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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.
2
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

3
About Light Green Advisors (LGA)
  • Best in class asset management (all economic
    sectors)
  • Investment advisory (environmental focus)
  • Specialist with over 100 years combined experience

4
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 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

5
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

6
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

7
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

8
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

9
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

10
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

11
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

12
Planning 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

13
Fiduciary 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

14
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

15
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

16
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?

17
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 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

18
Appendix
  • About the LGA Eco Performance Portfolio
  • Additional investor resources
  • Responsible Investor article
  • Environmental Finance article

19
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

20
Investment 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

21
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

22
LGA 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

23
LGA 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
24
Eco Performance Portfolio Since Inception Vs.
SP 500 , Russell 1000, and KLD 400 Benchmarks (
25
Eco 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
26
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

27
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.

28
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 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

29
Additional 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
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