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Sustainable Investing. April 2010. How We Fail as Investors . Junk Bond Scandals (late-1980’s) The Internet Bubble (2000) Enron, Tyco International, Adelphia, Andersen Consulting (early 2000’s) Subprime Meltdown/Credit Crunch (2007-9) Rogue Traders/Societe Generale(2008)

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Sustainable Investing


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    1. Sustainable Investing April 2010

    2. How We Fail as Investors • Junk Bond Scandals (late-1980’s) • The Internet Bubble (2000) • Enron, Tyco International, Adelphia, Andersen Consulting (early 2000’s) • Subprime Meltdown/Credit Crunch (2007-9) • Rogue Traders/Societe Generale(2008) • Bernie Madoff/Stanford & the SEC (2008-9) • What’s Next?

    3. Two Choices • Business as Usual = calamitous • Innovation & Mitigation = sea change In a world of increasing population (9B 2050), constrained resources (peak oil) & growing global competition, great change is at hand, one way or the other, with potentially large implications for investors.

    4. Sustainable Investing • Sustainable investing is an investment philosophy that explicitly considers future environmental and social trends in financial decision making, in order to provide the best risk-adjusted and opportunity-directed results for investors. By anticipating these trends ahead of the market, sustainable investing seeks to identify ‘predictable surprises’ that can help protect & enhance shareholder value over the long-term. • And so on the one hand, sustainable investors seek the key innovations and drivers of the opportunities of tomorrow that are being generated by the changing world now before us, while at the same time, mitigating environmental, social & governance risks • Different from socially responsible investing (SRI) www.unpri.org/academic09/agenda.php

    5. Sustainability 2.0 1 E S G F Q 0

    6. CERC – Columbia University – Sustainable Investing I & II Students will actively participate in the building of a most sustainable portfolio, while reviewing closely how sustainability affects asset classes, regions and public policy, and what hurdles remain to achieving ideal results for all stakeholders. Guest speakers included throughout the course. Sustainable Investing I – intro, corporate perspective, investor perspective, other asset classes, the science, fiduciary duty, final portfolio construction

    7. Sustainable Investing II • Alternative Energy/Themed Funds • Water • Private Equity • China • Detailed Sustainability Analysis • Growth within sustainability (Brand/Jackson/Victor)

    8. Sustainable Portfolio - CERC Ticker Company 2009 Returns US Equity AMZN Amazon.com +166% AXP American Express +121% AAPL Apple +149% AMAT Applied Materials +39% KO Coca Cola +29% FSLR First Solar –3% GPS Gap Inc. +58% GE General Electric –7% IBM IBM +59% ITRI Itron Inc +7% JCI Johnson Controls +53% PLL Pall Corp +29% TTEK Tetra Tech +15% WMT Walmart –4% Non-US Equity 0494 Li & Fung (HK) +129% RHAYY Rhodia ADR +181% - Correlates with other findings by GS SUSTAIN, Matthew Kiernan, Mark Fulton, Paul Hawken -

    9. Trucost > World’s most comprehensive database, reflecting over 750 environmental impact categories of 4500+ public companies globally > Up to 8 years of history > Cutting edge research on environmental issues 9

    10. Newsweek Green Rankings

    11. New Scientist – Consumer Perception vs. Reality

    12. Initial findings – UN Report on Ecosystems Valuation An initial analysis of externalities as they apply to the top 3000 public companies: US$2.25 trillion in environmental costs were caused by the largest 3,000 listed companies in 2008. Public companies account for over 1/3 of the total annual global environmental costs. Other elements of the economy, such as other public and private companies, governments, universities and consumers contribute the remaining externalities. For many of these organizations, externalities largely come from their supply chains. Our report estimates the value of external environmental costs at 10% of global GDP (issues include GHGs, Water, Forestry, Fisheries, Air Pollution) The cost of pollution and other damage to the natural environment caused by the world's biggest companies would wipe out more than one-third of their profits if they were held financially accountable P12

    13. Components of Estimated Total Economic Value Direct Use Values Direct use values are values derived from direct use or interaction with ecosystem resources and services. They involve both commercial, subsistence, leisure, or other activities associated with a resource. Subsistence activities are often crucially important to rural populations. Indirect Use Values Indirect use value relates to the indirect support and protection provided to economic activity and property by the tropical forest’s natural functions, or regulatory environmental services. For example, the watershed protection function of a tropical forest may have indirect use value through controlling sedimentation and flood drainage that affect downstream agriculture, fishing, water supplies and other economic activities. The microclimate function of some tropical forests may also have indirect use value through the support of neighbouring agricultural areas. If the environmental functions and services provided by the forest are disturbed, then there will be a corresponding change in the value of production or consumption of the activity and property that is protected or supported by the forest. As indirect values cannot, typically, be directly or indirectly inferred from observed human or market behaviour, they are often difficult to value. Option Value Option value is a type of use value in that it relates to future use of the tropical forest. Option value arises because individuals may value the option to be able to use a tropical forest some time in the future. Thus there is an additional premium placed on preserving a forest system and its resources and functions for future use, particularly if one is uncertain about the future value but believe it may be high, and if current exploitation or conversion may be irreversible. Option and bequest value is difficult to assess as it involves some assumptions concerning future incomes and preferences, as well as technological change. Non Value Non-use values are derived neither from current direct nor indirect use of the tropical forest. There are individuals who do not use the tropical forest but nevertheless wish to see it preserved in their own right. These intrinsic values are often referred to as existence values. Existence value is derived from the pure pleasure in something’s existence, unrelated to whether the person concerned will ever be able to benefit directly or indirectly from it. Existence values are difficult to measure as they involve subjective valuations by individuals unrelated to either their own or others use, whether current or future. However, several economic studies have shown the existence value of tropical forests to constitute a significant percentage of total economic value.

    14. Key performance indicators • In general, the top 7 environmental impacts are: • Greenhouse gas emissions • Acid rain & smog precursors • Volatile organic compounds • Water abstraction and use • Natural resource use • Heavy metals • Waste • - In a world of growing human population and constrained resources, it’s not just about carbon emissions

    15. Companies Environmental Impacts Source: UK Government Environmental Reporting Guidelines Proprietary and Confidential P15

    16. Environmental Impacts (cont.) Over 750 different environmental pollutants / damaging activities Sink Air – Acid rain precursors, Greenhouse gases, Heavy Metals, Ozone Depleting Substances Pesticides, Smog precursors, Volatile Organic Compounds (VOCs) Sink Land – Acid Rain Precursors, Fertiliser residues, General Waste, Heavy Metals, Nuclear Waste, Ozone Depleting Substances, Pesticides, Volatile Organic Compounds (VOCs) Sink Water – Acid Rain Precursors, Fertiliser residues, General Waste, Heavy Metals, Nuclear Waste, Ozone Depleting Substances, Pesticides, Volatile Organic Compounds (VOCs) Source Land – Crude oil, Natural gas, Coal, Metals, Minerals, Stone, Timber, Agricultural products, Water abstraction Source Water – Botanical, Zoological

    17. Greenhouse Gas Data • Standardized data so companies can be accurately compared • Broken down into Scope 1, 2 & 3 • Represented as absolute figures (tons) and intensity (%)

    18. Measures of environmental performance can be made relative to revenues or profit, from which one can compare companies within an industry and across a portfolio Environmental Damage Costs Annual Revenue or EBITDA • Normalizes environmental damage costs to a common reference - allows for an analysis of a portfolio of companies vs. its chosen benchmark index

    19. Potential exposure of Utilities and Oil & Gas companies Company Carbon price £12/tCO2-e Carbon price £57/tCO2-e Cost £m EBITDA Chg Cost £m EBITDA Chg E.ON AG 1,838 -18% 8,729 -85% RWE AG 2,153 -32% 10,227 -155% Intl Power Plc 811 -83% 3,852 -392% AEP 1,987 -99% 9,439 -471% BP 1,826 -9% 8,673 -44% * As first appeared in Trucost’s July 2009 ‘Carbon Risks in UK Equity Funds – In-Depth Utilities and Oil & Gas analysis’

    20. 180 160 140 120 100 Stoxx600 Benchmark Stoxx600 CO2 Weighted 80 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 UBS ECO– Carbon Optimized • European Carbon Optimised (ECO) STOXX 600 launched Q1 2008 • Sector neutral • Buys every company in the index and re-weights company within the sector by relative carbon efficiency • Risk averse strategy with significant carbon savings in a region specifically affected by new and pending regulation and customer demand • 0.7% tracking error • 39% carbon savings 20 Past performance is not necessarily indicative of future results.

    21. S&P 500 – Carbon Efficient Index Trucost data drives new S&P US Carbon Efficient Index – launched March 2009 Emerging Markets Index with IFC/S&P to launch December 2009 Trucost carbon footprint data has been used by S&P to drive the first in a series of global low carbon indices to meet growing investor demands for environmentally focused indices. The S&P US Carbon Efficient Index selects large cap US companies with relatively low carbon risk for their sector. The carbon footprint of the index is 48% lower than that of the S&P 500, while seeking to closely track benchmark returns. David Blitzer, Managing Director and Chairman of the Index Committee at Standard and Poor's Index Services said "This is a concept that has seen increasing visibility over the last few months.“ Create environmentally focused investment products  The S&P index demonstrates how Trucost's carbon footprint data can be used by Fund Managers to create innovative environmentally focused investment products, while maintaining and enhancing returns - and provides invaluable input into stock selection across existing portfolios. In a world where carbon is increasingly recognized as a major corporate risk, Trucost can help S&P and their clients identify and minimize their investment exposure.

    22. ETF - Low Carbon 100 Europe • NYSE Euronext ETF reflects performance of largest blue-chip European companies with lowest carbon emissions by sector • First of its kind created in partnership with NGO’s: WWF, GoodPlanet and AgriSud 42% lower CO2 emissions than benchmark 22 Past performance is not necessarily indicative of future results.

    23. Anticipating the future matters – outperformance vs. mainstream for Sustainable Investing through 1st half 2009 Source: Krosinsky, 2008

    24. IBM vs. S&P 500

    25. Future carbon transformation? Already changing valuations, but more still to come

    26. Top 10 Global Firms (end 2007) • Firm/Location Style Eq$T   • Capital Group/ LA Value 1.024 • Barclays/SF Index 0.886 • Fidelity/Boston Growth 0.759 • AllianceBernstein/NY Growth 0.609 • Vanguard/Philadelphia Index 0.587 • State Street/Boston Index 0.570 • Wellington/Boston Value 0.352 • T. Rowe Price/Baltimore Growth 0.265 • Fidelity International/London Growth 0.255 • Barclays/London Index 0.228 For the most part, these institutions don’t consider Sustainable Investing at all to this day.

    27. Sustainability Risk s • Business as Usual – A • Regulatory Risk – B • Geopolitical Risk – C • Reputational Risk – D • Employee Risk – E • Customer Risk – F • Measurement Risk – G • Innovation Opportunities not taken – H

    28. Climate Counts 2009

    29. Environmental Benefit Analysis The environmental benefit model is the compilation and evaluation of inputs, outputs and the environmental impacts associated with a product, process, or activity which includes the identification of energy, materials and substances used and emissions and wastes released to the environment, over the established life cycle of the product, process or activity. Water Raw Materials Fuels/Energy Emissions to Water Waste Emissions to Air

    30. Ecological Economics • In conventional economics, the system encourages ever increasing production of goods and services, measured by annualGDP typically at a national level. Conventional economics assumes that ever-increasing GDP is desirable, possible, and that everyone benefits. • Ecological economics takes a broader perspective whereby the primary goal is to develop a deeper scientific understanding of the complex linkages between human and natural systems, and to use that understanding to develop effective policies that will lead to a world which is ecologically sustainable. By assuring sustainability in the face of uncertainty, and aiming to maintain the resilience of ecological and socioeconomic systems by conserving and investing in natural assets.

    31. Trucost Advisory Panel The Trucost Advisory Panel supports and assists in the development of Trucost’s methodology. This panel of leading academics now includes:

    32. For more information please contact: Cary Krosinsky Vice President Trucost 245 Park Avenue 24th Floor New York, NY 10167 203-671-1342 cary.krosinsky@trucost.com www.trucost.com