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7th Natixis Asset Management Workshop “Climate change and investments: is it too soon to be concerned?”

Newsletter produced by Natixis Asset Management's Communications Department

A pioneer in the field of socially responsible investment with more than 25 years’ experience, Natixis Asset Management decided to devote its 7th client workshop to the integration of climate change issues into an investment strategy. The climate change workshop took place in October and was attended by almost 200 participants. For Pascal Voisin, CEO of Natixis Asset Management, the impact of the progressive increase in greenhouse gas emissions and the measures that could be taken in order to reduce them should be integrated into a long-term investment perspective from now on. “The subject of climate change was for a long time the domain of specialists and seemed restricted to the scientific and academic spheres”, he explains. “But that Pascal Voisin, CEO of Natixis Asset Management era is over, since the subject is now part of the political and economic landscape too, as amply demonstrated by the Copenhagen summit. The summit began in early December, and is aimed at picking up where Kyoto left off, and finding a way to limit the release of greenhouse gases. This is an issue that concerns us all.” As a major asset management player and pioneer in the field of socially responsible investment (SRI) for 25 years, Natixis Asset Management’s objective of combining ethical investments with financial performance fits perfectly with current considerations of the financial consequences of climate change. Natixis Asset Management is therefore committed to developing management expertise by integrating the climate change issues into an investment strategy: climate change expertise. It has also set up a Scientific Committee dedicated to climate change, bringing together eight recognized experts (specializing in climatology, economics, geography, etc.) Chaired by Carlos Joly*, the Scientific Committee helps the management teams at Natixis Asset Management to understand the issues relating to climate change and its effects. What are the potential economic and financial consequences of climate change? What are the issues to be tackled at the Copenhagen summit? What are the implications for asset allocation? These are some of the questions discussed during the 7th Natixis Asset Management workshop, which took place on 14 October and was attended by close to 200 participants, including (from left to right): Philippe Waechter, Chief Economist, Suzanne Senellart and Clotilde Basselier, portfolio managers in the Equities department, Maurice Gravier, Head of Products and Innovation in the Equities department and Carlos Joly, Chairman of the Climate Change Scientific Committee*. The round table discussion was led by Philippe Zaouati, Head of Business Development, and concluded with comments by Dominique Sabassier, Deputy CEO and Chief Investment Officer. *Carlos Joly is an SRI specialist and co-founder of UNEP-FI. He notably co-chaired the working group that drafted the UN’s Principles for Responsible Investment (PRI).

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Climate change: the economic impact Philippe Waechter Chief Economist

Faced with the unavoidable effects of climate change, the key challenges are to determine the limits perceived as acceptable in terms of global warming and to find the most effective solutions so that the critical thresholds defined are not breached. The increase in the average global temperature compared to the pre-industrial era is currently 0.8°C. The increase derives from the excessive accumulation of greenhouse gases (GHGs), which is largely the result of human activity. In order to limit the risks of accelerating the damage caused to the environment, it is thought to be essential that the temperature does not rise by more than 2°C in the second half of the 21st century. However, the probability of this threshold being exceeded is increasing in spectacular fashion. The observations of GHG emissions are still above forecasts. The measures that would contain global warming are complex to implement: they must be global as well as local, and they must reflect long-term goals but be adaptable to changing circumstances...

A global and local approach Measures to limit global warming will only work if they are implemented throughout the world. Global warming is an issue that concerns every country in the world, not just the most developed nations. However, the world’s different regions require a local approach. While climate change affects all latitudes, it will not have a homogeneous impact. New disparities are emerging. Take the issue of water: some areas will be flooded as sea levels rise, while others, such as northern India, will suffer drought as glaciers melt and the source of water used for irrigation of local agriculture becomes increasingly scarce.

A long-term approach that can be adapted over time The decisions to be taken must be sustainable. There are two important aspects to this point. Today’s activities, which give rise to greenhouse gas emissions, are going to have a long-lasting impact on the atmosphere of our planet. This is why we must act quickly. The decisions to be made will have a strong political character as the market does not really know how to evaluate this type of situation. We must also act quickly if we are to be able to meet the 2°C threshold. The later decisions are taken, the greater the risk of this target being exceeded.

"If we want to contain the rise in temperature to 2°C to limit the effects on the entire planet, we will have to cut greenhouse gas emissions by more than 50% by 2040..."

The difficulty raised by these two approaches, the global and the sustainable, comes from the fact that not all countries feel the same need to reduce their emissions. Developed countries consider that this is a global issue and that therefore every country in the world needs to take an active part in meeting the 2°C threshold. Emerging countries, on the other hand, see things differently. They want to continue their development, which will lead to in an increase in CO2 emissions. As a result, they do not want to reduce their emissions unless developed countries compensate them in some way.

A model approach to measuring the extent of climate change The measures that need to be taken depend on the extent of global warming. In agriculture, for example, a small rise in temperature increases yields, whereas too high an increase will reduce them considerably. These approaches have been modeled. The graph shows different changes in GDP depending on the temperature. The Stern Review modeled the impact of temperature changes on global GDP. An extreme rise of 6°C would result in a 5-10 % drop in GDP over a long-term horizon. It concludes that action must be taken rapidly to avoid such a situation occurring.

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By way of a conclusion If we want to contain the rise in temperature to 2°C to limit the effects on the entire planet, we will have to cut greenhouse gas emissions by more than 50 % by 2040. This suggests a need to provide incentives for consumers and business owners to reduce their carbon footprints, and the introduction of innovations and innovative programs to improve energy efficiency. Copenhagen must therefore find a way of containing, then very rapidly, reducing GHG emissions, while providing sufficient incentives so that it is in the interest of every country, whether developed or emerging, to participate in this global program.

Impact of the increase in average temperature on worldwide GDP Loss in terms of worldwide GDP (in %)

4.00 2.00 0.00 - 2.00

Tol Mendelsohn Stern Hope Nordhaus

- 4.00 - 6.00 - 8.00

Increase in temperature (in °C)

- 10.00 0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

Source: IMF

Our clients express their views What do you think is the priority of the Copenhagen summit? 1) The commitment by the United States and emerging countries to reduce emissions: 38.5 % 2) The north/south equilibrium, especially as regards financing assistance for emerging countries to reduce their emissions: 17.7 % 3) The creation of a supranational climate change organization equipped with powers and funding: 15.4 % 4) The summit is badly timed, taking place when the global economy is recovering, so nothing will be achieved: 28.4 % The workshop’s 200 participants were given the opportunity to reply to a series of questions on the subject of climate change using an electronic voting system. The results were displayed immediately.

Copenhagen summit: the challenges Carlos Joly Chairman of the Natixis Asset Management Climate Change Scientific Committee “In any event, we can’t wait any longer” explains Carlos Joly(1), Chairman of the Climate Change Scientific Committee. “The geographical, climatic and economic effects of global warming are already being felt.”

The cost of doing nothing outweighs the cost of doing something The impact of climate change currently generates losses estimated at almost USD 200 billion. The cost of a reduction and adaptation policy is relatively low, representing just 2% of global capital expenditure from now until 2030, or USD 500 billion.

"The impact of climate change currently generates losses estimated at almost USD 200 billion..."

*Carlos Joly is an SRI specialist and co-founder of UNEP-FI. He notably co-chaired the working group that drafted the UN’s Principles for Responsible Investment (PRI).

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A key requirement: reducing greenhouse gas emissions

The Concentration of Greenhouse Gases in the Earth’s Atmosphere

The atmosphere is close to its CO2(e) saturation point of 550 ppm(1). Once this point is reached, the average temperature will become too high. This will have catastrophic consequences on the weather, the availability of water, agriculture and urban areas. “We are only 70 ppm from this threshold and we will probably reach saturation point in 2040 unless we halve our emissions from current levels”, explains Carlos Joly.

2009: current saturation level in the atmosphere = 430 ppm CO2 (e)

Multi-sector impact and effects that are already tangible

2040: the atmosphere’s saturation level = 500 ppm CO2 (e)

Beyond the 500 ppm threshold, the geographical and economic effects of global warming could be disastrous. These are already starting to appear: melting glaciers, hurricanes, floods, drought, forest fires, and an overabundance or shortage of water for agriculture, etc. The economic and financial effects are going to become increasingly evident. A number of sectors have already been affected. The most obvious effects relate to energy, water, transport, and agriculture (etc.), but the sectors we don’t automatically think of in this connection include insurance (catastrophe cover and compensation of victims), reinsurance, logistics, real estate, and construction (repair and adaptation of infrastructure).

(annual rate increase: + 2,5 %)

Remaining margin between the current level and the atmosphere’s saturation level = 70 ppm CO2 (e)

The Natixis Asset Management Climate Change Scientific Committee Composed of eight recognized experts, the Scientific Committee aims to provide the management teams of Natixis Asset Management with a greater understanding of the issues relating to climate change and its effects, as this is a complex subject that calls for the input of scientists specialized in this area. For more information: www.am.natixis.com/climatechange/eng

Our clients express their views Almost 86 % of people asked about climate change believe that it can harm economic activity as it is reducing biodiversity, causing droughts and major floods, creating large-scale movements of people, and engendering climatic instability. The workshop’s 200 participants were given the opportunity to reply to a series of questions on the subject of climate change using an electronic voting system. The results were displayed immediately.

Moving in step with Copenhagen Faced with all these issues, one thing is clear: the Copenhagen summit cannot not take decisions. The growth of developing countries alone will lead to a 5°C rise in temperature and a carbon concentration beyond the 500 ppm threshold. This is why it is necessary to allocate emissions flows between countries. The solution requires a reduction in greenhouse gas emissions. This is a complex issue that depends on the stage of

industrialization reached by the countries concerned. The fairest approach would be to make reductions on a “per capita” basis. The Copenhagen summit must also tackle the issue of carbon pricing (which will probably be set at around USD 30 per ton) and the portion that will have to redistributed to poor countries to help them finance their efforts to reduce CO2 emissions. Will this be successful? Maybe. China’s example seems encouraging: although the country’s emissions are rising at present, China is

(1) ppm: part per million, i.e. the number of CO2 molecules per million molecules of dry air.

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also the country that has adopted the most stringent measures to reduce its emissions. A third of its USD 600 billion stimulus plan is earmarked to increase its energy efficiency and develop renewable energies. China has effectively set itself the objective of becoming world champion in wind and solar power. So, whatever the outcome of Copenhagen, some changes are already taking place. The multi-sector nature of climate change has consequences for asset values. It can therefore no longer be ignored in asset allocation or stock picking, and has become a key element to take into account with a view to preserving capital over the medium and long term.

Climate change: the financial impact

Led by Philippe Zaouati, Head of Business Development (on the right), the round table brought together (from left to right) Philippe Waechter, Chief Economist, Suzanne Senellart and Clotilde Basselier, portfolio managers in the Equities department, Maurice Gravier, Head of Products and Innovation in the Equities department and Carlos Joly, Chairman of the Climate Change Scientific Committee. The impact of climate change has not yet been fully priced into equities and asset values in general. “This market inefficiency represents an undeniably rich source of performance”, says Maurice Gravier, Head of Products and Innovation in the Equities department. “Most climate change funds only operate in a single ‘micro-segment’, such as green energy, ignoring the global dimension of this worldwide and multi-faceted problem.” Natixis Asset Management has therefore decided to acquire a more in-depth understanding of the subject, by establishing its Climate Change Scientific Committee, which focuses on three macro-themes: mitigation : reduction of greenhouse gas

emissions, adaptation to the inevitable consequences of climate change and better management of natural resources. Each of these themes breaks down into around ten sub-themes that have to be considered in taking into account every aspect of global warming, as well as the effects and possible solutions. Thus, the three strands of Natixis Asset Management’s analysis give equal attention to the issues of energy substitution, the energy efficiency of buildings, clean transport and changes in consumer behavior, etc. Suzanne Senellart and Clotilde Basselier are the two equity fund managers dedicated to following in the issues of climate change, which has become a valid investment theme. Two examples of the sub-themes included in the three macro-themes as part of the analyses carried out by Natixis Asset Management are energy efficiency and soil management.

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Energy efficiency

Soil management

Suzanne Senellart, portfolio manager: “We are going to identify the companies that improve energy efficiency.”

Clotilde Basselier, portfolio manager: “The need to develop sustainable agricultural practices leads us to favor operators at the top of the food chain.”

Among the actions that can be taken, energy efficiency has become a key issue and should contribute around 50 % to the global effort to reduce emissions. Energy efficiency brings solutions, notably by way of technologies that reduce the intensity of consumption. Most of these technologies are reliable and well-established. According to the US Department of Energy, if we reduce the loss of electricity by 5 %, especially in the delivery phase (in transport networks), this will lead to the elimination of emissions on a par with those released by all the cars in Germany (53 million vehicles). The theme of energy efficiency is thus firmly entrenched in the US and Chinese stimulus programs. The creation, for example, of a “smart grid” network bringing together new transmission standards with communications technologies and IT platforms, will mean that expensive peak hour energy consumption can be reduced considerably, while the investment needed to cover future requirements can be cut by half. In general, research in this area should lead to the introduction of new standards, the emergence of new technologies integrating network interactivity and management of peak consumption in real time. “We think that companies operating in energy infrastructure (transmission and distribution) and the manufacturers of communications infrastructure will enjoy significant growth potential on the global market going forward.”

Soil management includes agriculture and forestry. These two sectors are closely linked to climate change. Intensive agriculture and deforestation generate close to 30 % of greenhouse gas emissions globally, thereby contributing to global warming. The rise in temperatures and extreme weather events have in turn disrupted harvests. The imbalance between the supply and demand for food will increase in the future. The demand for food rises along with global population growth, the advance of urbanization and the increasing consumption of meat and dairy products. There is now intense competition for available land (urbanization, biofuel production, forestry projects). This is why it is necessary to increase agricultural yields, while at the same time protecting the environment. “We have decided to favor operators at the top of the food chain”, explains Clotilde Basselier, such as “fertilizer producers, agricultural equipment manufacturers and logistics firms (transport or refrigeration). In the paper sector, we favor integrated firms with their own forestry assets, which have the dual aim of preserving forests and producing paper.”

Conclusion “Climate change has become a key element to take into account with a view to preserving capital and assets today, as well as over the medium and long term, in the context of ‘sustainable’ management”, says Dominique Sabassier, Deputy CEO and Chief Investment Officer. Its multisector nature has consequences for asset values and cannot be ignored in the course of asset allocation or stock picking. Climate change brings together all the characteristics of an investment theme: the sustainability of an investment beyond economic cycles, a sufficiently wide investment universe to provide a value chain beyond sectors, and the implementation of human and technical resources enabling the acquisition of genuine expertise and the expectation of performance over time while keeping risk low. This is therefore a promising theme in which Natixis Asset Management, a socially responsible investment (SRI) pioneer with more than 25 years’ experience, has made a commitment by developing dedicated climate change management expertise, supported by the specialized contribution and analyses of its Scientific Committee of European experts.

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Our clients express their views With regard to your investments, global warming is: 1) A strictly environmental issue, without any specific impact on asset prices: 2.1 % 2) A long-term issue, with no material effects as yet on the financial markets: 70.2 % 3) An important issue that is already factored into business models and asset prices: 20.6 % 4) A fashionable theme, as the TMT sector was 10 years ago: 7.1 %

Will climate change and environmental issues influence your selection of funds or stock picking? 1) No: 15.1 % 2) Yes, to a degree: 42 % 3) Yes, very much so: 42.9 % The workshop’s 200 participants were given the opportunity to reply to a series of questions on the subject of climate change using an electronic voting system. The results were displayed immediately.

Natixis Asset Management in brief n The European investment expert of Natixis Global Asset Management. n n A multi-specialist, with assets under management of €301 billion*. n A recognized pioneer in the field of socially responsible investment

(SRI) with more than 25 years’ experience, and one of the leading SRI managers in France and in Europe. n Natixis Asset Management offers investment solutions targeted at a diverse client base (institutions, companies, distributors and bank networks).

V ia the multi-boutique model of Natixis Global Asset Management, Natixis Asset Management also offers special access to the expertise of some twenty international fund managers, notably in the US (Loomis Sayles & Co, Harris Associates, etc.) and Asia (Absolute Asia Asset Management Ltd). *As at September 30, 2009 - Source: Natixis Asset Management

Contact us Natixis Asset Management - Direction de la Communication - 21, quai d’Austerlitz - 75634 Paris cedex 13 Tel : (33) 1 78 40 81 74 - email: communication@am.natixis.com

Next Natixis Asset Management Workshop: March 24, 2010

www.am.natixis.com/climatechange/eng

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Newsletter Natixis AM Workshop N°7 - Climate Change  

Newsletter Natixis AM Workshop N°7 - Climate Change

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