Investing in a Sustainable World: The New Imperatives for Corporate Competitive Advantage

1. Investing In A Sustainable World Toronto Sustainability Speaker Series9 October, 2012 Dr. Matthew J. KiernanChief Executive, Inflection Point Capital Managementmjk@inflectionpointcm.com 1

2. UN Staff Pension Fund: zero • World Bank Staff Pension Fund: zero • Nature Conservancy: zero • State of Connecticut: zero • Gates Foundation: zero • UN PRI: 1% - not 80% What’s Wrong With This Picture?

3. ESG considerations are either immaterial or actually injurious to financial returns. • ESG considerations is, therefore, incompatible with fiduciary responsibility. • ESG research is inevitably more “wooly”, imprecise, and unreliable than mainstream investment research. • All ESG approaches and products are essentially the same: confusion and conflation of very different approaches. • Massive double standard: “sustainable” strategies have to work ALL of the time, or they’re discredited. Mainstream approaches generally work 30% of the time, but that’s O.K. But it’s not really about investment risk at all; it’s about CAREER risk. Better to “fail conventionally”… Why Is This Happening? A series of cognitive impairments and myths:

4. Two Major Tectonic Shifts • Demographic: global population growth, over 90% in GEMS; • Economic: shift of the world’s economic centre of gravity to GEMS; stagnation and low growth in the mature economies • Secular Megatrends • Increasing demand for and scarcity of raw materials • Energy demand growth, especially in GEMS • Increasing pressures on water availability and quality • Growing demand for food and pressure on land resources and biodiversity • Urbanization and infrastructure demand growth, particularly in GEMS • Tightening regulatory and taxation regimes for pollution and climate change • Changing consumer demographics (ie. 600m + middle class; BOP) • Growing global healthcare burden (including Access to Medicine) • Greater strain on transportation systems But There’s a New World Order New Imperatives for Corporate Competitive Advantage; New Skill Sets and Capabilities

5. The new competitive environment 5

6. The Impact Accelerators • Growing stakeholder influence • Greater investor awareness • New fiduciary paradigm • Rising stakeholder expectations • Greater information transparency • Real-time global communications Despite all this change, most money managers haven’t changed or examined their basic investment processes since 1980!

7. The new competitive environment for companies also requires new investment approaches. NOT . . . SRI NOT . . .ESG NOT . . .CSR NOT . . .RI NOT even SI But simply “SAI” – Strategically-Aware Investing A Better Way Forward . . . SAI

8. Both the complexity and velocity of change in companies’ competitive environments are accelerating dramatically. New skills, capability, and mindsets will be required to compete successfully. • A series of powerful global megatrends is largely responsible for creating an entirely new set of ‘non-traditional’ risk and return drivers for companies. Our shorthand term for those factors is ‘sustainability’ factors. • In this emerging environment, there will be an unprecedented premium for the most innovative, agile, and forward-looking companies. Traditional financial analysis is of only limited use in helping investors identify those companies. • By contrast, companies’ ability to manage sustainability-drive risks and opportunities better than their competitors is proving to be an increasingly robust proxy and leading indicator for those new skills and capabilities. • The variations among company-specific exposures to these emerging, megatrends-driven risk/return factors varies considerably, even within the same industry sectors. Deltas can be 30 times or more. • Robust, institutional-quality sustainability research and analysis is actually extremely rare. Consequently, the substantial differences among companies’ risk and opportunity profiles driven by the emerging megatrends remain largely hidden from investors. This creates significant information inefficiencies and asymmetries which astute investors can exploit. • This “sustainability alpha premium” will become even greater going forward, as the secular global megatrends continue to bite deeper. • Successful, forward-looking investment strategies require integrating sustainability insights with more traditional fundamental and technical financial analysis – from the very outset. The sustainability component complements the other two by adding a perspective which is more forward-looking, and focused on “intangibles”. The SAI Investment Thesis

9. Today, 75-80% of companies’ true risk profile and value potential lies below the surface, and cannot be captured by traditional financial analysis. BUT: Corporate sustainability is about MORE than “just” ESG Towards A More Robust Definition of Corporate Sustainability . . . Models like this are necessary if investors want to find the future out-performing companies. 9

10. The actual evidence linking superior company sustainability performance with financial returns is CONCLUSIVE: Deutsche Bank: Analyzed over 100 academic studies, 56 research papers, and 4 meta studies in June 2012. Results: • 100% academic studies found superior ESG performance = lower cost of capital (ie. Risk) • 89% showed superior stock performance • 85% showed superior profitability And, By the Way, the Jury is IN!

11. Restore integrity of “investment food chain”: owners of the assets should be at the TOP! • Educate, train, and empower fund trustees • Educate the investment consultants • If your money managers or consultants are not ESG/SAI – savvy, fire them! • Create more symmetrical incentive structures to encourage innovation and experimentation • Radically restructure business and management education • Wait for the dinosaurs to retire . . . Some Remedies . . . 11

12. Behavioural Finance 101: The 5 Stages of Organizational Self-Actualization

13. For more information, please contact Dr. Matthew KiernanChairman & Chief Executive 416-399-2861 mjk@inflectionpointcm.com www.inflectionpointcm.com What’s Next? It’s Up To YOU! 13

14. Further reading