www.innovestgroup.com

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Maximizing Returns through Leading-Edge
Management Quality and Intangible
Value Assessments National Association of State
Treasurers Boston, MA August 23, 2004
Frank Dixon Managing Director 4 Times Square, 3rd
Floor New York, N.Y. 10036 646 237
0220 fdixon_at_innovestgroup.com
www.innovestgroup.com
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Socially-Responsible Investing

• Three categories -- Investing, Shareholder
  Advocacy, Community-Based Investing
• Evolution from negative to positive screening
• Evolving concept of fiduciary responsibility
• Environmental and social issues are financially
  relevant
• Prudency dictates that conventional financial
  analysis incorporate them

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SRI in the U.S.

• SRI assets total 2.2 trillion in the U.S.,
  representing more than one out of every nine
  dollars under professional management.
• Since 1995, SRI assets have grown 40 faster than
  than all professionally managed investment assets
  in the U.S.
• 75 of SRI funds with over 100 million in assets
  earned top scores from Morningstar and/or Lipper
  Analytical Services in 2003.

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Changing Viewpoint

• Most academic and business studies show a
  positive correlation between environmental and
  stock market performance
• Correlation exists because environmental
  performance is an excellent proxy for management
  quality
• Management quality is a leading determinate of
  stock market performance

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Changing Viewpoint

• Environment and social issues represent one of
  the most complex challenges facing management
• High level of technical, market and regulatory
  uncertainty
• Many complex issues, stakeholders and
  non-financial measures to address
• Success in this high complexity area implies
  ability to excel in other business areas, and
  thereby earn superior returns

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Sustainability IssuesImpact on the Bottom Line

• Aventis Starlink Corn
• Union Carbide Bhopal
• Exxon Valdez
• Sandoz Pollution of the Rhine
• Royal Dutch/Shell Brent Spar, Nigeria
• Nike Sweatshops
• Monsanto Genetically Modified Foods
• Ford Bridgestone tire recall on Explorer
• Norsk Hydro Utkal Project in India
• ABB - Bakkun dam in Malaysia
• GE PCB in the Hudson River
• Elf Aquitaine Erika tanker wreckage

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The Iceberg Balance Sheet

• Four Key Intangible Value Drivers

Financial Capital

• Stakeholder Capital
• Labour relations
• Regulators Policymakers
• Local communities/NGOs
• Customer relationships
• Alliance partners

• Sustainable Governance
• Strategic scanning capability
• Agility/adaptation
• Performance indicators/monitoring
• International best practice

• Human Capital
• Recruitment retention strategies
• Employee motivation
• Innovation capacity
• Knowledge Development Dissemination
• Health Safety
• Progressive workplace practices

• Eco Value
• New business opportunities
• Cost reduction
• Process efficiencies
• Innovation effect

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SRI Market Drivers

• Pension fund laws -- eight European countries
  require consideration of environmental and social
  issues
• Growing distrust of accounting numbers and
  traditional financial analysis
• Increasing regulations around the world
• Demographics -- Baby Boomers interested in SRI
• Growing corporate awareness of competitive
  benefits
• Evolving interpretation of fiduciary
  responsibility

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Deteriorating Environmental Conditions

• Every major environmental system is in decline
  (World Watch Institute, State of the World)
• 50 of Forests cleared
• 50 of wetlands gone
• Accelerating biodiversity losses
• Global warming exacerbated by greenhouse gas
  emissions
• Topsoil erosion, salination of soil, and
  acquifer depletion ongoing
• Every major ocean fishery at its limit or in
  decline
• Ozone layer thinning ongoing
• Coral reefs in decline

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Major Obstacles to Providing Accurate Analysis

• High Complexity -- Identifying, quantifying and
  attributing environmental impacts is difficult
• Poor Data Quality Data is often lagged,
  missing, inaccurate and biased

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Company 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.
• 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

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Eco Value 21Environmental Research
Financial Risk Management Balance Sheet
Strength Insurance Cover Adequacy
Strategic Management Capacity Corporate
Governance Capability Env Management Systems Env
Audit Accounting Capacity Social Issues
Performance Stakeholder Relations
Historical Contingent Liabilities Superfund State
Hazardous Waste RCRA Toxic Torts
EV21
Sustainable Profit Opportunities Profit
Potential from Environment Social Industry
Trends
Operating Risk Exposure Toxic Emissions Product
Risk Liabilities Hazardous Waste Disposal Waste
Discharges Supply Chain Management
Sustainability Risk Energy Efficiency Resource
Use Product Life Cycle Recycling Shifts in
Consumer Values Social Licence to Operate
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Intangible Value AssessmentSocial Research
Sustainable Governance Strategic
Scanning Capability Agility/Adaptability Performan
ce indicators/monitoring/reporting International
best practice
Emerging Markets Economic Development Human
Rights Oppressive Regimes
IVA
Stakeholder Capital Labour relations Regulators
and Policymakers Local communities
NGOs Customer relationships Supply
Chain Partnerships/alliances
Human Capital Recruitment/retention
strategies Employee Motivation Innovation
Capacity Knowledge Development Dissemination Hea
lth Safety Progressive workplace practices
Products Services Intellectual Capital Product
Safety
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Methodology for EV21 and IVA Company Reports

• Overview of Sector
• Analyst reviews general information of the
  sector which is being analyzed
• Analyst determines major competitive risks and
  opportunities of the sector, which will determine
  the focus of the analysis

• Collection of Data
• From Companies Annual reports, Securities
  filings, Environmental and Sustainability
  reports, websites
• From government U.S. EPA data, DOE data, U.K.,
  EU, and other govt data
• From NGOs, industry associations, specialist
  industry publications, other research
  organizations, and ongoing media search engines

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• Preliminary Work on Matrix
• Analyst fills in data and scores on each of 100
  factors in the rating matrix for each company
  sector. Factors receive industry-specific
  weightings, based on performance attribution
  analysis of actual stock returns

• Company Interview
• Analyst interviews each company, honing in on
  questions resulting from preliminary analysis

• Completion of Rating Matrix
• Analyst fills in data and scores each of 100
  factors in the rating matrix for each company in
  a sector

• Quality Control Review
• Analyst defends final rating to MD of Research

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Final Rating Relative to Industry Peers
1
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Alpha Generation
Mining Sector
Steel Sector
Mining Sector Top Half Outperforms by 23
Steel Sector Top Half Outperforms by 38
Semiconductor Sector
Petroleum Sector
Petroleum Sector Top Half Outperforms by 16
Semiconductor Sector Top Half Outperforms by 27
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The Innovest Overlay Can Add Value Across a
Number of Different Investment Styles U.S.
Public Pension Fund Actual Plus Portfolio
Simulation, full year March 02 March 03
ACTUAL
1.50
All stocks identical to underlying portfolios
only the weights were changed
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Innovest Partial Client List

• ABN-AMRO Bank
• ABN-AMRO Asset Management
• ABF Capital
• ABP Investments
• Aeltus Investment Management (ING)
• Bank Sarasin
• BNP Paripas
• BP Pension
• Brown Brothers Harriman
• CalPERS
• Contra Costa County Employees Retirement
  Association
• Daiwa Securities
• Dreyfus Investment Advisors
• Friends, Ivory Sime
• Frontier Capital Management
• Glenmede Trust

• Hermes Pensions Management Ltd.
• IBK Capital Corp.
• John A. Levin Co.
• Legg Mason Funds Management
• Lombard Odier Cie
• Mellon Capital Management
• Mellon Equity
• Neuberger Berman
• Rockefeller Co.
• Schroders Investment Management
• Societe Generale
• SNS Asset Management
• Swiss RE Asset Management
• State Street Global Advisors
• T. Rowe Price
• Wellington Management
• World Bank

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SRI - Two Key Points

• Environmental and social issues are highly
  financially relevant. Taking them into account
  lowers financial risk and increases upside
  potential. Failing to consider these issues is
  imprudent as it would be imprudent to not
  consider any other financially relevant issue.
• It is illogical and incorrect to say that SRI
  underperforms. The truth about SRI is exactly
  same as in the overall equity area -- some funds
  outperform and some underperform. The key is
  fund construction methodology.