their owners Investment Climate portfolios scenarios Matching assets with owners and with 2M+ Stock/Bond tickers issuers of securities Parent companies Sources: ● Economic Intel data ● Ownership data (Orbis) Owners ● Ownership analysis by the University of Zurich Physical asset data
APPROACH Step 3 - Generating Energy Transition profiles for securities Investment Climate portfolios scenarios Generating ET profiles for 100k+ stocks and Stock/Bond tickers bonds in key energy- related sectors Parent companies Sources: Owners ● Bloomberg ● S&P cross reference Physical asset data
APPROACH Step 4 - Analysing investment portfolios based on their composition Investment Climate portfolios scenarios Analysing financial portfolios on demand and matching with Stock/Bond tickers 25k+ funds Parent companies Sources: ● Supervisory authorities Owners ● Morningstar ● AMBEST ● Freedom of information Act requests Physical asset data
APPROACH Step 5 - Comparing portfolios trajectories with a 2°C scenario Investment Climate portfolios scenarios Stock/Bond tickers GAP Parent companies Required growth Owners under 2°C trajectory Where the CAPEX plans of market is companies in today Physical asset data your portfolio Where your portfolio is today
APPROACH Step 5 - Comparing portfolios trajectories with other climate scenarios Investment Climate portfolios scenarios IEA 2°C BNEF 4°C Greenpeace Stock/Bond tickers SBTi 6°C Parent companies Portfolio Owners Market 2019 2021 2020 Physical asset data
OUTPUTS Sectors, asset-classes and scenarios covered Scenarios Sectors 2° IEA BNEF Oil & gas Auto 4° Coal Power Greenpeace upstream mining manufacturing 6° SBTi Aviation Cement Steel Shipping 80-90% of CO2 emissions associated with an index COMPANY INDICATORS Private equity/loans Bonds Funds Existing Capacity additions / Stocks Locked-in CAPEX assets production forecasts emissions plans 10-20% of asset value of indices/funds Metrics Asset classes
USE CASES Comparing portfolios Portfolio vs. Carbon budget Portfolio vs. Scenarios 6° 4° 2° Coal Gas Hydro Nuke Renewables Energy Mix of power capacity Portfolio in 2022 vs. peers
USE CASES Comparing companies and tracking progress POWER Renewables Gas Coal Hydro Nuke
USE CASES Engaging with investee companies on science-based target setting POWER Addition of renewable power Planned additions Required additions Retirement of coal power Planned additions COMPANY INDICATORS Required retirements by 2020 Required retirements by 2025 GW COAL POWER
USE CASES Mapping risky assets (company and portfolio level) Related Location of coal- locked-in fired power plants emissions 100 Coal CO2 emissions Gas model, MMT Oil 50 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034
TOOL Free open-source online software THE ONLINE SOFTWARE DOWNLOAD UPLOAD DOWNLOAD VISUALIZE A TEMPLATE YOUR A YOUR RESULTS PORFOLIO REPORT
USERS AND DISTRIBUTION MODELS 250 institutional investors, 2 investor associations, four national authorities The supervisor do the analysis An investor association invite its members to using regulatory reporting perform the analysis on a dedicated platform California, 670 insurers France Insurance Association, UN PRI A government request domestic investors to perform the analysis on a dedicated platform Switzerland, 70% of insurers and pension funds The UNFCCC tracks progress of capital markets towards 2°C Capital Market Outlook, Dec 2018 Financial institutions join An asset manager use the the road-testing program model to assess the 250 investors, 5 banks portfolios of all its clients USA, confidential
INTEGRATION INTO FINANCIAL REGULATION 250 institutional investors, 2 investor associations, four national authorities Senate Bill 560 (2015) Article 173 of the Regulatory proposal on Mandatory scenario Energy Transition Law (2015) investors disclosures analysis and target setting Mandatory scenario analysis and (2020) for public pension funds target setting for investors Mandatory climate disclosure EC Tracking Art 2.1.C of the Paris Agreement (2017) Switzerland
LINKAGE WITH INVESTORS AND SUPERVISORS MANDATES 250 institutional investors, 2 investor associations, four national authorities SCENARIO ANALYSIS 1 BETTER PRICING OF LONG-TERM RISKS Assessing the consequence of a potential Optimization of long-term returns Orderly mispricing of long-term risks functioning of financial markets Liquid assets STRESS-TEST Resilience to a shock Illiquid assets Horizon of risk analysis
LINKAGE WITH INVESTORS AND SUPERVISORS MANDATES 250 institutional investors, 2 investor associations, four national authorities IT IS POSSIBLE FOR MY INVESTMENT 1 BETTER PRICING OF LONG-TERM RISKS DECISIONS TO INFLUENCE THE Optimization of long-term returns AMOUNT OF CLIMATE CHANGE Orderly functioning of financial markets CAUSES BY HUMAN ACTIVITIES INTEGRATION OF RETAIL CLIENTS 2 NON-FINANCIAL OBJECTIVES Make a difference with their money Consumer protection THERE IS A NECESSARY TRADE-OFF BETWEEN MAKING A POSITIVE IMPACT AND PROFITABILITY Source: Morgan Stanley 2017
LINKAGE WITH INVESTORS AND SUPERVISORS MANDATES 250 institutional investors, 2 investor associations, four national authorities 1 BETTER PRICING OF LONG-TERM RISKS Mobilise and orient Optimization of long-term returns private capital flows Orderly functioning of financial markets towards sustainable investments. Without prejudice to the INTEGRATION OF RETAIL CLIENTS objective of financial 2 NON-FINANCIAL OBJECTIVES stability and orderly Make a difference with their money functioning of financial Consumer protection markets, implement the regulatory and supervisory framework to support the 3 ALIGNMENT WITH POLICY GOALS general economic policies in Support national climate policies the Union, contributing to Consistency of financial policies the achievement of the objectives of the Union.
IMMEDIATE NEXT STEPS Rolling out the concept 1 LINK WITH SHAREHOLDER ENGAGEMENT Linking Investors and investees targets Paris-aligned resolutions Portfolio scenario analysis Engagement on climate trajectory Target at company level Target at portfolio level
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