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Climate Change Business Risks and Incentives for GHG

Verification CHRIS KLINKHAMER, PHD

CKLINKHA@KERAMIDA.COMKERAMIDA INC.

WWW.KERAMIDA.COM

June 4, 2019

Agenda

Why Should I Report and Verify My GHG Emissions? Investor Relations

Climate Change Drivers

Legislation

Litigation

What is Verification? Business Benefits

Proposal Process

Split Verification

Facts and Myths

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Investors Demand Minimal Risk Uncertainties related to the impacts of climate change major source of risk

Specific impacts include hurricanes, extreme precipitation, tornadoes, landslides, mudflows, drought, wildfires, heat waves, flash floods, and rising sea levels, storm surges, loss of biodiversity, species extinctions, sealevel rise, loss of ice caps, water scarcity, and so on.

World Economic Forum Global Risk Report - Survey of 1000 experts and decision-makers Collaborative effort of Marsh, Zurich, Oxford Martin School, National University of Singapore and

Wharton Risk Management Center

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“Warming of the climate system is unequivocal”-Intergovernmental Panel on Climate Change

“It is extremely likely that human activities, especially emissions of greenhouse gases, are the dominant cause of the observed warming”

-U.S. Global Change Program

“The scientific understanding of climate change is now sufficiently clear to begin taking steps to prepare for climate change”

-U.S. National Academy of Sciences

“The Earth’s climate is changing in response to increasing concentration of greenhouse gases and particulate matter in the atmosphere, largely as a result of human activities”

-American Chemical Society

Quotes from Science Community 4

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Three Key Risk Areas

Physical Impact Risk Increasing frequency and severity of extreme weather events Substantial cost for repairing the damage of such events Unpredictable weather patterns also play havoc with future predictions and business

modeling With climate change, historical data begins to lose its value

Investment Risk Stranded assets: Investments in coal, oil or gas suffer sudden and unexpected drop in value

Society puts measures in place to prevent their use. Drop in demand, new legislation, or threats of legal action.

Legal Liability Litigation cases related to climate are beginning to become reality. SF trying to force insurance companies to stop insuring and investing in fossil fuels

The Paris City Council passed a similar declaration.

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Impacts of Climate Change World Meteorological Organization

80% of natural disasters between 2005 and 2015 climate related.

Total economic losses from natural disasters more than 1.3 trillion USD

Total direct losses in the range of 2.5 trillion USD since 2000.

Natural Disasters caused about $340B in damage across the world in 2017 AON Benfield report

Total economic losses from hurricanes nearly 5 times average of the preceding 16 years.

OECD (Organization for Economic Co-operation and Development) report Economic effects of climate change may cause reduction of 3.3% in global GDP by 2020.

New England Journal of Medicine Rising temperatures could lead to more than 250,000 prevdntable deaths per year

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Temperature Rising: 2018 IPCC Report

IPCC 2018 Report delivered to world leaders inKorea in 2018. If the global temperature rises by1.5 degree Celsius, humans will faceunprecedented climate related risks andweather events.

According to IPCC, We are currently on track for a 3-4 degree

Celsius rise by the end of the Century

Half a degree is the difference between a worldwith coral reefs and without them

As of now, not a single G20 country is meetingits climate targets

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• CO2 makes up 60-80% of theanthropogenic GHG emissions

• Literature indicates atmosphericlifetime of CO2 up to 200 years• Sinks of CO2 include land and

ocean uptake• Accumulation of CO2 in

the atmosphere outpacing uptake rate from land and ocean sinks.

Climate Change Driven by Rising Atmospheric CO2 Concentrations

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• Atmospheric CO2 concentration of400 ppm is predicted to increasetemperatures from 2-7 degreesFahrenheit.

• Atmospheric CO2 concentration of500 ppm is predicted to increasetemperatures from 4-9 degreesFahrenheit.

Climate Change Driven by Rising Atmospheric CO2 Concentrations

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GHG Emissions, United States 10

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GHG Emissions, United States 11

Global CO2 Emissions, 2002 and 2016 12

USA, 24%

China, 14%

Russian Federation, 6%India, 5%Japan,

5%EU, 7%

Other, 39%

Global CO2 Emissions ~ 25 million MT Global CO2 Emissions ~ 32 million MT

USA, 15%

China, 28%

Russian Federation,

5%India, 5%Japan, 4%

EU, 9%

Other, 34%

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• 2009 to 2013: over 100new climate changelaws were passed eachyear

• Pace of law-making hasslowed

• 2016: 40 new laws.

Climate Change Legislation

14Climate Change Legislation - 1997

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15Climate Change Legislation - 2017

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• 80% of litigation government is the defendant

• About 40% of litigation cases brought by corporations• Mostly filed against the government• Not granting permits or licenses based on climate change

• No clear relationship between the number of climate change regulationand court cases

• Two-thirds of the court rulings strengthen or preserve existing climateregulations

Climate Change Litigation

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17Litigation CasesGlobally, 1994-2017

US Climate Change Litigation

Federal Statutory Claims• Clean Air Act [184 Cases]

• Endangered Species Act and Other Wildlife Protection Statutes [98 Cases]

• Clean Water Act [31 Cases]• NEPA [199 Cases]• Freedom of Information Act [56 Cases]• Other Statutes and Regulations [78 Cases]

•Constitutional Claims• Commerce Clause [16 Cases]• First Amendment [7 Cases]• Fifth Amendment [8 Cases]• Fourteenth Amendment [9 Cases]• Other Constitutional Claims [22 Cases]

•Securities and Financial Regulation [31 Cases]

•Trade Agreements [1 Case]

State Law Claims• Freedom of Information/Public Records [10 Cases] • Other Types of State Law Cases [11 Cases]• Industry Lawsuits [34 Cases]• Environmentalist Lawsuits [37 Cases]• State Impact Assessment Laws [163 Cases]• Enforcement Cases [16 Cases]• Utility Regulation [25 Cases]

Common Law Claims [21 Cases]

Public Trust Claims [23 Cases]

Adaptation• Other Types of Adaptation Cases [1 Case]• Reverse Impact Assessment [12 Cases]• Actions seeking money damages for losses [21 Cases] • Insurance cases [3 Cases]• Challenges to adaptation measures [16 Cases]• Actions seeking adaptation measures [15 Cases]

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Climate Change Litigation Case Study 19

Quotes About Julianna vs U.S.

This is “no ordinary lawsuit” – Ann Aiken, U.S. District Judge “It could force the government to develop a comprehensive plan to

reduce greenhouse gas emissions across multiple sectors, anoutcome that could require an overhaul of the American energysystem” – Benjamin Hulac

“The most import environmental case in the US as well as the biggestcase on the planet” - VOX

“A shining example of what law can be” – Rick Reibstein, ABA “The Climate Trial of the Century” -350.org

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Defendants

President Trump Executive Office of The President Council on Environmental Quality,

Ditector (vacant) Office of Management and Budget,

Director Mick Mulvaney Office of Science and Technology,

Director (vacant) U.S. Department of Energy and

Secretary Perry U.S. Dept of Interior and Secretary Zinke

U.S. Department of Transportation and Secretary Chao

U.S. Department of Agriculture and Secretary Perdue

U.S. Department of Commerce and Secretary Ross

U.S. Department of Defense and Secretary Mattis

U.S. Department of State and Secretary Tillerson

U.S. Environmental Protection Agency and Administrator Pruitt

Constitutional and Public Trust Claims 5th Amendment and Substantive Due Process

State Created Danger – Threatening Personal Safety Infringement of Fundamental Rights Discrimination Against Children

Fundamental Right to Climate Capable of Sustaining Life

Public Trust Doctrine Institutes of Justinian 2.1.1 (533 A.D.)

“By the law of nature… …the air, running water, the sea and consequently the shores of thesea… … are consequential to all mankind”

Establishes Fiduciary Obligation of Government to Preserve Essential Natural Resourcesfor present and future generations

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Point to Long History of Climate Knowledge

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Request Non-Monetary Relief

Judicial Declaration Aggregate actions and current climate policies of the federal

government violate their fundamental constitutional and public trustrights

Court Orders The federal government will perform a consumption based inventory of

CO2 emissions

Prepare and implement an enforceable national remedial plan tophase out fossil fuel emissions and draw down excess atmospheric CO2

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Government Motion to Dismiss

Lack of Art. III Standing—no particularized harm, and are a generalized grievance bestaddressed through democratic means.

Failure to state a claim under the Constitution—there is no Constitutional right to be freeof CO2 emissions, plaintiffs are not a discrete minority and have no equal protectionclaim, the Ninth Amendment guarantees no substantive rights, and defendants have arational basis.

The court lacks jurisdiction over public trust doctrine suits, which arise under state law. Joined by Intervening Defendants

The National Association of Manufacturers

The American Fuel & Petrochemical Manufacturers

The American Petroleum Institute

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Motion to Dismiss Rejected

This lawsuit is of a different order than the typical environmental case. Italleges that the federal government’s actions and inactions, whether ornot they violate any specific statutory duty, have so profoundlydamaged our home planet that they threaten the plaintiffsfundamental constitutional rights to life and liberty”

“For the purposes of this motion I proceed on the understanding thatclimate change exists, is caused by humans, and poses a significant riskto our planet”

Defendants Admit: “Climate change poses a monumental threat toAmerican’s health and welfare by driving long-lasting changes in ourclimate, leading to an array of negative effects that will worsen overtime”

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Motion to Dismiss Rejected

Jurisdiction “At its heart this lawsuit asks the Court to determine whether defendants have violated plaintiff's

constitutional rights. This question is squarely within the purview of the judiciary”

Individual Injury Plaintiffs adequately allege injury in fact. Lead plaintiff Kelsey Juliana alleges algae blooms harm the water she drinks, and low water

levels caused by drought kill the wild salmon she eats. Plaintiff Xiuhtezcatl Roske–Martinez alleges increased wildfires and extreme flooding jeopardize

his personal safety. Plaintiff Alexander Loznak alleges record-setting temperatures harm the health of the hazelnut

orchard on his family farm, an important source of both revenue and food for him and his family. Plaintiff Zealand B. alleges he has been unable to ski during the winter as a result of decreased

snowpack. Plaintiff Sahara V. alleges hot, dry conditions caused by forest fires aggravate her asthma.

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Motion to Dismiss Rejected

Causation “Here, the chain of causation is: fossil fuel combustion accounts for the lion's share of

greenhouse gas emissions produced in the United States; defendants have the power toincrease or decrease those emissions; and defendants use that power to engage in avariety of activities that actively cause and promote higher levels of fossil fuel combustion”

Standing “The declaratory and injunctive relief plaintiffs request meets this standard”

“Most notably, plaintiffs ask this Court to ‘Order Defendants to prepare and implement anenforceable national remedial plan to phase out fossil fuel emissions and draw down excessatmospheric CO2’”

“If plaintiffs can show, as they have alleged, that defendants have control over a quarter ofthe planet's greenhouse gas emissions, and that a reduction in those emissions wouldreduce atmospheric CO2and slow climate change, then plaintiffs' requested relief wouldredress their injuries”

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Motion to Dismiss Rejected

Constitutional Rights “I have no doubt that the right to a climate system capable of sustaining human life is

fundamental to a free and ordered society. Just as marriage is the "foundation of thefamily," a stable climate system is quite literally the foundation "of society, without whichthere would be neither civilization nor progress."

Public Trust Doctrine “I can think of no reason why the public trust doctrine, which came to this country through

the Roman and English roots of our civil law system, would apply to the states but not to thefederal government”

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Motion to Dismiss Rejected

“At the motion to dismiss stage, I am bound to accept the factualallegations in the complaint as true”

Plaintiffs have alleged that defendants played a significant role increating the current climate crisis, that defendants acted with fullknowledge of the consequences of their actions, and thatdefendants have failed to correct or mitigate the harms theyhelped create in deliberate indifference to the injuries caused byclimate change.

They may therefore proceed with their substantive due processchallenge to defendants' failure to adequately regulate CO2emissions.

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Discovery Proceeds With Multiple Delays

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Order Certifying Interlocutory Appeal

Issued two days before the Trump administration released the FourthNational Climate Assessment, which states: ...a direct connection between the warming atmosphere and the

resulting changes that affect Americans’ lives, communities, andlivelihoods, now and in the future. It [the Assessment] documentsvulnerabilities, risks, and impacts associated with natural climatevariability and human- caused climate change across the United Statesand...concludes that the evidence of human-caused climate change isoverwhelming and continues to strengthen, that the impacts of climatechange are intensifying across the country, and that climate-relatedthreats to Americans’ physical, social, and economic well-being arerising. These impacts are projected to intensify—but how much theyintensify will depend on actions taken to reduce global greenhouse gasemissions and to adapt to the risks from climate change now and in thecoming decades.

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Potential Impacts of Case

“Who Knew What and When” may be Established Legal Precedent for Other Citizen Suits Impact on Industries and Long Tail Claims Projecting Future Risks and Reserves Public Policy Legislative Action

Oral Arguments Scheduled Week of June 3rd, 2019

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Investors Have Taken Notice

Insurers Largest Fossil Fuel Investors National Association of Insurance Commissioners (NAIC)

Climate change could pose significant risks to insurers and the consumers they insure.

National Oceanic and Atmospheric Administration (NOAA) 10 hottest years on record have occurred since 1998.

Rising global temperatures have been linked to changes in the frequency and severity of weather events.

Munich Re, Weather related losses have increased nearly fourfold in the US since 1980.

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Risks of Climate Change

“Climate Change and economic instability are amongst the biggest challenges we will face in the coming decades. We have no time to waste. It’s not a question of getting the wheels turning, but rather how fast we can drive the change. “ Oliver Bate, Chairman of the Board, Allianz SE

• The insurance industry has long understood the risk of climate change on our communities and customers, and it is vital that the financial sectors work collectively to share our knowledge and create a financial framework for transparent and sustainable operations and reporting. Peter Harmer, Managing Director & CEO, IAG

• Climate Risk is a priority issue for QBE. We support the strong framework provided by (UNEP FI) for enhancing climate related management and disclosure and believe this important pilot will further progress our approach to climate scenario modelling. Pat Regan, Group CEO, QBE Insurance Group

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Who to Insure? –AS RISK MANAGERS AND UNDERWRITERS QBE Insurance Group

Plans to stop insuring thermal coal projects Part of recently implemented climate plan

QBE join the ranks of 11 other major re/insurers that have restricted their underwriting for coal

Where to Invest? – AS INVESTORS USING ESG APPROACH In 2018, companies like Swiss Re moved its entire investment portfolio to take account of

ESG benchmarks, lead to a reduction of investment in the kinds of companies that cause climate change

Insurance Companies are increasing their investments in green energy schemes Wind parks, solar farms and hydro projects.

AXA increased its target for green investments from 3B Euros to 12B Euros by 2020

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UNEP Finance Initiative

November 2018 UNEP FI announced a partnership with 16 of theworld’s largest insurers-representing around 10% of the worldpremium and USD 5 trillion in assets under management- to developa new generation of risk assessment tools designed to enableindustry to better understand the impacts of climate change ontheir business.

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Business benefits of verification are far reaching

Builds Reputation of Responsibility Increased confidence in data for internal and external use

Demonstrated carbon reduction strategy effectiveness

Improved business processes

Reduced operational costs

Provide Credibility for products services and internal processes

Counteract claims of greenwashing

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Business benefits of verification are far reaching

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Identify Risks and Opportunities Alerted to upcoming regulations and legislation

Carbon tax, cap and trade, fuel or energy taxes

Mandatory non-financial reporting

Operational Risks Errors from manual data entry or transportation

Failure to accurately quantify carbon in trading programs carries significant penalties

Identify greatest opportunities for emissions reductions and cost savings Understanding of true proportion of emissions for individual units

Business benefits of verification are far reaching

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Improve internal processes Identify inefficient process areas

Allows for corrective action

Independent justification for investment decisions

Opportunities for improvement provided in an issues log or internal report Referenced during subsequent verifications

Whether plans have been implemented

What is the effectiveness

Generally simplify emissions reporting and monitoring Greatly reduced time and cost of subsequent monitoring, reporting, and verification

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Business benefits of verification are far reaching

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Increase reliability of data Annual third party verification is most beneficial

Able to identify and implement Improvements to internal quality assurance and quality control processes

Reduction of time and cost requirements Typically 25% reduction year 1 to year 2

Continuous follow-up of data

Reduced information chasing

Improved consistency in format and ability to replicate analysis

Voluntary verification demonstrates data control and quality Reflects high-internal standards

What Goes in a Verification RFP? The more information provided in an RFP the more tailored the verification

Scope of the Company Type of data collation system used to determine inventory A list of which facilities will be included and their locations Main activity of the facilities Level of assurance required Accreditation requirements

May be more stringent for mandatory reporting

Often Neglected Considerations How do you calculate your emissions inventory?

Collated and centrally calculated? Calculated at each facility? Sophisticated software models or spreadsheet math?

Important aspects to consider for review and risk assessment

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What to look for in a proposal?

Do the costs include a report in recommendations for improvement? Where are the verifiers located in relation to the facilities?

Impacts travel costs

Is travel time included or to be charged separately? Is extra time included should errors be identified and require correction? Is the verification body accredited?

CDP, GRI, SASB certified partner

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Why Do I Need an Accredited Verifier?

Ensures an appropriate level of organizational proficiency Adheres to standards developed by impartial organizations

International Accreditation Forum (AIF)

Follows relevant ISO or ISAE standards

Ensures the same level of quality across geographies products and sectors Confidence in confidentiality, competence, handling of complaints and

physical safety Mechanisms to ensure accountability Knowledge that there is a quality improvement process in place to

continually improve services

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How to Ensure Efficient Verification?

Best Practice The most efficient verifications are those where the processes,

procedures, and data for carbon reporting are fully imbedded into the core management systems Records are well maintained and accessible

Roles relating to carbon reporting are clearly defined and understood within the organization

Ensures that identified issues are able to be efficiently addressed and corrective preventative action taken Allows for learning from the process in order to continually improve

management systems and data accuracy

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Initial Preparation

Develop a relationship with the Verifier Openness of data and access is crucial

Initial stages are learning stages For you and the Verifier Need to quickly understand the organization, its boundaries, its management systems,

structures, and reporting lines Key contact must be well informed

Allows the Verifier to accurately predict data requirements from an early stage

Verifier will compile a plan of action Clear expectations of the information needed and how the process will unfold

Pre-check your data Provides confidence Reduces verification time Often required by regulation

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Split Verification

Does not need commence after the reporting period Verification can begin part way through or at the outset of reporting

Prevents loss of data and information Identify issues in plenty of time for correction In extreme cases if issues cannot be over come, end the verification process

Saves time and cost

Reduces the cost of a more expensive pre-verification while providing the same benefits

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Post-verification

Ensure that verifier provides good feedback Detailed reports of issues and where improvements can be made

Communicate the reports to management The verifier may also include an executive summary or a brief

presentation of the key results and benefits

Set up a system to capture the lessons learned Understand how to implement these programs

Decide which recommendations for improvement to address Demonstrates that you understand the issues and have a plan to move

forward

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Beyond the First Verification

How can you do more? Expand geographic score

Most common obstacles involve differing management systems Many companies take different approaches in different geographies

Leads to inconsistency

Difficulty comparing data

Create global KPIs that must be reported and monitored

Local regulations may dictate different mandatory requirements Creates mandatory need for inconsistency of approach

Consider organization-wide overarching management ISO 14064

Brings consistency while allowing for local variations when neccessary

Facts and Myths FACT: The verifier is contracted to the reporting

organization. While the verifier must maintain independence, their

ultimate aim is always for a successful verification.

FACT: Verifiers identify, not appoint blame for, errors. If issues are identified, the verifier will clearly explain the

problem and will discuss and agree steps to rectify

FACT: The verifiers are experienced individuals They can and will make recommendations

FACT: The verification statement is the property of the reporting organization. Companies can therefore choose to communicate it

internally or externally, or not, as they wish.

FACT: You do not pass or fail verification. The verifier will remain impartial and will not be able to

provide consultancy in terms of how to correct issues, but will explain issues that have arisen and need to be corrected.

MYTH: Verification is something only large organizations should be considering. Verification of small systems can help greatly to identify improvements that

can benefit the reporting of emissions and business performance.

MYTH: Small corporations can’t afford verification. There is no ‘one size fits all’

Cost depends on a wide number of variables,

size and scope of the company and the level of assurance required

MYTH: Organizations with a large number of facilities will require a more complex and more expensive verification. The verification duration and cost is dependent on the complexity and risk

posed within the inventory.

A large organization with many facilities, but a well designed and implemented management system, may require only a simple verification of short duration.

MYTH: Verification is only necessary if there are no procedures and no systems in place. Even the most evolved procedures and systems can benefit from

verification

Identify areas for improvement in efficiency and effectiveness.

Objectivity and technical expertise of the verifiers provides a perspective that organizations cannot create themselves.

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Summary

Investors are beginning to demand that companies account for their GHG emission

Verification of GHG emissions provides: Investor confidence

Opportunities for improvement of internal processes

Cost savings

CDP Reporting and Verification Webinar August 7, 2019

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