Title: CONFIDENTIAL Innovest Strategic Value Advisors' Inc' Uncovering Hidden Value Potential for Strategic
1Environmental Performance A Financial Sector
Perspective Performance Track 2004
Conference Baltimore, MD, April 21, 2004
Hewson Baltzell President 4 Times Square, 3rd
Floor New York, NY 10029 United States Tel
212-421-2000 Fax 212-421-9663 hbaltzell_at_innovestg
roup.com
www.innovestgroup.com
2Outline
- What is Innovest?
- What do we do?
- Is Performance Track relevant to our work?
- Who uses our ratings and how do they use them?
- Are there financial rewards for Performance Track
companies?
3Company Overview
- Background
- Specialist investment research provider,focusing
on non-traditional drivers of investment risk and
returns. Leading indicators of financial
performance and overall management quality
include companies environmental, social, and
governance performance, all factors of growing
importance. - Coverage universe of over 1400 global companies
in over 55 sectors - Founded in 1995 and has since grown to
approximately 40 professionals - Offices in London, New York, Toronto, and Paris,
clients in 20 countries - Chairman was former Chief Investment Officer of
TIAA-CREF, one of the largest pension funds in
North America - Strategic investors include ABP, largest pension
fund in Europe - Serves both mainstream and SRI investment clients
- 800 million under structured sub-advisory
mandates
4 Innovest Ratings
What we do we rate companies based on their
environmental and sustainability performance
5Is Performance Track Relevant to Our Work?
- We love hard data, which is not easy to get
- Very good in some sectors
- Typically spotty in many
- So, we look for proxies of good performance
- And we look for third party information that we
can use as a check against what the companies
provide in their own information - Performance Track is an excellent third party
data point - When using Performance Track as a data source, we
would rate companies based on of facilities
which are in the program
6 Rating Model
Overview of Sector Analyst reviews general
information on the sector which is being
analyzed Analyst determines major risks and
opportunities of the sector, which will
determine the focus of the analysis
1
Collection of Data From Companies - Annual
Reports, 10Ks, Environmental Reports,
websites From Government EPA data, DOE data,
other govt data From NGOs, other research
organizations, and many other sources
2
Preliminary Work on Rating Matrix Analyst fills
in data and scores each of 60 factors in the
rating matrix for each company in a sector
3
Company Interview Analyst interviews each
company, honing in on questions resulting from
preliminary analysis
4
Completion of Rating Matrix Analyst fills in data
and scores each of 60 factors in the rating
matrix for each company in a sector
5
Reality Check Analyst defends final ratings in
front of MD of Research or CEO
6
7 Rating Model
Preliminary Work on Rating Matrix
3
Major Categories of the Rating Model (many of
these also have sub-categories)
8 Rating Model
Preliminary Work on Rating Matrix Analyst fills
in rating matrix with quantitative and
qualitative data from many sources
3
9 Rating Model
Preliminary Work on Rating Matrix Analyst reviews
rating categories and weights, modifying as
necessary to reflect data availability and
industry specific issues
3
10A Self-Selected Group of Over-AchieversRatings
of Performance Track Members
Others rated BBB or below will remain nameless
11Who uses our ratings and how do they use them?
- Clients some of the largest institutions in the
world (see client list) - Many types of institutions
- Money managers
- Pension funds, both public and private
- Banks
- Investment banks
- Many financial categories
- Insurance
- Debt
- Equity
- Conclusion Increasing influence of these ratings
12 Partial Client List
Innovest investment research has been used by
- IBK Capital Corp.
- ING Investment Management
- Insight Investment Mgmt (HBOS Group)
- Integral Development AM (Credit Lyonnais)
- Lombard Odier Cie
- MMA -Praxis
- Neuberger Berman (Lehman Brothers)
- Prado Epargne
- Rockefeller Co.
- Schroders Investment Management
- Sogéposte
- State Street Global Advisors
- T. Rowe Price
- Threadneedle Asset Management (American Express)
- UBS Investment Bank
- Universities Superannuation Scheme
- Wellington Management
- World Bank
- Financial Institutions
- ABN-AMRO
- ABP Investments
- Alliance Capital Management
- Baillie Gifford Co.
- Bank Julius Baer
- Bank Sarasin
- BNP Paribas
- BP Investment Management
- Brown Brothers Harriman
- Capital Guardian
- Cazenove Fund Management
- Collins Stewart (CI) Ltd.
- Daiwa Securities
- Dreyfus Investment Advisors
- Frontier Capital Management
- Green Cay Asset Management
- Glenmede Trust
- Hermes Pensions Management (British Telecom
Pension)
13 Partial Client List
Innovest investment research has been used by
- Advisory Firms
- Arthur D. Little
- Booz-Allen Hamilton
- Cambridge Associates
- Data Systems Solutions
- Deloitte Touche
- KPMG
- Marsh Risk Consulting
- NTT Data Institute - Japan
- PricewaterhouseCoopers
- Not-For-Profit Organizations and Government
- ADEME - Agency for Environment and Energy
Management (French Government) - Carbon Disclosure Project
- Central Finance Board, Methodist Church
- CERES
- Contra Costa County Employees Retirement Assoc.
- England Wales Environment Agency
- Environment Canada
- F. B. Heron Foundation
- Greenpeace International
- Guardians of New Zealand Superannuation
- Heinz Endowments
- Natural Resources Canada
- New Zealand Government Superannuation Fund
- NWF National Wildlife Federation
- United Nations Environment Program
- US Department of Energy
- US Environmental Protection Agency
- WWF World Wide Fund for Nature
14Products in which Innovest research is used
The Risk/Return Continuum
Long/Short Hedge Fundse.g. Green Cay
HIGH
Private Equity Funds, e.g. Carbon, Renewables,
Forestry
Active Equities e.g. T.Rowe Price Credit
Lyonnais
Return
Enhanced Index Equities e.g. ABP, ING, SSgA
Enhanced CDOs not used yet
Debt e.g. ABN AMRO
HIGH
Risk
15Are there financial rewards for Performance Track
companies?
- Other than internal cost savings that might
accrue, we do not know of a direct financial
reward currently - Substantial evidence of indirect benefits of
eco-efficiency as seen by stock price performance - Performance of Innovest client funds
- Innovest simulation
- Erasmus/Maastrecht study
16Sub-Advisory Services
Results So Far . . .
17Stock Portfolio Simulation
1.30
18Time Series Analysis
- The Eco-Efficiency Premium in the U.S. Equity
Market - Study by Erasmus University and Maastricht
University, The Netherlands, October 2003 - Constructed 2 portfolios, one consisting of
high-ranked companies and the other of low-ranked
companies (U.S. companies only) - Used a best-in-class approach on a sector by
sector basis and remained sector-neutral overall - Ran portfolios from May 1997 to December 2002
- Results
- Best-in-class portfolio had annual return of
5.76 - Worst-in-class portfolio had annual return of
0.84 - Cumulative differential over the test period was
about 30 - Conclusion Eco-efficient companies as a group
are already being rewarded in the marketplace
19Are there financial rewards for Performance Track
companies?
- What direct financial rewards could be used?
- Lower cost of capital (2 components - debt and
equity) - Lower interest rates on debt
- Possible if the borrower is perceived to be a
lower risk due to Performance Track participation - Could be initiated by a forward-thinking lender
- Lower equity premium
- Equity premium could be lower if market
participants viewed the company as less risky - In effect, this is broadly already happening per
our research - This is determined by the market, not by a
specific firm, so it would need to develop over
time - Lower collateral requirements
- As with interest rates, could be implemented by
lender
20For Further Information
Hewson Baltzell, President Four Times Square,
3rd Floor New York, NY 10036 Direct Line
212-421-2000 x 215 Fax 212-421-9663 Email
hbaltzell_at_innovestgroup.com
www.innovestgroup.com