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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
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