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Impact on Capital Market Decisions
January 2011
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FINE PRINT
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professional tax or professional legal advice. Neither Ativo Capital Management LLC, Ativo Research LLC nor its
representatives is providing tax, financial or legal advice in this presentation.
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warranty that such information is accurate or error-free.
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Limitation of LiabilityThis presentation is provided for informational purposed only and in no event shall Ativo Capital Management LLC or
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anticipated profits, benefits, use, or data or (ii) injury caused by reliance upon the information contained within.
Copyright Policy
Ativo Capital Management LLC and Daniel T. Allen maintain a copyright of the text, logos and graphics contained
throughout this presentation, except where specifically noted. All third party content and trademarks appearing within this
resentation are the exclusive ro ert of their res ective owners. Unauthorized modification or extraction of an material
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contained in this presentation is prohibited.
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About the Ativo Group
e t vo roup escr es two separate, ut a ate rms nc u ng:
Ativo Capital Management LLC, an SEC-registered investment advisor offering
long-only equity asset management since 2001 in Separately Managed Accounts to
-
other structured products.
Ativo’s approach begins with the principles originally developed by Merton Miller,Franco Modi liani, James Tobin and others at the Universit o Chica o. Ativo’s
unique contribution was the empirical validation that made these theoretical
principles useful in making investment decisions.
Ativo Research LLC, a Chicago based securities research firm that has been
producing independent equity research since 1971. Ativo Research is consistentlyranked as one of the top investment research firms in the industry by independent
rating agencies such as Investars. Ativo Research is an industry pioneer in the practical
-
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of securities.
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Why is this topic relevant?
–
“…in just four years, around US$ 22 trillion of assets have been
si ned u to the Princi les for Res onsible Investment PRI .
This is more than 10% of total global capital markets…”
. . nnua epor o e n a ve . ew or : n e a ons.
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Religious Roots
John Wesley, founder of the Methodist
Church, preached in his famous Sermon
" ", ,
moral in all dealings with money so that
we mi ht …
" gain all we can without hurting our neighbour."
“ ”- ,The Sermons of John Wesley 1872 Edition (Thomas Jackson, editor)
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Civil Rights Movement
e re g ous pro on aga ns
“sin stocks” continued to be the
,
during the Civil Rights
Movement, Dr. Martin LutherKing, Jr. and others began to use
economic power through boycotts
as a means to create pressure forchange."Martin Luther Kin - Bio ra h ". Nobel ri e.or . 23 Mar
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2011
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Angst Over Vietnam War
,
for his photograph of a naked and badlyburned young Vietnamese girl, running
from her village after a napalm attack.
Outrage over the incident led to widespread protests and investor
revolts against Dow Chemical, the makers of napalm. The
impact was so great that Dow Chemical stop manufacturing thechemical and vowed never to do so again.
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Broader Impact of Social Issues
n e s an s, grow ng
investor avoidance of South
international investments in South
Africa by as much as 75% and isbelieved to have added to the
political pressure for that system
to change.
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Costly Environmental Disasters
e xxon a ez ran agroun on g
Reef at 12:04 a.m., March 24, 1989.
-
,
Horizon explosion killed 11 men and
was stopped finally capped after it
had released about 4.9 millionbarrels, or 205.8 million gallons of
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Cost of Corporate Governance Misconduct
are o ers os near y on
when Enron's stock price, which hit a
- ,
plummeted to less than $1 by the end of
November 2001 due to fraud.
On July 21, 2002, WorldCom filed for Chapter 11
bankru tc rotection after it was discovered that there
financial records were fraudulent.
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More Irresponsibility in Governance
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DefiningSustainability
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Traditional Triple Bottom Line
Environmental
Social
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John Elkington, (Sustainability, Inc.) 1984
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Broad Definition of Sustainability
Development that meets the needs of the present
generations to meet their own needs.(Brundtland Report – 1987)
but are inadequate for organizations.
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An Organizational Definition
usta na ty s t e a ty o an organ zat on to
appropriately address direct and indirect risk
actors w e ncreas ng s are o er va ue.
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Sustainability is Primarily about Risk
e s ory o sus a na y as een u upon
recognizing both direct and indirect risks associated.
If sustainability is about risk then it must also be about
order to evaluate risk and return you, of necessity, must
look at the cost of capital.
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Cost of Capital
ost o ap ta s t e expecte return t at s
required on an investment to compensate for the
r s e ng ta en.
The question is, how do we fully measure risk?
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How does Sustainability Impact Risk?
organization is managing indirect financial metrics (i.e. ESG)?What is the likelihood a com an will suffer a tail risk event?
Does the return on investment appropriately reflect the risk
profile of the investment?Does the company operate in a way that reflects investor
preferences?
advantage of emerging opportunities in the market?
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Measuring Risk
Direct Direct
n recInternal
n recExternal
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How is Sustainability being integrated?
for sustainability initiatives.1. Qualitative criteria – variations of “the right thing to do”
2. Profitability –Sustainable practices increase revenue and reduce costs,
leading to improved long-term profitability
3. Investor Preferences & Stock Price – Investors (e uity markets) shiftcapital to firms with higher sustainability rankings, resulting in higher
share prices and improved shareholder value performance
Linking sustainability to stock price provides a persuasive (andquantitative) case that sustainability initiatives help executives
achieve targets for creating shareholder value
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Impact on Cost of Capital
is a 50-70 bps impact (depending on industry and sector)surrounding adherence to ESG best practices for those areas in
which there is economic opportunity for or risk to the company.
ven a on y a e over o e g o a cap a mar e s
looking at these factors, it is highly likely that the impact will
increase dramatically over time. Obviously, the exact amount
will depend on the elasticity of the various capital markets.
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Summary
e concep s surroun ng sus a na y are no new.
The concept goes back thousands of years.
What is new is that the capital markets are now seeking
ways to quantify the opportunities and risks anddevelop meaningful ways to measure the financial
impact of corporate behavior.
Sustainability will impact every business in every
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Additional Information
For more information, please free to contact me:Daniel T. Allen
Director – ESG Initiatives
Ativo Research LLC
- -
ou are nv te to o n ESG Investing on n e n™
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Fannie and Freddie
“
that we have in OCC [Office of the Comptroller of the Currency]and OTS [Office of Thrift Supervision]. I want to roll the dice a
little bit more in this situation towards subsidized housing. . . .”
House Financial Services Committee hearing, Sept. 25, 2003
It is not just corporations.
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