Some like it hot How climate change is affecting equity investments in a range of sectors Simon Webber Portfolio manager Schroder Global Climate Change Fund June 2008 For professional advisers only Not suitable for retail clients.
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Climate change A global investment theme 2
The “inconvenient” facts Today, the earth is hotter than it has been in two thousand years – 1990s was the warmest decade – Snow cover is down 10% in the last 40 years – 2005 the warmest sea temperatures for 400 years – 2007 extreme weather across the world Source: An Inconvenient Truth, Al Gore, 2006 3
And where is it leading? Uncharted territory Under business as usual scenario – “Greenhouse gases could treble by the end of the century” – “50% risk of exceeding 5°C global average temperature change during the following decades” – “Such changes would transform the physical geography of the world” Projected Level CO2 2100 “Emissions per unit of GDP would need to be 25% of current 50 700 levels by 2050” 45 40 600 Variation with time of temperature and carbon dioxide levels* 2 35 Current Level 30 500 CO2 25 Preindustrial Level CO2 18 20 400 Century 15 Current Antarctic 10 300 Temperature 5 0 200 5 10 100 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Degrees Centigrade Variation Carbon Dioxide Source: The Stern Report – October 2006 2 Source: J.R. Petit et al., op elt, 1999 4 * Variation between present (=0) and years before present (“BP”)
Global consequences The global picture Source: Intergovernmental Panel on Climate Change, Fourth Assessment, Global Surface Temperature Projections, Model Scenario A2 5
Global consequences The local picture Potential impact of sea level rise on Bangladesh Source: UNEP/GRID Geneva; University of Dacca, JRO Munich; The World Bank, World Resources Institute, Washington D.C. 6
We know what we have to do Mitigation and adaptation Mitigation – preventing the worst of future climate change Adaptation – adapting to some climate change that is already inevitable Source: Der Spiegel, Adaptation artist’s impression of Dutch town of the future. It can “float” during floods Source: BBC, Mitigation solar thermal power plant outside Seville in southern Spain 7
The economic implications are huge This is not about building a few wind farms Energy and nonenergy emissions in 2000, by source 3% 14% 24% Power Transport 18% Industry Buildings 14% Other Energy Related Land Use 5% Agriculture Waste 8% 14% Source: The Stern Report, 2006 drawn from World Resources Institute 8
Downward economic revisions ... Many risks correlate around the economic cycle US consensus GDP forecasts y/y% 6 5 2000 2004 4 2005 2009 2008 3 2006 1999 2001 2003 2007 2 2002 1 0 98 99 00 01 02 03 04 05 06 07 08 Time of forecast Source: Schroders, May 2008. 9
…and upward climate change revisions UK Climate Bill – cross party commitment Long term emission reduction targets UK Climate Bill emissions reduction profile 5 Year national “carbon budgets” Carbon Emissions, indexed. 1990 baseline = 100 100 90 Targets are independent of GDP 80 growth 70 60 Targets will be legally binding 50 40 30 Discussion of 60% or 80% goal 20 – 60% target = 1.9% average annual 10 reduction from 2006* 0 1990 2000 2010 2020 2030 2040 2050 – 80% target = 3.4% average annual reduction from 2006* 60% reduction 80% reduction Source: Schroders’ estimates, UK Government Data (DEFRA) * Schroders’ estimate based on constant percentage annual reductions from current levels 10
Increasing regulation Governments are already taking action 20% of EU power to come from renewables by 2020 US fuel efficiency standards raised 40% to 35mpg by 2020 US renewable fuels 36 billion gallons by 2022, up over 400% Australia, Canada, China – phasing out incandescent lighting in next 510 years Source: Favtivia 11
Momentum is building Clear catalysts ahead 2008 US Presidential Election (USA) G8 in Japan to focus on climate change July 2008 UN Convention on Climate Change in Poland December 2008 Completion of the Bali Roadmap – a treaty involving 2009 the US, Europe, China and India 12
New global growth markets Key themes Climate change is creating completely new growth markets The magnitude of the investment ahead is huge Low sensitivity to global economic growth – Environmental resources – Low carbon fossil fuels – Energy efficiency – Clean energy – Sustainable transport 13
The entire food value chain affected Environmental resources Climate change is inflationary for The US renewable fuels standard agricultural commodity and asset prices Billion gallons 40 Agricultural cycle 30 – Fertiliser – Agricultural Equipment 20 – Crop Science – Forestry 10 Food retailers – fixed cost leverage 0 2008 2010 2012 2014 2016 2018 2020 2022 Conventional Cellulosic Biofuel Biomass Diesel Other Advanced Biofuel Source: Text of House Resolution 6, the Energy Independence and Security Act Note: Figures reflect billions of gallons of alternative fuels with the total rising to 36bn gallons by 2022. 14
Cleaning up coal Low carbon fossil fuels 65% of global electricity is still fossil Carbon Price – EU ETS 2008 emission allowance 1 fuels Euros per Tonne of Carbon Dioxide 35 EU Emission Trading Scheme – cap and trade 30 Switch from coal to gas 25 20 Carbon capture and sequestration 15 10 Oct Jan May Aug Nov Feb Jun Sep Dec 05 06 06 06 06 07 07 07 07 1 Source: Bloomberg, May 2008. 15
So electric cars are uncool? Sustainable transport The Tesla Roadster * – 100% electric – 0 to 60 in under 4 seconds – Range about 220 miles – 5x cheaper to run than a UK Toyota Corolla – Charging time 3.5 hours Electric cars could revolutionise the auto industry – Those who are slow to adapt may not survive – Big new source of demand for power – Mass market * Source: Tesla Motor, New Energy Finance 16
Climate change will affect all sectors Capturing the broader opportunity Climate change affects all industries Single industry approaches will miss opportunities There are many potential poor investments as well as good ones Broad opportunity set is key “I can’t think of any industry that isn’t affected” – Madeleine Albright, former US Secretary of State 17
A global investment theme Structural growth The biggest investment theme of the next 20 years An industrial transformation is required New growth industries with low economic sensitivity Climate change affects all industries 18
Important information For professional advisers only. This material is not suitable for retail clients. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. Exchange rates may cause the value of overseas investments and the income from them to rise or fall. The fund may make use of derivatives which involves a higher degree of risk and can be more volatile. Portfolios which invest in a smaller number of stocks carry more risk than funds spread across a larger number of companies. Investments in smaller companies may be less liquid than in larger companies and price swings may therefore be greater than in larger company funds. Investors should be aware that the fund is index unconstrained and has the potential for greater volatility. The forecasts included in this presentation should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. Issued in June 2008 by Schroder Investments Limited 31 Gresham Street, London EC2V 7QA. Registered No: 2015527 England. Authorised and regulated by the Financial Services Authority. 19
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