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Copyright© JSE Limited 2008
www.jse.co.za
Corli le Roux Shameela EbrahimHead of SRI Index Senior Strategist
10 September 2009
Carbon and ESG – What does it mean for portfolio managers?
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The one we know and measure
Source: Presentation by Nelmara Arbex, GRI, 1 September 2009
Introduction: Two crises
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The one we don’t
Source: Presentation by Nelmara Arbex, GRI, 1 September 2009
Introduction: Two crises (2)
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The JSE and sustainability?
Pivotal player in SA economy
Gateway to global markets
Independent, credible
Catalyst for debate
Two perspectives
• SRI Index
• Carbon markets
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SRI Index: Setting the scene
Conscience- / Cause-based SRI has always been around
South Africa catalyst for evolution and momentum of many global SRI movements
Today
• CSR, CSI, part of corporate lexicon
• Rewards from investors?
Evolution to Responsible Investment
• Maximise returns, reputation management?
• Challenged thinking – SRI Index
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JSE SRI Index
Launched May 2004• Crystallise debate
• Recognise companies
• Facilitate responsible investment
Global alignment and local relevance
Steep learning curve, taking time and resources
A lot has been achieved• Growing understanding that sustainability can deliver good results
• Message: Integrated risk management
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Construction of index
Triple bottom line and governance• Policy, management and reporting
• Environmental impact classification
Positive and aspirational• No exclusions
• Encourages enhanced performance and reporting
Eligible universe – FTSE/JSE All Share IndexAnnual assessment• Two-phased process
• External data analysis
Technical construction mirrors FTSE/JSE Africa Index Series
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Current statistics
108 being assessed for 2009
60 constituents from 2008
23 best performers
Who does well?
• Top 40
• Increasingly Mid and Small Caps
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Responsible Investment?
Has not yet hit actual AUM
• Responsible investment experiencing burgeoning growth internationally
• But not yet integrated
• Results, results, results
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What now?
Need fundamental shift
• From the right thing to doo Social complexities in SA, transformation imperatives
o Proliferation of charters and regulatory framework
o Emerging hot topics and best practices
• To doing it righto Integration into business operationso Mainstream investment consideration
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Why is it important?
Where people’s savings meet society’s goals
Stakeholders care
• Investors
o PRI, GEPF, SRI Index
• Public
• Planet
• Business
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What is needed?
Copernican Revolution?
Source: Presentation by Michael Schluter, Relationships Foundation, 1 September 2009
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What is needed? (2)
Information
• Company performance
• Track record
Education
Development
• Criteria
• Investment analysis
Collaboration – how do we help you?
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Climate Change
A carbon constrained future is a reality
Almost all sectors face some degree of change
Opportunity to encourage new the growth of new sectors and the investment therein
‘Green job’ security growing
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Carbon Market
“U.S. carbon futures market expected to be worth $2 trillion in 5 years”
Commodity Futures Trading Commission (Commissioner Bart Chilton), June 2009
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Climate Change, the global response and carbon markets
Market mechanisms are recognised as a tool to encourage private sector and developing country participation – move to cleaner technology
Carbon markets worth approx. $126 billion in 2008 ($63 billion in 2007)
Lets firms or nations buy and sell greenhouse gas emissions offsets to meet both voluntary and mandatory targets
CDM: companies in developing countries can qualify to sell carbon credits, known as Certified Emission Reductions (CER’s), in global commodity markets when they reduce their output of environmentally harmful substances.
Example: Omnia
• 500 000 credits a year potentially
• @ 18 Euro* per credit = 9 million Euros a year
• = R112.5 million per year for 5 year
*Source: ThomsonReuters - average price of Exchange traded Dec. 08 CER’s on 22 October 2008
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Key findings: Government initiatives/sentiment
No legislation limiting GHG emissions
Strong indication from July 2008 that limits will be imposed: release of the LTMS and the approach adopted by cabinet
Need for a clear negotiating position for a post-Kyoto framework as a ‘developing’ country
Already a carbon tax of sorts in the form of the 2c/kwh levied on electricity from non-renewables
Press statements on a carbon tax starting at R100 per ton of CO2e
Tax position on primary CER’s announced by NT (2009 Budget speech)
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Key findings: International market activity
Carbon market tending towards being a truly global market
Mitigation happens when carbon is ‘priced’ i.e. internalisation of an externality
Boosted by the Kyoto Protocol’s recognition of market mechanisms i.e. putting a ‘price’ on carbon
Well intermediated market
Dominated by OTC trade but increasing on-market volumes
Private sector (exchanges) providing the platforms, tools and instruments to support regulatory objectives
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Dec05 Sett Dec06 Sett Dec07 Sett Dec08 Sett Dec09 Sett
Dec10 Sett Dec11 Sett Dec12 Sett Dec13 Sett Dec14 Sett
Dec09-Dec12 Sett Dec10-Dec12 Sett Dec11-Dec12 Sett
Release of actual emissions data showing over allocation of permits
Source: European Climate Exchange
ECX : EUA Futures
Global economic crisis
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Primary CDM and JI Buyers
Source: World Bank, May 2009
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Location of CDM Projects (Sellers)
Source: World Bank, May 2009
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Key findings: Market predictions
Value predictions for 2020 for the compliance market based on various carbon price assumptions
Price pertonne(Euros)
Market Value in Euro(using ‘Main’ scenariovolumes of 40 Gt)
10 400 billion
25 1 trillion
50 2 trillion
100 4 trillion
Source: Point Carbon, May 2008
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Key findings: Local market activity
Comparatively low number of CDM projects in SA
No natural buyers locally
Few credits freely available for trading
Credits being banked or forward sold
Low incidence of voluntary credits
Market feels that a transparent price discovery mechanism is critical (also consider the impact of the financial crisis and the call for greater transparency in financial instruments)
All project owners seeing a high demand for their credits from compliance buyers
Project owners cautious due to lack of certainty around regulation and lack of government support via incentives etc.
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How does this affect the entities we invest in?
Global pressure to start limiting emissionsLocal companies already exposed in certain sectors (export industries)Revenue impact
• Penalties for high emitters/energy intensive users
• Carbon credit trading revenue
Increasing governance and reporting requirements
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The risks?
Project risk• Type of technology and methodology
• Duration of project (value of credits increase the more certain they become)
• Experience of the project developers
Global agreement uncertainty • Will the mechanism be recognised in future?
• What will the obligation of developing countries be?
• To what extent will developed countries take on targets (impacting demand for compliance credits)
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What business needs to drive
Greater involvement in the development of the national strategyInput to government as to what the key issues are
• Transparent and efficient registries
• Timeous and accurate reporting
• Clarity regarding tax, and incentives to give greater certainty to investment decisions
What business thinks is the optimal way to tackle the issue• Voluntary emissions trading?
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The Role of the JSE
“An exchange provides the platform/s to facilitate the trading, clearing and settlement of tradable instruments and commodities.”SA market trusts the JSE brand and positive at the prospect of JSE involvement in the market
Has the interest in providing relevant support services
Ready to consider using our platforms to support the trade in carbon or other environment-related goods and instruments e.g. renewable energy certificates
Would like to be involved in the market development process and willing to serve on related forums and committees
Has already begun exposing investors to carbon as an asset class
Has established relationships with most large emitters by virtue of their listing on the JSE
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Contact:
Corli le Roux Shameela Ebrahim
E-mail CorliLR@jse.co.za ShameelaE@jse.co.za
Tel: 011 520 7104 011 520 7232
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