The Rise of Sustainability Investing

March 25, 2008

Doug Wheatinvest @ highridgefinancial.comwww.highridgefinancial.com413-341-1215

2March 2008

THE RISE OF SUSTAINABILITY INVESTING

Socially Responsible InvestingBased on ethics and moralsPersonal

Sustainability InvestingEvaluates social, environmental, and economic criteriaFocus on materiality/financial impact

Sustainability for SRI investors

3March 2008

SOCIALLY RESPONSIBLE INVESTMENT IS BASED ON ETHICAL AND MORAL PRINCIPLES

Socially Responsible Investing is the integration of personal values (or institutional values) in investment decisions

Desire not to profit from or invest in specific activities

ie, tobacco, war, animal productsDesire to influence social and environmental outcomes with investment choicesDesire to invest in organizations that make the world a better place

Source: Poise Magazine

4March 2008

SRI DECISIONS ARE PERSONAL (INSTITUTIONAL)

SRI is not a search for the most ethical, or socially responsible companies

There is no single definition of socially responsibleSRI investors may have opposing personal values

Research and rating firms analyze social and environmental information about companies

Many SRI investors (and all institutional SRI investors) pick investment choices that complement their personal values as well as their financial goalsMinimum social and environmental thresholds may be used to define entry into a SRI index or mutual fund

5March 2008

SRI HAS PROVEN THAT ETHICS AND FINANCES CAN EXIST TOGETHER

SRI evaluates: Governance and ethicsLabor and workplaceEnvironmentProduct safety and impactHuman rights

International operationsSupply chain

Community relationsSRI has generally performed on par with financial benchmarks

Performance may be driven by individual managers Financial analysis is often outsourced to sub-advisors

Social and Environmental Analysis is Generally Separate from Investment Analysis

Social and Environmental Analysis is Generally Separate from Investment Analysis

Performance of KLD Domini 400 Index Vs S&P 500 Index

Source: KLD Research and Analytics

6March 2008

SOCIALLY RESPONSIBLE INVESTING IS SHIFTING TOWARDS A VALUE-DRIVEN STRATEGY

Moral/Ethical Social/Environmental1950 1960 1970 1980 1990

Values-driven

2000Corp. Governance

Eco-efficiency

Sustainability

Value-driven

The Evaluation of Social and Environmental Criteria

The Market for Investors Requires an Evolving Approach & MessageThe Market for Investors Requires an Evolving Approach & Message

Best-in-class

ESG

Source: SRI World Group, Inc.

7March 2008

ANALYSIS OF SOCIAL & ENVIRONMENTAL ISSUES MAY HELP FINANCIAL RETURNS

Analysis of Social & Environmental IssuesIs a risk management technique

Identifies environmental liabilitiesIdentifies practices that may be contrary to the goals of society

ie, predatory lending, child labor

Helps identify well-managed companies

Companies with robust environmental systems often have robust systems in other areas.

Identifies companies that have the ability to capitalize on social trends

Energy efficiencyAlternative energyNatural productsWater conservation

8March 2008

THE TERM SUSTAINABILITY GERMINATED FROM THE BRUNDTLAND COMMISSION, 1987

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs."

- Brundtland Commission, 1987.

Sustainable investing and development is widely interpreted to include 3 elements:

EnvironmentSocial

Human RightsLaborCommunity

Economic

Source: ACCA.

9March 2008

THE SOCIAL VENTURE NETWORK TOOK THE CONCEPT OF SUSTAINABILITY TO BUSINESS

“We decided that it was imperative for us to use our resources to create a new paradigm: one in which business operates to add value to society – without compromising the well being of future generations.”Josh Mailman, Co-founder Social Venture Network in 1987

In his book “What Matters Most” Jeffery Hollender discusses how social minded companies have influenced corporate behavior

In his book “What Matters Most” Jeffery Hollender discusses how social minded companies have influenced corporate behavior

10March 2008

SUSTAINBILITY IS GAINING TRACTION WITH CORPORATIONS AND INVESTORS

1998

199920002001

2002

2003

2004

2005

20062007

2008

Interface issues sustainability report

Dupont, Procter & Gamble issues sustainability reports

Corporate European Investors

Dow Jones Sustainability Index

EthibelSustainability index

US SRI Investors

Portfolio 21 mutual fund

KLD Sustainability Indexes

Wall Street

Generation IM launched by Blood/Gore

Citigroup, AIG, Smith Barney, GS launch sustainability initiatives

UPS issues sustainability report

Pax World shift

Northern Trust/DFA launch funds

Dow Jones has 50 licensees (EUR 3 billion)

100s of sustainability reports issued

11March 2008

LEADERS IN SRI ARE INCREASINGLY USING THE TERM SUSTAINABILITY

THE LARGEST SRI ADVISOR NETWORK

CELEBRITY SRI INVESTOR – AL GORE

FIRST SRI MUTUAL FUND FAMILYLARGEST SRI RESEARCH AND RATINGS FIRM

WALL STREET

12March 2008

SRI IS USING SUSTAINBILITY TO OVERCOME LANGUAGE AND FINANCIAL BARRIERS

SRI really isn't a financial discipline at all, but rather the marrying of various financial disciplines with various values based on the premise that "you don't have to sacrifice performance" in order to do so. Joe Keefe, CEO, Pax World Funds, from Green Money Journal. August 2007.

Sustainable investing, by contrast, is a financial discipline. It's about performance. It's about aligning ESG performance with financial performance - combining rigorous financial analysis with equally rigorous environmental, social and governance analysis in order to invest in forward-thinking companies with sustainable business models.[2]Joe Keefe, CEO, Pax World Funds, from Green Money Journal. August 2007.

13March 2008

SUSTAINABILITY SEEKS TO BE “INDUSTRY NEUTRAL” AND “EXPLICITLY PROGRESSIVE”

Standards are different for each industry

Software and mining are not judged equallyTop performers in each industry are selected

Dow Jones – top 10%, numericallyKLD – top 37.5% by market cap

Socially ProgressiveDefines the best companies as those that act in the public interest and serve all their stakeholders while pursuing wealth creation strategies focused on the long term. It is defined positively rather than negatively.

14March 2008

BUT THE QUESTION OF MATERIALITY IS KEY TO HOW SUSTAINABILITY IS UTILIZED

Sustainability and Socially Responsible :

Social criteriaEnvironmental criteria

Sustainability adds economic criteria

This includes the economic impacts of the companyBut also includes the consideration of social and environmental factors when it is in the “economic interests” of a companyEconomic interests is often interpreted as what is “material” to the company

Source: BT

BT Materiality Test

15March 2008

FOR WALL STREET MATERIALITY IS THE KEY TO SUSTAINBILITY INVESTING

“Sustainable Development is the focus of Citigroup's research product which makes it applicable for both mainstream investment financial analysts as well as 'socially responsible investment' specialists.”Citigroup Report, February 8, 2007

“Sustainable Investable Themes -form the basis for our analysis and ensure that we focus on those special social and environmental issues that are most likely to have an impact on stock prices.“Citigroup Report, February 8, 2007

Focus is How to Make Money From SustainabilityFocus is How to Make Money From Sustainability

16March 2008

SRI IS WORKING TO COMBINE TRADITIONAL ETHICS WITH A NEW SUSTAINBILITY ANALYSIS

CLIMATE CHANGE (Calvert position)“For Calvert, climate change is as much a governance issue as an environmental one. What we seek from companies in which we invest is that they have a clear understanding of the risks and opportunities of climate change, and a strategic sense of how to manage both.”

DARFUR (Calvert position)“Due to the consistent and rigorous application of our human rights and Indigenous Peoples' rights criteria, Calvert currently has no investments in companies that are materially involved in the conflict in Sudan or that are otherwise subject to targeted divestment as determined by the Sudan Divestment Task Force.”

17March 2008

THE CHALLENGE TO SRI INVESTORS:EVOLVE BUT STAY TRUE TO YOUR VALUES

“To equate sustainability with what is material and, even worse, to deduce that what is not material is not sustainable, would be the worst post hoc fallacy….We believe it is unacceptable to give investors some sort of materiality-diluted pseudosustainability for the real thing.”Christoph Butz, Stephen Barber, and Jean Lavielle in The Financial Times, November 13, 2006.

What is ethical, socially responsible, and socially desirable isconstantly changing. Socially responsible investing can evolve to be sustainable but needs to be mindful of the ethics and morals that are its foundation.

Source: Unknown