Thomas holzer

Sustainable Swiss Private Banking since 1841.

Emerging Sustainability

Sustainability analysis of emerging market companies Andreas Holzer, Bank SarasinTBLI, November 2010

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Structure

Sarasin Sustainable Investment

Sustainable development in emerging markets

Why invest along sustainability criteria in emerging markets?

Sustainability analysis of companies

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Sarasin Sustainable Investment - Bank Sarasin & Co Ltd.

Leading Swiss private bank – founded in 1841

Investment advice and asset management for private and institutional clients as our core business

We specialise in:– Sustainable asset management– Thematic asset management– Non-predictive or quantitative asset

management Majority shareholder Rabobank has a triple-

A credit rating* Represented at more than 20 locations

around the world, in Switzerland, Europe, the Middle East and Asia

*Standard & Poors issues credit ratings of corporations: AAA is the best rating and denominates reliable and stable borrowers

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Sustainability research since 1989 Continuous build-up of staff Very low fluctuation Responsible for CHF 12,4 billion / EUR 9,4 billion assets

The team:

50 employees 30 portfolio manager 11 sustainability analysts

Number of employees working in sustainable investment

Sarasin Sustainable Investment -resources & experience

Source: Bank Sarasin, as at 30/06/2010

0

5

10

15

20

25

30

35

40

45

50

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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Water pollution in China

50% of cities have polluted drinking water

70% of rivers and lakes are substantially polluted

80% of household sewage is not treated

30% of rivers cannot even be used for agricultural or industrial purposes

190 million cases of illness each year caused by polluted water

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Trend in global primary energy consumption (IEA)

Source: IEA

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G-20 countries with highest climate vulnerability

100,45Japan

80,53Australia

80,53France

70,54USA

60,55Saudi-Arabia

40,62China

40,62South Africa

30,69Brasil

20,70Indonesia

10,74India

RankScore

Source: HSBC, 2009

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High economic growth will continueand improve the living conditions…

0

1

2

3

4

5

0 10'000 20'000 30'000 40'000 50'000

GDP per capita 2008 (USD)

GD

P G

row

th 2

000 -

2008

(%

p.a

.)

Emerging Markets

Developed Countries

0 2 4 6 8 10 12

India

Taiwan

South Korea

Brazil

China

Developing Countries

Developed Countries

GDP growth 2010 - 2014 (% p.a.)

Source: IMF

Source: UNCTAD

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Quality of life – Sarasin Country Sustainability Rating

Source: Bank Sarasin 2010 / based on data from 2006

0%

20%

40%

60%

80%

100%N

orw

ay

S. Kor

ea

Cze

ch R

ep.

Mex

ico

Pola

nd

Bra

zil

Peru

Turk

ey

Rus

sia

Thai

land

Chi

na

Egyp

t

Indo

nesi

a

S. Af

rica

Indi

a

Nig

er

In %

of th

e hi

ghes

t ra

ting Health

EducationMaterial wealth

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The use of a sustainability screen is especially valuable in the case of

emerging market investments, because…

Why invest along sustainability criteria?

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Strong economic growth has accentuated environmental and social problems: High air pollution in urban and industrial areas, widespread water pollution and scarcity.

High importance of the (more polluting) industrial sector

Increasing resource consumption per capita

Precarious working conditions, partial lack of political stability and political rights, corruption, incipient shortage of labour

Emerging markets will be heavily impacted by climate change

Emerging markets are confronted with growth-limiting environmental and social risks at a comparatively early stage of economic development

…environmental and social risks for companies there are high…

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As a reaction to the various environmental and social challenges, a shift towards sustainable development is evident on various levels within the emerging economies.

Governments are implementing tougher environmental laws, regulation and taxes and promote environmental technologies.

Consumers developed a preference for environmentally and socially sound products, that are safe (remember several food scandals in China).

Business clients want to improve social and environmental performance in the supply chain.

Employees and unions are using protests to improve working conditions (e.g. wages in China, occupational safety in South Africa).

More public protests in case of heavy pollution.

Various stock markets in emerging market nations have introduced sustai-nability reporting standards or sustainable investment indices.

…and sustainability requirements for companies are on the rise

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China getting tough on energy efficiency

China in July scrapped preferential power rates for energy-intensive industries.

Beijing has ordered 2,000 firms in heavy industry to close their old plants by end September, or risk having bank loans frozen and power cut off.

In August, electricity supply for 500 energy intensive companies in the province of Anhui was cut by the government: Companies did not meet efficiency targets.

More than 1,000 energy intensive enterprises in Anhui were advised to restrict electricity use from October to December.

Young entrepreneur: "I had to shut down my online shop for two weeks because I had no power for my computer."

Enterprises in Jiaxing (Zhejiang province) have to stop using electricity from the grid at least two days each week to meet conservation targets. (Side effect : increased demand for diesel for backup systems)

=> Probably not a sustainable solution in each case

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In May of this year Chinese workers began to protest/strike for better remuneration in several companies (Foxconn, Hyundai etc.).

Wages were not below the legal minimum, but were not living wages. Many workers had therefore to do a lot of overtime.

Such protest is new and similar protests were cracked down by the government in the past. The government is currently more reluctant, because it knows that low wages could lead to more widespread unrest and strategically wants to improve domestic consumption.

Wages were substantially increased (50%+).

+ Labour shortage: In southern coastal regions and Beijing

Conclusion: Good working conditions become a competitive factor in emerging markets

Chinese workers flex their muscles

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The more sustainable companies will have a competitive advantage

This new growth paradigm rewards companies for being more responsible and long-term thinking.

Additionally, a sustainability screen for emerging markets makes also sense because:

A good environmental and social performance is also an indicator for a well organized, transparent company that is able to manage risks.

ESG information on emerging market companies is used by few investors. It is not yet – or only partially – priced into company valuations.

Sustainable investments in EM will see strong growth; progressive companies will benefit from this investor demand.

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More sustainable companies will therefore have a competitive advantage.

High environmen-tal + social risks

Trend to more sustainable

development

More sustainable companies

Less sustainable companies

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Country allocation MSCI Emerging Markets Index

Source: MSCI, 31.10.10

16%

13%

11%

8%

7%

6%

4%

2%2%

3%

1%2%2%

2%

18%

China Brazil Korea TaiwanIndia South Africa Russia MexicoMalaysia Indonesia Turkey ChileThailand Poland Colombia PeruPhilippines Egypt Hungary Czech RepublikMorocco

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The investment process - example

Emerging market universe 751 Stocks*

* Data as of 01.10.2010, for illustrative purposes only

The portfolio manager selects 50 stocks within the sustainable investable universe, based on the criteria of high volatility and low correlation, and weights them equally.

The portfolio is rebalanced at monthly intervals and the stock selection is actively reviewed.

Using mainly raw data provided by our research partner Asset4, our sustainability analysts screen the EM universe of companies along Sarasin criteria

Investable universe110*

e.g. Sarasin Sustainable Equity - Global Emerging Markets Fund

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Research universe420*

Stock selection

Sustainability validation

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Same criteria and weightings for the sustainability assessment of EM companies as for their counterparts in the developed markets.

Comparison with their international peers.

We enlarged the eligible area of our Sustainability Matrix

We included the Hong Kong and Singapore stock markets

As in all our sustainable investment products, we exclude the stock of any companies that generate more than 5% of their revenues from:

– Nuclear energy

– Arms

– Chlorine and pesticides

– Tobacco, pornography

– Genetic engineering (in agriculture)

How does our research work in the emerging markets?

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Assessment of companies: the Sarasin Sustainability-Matrix®

highlow average

Cor

pora

te s

usta

inab

ility

Sector sustainability Best-of-classes

Adaptation to EMMA countries

Investable universe

Non-investable universe

Best-in-class

High

Averag

eLow

To ensure investability, we slightly expanded the eligible area

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Distribution of rating classes

Emerging Markets Developed Countries

Source: Bank Sarasin

9%2%

21%

24%

45%

25%

20%

32%

17%

6%

above averageaveragebelow averagelowhigh

above averageaveragebelow averagelowhigh

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Country distribution of the sustainable universevs. the MSCI Emerging Markets index

Source: Bank Sarasin

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

China

Brazil

Korea

Taiwan

Indi

a

South

Afri

ca

Russia

Mex

ico

Mal

aysia

Indo

nesia

Turke

yChil

e

Thaila

nd

Poland

Colom

bia

Peru

Philipp

ines

Egypt

Hunga

ry

Czech

Rep

.

Mor

occo

Hong

Kong

Singap

ore

Share in MSCI EmMa

Share in Investment Universe

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Sustainability ratings of selected emerging market companies

SuzlonSuntech Power

Nedbank

Natura

MTR

Lonmin

Jain Irrigation

Itaú Unibanco Hyflux

Globe Telecom

City Dev.

Cemex

AU OptronicsAspen

Sustainability of the Sector

Sus

tain

abili

ty o

f th

e Com

pany

high

low

high

low

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Natura Cosméticos, Brasil

Largest brasilian cosmetics company Focus on plant based raw materials Systematic use of environmental and

social criteria in procurement Strong brand in Latin America Benefits from the trend to more

natural cosmetics

Development of the share price31.10.2004 – 31.10.2010 in BRL

0

10

20

30

40

50

2004 2005 2006 2007 2008 2009 2010

Source: Datastream. No re-investment of dividends.

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Aspen Pharmacare, South Africa

Africa‘s largest pharma company One of the largest producers of

generic antiretroviral drugs (HIV/Aids)

Committed to the prevention and therapy of HIV/Aids in Africa

Distribution agreement with GlaxoSmithKline for subsahara Africa

Advanced environmental management

Development of the share price31.10.2000 – 31.10.2010 in ZAR

0

20

40

60

80

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Datastream. No re-investment of dividends.

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Bharti Airtel, India

India‘s largest provider of mobile telecommunication; expands to Africa

Mobile telecom adds social and economic value

10 additional mobile phones per 100 inhabitants in a typical developing country => Increase of the GNP growth rate per capita of 0,6%

Fishermen in South India check market situation while on sea => Fishermen earnings +8% / Consumer prices -4%

Bharti: Improvement of energy efficiency / Use of renewable energy

Development of the share price31.10.2002 – 31.10.2010 in INR

0

100

200

300

400

500

600

2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Datastream. No re-investment of dividends.

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Perfect timing for starting to use a sustainability screen for investments in EM. Companies start to get rewarded for sustainability!

The share of sustainable companies is still lower than in developed markets, but there are many companies that comply with strict sustainability criteria. Not surprisingly for EM, they are catching up fast.

Some adaptation of the investment universe was necessary, but no need to substantially lower sustainability criteria.

There are specific ESG issues in emerging markets. But, most of these issues are known from the sustainability analysis of multinationals (supply chain!).

Nevertheless, the availability and quality of information/reporting needs to be improved.

So!?

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Important Information

This marketing publication has been prepared by Bank Sarasin & Co. Ltd, Switzerland, (hereafter “BSC”) for information purposes only. It contains selected information and does not purport to be complete. This document is based on publicly available information and data (“the Information”) believed to be correct, accurate and complete. BSC has not verified and is unable to guarantee the accuracy and completeness of the Information contained herein. Possible errors or incompleteness of the Information do not constitute legal grounds (contractual or tacit) for liability, either with regard to direct, indirect or consequential damages. In particular, neither BSC nor its shareholders and employees shall be liable for the opinions, estimations and strategies contained in this document. The opinions expressed in this document, along with the quoted figures, data and forecasts, are subject to change without notice. A positive historical performance or simulation does not constitute any guarantee for a positive performance in the future. Discrepancies may emerge in respect of our own financial research or other publications of the Sarasin Group relating to the same financial instruments or issuers. It is impossible to rule out the possibility that a business connection may exist between a company which is the subject of research and a company within the Sarasin Group, from which a potential conflict of interest could result. This document does not constitute either a request or offer, solicitation or recommendation to buy or sell investments or other specific financial instruments, products or services. It should not be considered as a substitute for individual advice and risk disclosure by a qualified financial, legal or tax advisor.This document is intended for persons working in countries where the Sarasin Group has a business presence. BSC does not accept any liability whatsoever for losses arising from the use of the Information (or parts thereof) contained in this document.

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