Title: Contact: Jon Naimon, CEO
1- 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
Integrating Environmental Considerations Into
Investment Decisions Opportunities, Constraints
Case Studies The National Association of
State Auditors, Comptrollers, and
Treasurers NASACT 2008 Chicago, IL
0
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.
2Agenda
- 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
3About Light Green Advisors (LGA)
- Best in class asset management (all economic
sectors) - Investment advisory (environmental focus)
- Specialist with over 100 years combined experience
4Best 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 SP 500, by almost 6 in 2008 - 1.5 per year annualized performance advantage
relative to SP 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
5Investment 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
6The 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
7Recent 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
8Differences 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
9Climate 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 -
10Investment 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
11Investment 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
12Planning Issues for Public Funds and Trustees
- 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
13Fiduciary Constraints for Public Fund Trustees
- 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
14Case 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
15Case 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
16What 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?
17Summary 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 SP 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
18Appendix
- About the LGA Eco Performance Portfolio
- Additional investor resources
- Responsible Investor article
- Environmental Finance article
19LGA 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
20Investment Thesis - Environment Share Value
Corporate environmental leadership conserves
capital and improves cash flow, as well as
reducing litigation, regulatory, and reputation
risk
- Risk
- Litigation risk
- Regulatory risk
- Reputation risk
- Accounting irregularities
- Efficiency
- Lower environmental costs
- More efficient resource utilization
- Responsible management
- Consistent earnings
21Alternate 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
22LGA integrates many metrics for corporate
environmental performance into an E-score.
- 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
23LGA Investment Process
Research inputs - Compustat - SP, Multex -
Risk Metrics, Trucost - Govt. agencies -
Company interviews
Identify top 50 of firms in each industry based
on Eco-Metrics comparison
24Eco Performance Portfolio Since Inception Vs.
SP 500 , Russell 1000, and KLD 400 Benchmarks(
25Eco Performance Portfolio and Traditional
Benchmarks(12/31/1999 - 6/30/2008)
Month Quarter Year Latest 1 Latest 3 Latest 5 Inception
To Date To Date To Date Year Year Year To Date
--------- --------- --------- --------- --------- --------- ---------
Eco Performance Portfolio composite -5.09 2.12 -6.47 -5.02 6.48 7.98 1.54
SP 500 adjusted for dividends -8.43 -2.73 -11.92 -13.12 4.41 7.57 0.05
Russell 1000 -8.31 -1.89 -11.2 -12.36 4.81 8.22 0.63
KLD 400 -8.99 -3.83 -12.88 -15.12 2.5 5.81 -1.36
26Financial 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
27LGA 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.
28Summary
- 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 SP 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
29Additional Resources for Sustainable Investing
- Enhanced Analytics Initiative
- Company specific thematic research from EU
brokerage firms - Participation by several asset owners
- www.enhancedanalytics.com
- Innovest
- Corporate rating of extra-financial factors,
climate risk assessments - www.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 - Risk Metrics Group
- Tools for managing multiple types of market risk
- Information on social and environmental risks
from IRRC and ISS - www.riskmetrics.com