Generation InvestmentManagement

Global Compact COP: An Investor View

Lila PrestonApril, 2007

Introduction to Generation

• Independent, private, employee ownedpartnership established in April 2004

• Chairman - Al Gore, Managing Partner -David Blood

• Global equity investor, institutional clients

• Concentrated (30-50 stocks), long-only &long term

• 5% of profitability goes to GenerationFoundation

• Our Advisory Board plays an importantpart in our long-term research agenda

SustainabilityThemes

TraditionalEquity Analysis

PortfolioManagement &Stock Selection

> Long Term Focus

> High Conviction Investing

> Integrated Sustainability Research

Long term investing implies identifying companies with an enduringcapability to create value and sustain competitive advantage.

Our investment philosophy

> Climate Change> Pandemics / HIV/AIDS> Poverty / Real Needs> Water> Human Capital

> Lobbying> Corporate Governance> Stakeholder Engagement> Bribery / Corruption> Demography / Urbanization

Examples of Sustainability Issues Systematically Addressed

Identifying material issues - both traditional and non-traditional

Traditional Themes

> Retail Consolidation> Rise of discounters> Rise of private labels> Tightening price environment> JVs & partnerships

Sustainability Themes

> Sustainable Agriculture> Organic Food> GMOs> Fair Trade> Obesity

Food Manufacturing Sector

Traditional Themes

> Reserve replacement rate> Country risk> Finding and development costs> Transparency and reporting> Talent attraction and retention

Sustainability Themes

> Reducing CO2 footprint> Stakeholder engagement> Leadership on climate change> Carbon capture and storage> Renewable Energy R&D

Oil & Gas Sector

We only “see” a portion of what is really going on…

Visible Light

Radio Waves Microwaves Infrared Ultraviolet X-rays Gamma

rays

This analogy also goes for investing…. If all we look at is financial reports, we maymiss the broader picture.

• Management Quality (1-5)

– Culture of Integrity– Long term strategy– Respect for shareholders– Well managed for the

long-term

• Business Quality (1-5)

– Dominant market position– Strong entry barriers– Pricing power– Secular growth trends– Part of the solution

What we look for in companies?

We buy high quality businesses with high quality managementteams, at the right price.

Generation’s definition of Quality:

• An indicator of Management Quality

• A way to check if consistency between what a company says and does(also look at lobbying practices)

• A research tool to learn more about a company

• … But it is only part of the broader picture– Talking with management– Primary research with suppliers, customers, NGOs, other stakeholders– Talking with the broker community– Looking at other indicators (holistic view of a company)– Linkages between sustainability performance and compensation (and

discipline)

• The COP is a part of the two-way communication between companiesand investors– We see the COP as an important way for investors to communicate how

they address the principles (i.e. Generation’s COP)

Role of the COP in our Investment Process

• UN Principles for Responsible Investment– Commitment by asset owners to incorporate environmental, social, and

corporate governance (ESG) issues into investment decisions.

• CERES and Investor Network on Climate Risk (INCR) letter to Congress– Institutional investors managing $4 trillion in assets called on US lawmakers to

enact legislation on CO2 emissions.

• Carbon Disclosure Project’s (CDP5)– Signed by more than 280 institutional investors with assets of more than $41

trillion. The 2007 request was sent to 2,400 companies to ask for disclosurearound climate change.

• The Enhanced Analytics Initiative– Collaboration of asset owners and managers aimed at encouraging better,

longer-term, investment research, in particular research that take account of theimpact of extra-financial issues on long-term investment (represents $2.4 trillionAUM)

Some Indicators of Investment Community

We are seeing early stages of investor collaboration, but much is still focused onsingle issue (climate change) – this may be a template for addressing other issues.

• Move away from focus on the short term – investors and companiesboth to blame– The average mutual fund in America turns over 100% of its portfolio

every 11 months– 78% of financial executives surveyed said they would give up economic

value in exchange for smooth earnings and 55% of managers wouldavoid initiating a project with a very positive return if it meant fallingshort of the current quarter's consensus earnings.*

• Companies need to talk about long term strategy and non-financialdrivers of performance from the top– COP, GRI, Sustainability Reports, Annual (event Quarterly) Reports– Analysts will follow the company lead– A long-term focus is better for the economy and society

Conclusion: What we wish we saw more of…

*National Bureau of Economic Research

Appendix

• Asian SRI Association

• Carbon Disclosure Project

• Enhanced Analytics Initiative

• European SRI Association

• Extractive Industry Transparency Initiative

• Global Business Coalition on HIV/AIDS

• Institutional Investors Group on Climate Change

• International Corporate Governance Network

• UK Social Investment Forum

• UN Global Compact

• United Nations Environment Programme, Finance Initiative — Principles forResponsible Investment

• US Social Investment Forum

Our Commitments

VII. Step 2: Investment DecisionSector examples show how we integrate sustainability research with fundamentalanalysis in our assessment of Management and Business Quality.

Automation and Efficiency

IndustrialsJohnson Controls Inc

Investment Advisory Services

FinancialsT. Rowe Price

Diabetes Treatment

HealthcareNovo Nordisk

BUSINESS QUALITY> Transition to energy efficiency in

buildings and hybrid battery business

> Pricing power, stable recurringrevenues, lower capital intensity versuspeers

> Business model built around customerrelationships

> Long-term customer relationships,product innovation

> Funds have strong track record, withsome of the lowest fees across theindustry

> Growing market share of fund inflowson the back of reputation of integrity

> Market w/ good LT volume growth

> Strong barriers to entry in diabetes due tomanufacturing capabilities, patient loyalty,patent protection

> A sustainable insulin strategy in developingmarkets that is built around prevention

> Proven management with track recordof execution

> Educate consumers on energyefficiency

> Leadership on energy saving as asolution to climate change

> Leading human capital management –broad equity ownership

> High level of investment in training andretention

> Avoided market timing scandals due toethical culture

> Sustainability embedded with seniorsupport (triple bottom line)

> Low staff turnover, culture of innovation

> Strong track record in stakeholderengagement

MANAGEMENT QUALITY

Page 14 | October 2006

Step 2: Example

The use of specific companies does not represent investment advice, they are used purely as examples to assist in the explanation of Generation’s investment process and they mayor may not be held in portfolios managed by Generation

Management Quality –

– Recognized assustainability leader withLT mindset

– Educate customers onenergy efficiency

– Hold annual energyefficiency conference

Business Quality –

– Strong market fordemand-side efficiency(rising energy costs,increased regulations)

– Boom in green buildingdesign, urbanizationtrends

– Growth in the hybrid carmarket

Example in Industrials Sector climate changefocusJohnson Controls Inc: Portfolio of businesses, including automotiveinteriors, building efficiency and batteries for hybrid vehicles.

Management Quality –

• Avoided the market timingand trading scandals – whichhas grown market share

• Well regarded management,high level of client alignment,culture of integrity

• Strong human capitalmanagement (stock optionsbroadly shared)

Business Quality –

• Solid, long-term track record,low fees

• Traditional market leader indirect distribution

• No current debt and a largeand accumulating cashbalance

Example in Financial Sector human capitalfocusT. Rowe Price: Financial services firm providing investmentadvisory services

DisclaimerThis material is for information only and for the use of the recipient. It is not to bereproduced or copied or made available to others. Under no circumstances is it to beconsidered as an offer to sell, or a solicitation to buy any investment referred to in thisdocument. While the information contained herein is from sources believed reliable, we donot represent that it is accurate or complete and it should not be relied upon as such.Generation accepts no liability for loss arising from the use of this material. Any opinionsexpressed are our current opinions only. This report is not meant as a general guide toinvesting, or as a source of any specific investment recommendations, and makes noimplied or express recommendations concerning the manner in which any client's accountsshould or would be handled. This report is for general information purposes only and doesnot take into account your individual circumstances nor your financial situation or needs.Stocks can be volatile and entail risk and individual stocks presented may not be suitable foryou. You should not buy or sell a stock without first consulting your financial advisor orconsidering whether it is appropriate for you and your respective portfolios. Certaininformation presented may be provided by third-parties. Generation believes that such third-party information is reliable, but does not guarantee its accuracy, timeliness orcompleteness, and it is subject to change without notice. Generation, their employees,directors, consultants, and/or their respective family members may directly or indirectly holdpositions in the securities referenced. Therefore, this research material is not to beconsidered impartial. Nothing in this report should be interpreted to state or imply that pastresults are an indication of future performance

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