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Innovest Rating Methodology

ICC Moscow - Sept. 2007

Marc Brammer, Director of Research, Europe

Innovest Strategic Value Advisors

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About Innovest

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. Clients with a collective asset base of over $7 trillion.

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How do you invest “long term” when everything is changing so fast?

Current Sustainability threats – resource depletion, climate change, over-population, extinctions – are long term problems needing long term solutions. Quarterly earnings prevent companies from developing long-term business strategies to these challenges. However, the old paradigm of “Growth” won’t work anymore in a resource constrained environment.

Quarterly Earnings are a reality of the market that must be addressed by investment advisors that focus on the sustainability or “ESG” question.

Make the connection between sustainability issues and short term events.

Examples – fuel & resource prices, env. regulations, labor strikes, etc.

Challenges to the Long-Term – Challenges to the Short Term

Therefore, investors need a tool that addresses the need

for a long term investment strategy while incorporating

the complexity of the emerging sustainability challenges.

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New Conditions – 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.

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Since 1750, the atmospheric concentration of CO2 has increased by about 32% (from about 280 to 376 parts per million in 2003), primarily due to the combustion of fossil fuels and land use changes.

Approximately 60% of thatincrease (60 parts per million) has taken place since 1959.

New Conditions – the “Mother” of all Investment Risks

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Additional Pressures: High Oil Prices

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New Conditions: Human Population Growth

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

2042

2046

2050

Est. Future Growth

Human Pop.

Approximate Point where the earth's carrying capacity has been reached according to the WWF.

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New Conditions - Earth’s “Carrying Capacity”

Source: WWF’s Living Planet Report 2004

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0

100

200

300

400

500

0 10 20 30 40 50 60 70 80 90 100 110 120

Mar

ket

Cap

ital

izat

ion

in U

S$

Bil

lio

ns

Plant, Property & Equipment in US$ Billions, Top 100 market cap. firms (‘81, ‘91, ’01)

Over the past 20 years, companies’ stock market performance has come de-coupled from the tangible asset base.

1981

1991

2001

AT&T

AIG

General Electric

CiscoSBC

Wal-Mart

Exxon-Mobile

Microsoft

Daimler Chrysler

Nippon

BP AmocoIBM

Intel

Deutsche Telekom

Pfizer1981

1991

2001

Current Accounting Doesn’t Capture True Information about the Value of the

Company…

Source: Ernst & Young Center for Business Innovation

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Assumes $30/Ton Carbon Price and 10% Emissions Reduction Target

Potential Carbon Liabilities as a % of Market Capitalization (a/o 7/05)

The Upside – Avoid Risk

Electric Utilities

0%

1%

2%

3%

4%

5%

6%

EX

C

TX

U

PE

G

DU

K D

CE

G

ET

R

FP

L

PP

L

PN

W FE

PG

N

EIX

DT

E

AE

S

AE

E TE

SO

CIN

CP

N

CM

S

CN

P

XE

L

AY

E

AE

P

Carbon Reduction Cost as % of Market Cap @ $5/ton (US price)

Carbon Reduction Cost as % of Market Cap @ $30/ton (EU price)

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The Upside – Seize Profit Opportunities

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%MW of installed capacity per year

Global Annual Installed Capacity 1995-2005

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Four Key Intangible Value Drivers

Financial Capital 30%

Sustainable Governance

• Strategy• Capability/

Adaptability• Traditional

governance practices

Stakeholder Capital• Regulators &

Policymakers• Local communities• NGOs• Customer

relationships• Alliance partners• Supply chain• Social benefits of

products & services

Human Capital• Recruitment retention

strategies• Employee motivation• Labor relations• Innovation capacity• Knowledge

Development & Dissemination

• Health & Safety• Progressive workplace

practices

Eco-Value• Quality of

environmental management

• Environmental risks & Eco-efficiency

• Strategic profit opportunities

A New Approach The “Iceberg” balance sheet

Intangible Capital 70%

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Intangible Value Assessment

100+ factors, grouped into 4 key categories:

Human CapitalRecruitment/Retention strategies

Employee MotivationInnovation Capacity

Knowledge Dev’t & DisseminationHealth & Safety

Progressive workplace practices

Stakeholder CapitalSupply ChainLabour relations Emerging MarketsPartnerships/alliancesCustomer relationships Regulators and PolicymakersLocal communities & NGOs

Environmental Performance

Environmental Strategy /ManagementRisk Factors

Product/Materials IntensityEco-efficiency Initiatives

Strategic Profit Opportunities

Sustainable Governance Strategic Scanning Capability

Agility / AdaptabilityPerformance indicators/monitoring/

reporting International ‘best practice’

Products & Services

IVA™

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How We Work – Innovest’s Research Process

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2Collection of DataFrom Companies - Annual Reports, 10Ks, Sustainability Reports, websitesFrom Government – EPA data, DOE data, other gov’t dataFrom NGOs, industry associations, “think tanks”, other research organizations, and many other sources

In-Depth Sector AnalysisAnalyst reviews general information on the sector which is being analyzedAnalyst assesses competitive dynamics, major risks and opportunities of the sector, which will determine the focus of the analysis

Preliminary Work on Rating MatrixAnalyst fills in data and scores each of 100+ factors in the rating matrix for each company in a sector

“Reality Check”Analyst defends final ratings in front of Directors or MD of Research. Process analogous to a presentation to an Investment Committee at an asset manager.

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Company InterviewAnalyst interviews each company, honing in on questions resulting from preliminary analysis

5Completion of Rating MatrixAnalyst fills in data and scores each of 100+ factors in the rating matrix for each company in a sector. Industry-specific factor weightings determined by empirical stock market research

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Auto Sector Ratings ‘07

Ticker Company Combined Rating Environmental Rating Social Rating

7203-TO Toyota AAA AAA AA

7267-TO Honda AAA AAA A

RNO-FR Renault AAA AA AAA

VOW-FF Volkswagen AG AA AA AA

7272-TO Yamaha AA A A

BMW-FF BMW A BBB A

7202-TO Isuzu A A BBB

7201-TO Nissan A BBB A

7270-TO Fuji Heavy Industries A BBB BBB

UG-FR Peugeot A A BBB

7269-TO Suzuki BBB A BB

DCX-FF DaimlerChrysler BBB BB A

7261-TO Mazda Motor BBB BB BBB

HMC-SE Hyundai BBB BBB BBB

F-MI Fiat BBB BBB BB

7211-TO Mitsubishi Motors BBB BB BBB

GM General Motors BBB BB BBB

POR3-FF Porsche BB B BBB

HDI Harley-Davidson BB CCC BBB

F Ford B CCC BB

MARUTI-BY Maruti Udyog B CCC BB

BAJAJAUTO-BY Bajaj Auto CCC CCC B

203-HK Denway Motors CCC CCC CCC

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Chart of fuel economy standards in major markets

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25

35

45

55

1997 2002 2007 2012 2017 2022

US fleet average

EU

China

Japan

USA

mp

g

fuel e

co

nom

y ta

rgets

EU fleet average

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European fleet fuel economy performance

CO2 emissions in g/km and MPG

Rank Brand

2005

sales 1997 Fleet 2005 Fleet

’97-’05

reduction

2005

reduction

target

% of ‘05 Target

Achieved

1 Fiat 681,613 169 33.4 139 40.6 -30 -21 140%

2 Citroën 875,389 172 32.8 144 39.2 -28 -24 115%

3 Renault 1,361,607 173 32.6 149 37.9 -25 -25 100%

4 Ford 1,167,602 180 31.4 151 37.4 -29 -30 95%

5 Peugeot 1,049,819 177 31.9 151 37.4 -26 -28 94%

6 GM 1,262,798 180 31.4 156 36.2 -24 -30 81%

7 Toyota 704,723 189 29.9 163 34.6 -26 -35 76%

8 Kia 231,434 202 27.9 170 33.2 -32 -44 72%

9 Skoda 265,486 165 34.2 152 37.1 -13 -19 71%

10 Seat 344,693 158 35.7 150 37.6 -8 -13 63%

11 Honda 224,258 184 30.7 166 34.0 -18 -31 60%

12 Mercedes 626,824 223 25.3 185 30.5 -38 -64 59%

13 Hyundai 294,468 189 29.9 170 33.2 -19 -34 57%

14 VW 1,387,628 170 33.2 159 35.5 -11 -22 48%

15 BMW 575,087 216 26.1 192 29.4 -23 -58 40%

16 Volvo 224,415 219 25.8 195 28.9 -24 -61 39%

17 Audi 582,220 190 29.7 177 31.9 -13 -38 35%

18 Mazda 214,105 186 30.3 177 31.9 -9 -32 27%

19 Suzuki 172,941 169 33.4 165 34.2 -4 -20 22%

20 Nissan 332,742 177 31.9 172 32.8 -5 -26 20%

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Who’s betting where on powertrains

Company Gas

Gas Hybrid

Diesel Hybrid

Clean Diesel

Plug-in / Battery

Hydrogen

HondaGMDaimlerChryslerRenaultNissanBMWToyotaFordVWPeugeotYamahaFiatSuzuki

HyundaiMitsubishiFuji HeavyBajajIsuzuMazdaPorscheDenwayMaruti UdyogHarley-Davidson

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Potential cost of CO2 emissions at €30/t emissions cost

$0 $100 $200 $300 $400 $500

Fiat

Yamaha

Renault

Peugeot

BMW

Hyundai

Nissan

Honda

VW

Toyota

DCX

Ford

GM

Expected CO2 Cost

Value of total CO2e

Calculations are based on the latest figures available for each company’s Scope 1&2 emissions set forth under the reporting guidelines of the GHG Protocol. Expected reduction cost is based on assumed 10% reduction requirement.

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CO2 Emissions and potential CO2 emissions liability

CO2 Emissions

(Mt)

Value of CO2 Emissions

($ mil) Likely CO2 Cost ($ mil)

Likely CO2 Cost as % of Net

Income GM 12.3 $454.3 $50.5 25.5% Peugeot 0.8 $31.4 $3.5 15.0% DCX 7.2 $268.1 $29.8 7.0% VW 6.1 $225.3 $25.0 6.9% Hyundai 1.8 $67.5 $7.5 5.5% Yamaha 0.5 $17.5 $1.9 3.0% Ford 8.4 $310.3 $34.5 2.7% Toyota 6.9 $255.4 $28.4 2.4% Honda 2.9 $110.1 $12.2 2.4% Nissan 2.1 $78.3 $8.7 1.9% BMW 1.3 $47.3 $5.3 1.3% Fiat 0.4 $14.7 $1.6 1.1% Renault 0.7 $25.4 $2.8 0.7%

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0%

50%

100%

150%

200%

250%

300%

Dec1996 Dec1998 Dec2000 Dec2002 Dec2004 Dec2006

To

tal R

etu

rn

Difference

EV21 Rating of BBB and above

Sector average

Innovest Auto Ratings Performance

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Three Year Live Simulation

California Pension Fund: 3 Year Live Simulation

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

1Q - 12Q Tilt = 50 -0.26 0.07 0.35 0.46 0.15

1Q - 12Q Tilt = 100 -0.36 0.70 0.78 0.34 0.36

1Q - 12Q Tilt = 200 0.36 0.35 2.20 0.76 0.92

U.S. Large Cap Value Int'l Large Cap (EAFE) U.S. Mid/Small Cap U.S. Large Cap Core Average

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Financial Institutions ABN-AMRO ABP Investments Allianz Group Barclays Global Investors BNP Paribas BP Pension CalPERS Credit Lyonnais Daiwa Securities Frontier Capital Management Glenmede Trust Goldman Sachs Hermes (British Telecom Pension) JPMorgan Chase Lombard Odier & Cie Mellon Equity Neuberger Berman Rockefeller & Co. Schroders Investment Management Societe Generale

Swiss RE Asset Management State Street Global Advisors T. Rowe Price Threadneedle (American Express) UBS Investment Bank Wellington Management

Partial Client List

Innovest investment research has been used by:

Collectively, these institutions have over $7 trillion in assets under management

Not-For-Profit Organizations and Government

Environment Agency of Victoria (Aus) Environment Canada Greenpeace Heinz Endowments Natural Resources Canada New Zealand Superannuation Fund NWF – National Wildlife Federation United Nations Environment Program Unicef UK Environment Agency US Environmental Protection Agency WWF – World Wide Fund for Nature