Opportunities for Green Investment 17th November 2008.

Opportunities for Green Investment

17th November 2008

© EIRIS

The State of Responsible Business in 2008

Bob Gordon

17th November 2008

© EIRIS

• EIRIS

• The Principles for Responsible Investment (PRI)

• The Report

• Results: Environment & Climate Change

• Recommendations

Contents

© EIRIS

• Independent Research Provider

• Operating for 25 years

• Research c.3,000 companies worldwide

• Covering over 60 areas

• Robust methodology – assessing risk, identifying opportunity

• Policy, systems, reporting, performance

EIRIS

© EIRIS

The Principles for Responsible Investment

Principle 1:To incorporate ESG issues into investment analysis and decision-making processes.

Principle 2:To be active owners and incorporate ESG issues into ownership policies and practices.

Principle 3:To seek appropriate disclosure on ESG issues by the companies invested in.

• A framework for incorporating ESG

• Complements and promotes the UN Global Compact

• Provides support

© EIRIS

• Objectives of the report

• Response and reporting results• FTSE All World Developed Index• Addresses UN Global Compact issues• Explores risk exposure and corporate response

• Convention Watch

• EIRIS PRI Toolkit

The State of Responsible Business

© EIRIS

Environment

Response and reporting by high impact companies

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Response Reporting

No evidence

Limited

Intermediate

Good

Advanced

© EIRIS

Regional response by high impact companies

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Japan Europe Aus / NZ NorthAmerica

Asia ex-Japan

No evidence

Limited

Intermediate

Good

Advanced

Environment

© EIRIS

Climate Change

Response and reporting by very high and high impact companies

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Response Disclosure

No evidence

Limited

Intermediate

Good

Advanced

© EIRIS

Integrate ESG risk into your investment strategy

Recommendations

Engage to improve company performance

Seek better corporate disclosure

Support the PRI

Opportunities for Green Investment

Jo Allen

Head of SEE Engagement & Research

17th November 2008

12

Summary

• The Co-operative Asset Management

• Why incorporate environment into investment analysis

• Our Approach: Investment Philosophy and Analysis Process

• Sustainable Leaders Trust

• Good Companies Guide

• Case Studies: Drax and Scottish & Southern Energy

• Engagement on Environmental Issues

• Investment Performance

13

The Co-operative Asset Management

• The Co-operative Asset Management carry out the fund management activities of The Co-operative Financial Services and is part of The Co-operative Group.

• 300,000 investors in unit trust range - approx £20 billion AUM.

• Co-operative ownership structure & long-standing socially responsible tradition.

• Fully integrate ESG issues throughout the investment process.

• Ethical Engagement Policy launched following customer consultation in 2005, applied to all funds under management.

14

Why incorporate environmental issues into investment decisions?

• ESG issues are material – robust evidence that ESG affects shareholder value in both the short and long term

• Identification of potentially overlooked risks reduces portfolio risk

• Engagement on environmental issues delivers more decision-useful information

• Enhances fundamental company analysis

• Enhances fund performance

15

Investment Philosophy

We believe that by looking over a longer time horizon and using a broader perspective than the market, we can identify mispriced stocks and build focused portfolios to deliver sustainable performance.

It is fundamental to our view of responsible investment to promote good governance and reflect our investors’ values.

Our analysis process

Theme • Identify and quantify macroeconomic, social and political trends• Investigate long-term thematic changes with senior management at company meetings• Medium to long term trends tend to be underestimated

• Industry• Awareness of global industry changes and their interactions between industries• Industry lifecyles can be more important than economic cycles• Understanding the change in industry dynamics, particularly competitive behaviour

• Company• Identify good businesses - cash generative, well capitalised, generating above WACC returns• Focus on changing situations, e.g. new managements or transformational M&A • House view on a stock derived from agreement between equity analysts, ESG and fixed income

Quantify change and incorporate to valuations

SLT INVESTMENT UNIVERSE

SLT:Advisory Committee

•Expert multi-disciplinary panel

•Approves overall process

•Adjudicates on ‘marginal’ companies

SLT:Negative Screening

•Detrimental impact on the environment or society

•Defence, tobacco, animal testing for cosmetics, nuclear power

SLT:Positive Screening

•Positive contribution to human health, safety, environment and quality of life

•e.g. Pharmaceuticals, healthcare, utilities

SLT:Best in Class

•All companies assessed in 3 generic areas

•Sector specific issues considered

•Companies scored on a relative basis

The Sustainable Leaders Trust: Screening Process

18

Sustainable Leaders Trust: Investment Universe

What does the investment universe look like?

• Key underweights: Oil, mining, tobacco, defence

• Key overweights: Healthcare, utilities, housebuilders, business services

• Companies approved: Focused fund: invests in 40-50 companies (170 approved for investment = 52%of FTSE All-share) plus AIM and some overseas. High quality

• Positive structural drivers: increasing demand for healthcare, environmental and H&S regulation, sustainability

19

Investment Performance: SLT

CIS Sustainable Leaders Trust (MF)FTSE All Share TR (IN)

IMA UK All Companies (IN:IN)

Percentage Growth Total Return, Tax UK Net, In LC

3 Years From 31/10/2005 To 31/10/2008

Per

cen

tag

e G

row

th

-20

-10

0

10

20

30

40

50

60

01/2006 04/2006 07/2006 10/2006 01/2007 04/2007 07/2007 10/2007 01/2008 04/2008 07/2008

2.8

-9.3

-16.1

User may have modified the original chart and axis titles provided by Lipper.

Key ethical peers

Performance 3 months %

1 year %

3 years %

TCAM Sustainable Leaders -3.9 -11.8 28.0

Aegon Ethical -6.1 -10.9 33.8

F&C Stewardship Growth -12.2 -24.6 0.6

Jupiter Ecology -3.1 -9.0 39.9

NU Sustainable Future -7.3 -19.5 11.4

Source Lipper

Performance Data up to 31/07/08

• Consistent, competitive performance

21

Our Approach: The Good Companies Guide

• A guide to help individual investors wanting to put their money into companies making a positive contribution to society

• Highlight issues commonly considered as part of our investment approach

• Investor transparency: UNPRI

• Naming and shaming? Unavoidable. But also congratulating!

22

“The Good Companies Guide”: what we measured

• Risk Management & Reporting

• Environmental: control of impacts and management of risk (e.g. arising from climate change).

• Social: management of stakeholder relationships and workplace relations and the risks these pose to business

• Governance: independent oversight; board effectiveness; audit; directors’ remuneration; shareholder alignment.

• Sector-specific: e.g., food retailers – responsible sourcing; planning and competition; labelling and marketing; product sustainability.

Drax: squaring the circle?

SRI analysis identified:• Single-asset coal plant proscribed by EU

ETS• Limited headroom for reducing absolute

emissions• Drax will suffer when Phase 2 of ETS

corrects over-allocation• Significant costs (c. £160m p.a. assuming

$20 carbon price) 'til 2012, after which permits are likely to be 100% auctioned

Integration in practice:• This contributed to case for reducing

exposure to Drax and a bearish house-view

• Fund managers and SRI analysts working together on what Drax's new 'Project Willow' to build 3 biomass plants from 2015 means for our previous analysis.

Example: Scottish & Southern Energy

• Investment Case• Themes - global power shortage, climate change• Industry - consolidating industry trend• Company - outstanding management, very low debt

• ESG research highlights• Major investment in renewables• 100% rating for governance, 90% for environmental and social factors• Industry leading social responsibility programme

• Largest overweight position in the funds since 2005

25

Engaging on the Environment

• Tar Sands “Unconventional Oil: Scraping the Bottom of the Barrel”: commercialisation of unconventional fossil fuels. Intensively climate hostile sources of energy. Called on companies to report on the risks associated with the env & soc liabilities of oil sands operations. Halt further expansion.

• Biofuels: report on the sustainability risks and opportunities surrounding biofuels, including the impact on food prices.

• HSBC Samling: investment in a Malaysian logging company was at odds with HSBC commitment to the Equator Principles.

• Severn Trent: failures in governance since 2002. Fined £36m by OFWAT for submitting to false customer satisfaction data, used to justify increases in customer tariffs.

• UNPRI: Engagement clearinghouse

26

Jo Allen

Head of SEE Research & Engagement

The Co-operative Asset Management

22nd Floor, Miller Street

Manchester M60 0AL

t: (0)161 9034014 m: (0)7912162963

e: [email protected]

Disclaimer

This document is provided to you for your information and discussion only. It is not a solicitation or an offer to buy or sell any security or other financial instrument. Any analytical information provided is for information purposes only and is not an impartial assessment of the value or the prospects of its subject matter.

Nothing in this document constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your or your clients' individual circumstances, or otherwise constitutes a personal recommendation to you or your clients.

Any information in this document (including facts, opinions or quotations) may be condensed or summarised and are expressed as of the date of writing. The information may change without notice and The Co-operative Asset Management is under no obligation to ensure that such updates are brought to your attention.

The price and value of investments mentioned and any income that might accrue could fall or rise or fluctuate, and investors may get back less than they invest. Past performance is not a guide to future performance.

This document has been prepared from sources The Co-operative Asset Management believes to be reliable but we do not guarantee its accuracy or completeness and do not accept liability for any loss arising from its use (including as a result of any acts or omissions based on the information).

The Co-operative Asset Management, its affiliates and/or their employees may have a position or holding, or other material interest or effect transactions in any securities mentioned or options thereon, or other investments related thereto and from time to time may add to or dispose of such investments.

This document is intended only for the person to whom it is issued by The Co-operative Asset Management. It may not be reproduced or distributed either in whole, or in part, without our written permission. The distribution of this document and the offer and sale of the investment in certain jurisdictions may be forbidden or restricted by law or regulation.

For the purposes of this document The Co-operative Asset Management means Co-operative Insurance Society Limited and or its subsidiary company CIS Unit Managers Limited. Both companies are authorised and regulated by the Financial Services Authority. The registered address is CIS Tower, Miller Street, Manchester, M60 OAL (CIS registered no: IP3615R, CIS Unit Managers Limited registered number: 02369965).

Pagasus House, 37-43 Sackville Street, London, W1S 3EH, UKTel: +44 (0)20 7434 1122 Fax: +44 (0)20 7437 1245

Impax Asset Management Limited is authorised & regulated by the Financial Services Authority

Opportunities for Green Investment

Presentation to charity advisors and investors

17th November 2008

Agenda

• Introduction to Impax Asset Management

• Background on environmental investing

• Different approaches to environmental investing

Introduction to Impax Asset Management

0

200

400

600

800

1000

1200

2001 2002 2003 2004 2005 2006 2007 2008

FUM £m Ca. £1 billion

Launch of Impax Environmental Markets plc

Launch of principal private equity fund

Launch of Absolute Return

Fund

• Investment manager dedicated to the environmental sector

• Founded in 1994; quoted on AIM (ticker IPX) since 2001

• Ca. £1 billion in funds under management or advisory

• 30 professional staff in London & Hong Kong

• Experienced investment team working together for over 10 years

Impax Asset Management

*Total assets under management and advisory on 15 May were £1.26 billion.

Background on environmental investing

What is environmental investing?

Environmental investing:

“Investing in companies which provide, utilise, implement or advise upon technology-based systems, products or services in environmental markets, particularly those of alternative energy and energy efficiency, water treatment and pollution control, and waste technology and resource management.”

Environmental Investing differs from mainstream SRI by:

• Investing only in environment-related sectors

• Applying no ethical screens

• Focusing on returns only

Source: IPCC

Leading to…

Several forces driving the environmental sector

… including Climate Change

…temperature increases

Source: IPCC

…and water shortages

Other drivers…

Water and air pollution

Source: World Bank

Increasing levels of consumption and waste

Source: OECD Environmental outlook to 2030

Source: Thomson DataStream

0

2

4

6

8

10

12

1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

US Production

North Sea Production

US WTI Oil Price Peak Oil – US production peaked in 1970North Sea in 2000

Source: 1950-1970 Economist 100 years of Economic stats, 1971-1984 BP Statistical Review of world energy, 1985 -2004 International Energy Agency Oil Market Report.

Economic and security factors…

including the price and availability of oil

CRUDOIL17/11/081999200020012002200320042005200620072008020406080100120140160Crude Oil-WTI Spot Cushing U$/BBLSource: Thomson Datastream

US water infrastructure spending requirements:Forecasted expenditure of US$277 billion from 2008

to 2020

Source: US EPA

Ageing infrastructure

Environmental Markets

Legislation

• Target market sizes

• Mandatory capex

• Emission limits

• Financial support

Technology

• New solutions

• Corporate R&D

• Government support

• Economies of scale

Energy Water Waste

Aggregate revenues in excess of USD 200 billion per annum

Different approaches to environmental investing

3. Waste Technologies & Resource Management2. Water Treatment & Pollution Control

1. Alternative Energy & Energy Efficiency

BiofuelsWind turbine manufacturing

Solar manufacturers

& integrators

Renewable developers

& IPPs

Meters & demand side

mgmt

Industrial energy

efficiency

Buildings energy

efficiency

Transports energy

efficiency

Fuel Cells & hydrogen

Trading in carbon

& other env. assets

Recycling eqpt.& systems

Commodityrecycling

Integrated waste

management

Hazardous waste

management

Environmentalconsultancycompanies

Water infrastructure

companies

Multi-technology

water treatment cos.

Air pollution control

Testing & sensing

Water Utilities

Listed equities: Impax / FTSE sub-sectors

Full Universe – 1200+ stocks

• Ca. 750 stocks with >50% revenues / profits or capital employed in environmental markets

- 450 full liquidity

- 300 liquidity constrained

• Ca. 450 stocks 20-50% with revenues / profits or capital employed in environmental markets

• Steady flow of Pre IPO and infrastructure project-related investments e.g. wind farms

Impax’s Investment Universe

• Ca. 750 stocks with >50% revenues/profitsor capital employed in the environmental sector

• Typically small cap

• $750 billion market cap

• Ca. 1200 stocks with >20% revenues/profits/capital employed in the environmental sector

• $4.5 trillion market cap

Pure Play Universe All Cap Universe

>$2bn 12%

$200m-$2bn 72%

<$200m 12% Cash

4%

Energy37%

Water28%

Waste31%

Cash4%

North America

41%

EU & EFTA 43%

Rest of the

World 12%

Cash 4%

Pure Play: Portfolio Breakdown*

* Impax Environmental Markets Plc by market cap., 31 October 2008

Portfolio =

70-90

listed

companies

Share Listing Size of Company

Forward 12 months’ Price to Earnings Ratio to October 09

Sector Focus†

• PER: 10 x forward 12 mths earnings to October 09

• Median forecast annual portfolio earnings growth of 16%

<15x72%

Unprofitable2%

>20 x11% 15-20x

11%

Cash4%

Pure Play: Top 10 Holdings*Company Description Country Holding %

Clean Harbors Hazardous waste US 3.4

Clarcor Filtration US 2.7

Pentair Water treatment US

2.6

Regal Beloit High efficiency electric motors US 2.6

Pall Corp Filtration US 2.5

Stericycle Hospital waste treatment US 2.5

Covanta Waste to energy incineration US 2.3

Kurita Water Water treatment & desalination Japan 2.1

Vacon Frequency converters Finland 2.0

Ormat Geothermal

Israel/US 2.0

Total 24.7

* Impax Environmental Markets plc, 31 October 2008

Pure Play: Investment Performance*

Source: Thomson DataStream

YTD (end Oct)

2007 2006 2005 2004 20033 Year

Volatilities†

IEM plc* -32% 16% 21% 21% 16% 22% 17%

FTSE Global All Cap (Total Return) -27% 10% 7% 25% 9% N/A 17%

FTSE Global Small Cap (Total Return) -31% 8% 19% 27% 16% N/A 18%

FTSE ET50 -45% 68% 19% 23% 5% 18% 27%

FTSE All-Share (Total Return) -31% 5% 17% 22% 13% 21% 22%

MSCI World (Total Return) -24% 8% 6% 23% 7% 20% 17%

MSCI World Small Cap (Total Return) -26% -1% 3% 30% 16% 42% 17%

* NAV Performance of Impax Environmental Markets plc in Sterling

† Volatilities calculated using daily series as at 31 October 2008

Global growth in cleantech PE investing

Source: Cleantech Venture Network

Example PE investment

• Innovate design of fuel cells for fork-lift trucks

• Focussed on distribution hub application – indoor, clean-air demand

• Fast recharging and consistent performance beat the traditional battery alternative

• Sold to Plug Power in March 2007

• Impax investment return with 70%+ IRR

• Sector has scale and is growing rapidly

• Individual projects offer low technology risk & attractive economics

• Sponsors can partner with a specialist fund or sell out to a utility

• Fund can add value e.g. by arranging debt, overseeing construction, repackaging assets

• Early movers (funds) can leverage expertise and relationships

• Projected fund IRRs > 20%

Infrastructure investing

Impax New Energy Investors LP:Typical project structure

Investment

Contract

Impax Fund

Supply & Construction

Project Company

Operation &Maintenance

Land Lease

Power Sales

Sponsor Holding Co. Investment Structuring Options

Senior Debt

Conclusions

• Strong market drivers leading to superior expected growth rates

• Continuing government support for environmental sector

• Well-chosen, diversified portfolios of listed stocks should outperform global markets

• Venture investments likely to perform well but exits dependent on favourable markets

• Project-related investments well suited to “infrastructure” asset class

Disclaimer

This document has been prepared by Impax Asset Management Limited (Impax, authorized and regulated by the Financial Services Authority). The information and any opinions contained in this document have been compiled in good faith, but no representation or warranty,

express or implied, is made as to their accuracy, completeness or correctness. Impax, its officers, employees, representatives and agents expressly advise that they shall not be liable in any respect whatsoever for any loss or damage, whether direct, indirect, consequential or

otherwise however arising (whether in negligence or otherwise) out of or in connection with the contents of or any omissions from this document. This document does not constitute an offer to sell, purchase, subscribe for or otherwise invest in units or shares of any fund

managed by Impax. It may not be relied upon as constituting any form of investment advice and prospective investors are advised to ensure that they obtain appropriate independent professional advice before making any investment in any such Fund. Any offering is made only

pursuant to the relevant offering document and the relevant subscription application, all of which must be read in their entirety. Prospective investors should review the offering memorandum, including the risk factors in the offering memorandum, before making a decision to invest. Past performance of a fund is no guarantee as to its performance in the future. This presentation is not an advertisement and is not

intended for public use or distribution.

Adrian CornwallTel: +44 20 7432 [email protected]

Contact Details

Les Jones

Ethical and Socially Responsible Investment in Practice

Ethical and Socially Responsible Investment

What is it:• Ethical – interpreted frequently as negative – avoid

certain companies• Socially responsible investment – interpreted

frequently as positive – focus on positive companies• The two get mixed• I believe a sound policy should have elements of both• Integrates values and social concerns with

investment decisions• Considers both the charity’s investment needs and

the impact they will have on society/the environment etc.

Ethical and Socially Responsible Investment

The Charity Commission’s views

• The governing document• Trustees decide on any policy• Case law (Bishop of Oxford) trustees must seek to

make returns on their investments but they can avoid companies whose activities interfere with their objectives

• A view that companies which act in a socially responsible way deliver the best long term returns

• Trustees are free to adopt a policy they reasonably believe provides the best balance of risk and reward

Ethical and Socially Responsible Investment

Why charities must consider a policy• Exceptions to the primary responsibility to maximise

the return– Where the activities of the company are clearly in conflict

with the charity’s aims– Investing in a particular company or sector may hamper the

work of the charity e.g. reputational risk – donors– Trustees may take a more personal moral stance if this does

not risk “significant financial detriment”– If a policy exists it must be disclosed – SORP 2005– If it doesn’t?

WWF – A Case Study

• 1996 a principles statement• 1996 first challenge – Jonathon Porritt• 1997 a new policy• 1999 policy made more positive with more engagements• 2000 policy used as basis of WWF/NPI investment fund

– Economist– Times– Daily Mail

• 2000 policy extended to include all relationships with business and industry

• Subsequently - More positive- More engagement

WWF Socially Responsible Investment Policy• Overall objectives• Primary objective: to maximise the value of its

investments by way of a diversified portfolio• No investment will be permitted in companies whose

business operations conflict with or detract from the objects of the charity

• Investments should promote the principles of socially responsible investment

• This means investing in companies whose operations enhance the environment for the benefit of present and future generations

• The concept of “inherent sustainability”

WWF Socially Responsible Investment Policy

The three tests:

• Invest in positively sustainable companies• The exclusion test

– Armaments/offensive weapons– Tobacco– Trade in cites appendix 1 listed flora and/or fauna– Animal testing for cosmetic or other non-medical

products or medical testing on endangered species

– Nuclear powerThe 10% test

WWF Socially Responsible Investment Policy

The third test – extreme caution• Investing in these sectors will shift the core business

on to a more sustainable basis e.g:– Genetic engineering– Pesticides and agro chemicals– Oil– Fossil fuels– Intensive farming– Mining– Environmentally insensitive tourism

• Best in sector• The decisions are informed by the Ethical Investment

research Service (EIRIS)

WWF Socially Responsible Investment Policy

Engagement.

• Dialogue with companies we invest in• Influence performance and attitudes to the

environment• Research matrix• Company questionnaires• The policy to be disclosed in the annual

report and accounts• Influence WWF International and the national

organisations

WWF Socially Responsible Investment Policy

Other factors:• Campaigning engagement

– BP shareholders motion– Portfolio share holding– Investment advisors– Animal testing etc.

• The business and industry policy– Based on investment policy– Who we take money from– Who we partner– Confrontation

• The business and industry group– Cross departmental– Considers relationships– Knows what is in portfolio

Ethical and Socially Responsible InvestmentOther charity involvement

• Animal charity– Animal testing– Human health– The laboratories– The environment

• Medical charity– Smoking ?– Airlines– Insurance companies.

Ethical and Socially Responsible InvestmentGetting involved• He WWF-UK/NPI fund

– Joint fund– Some of the proceeds to WWF-UK– Joint committee– Well received– Amp takeover

• The Living Planet fund– Owned by WWF International– A “world” fund– Delegate investment management– $50 million– Not yet marketed in the uk

• The future– Morale hazard

Ethical and Socially Responsible Investment

Conclusion

• All charities need a socially responsible/ethical policy/statement – irrespective of money or size

• Charities should set an example• It needs to be realistic and balanced• Trustees need to be involved• Charities should engage

Opportunities for Green Investment

www.charitysri.org