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The business of sustainability ERM Webinar: Climate-related Financial Disclosures Part of ERM's 2018 Sustainability Means Business Webinar Series The business of sustainability © Copyright 2018 by ERM Worldwide Group Limited and/or its affiliates (‘ERM’). All Rights Reserved. No part of this work may be reproduced or transmitted in any form or by any means, without prior written permission of ERM.

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Page 1: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

ERM Webinar: Climate-related Financial DisclosuresPart of ERM's 2018 Sustainability Means Business Webinar Series

The business of sustainability

© Copyright 2018 by ERM Worldwide Group Limited and/or its affiliates (‘ERM’). All Rights Reserved. No part of this work may be reproduced or transmitted in any form or by any means, without prior written permission of ERM.

Page 2: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Welcome

2

This presentation will be recorded and all who registered will receive a follow-up email containing a link to the presentation within a week.

Participants can ask questions throughout the presentation using the WebEx chat function and they will be answered during the last 15 minutes of the webinar in the order that they were received.

Type your question and send

Click on chat

Send your question to “Everyone” so that those answering the questions will be able to see them.

Select “Everyone”

WebEx Toolbar

WebEx Chat box

Page 3: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Supply Chain Engagement

(Nov)

Emerging Disclosure

Trends (Sept)

Maximizing the Value of Assurance

(July)

Valuing Corporate

Impacts on the Environment and Society

(May)

Climate-related

Financial Disclosures

(today)

2018 Webinar Series

3

Megatrends:

Climate change Digital transformation Population growth Emerging middle classes

2018 ERM Webinar Series

Page 4: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Toby HannaERMPartner

[email protected]

+1 (609) 403-7518

Lee SolsberyERMTechnical Director

[email protected]

+1 (832) 272-5038

Tara SchmidtERMPrincipal Consultant

[email protected]

+44 (131) 221-6777

Ariane BurwellERMProject Manager

[email protected]

+1 (628) 221-7813

Today’s Speakers

4

Page 5: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Presentation Overview

Turning Point: What is Driving the Change?01

TCFD Overview02

Climate Financial Risk Approach03

Q&A04

5

Page 6: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Turning Point: What is Driving the Change?

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Page 7: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

The risks driven by a more rapid low-carbon transition mean the financial sector… “has a clear interest in ensuring the financial system is resilient to any transition hastened by those decisions, and that it can finance the transition efficiently.”

Financial Stability Issue…

7

Mark Carney, Chairman G20 Financial Stability Board and Chairman UK Central Bank

Page 8: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

The imperative for companies to assess transition risks and opportunities continues to grow.

■ G20 Financial Stability Board bringing transition risks into financial ‘mainstream’ with TCFD

■ Major stock exchanges already integrating TCFD recommendations into reporting guidelines

■ S&P, Moody’s and former chair of the US SECsupported TCFD, the London Stock Exchange has already endorsed its recommendations

■ So have the world’s largest insurance business AXA and world’s largest asset manager Blackrock

■ Climate-related shareholder resolutions have been filed at many energy company AGMs

■ Integrated with numerous sustainability disclosures -CDP, DJSI, PRI, etc.

Finance Sector Driven Initiative

8

62 shareholder resolutions filed already in 2018 on everything from conducting GHG emissions inventories to evaluating 2 degree scenarios

Climate change is the number 1 topic shareholder resolutions are being filed on

Page 9: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

TCFD Focus is Transition & Physical Risk

9Source: NOAA

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Page 10: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

TCFD Overview

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Page 11: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

TCFD Overview

13Source: TCFD Final Recommendations Report

Formed in 2015 by G20 Financial Stability Board

(FSB)

2015

ERM supported in development of

recommendations and supplemental guidance on scenario analysis

Developed set of recommendations for

voluntary climate-related financial disclosures that

provide decision-useful information for lenders,

insurers, investors

Task force members represented users and

preparers of disclosures across

economic sectors and financial markets

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Page 12: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability14 Source: TCFD Final Recommendations Report

Climate-related Risks & OpportunitiesIn the eyes of the TCFD…

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Page 13: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Climate Financial Risk Approach

13

Page 14: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Source: ERM / G20 Financial Stability Board, Task Force on Climate-related Financial Disclosures (TCFD)

How do you respond?

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Page 15: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Materiality of Climate Risks

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Page 16: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Supply chains disrupted. “Thailand floods result in loss of 150,000 units of production and 18% ($200m) fall in quarterly profits at Toyota” (FT)

Assets impaired. “French authorities forced to shut down nuclear power plants as heatwave raised river temperature and reduced flow.” (UNEP)

Markets eroded. “Peabody is the 50th coal company to file for bankruptcy since 2012 and a startling example of the industry’s failure to anticipate how future markets might be limited by tighter environmental regulations.” (Forbes)

Products banned. “Phased ban on the sale of incandescent lightbulbs is completed following EU directive to reduce energy use of lighting.” (Europa)

Compliance burden is rising. “Already 40 countries require GHG reporting. 35 countries and more than 20 states or cities have carbon tax or trading schemes. (World Bank)

Brands tarnished. “VW warned of consumer backlash over CO2. Some analysts say understatement of CO2 emissions could hurt car sales more than scandal over diesel pollutants.” (FT)

Climate Risk & Opportunity - Business Impacts

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Page 17: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Investments face a variety of financial risks from the low-carbon transition and climate change.

Source: ERM, TCFD Technical Supplement with reference to CDP questionnaire

Transition and physical risks on investment returns

Market

Time horizon

Sector Asset value

($)

Asset life

(years)

Investment return (%)

Intensifying carbon policy

Advancing low-carbon technologies

Mounting investor pressure

Classifying investments against level of risk

Financial Risks of Investments

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Page 18: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Range of Scenarios

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Page 19: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Why Scenarios?

-

1 000

2 000

3 000

Glo

bal T

PED

Gro

wth

(Mto

e)

Global energy growth shifting to lower carbon

IEA

Coal Oil Gas Zero-carbon energy

1990-2015 2015-2040

Source: IEA World Energy Outlook 2016, BP 2035 Outlook, XOM 2040 Outlook

Key question is “how quickly”

83% of growth over next 25 years in natural gas and zero-carbon fuels

IEA

(1) Electrification / energy storage

XOM

(2) Divestment from coal

BP

(3) Gas as a transition fuel

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Page 20: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

■ Scenarios are:

■ Plausible alternative views about how future climate change issues could evolve

■ Not a “what if” exercise for only one uncertainty

■ Provide challenge to conventional wisdom of their users

■ Assess financial exposure to both transition and physical climate-related risks and opportunities

■ Ensure companies have a robust strategy to mitigate risks and capture opportunities

■ Identify early market signals to monitor

■ Define the range of business, strategic and financial impacts and management actions to be considered

Scenarios: global market uncertainties

Financial risks and opportunities

Multipolar carbon world Breakthrough to 20C

Market Sector Geography

Value Add of Scenarios & Climate Financial Risk

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Page 21: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Transition scenarios Global balance (e.g. International Energy Agency)

Country-specific (e.g. US EIA)

Sector-specific (e.g. Cement)

Policy (e.g. US mid-century strategy, Paris Agreement NDCs)

Technology breakthrough research (e.g. CCS, EVs)

Your own company-specific (e.g. BP)

Physical scenarios Intergovernmental Panel on Climate Change

Regional scenarios published by government authorities (e.g. US National Climate Assessment)

Think Tanks (e.g. World Resources Institute Aqueduct)

Which Scenarios to Use?

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Page 22: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Asset Investment Risk Impact 20C vs BAU scenario Trend

Sector Sub- sector GeographyImpact Category

Financial Driver

Transition Risk Impact2C vs BAU scenarios Data Source

2020

2025

2030

Rev - fl ight demand Decreasing number of fl ights passing through an airport

IEA ETP Total passenger kilometres travelled

Regulatory and strategic changes to city and intercity networks driving demand for high or low carbon transport options

IEA ETP Share of passenger kilometres travelled by air

CapEx & OpEx - Emission reduction requirements

Potential technology improvements in airplanes (to reduce emissions), leading to required investments in the airport infrastructure

IEA ETP Investment options to reduce fl ight carbon intensity

OpEx - Fuel provision for fl ights

Potential technology improvements in airplanes fuel requirements, leading to potential increases in providing fuel provisions for fl ights

Government policy

OpEx - Carbon pricing

Changes in carbon pricing World Bank Historic data; government policy

Transport Aviation India Revenue

Cost

How Scenario Analysis Works in Practice

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Page 23: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Assessing Risks - Portfolio to Asset-level

Storm surges

Hurricane / cyclone tracks

Asset level screening of physical climate threats for a portfolio of assets.

Example supporting GIS outputs from ERM climate-related physical risk screening tool.

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Page 24: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Business Impacts

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Page 25: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Key Financial Drivers Drop in asset revenues driven by:

Lower than expected plant utilisation, with more rapid uptake in renewables and gas

Lower power prices, as intermittent renewable supply grows (i.e. duck curves)

Rise in asset costs driven by:

Capex: requirements to reduce emissions (e.g. more efficient operations, carbon capture)

Opex: changes in carbon pricing; physical risk impacts

Take for instance, an investment in a coal-fired power plant in the US

Assessing Financial Impacts

25

Page 26: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Investment: Company/Region/Asset XClimate-related Financial Risk Impact

Fall/Rise in asset revenues Rise/Fall in asset costs

Risk category Risk Financial impacts Signposts to monitor Mitigation options Supporting evidence/sources Short d Med Long Short Med Long

Regulatory Carbon price escalates Additional OPEX costsCarbon price developments Carbon reduction plans Carbon price forecasts/asset footprinting

Market Gas demand rises as result New revenue potential Coal market Spot market Energy market outlooksReputation Access to project financing Lower cost of capital Bank investment guidance Venture partnering Reputational historic trends and scenarios...etc ...etc ...etc ...etc ...etc ...etc

(1) Identify climate financial risks

(2) Assess impacts using scenarios

Copyright @ 2017 ERM All Rights Reserved

(3) Evaluate business impact

$0.09

$0.10

$0.11

300

325

350

375

400

2017 2018 2019 2020 2021

Comm

odityprices ($/kWh)

Reve

nue

(US$

m)

Asset revenue and commodity prices

$150

$170

$190

$210

$230

$250

$0

$50

$100

$150

$200

2017 2018 2019 2020 2021

Operating costs (US$m

)

EBIT

DA (

US$m

)

EBITDA and operating costs

EBITDA (US$m) - LHS Opex (US$m) - RHS

$0

$20

$40

$60

$80

$100

$120

2017 2018 2019 2020 2021

Free

cas

hflo

ws

(US$

m) Free cashflows

-80%-70%-60%-50%-40%-30%-20%-10%0%10%

-$500

-$400

-$300

-$200

-$100

$0

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

IRR

Cash

flow

s (U

S$m

)Asset investment return

Robust Investment Strategy for Solid Returns

26

Page 27: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Potential Responses

27

Page 28: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability28

Potential Strategic Responses

• Adapt the business portfolio to mitigate climate-related risks

• Invest in adaptation and resilience building in asset operations

• Reduce carbon footprint of business value chain or financial portfolio

• Invest in capabilities to capture lower carbon opportunities

• Pilot new business models (e.g. partnering)

• Test the market for lower-carbon services and products (e.g. venture capital)

• Capitalize on new emerging markets (e.g. low-carbon transition, physical risk resilience)

• Build out new market strengths & capabilities

• Deliver new products and services

Adapt Invest Capitalize

Page 29: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Disclosures

29

Page 31: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Financial Filing Example

31

BHP Billiton is a leading example…

“Demonstration of our commitment to climate change-related disclosures” Approach to strategic planning Insights: latest market signals which indicate shifts to low emissions world Portfolio implications Corporate actions Actions to manage climate change risk

Page 32: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainabilityThe business of sustainability

CDP – New Questions

Section 2018 CDP # 2018 Question Detail

Risks and opportunities

C2.1Describe what your organization considers to be short-, medium- and long-term horizons.

C2.2bProvide further details on your organization’s process(es) for identifying and assessing climate-related risks.

C2.2cWhich of the following risk types are considered in your organization's climate-related risk assessments?

C2.5Describe where and how the identified risks and opportunities have impacted your business.

C2.6Describe where and how the identified risks and opportunities have factored into your financial planning process.

Business strategy

C3.1aDoes your organization use climate-related scenario analysis to inform your business strategy?

C3.1dProvide details of your organization's use of climate-related scenario analysis

Governance

C1.1bProvide further details on the board’s oversight of climate-related issues.

C1.2Below board-level, provide the highest-level management position(s) or committee(s) with responsibility for climate-related issues.

C1.2aDescribe where in the organizational structure this/these position(s) and/or committees lie, what their associated responsibilities are, and how climate-related issues are monitored.

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Page 33: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Climate-risk Financial Reporting to Grow

02

03

Recommendations have been delivered 2017

Organizations to begin to disclose in financial filings in April Reporting season

Companies are already reportingUptake will increase with

CDP (PRI, etc.)

Greater adoption expected over time

Growing sense of what good looks like

04

01

Further guidance to be delivered Once agreed on what good looks like

Over 5 years, expect broad understandingThe concentration of carbon-related assets in the financial system & exposure to climate-related risks

0506

The TCFD expects the adoption (and depth) of climate-risk financial reporting to grow over the next 5 years.

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Page 34: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Questions

34

Page 35: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Supply Chain Engagement

(Nov)

Emerging Disclosure

Trends (Sept)

Maximizing the Value of Assurance

(July)

Valuing Corporate

Impacts on the Environment and Society

(May)

Climate-related

Financial Disclosures

(today)

2018 Webinar Series

35

Megatrends:

Climate change Digital transformation Population growth Emerging middle classes

2018 ERM Webinar Series

Page 36: ERM Webinar: Climate-related Financial Disclosures...The business of sustainability. Welcome. 2 This presentation will be recorded and all who registered will receive a follow-up email

The business of sustainability

Doug MacNairERM

Technical Director

Christian HellerBASF

Senior Manager Corporate Sustainability Strategy

Eva ZabeyWBCSD

Director, Redefining Value –Natural Capital

Clemence McNultyERM

Principal Consultant

ERM’s Next Webinar in this Series

Valuing Corporate Impacts on the Environment and Society May 2018

Measuring and valuing impacts on the environment and society provides companies the opportunity to mitigate risk, find new opportunities, and develop sound growth strategies. Join us to hear how companies are using the Natural Capital Protocol, Social Capital Protocol and Impact Valuation to create business value.

Speakers include:

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