Looking for alpha in the weather: Warming to climate change as an investor in Australia

TBLI Asia – Bangkok, 30 May 2008

Nick Edgerton, Research Analyst, Sustainable Alpha Team

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Outline

The implications of direct impacts of climate change for investors in Australia

The societal response to climate change that investors in Australia must consider

Understanding the winners and losers

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Sudden impacts:What’s in the weather for investors?

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Sudden change: Weather events

Source: BOM (2008)

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Climate change and realising risk

Source: IAG (2007)

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Sudden change: Investment impact

Sydney Storms

Sydney storm losses announced

Newcastle storm losses announced

Newcastle Storms

Announced that previous yr storms

cost $125 mill

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Sudden change: Investment impact

Source: BOM (2008)

Floods and mining

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Sudden change: Investment impact

Source: BOM (2006)

Cyclones and agriculture

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Climate change responses:playing on a shifting field

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Australian Emissions Trading Scheme

Cap and trade scheme commencing 2010

The scheme includes approx 420 MT CO2-e (10% emissions abatement)

Permit Price likely to be $25-30/tonne CO2-e permit market $10.5 - 12.5bn p.a.

Permit allocation may lead to significant wealth transfer and impact company valuations and investor returns, about 3.2% ASX200 EBITDA.

Key questions: What is the ability to pass on carbon costs? What happens in the electricity sector?

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Picking the winners and losers

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Winner & Losers

Source: IGCC 2007

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Forestry operators and impact of different carbon rules in ETS

Winner & Losers

Impact on airlines and ability to pass through costs

Company

CO2-e cost as % EBITDA @ $25/t

CO2-e cost as % Rev @ $25/t

Airline 1 16% 1.7%

Airline 2 12% 1.9%

Airline 3 20% 2.9%

Company

%EBIT p.a. under exclusion of wood products

%EBIT p.a. under inclusion of wood products

Forestry 1 0.1 0.1Forestry 2 1 1Forestry 3 0.7 0.7Forestry 4 1.6 4.9Forestry 5 1.4 4.1Forestry 6 1 2.9Forestry 7 0.6 0.6Forestry 8 1.2 3.6

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Ongoing opportunity

Climate issues most important for managing corporate reputations and brand – with 68% of >2,000 execs*

Growth in carbon offset and consumer trends

Govt policy and voter valuesExpectations on the role of business; ETS;

Renewables policy; and policy towards adaptation

Knowledge and IPInnovation and design

Opportunity along the supply chainLow emission-intensity products * McKinsey 2008

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Winner & Losers:How Prepared are Australian Companies?

97% Recognise climate change as a commercial risk

93% Senior Mgt or Board responsibility for climate change issues

89% Recognise climate change as a commercial opportunity

77% Have considered ETS opportunities

60% Disclose sufficient GHG emissions data

36% Have established GHG emission reduction programs with targets

33% Emissions intensive companies did not disclose possible risks and opportunities or management and mitigation strategies

Source: 2007 CDP Report

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Summary and recap

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Summary

Climate change is having a material impact on investments and is likely to increase with time

Climate risk can and should be integrated into investment decisions along with all other risks

Understanding the winners and losers requires digging deeper into the direct impacts, and responses, to climate change

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Climate and Sustainable Credentials

The Sustainable Alpha Team’s activities are

carbon neutral for energy and transport

with the help of Climate Friendly

The Australian Sustainable Future product received an

inaugural SRI symbol certification

AMP Capital is a founding member of Investor Group on Climate Change

AMP Capital is a signatory to the Principles for Responsible Investment

AMP Capital is a signatory to the Carbon

Disclosure Project

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Important note

Neither AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497), nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this presentation.

Past performance is not a reliable indicator of future performance.

While every care has been taken in the preparation of this document, AMP Capital Investors makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts.

This document has been prepared for the purpose of providing general information, without taking account of any particular investor's objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor's objectives, financial situation and needs.

This document is solely for the use of the party to whom it is provided.