Understanding Transition Risks Through Environmental Metrics

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Paris, March 19
th
, 2019
Jean-Guillaume Péladan 
| Sycomore Asset Management
Pierrick Arnault 
| BNP Paribas Securities Services
Audrey Manh-Tilleul 
| Sycomore Asset Management
Is the transition risk material?
Testing the Net Environmental
Contribution™ metric on a universe
of listed European equities
2
what does the carbon footprint tell us?
A question of 
greenhouse gas scope
Source: Carbon footprint calculated as scope 1, scope 2 and Tiers one supplier scope 3 in CO
2
 eq. / year / M€ invested as of June 2018, Trucost; example
used in the Green Finance Handbook of the French SIF, see 
https://www.frenchsif.org/isr-esg/wp-content/uploads/UK_Executive_Summary_13nov2018.pdf
CARBON
FOOTPRINT
TONS eq.  CO
2
/
YEAR/ M€ invested
Sports
cars
Online clothes
retail
Water, waste and
energy management
Trains, tram, subways,
rail systems
7
17
4168
839
what does the carbon footprint tell us?
A question of 
environmental scope
Source: 
carbon footprint of packaging according to the Ecoinvent greenhouse gas emissions factor and the ADEME FOODGES database, Quantis calculations, 2018.
Existing indicators
, such as the carbon footprint or E rating ratings, 
do not
reflect
 on the 
risk of transition
, nor on climate risk or on issues 
beyond carbon
,
such as damages from plastics, air quality, nuclear waste or biodiversity
3
4
Source: Sycomore AM.
the need for integrating environmental issues
Why do 
environmental challenges
matter to 
investors
?
Which are the activities,
companies, portfolios, projects
that 
positively contribute to the
environmental transition 
to
create a sustainable world?
TCDF recommendations
European Commission's Action Plan
for a greener and cleaner economy
Fiduciary duty
Article 173
Technology risk
Policy risk
Reputation risk
Market risk
Acute risk
Chronic risk
Opportunities
Transition
Resilience
Solutions
Mitigation
Risks
Regulatory
landscape
Capital
reallocation
Paris agreement
SDGs
Impact investing
5
NEC: a new advanced metric
A 
metric designed to 
assess transition risk
, 
drive investment decisions
and 
report
 according to the TCFD recommendations and the article
173 of the French law on energy transition for green growth
NET
 
ENVIRONMENTAL
 
CONTRIBUTION
Alignment with
the climate goals
Contribution to the
environmental transition
0%
+100%
+10%
-100%
-10%
ENVIRONMENTAL
DAMAGES
ENVIRONMENTAL
BENEFITS
Average
environ-
mental
impact
Impact analysis
by activity
Transition risk
    very high
  
             high
     limited
 
                     very limited
Non
significant
Source: Sycomore AM.
6
integrating key environmental issues
Important issue, but hard to quantify (lack of reliable data)
A 
multi-dimensional approach 
for an 
holistic
view
 of the net environmental impact
Source: NEC 
β
 
Sycomore AM, Quantis and I Care&Consult
, October 2018.
Key issues for the impact domain
7
example: food products
Main impacts in the value chain:
upstream
3 main environmental impacts:
GHG, biodiversity and water
Estimation of environmental
impact per grams of nutrient
Source: Quantis and Sycomore AM calculations, 
3 main quantifiable environmental issues: GHG, biodiversity
and water and main impacts during the production phase, Food & Beverages framework, NEC 1.0.
8
delivering manageable results
Source: NEC 1.0 of a selection of listed equities and of MSCI Europe Net Return (reinvested
dividends), calculated by
 Sycomore AM, Quantis and I Care&Consult o
n 2017 data, October 2018.
0%
-100%
+100%
More transition
risks…
More resilience and
sustainable growth…
+100%
-40%
-100%
+43%
-3%, MSCI Europe NR*
UNIVERSE
9
tested data set
Source: NEC β 
Sycomore AM, Quantis and I Care&Consult
, October 2018.
Companies in the Stoxx Europe 600 (all market capitalization accross 17
countries) which have a NEC score (570 companies)
Testing period of 1 year / 3 years  / 5 years
METHODOLOGY
Extraction of the weekly close prices
Risk/Performance analysis on different strategies and different time frames
NEC scores computed from June 2017 to February 2018, mainly with 2016 data
A 
company data 
centered on a 
2016 picture
10
what is the difference between NEC and E ratings?
Source: NEC β 
Sycomore AM, Quantis and I Care&Consult
, October 2018.
 
Majority of the components of the Stoxx
Europe 600 have a strong environmental
rating (red) whereas their NEC is often
neutral (blue)
Environmental ratings are calculated by
aggregating several ratings at corporate/
holding level (carbon footprint,
environmental progress, disclosed reports)
The NEC is based on a lifecycle
assessment using physical data,
and built activity by activity
NEC distribution (blue) 
versus 
average
environmental ratings (red)
 with their market cap
The NEC: a 
disruptive metric 
to
overcome 
the 
limits
 of existing
environmental ratings
11
6 Tested NEC-based investment strategies
Source: NEC 
β
 
Sycomore AM, Quantis and I Care&Consult
, October 2018.
 
Green strategy | 
Clear positive contribution
NEC b/t +10% and +100% (101 companies)
Green overweight strategy | 
Highly positive contribution
NEC b/t +30% and +100% over weighted by a factor of 10
Neutral Green strategy | 
Neutral and positive contribution
NEC b/t -10% and +100%
Sector neutral green strategy | 
Sector neutral best in class NEC
Top 10% by sector
Red strategy | 
Clear negative contribution
NEC b/t -100% and -10% (76 companies)
Red overweight strategy | 
Highly negative contribution
NEC b/t -100% and -30% over weighted by a factor of 10
AVERAGE NEC
+25%
+14%
+3%
+3%
-30%
-32%
12
what is the difference between NEC and E ratings?
Source: NEC 
β
 
Sycomore AM, Quantis and I Care&Consult
, October 2018.
 
13
risk-adjusted returns on 3-year and 5-year periods
 On a 
3-year or 5-year period
, the Green
Strategy shows the 
best Sharpe ratio
Results on a yearly period (2015, 2016, 2017) show no stable pattern
Results on 3 years and 5 years are more conclusive:
14
where does the Green Strategy outperformance come from?
Performance attributions per
market cap and per sector
show that 
more than 80% 
of
the 
outperformance 
is
explained by 
the 
security
selection 
based on the NEC.
15
key take away
Source: NEC 
β
 
Sycomore AM, Quantis and I Care&Consult
, October 2018.
 
Similar patterns between the NEC and stock performance emerge over 3 and 5-year
periods
The NEC selection effect is not significantly biased neither by market capitalization
nor by sector allocation
The NEC metric is completely different from existing environmental ratings
The transition risk measured by the NEC metric appears to be material on long term
stock returns
The NEC is worth being further improved and rolled out
Launch of the 
NEC Initiative 
to share and
scale the NEC methodology on an 
open
source platform
 operated by 
Quantis
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Exploring the significance of transition risks in the context of environmental metrics like carbon footprint, this content delves into the implications for investors, opportunities for sustainability, and the need for integrating environmental considerations within investment strategies. It highlights the various risks, challenges, and solutions associated with the transition towards a more environmentally sustainable world.


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  1. https://1e64.net/risks-forum-7a9654/uploads/1548271660643-RF2019-LOGO-Header-website.pnghttps://1e64.net/risks-forum-7a9654/uploads/1548271660643-RF2019-LOGO-Header-website.png Is the transition risk material? Testing the Net Environmental Contribution metric on a universe of listed European equities Paris, March 19th, 2019 Jean-Guillaume P ladan | Sycomore Asset Management Pierrick Arnault | BNP Paribas Securities Services Audrey Manh-Tilleul | Sycomore Asset Management Jean-Guillaume P ladan | Sycomore Asset Management Pierrick Arnault | BNP Paribas Securities Services Audrey Manh-Tilleul | Sycomore Asset Management

  2. what does the carbon footprint tell us? A question of greenhouse gas scope CARBON FOOTPRINT TONS eq. CO2/ YEAR/ M invested Sports cars Online clothes retail Water, waste and energy management Trains, tram, subways, rail systems 7 17 4168 839 Source: Carbon footprint calculated as scope 1, scope 2 and Tiers one supplier scope 3 in CO2eq. / year / M invested as of June 2018, Trucost; example used in the Green Finance Handbook of the French SIF, see https://www.frenchsif.org/isr-esg/wp-content/uploads/UK_Executive_Summary_13nov2018.pdf 2

  3. what does the carbon footprint tell us? A question of environmental scope CARBON FOOTPRINT (kg eq. CO2/ liter) 0.5 0.4 0.3 0.2 0.1 0 Bottle PET Aluminium can Food brick Glass Bottle Existing indicators, such as the carbon footprint or E rating ratings, do not reflect on the risk of transition, nor on climate risk or on issues beyond carbon, such as damages from plastics, air quality, nuclear waste or biodiversity Source: carbon footprint of packaging according to the Ecoinvent greenhouse gas emissions factor and the ADEME FOODGES database, Quantis calculations, 2018. 3

  4. the need for integrating environmental issues Why do environmental challenges matter to investors? Opportunities Which are the activities, companies, portfolios, projects that positively contribute to the environmental transition to create a sustainable world? Technology risk Policy risk Reputation risk Market risk Acute risk Chronic risk Transition Resilience Solutions Mitigation Capital reallocation Regulatory landscape TCDF recommendations European Commission's Action Plan for a greener and cleaner economy Fiduciary duty Article 173 Paris agreement SDGs Impact investing 4 Source: Sycomore AM.

  5. NEC: a new advanced metric NETENVIRONMENTALCONTRIBUTION +10% -10% -100% ENVIRONMENTAL DAMAGES +100% 0% Impact analysis by activity ENVIRONMENTAL BENEFITS Average environ- mental impact Alignment with the climate goals significant Contribution to the environmental transition Non very high high limited very limited Transition risk A metric designed to assess transition risk, drive investment decisions and report according to the TCFD recommendations and the article 173 of the French law on energy transition for green growth 5 Source: Sycomore AM.

  6. integrating key environmental issues AIR Examples of specific KPIs & certifications CLIMATE WASTE BIODIVERSITY WATER 5 ISSUES QUALITY DOMAINS - Type of agriculture and farming (intensive vs organic, ) - GHG content and water footprint - Palm Oil usage (RSPO) - Forestry and wood certifications (PEFC, FSC, SFI) - APUR, Ecolabels, Blue Angel... Ecosystems-related: food & beverages, water, forestry/wood/pulp - Species depletion (Nb/kWh) - Type of extraction of fossil fuels - Carbon Tracker Initiative over 2 C budget for fossil fuels - gCO2e/kWh Energy: fuel, heat and electricity - Passenger mobility: CO2e, NOX and fine particles per passenger.km - Freight: CO2e, NOX and fine particles per ton.km Mobility: passenger transportation and freight - Energy Intensity - carbon content of materials and constructive solutions - BREEAM, LEED, BBCA, HQE, etc. Construction: building and real estate Production: mining, metals, chemicals, textile, personal & home care, IT, appliances, waste - ReCiPe method with ecosystem quality endpoint from Ecoinvent, type of mine, biodiversity management - Product reliability and lifespan - MSI score for textile from Sustainable Apparel Coalition - % of input with recycled materials Key issues for the impact domain Important issue, but hard to quantify (lack of reliable data) A multi-dimensional approach for an holistic view of the net environmental impact 6 Source: NEC Sycomore AM, Quantis and I Care&Consult, October 2018.

  7. example: food products Main impacts in the value chain: upstream 3 main environmental impacts: GHG, biodiversity and water NEC Organic veg. unpacked Estimation of environmental impact per grams of nutrient +100% Organic pulses Organic veg. canned (97%) Standard veg. canned (64%) Organic milk(53%) Average footprint Organic egg (33%) Organic fish (24%) Environmental performance Milk (22%) Standard egg (0%) Organic chicken (-7%) Chicken (-41%) Beef (-100%) -100% Source: Quantis and Sycomore AM calculations, 3 main quantifiable environmental issues: GHG, biodiversity and water and main impacts during the production phase, Food & Beverages framework, NEC 1.0. 7

  8. delivering manageable results More resilience and sustainable growth More transition risks -100% +100% 0% Southwest - link to home page -100% -40% -3%, MSCI Europe NR* +43% +100% Source: NEC 1.0 of a selection of listed equities and of MSCI Europe Net Return (reinvested dividends), calculated by Sycomore AM, Quantis and I Care&Consult on 2017 data, October 2018. 8

  9. tested data set UNIVERSE Companies in the Stoxx Europe 600 (all market capitalization accross 17 countries) which have a NEC score (570 companies) Testing period of 1 year / 3 years / 5 years METHODOLOGY Extraction of the weekly close prices Risk/Performance analysis on different strategies and different time frames NEC scores computed from June 2017 to February 2018, mainly with 2016 data A company data centered on a 2016 picture 9 Source: NEC Sycomore AM, Quantis and I Care&Consult, October 2018.

  10. what is the difference between NEC and E ratings? Majority of the components of the Stoxx Europe 600 have a strong environmental rating (red) whereas their NEC is often neutral (blue) Environmental ratings are calculated by aggregating several ratings at corporate/ holding level (carbon footprint, environmental progress, disclosed reports) The NEC is based on a lifecycle assessment using physical data, and built activity by activity The NEC: a disruptive metric to overcome the limits of existing environmental ratings NEC distribution (blue) versus average environmental ratings (red) with their market cap 10 Source: NEC Sycomore AM, Quantis and I Care&Consult, October 2018.

  11. 6 Tested NEC-based investment strategies AVERAGE NEC Green strategy | Clear positive contribution NEC b/t +10% and +100% (101 companies) +25% Green overweight strategy | Highly positive contribution NEC b/t +30% and +100% over weighted by a factor of 10 +14% Neutral Green strategy | Neutral and positive contribution NEC b/t -10% and +100% +3% Sector neutral green strategy | Sector neutral best in class NEC Top 10% by sector +3% -30% Red strategy | Clear negative contribution NEC b/t -100% and -10% (76 companies) Red overweight strategy | Highly negative contribution NEC b/t -100% and -30% over weighted by a factor of 10 -32% 11 Source: NEC Sycomore AM, Quantis and I Care&Consult, October 2018.

  12. what is the difference between NEC and E ratings? 12 Source: NEC Sycomore AM, Quantis and I Care&Consult, October 2018.

  13. risk-adjusted returns on 3-year and 5-year periods Results on a yearly period (2015, 2016, 2017) show no stable pattern Results on 3 years and 5 years are more conclusive: On a 3-year or 5-year period, the Green Strategy shows the best Sharpe ratio 13

  14. where does the Green Strategy outperformance come from? Performance attributions per market cap and per sector show that more than 80% of the outperformance is explained by the security selection based on the NEC. 14

  15. key take away Similar patterns between the NEC and stock performance emerge over 3 and 5-year periods The NEC selection effect is not significantly biased neither by market capitalization nor by sector allocation The NEC metric is completely different from existing environmental ratings The transition risk measured by the NEC metric appears to be material on long term stock returns The NEC is worth being further improved and rolled out Launch of the NEC Initiative to share and scale the NEC methodology on an open source platform operated by Quantis 15 Source: NEC Sycomore AM, Quantis and I Care&Consult, October 2018.

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