www.fandc.com

Sustainable Investment: How active shareholders drive positive change Karina Litvack, Director, Head of Governance & Sustainable Investment

Lisbon, 7th May 2012

Agenda

 F & C’s Approach to Responsible Investment

 Market Drivers of Responsible Investment

 What are the Hot Issues?

 Case Studies

 Q & A

3

F&C Investments – responsible investment overview

 European asset manager with €120bn* under management

  London-based   Listed on London Stock

Exchange   28-year track record in ethical

and sustainable investment funds

3 *€120.1 bn as at 31.12..2011. ***Strategic partners

Overview Leading European Fund Manager

3 3

F & C’s Ethically-Screened Funds

 Growing consensus that best long-term performance will come from companies that take seriously their wider environmental, social & governance responsibilities

 High energy prices & awareness of climate change have spurred investor interest in clean energy & related investments

 Need to meet ethical considerations that are becoming increasingly important in the minds of investors

 “You cannot escape the responsibility of tomorrow  by evading it today”

 Abraham Lincoln

Occupy percolates up to investment world

New York

London Lisbon

5

Market Drivers Behind Responsible Investment

 Systemic concerns

 Investment drivers  Corporate scandals and crises: downside protection  Reducing risks, Spotting opportunities

 Regulations & Codes:  From divestment to active investment  Pensions laws and codes

 Corporate leadership: will investors follow?

 Stock Exchanges: JSE, Novo Mercado, Borsa Italiana Star Index

 Sell-side research: Integration of ESG into investment analysis

Changing Definition of Fiduciary Duty

 “Where fiduciary duties apply, there is no general requirement in law for investment decision-makers to invest according to ESG considerations, but ESG considerations are relevant considerations that must be taken into account in the process of investment decision-making.

 The weight to be given to ESG considerations, however, is for the investment decision-maker empowered to make discretionary investment decisions in the interests of all beneficiaries.

 It is not a breach of fiduciary duties per se to have regard to ESG considerations while pursuing the purposes of the trust. Rather, in our opinion, it may be a breach of fiduciary duties to fail to take account of ESG considerations that are relevant and to give them appropriate weight.”

Freshfield Bruckhaus Deringer, October 2005

A Philosophy: Shareholder Engagement

 reo®: Responsible Engagement Overlay   Responsible

 Uses shareholder influence to encourage adoption of best practices  Focuses on risk reduction and long-term shareholder value

 Engagement  Recognises common interests of company & shareholder  Builds on constructive dialogue with companies

 Overlay  Does not screen out companies = no impact on portfolio construction  Investment decisions driven by financial considerations

 Applies to all of F&C’s equity holdings + third-party funds

9

Where do investors engage?

Environment

Environmental management   Environmental standards   Supply chain environmental

standards   Pollution control

  Waste & recycling   Product opportunities

Ecosystem services   Biodiversity management

  Water   Access to land

Climate change   Emissions management &

reporting   Climate change strategy   Access to land

  Biofuels 9

Social

Human rights   Security   Privacy & free expression

  Community relations   Weak governance zones

Labour standards   Health & safety

  ILO core conventions   Diversity

  Supply chain labour standards

Public health   Nutrition

  Access to medicines   Product safety   HIV/AIDS

Governance

Corporate Governance   Remuneration   Board structure

  Shareholder rights   Audit & control

Sustainability Management   Disclosure & reporting

  Governance of sustainability issues

  UNGC compliance   Stakeholder engagement

Business Ethics   Bribery & corruption

  Political influence   Whistleblowing systems   Responsible marketing

9

Case Study: Tackling the Credit Crunch

 Engaging with banks

 Banking sector has experienced a series of seismic shocks

 Issue:   Inadequate oversight of risk and link to pay   Lack of transparency and accountable practices  Disregard for systemic impacts

 Action:   Engage with banks – 4 key themes:   Disposal of toxic assets and recapitalisation   Reform of incentive structures to ensure pay-for-performance and appropriate risk-taking   More robust boards that hold executives to account   Cultural reform - Lobbying

 Using voting rights to challenge poor practices  Tackling systemic factors: Dialogue and engagement with regulators

  Regulation that sets good governance standards and encourages greater transparency without inhibiting competition.

11

Aligning bank remuneration with risk

 Excessive focus on Return on Equity for banks  F&C pioneered Credit Quality Underpin as precondition for bonus awards  Engaged over 50 banks globally  To date: RBS and Barclays accept idea  See F&C Viewpoint

Credit quality as a bonus underpin

“There is an underpin whereby awards will only vest if the Remuneration Committee is satisfied that risk management during the performance period has been effective and that financial and non-financial performance has been satisfactory”

“The Remuneration Committee has the discretion to reduce the vesting of deferred incentives and long term incentive awards (to nil if appropriate) if, in its sole opinion, the financial health of the Group has significantly deteriorated”

11

BP Golf of Mexico

12

Fukushima

13

Tokyo Electric Power Company - TEPCO

TEPCO and the Fukushima nuclear accident

Background  In March 2011, Japan suffered a major earthquake and tsunami  Fukushima nuclear power plant suffers a catastrophic safety

failure  Safety failure leads to plant shutdown and subsequent rolling

power outages

14

Market Reaction  Share price has fallen 80% since the earthquake  TEPCO’s credit rating is downgraded by Moody’s from A1 to Baa1 and

remains under review  TEPCO’s credit default swaps peaked at 400bps over risk-free, in line

with sub-investment grade risk, compared to 8bps pre-disaster

TEPCO

F&C Acts  Meeting with TEPCO at Tokyo offices to discuss ESG strategy, practices

and reporting  Recommendations to:

  Improve independent oversight of the company through appointment of outside board directors

 Enhance safety and reporting systems at key nuclear facilities   Implement comprehensive climate change policy to include emissions targets,

renewable energy goals  Encourage responsible consumer behaviour towards energy use

 F&C leading collective engagement on behalf of UK investors to:  Urge management strategies to lead business out of the crisis

 Safety review and post-mortem will shape F&C’s ongoing engagement

15

ESG risks and Credit risk: BP and TEPCO

Impact of Macondo oil spill on BP’s cost of credit Impact of nuclear blast on

Tepco’s cost of credit

Source: Bloomberg.

ESG risk hits investors in the wallet

Technology and media industries

17

Since 2004, active involvement in Global e-Sustainability Initiative (GeSI) and Electronics Industry Citizenship Coalition (EICC).

EICC: de facto standard for technology hardware companies to improve labour and environmental standards in electronics factories

From an initial group of three US computer companies, now over 40 global companies throughout value chain.

 Major criticism of factory labour standards of Apple’s popular iPhone and iPod

 F&C engaged Apple and Foxconn, its outsourced manufacturer  Encouraged both to join the EICC, implement policies and publish

factory audits.  Dell introduced a comprehensive take-back programme for its

obsolete products as early as 2004.

Deforestation & Climate Protection

18

Forest protection essential to safeguard rainfall and avoid soil erosion Poor government enforcement and company practices High-profile scandal linking Unilever to rainforest destruction

F&C Acts  Site visits: Indonesian palm oil plantation  Pressed Unilever, Golden Agri and 12 companies to curb deforestation  Collaborative engagement : Forest Footprint Disclosure Project, government action

Results & Next steps  Golden Agri undertaken remedial action  Unilever will halve environmental footprint of its products by 2020  Consumer Goods Forum goal: zero net deforestation by 2020  78 participants in a new Forest Footprint Disclosure Project  Government support for forest protection at Cancun

Market failure: “Universal investor” factors

 Food & beverage companies:   Incl. Access to Nutrition Index (ATNI)

 Retailers and restaurants

 Large employers on employee general health

Investor engagement:

The challenge: Diabetes an escalating social and economic burden

19

2007 2011 2030

15

47

China to see 80% increase in diabetes cases by 2030

Cost to health

service

($ billion)

Years

26

Global Engagement: Examples of Milestones

Russia: Novatek increased the number of independent board directors

UK: HSBC Improved board independence enhancing oversight of group risk management

US: Hewlett-Packard Supported US laws to improve shareholder influence over executive compensation

France: Danone implemented a strict policy not to market to children

Korea: Shihan Financial improved shareholder rights

India: TATA Consultancy developed capacity to lead clients in sustainability strategies

Australia: Arrow Energy committed to comprehensive biodiversity management throughout its supply chain

US: Pfizer raised animal welfare standards throughout its supply chain

Brazil: BM&F Bovespa protected the rights of minority shareholders in the Brazil Stock Exchange

UK: Petrofac actively addressed humanitarian and human rights issues in Sudan

UK: Standard Chartered incorporated climate risk into its lending criteria

NL: Heineken committed to new ideas for limiting water usage in breweries

US: Motorola introduced more energy efficient batteries into its mobile phones

Italy: Bulgari Pledged to responsible jewelry sourcing, addressing human rights concerns over conflict diamonds and Burmese gems

Japan: Mitsubishi leveraged suppliers to improve labour standards

Mexico: Alsea integrated environmental impact targets into company performance goals

Germany: Adidas joined SEDEX, an initiative to promote labor standards

China: China Telecom took active steps to eliminate corruption by enhancing employee conduct standards

Thematic investment approach

21

Mitigation

Adaptation

Supporting services

Alternative energy

Solar, wind, geothermal…

Energy efficiency

Insulation, energy demand management…

Sustainable mobility

Alternative fuels, efficient cars…

Waste

Recycling, landfill, gas capture…

Advanced materials

Bioplastics, silicon…

Forestry & agriculture

Forestry projects…

Desalination, water purity testing…

Water

New crop varieties, catastrophe insurance…

Acclimatisation

Consultancy, carbon trading...

Supporting services

Investment themes

Theme: Energy efficiency  Huge untapped scope for energy efficiency

improvements  Doubling the rate of energy efficiency

improvement worldwide could save energy equivalent to 2,000 coal-fired plants by 2030 – and save consumers $500bn/yr

 Governments are becoming increasingly bold in their approach, using regulation to set minimum standards in buildings and products (e.g. EU action on the old-style lightbulb)

 Improvements to electricity distribution systems also critical – over $90bn of fiscal stimulus money directed towards investments in grids

22

Mitigation: Energy Efficiency and Informatica

Climate Change Rationale  Running servers at higher utilization

rates means less total energy usage, which results in lower carbon emissions. Cloud data centres are also more energy-efficient compared with more decentralised systems.

 Large UK companies that use cloud computing could reduce CO2 emissions associated with their IT estate by 50% compared to predicted levels without the adoption of this technology. This would be equivalent to the annual emissions of over 4 million passenger vehicles, and that’s the potential for UK companies alone. 1

 Data is power hungry: the average data centre consumes as much energy as 25,000 households. 2

Investment Rationale  Unique position in the data

integration market driving a major secular growth opportunity. Plays into the mega trends of cloud computing, social and mobile computing.

 Embedded deeply within customer IT systems

 High and resilient returns, even expanding margin through the last recession

23 1Source: Carbon Disclosure Project 2 Source: McKinsey Analysis

Waste

 3.6% of global greenhouse gas emissions come from waste: largely gases from landfill sites

 Recycling also offers significant energy savings compared with producing goods from new

 The sector is already subject to heavy regulation (eg EU Landfill Directive). Climate change concerns are adding to the pressures

 Growth opportunities include recycling and waste-to-energy projects

24

Q&A

Your Questions?

26

F&C Offices United Kingdom F&C Management Limited Exchange House Primrose Street London EC2A 2NY Tel: +44 (0) 20 7628 8000 Fax: +44 (0) 20 7770 5487 Website: www.fandc.com Authorised and regulated in the UK by the Financial Services Authority.

United Kingdom F&C Management Limited 80 George Street Edinburgh EH2 3BU Scotland Tel: +44 (0) 20 7628 8000

Authorised and regulated in the UK by the Financial Services Authority.

United Kingdom F&C Management Limited Park Lodge London Road Dorking Surrey RH4 1QP Tel: +44 (0) 20 7628 8000

Authorised and regulated in the UK by the Financial Services Authority.

United Kingdom F&C REIT Property Asset Management Plc 5 Wigmore Street London W1U 1PB Tel: +44 (0) 20 7499 2244

F&C REIT Property Asset Management Plc is a wholly owned subsidiary of F&C REIT Asset Management LLP and is authorised and regulated by the Financial Services Authority

United Kingdom Thames River Capital LLP 51 Berkeley Square London W1J 5BB Tel: +44 (0) 20 7360 1200

The Funds business of the F&C Group. Authorised and regulated in the UK by the Financial Services Authority .

Netherlands F&C Netherlands B.V. Jachthavenweg 109 e 1081 KJ Amsterdam Netherlands Tel: +31 (0) 20 582 3000

Regulated in the Netherlands by the Autoriteit-FM.

Portugal F&C Portugal, Gestão de Patrimónios, S.A. Rua de Campolide,372 1st floor 1070-040 Lisboa Portugal Tel: +351 (0) 21 003 3200 Regulated in Portugal by the CMVM and the Bank of Portugal.

Germany F&C Management Limited Oeder Weg 113 60318 Frankfurt Germany Tel: +49 (0) 69 597 99 080

Authorised and regulated in the UK by the Financial Services Authority

Ireland F&C Ireland Limited Block 5 Harcourt Centre Harcourt Road Dublin 2 Tel: +353 (0) 1 436 4000

F&C Ireland is regulated by the Central Bank of Ireland

United States F&C Management Limited 265 Franklin Street 16th Floor Boston MA 02110 USA Tel: +1 (0) 617 426 9050

Authorised and regulated in the UK by the Financial Services Authority

Hong Kong F&C Management Limited 66th Floor, Suite 01 The Center 99 Queen’s Road Central Hong Kong Tel: +852 3965 3160

Authorised and regulated in the UK by the Financial Services Authority.

India F&C REIT Property Management India 91 Maker Chambers VI Nariman Point Mumbai 400 021 India Tel: +91 (0) 22 2282 9430 F&C REIT India Private Limited is a wholly owned subsidiary of F&C REIT Property Asset Management LLP. Part of the F&C Asset Management Plc Group

Germany F&C REIT Property Asset Management GmbH & Co. KG Oberanger 34-36 80331 München Germany Tel: +49 (0) 89 61 46 51 0 F&C REIT Property Asset Management Plc is a wholly owned subsidiary of F&C REIT Asset Management LLP and is authorised and regulated by the Financial Services Authority

Past performance should not be seen as an indication of future performance. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. The information, opinions estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time. F&C Group Companies may from time to time deal in investments mentioned herein on behalf of their clients. The source of information in all graphs is F&C unless otherwise stated. F&C Management Limited is authorised and regulated by the Financial Services Authority (FSA) FRN:119230. Limited by shares. Registered in England and Wales, No. 517895. Registered address and Head Office: Exchange House, Primrose Street, London, EC2A 2NY, United Kingdom. F&C Asset Management plc is the listed holding company of the F&C group. F&C Management Limited is a member of the F&C Group of companies and a subsidiary of F&C Asset Management plc. F&C, the F&C logo, REO and the ‘reo’ logo are registered trade marks of F&C Asset Management plc. F&C INVESTMENTS and the F&C INVESTMENTS logo are trade marks of F&C Management Limited. © Copyright F&C Management Limited 2011. All Rights Reserved. Neither this document nor any part of it may be reproduced by any party whether by photocopying or storing in any medium by electronic means or otherwise without the prior approval of F&C Management Limited. CN: