TBLI Event – Buenos Aires 2015 Itaú Unibanco

Behavior change

Urban Mobility

If all São Paulo´s 7,4 million vehicles drove at the same time at the speed of 40 Km/h, the city would need more than double the 17,000 kilometers of existing roads

If all cars were parked in a single line, it would reach 27,000 kilometers - three times the length of the Brazilian coast

Responsible Use of Water

Water scarcity is a serious environmental problem with increasingly severe impacts while the management of water resources isn´t reviewed by the countries.

Currently, over one billion people lack access to adequate clean water to meet their basic daily needs.

According to UN studies, in 20 years there will be no water available for 60% of world population

Selective Waste Collection

In 2014, Brazil approved after two decades of discussions, the National Policy on Solid Waste (PNRS). The purpose is to organize the way the country treats the waste, encouraging recycling and sustainability. Following the approval of the policy, a National Plan for Solid Waste was developed. The policy highlights three main points:

! All waste dumps will be closed by the end of 2014;

! Only non-recyclable waste will be sent to landfills;

! Preparation of solid waste plans by municipalities.

Behavior change

Urban Mobility

Carmakers are concerned about the changes in major urban centers and especially with behavior change of adolescents who do not see the first car as a priority

Responsible Use of Water

Water-intensive companies have been paying particular attention to climate change and scarcity problem. In addition, the taxation of water will represent sunstantial impact on business costs

Selective Waste Collection

Major producers of semi-durable consumer goods are adapting to the new rules. Reverse logistics will impact production costs of these goods (companies will be responsible for collecting recyclable packaging).

Investment process

Suppliers Frequent meetings with supply chain (including non-listed players), degree of integration and bargaining power

Substitutes Understanding of consumer habits and trends. Economic analysis of disposal income and consumer leverage

Customers Deep understanding of distribution channels, brand equity and price sensitivity of clients.

New Entrants Analysis of entry barriers, study of available infrastructure and meetings with newcomers (pre-IPO)

Competitive Environment and

ESG Factors Integrated in the investment

process, ESG factors are part of traditional valuation and

momentum analysis

ESG Integration

Introduction to SRI at Itaú Asset Management

Coverage and Activities

!  80% of IBOVESPA and 90% of ISE

coverage

!  Engagement with companies

!  Active Ownership

!  Broker incentives

!  First SRI exclusion Fund - 2004

!  PRI signatory – 2008

!  Proxy Voting ESG - 2009

!  ESG Equities Methodology – 2010

!  ESG Integration White Paper - 2013

!  ESG Fixed Income Methodology - 2014

SRI History

!  SRI Equities PM

!  SRI Analyst

Team

ESG Integration Method - Equities

3rd Stage Valuation

Company fair price

adjustment

Calculation of ESG

issues NPV

2nd Stage Quantification

1st Stage Research

Cross-sector dimensions

Company performance

Sector specific Value drivers

!  Revenues !  Costs !  Expenses !  Provisions !  Capex !  Cost of

Capital

Cross-sector dimensions

Potential cash flow impact

Industry relevance

Management capabilities

Information availability

Environmental dimensions

Stakeholders dimensions

Company

Risks and opportunities

Operational

Productivity

Costs

Extraordinary Expenses

Investiments

Legal / Regulatory

Fines

Investiments

Business interruption

Market

Premium price

New markets

Reputational

Intangilble assets

Cost of capital

Environmental dimensions

Stakeholders dimensions

Company

Example 1 – Construction Dimension: Labor relations

Risk Type Metric High relevance

Low relevance

Short Term Long Term

Operational Loss of

efficiency due to low morale

Reputational

Deteriorated customer

retention due to work conditions

Indenizações por situações degradantes

(trabalho escravo, infantil)

Sanctions associated with

health and security

problemas

Legal

-20% -15% -10% -5% 0% Company A Company B Company C Company D Company E Company F

-17,38%

- 0,14% - 0,91% -0,35% - 0,00% - 0,00%

The main risks of this dimension are legal. In addition, operational risks from low employee morale are analyzed. Reputational risks associated with reactions that stakeholders may have when faced with serious labor issues.

Example 2 – Food Industry Dimension: Water, Energy and Raw Materials

Assuming that the pricing of water resources is imminent in the environmental agenda, there are regulatory and operational risks related to the rising cost of water in the food industry chain

High relevance

Low relevance

Sort term Long Term

Increase in the value chain costs

due to water pricing

Increase in direct costs due to water

pricing

Operational

Risk Type Metric

-10% -8% -4% -2% 0% Company A Company B Company C

-4,14%

- 0,58%

-5,27%

Example 3 - Telecom

This dimension encompasses several value drivers: quality of services and care, opportunities in the bottom of the pyramid, and mobile education and loss of revenue from clandestine mobile lines. All evaluated carriers have poor performance in quality of services and care. Yet, there are many opportunities available to give this dimension a positive final value.

High relevance

Low relevance

Short term Long term

0,00% 1,00% 2,00% 3,00% 4,00%

Company A Company B Company C

-0,5%

3,06% 3,21%

Suspension of sales for poor quality of

services

Fines for poor quality of services and care

Legal

Market

Opportunities in mobile education and

BoP

Loss of revenue from clandestine mobile

lines

Risk Type Metric

Dimension: Client

Water Scarcity Risk: Charging for Water Use

Currently, like other developed countries, some river basins already charge for the use of raw materials

!  Billing of R$ 0,05 per m3 of water to assess the impact of adopting the new policy for all basins may have on economic activity.

!  We estimate that within 10 years water will be charged and will impact business costs.

No Impact 0% of Companies Market Cap •  Banks •  Energy - Transmission •  Road Concessions •  Telecom •  Insurance •  Diagnostic Laboratories •  Consumer Goods •  Cosmetics

Low and Medium Impact 0,1% to 1,5% of Companies Market Caps •  Beverages •  Construction •  Petrochemical •  Pulp & Paper •  Aviation •  Capital Goods •  Banco do Brasil – Rural credit portfolio •  Energy - Distribution

Alto impacto Acima de 1,4% do Market Cap das Companys •  Water Supply and Sanitation •  Mining •  Steel •  Food •  Energy - Generation

Ranking of Evaluated Sectors

Challenges for Implementation

•  Integration and analysis of non-financial issues requires additional skills

and continuous learning

•  Converto ESG issues to opportunities and not limit them to risk

management

•  Change the timehorizon - short-term view of reports vs long-term view of

environmental issues

•  Risks materialize so abruptly as gradually

Thank you!

Maria Eugenia Sosa Taborda

sustentabilidade@itau-unibanco.com.br