Download - Trends and Tremors in the Sustainable Investing Landscape

The New Metrics of Sustainable Business

Trends and Tremors in the Sustainable Investing Landscape

The New Metrics of Sustainable Business 2013

Paul Herman, HIP Investor, Inc.Joy Poland, Building Bridges, LLCBart Houlahan, B LabStephen J. Donofrio, CDP North AmericaBill Baue, Corporate Sustainability Architect

TrendsTremorsToolsCONFIDENTIAL 2006-2013 HIP Investor Inc. 2

80% of Market Value = Intangiblewww.AgeOfVolatility.com

2006-2013 HIP Investor Inc. 383%68%32%20%20%17%32%68%80%80%

2006-2013 HIP Investor Inc. 4

Ocean Tomo Patent ETF (OTP)Intangibles Index Beats S&P500 (12/29/06 to 3/05/12)

+7.7%-3.9%

FUTURERISK, UPSIDECONFIDENTIAL 2006-2013 HIP Investor Inc. 5

ESG in Each Asset Class StillRipe for Sustainability PortfoliosCONFIDENTIAL 2006-2013 HIP Investor Inc. 6Source: Mercer ratings

How Much Carbon Do You Own?CONFIDENTIAL 2006-2013 HIP Investor Inc. 7Fund Tons of CO2 = 2602Fund Tons of CO2 = 778

Note 2 Values as of 6/30/2013

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IMPACT-RATED MUNI BONDSCity of Seattle = 72%15 of possible 25 WEALTH points forMedian IncomeAffordability of HousingVacant HousesUnemploymentPoverty

24 of possible 25 EARTH points forCommuting Method and Duration17 of possible 25 HEALTH points forObesity/DiabetesCrime RateGraduation RateHealth Insurance Coverage75%16 of possible 25 EQUALITY points for Gender Diversity & Ethnicity Reflected in Business Ownership72%

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IMPACT-RATED BONDSCONFIDENTIAL 2006-2013 HIP Investor Inc. 9Seattle Public Utilities Wastewater = 59%15 of possible 20 HEALTH points forSewer Overflow management34 of possible 60 EARTH points for Treatment techniquesSeparated pipesBiosolids practices5 of possible 10TRUST points for3rd Party certifications59%5 of possible 10 EQUALITY points for Gender diversity on the board and executive management

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CONFIDENTIAL 2006-2013 HIP Investor Inc. 10

* Past 5 years, as of 8/31/2013; HIP Scores (2011/12)Source: XYZ 401(k); Morningstar; HIP Investor ScoresTOP 50 Funds (ETFs)RETURNS: Annualized 5- Yr Returns*RISK Standard Deviation of 5-Year Returns*VALUE: size of circles relative to $ Invested in FundIMPACT: color of circles: Green = higher IMPACTYellow = medium IMPACTRed = lower IMPACT


RETURNS: Annualized 5- Yr Returns*RISK Standard Deviation of 5-Year Returns*VALUE: size of circles relative to $ Invested in Fund

IMPACT: color of circles: Green = higher IMPACTYellow = medium IMPACTRed = lower IMPACT* Past 5 years, as of 8/31/2013; HIP Scores (2011/12)Source: XYZ 401(k); Morningstar; HIP Investor ScoresTOP ETFsIndustry-Sector


RETURNS: Annualized 5- Yr Returns*RISK Standard Deviation of 5-Year Returns*VALUE: size of circles relative to $ Invested in Fund

IMPACT: color of circles: Green = higher IMPACTYellow = medium IMPACTRed = lower IMPACT* Past 5 years, as of 8/31/2013; HIP Scores (2011/12)Source: XYZ 401(k); Morningstar; HIP Investor ScoresTOP ETFsFixed Income


RETURNS: Annualized 5- Yr Returns*RISKStandard Deviation of 5-Year Returns*VALUE: size of circles relative to $ Invested in Fund

IMPACT: color of circles: Green = higher IMPACTYellow = medium IMPACTRed = lower IMPACT* Past 5 years, as of 8/31/2013; HIP Scores (2011/12)Source: XYZ 401(k); Morningstar; HIP Investor ScoresTOP ETFsEquities



Billion+ IMPACTMillion JOBSTrillion $ MARKETCONFIDENTIAL 2006-2013 HIP Investor Inc. 16

Building Bridges Joy PolandBuilding More Value + Profit:The Rhode Island MVP Program

17Slide 1We created a program in RI - collaboration with the RI state society of CPA's, Providence College, HIP Investor/ SNW asset Management and a group of other business thought leaders called THE MVP MORE VALUE & PROFIT PROGRAM WHOLE PREMISE TO PROGRAM BY LOOKING AT THESE INTANGIBLES, SUSTAINABILITY ISSUES, AND SUSTAINABILITY STRATEGIES WE CAN CREATE MORRE VALUE & PROFIT FOLL ALL COMPANIES BOTH PUBLIC AND PRIVATE

Tremors

Flying in the fog of False Estimates of real corporate value is a threat of planetary proportions. These can be fixed with fundamental shifts in measurement, reporting and rating companies.Allen White, (Guardian Professional) February, 2013

Answer: Bridge the GAAP

18Allen L Whiteis vice president of theTellus Institute, co-founder of the Global Reporting Initiative, and founder of theGlobal Initiative for Sustainability Ratings GOES ON TO SAY Change is happening, but not fast enough. The collective voice of enlightened business, civil society, and government is needed to accelerate this necessary transformation. The planet's, and society's, patience is not limitless.

threats like environmental costs not being not factored into the value of companies - and litigation prone industries - fines etc they are obvious threats and we all know in this room that these false estimates of value can be fixed with a shift in measurement, reporting and ratings but from our perspective the threat that we perceive to this movement and what is preventing it from changing fast enough because the is a sense of urgency with this - is the lack of understanding about the relevance of sustainability issues intangibles, new metrics etc on the privately-held business and the lack of understanding by mainstream to how these issues are directly impacting our personal lives it is our belief that these factors/issues etc AFFECT ALL BUSINESSES EVEN ORGANIZATIOONS NON-PROFITS there has to be a deeper penetration into mainstream CPAs and Financial ADVSIORS specifically ABOUT THE RELEVANCE AND THE IMPLICATIONS THAT THESE INTANGIBLES MEAN TO BUISINESS THIS CANT JUST BE ABOUT PUBLICLY-TRADED COMPANIES and Shareholders it has to be about stakeholders which is all of us

For example I see the financial institutions listed as sponsors to these types of events however on the street so to speak the average financial planner wealth advisor, that are affiliated or registered with these entities do not know what ESG stands for ? Does not know what sustainable/impact investing is? And the ones that do think they know automatically assume it is SRI socially responsible investing which is really a completely different concept - There are so many mandated venues for advisors, CPAs that they must participate in for CPE that we could be delivering this information but it is not happening

Privately held businesses AND MOST cpaS think that these issues do not pertain to them CLICK SO THE ANSWER TO US IS THAT WE HAVE TO BRIDGE THE GAAP

There is a huge disconnect between the relevance and understanding of the implications of this to the privately held business. SO FOR US THE THREATS ARE ABOUT CONNECTION COMMUNICATION OF THIS TO MAINSTREAM AND HENCE THE GENESIS OF THIS mvp PROGRAM We have to bridge the GAAP so to speak if we want to success in this movement. BRIDGE THE SECTORS AND BRIDGE THE GAP TO THE CONSUMER

we have to do a better job about educating the consumer - the consumer HAS TO BE EDUCATED ABOUT THE SYSTEMIC NATURE OF THESE issues THE CONNECTIVITY OF THESE ISSUES - and how these FALSE ESTIMATES OF VALUE AND IMPACT ARE SHOWING UP IN OUR PERSONAL LIVES

Kevin

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So this is Kevin "Kevin's Law is named in memory of 2 1/2 -year-old Kevin Kowalcyk, who died so tragically in on August 11 2001 after eating a hamburger contaminated with E. coli O157:H7. WHAT THIS LITTLE BOY AND HIS FAMILY WENT THROUGH WAS HORRIFIC no family should have to bear witness to a loved one suffering in the way that Kevin did.

The meat that Kevin ate had been produced by a subsidiary of one of Americas largest agribusinesses. In July 2000 one year before Kevins illness - this company failed USDAs Salmonella test for the second time. In December 2000, this same company had a positive random E.coli test and 1.1 million pounds of ground beef were recalled. After the recall, USDA performed another random E. coli O157:H7 test, which was negative, but then, in July 2001, an outbreak in northern Illinois and Chicago was traced back to the same offending plant. As a result, USDA performed a non-random test for E. coli O157:H7 on August 2, 2001 and this test came back positive. Finally, on August 27, 2001 after 25 days of USDA-industry negotiations the plant recalled 530,000 pounds of ground beef. The PFGE pattern (or DNA) for Kevins E. coli matched the PFGE pattern of the August 27th recalled meat

Was the intent of this company to kill kevin I doubt it what the substandard meat processing a way to cut costs and increase profits for shareholders probably however the focus solely on profits and short term value and quarterly earnings is a catalyst for these types of tragedies.Question could this company have been in one of the portfolios of Kevins parents or grandparents ? Could We be investing in companies that are creating the very challenges and painful experiences we say we wish to stop Would reporting and disclosure of these issues prevent these things from happening. The system is broke

Kevins Lawwas introduced in 2005 was proposed legislation that would have given theU.S. Department of Agriculturethe power to close down plants that produce contaminated meatThis bill never became law, as it was referred to committee but never reported on. Versions of the bill have been introduced in each subsequent Congress, but as of April 2010 have never been reported out of committee.

Corporate meat processors have and continue to lobby against Kevin's Law, arguing that it would increase the cost of food and is unnecessary. (Metric)

The Centers for Disease Control and Prevention estimate that food borne diseases cause roughly 76 million illnesses, 325,000 hospitalizations, and 5,000 deaths each year.

Everything is connected

TrendsThought-Leaders Using SI/ESG Fundamentals to Engage CPAs, Business Owners & Educators Engage the CPA Community ~ Most Trusted Advisor Engage the Business Owner (Privately-Held) ~ Valuation & Succession Planning

Engage Leaders/Job Creation ~ Knowledge-Economy $$$

Education Partners ~ Colleges & Universities

20So this whole program was borne out of a basic premise that ALL BUSINESSES ARE IMPACTED BUY THESE ISSUES ALL COMPANIES CAN BENFIT FROM THIS AND SHOULD BE ACCOUNTABLE TO THESE DISLCOSURE ISSUES AND ALL CPAS SHOULD BE DISUCSSING THIS AND ADVISORS SHOULD BE INCORPORATING THESE CONCEPTS NOW INTO THEIR DISCUSSIONS WITH CLIENTS THAT WE SHOULD BE INVOLVING AND COMMUNICATING THIS INFORMATION Engage the CPA community RISK MANAGEMENT and AUDITING FOR RISK there is a whole peripheral population the CPAs - that could be being used as a major catalyst for this movement education, momentum, & action is peripheral on the side lines Risk Management, Most Trusted Advisor, Value Add to Clients, Profit Center to Firm (AICPA/State Societies)

Engage the PH bus owner demonstrate this ESG criteria (People-Driven Business Model/Intangibles) drives profitability, bottom line and

businesses are teaching how to Operationalize these ESG concepts into a business model and quantify

Colleges and Universities are Building Sustainability Curriculums, Internships, Project-Based Learning (NetImpact.org)

Tools MVP (More Value & Profit) Program Based on People-Driven (and Planet Too) Business Model

Sustainability Scoring & Impact Ratings; 401K, Pensions (& Endowments)

Internships ~ MBAs, Sustainy Accounting: Providence College Create New, Viable Profit Centers Especially for CPAs

Community Signature ~ Environmental Literacy Programs ~ No Child Left Inside (NCLI)

21The tool we are using is the MVP Program and there are several components to it

The INTEGRATION OF THE POEPL/PLANET DRIVNE BUSINESS MODEL SUSTAINABILITY SCORING AND IMPACT RATINGS ON THE 401K the CPA is like the doctor for your 401K and pension how healthy or sick is 401K The the PC Internship utilizing MBA students to assist with this helping from a cost and time perspective Building curriculum for CPE for the CPA community AND TAKING THAT CURRICULUM AND BRINGING IT TO THE SCHOOLS AND THE EDUCATION PIECE CASE STUDY PIECE TO EXECUTE AND BUILD CURRICILUM FROM - COMPLETES ECOSYSTEM

A People-Driven Business Model ValuesHuman, Environmental, Social & Financial Capital

PROFIT-DRIVENFinancial Data:Tangibles Earning GrowthPrice/Earnings RatioReturn on EquityOperationsCash FlowRisk ManagementPEOPLE-DRIVENHuman Env Social Data: Intangibles

Health ~ Stress/Wellness Program Wealth ~ Scoring/Impact Earth ~ Energy Efficiency & Natural Resource Intensity Equality ~ Employee Engagement &Leadership Trust ~ Sustainability Reports/Community Signature Profit +People +Planet = ProsperityWhy? Intangibles Drive ValueBenefits theWhole

Building Bridges 2012 Copyright 2012 All Rights Reserved

22Integrating a people driven business model and using 5 basic core metrics taken from the HIP book simple people understand it and it basically covers all the categories that SASB is looking in great detail So we are doing an initial assessment along these 5 metrics getting our baselines and ascertaining where to start and then executing specific sustainability strategies re-assessing then linking to bottom line and performance and quantifying

Today we are going to discuss the wealth metric and the scoring and impact ratings and how to sue this as an employee engagement strategy

CONFIDENTIAL 2006-2013 HIP Investor Inc. 23401(k) Plan Funds Scored for IMPACT

23This is the KLR 401K plan all of the holdings

Another interesting piece to this is the Newberger berman has privately held companies in it with no dislcosure rerquirements

Benefits of 401(k) Plan Scoring: Engaging Employees; Attracting Top Talent; Discovering How to Quantify Future Risk & ImpactCONFIDENTIAL 2006-2013 HIP Investor Inc. 24RETURNS: Annualized 5- Yr Returns*RISK: Standard Deviation of 5-Year Returns*VALUE: size of circles relative to $ Invested in FundIMPACT: color of circles: Green = higher IMPACTYellow = medium IMPACTRed = lower IMPACT* Past 5 years, as of 8/31/2013; HIP Scores (2011/12)Source: KLR 401(k); Morningstar; HIP Investor Scores

2466% if investors would like to see their company add a sustainable and responsible 401K option Source: Yankelovic Study sponsored by Calvert, 2006.

While participant demand continues to grow few plan sponsors currently offer and sri option ONLY 14% of Defined contribution plans offered have one or more SRI funds in them 84% of plan sponsors predicted in 2011 that the demand for SRI options would increase or remain steady during the following 5 years however only 14% of defined contribution plans offered one or more SRI funds Source: (Mercer Report for Social Investment Forum, Opportunities for Sustainable and Responsible Investing in U.S. DefinedContribution Plans, September 2011)

Deloitte reports 62% of gen y want to work for a company who is socially responsible they want to apply their skills to benefit communities and society 68% say they would not work for a company that is not socially responsible

A group of asset managers, representing approximately $2 trillion in assets under management, say that integrating ESG considerations into investment decisions should be a legal responsibility Source: Report produced by the Asset Management Working Group of United Nations Environment Programme Finance Initiative (UNEP FI), Fiduciary Responsibility - Legal and Practical AspectsPrudent fiduciaries should consider material ESG issues as an integral part of their investment decisions. A Freshfields study examining fiduciary investment decision making in nine countries concluded that "integrating ESG considerations in an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions. Source: 4 "A Legal Framework for the Integration of Environmental, Social and Governance Issues into Institutional investments Freshfields Bruckhaus Deringer. 2005. Survey included: Australia, Canada, France, Germany, Italy, Japan, Spain, the United Kingdom, and the United States

The Department of Labor believes sustainable and responsible investment options are not inconsistent with fiduciary standards. Source: Letter from the Department of Labor to Calvert Group, Ltd. (now known as Calvert Investments, lnr.), May 28, 1998.

380% increase in SRI assets in 15 years Source: "2010 Report on Socially Responsible Investing Trends in the United States:' Social Investment Forum, 2011 As of June 2013 of the 600 shareholder resolutions filed 44% are focused on ESG issues Source: Ernst and Young

This scoring and information Empower Employees to be a catalyst for Positive Human Impact!

25Opportunity for participants to integrate impact EMPLOYEE ENGAGEMENT & ATTRACT TALENTNew revenue-generating potential can be explored for KLR- INVESTMENTS/CONSULTING/SUSTAINABILITY REPORTS New Possibilities for KLR to Generate Revenue click Analyze retirement-plan choices & recommend better funds (Pension Audits)Attract new wealth-management clients & AUM (Impact Investing) click Attract new clients/Analyze knowable but ignored risks & opportunities Account for unseen, intangible value (Sustainability Reports) Attract new non-profit clients with Impact-Ratings to quantify outcomes

850+ B Corporations $7.0 Billion Marketplace 60 Industries

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Trends: An Emerging Marketplace?All Investing$61.9 Trillion Negatively Screened Funds + Impact Investing$3.1 TrillionImpact Investing in 10 years?~$1 Trillion

Impact Investing is the use of for-profit investment to address social and environmental challenges.


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Who makes Impact Investments?


What do they want to Measure?

Operational ImpactBusiness Model Impact


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Benefit Corp: Twenty Passed (DE, PA, CA, HI, IL, LA, MA, MD, NJ, NY, SC, VT, VA, DC, AZ, AR, NV, OR, CO, RI)

Not Alone L3C Flexible Purpose Corp Social Purpose Corp UK / Chile

Tremors: New Corporate Forms


Tools: Resources


Subsidiaries

Investment

Supply Chain

Tax

Procurement

Tools: Engagement


Provides clarity to directors and officers that their fiduciary duty includes creating a material positive impact on society and the environment, even in liquidity scenarios;

Offers legal protection to directors and officers to consider the non-financial interests of the workforce, community, and environment when making decisions, even in liquidity scenarios;

Helps maintain mission over time by 1) expanding shareholder rights to enforce this expanded definition of fiduciary duty and standard of consideration; and 2) requiring a 2/3 majority vote of shareholders to remove these higher standards;

Creates a marketing opportunity to differentiate the business as a Benefit Corporation, a new class of corporation required by law to benefit society as well as shareholders

Creates press opportunity for early adopters

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Page 33 Discovering corporate sustainability trends & tremors through CDP disclosure assessmentSustainable Brands#NewMetrics

Philadelphia 25th September 2013Stephen DonofrioVice President, Partnerships & Innovation

[email protected] / 212.378.2086132 Crosby Street, 8th Floor, New York, NY 10012


Trends

Tremors

ToolsAgenda34Increasing investor interest & corporate disclosureQuality of corporate disclosure is ever-improving

Scope 3: Financed emissions minimally reported by financialsScope 3: Investments methodologies exist, but no standardCase Studies of Scope 3: Investments calculated by financials

CDP overviewAction and engagement on financed emissions


Trends

Tremors





Trends: Increasing investor interest & corporate disclosureTo transform the global economic system to prevent dangerous climate change and value our natural resources by putting relevant information at the heart of business, investment and policy decisions.

Forests100 Companies disclosed in 2012Water340+ Companies disclosed in 2012

Climate Change 4600+ Companies disclosed via CDP in 2013

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Trends: Quality of corporate disclosure is ever-improvingTransparency97%min score for G500 disclosure leaders in 2013

8% increase from 2011

Page 37 Verification 71%of G500 companies verified their GHGs in 2013

2X % from 2011


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Trends

Tremors





Page 39

Energy: Energy companies reported scope 3 emissions are 4X higher than the sectors scope 1 and 2 emissions; 98% of these are emitted through the use of sold products.

whereas

Financials: Financials makes up 24% of respondents, however, represents only 0.6% of total S1+2 emissions; Only 6% report the carbon impact of their investments

Tremors: Scope 3: Financed emissions minimally reported by financials


Financials:Sector Stats: The most reported risk and opportunity is reputation;

Scope 3: Business travel, employee commuting and waste generation are 3 most commonly disclosed categories

Energy:Sector Stats: 50% of energy companies have a performance band of C or lower; The sector has the highest proportion of companies without emission targets (24%); and

Scope 3: Reported scope 3 emissions are four times higher than the sectors scope 1 and 2 emissions. 98% of these are emitted through the use of sold products.

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- RBSs true carbon emissions 2012, The World Development Movement (WDM)Under the CDP, in 2012 RBS reported greenhouse gas emissions of 735,437 tonnes of carbon dioxide equivalent (tCO2-e)... RBS did not report any emissions resulting from the money it loans to fossil fuel companies or projects. These financed emissions resulting from the banks loans to coal, oil and gas companies bring the banks 2012 carbon footprint to up to 1,200 times the footprint reported...Page 40

{{{{


Tremors:Scope 3: Investments methodologies exist, but no standard Various approaches exist: 2o Investing Initiative ided a dozen

Standardization efforts: results in 2014-2015? UNEP-FI (global) & VfU (regional)

Methods mentioned in CDPs 2013 disclosure cycle: UNEP-FI (10 mentions), GHG Protocol (9 mentions), VfU (7 mentions), WRI (7 mentions) & WBCSD (3 mentions)

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{{{{Investments are categorized as a downstream scope 3 category because the provision of capital or financing is a service provided by the reporting company.- GHG Protocol (WRI/WBCSD)


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Tremors:Scope 3: Investments methodologies exist, but no standard42

{{{{There are many factors to be considered including availability, credibility, and consistency of information as well as the direction of the regulatory landscape in North America.- Bank of Montreal 2013 CDP Climate Change Disclosure

We have tested all available methodologies to assess GHG emissions from investments, but none of them meets our criteria in terms of reliability and bias.- BNP Paribas 2013 CDP Climate Change Disclosure{{{{


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Case Studies of Scope 3: Investments calculated by FinancialsCommonwealth Bank of Australia % of financing X total lifetime project emissions

1 project (25 year life) in 12

Uses Australian govts def. of emissions intensive to identify deals closed during reporting yr

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Case Studies of Scope 3: Investments calculated by Financials Mizuho Financial Group % of equity x emissions as reported to CDP or other

Top 30 companies held by the parent company

Accounts for ~20% of the value of consolidated non-investment holdingsPage 44


Case Studies of Scope 3: Investments calculated by FinancialsCitigroup % of financing X total lifetime project emissions

1 project (30 year life) in 11

Project-specific GHGs are derived from the plants capacity & heat rate, the carbon content of the fuel, and projected capacity utilizationPage 45


Trends

Tremors





Tools:CDP overview CDP is an international, not-for-profit organization providing the only global system for companies and cities to measure, disclose, manage and share vital environmental information.

Mission is to transform the global economic system to prevent dangerous climate change and value our natural resources by putting relevant information at the heart of business, investment and policy decisions.CDP has 501(c)3 charitable status in the U.S. via its fiscal agent and sponsor liaison, Rockefeller Philanthropy Advisors47


Tools:Action and engagement on financed emissionsGeneral Motivations:

Pressure from NGOs. Companies want investor feedback

Mandatory reporting requirements will increaseCDP Efforts:

UNEP-FI Scope 3 - Investments task force

CDP is increasing work on sector disclosure & materiality focus

CDP could be utilized as a financed emissions reporting toolPage 48


Page 49 Discovering corporate sustainability trends through CDP disclosure assessmentSustainable Brands#NewMetrics

Philadelphia, 25th September 2013Stephen DonofrioVice President, Partnerships & Innovation

[email protected] / 212.378.2086132 Crosby Street, 8th Floor, New York, NY 10012


Trends & Tremors in the Sustainable Investing Landscape:Threshold InvestingSustainable Brands #NewMetrics ConferenceWharton, UPenn, September 24, 2013

Bill BaueCo-FounderSustainability Context Group

50Sustainable Investing doesn't currently address threshold overshoot

TremorOvershooting Sustainability Thresholds

Rockstrom's Planetary BoundariesPssst: Sustainable Investing Currently Ignores Thresholds

51Sustainable Investing doesn't currently address threshold overshoot

TrendThreshold-Based Advocacy 350.org's Divestment Campaign

Pssst: Campaign Currently Ignores Demand SideCarbon Emitters

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ToolThreshold Investing Pssst: Investors Wanted

Sustainable Investing Founders Add New Dimension

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ToolsThreshold-Based Carbon Counters Pssst: Run the Numbers CSO, Autodesk, CDP/WWF Offer Free Calculators

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ToolThreshold-Based Screening Climate Counts IndexPssst: Build Portfolios That Profit From Climate Solutions

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Tool Triple Bottom Line Threshold ScreeningTrue Sustainable InvestingPssst: Build Portfolios That Profit From Sustainability Solutions

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Download - Trends and Tremors in the Sustainable Investing Landscape

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