tbli europe 2015 - low carbon investment opportunities - pierre lenders

Opportunities along the way to a lower carbon world

Authorized and regulated by the Financial Conduct Authority

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BACK TO THE FUTURE

http://www.priuspartners.com/


SOME RECIPES TO AVOID SLOW MOTION CRASH SCENARIO

SOLUTIONS ?




1st option : forget it…




…RISKY




2nd option : hope…




…RISKY




3rd option : centralised ruling




…RISKY



BACK TO THE FUTURE – ELEMENT OF SOLUTION IDENTIFIED



LET’S FACE IT HERE IS THE STUMBLING BLOCK !!!

Cartoon money rules the world



SO, WE NEED TO SHIFT THE TRILLIONS

Quote by Figueres? Diagraml showing gvts trying to move a dunkey - to wake up a

sleeping giant ? - in fact 2 mountains Business and Finance



Business syntax?

SPEAKING THEIR LANGUAGE …



PROFITBusiness syntax?




Business syntax? PROFIT

Finance syntax?




Business syntax? PROFIT

Finance syntax? ALPHA




-> “Where the index is and where the market is – we are all going to hell in

a handcart … The investment industry has been bedevilled by the false

god of relative performance, and we might be slipping into that with

carbon footprinting.”

(Anne Simpson – Calpers - PRI in Person Sept 2015)

-> “Alpha is a zero sum game”(Martin Skancke – PRI – PRI in Person Sept 2015)

These issues are incredibly deep and philosophical

THE ALPHA CONTROVERSY



LINK BETWEEN ALPHA AND PROFIT

Profit => Alpha



CHANGES ABOUT MATERIAL

LONG TERM REALITIES

… WILL HAVE

… SHORT TERM IMPACTS



𝑘=0…𝑛 PV (Profit (t𝑘))

=> Alpha (t0)

LONG TERM REALITIES CAN HAVE SHORT TERM IMPACT



𝑘=0…𝑛 PV (Profit (t𝑘))

=> Alpha (t0)

LONG TERM REALITIES CAN HAVE SHORT TERM IMPACT

STRANDED ASSETS

PRICE ACTION ON COAL RELATED INDUSTRIES



PERCEPTION IS REALITY (BEHAVIOURAL FINANCE)

𝑃𝑒𝑟𝑐𝑒𝑝𝑡𝑖𝑜𝑛 𝑜𝑓 𝑘=0𝑛 PV (Profit (t𝑘))

=> Alpha (t0)



IT’S ALL ABOUT TRIGGERING VIRTUOUS CIRCLES


Alpha (t0)

Lower cost of capital

More R&D, lobbying, recognition

More clients

Greater ability for regulators to jump in

Higher profits for

early adopters



IT’S ALL ABOUT TRIGGERING VIRTUOUS CIRCLES


Alpha (t0)

Lower cost of capital

More R&D, lobbying, recognition

More clients

Greater ability for regulators to jump in

Higher profits for

early adopters

ALPHA DRIVES

ASSET OWNERS ALLOC

TO ASSET MANAGERS

ALPHA NEEDS TO BE

UNDERSTOOD IN ITS RELATION

TO LONG TERM GOALS



RECAP :

We need a measure of the “Climate Change ALPHA”

We need AOs to hold AMs responsible for it

BUT WHAT KIND OF ALPHA CAN YOU GET, AND

HOW, FROM INTEGRATING CLIMATE CHANGE

ISSUES INTO PORTFOLIO MANAGEMENT?

TO TRIGGER THE VIRTUOUS CIRCLE



TWO WAYS OF INTEGRATING CLIMATE CHANGE

JUST BUY “LOWER FOOTPRINT”




Is that enough ?





Is that enough ?

Is that entirely convincing ?





Is that enough ?

Is that entirely convincing ?

Is that not risky at some point?





?? and / or ??




JUST BUY BEST RATED

ALSO BUY IMPROVEMENT





vs



JUST BUY BEST RATED ALSO BUY IMPROVEMENT

Societal impact

Business case

How to implement

How to Monitor





Societal impact

Business case

How to implement

How to Monitor

Suggested

Analytical

Framework




JUST BUYING LOWER FOOTPRINT ALSO BUYING IMPROVEMENT

Societal impact Pro: Signalling effect to higher GHG

emitters if looking for capital

Con: bad Co’s end up in careless

hands

Business case

How to implement

How to Monitor

Suggested

Analytical

Framework








hands

Pro: Signalling effect to all cies to do more

Pro: Active ownership can be effective with

bad Co’s (washing machine)

Business case

How to implement

How to Monitor

Suggested

Analytical

Framework








hands




Business case As long as rating is not “priced-in”, or

remains forward-looking. Onus on rating

agencies to go beyond simply rating Co’s

Risk: buying co’s too expensively

How to implement

How to Monitor

Suggested

Analytical

Framework








hands








Valid as long as anticipation skill helps

position in improving Co’s.

Onus on managers to perform

Risk: eroding skill-set

How to implement

How to Monitor

Suggested

Analytical

Framework








hands












How to implement Apply carbon emission screening before

and/or after “mainstream” stock selection

Risk of PM’s frustration, when

opportunities are missed, and of ESG

team pushed into a compliance function

How to Monitor

Suggested

Analytical

Framework








hands

















Art not science, true integration simply

means more thorough fundamental analysis

PMs end up dealing with ESG analysts as if

they were “mainstream” analysts,

How to Monitor

Suggested

Analytical

Framework








hands





















How to Monitor Simple compliance exercise

Suggested

Analytical

Framework








hands





















How to Monitor Simple compliance exercise More complex analytical framework

Suggested

Analytical

Framework

.








hands





















How to Monitor Simple compliance exercise More complex analytical framework

Suggested

Analytical

Framework

FLAME and ASAP - to measure ex-post how much managers have

so far managed to invest alongside the right carbon trajectories





Societal impact

Business case

How to implement

How to Monitor

Proposed

Framework





Societal impact

Business case

How to implement

How to Monitor

Proposed

FrameworkFLAME and ASAP - to measure ex-post how much managers have

so far managed to invest alongside the right carbon trajectories




What do we need ?ESG 1.0 ESG 2.0

Use emission

data to build

portfolios,

Focus on lower

footprint cies.

Look for the

improving

cies. Use

emission

data to

validate ex-

post

From one alpha

driver to the next



THE BENCHMARKED VIEW



VISUALISING THE GRANULAR LEVEL



THE KEY IS TO PUSH FOR DISCLOSURE

RESULTS

GREATLY

VARY

DEPENDING

ON

ASSUMPTIONS

ABOUT THE

NON

DISCLOSING

COMPANIES

IN PORTFOLIO


LAYING OUT RISKS AND OPPORTUNITIES AHEAD


FLAME ANALYSIS

QUESTION: IS THE MANAGER HAVING (ENOUGH OF) A DEMONSTRABLE BIAS

TOWARDS PREFERRING ALLOCATING CAPITAL IN PORTFOLIO TO COMPANIES

REDUCING EMISSIONS FASTER THAN THEIR PEERS ?



QUESTION: WAS THE UNIVERSE FRIENDLY TO THE “GREEN” INVESTOR ?

Quantifying the Climate Change opportunity set

Green alphas - Red alphas All alpha (six scenarios)

Universe “S-Alphaity” =

Negative Carbon Outlook for Cies in

Universe

NeutralOutlook

Positive Carbon Outlook for Cies in

Universe

ALL ALPHA

ALPHA + Alpha+ ESG - Alpha+ ESGn Alpha+ ESG +

ALPHA - Alpha- ESG -- Alpha- ESGn Alpha- ESG +


ASAP: not all dollars are equal

www.priuspartners.com – Private and confidential54

Negative Carbon Outlook for Cies in

Portfolio

NeutralCarbon Outlook

Positive Carbon Outlook for Cies in

Portfolio

ALL ALPHA

ALPHA + OVER RISKY GAIN

* 1/xNeutral ESG

GainPREFERRED GAIN

*x

ALPHA - NASTY LOSS

* XNeutral ESG

LossEXCUSABLE LOSS

* 1/x

(x-1)*(Green + Red) - (1-1/x) * (Blue + Yellow)

number of years

Fund ASAP =



ASAP ANALYSIS

QUESTION: CAN THE MANAGER

PROFIT FROM SITUATIONS WHEN POSITIVE ALPHA IS ASSOCIATED WITH SIGNIFICANT

EMISSION REDUCTIONS AND AVOID LOSSES ASSOCIATED WITH THE OPPOSITE CASE ?



COMPARING ASSET MANAGERS AGAINST VARIOUS METRICS

Fund 2

Fund 1

Fund 3

Fund 4

Fund 5

Fund 6

Fund 7

Fund 8



ALPHA matters

A return-focused approach is required to bring

mainstream to REALLY care about climate change

CONCLUSION



CONCLUSION



A return-focused approach is required to bring mainstream to REALLY care about

climate change

Low Carbon Footprint investing ( ) can

generate good alpha for now,

… but has its risks and limitations

CONCLUSION




climate change

Low Carbon Footprint investing ( ) can generate good alpha for now, but

has its risks and limitations

Investing alongside improving companies ( nn )

probably leads to a more sustainable alpha,

based on value creation as opposed to re-rating, but

requires more anticipatory skills, and engagement.

CONCLUSION




climate change

Low Carbon Footprint investing ( ) can generate good alpha for now, but

has its limitations

Investing alongside improving companies ( ) probably leads to a more

sustainable alpha, based on value creation as opposed to re-rating, but requires

more anticipatory skills, and engagement.

AOs could & should use a quant framework allowing

to quantify

• how much AMs are “on path” towards the 2°

• what kind of climate change alpha they produce.

CONCLUSION


FLAME: most inclusive framework for ESG integration, focused on impact, not compliance, to enable AO engage with all of their managers.

FLAME: a first quant toolkit to check how much a manager invests alongside any particular definition of sustainability and benefits from it.

FLAME, the most credible way of using granular data to vet and rank funds, acknowledging leads and lags between factors and price changes.

FLAME ASAP TOOLKIT ENABLES ASSET OWNERS ASCERTAIN HOW EFFICIENTLY MANAGERS DEAL WITH ESG & BRINGS ACTIVE OWNERSHIP TO THE NEXT LEVEL

ESG integration should no longer be limited to a compliance exercise constraining investment processes from the outside. This approach is perceived as creating financial sub-optimality.It should rather dissolve & disappear into portfolio management as pure fundamental analysis. So a toolkit is needed to assess if ESG integration happens & creates value, even when hidden.

The next issue we need solving to push ESG integration mainstream ?

Factor / Sector heat map ESG Alpha opportunity set Manager ASAP ability

Using historical ESG rating data and granular past portfolios, we help AOs verify how much their AMs truly invest alongside sustainability & benefit from it.

AOs can scan the contextual ability of AMs to extract value from the factors they most care about, drill down and target engagement policy accordingly.

An ocean of data is now available to investors.The challenge is to detect signals within the noise.

This is a new generic due diligence toolkit which maps managers’ past holdings to subsequent stock price and factor changes (ESG or not) to detect style biases.

AO have so far used the toolkit to:• compare existing managers to peers and

indices, LO or L/S,• select new ones using their own weightings for

our criteria,• identify questionable holdings on material

issues and engage at both level (AM &/or Cie).

Manager past decisions Manager timeless DNA Manager Style drift

FLAME (Forward Looking Assessment of Material Externalities) detects bias to invest alongside E, S or G factors.ASAP (Annualized Sustainable Alpha Premium) maps this within financial performance, absolutely or relatively.

Fund multi criteria comparison screens Fund scores histograms Top & bottom contrib. holdings

tbli europe 2015 - low carbon investment opportunities - pierre lenders

Economy & Finance