Climate Change Risks and Opportunities for CIBC

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

3. 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 CIBC Environmental Risk Management

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

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 CIBC Environmental Risk Management

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

7. CIBC Environmental Policy Framework Reputation & Legal Risk Policy CIBC Environmental Risk Management

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

9. The Legislative FrameworkKyoto Protocol • Objective is to stabilize concentrations of GHGs at levels that will stabilize human-induced climate change • During First Commitment Period of 2008-2012, 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

10. The Legislative FrameworkClimate Change Regulation in Canada ? CIBC Environmental Risk Management

11. The Legislative FrameworkClimate 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 CIBC Environmental Risk Management

12. Impacts of Climate Change on CIBC Overview Risks: Operational risk, credit risk, reputational risk CIBC Environmental Risk Management

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

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

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

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

17. 1. Impact of GHG Regulations on IndustryMethod • 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

18. Impact of GHG Regulations on IndustryResults 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 High Ability to Pass on Costs CIBC Environmental Risk Management

19. 2. Impact of GHG Regulations on CIBC ClientsMethod • 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

20. Impact of Climate Change Regulation on ClientsResults • 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

21. 3. Impact of GHG Regulations on CIBC’s PortfolioMethod • 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

22. Impact of Climate Change Regulation on PortfolioResults • 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

23. 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

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 www.ran.org 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

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

26. Environmental Risk Management GroupStructure 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 Environmental Credit and Investment Risk Management Corporate Environmental Programs • 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