Contact: Jon Naimon, CEO Light Green Advisors 800 Fifth Avenue,
Suite 4100 Seattle, WA 98104 USA Tel (206) 547-8645 Fax (206)
505-5815 www.lightgreen.com This presentation contains proprietary
information and is company confidential. Any use or distribution of
material, including but not limited to trade names, analyses, and
explanatory material contained within requires the written consent
of Light Green Advisors. Integrating Environmental Considerations
Into Investment Decisions: Opportunities, Constraints & Case
Studies The National Association of State Auditors, Comptrollers,
and Treasurers NASACT 2008 Chicago, IL 0
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Agenda LGA Background The Investment Integration Thesis
Differences between Environmental and Social Issues Climate Change
Investment Risks and Opportunities Planning and Fiduciary Issues
for Public Funds Case Studies Appendix Eco Performance Portfolio
Responsible Investor and Environmental Finance articles
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2 About Light Green Advisors (LGA) Best in class asset
management (all economic sectors) Investment advisory
(environmental focus) Specialist with over 100 years combined
experience
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3 Best in Class Asset Management LGA pioneered investment
strategy focused superior environmental management by major
companies in every industry sector Manages funds for institutional
investors, e.g. California State Teachers Retirement System
(CALSTRS) Longest track record of any U.S. firm with true
best-of-class approach Eco Performance Portfolio demonstrates the
concept of environmental alpha: Eco Performance Portfolio
outperformed its benchmark, the S&P 500, by almost 6% in 2008
1.5% per year annualized performance advantage relative to S&P
500 since inception in 2000 No other asset manager we are aware of
offers a U.S. environmental sustainability strategy that invests in
every sector
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4 Investment Advisory and Consulting Services LGAs principals
managed development of two specialized environmental research
services IRRC now part of Risk Metrics Group Innovest Strategic
Value Advisors Advised Treasurer and funds involved in California
Green Wave Initiative LGA research cited Advised DLC/PPI on
market-oriented approach to climate change LGA paper published
Advised Sun Edison, a top US distributed solar company
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5 The Integration Investment Thesis The tension between rising
global demand for goods and rising environmental standards
(corporate, governments, and consumers) generates opportunities
Companies that are able to integrate environmental opportunities
and constraints into their business models have a source of
competitive advantage Diversified portfolios of companies
exemplifying superior environmental management will outperform
industry peers Environmental issues impact the entire economy - not
just one clean sector Successful application of clean technologies
confers a competitive advantage Eco-efficiency of LGA portfolio
companies contributes to higher returns LGA track record suggests
active management adds value in the U.S. Institutions that say
companies should integrate environmental concerns into their
businesses should be able to integrate E-concerns into their
investments
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6 Recent Developments CERES, INCR, CEG, CDP, UN PRI coalitions
Multiple opportunities to register concerns regarding public
policy, corporate policy and corporate investments Mature industry
provides proxy voting advice and software Voting proxies is a
common first step for public funds Four state funds are moving
ahead with investing CALPERS, CALSTRS, Pennsylvania, New York,
& others Consulting firms and other confirm that integration
into asset management is the future Cutting-edge for traditional
financial service industry players
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7 Differences between Environmental and Social Issues
Superficial similarities between environmental and social issues
Headline risks common to both For cynics, the watermelon analogy:
outside it is green, inside it is red Significant differences
Broader agreement about threats from environmental problems Lack of
agreement re: alcohol, tobacco, defense, birth control, media
content Multiple opportunities to generate return Stock Portfolios
Fixed income Private equity Commodities Real estate Alternatives
Positive vs. negative approach
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8 Climate Change: Key Indicators for Public Funds Major
regulatory initiatives in multiple markets 30 states, U.S. EPA,
U.S. DOE, 100 countries, EU ETS Major companies have plans in place
to leverage opportunities Leading investors are gearing up to take
advantage of new markets Creation of new regulatory markets Carbon,
renewable energy credits, ethanol, etc Carbon market now larger
than the size of the U.S. wheat market Companies competing to green
their offerings Combination of civic, corporate, and investor
interest are driving the creation of a new market dynamic impacting
multiple sectors
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9 Investment risks Lessons from history Environmental
regulations have created new markets but Boom and bust cycles of
prior waves of environmental regulation and innovation Internet,
collateralized mortgage, and perhaps credit default swap bubbles
show innovations do not always trend upwards Winners can be
tortoises as well as the IPO hares This time is different Whenever
you hear it, remember that risk needs to be managed Special issues
for larger funds Potential impact on trade volume and pricing
Research examining South Africa divestment impacts suggests higher
risks resulted from negative screening
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10 Investment Opportunities by Asset Class Equities Sector,
Thematic, SRI, and Best of class funds Debt Senior, convertible,
junk, project finance, venture Private equity Venture, mezzanine,
project finance, and buy-out Real Estate New development and
existing portfolios Alternatives Hedge funds, carbon funds, OTC
exotics
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11 Establishing goals Aligning interests Defining
responsibilities Working with existing resources Identifying
specialist resources Organizing the information Determining where
it makes sense to start Evolution not revolution Defining
objectives Developing an execution plan Implementation Monitoring
Evaluation Public reporting Planning Issues for Public Funds and
Trustees
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12 Prohibition of imposing personal goals that are inconsistent
with the goals of the fund Negative screening is highly subjective
and thus runs close to the personal goals prohibition Some DC plans
allow individuals to select screened funds Religious fund trustees
generally exempt Financial responsibility to fund Long term best
interest of fund beneficiaries Maximization of investment returns
Minimization of risk Evolution of standards over time What is
financially important to risk and return changes with market views
For example, corporate governance was viewed as irrelevant in
1980s, and is now a source of return for several funds Fiduciary
Constraints for Public Fund Trustees
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13 Case Study: CALSTRS Largest teachers pension plan in US; #3
by AUM Independent governance, not part of CALPERS Longtime leader
in responsible investing 2004 Green Wave Initiative adopted by
board Trustees built policy guidance Investment staff built
investment case Investment objectives include adding financial
value Allocations to public equity, venture, and real estate
Individual managers responsible for portfolio construction
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14 Case Study: Pennsylvania 2006 Initiative Energy and Energy
Efficiency Focus Multiyear program intended to : Maximize in-state
benefits from environmental progress Minimize adverse impact of
energy use Categories include : Debt Public Equity Private Equity
Emerging Managers Real Estate Energy Efficiency Implementation is
beginning now
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15 What should you be discussing with your consultants? Its no
secret that specific investment strategies are typically reviewed
by consultants California is often a bit different since they have
greater staff resources What type of staff expertise, if any, do
they have in environmental investment issues? Do they equate
environmental issues with SRI? Climate change with venture capital?
Can they help your board answer questions like how climate change
may impact returns in various asset classes over the working life
and retirement of a young beneficiary? Do they have staff with
expertise in private equity? Public equity? Alternatives? Could
they distinguish between a manager that integrates E-considerations
into asset management and a traditional manager that simply uses an
SRI black list? Is the information in their databases is relevant
to your requests? Do they know what additional resources are
available? Can they identify gaps? Is the staff consultant the best
suited to help the board with policy issues such as new asset
allocations?
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16 Summary: The Time to Begin is Now California, Pennsylvania,
New York and others have demonstrated that US investors are now
involved in sustainable investing in the USA Best of class
strategies provide a means for investors to benefit from corporate
progress Beneficiaries of climate change include major companies in
S&P 500 as well as smaller pure plays Alternative energy is a
substantially higher risk investment alternative (Kennetech,
Nordex, etc) Theories are not new LGA principals involved in
leading EU best-in-class approach in Norway, Sweden, and
Switzerland Risk management and return-driven orientation is
different than old-fashioned religious SRI Integration into
portfolio management is the cutting edge Separation of ESG research
from portfolio management is still the status quo in industry
Mercer and others predict integration into asset management will be
required more in next 3 years The US promise is bright for
financially sound, environmentally responsible strategies There is
evidence for alpha generation that can be exploited further LGA
performance has been best in markets with higher commodity and
resource prices Commodity demand growth expected by many to
continue in emerging markets such as China Public funds in Europe,
Asia and the Middle East are defining environmental
allocations
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17 Appendix About the LGA Eco Performance Portfolio Additional
investor resources Responsible Investor article Environmental
Finance article
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18 LGA People John Cusack, Managing Director, Sustainability.
Formerly CEO Innovest, Chief Technology Officer, Combustion
Engineering, Civil Engineering, Manhattan College and MBA Finance,
New York University Michael DeFelice, Managing Director, Real
Estate. Formerly Managing Director, Real Estate, Deutsch Bank,
Engineering, Dartmouth, and Law, University of Chicago Jack Jolly,
Senior Advisor, Formerly Partner, Quellos Group (now part of
Blackrock) and former VP, Treasury, Microsoft. BA Accounting,
University of Washington Tom Lord, Managing Director, Commodities.
Formerly VP, Gas Trading, BP, Responsible for gas trading at
Transco. BA Civil Engineering and Government, Cornell, and Law,
University of Denver Chris Murphy, Managing Director, Public
Policy. Formerly Economic and Trade Advisor, Government of Canada,
and Director, Corporate Conservation Council. Law, University of
San Diego, and MBA, Notre Dame Jon Naimon, Managing Director,
Investments, Formerly Visiting Professor, Carnegie Mellon,
Director, IRRC Environmental Service (now part of Risk Metrics),
Economic and Technology Analyst, ICF, ABB, House Energy & Power
Committee. Biology, MIT and Environmental Management, University of
North Carolina
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19 Investment Thesis - Environment & Share Value Efficiency
Lower environmental costs More efficient resource utilization
Responsible management Consistent earnings Risk Litigation risk
Regulatory risk Reputation risk Accounting irregularities Corporate
environmental leadership conserves capital and improves cash flow,
as well as reducing litigation, regulatory, and reputation
risk
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20 Alternate Approaches to Environmental Investing Socially
Responsible Investing Screen out companies with visible
environmental or social liabilities Give restriction lists to
traditional asset managers Rewards corporate philanthropy and
corporate social responsibility statements E.g., Domini, Citizens,
Calvert Lower exposure to natural resource sector Alternative
Energy and Cleantech Funds Sector funds (Alternative energy focus,
small cap growth orientation) Government subsidies essential to
profitability in several segments (biofuels) E.g., Wilderhill
Powershares ETF, New Alternatives Fund Riskier investment profile,
lower impact on The LGA Best in Class or Eco-Efficiency Approach
Invest in corporate eco - leaders in all sectors of the economy
Focus on environmental performance rather than PR greenwash Exploit
material information on comparative performance trends (e.g.,
carbon emissions) as a financial factor Maintain exposure to all
sectors, benefit from progress in all sectors
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21 Corporate expenses associated U.S. environmental statutes
Frequency and cost of corporate chemical and oil spills Toxic
chemical releases to the environment and associated expenses
Superfund and hazardous waste cleanup liabilities Corporate waste
generation and trends in waste reduction LGA integrates many
metrics for corporate environmental performance into an
E-score.
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22 LGA Investment Process Determine material financial and
environmental factors by industry sector Extract financial and
environ- mental data Research inputs: - Compustat - S&P, Multex
- Risk Metrics, Trucost - Govt. agencies - Company interviews
Integrate information into LGA Eco-Metrics model to develop firm-
specific rankings for each industry For top firms, assess
litigation, management programs and sustainability challenges
Combine qualitative assessment w/ Eco-Metrics rankings to select
securities for portfolio Constrain industry weights to match
S&P 500 benchmark Continually monitor portfolio and re-balance
as necessary Identify top 50% of firms in each industry based on
Eco- Metrics comparison LGA Value- Added Step Key
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23 Eco Performance Portfolio Since Inception Vs. S&P 500,
Russell 1000, and KLD 400 Benchmarks (
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24 Eco Performance Portfolio and Traditional Benchmarks
(12/31/1999 - 6/30/2008) MonthQuarterYearLatest 1Latest 3Latest
5Inception To Date Year To Date --------- Eco Performance Portfolio
composite-5.092.12-6.47-5.026.487.981.54 S&P 500 adjusted for
dividends-8.43-2.73-11.92-13.124.417.570.05 Russell
1000-8.31-1.89-11.2-12.364.818.220.63 KLD
400-8.99-3.83-12.88-15.122.55.81-1.36
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25 Financial Performance: Attribution Positive returns from
stock selection in energy-intensive sectors Utilities Industrials
Energy Health Care Consumer Staples Financial sector was the
greatest source of negative returns Attribution analysis results
are consistent with LGA eco-efficiency investment thesis: Eco and
energy efficiency as assessed by LGA on industry and size neutral
basis is relevant to equity returns at portfolio level
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26 LGA Value Add Excess return from stock selection primarily
Reduced environmental risk; more important going forward Corporate
environmental progress drives model Positive incentive for
companies Channeling funds to LGA demonstrates that the investor
values integration of sustainability into portfolio
management.
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27 Summary LGA Eco Performance Portfolio has proven that
best-of-class investing can work in the US Investors have a proven
institutional quality environmental specialist partner Best of
class strategies provide a means for investors to financially
benefit from corporate progress Beneficiaries of climate change
include major companies as well as smaller pure plays Alternative
energy is a substantially higher risk investment alternative
(Kennetech, Nordex, etc) Theories are not new LGA principals
involved in initiating best-in-class investing in Norway,
Switzerland in 1990s Capacity to distinguish signal from noise is
critical Integration into portfolio management is the cutting edge
Separation of ESG research from portfolio management is still the
status quo in industry Mercer and others predict integration into
asset management will be required more in next 3 years LGA 7 year
live track record distinguishes it from other managers seeking to
market traditional or SRI investment platforms with new green
clothing Outperforming both S&P 500 and KLD DS 400 benchmarks
illustrates that LGA is different style than SRI The US promise is
bright for financially sound, environmentally responsible
strategies There is evidence for alpha generation that can be
exploited further LGA eco-efficiency investment rationale supported
by strong commodity pricing Commodity demand growth expected by
many to continue in emerging markets like China
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28 Additional Resources for Sustainable Investing Enhanced
Analytics Initiative Company specific thematic research from EU
brokerage firms Participation by several asset owners
www.enhancedanalytics.comwww.enhancedanalytics.com Innovest
Corporate rating of extra-financial factors, climate risk
assessments www.innovestgroup.comwww.innovestgroup.com Trucost
Estimates of greenhouse gas emissions and associated costs Carbon
footprinting and greenhouse gas emission estimates for funds and
corporations www.trucost.com www.trucost.com Risk Metrics Group
Tools for managing multiple types of market risk Information on
social and environmental risks from IRRC and ISS
www.riskmetrics.comwww.riskmetrics.com