sustainable thematic funds - exploring the link between thematic portfolios, sustainability and...
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Sustainable Thematic Funds and Long-Term Investment Returns
TBLI Conference Europe 2008TBLI Conference Europe 2008
Steven Falci, CFASteven Falci, CFA
Vice President Sustainable InvestmentKBC Asset Management Limited
Amsterdam Nov 13th & 14th 2008
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Environmental Issues on the Agenda
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Sustainable Thematic Funds
AgribusinessRenewable Energy
Water Climate Change
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Global Mega Trends- Sustainability Imperatives
• Population Growth/ Industrialisation/ GDP Growth
• Supply and Demand for Natural Resources
• Climate Change
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Sources of Long-Term Return
• Sustainable Themes Sustainability Solutions
• Sustainable Strategic Framework - Selection of sectors within each theme best positioned to outperform over the long run
• Selection of best stocks within each sector
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Alternative Energy: the central issues
Fossil Sources Renewable Energy
Long-Term Supply Constraints
Security of Fuel Supply
Climate Change
Falling Costs/Rising Demand
Local
Environmental / Political
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Investment Driver:Current Market Share
Renewable Energy• Wind• Solar • Biofuels• Fuel Cells • Waste to Energy
International Energy Agency:30% of all energy related
Investments in next 30 years willbe in renewables
Renewable electricity capacity, share of 2005 electricity production
Source: REN 21 “Renewables Global Status Report 2006 Update”
Other3.6%
Ocean (tidal)0.0%
Nuclear16.0%
Conventional65.5%
Large Hydro14.9%
Small hydro1.3%
Wind Power1.2%
Solar Thermal0.0%
Solar PV0.1%
Geothermal0.2%
Biomass0.9%
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Investment Driver:Falling Renewable Energy Costs
Renewable energy actual cost of production — cents/kWh
Expected cumulative reduction in costs of renewable technologies by 2020
Source: United Nations Economic and Social Council
Source: EIA, American Wind Energy Association
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What Do We Mean By Investing In Water?
Stage 4 Secondary disinfection
treatment prior to discharge into the
environment
Stage 3 Residential, commercial
and industrial water use
Stage 2 Filtration and disinfection process
Stage 1 Sources of water: ground or surface water
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0
100
200
300
400
500
600
700
800
900
1000
1900 1940 1950 1960 1970 1980 1990 1995 2000 2010 2025
Global Population Global Water Consumption
Sources: US Census Bureau / German Ministry of Environment
Investment Driver Water Demand
Economic Growth
Population Growth
Standard of Living
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Global Supply versus Demand for Water
Source: UNESCO
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2006 Projected Capital Expenditure
Projected expenditure on water infrastructure, 2006
Current exp on waterinfrastructure (US$bn)
Current exp on waterinfrastructure (% GDP)
Projected exp on waterinfrastructure as % GDP by 2025
Average annualinvestment (US$bn) by 2025
Annual avg real growth rate (2006–25) by 2025
North America 109.6 0.75% 1.08% 246.4 4.4%
South America 18.0 0.94% 1.52% 61.6 6.7%
Europe 135.5 0.83% 0.94% 284.2 4.0%
Asia 85.2 0.97% 2.06% 606.1 10.9%
Australasia 7.3 0.85% 1.10% 14.8 3.8%
Total 355.6 0.84% 1.38% 1,213.0 6.4%
Source: OECD, IMF, Credit Suisse estimates
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Climate Change – No Longer Fringe Issue
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Climate Change Sectors
Water
Cleaner Energy Sources
Energy Efficiency
Better Waste Management
Carbon Credits Trading
• Physical
temperature, wind, precipitation
• Regulation
environmental legislation, subsidies
• Behavioral
Voluntary actions, client behavior, reputational risk
15 Source: World Resources Institute
Source of Greenhouse Gas Emissions: Energy Break-down
Other21%
Transportation22%
Electricity & Heat40%Industry
17%
Focus on Energy Generation,Usage and Transportation
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Focus Now Shifting to Energy Efficiency
• Focus has been on alternative energy
BUT
Energy Efficiency!
- Immediate Impact
- Multiplier effect
Definition = Delivering the same or better output with reduced power consumption
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Energy Efficiency Multiplier Effect
Fuel = Coal
Transmission Lines
Power Plant65% Loss
10% Loss
Every 1 unit of energy saved at home or business represents up to 4 units saved at the power plant
Source: Sustainable Energy, Choosing Among Options (Tester, Drake, Driscoll, Golay, Peters), UBS Research
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2/3 of Projected Co2 emission savings to come from energy efficiency
Source: International Energy Agency
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Case study – Alternative Energy
10%
Utilities
Wind Energy
Solar
Fuel Cells
Bio Fuels
20%
25%
25%
10%
Other (Emerging Technologies) 10%
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Wind Industry – US$30billion Market
Expected growth rate – 20%+ growth a year
Global Wind Energy Growth forecast
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Investment Driver:Falling Renewable Energy Costs
Renewable energy actual cost of production — cents/kWh
Expected cumulative reduction in costs of renewable technologies by 2020
Source: United Nations Economic and Social Council
Source: EIA, American Wind Energy Association
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Stock Selection Framework
• Sector Analysis Life cycle of sector Structure of value chain Bottlenecks in value chain
• Company Analysis Life Cycle of company Structure & quality of management Product & services range Positioning in value chain
• Financials Balance Sheet Access to capital
• Valuation FCF Models Valuation Multiples
• Price Targets
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Wind Sector Value Chain
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Correlation with Global Equities
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• Climate change and natural resource shortages will impact on our investments
• Contribute to solutions to our sustainability challenge
• Enhance the potential for long-tem returns