Carbon Metrics: How and Why Companies are evaluated 6/30/2010

1. Carbon Metrics: How and Why Companies are evaluated6/30/2010 Brad Denig Advantage IQ Bdenig@advantageiq.com

2. Topics and Questions • What’s driving corporate disclosure of greenhouse gas (GHG) emissions? Are these the same drivers for disclosure of carbon management strategies? • What organizations are most influential in organizing, ranking, and disseminating corporate emissions and management information? • How are rankings compiled? What metrics are used? • The difference between high disclosure rankings and high performance scores. • Do carbon performers=better financial investments?

3. Agenda • Drivers for Information- • Consumers, Government, Shareholders, Business Partners • Information that is reported- • Scope 1 and 2 emissions; Scope 3 • Risks and opportunities created by climate change • Organizations and their metrics- • Climate Counts • CERES • Carbon Beta • Carbon Disclosure Project • How is this information used?

4. Global GHG emission reduction targets amid developing world led global growth

5. What are the Key Drivers for Corporations to Perform a GHG Inventory? • Regulations • Mandatory reporting for large emitters • Become members and submit GHG reports to voluntary entities (EPA Climate Leaders, The Climate Registry) –prepare for legislation. • Consumers • Enhance your image with consumers and stakeholders • Company Strategy • Proactively engage stakeholders with GHG information • Identify opportunities to reduce waste and costs • Additional metric to track corporate social responsibility goals • Financial Risk and Opportunity • Assess liabilities in the event of carbon legislation • Assess opportunities for differentiation; opportunities for carbon trading. • Requests from other businesses (e.g., Wal-Mart questionnaire)

6. Greenhouse gas emissions inventories • Collect Data for Scope 1 and 2 emissions • Register, verify, and report emissions • Reduce your emissions with strategic energy plans and progressive goals setting. • Absolute and intensity metrics • Collect Data on Scope 3 and Supply Chain Emissions

7. Scope 3 constitutes the majority of a company’s GHG emissions GHG Emissions by source, S&P 500 sample GHG Emissions by source, by industry Source: TruCost, S&P 500 Carbon Intensity

8. What about the drivers for carbon management strategy? • Carbon Management • Referring to the internal policies and actions taken by a company to navigate the risks and opportunities presented by climate change and climate change legislation. • Institutional Investors • IIGCC • Carbon Disclosure Project • Shareholder resolutions • SEC Disclosure Guidance

9. Risk Assessment: Regulations • International • EU-ETS; CDM/JI • Regional • Regional Greenhouse Gas Initiative (RGGI) (10 states) • Western Climate Initiative (WCI) • (11 members; 10 observers) • Midwestern Greenhouse Gas Reduction Accord • (7 members; 4 observers) • National • New Zealand Emissions Trading Scheme • Australian Carbon Trading Scheme • State/Province • California AB 32 • Florida • British Columbia (B.C. Carbon Tax) • Ontario and Quebec (Cap-and-Trade Schemes)

10. Risk Assessment: Financial • (Direct) Cost of GHG compliance as percentage of EBITDA* • Companies active in managing carbon have less at risk and are gaining positive attention from investment community. • (Indirect) Pass-Through Costs • Most cap-and-trade systems direct attention to upstream heavy emitters. Pass-through costs are expected in prices paid for various fuel sources and industrial commodities. • Institutional Investors • Carbon Disclosure Project (CDP) • On behalf of 534 investors with assets of $64 trillion • Leadership Index ranks those companies that have provided the most thorough GHG inventories and management strategies. • U.S. Shareholder Resolutions pertaining to climate change • In 2009, a record 68 climate-related shareholder resolutions were filed by investors. • Bloomberg terminals access CDP Scope 1 and 2 data. • Carbon Products (S&P U.S. Carbon Efficient Index; Markit CDPLI Index) Source: *Innovest, Carbon Beta (2007)

11. Risk Assessment- Physical and Consumer • Physical Risk Assessment • Assessment of Infrastructure • Facilities in low-lying coastal areas • Supply chain risk • Agricultural inputs • Example: Utility Assessment • Warming leads to higher summer cooling loads; lower natural gas heating demand • Hydropower variance; where to locate power plants (long-lived assets need long-term planning/assessment of risk) • Consumer Risk Assessment • 63% of UK respondents said they are more likely to buy a product if they know actions are being taken to reduce its carbon footprint. • Only 12% of consumers think companies are doing enough to cut carbon emissions and tackle climate change. • 64% of 18-to34-year olds (U.S.) believe climate change is caused by human activities; more than any other age group. • Stakeholder groups stepping in to educate consumers • Carbon Trust has employed PAS 2050 to begin carbon footprint product labeling. • ClimateCounts

12. Introduction to climate change rating agencies: what’s getting measured?

13. Climate counts scorecard—Review (22/100 Pts)

14. Climate counts scorecard—Reduce (56/100 Pts)

15. Climate counts scorecard—Policy stance (10/100 pts) and Reporting (12/100 pts)

16. CERES- Corporate governance and climate change

17. CERES- Corporate governance and climate change

18. CERES- Corporate governance and climate change

19. Carbon Beta: Industry And Company Risk Exposure • Industry Sector Climate Change Exposure, 3 Indicators • Direct Intensity (Scope 1) • Captures the sector’s exposure to carbon regulations and constraints. • Indirect Intensity (Scope 2) • Captures the sector’s sensitivity to upstream energy costs and potential upsurge as a result of a carbon constrained economy. • Demand Sensitivity • Whether the products from a sector will experience a shift in consumer preference (products that are associated with large GHG emissions, cars)

20. Carbon Beta: Company Specific Factors • Products • Energy intensity and fuel source mix • Product mix—direct, indirect, and embedded carbon • Geography • locations of production facilities relative to specific regulatory and tax liabilities and compliance schedules in different countries. • Strategic Governance • Company-specific “marginal abatement” cost structures; some companies can reduce emissions at much less cost than others. • Company-specific risk management capability • Ability to identify and capture upside and revenue opportunities, new product/service opportunities, and emissions trading. • Ability to pass costs on to consumers • Technology trajectory: • level of progress which a company has already made in adapting/replacing its production technologies for a carbon-constrained environment.

21. Carbon disclosure Project • Launched in 2000 (London) • 2,500 companies report from over 60 countries • 534 Institutional investors, holding $64 trillion in assets under management. • Influential database that houses carbon footprint information and carbon management strategies for ~2,500 companies. • Influential reports (supply chain, Global 500, CDP Cities)

22. Carbon disclosure Project Leadership Index • Risks and Opportunities • Internal process for identification • Regulatory, physical, and other • Strategy • GHG accounting • Scopes 1, 2, and 3 • Emissions Trading • Verification • Reporting • Intensity metrics (financial, operational activity-related)

23. Carbon disclosure project rankings and data: relevance to financial analysts/products • Markit CDL index family • Four indices covering US, Europe, UK and Global. • Bloomberg terminals

24. Climate leaders matrix: Comparing CDPLI and Carbon Beta

25. Carbon Beta: U.S. Utility Sector Performance

26. CDLI vs. Carbon Performers (Beta)

27. Thanks!