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					GLOBAL CLIMATE CHANGE
Risks for South African Investors


           February 2005




                           FRATER ASSET MANAGEMENT
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CONTENT

 1. The South African financial sector
 2. Climate impacts and market
    vulnerability- global and SA context
 3. International investor initiatives
 4. Climate change as a portfolio risk
 5. The role of the financial sector



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  Every truth passes through three stages
   before it is recognised. In the first it is
ridiculed, in the second it is opposed, in the
     third it is regarded as self-evident"
            Arthur Schopenhauer

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CLIMATE CHANGE IN SOUTH AFRICA


 • Other socio-economic priorities
 • No emissions reduction obligations
 • Low levels of communication
   – Government response strategy released, but
     not strong on action
   – Low media coverage relative to international




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THE SA FINANCIAL SECTOR ON CLIMATE
CHANGE

   If there is pressure from government to
   meet emission targets, industry would
   respond. CEO of an asset management division of a large SA
   financial services company



 • Some commentary from the domestic
   insurance industry


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FUND MANAGERS AND “NON-FINANCIAL”*
ISSUES

 • Fiduciaries have a responsibility to their
   beneficiaries
 • What is the time horizon of the investor?
 • Examples of impacts on shareholder value
    – Leak of the Draft Mining Charter
    – Undisclosed asbestosis liabilities at Gencor
 * Non financial refers to those issues not traditionally reflected in the financial
    statements




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OPTIONS AND COSTS ….




                      Options


Range                                                         Total
  of                                             Costs        Costs
options




          Latency   Awareness   Activism    Regulation/litigation

                      Time / Impacts
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    CLIMATE CHANGE
     VULNERABILITY

GLOBAL AND SOUTH AFRICAN
        CONTEXT



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THE CLIMATE CHANGE IMPACTS FOR
SOUTH AFRICA




       “We no longer have a normal climate.”
      Prof B Hewitson, UCT, Weekend Argus, 15 /01/2005

 • Increasing aridity and change in weather
   characteristics
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GLOBAL WARMING

 • Climate change hits the headlines January 2005
   – Severe impacts anticipated should average
     temperatures rise above 2oC from pre-industrial
   – At current rates of emission release, a 2oC increase
     will be reached within 10 years Source: International Climate
     Change Taskforce, 2005. Widely reported by international media 25 January
     2005
 • Impacts are linked
   – Warming: changes in weather characteristics,
     changes in water availability, loss of ecosystem
     productivity, loss of agricultural land and reduction in
     crop yields, increase in vector borne disease,
     increased demand for energy

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IMPACTS: HERE IS ONE EXAMPLE

 • European 2003 heat wave
    – Severely reduced grain production (cutting 20 million
      tons off world harvest) Source: The Independent
    – Nuclear power stations forced to shut due to cooling
      logistics
    – Heat related deaths
    – Forest fires in France
    – Insurance industry reports close to £400 million in
      subsidence claims Source: Association of British Insurers

 • By 2060, temperatures such as the 2003
   European summer will be unusually cool.               Source: UK
   Hadley Centre Met Office, 2004

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WHAT’S IN STORE FOR THE FINANCIAL
MARKET

 • Uncertainty!
 • Global temperatures will continue to rise
 • Impacts will grow in scale
 • Depth of economic structural change
   required is significant
 • All sectors affected


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TIME HORIZONS


 • These vary depending on the type of
   climate risk associated with an investment
   portfolio
   – Regulatory risk is the most proximate and
     certain
   – Reputation and competitive risks may occur in
     the near to medium term
   – Timing of physical risk is the most uncertain


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KYOTO


 • The Protocol has led to development of
   market based instruments
   – Emissions Trading Scheme (ETS)
   – Carbon energy taxes
   – Incentives for renewables
   – Removal of “perverse” subsidies
 • A framework for factoring financial
   impacts of climate change

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SOUTH AFRICA - CARBON INTENSIVE




 • When developing countries are called to act,
   reductions based on status quo, will be
   challenging
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SOUTH AFRICA’S - VULNERABILITY


 • SA coal-based economy is vulnerable to
   carbon regulation in the rest of the world:
   – Coal demand fluctuations
   – Investment, trade and aid patterns
   – Non-tariff trade barriers
   – Global sourcing of inputs (reduced demand
     for high CO2 “footprint” goods)



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  CLIMATE CHANGE
       AND
SHAREHOLDER VALUE

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FINANCIAL RESEARCH ADDRESSING
CLIMATE CHANGE

 • Different analytical processes use
   predominantly three methods
   – Corporate governance.
      • Management systems to plan for risk
   – Emissions
      • Emissions profiles in the context of regulatory
        environment
   – Financial analysis
      • Financial impacts (predominantly relating to
        emissions)

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GOVERNACE BASED RISK ASSESMENTS

 • Examples…
 • Ceres/IRRC
    – Corporate Governance and Climate Change, 2003
    – Assesses 20 of the worlds largest emitters. Checklist of 20
      specific governance actions
 • Carbon Disclosure Project
    – Climate Change and Shareholder value, 2002 and 2004
    – 95 Institutional investors representing $10 trillion
    – Targeting FT500 asking for investment relevant information
      concerning emissions. Includes a Climate Leadership Index.
    – Analysis of sector risk
    – Preliminary analysis of changing input costs and impacts on
      share price

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EMISSIONS BASED RISK ASSESSMENTS

 • Examples…
 • JP Morgan
   – CO2 Emissions: No windfall for European Utilities,
     2003
   – Ranks utilities based on variety of inputs including
     pollution content
 • Standards and Poor’s
   – Emissions Trading: Carbon will become a taxing Issue
     for European Utilities, 2003
   – Ranking of emissions from 25 largest EU utilities, and
     indicates those most at risk under the ETS


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FINANCIAL ANALYSIS

 • Examples..
 • ABN AMRO
    – Climate Change and Analysis, 2003
    – A framework for analysts
    – Assess the environmental, regulatory and climate change
      opportunity for sectors including metals and mining,
      construction, real estate and chemical and insurance industries
 • West LB
    – Carbonomics: Value at Risk through Climate Change, 2003
    – Modelling of macroeconomic risks – both direct impacts and
      regulatory impacts
    – Up to $915 billion of the world’s equity markets are at risk



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FINANCIAL ANALYSIS
PUT FORWARD BY WEST LB
       Climate
                               Management           Value           Valuation        Company’s
        change
                                decisions          drivers         components        objectives
       impacts

Direct impacts: Extreme                          Duration of
weather, impact on                              value added
production, water                Operating
availability, health impacts                                         Operating
etc.                                           Sales growth,         cash flow
                                              profit margin, tax
                                                     rate                             Shareholder
                                                                                         value
                                                                     Discount
                                                                       rate
                                               Investment in
Indirect impacts: Shifting      Investment
                                                  assets
regulatory environment,
market mechanisms,                                                                    Shareholder
customer requirements,                                                 Debt            returns in
financial market demands,                                                            dividends and
litigation risks, etc.            Financing   Cost of capital                         capital gains




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FACTORS AFFECTING SHAREHOLDER
VALUE

 •   Asset mix
 •   Position in the value chain
 •   Location of operations and sales
 •   Management foresight




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INVESTORS TAKING INITIATIVE


 • Carbon Disclosure Project
   – Third campaign launched 1 February 2005
   – 143 institutional investors with assets of $20 trillion
 • Pension funds urge SEC to issue a
   clarification that climate change is a
   material risk (Section 20F)
 • Increasing number of shareholder
   resolutions
   – 28 resolutions filed in the US in 2004
   – Doubling of resolutions raised by public pension funds
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SA COMPANIES


 • Little disclosure
   – Impossible to know the levels to which this is
     being factored into risk management
 • Shareholders do not communicate the
   interest
 • Exception
   – Those companies with offshore listings and
     strong international shareholder base


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SASOL

 • A significant emitter in global terms
 • 80 million tonnes CO2 per annum
 • Sasol’s disclosure on the issue reflects
   – An ability to manage
   – Awareness of the materiality of the issue




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SASOL – DISCLOSURE


 • Kyoto Protocol noted as a material
   sustainability related risk and opportunity
 • Greenhouse gas position statement with
   specific goals, actions and targets
 • 17% reduction of CO2 equivalent per ton
   of production in 2004 compared with 2002



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SASOL’S EXPOSURE TO CLIMATE CHANGE
RISK AND OPPORTUNITY

 • Ability to respond
   – Efficiency improvements, alternative energy sources,
     technology flexibility, carbon storage
 • Business mix
   – Oil-gas-coal mix, strategic market opportunities,
     erosion of fossil fuel market
 • Location of operations and sales
   – Exposure to GHG emission regulations, CDM
     opportunities, access to natural gas reserves
   Source: G Barker, 2004 Research Project UCT GSB, Methodology put
     forward by West LB
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….EXAMPLES OF SECTOR
     INITIATIVES




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METALS AND MINERALS


 • Responsive practices reported by the Carbon
   Disclosure Project
    – Carbon shadow pricing incorporated into investment
      decisions
    – Factoring carbon regulation into demand and supply
      forecasts for coal
    – Forecasting impacts of carbon taxes
 • Location of operations is a key risk factor (short
   term)
 • High input costs – vulnerable to water and
   energy pricing
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BANKING AND FINANCE


 • Responsive practices reported by CDP
   – Interviewing corporate clients to analyse
     potential climate impacts
   – Incorporating “carbon risk” into risk
     assessments
   – Mapping economic effects
   – Exploring structural finance market for
     renewable energy


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INSURANCE AND REINSURANCE


 • Responsive practices reported by CDP
   – Integrating climate change risk as a supplementary
     criteria for investment mandates
   – Researching potential risk-transfer load from sectors
     such as agriculture, real estate and tourism
   – Integrating carbon finance into a range of insurance
     and financial functions
   – Exploring increased coverage and lending
     opportunities….



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CONSTRUCTION AND WEATHER RISK


 •       Extreme weather leads to delays
     –     Additional resources, penalties, delayed cash flow,
           impact on operating results
 •       Weather derivatives and insurance
     -     Define exact type of weather that effects a project
     -     Quantify the relationship in monetary terms
     -     Identify relevant weather variable's (strike value)
     -     Define incremental cost associated with incremental
           weather variable (tick value)


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      INVESTORS
WHAT COURSE OF ACTION?




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PROTECT INVESTMENTS


 • Improve understanding of impacts
 • Assess physical and policy risks of climate
   change in company, sector and portfolio
   holdings
 • Network with others
 • Communicate issues pertaining to climate
   risk / Ask companies to identify material
   risk
 • Reduce climate risk exposure
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RESPONSIBILITY OF FINANCIAL SECTOR


 • Companies are accountable to
   shareholders
 • Response (and disclosure) from
   companies will be limited as long as this
   issue is not understood to be a
   shareholder concern



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THE WAY FORWARD


 • Look to the results achieved by the
   Carbon Disclosure Project
   – A collaborative communication from investors:
      • Companies made aware
      • Disclosure improves
      • This in turn provides enhanced understanding for
        financial community
 • Scope for collaboration and joint
   engagement within South Africa
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DISCUSSION




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