1 You Are What You Finance ESG Risk in the Finance Sector New York Paris Toronto London San...
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You Are What You FinanceESG Risk in the Finance Sector
New York
Paris
Toronto
London
San Francisco
Sydney
Tokyo
Innovest UncoveringHidden Value forStrategic Investors
2
Redefining and Recalculating Risk
Investors now have to recalibrate and recalculate what risk is:
What is the cost of eco-inefficiency when oil is $160/brl?
What is the cost of climate change when carbon costs $60/tonne?
What is the cost of predatory lending in the wake of the subprime collapse?
Who will be hurt?
Who will thrive?
3
How Sick is the American Consumer?
12.0%
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
1999Q1 2001Q1 2003Q1 2005Q1 2007Q10.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Household net savings rate (moving average, right scale)
Household debt service ratio (left scale)
US Household Net Savings Rate
vs Debt Service Ratio
12,000
13,000
14,000
15,000
16,000
17,000
18,000
19,000
20,000
1995
Q1
1996
Q1
1997
Q1
1998
Q1
1999
Q1
2000
Q1
2001
Q1
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
US Real Wages
Growth in Credit Card Debt
vs Growth in Real Wages
60
80
100
120
140
160
180
200
1999Q1 2001Q1 2003Q1 2005Q1 2007Q1
real wage (1999=100)
credit card debt outstanding(1999=100)
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve.
4
How Big and How Soon?
Innovest forecasts:
-First Quarter 2009 Charge Offs of $18.6 billion
-Total 2009 Charge Offs $96 billion
-Estimate: Net Charge Off Rate peaks at 10% in Q1 2009
5
Subprime Exposure as % of Credit Card Loans
(subprime = FICO score below 660)
Who Are the Borrowers?
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
Amex JP
MHSB
C
Discov
er Citi
Cap O
ne
B of A
WaM
u
% o
f re
ceiv
ab
les
Source: SEC Filings of Master Trust Data, S&P.
6
What happens when emitting carbon isn’t free?
The Cost of Carbon
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Allegheny Progress Energy Duke Energy TXU Calpine Exelon
0%
5%
10%
15%
20%
25%
30%
35%
40%
Cost of Carbon Abatement (left scale)
US bn
carbon costs as % of earnings (rt scale)
7
You Are What You Finance
High ESG risk deal exposure
-
20
40
60
80
100
120
140
160
180
200
Citigro
upJP
M
Deutsc
he B
ank
Bank o
f Americ
aRBS
Credit
Suis
seBNP
UBS
HSBC
Barcla
ys
Soc G
en
Mits
ubish
i
Credit
Agr
icole
Mizu
ho
Sumito
mo
Stand
ard
Charte
red
BBVABNS
Fortis
Banco
Santa
nder
KBC
0
20000
40000
60000
80000
100000
120000
140000
160000
Number of Deals Value of Deals
# of deal
s
USD mn
8
You Are What You Finance
high risk deals as % of tier 1 capital
-
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
BNP
Citigro
up
Credi
t Agr
icole
Mizu
ho
Deuts
che
Bank
Credi
t Sui
sse
JPM
UBSBNS
Soc G
en
Bank o
f Am
erica
Sumito
mo
Barcla
ys
Stand
ard C
harte
red
BBVA
Mits
ubish
iRBS
HSBC
Banco
San
tand
er
9
Stock Performance of US Consumer Finance Companies
Above-Average vs. Below-Average Innovest Rating
Winning and Losing Strategies
-20
0
20
40
60
80
100
120
Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08
above BBB
below BBB
difference
Source: Innovest, Bloomberg.
10
Three Year Stock Performance
Three Year Stock Performance
(40.000)
(20.000)
0.000
20.000
40.000
60.000
80.000
100.000
120.000
140.000
160.000
180.000
9/6/
2004
11/6
/200
4
1/6/
2005
3/6/
2005
5/6/
2005
7/6/
2005
9/6/
2005
11/6
/200
5
1/6/
2006
3/6/
2006
5/6/
2006
7/6/
2006
9/6/
2006
11/6
/200
6
1/6/
2007
3/6/
2007
5/6/
2007
7/6/
2007
9/6/
2007
11/6
/200
7
1/6/
2008
3/6/
2008
5/6/
2008
Top Half
Bottom Half
Difference
11
Twelve Month Stock Performance
Stock Performance Since Rating
-20.000
0.000
20.000
40.000
60.000
80.000
100.000
120.000
9/6/
2007
9/20
/200
7
10/4
/200
7
10/1
8/20
07
11/1
/200
7
11/1
5/20
07
11/2
9/20
07
12/1
3/20
07
12/2
7/20
07
1/10
/200
8
1/24
/200
8
2/7/
2008
2/21
/200
8
3/6/
2008
3/20
/200
8
4/3/
2008
4/17
/200
8
5/1/
2008
5/15
/200
8
Top Half
Bottom Half