Carbon Risk for Investors A briefing to investors Market Transformation and Climate Change:

1. Carbon Risk for Investors A briefing to investors Market Transformation and Climate Change: Opportunities, Risks, and Investments Tuesday, March 14th, 2006 Marc Brammer, Director of Research, New York mbrammer@innovestgroup.com / 1-212-421-2000 x.217 www.innovestgroup.com Innovest STRATEGIC VALUE ADVISORS

2. Company Overview Background • Specialist investment research provider, focusing on non-traditional drivers of investment risk and returns, including companies’ performance on environmental, social and governance issues • Companies’ performance on these factors provides a robust proxy for their overall management quality and long-term financial performance • Founded in 1995 and has since grown to over 40 professionals • Offices in London, New York, Toronto, Paris and Madrid; clients in 20 countries • Chairman was former Chief Investment Officer of TIAA-CREF, one of the largest pension funds in North America • Largest outside investor is ABP (Netherlands), one of the top 3 largest pension funds in the world • Serves both mainstream and SRI investment clients • $1.1 billion under structured sub-advisory mandates and $4 billion in SRI AUMs using Innovest’s research.

3. Climate Change – the “Mother” of all Investment Risks • Carbon stabilization at double pre-industrial CO2 levels would require reductions of 7 gigatons (7 billion tons). • 700 nuclear plants to replace fossil fuel plants. • Increase solar panel use by a factor of 700. • Stop all deforestation and double present efforts at reforestation. • Four additional large scale reallocations of capital & infrastructure. • Result: Avoid “worst case scenario” • but still undergo significant climate change • and disruptions.

4. Climate Change Market Dynamics

5. Climate risks: the Context • Kyoto Protocol entered into force on 16 February 2005 • Latest climate data underscores economic, social impacts • Major banks, institutional investors increase climate awareness • Weather, CAT bond markets continue to expand • Carbon regulations are now a fact of life across the OECD • Accounting, financial market authorities focusing on environment • Climate change litigation, trade regulation effects more discernable • Environmental markets can enhance project returns, hedge risk • Wholesale power price volatility likely to rise • Clean technology markets get fresh attention from investors 5

6. Clean Technology / Carbon Opportunities • “Sustainability” issues such as Climate Change are creating major risks – and opportunities – for investors worldwide • There is a growing demand among institutional investors for solutions and action: eg. Carbon Disclosure Project($31 trillion); Investors Network on Climate Risk; unprecedented shareholder resolutions in the U.S. • Regulatory pressures and consumer concerns are driving accelerating demand for “clean technologies” • Royal Dutch/Shell predicts that renewables will account for 15% of all OECD energy production by 2020 • World Energy Council estimates global market for renewables as up to $625 billion by 2010, and $1.9 trillion by 2020 • Currently generating a 30% compound annual growth rate

7. Climate Change – What Have We Learned So Far? • Financial impacts of climate change extend well beyond the “obvious” industry sectors • Same-sector risk – and awareness – varies widely from company to company • Financial risks – and opportunities – certain to intensify • Early movers are already gaining competitive advantage • Aggressive, pro-active climate change responses need NOT be costly; in fact they can generate net revenues

8. Additional Pressures: High Oil Prices

9. The Finance & Banking Sector is Waking Up • EU ETS Impact on Equity Markets under the microscope: UBS Warburg, Deutsche Bank, Dresdner Kleinwort Wasserstein, ABN Amro and JP Morgan Chase issued detailed quantitative reports analysing the impact on European industry of the forthcoming E.U. Emissions Trading Scheme . • Macroeconomic impacts also being studied: West LB estimated that the Market Value at Risk for the world’s equity markets to be between $192 billion and $916 billion….Abbey National undertaken group-wide impact assessment • Climate Risk Profiling has begun in debt markets: Westpac, National Australia Bank, Royal Bank of Canada, HBOS, Standard Chartered, ABN Amro have commenced analysing the greenhouse gas risk profile of customers in lending portfolios • Environmental Markets creating tangible opportunities: Barclays Bank, Deutsche Bank, Fortis, ABN Amro, Bank of Ireland, Goldman Sachs, CDC Ixis and other banks are reported to be setting up or expanding environmental financial products desks to trade and finance carbon-, renewables- and weather-related products • Institutional Investors are stirring: Collective (INCR, IIGCC, etc) and individual action (CalPERS, Dexia, BNP Paribas, Santander Central Hispano, Merrill Lynch, etc) on technology, low-C solutions 9

10. Carbon Disclosure Project Overview CDP 4- Collaboration by investors February 2006 • Over 211 participants representing over $31 trillion assets. • Questionnaire sent to 1900 largest companies globally by market capitalization. Up from 500 in 2005. • Request for disclosure of investment-relevant information regarding climate change. • 89% response rate in 2005.

11. Innovest has Developed Robust Carbon Analysis • Starting with high impact sectors, Innovest has developed a carbon-focused investment risk model that analyses: • Company risk exposure • Management strategy • Focused on industry specific risk/opportunity factors • Provides relative performance to competitors.

12. Company-Specific Risk Individual companies’ financial exposures are essentially a function of eight company-specific key factors: GHG emissions-intensity of its industry sector Energy intensity and source mix and consumption patterns Geographic locations of production facilities relative to specific regulatory and tax liabilities and compliance schedules in different countries. Product mix – direct, indirect, and embedded carbon intensity Company-specific “marginal abatement” cost structures - some companies can reduce emissions at much less cost than others Technology trajectory – level of progress which a company has already made in adapting/replacing its production technologies for a carbon-constrained environment Company-specific risk management capability Ability to identify and capture upside and revenue opportunities, including new manufacturing cost efficiencies, new product/service opportunities, and emissions trading.

13. Industry Sector Exposures Investment portfolios differ widely in their exposure to different industry sectors, and the sectors in turn vary considerably in their “carbon-intensity”:

14. Carbon Risk Varies by Sector – AND Within the Same Sector Sector Company “Carbon Beta” Evaluation Auto Mfg FT500 auto manufacturers vary by a factor of 35x in terms of CO2 emissions per vehicle sold/produced Oil & Gas Costs to cut GHG emissions by 10% below 2001 levels as pc of annual cash flow range from 2.5% to 0.4% (assuming $20 per tonne CO2e) Electric Utilities • Reduction by 10% in GHG emissions intensity ranges from $0.2 to over $1.7 per MWh • EU utilities:emissions reduction cost burden could be between 2.7% and 19.5% of net income Metals & Mining • Total annual costs for 5 major FT500 M&M firms to cut 2001 CO2 emissions by 10% over 5 yrs assuming uniform abatement costs are $67m • For the firms, this ranges from 0.3% to 1.5% of annual net income

15. Carbon Risk Differential The range of company-specific carbon risk among companies within the same sector (electric utilities), same country (United States), and similar company size (large cap):

16. European Electric UtilitiesEmissions Intensity – Trend Analysis

17. Sector Example – Auto Fuel Efficiency

18. Sector Example – Auto Fuel Efficiency

19. O&GEmissions Intensity – Trend Analysis

20. Integrated O&G4-Year Gas Reserve Growth

21. BankingRenewable Energy Engagement

22. Sample Carbon Beta Portfolio analysis

23. “In global warming, we are facing an enormous risk to the U.S. economy and to retirement funds that Wall Street has so far chosen to ignore…. investors need to pay more attention to corporate practices that affect long-term value” Phil Angelides California State Treasurer November 2003 “We view climate change as a key long-term investment theme which receives insufficient attention” ABN AMRO Equities Research November 2003 23