Some like it hot How climate change is affecting equity investments - - PowerPoint PPT Presentation

Some like it hot

Simon Webber Portfolio manager Schroder Global Climate Change Fund June 2008

How climate change is affecting equity investments in a range of sectors

For professional advisers only ­ Not suitable for retail clients.

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A global investment theme

Climate change

3 Source: An Inconvenient Truth, Al Gore, 2006

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

The “inconvenient” facts

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100 200 300 400 500 600 700 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 ­10 ­5 5 10 15 20 25 30 35 40 45 50 Degrees Centigrade Variation Carbon Dioxide

Uncharted territory

Source: The Stern Report – October 2006

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Source: J.R. Petit et al., op elt, 1999 * Variation between present (=0) and years before present (“BP”)

And where is it leading?

Variation with time of temperature and carbon dioxide levels*

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Projected Level CO2 2100

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” “Emissions per unit of GDP would need to be 25% of current levels by 2050”

Current Level CO2 Preindustrial Level CO2 18 Century Current Antarctic Temperature

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The global picture

Source: Intergovernmental Panel on Climate Change, Fourth Assessment, Global Surface Temperature Projections, Model Scenario A2

Global consequences

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Global consequences

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.

The local picture

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We know what we have to do

Mitigation – preventing the worst of future climate change Adaptation – adapting to some climate change that is already inevitable

Source: BBC, Mitigation ­ solar thermal power plant outside Seville in southern Spain

Mitigation and adaptation

Source: Der Spiegel, Adaptation ­ artist’s impression of Dutch town of the future. It can “float” during floods

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24% 14% 14% 8% 5% 14% 3% 18%

Power Transport Industry Buildings Other Energy Related Land Use Agriculture Waste

The economic implications are huge

Source: The Stern Report, 2006 drawn from World Resources Institute

Energy and non­energy emissions in 2000, by source

This is not about building a few wind farms

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1 2 3 4 5 6 98 99 00 01 02 03 04 05 06 07 08

Downward economic revisions ...

Source: Schroders, May 2008.

US consensus GDP forecasts

Many risks correlate around the economic cycle

y/y% Time of forecast

1999 2001 2000 2002 2003 2004 2005 2006 2007 2008 2009

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UK Climate Bill ­ emissions reduction profile

…and upward climate change revisions

Carbon Emissions, indexed. 1990 baseline = 100

Long term emission reduction targets 5 Year national “carbon budgets” Targets are independent of GDP growth Targets will be legally binding Discussion of 60% or 80% goal – 60% target = 1.9% average annual reduction from 2006* – 80% target = 3.4% average annual reduction from 2006*

Source: Schroders’ estimates, UK Government Data (DEFRA) * Schroders’ estimate based on constant percentage annual reductions from current levels

10 20 30 40 50 60 70 80 90 100 1990 2000 2010 2020 2030 2040 2050 60% reduction 80% reduction

UK Climate Bill – cross party commitment

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Governments are already taking action

Source: Favtivia

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

Increasing regulation

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Momentum is building

Clear catalysts ahead

2009 US Presidential Election (USA) G8 in Japan to focus on climate change UN Convention on Climate Change in Poland Completion of the Bali Roadmap – a treaty involving the US, Europe, China and India December 2008 July 2008 2008

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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

New global growth markets

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The US renewable fuels standard

The entire food value chain affected

Billion gallons

Climate change is inflationary for agricultural commodity and asset prices Agricultural cycle – Fertiliser – Agricultural Equipment – Crop Science – Forestry Food retailers – fixed cost leverage

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.

10 20 30 40 2008 2010 2012 2014 2016 2018 2020 2022 Conventional Cellulosic Biofuel Biomass Diesel Other Advanced Biofuel

Environmental resources

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Carbon Price – EU ETS 2008 emission allowance

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Cleaning up coal

Euros per Tonne of Carbon Dioxide

65% of global electricity is still fossil fuels EU Emission Trading Scheme – cap and trade Switch from coal to gas Carbon capture and sequestration

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Source: Bloomberg, May 2008.

10 15 20 25 30 35 Oct 05 Jan 06 May 06 Aug 06 Nov 06 Feb 07 Jun 07 Sep 07 Dec 07

Low carbon fossil fuels

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So electric cars are uncool?

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

Sustainable transport

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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

Climate change will affect all sectors

Capturing the broader opportunity

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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

A global investment theme

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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.

Important information