1. Climate Change Risks and Opportunities for CIBC
ORIMS Professional Development Day
March 29, 2007
Sandra Odendahl, Senior Director
Environmental Risk Management
Corporate Risk and Insurance Services

2. CIBC Environmental Risk Management
Outline
About CIBC
CIBC’s Environmental Risk Management Group
Environmental Policy Framework
Climate Change
What Next
CIBC Environmental Risk Management
March 2007

3. CIBC Environmental Risk Management
About CIBC
Assets ~ $304 billion; market capitalization $33.6 billion.
Approximately 37,000 employees worldwide.
1,061 branches; more than 3,800 ABMs
Business areas:
CIBC Retail Markets (~76% of revenue)
retail markets (everyday banking, borrowing, mortgages and investing), wealth management and credit cards
CIBC World Markets (~24% of revenue)
wholesale banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking and merchant banking
Corporate Risk and Insurance Services, Treasury, Balance Sheet and Risk Management maintains responsibility for CIBC–wide environmental management policies and standards, including the Environmental Credit & Investment Risk Management Policy. It also has overall responsibility for monitoring, governance and communication programs to promote and support adherence to CIBC’s policy commitment.
Our Environmental Risk Management ‘Group’ consist of two individuals:
Bill Christmas - Senior Manager, Environmental Credit Risk
Tony Basson – Manager, Corporate Environmental Program
CIBC Environmental Risk Management
March 2007

4. Environmental Risk Management Group
Oversight responsibility for Environmental Management at CIBC
Oversight of adherence to CIBC environmental policy and other environmental requirements and commitments
Corporate environmental footprint
Environmental credit risk management
Established in 1992 as part of TRM, Corporate Risk and Insurance Services
Originally driven by enactment of environmental legislation in Canada and the U.S. in the early 1990s that raised the possibility of significant credit and legal risk to banks associated with lending activities
Three full-time permanent staff:
Sandra Odendahl, Senior Director
Tony Basson, Senior Manager
Bill Christmas, Senior Manager
CIBC Environmental Risk Management
March 2007

5. Risks Arising from Environmental Issues
Credit Risk
Ability of borrower to repay debt is impacted by problems associated with contaminated property and/or inadequate client environmental management systems, for example:
Revenue or net income affected by clean up costs, fines and penalties
Business operation curtailed due to regulatory orders
Value of collateral security much lower than appraised value, due to contamination, financial ratios are adversely impacted, and credit risk is higher
Legal Risk
Direct liability of bank for clean-up costs, possibly exceeding the amount of the loan or investment, following foreclosure or bankruptcy
Operational Risk
Risk of loss due to inadequate environmental management (fuel tanks, asbestos, etc) in bank’s own operations
Reputation Risk
Damage to bank reputation caused by association with environmentally damaging company or issue
Corporate Risk and Insurance Services, Treasury, Balance Sheet and Risk Management maintains responsibility for CIBC–wide environmental management policies and standards, including the Environmental Credit & Investment Risk Management Policy. It also has overall responsibility for monitoring, governance and communication programs to promote and support adherence to CIBC’s policy commitment.
Our Environmental Risk Management ‘Group’ consist of two individuals:
Bill Christmas - Senior Manager, Environmental Credit Risk
Tony Basson – Manager, Corporate Environmental Program
CIBC Environmental Risk Management
March 2007

6. CIBC Environmental Risk Management
What Reputation Risk Looks Like
4 year ‘Global Finance Campaign’
CIBC Environmental Risk Management
March 2007

7. CIBC Environmental Policy Framework
Reputation & Legal Risk Policy
Environmental policy has been in place since Foundation for standards and procedures, including those applied to project finance, and all sizes of lending.
Standards and procedures are supported by tools such as checklists, guidance documents and forms that are used in each transaction, as required.
CIBC Environmental Risk Management
March 2007

8. Climate Change: An Emerging Environmental Risk Issue
The Legislative Framework
Impact on CIBC
Carbon Management Program
Study of Risks of Climate Change Regulation to:
Industries
Companies
CIBC loan portfolio
CIBC Environmental Risk Management
March 2007

9. The Legislative Framework Kyoto Protocol
Objective is to stabilize concentrations of GHGs at levels that will stabilize human-induced climate change
During First Commitment Period of , industrialized nations to reduce 6 GHGs (CO2,CH4, N2O, HFCs, PFCs and SF6) to 5.2 per cent below their 1990 levels
Starting Jan.1, 2008, participating Nations get allowances based on total emissions desired in the country
Kyoto introduces ‘supply constraint’ on GHGs at the country level
As a result, GHG reductions, and the right to emit GHGs, become valuable
To meet targets, Nations can:
Reduce emissions in their country
Buy the right to emit more GHGs (allowances)
Buy proof that GHGs have been reduced somewhere else (credits)
Allowances are allocated, credits are created
CIBC Environmental Risk Management
March 2007

10. The Legislative Framework Climate Change Regulation in Canada?
Canada’s target is ambitious because of its growing oil and gas sector, and because the government waited so long to get going on this
CIBC Environmental Risk Management
March 2007

11. The Legislative Framework Climate Change Regulation in Canada
Canada ratified Kyoto Protocol in Dec. 2002
Committed to reduce annual CO2 emissions 6% below 1990 levels, which now amounts to almost 300 Mt/year, or 35% reduction
“Project Green” released April 2005
Total emission levels of greenhouse gases were to be capped for ~ 700 “Large Final Emitters”
Ability to create credits was offered through “offset projects”
Funding for transportation infrastructure improvements, renewable energy, home energy efficiency, etc.
National emissions trading scheme would start Jan 2008
What Next?
Canadians expect climate change to be addressed through regulation
Expect to see short, medium and long term targets. Short term targets will definitely be intensity-based (i.e. emissions per tonne of production)
Emission limits on some industrial sectors,
National emissions trading, possibly international
Incentives for clean technology
Canada’s target is ambitious because of its growing oil and gas sector, and because the government waited so long to get going on this
CIBC Environmental Risk Management
March 2007

12. Impacts of Climate Change on CIBC Overview
People
Assets (Operations)
Business Activities
Physical Aspects
Adverse health effects on employees
Higher insurance premiums
Operational Risk: Physical damage from storms
Higher cooling needs; lower heating needs
Higher business continuity management costs
Increased credit risk of clients in certain weather-dependent sectors
Business interruption
Capital & operating costs
Revenues
Opportunity to finance infrastructure development
Regulatory Aspects
Earn tradable offset credits through projects
Higher cost for energy
Increased credit risk if clients face new costs or penalties associated with regulations
New carbon market products and services
Renewable energy finance
Reputational risk
Risks: Operational risk, credit risk, reputational risk
CIBC Environmental Risk Management
March 2007

13. Impacts of Physical Aspects of Climate Change on CIBC
Risks
Human resources impacts
Effect of more respiratory problems = absenteeism?
Higher insurance costs for CIBC premises in some regions
Increased cooling requirements in summer
Business interruption due to major storms, power availability in Ontario, etc.
Credit risk due to impacts on clients’ sectors
(Especially agriculture, forestry, fisheries, tourism, food & beverage, etc)
Increased capital & operating costs to clients
Increased business interruption to clients
Increased cost for (or unavailability of) insurance
Opportunities
Participate in project finance for infrastructure redevelopment
Wind power, clean technology, road replacement, etc
Lower heating requirements in northern regions
CIBC Environmental Risk Management
March 2007

14. Impacts of Regulatory Aspects of Climate Change on CIBC
Risks
Increased cost for purchased energy if power producers pass on new regulatory costs
Credit risk
Clients face new regulations, new costs, climate change litigation and other
Reputation Risks
Stakeholders increasingly demanding action from banks and other firms to mitigate emissions, avoid lending to high CO2 emitters, and manage supply chain
Opportunities
New products and services
Green retail products, CO2 trading and brokerage, carbon trust services; carbon fund, advisory services, etc.
Growth in Renewable Energy finance
renewable energy or GHG credits as a cash flow stream
Earn Offset Credits from energy conservation projects
CIBC Environmental Risk Management
March 2007

15. Carbon Management Program
Manage greenhouse gas emissions from CIBC’s Operations (our own climate change footprint);
Assess impacts of Climate Change Regulation on CIBC’s Credit Portfolio;
Track opportunities in emerging North American carbon markets;
Develop screening tools for climate change risk in credit risk assessment; and
Develop a study of physical impacts of climate change to CIBC’s operations, and to our lending & investment portfolio.
CIBC Environmental Risk Management
March 2007

16. Impact of Climate Change Regulation on CIBC’s Portfolio
The eventual regulation of carbon dioxide and other greenhouse gases will impact different sectors in different ways
Companies will need to select one or a combination of strategies to meet carbon dioxide targets, including:
investment in internal abatement measures,
the purchase of credits on national or international carbon markets, and
investment in projects that will offset carbon dioxide emissions
Completed a study in 2006 to look at the impacts of GHG regulations on 3 levels:
Industries
Clients
Portfolio
CIBC Environmental Risk Management
March 2007

17. 1. Impact of GHG Regulations on Industry Method
Modified Porter Model to identify key factors that determine how much a sector will be affected by new regulations:
Government policy
Policy can have uneven effects on different sectors
Energy Intensity
Input costs likely to rise
Emissions Intensity (emissions per unit output)
More emission intense industries may face higher absolute emission reductions
Ability to pass along costs
Can mitigate impacts of new regulation in that sector
Opportunities to abate
Are low cost abatement opportunities still be available to sector?
CIBC Environmental Risk Management
March 2007

18. Impact of GHG Regulations on Industry Results
Highest Risk
Aluminum
products
Smelting/refining
Steel
Electricity
Oil Sands
Cement
Chemicals
Petroleum
Emissions Intensity
Refining
Pulp & Paper
Oil & Gas
Mining
Pipelines
Lowest Risk
Low
Ability to Pass on Costs
High
CIBC Environmental Risk Management
March 2007

19. 2. Impact of GHG Regulations on CIBC Clients Method
Identified companies likely to face GHG regulation
Forecasted future emissions and compared to probable targets
Emissions – target = CO2 asset or liability
Calculated cost of compliance for companies in a liability position (i.e. unable to meet their regulated target)
Cost for abatement through new technology
Cost to buy CO2 allowances in the marketplace under different price scenarios
Cost to buy CO2 allowances from federal government at $15/tonne
Assessed ability of sectors and firms to pass on costs of compliance to customers
Determined annual cost of compliance on an absolute and percentage of net income basis
CIBC Environmental Risk Management
March 2007

20. Impact of Climate Change Regulation on Clients Results
Impacts of new regulations vary among clients within a sector
GHG regulations, as articulated in Canada’s “Project Green”, would have placed a fairly modest financial burden on most of CIBC’s large clients; however, a few clients faced potentially material impacts.
Clients in coal fired power generation and aluminum faced largest compliance costs.
Majority of Single Names faced some costs to meet GHG regulations, but 18% of firms likely to face no cost to comply with GHG regulations
For most Single Names, carbon compliance costs were a very small percentage of annual net income: representing under 1% of profit in 90% of cases
Analysis must be updated as soon as new federal GHG regulations are available
CIBC Environmental Risk Management
March 2007

21. 3. Impact of GHG Regulations on CIBC’s Portfolio Method
Top-down approach:
Percentage of loans in portfolio that are to all clients in industrial sectors likely to be regulated, and that are to sub-investment grade clients (i.e. clients least likely to have financial means to meet new regulatory targets for greenhouse gases)
Bottom-up approach:
Use client info to determine sector average Loss in Event of Default (LIED) and Obligor Default Ratings (ODRs). Combine with loan exposure and apply a stress factor for impact of carbon regulations
Determine potential loss in each sector and then as a percent of portfolio
CIBC Environmental Risk Management
March 2007

22. Impact of Climate Change Regulation on Portfolio Results
Portfolio impacts of proposed GHG regulations would have been very low, affecting clients representing less than 7% of CIBC’s net loans and acceptances.
Almost 90% of the clients that would be regulated were investment-grade
Climate change-related loan losses, under our worst-case scenario, were estimated to be <0.009% of total portfolio
Analysis must be updated when new regulations are released
CIBC Environmental Risk Management
March 2007

23. CIBC Environmental Risk Management
Next Steps
Integrate climate change considerations into credit risk assessment and industry analysis
Environmental Credit Risk Standards and Procedures now include questions about impacts of climate change legislation on client. Quantitative questions to be added when regulations are clear
Industry Reviews include environmental section, which covers climate change impacts where relevant
Raise awareness amongst CIBC business and functional units of potential risks and opportunities presented by climate change.
Research Physical Risks of climate change to industry sectors including the banking sector.
Investigate business opportunities associated with climate change, including: trading, brokerage, carbon advisory services, carbon funds, and project finance for emission reducing projects
Monitor changing policy and market developments on a continuous basis, and adjust the assessment of risks and opportunities as required.
CIBC Environmental Risk Management
March 2007

24. …..and engage our stakeholders…
Don’t fund global warming.
Stop investment in all new coal-burning power plants.
Coal-burning power plants are the world’s largest greenhouse gas polluters and a direct threat to our future. Yet prominent financial institutions, including JPMorgan Chase, Goldman Sachs, Citigroup, Morgan Stanley, Merrill Lynch, Credit Suisse and Lehman Brothers, are eager to finance their construction. The truth is, every dollar invested in coal is a dollar that could be invested in energy efficiency and wind and solar power. Help us make sure these coal-burning power plants are never built. Tell Wall Street that investing in coal is simply too risky.
Visit to join the fight.
There are over
150 new coal-burning
power plants currently
on the drawing board.
Let’s keep them there.
(from New York Times, March 23, 2007)
CIBC Environmental Risk Management
March 2007

25. CIBC Environmental Risk Management
Thank You!
Any questions?
CIBC Environmental Risk Management
March 2007

26. Environmental Risk Management Group Structure and Functions
Strategic Leadership and Oversight
Oversee enterprise-wide adherence to internal policy requirements, external commitments, and compliance to environmental regulations
Provide internal expertise in environmental science & engineering, and corporate environmental management
Identify and communicate emerging environmental risks and opportunities
Benchmark CIBC against other FIs; Communicate internally and to the public; manage stakeholder relationships
Corporate Environmental Programs
Environmental Credit and Investment Risk Management
Manage environmental impacts from CIBC’s own operations, i.e. CIBC’s “environmental footprint”
Advocate and support green initiatives
Ensure legal compliance, cost and risk reduction, and enhancement of CIBC’s corporate reputation
Advise on environmental donations,
Monitor and report on environmental performance
Manage credit and legal risks arising from environmental issues in CIBC credit and investment portfolios
Develop and maintain policies, procedures and guidelines to manage environmental risk
Expert advice to lenders, risk managers, and clients on environmental issues
CIBC Environmental Risk Management
March 2007