The Best of Class Approach to Environmentally Responsible Investing Jonathan Naimon President Light

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The Best of Class Approach to Environmentally
Responsible Investing Jonathan
NaimonPresidentLight Green AdvisorsNew
England Association of State TreasurersBoston,
MAAugust 23, 2004

• Light Green Advisors, LLC
• 2940 Westlake Avenue N. Suite 300
• Seattle, WA 98109 USA
• Tel [phone]
• Fax [phone] www.lightgreen.com

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.
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Agenda

• About LGA
• Best of Class Approach to Environmental Investing
• LGA Eco Performance Portfolio
• LGA Research
• Climate Change
• Future of Best of Class Investing
• Appendix

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About Light Green Advisors (LGA)

• LGA is a Seattle-based, SEC-registered specialist
  asset manager that has developed and manages a
  series of best-of-class investment products that
  utilize environmental information as a source of
  financial value.
• Institutional client base (primarily
  foundations/endowments) in North America and
  Europe
• Distribution partners include Citigroup, EFG Bank
  Group, Wachovia Securities, and Wells Fargo

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Environment Shareholder 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
• Employee turnover
• Accounting irregularities

• Efficiency
• Lower environmental costs
• Reduced emissions
• Efficient resource utilization
• Responsible management
• Consistent earnings

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Environmental Best of Class Examples

• Global Public Equity
• Storebrand Principle Fund (1996)
• LGA-EFG Global Eco Index series (1998)
• Sustainable Asset Management (1999)
• Global Private Equity
• Global Environment Fund (1990)
• US Small Cap Growth
• Winslow Green Growth (1995)
• US Large Cap
• LGA First Trust Environmental Leadership Trust
  (1999)
• LGA Eco Performance Portfolio (2000)

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SRI and ERI Distinctions

• SRI
• Starting Point
• Values ethics
• Criteria
• Social environmental
• Methodology
• Qualitative
• Industry Exclusion
• Example Defense

• ERI
• Starting Point
• Economic efficiency
• Criteria
• Environmental
• Methodology
• Quantitative
• No exclusions

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Eco Performance Portfolio Strategy

• Designed to provide investors with a diversified
  large cap core allocation that is composed of 80
  best-of-class SP 500 companies in every sector
  of the economy
• Outperform SP 500 benchmark without making tacit
  sector and style bets like most SRI funds
• Demonstrate that it is possible to utilize
  environmental information in a disciplined way as
  a source of investment value

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LGA Investment Process

• Acquire corporate environmental and financial
  information
• Quantitative (Eco-Metric) analysis
• Qualitative review
• Portfolio creation
• Risk management
• Review and refresh portfolio

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LGA Eco Performance Portfolio
Annual Returns (gross) 2004 YTD returns shown
through 6/30/2004 Source Light Green Advisors,
LLC
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Excess Return
Cumulative excess return compares LGA portfolio
performance (gross) with the SP 500 benchmark
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Sources of Excess Return by Sector(Eco
Performance Portfolio 12/31/99- 6/30/2004)

• Utilities
• Industrials
• Energy
• Health Care
• Consumer Staples
• Telecom
• Consumer Discretionary
• Information Technology
• Materials
• Financials

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Manager Statistics
Source LGA based upon data extracted from
Factset 08/09/2004
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Research Alternative Strategies

• Can a modest environmental alpha be enhanced
  through use of more sophisticated risk
  management?
• Long-Short portfolio created using LGA return
  model and the APT risk model
• Simulation conducted by APT over same period as
  long-only portfolio live track record
• Portfolio optimized on same dates as Eco
  Performance Portfolio trades to avoid look
  ahead bias
• Historical APT models from LGA trade dates used
  to avoid look ahead bias
• 45 total positions, maximum 20 short position,
  5 maximum individual position
• Simulations do not reflect actual investment
  results or include provision for trading
  commissions, management fees, or taxes.

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LGA Long Short Simulation Results
Source APT, based upon LGA and CSFB Tremont
Indices. Data from Hedge Index
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Research Earnings Restatements

• Firms that serially restate their earnings are
  not meeting one of their basic responsibilities
  to investors. LGA is expanding its efforts to
  probe a small set of governance issues.
• LGA research suggests that firms with worse
  Eco-Metrics scores tend to have more frequent
  earnings restatements than their peers in the
  following industries

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Climate Change Challenge

• At the same time that many fossil fuel firms
  have spent lavish sums on television and print
  advertisements denying the need for strong
  international action to address climate change,
  one energy giant, ???? , has emerged as the
  world leader in renewable energy investment
• -John Topping, President
• Climate Institute

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Research Caveat

• Some top rated companies even climate change
  leaders - gloss over financial reporting and
  corporate governance issues that are vital to
  fiduciaries
• Enron
• Shell
• Halliburton
• Astropower
• Key research challenge for asset managers is
  using research to develop metrics that are
  related to shareholder return during the
  investment time frame
• Climate change is an example of an environmental
  challenge with clear science but uncertain
  economics

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Future of Best-of-Class Investing

• U.S. plan sponsors will begin to allocate more
  money to best of class environmental leadership
  strategies since they will meet highest fiduciary
  standards
• More institutional, non-SRI managers will
  discover the virtues of the best-of-class
  environmental leadership (ERI) approach
• A wider variety of ERI products, including
  alternative investments
• Better, more quantitative research products for
  evaluating corporate environmental and social
  responsibility information
• IRRC, ISS, Innovest, KLD, TruCost
• Improving SEC disclosure will permit a higher
  level of quantification
• Significantly greater impact on corporate
  behavior as more money flows into true best of
  class strategies

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Appendix Resources

• Plan Sponsor Programs
• California Green Wave Initiative
• http//www.treasurer.ca.gov/news/greenwave.htm
• Economic Rationale
• Light Green Advisors published research summary
• http//lightgreen.com/research.htm
• Plan Sponsor, Money Manager, and Consultant
  Responsibilities
• UK Pensions Self Assessment Tool
• http//www. uksif.org/Z/Z/Z/lib/2002/files/07/jp-u
  kpf-do/ukpf2002-justpens-appxb.pdf