Investment Management Inc.

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Investment Management Inc.

U of T October, 2004
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Background on Acuity

• Acuity was founded in 1990.
• Currently manage 3.5B on behalf of institutional
  and retail clients
• Acuitys management team has a mix of science and
  business backgrounds - provided a basis for
  innovation in approaches that incorporate
  sustainability criteria for retail and
  institutional clients.
• Acuity is currently
• advisor to United Nations Environment Program
  financial initiative
• advisor to Environment Canadas Capital Markets
  initiative
• and recipient of Globe Foundations inaugural
  Capital Markets award for Sustainable Investment
  and Banking.

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Environmental issues can have a material impact
on equity valuations
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Materiality

• UN Report developed by an advisory group
  composed of 12 asset managers including
  Citigroup, Group AMA, Storebrand, Nikko Asset
  Management, Acuity
• Based on research from 9 brokerage firms
  (including Goldman Sachs, UBS, Deutsche Bank) in
  a number of sectors
• No ethical bias given to the sell-side analysts
• General conclusion
• Environmental, social and corporate governance
  issues affect long-term shareholder value. In
  some cases those effects may be profound.

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Materiality

• Dresdner Kleinwort Wasserstein report on European
  energy utilities found a significant positive
  impact for most companies due to creation of a
  European carbon emissions trading market.
• The relative impact varied from under 5 to as
  high as 20 depending on the companys technology
  positioning and ability to pass through costs

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Materiality

• Goldman Sachs European Oil and Gas team
  concluded
• The companies with the best social and
  environmental track record, as measured by the
  GSEES Index, dominate the next generation legacy
  assets. In an increasingly complex world, we
  believe such issues are part of the relative
  quality of overall management performance needed
  to compete successfully.

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The magnitude of the impact is very issue and
sector specific and can be overstated by
activists and understated by management
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Magnitude Kyoto and the Oil Sands

• It doesnt matter if we agree with the
  approachfocus on identifying sectors and
  businesses that are winners and losers
• Canadas oil sands will be significant source of
  oil by 2005, the oil sands will account for 50
  of Canadas oil production.
• Oil sands production requires 3 to 5 times as
  much energy as conventional wells
• Higher energy increases the amount of carbon
  dioxide emissions.
• Some oil sands companies have been vocal in
  opposition to Kyoto citing significant negative
  impact
• Fact Energy only account for approximately 10
  of total oil sands production costs
• Buying carbon credits to offset excess emissions
  will only increase production costs by fifteen to
  forty cents per barrel.

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Magnitude Kyoto in the Oil Sands

• Kyoto does not have a material financial impact
  on oil sands players in the short term much
  more important issues are labour costs,
  processing efficiency and commodity prices.
• Over the longer term the Kyoto standards will
  become more onerous.
• Determine which companies are better positioned
• Companies with technological advantages/disadvanta
  ges
• Petro Canada - least upgrading (MacKay River
  project)
• Nexen - use of syngas (Long Lake project)
• Or an effective strategic approach companies
  that are working to reduce their carbon liability
  through offsetting activities
• Suncor emissions trading, wind investments
• Encana fighting a political process

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Sulphur Theme

• Certain environmental factors have multi-sector
  implications
• Example sulphur emissions
• Environment Canada (and other regulators around
  the world) are moving to limit sulphur emissions
  to mitigate public health concerns
• Coal plants (Energy sector)
• Gas and diesel vehicles and trucks (Automotive
  sector)
• Refiners (Oil and Gas)
• Regulatory limits are being phased in on an
  incremental basis
• Corporate expenditures to reduce sulphur
  emissions are massive
• Company positioning on this issue can drive short
  and long term share price movement

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Sulphur Theme

• Refining focus on refiners with processing
  capacity for high sulphur crude Valero
• Technologies / Services focus on companies well
  positioned to benefit from sulphur emission
  reduction capital expenditures Chicago Bridge
  and Iron
• Coal Mining focus on low sulphur coal deposits
  Arch Coal
• Power Generation focus on renewable power
  sources, natural gas Canadian Hydro Developers
• Automotive focus on companies with advantages in
  fuel efficiency - Honda

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Ethical' bias has prevented a full appreciation
of these issues in Canada amongst institutional
investors
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Ethical Bias Fiduciary Context

• Environmental issues are not merely ethical
  concerns and cannot simply be disregarded within
  the investment process
• Environmental issues are generally
  underemphasized by analysts / PMs / trustees /
  securities regulators
• Sustainable, Green, Clean, Social Values
  are value-laden concepts often used in the
  retail market
• These factors can contribute significantly to
  relative performance within most resource sectors
  (which compose 37 of TSX)

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The materiality of environmental factors is the
key issue for investors but is open to
considerable interpretation
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Reality of Disclosure and Analysis

• Disclosure
• Yale University team examined disclosures of
  material environmental liabilities in the metals
  and mining industry in North America
• serious flaws in corporate disclosure of
  environmental information prior to and during
  events which resulted in significant share price
  deterioration.
• Disclosures of environmental and social risks
  appear to be below the level of diligence that is
  attributed to other factors.
• No evidence of companies being challenged
  regarding these issues companys story accepted
• Lack of emphasis is substantiated by other
  studies / initiatives
• Environment Canada / CEC study
• Analysis
• Uncertainty on how to deal with these issues -
  training, regulatory guidance needed

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Acuitys Approach

• Principle 1 Determine the investment impact
• Measure the impact where possible
  environmental factors represent another set of
  criteria more information to support investment
  decisions
• Interpret the qualitative impact what is the
  likely public / market reaction to these issue
  reputation, regulatory approvals etc..
• Principle 2 Determine the Portfolio Impact
• There will winners and losers pick the winners.
  
• Principle 3 Relegate ethical debates to the
  background
• Not a question of right or wrong but rather
  whether the issue has a material impact on the
  valuation of the security in question