Sustainable Investing

1. Sustainable Investing

2. How Investing Continues to Fail – Unanticipated Risk • Junk Bond Scandals (late-1980’s) • The Internet Bubble (2000) • Enron, Tyco International, Adelphia, Andersen Consulting (early 2000’s) • Subprime Meltdown/Credit Crunch (2007) • Rogue Traders/Societe Generale(2008) • Madoff/Stanford & the SEC (2008-9) • Consequences of Climate Change/Legislation? (2012)

3. Sustainable Investing • Resolving Terminology Confusion • Financial Performance Analysis • A look at Opportunities & Risks • As well as Mechanisms, Trends & Future Considerations

4. Global Perspective on Sustainability Contributors include industry practitioners hailing from: • US • UK • France • Switzerland • Netherlands • Germany • China • India

5. What is SRI? • There isn’t one such thing as Socially Responsible Investing (SRI). (we see as many as 11 separate strands of SRI) • SRI is a catch-all phrase, representing numerous sub-categories, which as it turns out, have very different behavior patterns, including financial performance. • ‘Pure’ SRI investment remains a small percentage of the total value of all equity under management in the US, though it is growing, especially in Europe

6. 11 Strands of SRI • 1. Ethical ‘negative’ screening • 2. Environmental/social ‘negative’ screening • 3. ‘Positive’ screening • 4. Community and social investing • 5. ‘Best in class’

7. 11 Strands of SRI (cont.) • 6. Financially-weighted ‘best in class’ • 7. Sustainability/Climate Change themes • 8. Constructive engagement • 9. Shareholder activism • 10. Integrated analysis • 11. Norms-based screening Ultimately, these 11 boil down to 2 major categories: Negative Screening & Sustainable Investing

8. Negative Screening • Most think of SRI as Negative Screening, and this is how it began - divesting from South Africa, avoiding undesirable sectors from a values perspective, for example. • Negative Screening includes Religious funds, Ethical funds, as well as many index trackers, and remains the major strand of SRI to this day. • Much of the assets dedicated to what is called SRI in the US still focus on Negative Screening

9. Sustainable Investing Completely different in behavior from Negative Screening, Sustainable Investing strategies look to find positive opportunities, while at the same time, minimizing environmental, social & governance (ESG) risk as much as possible. Sustainable Investing is the other, more contemporary strand of SRI, and is complete distinct as an investment philosophy from classic SRI approaches.

10. SRI Fund Study • All Global SRI Funds • Negative Screening focus or Sustainable Investing focus • Equity focused • $100M or more under management • Have existed for 5 Years or more • 135 such funds at the end of 2007, all of which were included in the study

11. Sustainable Investing as an Outperforming Strategy Avg 5 Yr Annual % Return • Sustainable Investing 18.7 • Negative Screening 13.8 • S&P 500 13.2 • MSCI World 17.0

12. Anticipating the future matters Source: Krosinsky, 2008

13. SRI Funds by Turnover

14. Most Owned Companies by Sustainable Investors Vestas Wind Systems Denmark Veolia France Novozymes Denmark SolarWorld Germany Gamesa Corp Tech Spain ING Netherlands Schneider Electric France BG Group UK Nokia Finland

15. Sustainable Companies • Vestas Wind Systems is the world’s largest provider of wind energy. The company estimates that they have a 28% market share and 33,500 wind turbines installed. • Veolia performs environmental services, such as the processing of waste, water distribution, clean water processing and more, and is well known for being an extremely efficient, environmentally minded services provider. • Novozymes is a leader in enzymes, including biological solutions that improve industrial performance and quality while at the same time saving on water, energy, raw materials and waste. • SolarWorld researches, develops, produces and sells solar power technology products. • Other most owned European companies - banks such as ING, natural gas providers and others seeking maximum efficiencies. • US companies such as IBM and others trying to innovate and adapt.

16. Regional focus on Socially Responsible Investing (SRI)

17. Other Topics Covered • Sustainability Beta – Societe Generale • The argument for cap-and-trade – Abyd Karmali • Why the largest coal burning utilities want a price on carbon – in general, what companies are doing and why that’s relevant for investors – RWE and more • What are the range of alternative energy investment opportunities - Mercer

18. Other Topics (cont.) • The implication of Water shortages • Other asset classes: FI & Microfinance • The implications of Greening Real Estate • Why sustainability is important for PE • The history of Social Business

19. Other Topics (cont.) • The opportunities in China & India – they will have to act, given their levels of pollution and lack of fresh water • The vital role of civil society in reshaping capital markets • Why it is now against your fiduciary duty to not factor in ESG into your investments • Conclusions

20. Trucost World’s largest and most accurate global database of environmental disclosure covering 4600+ companies with significant time series Thought leaders on environmental issues 20

21. Carbon Counts USA – least carbon intensive funds studied • Fidelity Financial Select SPDR Fund 40t • Vanguard Health Care Fund 48 • PowerShares QQQ Trust 69 (t = CO2-e metric tons/$M investment)

22. Carbon Counts USA – most carbon intensive funds studied • Sentinel Sustainable Select Core Opportunities 692 • Janus Fund 744 • Fidelity Capital Appreciation Fund 758 • iShares FTSE/Xinhua China 25 Index Fund 1549

23. Sentinel Sustainable Core Opportunities Fund • Sustainable and Responsible Investing. The Fund employs a process of corporate, sustainable and environmental screening that is overseen by Sentinel’s in-house sustainable research department. First, Sentinel’s financial analysts and portfolio managers apply a series of exclusionary screens developed by our sustainable research analysts to a company. If a company passes the exclusionary screens, the company’s securities are eligible to be purchased by the fund. Next, Sentinel’s sustainable research analysts conduct a second, more in-depth qualitative screening process. If a company fails the qualitative screening process, the company’s securities are no longer eligiblefor investment and must be sold within 90 days of the final rejection of the company by the sustainable research team if it is held by the Fund. As a result, the fund may be required to sell securities based upon sustainable, environmental or corporate reasons when it may be financially disadvantageous to do so. While no investment is ever made solely based on the qualitative criteria alone, the Fund believes sustainable screening provides a unique and more comprehensive view of the companies it considers for investment. Two stars/Morningstar – be careful what you mean by Sustainability

24. Janus Fund • MARKET RISK The value of the Fund's portfolio may decrease if the value of an individual company or multiple companies in the portfolio decreases, or if the portfolio managers' belief about a company's intrinsic worth is incorrect. • GROWTH SECURITIES RISK • FOREIGN EXPOSURE RISK • DERIVATIVES RISK “For more than 36 years, this traditional growth fund has exemplified Janus' research and stock-picking abilities….. I believe my investment and incentives are in alignment with yours.”

25. S&P 500 Carbon Footprint Analysis – Largest Absolute Emitters by Sector • ExxonMobil (Oil & Gas) – owned by America • Alcoa (Basic Resources) • Wal-Mart (Retail) • American Electric Power (Utilities) • Dow (Chemicals)

26. Growing Concentration of Equity Ownership among Institutions • In 2007, Global Financial Institutions accounted for 67.9% of ownership in the largest 1000 global companies, up from 61.4% in 2000 • Approximately 60% of Global Institutional Equity is managed from the United States, an even higher percentage of concentration if you add London to the picture. Boston, London & NY largest three cities accordingly.

27. Potential of Sustainable Investing • Simply put - if Institutional Investors, put more emphasis on Sustainability, it would create a positive Global dynamic. • This dynamic would in effect force Public Companies to behave with maximum efficiency, as they would be competing to be best actors, and most owned, and not most sold, by long-term investors.

28. 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.

29. In Summary • Regardless of the largest Global Investors current focus, Sustainable Investing has been an outperforming strategy in good times, and has not underperformed in down markets. • Negative Screening has been underperforming or at best matching performance of benchmarks - other studies correlate these findings – including Statman, Kiernan, Budde, PRI • So why aren’t more Pension Funds, Endowments & Foundations thinking and investing this way, let alone other investor classes with long-term horizons?

30. Investing in a Sustainable World - Kiernan • UN Joint Staff Pension Fund • State of Connecticut • Gates Foundation/Warren Buffett • Public Company Pension Funds • Yale Endowment

31. Investing in a Sustainable World (cont.) • “Were the Yale Endowment to even publicly consider integrating sustainability consideration into its investment process, the positive impact on its peers worldwide would be immense.” – Dr. Matthew Kiernan

32. Sustainable Entities • Global competition of sorts underway between cities, public companies & universities to be most sustainable – Vancouver/Philadelphia, Johnson & Johnson • Sustainable Endowments Institute Yale B+ (Endowment Transparency) Brown, Dartmouth, Columbia, Harvard, Penn A-

33. The constituents of 21st Century Investment • Successful investment (depends upon) • Identifying targets which can provide a good return (which depends upon) • A vigorous population of enterprises (which depends upon) • A healthy macro-economy (which depends upon) • A healthy civil society (which depends upon) • A sustainable planet

34. In Conclusion “We started this book as credit crunched, and we end it as long-standing financial institutions disappear, having failed either to link reward with responsibility, or to appreciate and properly manage systemic risk. The scale of the investment transformation ahead demands a new paradigm. The challenge for sustainable investing is not to become like today’s mainstream but, rather, to replace it.”

35. Contact Details Cary Krosinsky Vice President Trucost Inc 245 Park Avenue 24th Floor New York, NY 10167 203-671-1342 cary.krosinsky@trucost.com www.trucost.com