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The Cornerstone

Journal of Sustainable Finance and BankingSM

Summer 2016

Volume III Issue 5

“Explorations & Aspirations”

Global Market Strategy Regional and Sector Strategy: June/July Updates Michael Geraghty … p. 13-14 An Atypical Analysis of Industry Risks Michael Geraghty … p. 15

Brexit Fallout: Global Uncertainty to Weigh on Multiples Michael Geraghty … p. 16

Global Earnings Synthesis Michael Geraghty … p. 17

Corporate Governance A Voice in the Boardroom John K.S. Wilson, Caleb Ballou … p. 18

Our Response to the SEC on Sustainability Disclosures John Wilson & Cornerstone Capital Research Team … p. 21

Global Sector Research Food Safety: In a State of Transformation Michael Shavel, Sebastian Vanderzeil … p. 25

Tracking Our Thesis on Food Safety Opportunities: A Look at Neogen Michael Shavel, Sebastian Vanderzeil … p. 26

Exploring the Challenges in Maritime Financing David Lepper, IPSA Capital … p. 27

Accelerating Impact Bitcoin & Ethereum: Exploring How Smart Contracts Work Chris Burniske, ARK Invest … p. 33

Enhancing Food and Feed to Boost Nutrition Efficiency Karla Canavan, CAIA, Bunge … p. 36 Enhanced Analytics Decision-making in a Context of Uncertainty Felicitas Weber, KnowTheChain … p. 38

Materiality Fuels Aspirations for Future Generations Michael Kinstlick, SASB … p. 40

Exploring Ways to Close the ESG Info Gap: Perspective from Canada Catherine Gordon, SimpleLogic Inc … p. 42

Open Source Excellence Corporate Sustainability Through Shared Value and Innovation Gugu McLaren, Discovery Ltd … p. 44

Aspiring to the Gold Standard in Mining Management Brent Bergeron, Goldcorp … p. 46 Sustainable Editorial Why Is Everyone Angry at Wall Street? Jon Lukomnik, IRRC Institute … p. 48

Virtual Attendance Forest Ecosystems and Climate Uncertainty: Investment Implications Sebastian Vanderzeil & Dr. Bruce Kahn, Sustainable Insight Capital Management … p. 50

© Maksim Shmeljov/Shutterstock

2 / Cornerstone Journal of Sustainable Finance & BankingSM / Summer 2016

CEO’s Letter on Sustainable Finance & Banking

In this edition of the Cornerstone Journal of Sustainable Finance & Banking (JSFB), we consider the necessity of both “Explorations & Aspirations” in seeking strong risk-adjusted returns from across the capital markets in times marked by powerful forces of change. The former is essential, if we are to achieve the latter.

In recent weeks, investors have considered everything from a relatively uninspiring earnings reporting season and the dominance of polarizing forces in the political economy, to growth differentials in developing versus developed “markets and the “responsible” use of Pokémon Go. So here we explore subjects ranging from “smart contracts” in the blockchain to empowering investors with better measurement tools. And ultimately we hope to go beyond “sustainability” and move towards value creation and regeneration through investing.

An essential part of this process will be to leverage the power of the proxy as asset owners engage with corporations to have “A Voice in the Boardroom.” In Cornerstone’s new piece intended for investors who aspire to be engaged in the stewardship of their capital, John Wilson, Head of Corporate Governance, Engagement & Research, offers practical guidance to the process and major governance themes. We offer a snapshot of the report in this edition of the Journal, along with a link to the Executive Summary. John also spearheaded Cornerstone’s recent response to the US Securities and Exchange Commission’s (SEC) request for comment on its concept release “Business and Financial Disclosure Required by Regulation S-K,” laying out our aspirations for a pragmatic, principles-based approach to integrating ESG disclosure into corporate financial reporting.

Enhancing the ability of long-term investors to evaluate corporate performance thoroughly is a recurring theme in this edition of the JSFB. In our Enhanced Analytics section, both Michael Kinstlick of the Sustainability Accounting Standards Board (SASB) and Catherine Gordon of SimpleLogic offer cogent overviews of the importance of integrated reporting on material sustainability issues. Michael writes, “As billions express their aspirations to join the integrated global economy, we … must set our sights higher still: ensuring that future economic growth is sustainable.…” Felicitas Weber of Humanity United’s KnowTheChain project recounts the team’s important efforts to establish benchmarks that investors can use to understand how well companies are addressing the reputational risks of forced labor. By creating ways for investors to explore their concerns with companies, KnowTheChain aspires to motivate companies to take action and improve disclosures and practices.

We also explore complex issues requiring nuanced explanation: Contributor David Lepper of IPSA Capital explores the challenges ahead for maritime finance, a lesser-known alternative asset category, but one whose importance to global trade cannot be overstated. For those interesting in gaining an understanding of how blockchain-based “smart contracts” work,

Erika Karp Founder & Chief Executive Officer Cornerstone Capital Inc.

Summer 2016 / Cornerstone Journal of Sustainable Finance & BankingSM / 3

Chris Burniske of ARK Invest offers a comprehensive look at the current state of technology as well as a view into the promise it holds for “Accelerating Impact” in the future. Karla Canavan of Bunge discusses the ways in which scientists have begun to use enzyme supplementation to enhance the nutritional value of animal feed, and the work being done to explore their potential for combating human malnutrition. And our Virtual Attendance section recounts the highlights of a recent meeting on forest ecosystems and the role of the forestry community (including investors) to potentially address the impacts of climate change using the concept of a forest’s resilience.

In the “Open Source Excellence” section we draw insight from two firms that are taking action to create best-in-class partnerships with clients and their broader communities. Discovery Ltd takes a shared-value approach to its insurance product offerings, using “behavioral economics to translate positive behavior into immediate reward, which in turn inspires long-term positive behavior changes.” And Goldcorp, one of the world’s largest gold producers, aspires “to be a leader in finding innovative ways to create long-lasting social and economic benefits through every phase of the mining lifecycle.”

Lastly, Jon Lukomnik of the Investor Responsibility Research Center offers an aspirational Sustainable Editorial offering practical ideas for refocusing the capital markets to serve their true purpose: financing the real economy.

My sincere regards, Erika Erika Karp Founder and Chief Executive Officer


Table of Contents The views of our guest contributors are independent and their inclusion does not imply an endorsement by Cornerstone Capital Group

CEO’s Letter on Sustainable Finance & Banking 2

Market Summary

Overview 5

Market & Global Sector Performance, Monetary Policy & ESG Data 6

Global Market Strategy

Regional and Sector Strategy: June & July Updates Michael Geraghty, Global Equity Strategist Cornerstone Capital Group

13-14

An Atypical Analysis of Industry Risks Michael Geraghty, Global Equity Strategist 15

Brexit Fallout: Global Uncertainty to Weigh on Multiples Michael Geraghty, Global Equity Strategist 16

Global Earnings Synthesis Michael Geraghty, Global Equity Strategist 17

Corporate Governance

A Voice in the Boardroom John K.S. Wilson, Head of Corporate Governance, Engagement and Research, Cornerstone Capital Group

18

Our Response to the SEC on Sustainability Disclosures John Wilson & Cornerstone Capital Group Research Team 21

Global Sector Research

Food Safety: In a State of Transformation

Michael Shavel, Global Thematic Analyst, Sebastian Vanderzeil, Research Analyst Cornerstone Capital Group

25

Tracking Our Thesis on Food Safety Opportunities: A Look at Neogen

Michael Shavel, Global Thematic Analyst, Sebastian Vanderzeil, Research Analyst Cornerstone Capital Group

26

Exploring the Challenges in Maritime Financing David Lepper, Founding Partner & Chief Investment Officer, IPSA Capital

27

Accelerating Impact

Bitcoin and Ethereum: Exploring How Smart Contracts Work Chris Burniske, Analyst, ARK Invest 33

Enhancing Food and Feed to Boost Nutrition Efficiency Karla Canavan, Director of Sustainable Finance, Bunge 36

Enhanced Analytics

Decision-making in a context of uncertainty Felicitas Weber, KnowTheChain Project Lead, Business & Human Rights Resource Centre

38

Materiality Fuels Aspirations for Future Generations Michael Kinstlick, Head of Standards Setting Organization, Sustainability Accounting Standards Board

40

Exploring Ways to Close the ESG Info Gap: Perspective from Canada

Catherine Gordon, President, SimpleLogic Inc. 42

Open Source Excellence

Corporate Sustainability Through Shared Value and Innovation

Gugu McLaren, Senior Sustainability Specialist, Discovery Ltd 44

Aspiring to the Gold Standard in Mining Management Brent Bergeron, Executive Vice President Corporate Affairs and Sustainability, Goldcorp

46

Sustainable Editorial

Why Is Everyone Angry at Wall Street?

By Jon Lukomnik, Executive Director Investor Responsibility Research Center Institute

48

Virtual Attendance

Forest Ecosystems and Climate Uncertainty: Investment Implications

Upcoming Events: Global ESG Calendar 51

Sebastian Vanderzeil, Research Analyst Cornerstone Capital Group Dr. Bruce Kahn, Sustainable Insight Capital Management Cornerstone Capital Group Team

50

55


Market Summary

Overview As we enter the “dog days” of summer, equity markets continue their march higher, shrugging off earlier losses following the UK’s unexpected late-June referendum vote result to leave the EU. In nominal terms, the S&P 500 index notched another all-time high last week, sparking the increasingly familiar debate around market valuations and investor sentiment. Irrespective of the market’s direction, central bank intervention remains a focal point, and investors continue to debate the ramifications of less accommodative Fed policy offset by more aggressive BOE and BOJ actions.

US equity markets edged higher on the back of generally positive economic data. The NAHB housing index registered 59 in July, one point lower than the June reading but indicating steady growth in the housing market. The ISM Manufacturing Index climbed from 51.3 in May to 53.2 in June, the highest level in 16 months, a sign of continued expansion in activity. Retail sales also posted a healthy gain in June, rising 0.6% from May and 2.7% from a year ago. The Labor Department’s release reported that the economy added 287,000 positions in June. This is the strongest growth in eight months and a positive surprise compared to the consensus estimate of 170,000 jobs. Unemployment rose to 4.9% in June from 4.7% the prior month, partly due to a rebound in labor-force participation. Average hourly earnings for private-sector workers were up 0.1% from the previous month, 2.6% from a year ago. Continued solid hiring and stronger wage growth could put pressure on the Fed to raise interest rates as early as September.

Despite the Brexit vote, Germany, the region’s economic powerhouse, seems largely undaunted, defying fear of an immediate slowdown. The German Ifo Business Climate Index beat expectations and only dipped slightly to 108.3 in July from 108.7 in June, the highest reading of the year. Meanwhile, the Markit purchasing managers index (PMI) for Germany advanced to a seven-month high, and DAX, the country’s main stock index, has already retraced nearly all of its losses after the vote. The situation is less sanguine in the UK, where the composite PMI dropped to 47.7 in July from 52.4 in June, the biggest one-month drop on record. Both services and

manufacturing recorded sharp declines, sending the sterling lower against the dollar. The Bank of England has signaled that it intends to cut interest rates in August to support the post-Brexit economy.

Elsewhere in developed markets, Japan’s economic environment remains challenging. The July 10 electoral victory for Prime Minister Shinzo Abe sent the Nikkei higher and the yen lower, as investors expected that he would push through substantial fiscal stimulus and monetary easing. Economists, however, worry that benefits from spending will be muted and may distract authorities from structural reforms.

In emerging markets, China’s economy expanded 6.7% year-on-year in the second quarter, steady from the first quarter. Industrial production rose 6.2% in June from a year earlier, compared to economists’ estimates for 5.9%. Consumer spending also proved resilient, and retail sales rose 10.6%, beating the median estimate of 9.9%. However, investment, which accounts for nearly half of GDP, was almost entirely powered by the state in recent months, as growth in private-sector investment cooled. This raises concerns about China’s government-led approach.

In Brazil, some leading indicators suggest that the country’s economic downturn may be nearing an end. GDP is still expected to contract 3.3% in 2016, but economists project it to expand by as much as 1% next year. The country’s benchmark stock index, the Ibovespa, has risen over 30% this year (in local currency) and the Brazilian real has strengthened about 20% against the dollar in the same period.

On a one-month trailing basis, the MSCI World Index (a developed market proxy) underperformed the MSCI Emerging Markets Index by approximately 2.5%, widening its relative YTD underperformance to 7.2%. Large-cap equities performed in line with their small cap counterparts on a YTD basis, though they underperformed by about 0.9% over the past month. Looking at sectors, performance was mixed between cyclicals and defensives. In the MSCI ACWI (broad index for both developed and emerging equities), information technology and healthcare outperformed, while consumer staples and energy lagged.


Market Summary

Market and Global Sector Performance

MARKET / INDEX PERFORMANCE

As of 07/26/2016 (local currency) T1M (%) T3M (%) YTD (%) 2016 P/E 2016 P/B Div. Yield US Equity Indices DJIA 6.3 3.3 7.5 17.5 3.1 2.6 S&P 500 6.6 4.2 7.4 18.4 2.7 2.1 Nasdaq 8.6 4.9 2.8 22.1 3.5 1.2 Russell 2000 8.0 6.0 7.9 26.8 1.8 1.4 MSCI KLD 400 Social 7.0 4.0 7.3 19.8 3.4 2.1 Developed International Indices Euro STOXX 50 7.4 -2.1 -5.7 13.9 1.3 4.1 in USD 5.7 -4.7 -4.6 FTSE 100 9.6 8.0 10.3 17.3 1.8 4.0 in USD 4.7 -2.7 -1.6 CAC 40 7.1 -0.6 -2.2 14.9 1.3 3.8 in USD 5.4 -3.3 -1.1 DAX 7.2 -0.1 -4.6 12.9 1.5 3.2 in USD 5.5 -2.8 -3.9 Nikkei 225 7.1 -5.1 -13.1 16.7 1.4 2.0 in USD 7.0 0.5 0.0 ASX 200 8.0 8.0 7.8 17.0 1.9 4.3 in USD 9.2 4.2 11.0 Emerging Market Indices IBOVESPA 13.5 7.2 31.2 14.3 1.4 2.9 in USD 17.7 15.6 58.7 Shanghai Comp 6.4 5.2 -12.2 14.0 1.5 2.1 in USD 7.3 1.9 -14.7 KOSPI 5.2 0.6 3.4 11.1 1.0 1.7 in USD 8.2 1.3 7.0 SENSEX 6.3 8.4 8.3 17.4 2.8 1.6 in USD 7.0 7.0 6.3 Bovespa Corp. Sustainability 12.9 8.4 14.8 15.5 1.8 2.8 in USD 17.0 16.9 38.8


As of 07/26/2016 (local currency) T1M (%) T3M (%) YTD (%) 2016 P/E 2016 P/B Div. Yield Global Market Indices MSCI World 6.1 1.9 4.2 17.4 2.1 2.6 MSCI All-Country World 6.1 1.7 5.8 14.7 1.4 3.5 MSCI EAFE 5.5 -1.8 -1.4 15.5 1.5 3.4 MSCI Emerging Markets 8.6 4.5 11.4 13.1 1.4 2.6 DJ Sustainability World Comp 7.3 0.9 2.9 15.6 1.7 3.2 FTSE4Good Global 6.3 1.0 2.7 15.9 1.9 2.9 Fixed Income Barclays US Aggregate 0.7 2.5 5.4 Commodities Levels 7/26/2016 1/26/2016 7/27/2015 WTI Crude 42.9 37.3 53.7 ICE Brent Crude 44.8 36.1 60.0 NYMEX Natural Gas 2.7 2.4 3.1 Spot Gold 1320 1120 1094 LME 3mth Copper 4899 4417 5263 CBOT Corn 340 392 409 ICE ECX Emission 4.5 6.1 8.1 Currencies Levels 7/26/2016 1/26/2016 7/27/2015 EUR/USD 1.1 1.1 1.1 USD/JPY 104.6 118.4 123.3 GBP/USD 1.3 1.4 1.6 AUD/JPY 78.5 83.0 89.6 DXY Index 97.1 99.1 97.2

Source: Bloomberg, Barclays. Equity Returns: All returns represent total return for stated period. Dividends and coupons are not included in the DAX and BOVESPA indices. Bond Returns: All returns represent total return for the stated period. Index characteristics: P/E, P/B, and Dividend Yield are based on Bloomberg consensus estimates for the stated period.


MSCI ACWI SECTOR PERFORMANCE

As of 07/26/2016 1 Month Price Return (%) YTD Price Return (%)

Source: Bloomberg. Sector returns are based on GICS methodology. MSCI ACWI is a free-float weighted equity index that includes both emerging and developed world markets.

Source: Bloomberg. Sector returns are based on GICS methodology. MSCI ACWI is a free-float weighted equity index that includes both emerging and developed world markets.

US EQUITY STYLE PERFORMANCE Style box returns are based on Russell Indices with the exception of the Large-Cap Blend box, which reflects the S&P 500 Index. All values are cumulative total return for the stated period including the reinvestment of dividends. The index used from left to right, top to bottom are: Russell 1000 Value Index, S&P 500 Index, Russell 1000 Growth Index, Russell Midcap Value Index, Russell Midcap Index, Russell Midcap Growth Index, Russell 2000 Value Index, Russell 2000 Index and Russell 2000 Growth Index.

1 Month

Year to Date

Source: Bloomberg Source: Bloomberg

Info TchHealthcare

MaterialCons Discr

UtilityMSCI ACWI

IndustialsFinancals

Tel SvCons Stpl

Energy

-5 0 5 10

EnergyUtility

MaterialTel Sv

Cons StplIndustials

Info TchMSCI ACWI

HealthcareCons Discr

Financals

-10 -5 0 5 10 15 20

Value Blend Growth

Larg

e

6.3 6.6 7.1

Mid 6.8 7.3 7.8

Smal

l

7.6 8.0 8.3

Value Blend Growth

Larg

e

9.4 7.4 5.5

Mid 13.1 10.1 7.1

Smal

l

11.8 7.9 4.1


SECTOR SNAPSHOT – TOP 5 COMPANIES BY MARKET CAP As of 07/26/2016

Company name Ticker Industry Mkt Cap (US$ Bn)

Price (Local)

Total Return YTD % (local)

P/E 2016E

EV/ EBITDA 2016E

Div Yield % 2016E

ESG Disclosure Score

Consumer Disc. Amazon.com AMZN Internet &

Catalog Retail 346.7 734.9 8.7 69.9 21.9 N/A 21.9

Toyota Motor Corp

7203.JP Automobiles 181.5 5699.0 -22.5 10.5 10.6 N/A 33.5

Home Depot Inc HD Specialty Retail 170.2 136.8 4.6 21.7 12.4 2.0 N/A

Comcast Corp CMCSA Media 163.0 67.2 20.6 19.1 8.2 1.6 27.7

The Walt Disney Co

DIS Media 156.7 96.5 -7.5 16.6 10.1 1.5 33.5

Consumer Staples Nestle NESN.VX Food Products 246.2 78.5 8.7 23.3 15.1 2.9 57.0

Wal-Mart Stores WMT Food & Staples Retailing

229.8 73.7 22.1 17.3 8.3 2.7 32.5

The Procter & Gamble Co

PG Household Products

227.0 85.3 10.0 23.4 14.4 3.1 46.7

Anheuser-Busch Inbev

ABI.BB Beverages 204.5 115.8 3.1 31.0 15.0 3.1 47.5

The Coca-Cola Co

KO Beverages 194.9 45.1 6.5 23.3 17.9 3.1 N/A

Energy Exxon Mobil XOM Oil, Gas &

Consumable Fuels

379.7 91.6 19.6 33.4 11.3 3.3 56.4

Royal Dutch Shell RDSA.LN Oil, Gas & Consumable Fuels

221.0 2059.0 40.4 23.3 8.0 6.1 57.3

Chevron CVX Oil, Gas & Consumable Fuels

193.6 102.7 16.9 71.0 9.2 4.2 48.5

Petrochina Co 857.HK Oil, Gas & Consumable Fuels

192.3 5.3 4.5 57.5 7.8 2.0 23.2

Total Sa FP.FP Oil, Gas & Consumable Fuels

116.7 42.4 5.9 15.5 6.5 5.7 58.5

Financials Berkshire Hathaway

BRK/B Diversified Financial Services

355.7 144.2 9.2 19.6 N/A N/A 13.6

Wells Fargo & Co WFC Banks 243.4 47.9 -10.4 11.9 N/A 3.2 51.3

JPMorgan Chase JPM Banks 234.6 64.1 -0.7 11.4 N/A 3.0 28.5

Ind & Comm Bank of China

1398.HK Banks 223.5 4.4 0.3 5.0 N/A 6.2 29.4

China Construction Bank

939.HK Banks 173.1 5.4 7.3 5.2 N/A 6.0 31.1


SECTOR SNAPSHOT – TOP 5 COMPANIES BY MARKET CAP (CONTINUED) As of 07/26/2016


Price (Local)


P/E 2016E

EV/ EBITDA 2016E

Div Yield % 2016E


Health Care Johnson & Johnson

JNJ Pharmaceuticals 344.0 125.1 23.6 18.7 13.0 2.6 59.5

Pfizer PFE Pharmaceuticals 223.0 36.8 16.1 15.0 11.1 3.3 N/A

Novartis AG NOVN.VX Pharmaceuticals 218.4 82.5 -1.4 17.4 17.0 3.3 63.2

Roche Holdings ROG.VX Pharmaceuticals 217.7 250.3 -6.5 17.0 11.4 3.2 48.8

Merck & Co MRK.US Pharmaceuticals 161.4 58.3 12.3 15.7 11.0 3.2 20.7

Industrials General Electric Co

GE Industrial Conglomerates

289.4 31.5 2.6 20.9 17.1 2.9 38.4

3M MMM Industrial Conglomerates

107.7 177.6 19.5 21.6 13.3 2.5 56.6

United Parcel Service

ups.us Air Freight & Logistics

97.4 110.3 16.4 19.0 10.1 2.8 17.4

United Tech Corp UTX Aerospace & Defense

90.1 107.6 13.6 16.5 10.0 2.5 28.9

Siemens SIE.GR Industrial Conglomerates

89.5 95.9 10.9 13.9 10.7 3.7 53.7

Info Tech Apple AAPL Technology

Hardware, Storage &

529.9 96.7 -7.0 11.8 5.3 2.4 50.2

Google GOOGL Internet Software & Services

513.0 757.0 -2.7 22.7 12.5 N/A 24.0

Microsoft Corp MSFT Software 446.4 56.8 3.8 19.7 10.8 2.5 35.5

Facebook FB Internet Software & Services

346.4 121.1 15.7 33.3 20.3 N/A 26.4

Tencent Holdings 700.HK Internet Software & Services

226.0 186.3 22.5 35.4 24.5 0.3 13.2

Materials BHP Billiton Ltd BHP.AU Metals & Mining 72.8 19.3 9.2 88.8 8.8 8.1 59.9

BASF BAS.GY Chemicals 72.6 72.0 6.0 15.8 8.0 4.0 61.6

Saudi Basic Ind. SABIC.AB Chemicals 66.9 83.6 13.7 16.6 7.7 7.2 32.2

Du Pont DD.US Chemicals 60.5 69.3 5.3 22.0 12.4 2.2 24.8

Dow Chemical DOW.US Chemicals 60.3 53.6 6.0 15.4 8.4 3.4 55.4


SECTOR SNAPSHOT – TOP 5 COMPANIES BY MARKET CAP (CONTINUED) As of 07/26/2016


Price (Local)


P/E 2016E

EV/ EBITDA 2016E

Div Yield % 2016E


Telecom AT&T T Diversified

Telecommunication 260.8 42.4 27.8 14.8 7.1 4.5 27.6

China Mobile 941.HK Wireless Telecommunication Ser

258.0 97.8 13.2 15.7 5.1 2.8 45.7

Verizon VZ Diversified Telecommunication

223.4 54.8 22.5 14.1 7.1 4.1 32.1

Ntt Docomo Inc 9437.jp Wireless Telecommunication Ser

107.2 2837.5 15.7 16.3 7.7 2.8 51.7

Nippon Telegraph

9432.jp Diversified Telecommunication

98.9 4946.0 3.5 13.1 5.0 2.4 44.6

Utilities Nextera Energy NEE.US Electric Utilities 59.4 128.6 25.6 20.8 11.5 2.7 N/A

Duke Energy DUK Electric Utilities 59.1 85.8 22.8 18.7 10.9 4.0 51.7

National Grid NG/ LN Multi-Utilities 54.6 1108.5 21.7 17.5 11.5 3.9 34.3

Southern Co SO.US Electric Utilities 51.1 54.4 19.0 19.1 11.3 4.1 31.7

Dominion Resources

D.US Multi-Utilities 47.8 77.5 16.9 20.5 13.4 3.6 17.7

Source: Bloomberg. The securities in each sector represent the largest companies by market cap in the MSCI ACWI in their respective sectors. Sector classification is based on GICS methodology. Equity characteristics: P/E, EV/EBITDA and Dividend Yield are based on Bloomberg consensus estimates for stated period.

GDP / CONSUMER PRICE INFLATION / RATES

Real GDP (% YoY) CPI (% YoY) Official Rates Long Rates Region/Countries 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E United States 2.4 1.9 2.2 0.1 1.3 2.2 0.5 0.7 1.2 2.3 1.7 2.2 Euro Area 1.5 1.5 1.2 0.0 0.3 1.3 0.1 0.0 0.0 - - - Japan 0.6 0.5 0.8 0.8 0.0 0.8 0.1 -0.1 -0.3 0.3 -0.2 0.0 UK 2.2 1.5 0.5 0.0 0.7 2.2 0.5 0.2 0.3 2.0 0.9 1.2 Australia 2.3 2.9 2.8 1.5 1.3 2.1 2.0 1.5 1.4 2.9 2.0 2.4 China 6.9 6.5 6.3 1.4 2.0 2.0 4.4 4.2 4.1 3.2 2.9 3.0 Brazil -3.7 -3.5 1.0 9.0 8.6 5.8 14.3 13.7 11.1 - - - * India 7.4 7.5 7.7 6.2 4.9 5.3 6.8 6.4 6.4 7.6 7.3 -

Source: Bloomberg. Estimates are composite of Bloomberg contributor estimates. *Italicized text represents actual data. ** India fiscal year runs to March 31.

MONETARY POLICY

Jul-16 Jan-16 Jul-15 Monetary Base growth (YoY) -5.4% -5.3% -0.1% M-2 growth (YoY) 5.4% 6.3% 6.9% Money multiplier (M-2/mon base) 3.4 3.2 3.0 1Q16 1Q15 1Q14 Velocity of money (GDP/M-2) 1.5 1.5 1.5

Source: Federal Reserve Bank of St. Louis


KEY ECONOMIC CHARTS

C&I Loan Growth (%) University of Michigan Survey of Consumer Sentiment

Source: Federal Reserve Bank of St. Louis Source: Bloomberg

NFIM Small Business Optimism Index ISM Manufacturing Purchasing Managers Index


US Treasury Yield Curve US Initial Jobess Claims


Production Employees Average Hourly Earnings

Source: Federal Reserve Bank of St. Louis

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100110120

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70

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1975 1980 1985 1990 1995 2000 2005 2010 201525

50

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1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y

%

7/26/20161/26/20167/26/2015

100

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% Y

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Regional and Sector Strategy: June Update By Michael Geraghty, Global Equity Strategist, Cornerstone Capital Group

Upgrade U.S. to Overweight from Neutral. Upgrade U.S. to Overweight from Neutral. Earnings estimate revisions turned sharply positive, adding to other favorable fundamentals including margins, share buybacks.

Information Technology: Still Neutral; Earnings Outlook Remains Unfavorable. We downgraded Information Technology to Neutral last month reflecting, in part, negative earnings estimate revision trends and a deceleration in expected earnings momentum. Both factors remain unfavorable.

Market Outlook Unchanged: Modest Gains in Global Equities in 2016. While the earnings outlook in the U.S. has improved, other countries are still seeing material earnings downgrades so that we continue to expect just a single-digit increase in global profits in 2016. Single-digit earnings growth combined with stable P/Es would suggest modest gains in global equities in 2016.

Figure 1: Regional Over- and Underweights Arrows Indicate Change vs. Last Month

Figure 2: Sector Over- and Underweights

Source: Cornerstone Capital Group Source: Cornerstone Capital Group

Summary of report originally published June 2, 2016.

Michael Geraghty is the Global Equity Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.

©mirexon/Crystal Graphics



Regional and Sector Strategy: July Update By Michael Geraghty, Global Equity Strategist, Cornerstone Capital Group

Sector implications of Brexit fallout. Uncertainty likely to prevail globally, at least until U.S. presidential election. Major corporate and consumer spending decisions potentially on hold, a negative for Information Technology, Industrials, and Consumer Discretionary (downgraded to Neutral). Low rates continue to pressure Financials.

Regional strategy. Russia and Australia still rank at top of regional model. Both seem relatively insulated from the uncertainty that’s likely to weigh on the U.K., Europe and the U.S. (downgraded to Neutral). While a strong dollar will pressure commodities —Materials just 14% of Australian market — oil prices may prove resilient following production cutbacks, a potential positive for Russia. (Energy upgraded to Neutral.)

Strategy in sync with Brexit thesis, but not driven by it. Both our sector strategy (neutral or negative on Consumer Discretionary, Industrials, Information Technology, Financials) and regional strategy (overweight Australia, Russia two countries far from the U.K.) are in sync with our Brexit thesis but are not driven by it, with valuation and earnings being the key determinants.

Figure 3: Industry Rankings

Source: Cornerstone Capital Group

Summary of report originally published July 6, 2016.




An Atypical Analysis of Industry Risks By Michael Geraghty, Global Equity Strategist, Cornerstone Capital Group

Intangible Factors Can be Material Too. Most investors focus on tangible income statement and balance sheet items, but intangible factors can be material too.

Analyzing Intangible Factors at the Industry Level. In our report “ESG in Sector Strategy: What’s Material?” we developed an approach to analyze intangible factors that can potentially have a material financial impact on sectors. We now apply our approach at the industry level.

Industry Risks are Constantly Evolving. In a subsequent report, “A Shifting ESG Materiality Matrix: What Has Mattered, What May Matter,” we concluded that the likelihood of an intangible factor having a financial impact, and the potential magnitude of that impact, are constantly evolving. We analyze industry risks associated with intangible factors currently.

Counterintuitive Conclusions. Based on our methodology, Tobacco is currently a less risky industry than Non Alcoholic Beverages. Food Retailers are currently more risky than Investment Banks.

Figure 4: Ten “Most” and “Least” Risky Industries Currently Based on Ranking of Intangible Factors

Source: Cornerstone Capital Group

Summary of report originally published May 26, 2016.

©valex113/Crystal Graphics


Global Market Strategy Brexit Fallout: Global Uncertainty to Weigh on Multiples

By Michael Geraghty, Global Equity Strategist, Cornerstone Capital Group

Uncertainty Has Increased Materially in Key Regions of the World. In the U.K., Brexit uncertainty could drag on for a few years. Globally, the next big uncertainty surrounds the U.S. presidential election, although that issue will be clarified in a few months.

Major Corporate Decisions Likely on Hold. In the U.S., Europe and the U.K., uncertainty will likely mean that managements avoid making major decisions pertaining to hiring, expansion, capex, M&A, etc. This decision-making paralysis could ultimately weigh on global economic activity and corporate profits.

U.S. Stock Prices Flat, at Best, in 2016. In equity markets, uncertainty has already taken a toll on stock prices by way of P/E compression. It’s hard to construct a scenario where multiples in the U.S. expand, at least until a clear victor emerges in the U.S. presidential elections. The combination of compressed multiples, and earnings that are potentially under pressure, suggests that U.S. stock prices will be flat, at best, in 2016.

Some Grounds for Optimism. Lower interest rates could support an uptick in consumer spending and business investment. A new U.S. president could initiate significant fiscal stimulus. Alternatively, a populist president could introduce a minimum national wage, which could spark consumer spending. Finally, despite uncertainty, technological innovation will continue, supporting new business models as well as creating new jobs.

Report originally published June 2, 2016.




Global Earnings Synthesis: Consensus 2016 Estimates Have Been Falling; 2017 Estimates Look Too High By Michael Geraghty, Global Equity Strategist, Cornerstone Capital Group

A Sharp Drop in 2016 Estimates. Consensus estimates for 2016 global earnings have fallen sharply since the start of the year. Nevertheless, many stock markets globally have performed strongly, even as uncertainty has increased given both the Brexit vote and the forthcoming U.S. presidential election.

2017 Estimates Look Too High. Consensus estimates currently imply a 26% gain in global earnings in 2017. Annual earnings growth has not exceeded 13% in any of the past five years.

Some Stock Markets Look to Be at Precarious Levels. The combination of falling earnings estimates and heightened levels of global uncertainty suggests some stock markets that are at, or close to, record levels —such as the U.S. — seem vulnerable to a pullback. The potential combination of a continued decline in earnings estimates and compressed multiples suggests that U.S. stock prices will be flat, at best, in 2016.

Figure 5: Estimated 2016 MSCI ACWI EPS: July 2016 and January 2016 Percentage and Absolute Change in Earnings in $ Millions (Sum of Sectors Equals MSCI ACWI)

Source: MSCI, Cornerstone Capital Group

Summary of report originally published on July 22, 2016.

©Sergey Nivens/Crystal Graphics



A Voice in the Boardroom: Practical Guidance for Voting Proxies to Influence Corporate Governance, Sustainability, and Performance By John K.S. Wilson, Head of Corporate Governance, Engagement and Research, and Caleb Ballou, Research Associate, Cornerstone Capital Group

We recently published a proprietary guide to voting proxies, titled A Voice in the Boardroom. This document is written for organizations and individuals who want to use their voice as shareholders to influence companies, but are not sure how to get started. It is meant primarily for asset owners — endowments, foundations, family offices, individuals or others — who are long-term stewards of capital on behalf of themselves and others.

Shareholders have the power to influence companies by engaging them in dialogue around social, environmental and governance concerns. We call these activities active ownership,

the primary mechanism of corporate democracy. Active owners have helped bring about change in the policies of thousands of companies on such issues as climate change, board diversity and executive compensation, benefiting companies, investors and society as a whole. Proxy voting is a crucial tool in the engagement process.1

For small-time owners of common stock, it can be easy to discount the importance of participating in proxy voting. But adding one’s voice to those of other shareholders, large and small, can garner attention and influence the board of directors, management, and the social and environmental policies of a company. Even a small shareholder’s voice can become part of a larger trend of advocacy.

Because of the complexity of modern corporations and the diversification of many investment portfolios, the idea of getting involved in active ownership may seem daunting. But the corporate governance novice is not alone. There are numerous partners available who possess the experience and expertise to support investors, whether they aspire to become thought leaders who actively engage companies or merely want to ensure that their institution’s shares are voted in a thoughtful manner.

To get the most out of these partnerships, investors must be able to have an informed discussion about proxy voting and corporate governance with internal stakeholders such as boards, donors and staffs, and external stakeholders such as proxy agents, asset managers, and custodial banks. By understanding how the proxy process works and what the issues are, investors can position themselves to carry out their priorities efficiently and effectively.

1 This guide specifically addresses voting proxies. For broader instruction about engaging in dialogue with corporations, we recommend The Networked Corporation by John K.S. Wilson and 21st Century Engagement: Investor Strategies for Incorporating ESG Considerations into Corporate Interactions by CERES and Blackrock.

http://cornerstonecapinc.com/2015/07/flagship-report-the-networked-corporation/

http://cornerstonecapinc.com/2015/07/flagship-report-the-networked-corporation/

https://www.blackrock.com/corporate/en-us/literature/publication/blk-ceres-engagementguide2015.pdf

https://www.blackrock.com/corporate/en-us/literature/publication/blk-ceres-engagementguide2015.pdf


The Investor as Steward of Capital

It may come as a surprise that the primary purpose of the public equity markets is not to finance new business investment. Public companies typically use internal cash flows rather than the capital markets to fund the investments in property, plant, equipment and other expenditures that enable their growth. In fact, public companies in the US and other markets buy back more equity shares than they issue in a given year. The function of funding new investments resides more in other asset classes such as venture capital.

Public equity investors do serve an important function, however: to serve as stewards of their existing investments. Stewardship involves a commitment to engage with companies, through both proxy voting and shareholder–company dialogue, to answer some of the most important questions about how companies govern themselves:

• Can investors feel confident that the managers of public corporations, to whom they have entrusted their capital, will act in shareholders’ best interests?

• Will corporate managers look to build enduring value, rather than pursue short-term profitability that places the institution at greater risk over the long term?

• Will companies behave responsibly towards other corporate stakeholders such as employees, customers and society?

Why Is Stewardship Necessary?

Investment in the public equity markets brings numerous advantages over investments in other asset classes or direct investments. Important among them is the ability to diversify a portfolio across companies and industries. Equity investment also requires a “separation of ownership from control”—the owners of capital delegate the job of running companies to professional boards and management teams.

There are real benefits to delegating the day-to-day management of companies to specialists with specific industry expertise. However, this separation creates risk in the form of the principal-agent problem. Managers are hired to deliver returns to shareholders, but may be tempted to make decisions that benefit themselves at the expense of the company. Or, they may choose a strategy that earns high returns immediately but places the organization at risk in the future. Or, surrounded by like-minded individuals, they may become victims of “group-think” and miss the early signals of social change that will impact their competitiveness.

Moreover, as large companies supply an increasing share of the global economy, a narrow focus on maximizing shareholder returns without regard to the welfare of other stakeholders can exacerbate social ills such as pollution, inequality, or public mistrust of society’s institutions. Ironically, over the long term, exclusive focus on short-term profit maximization can actually undermine the interests of the shareholders themselves—as the financial crisis of 2007-08 demonstrated.


The Link Between Governance and Sustainability

As owners of companies, shareholders are well positioned to play an important role in addressing these issues within their investment portfolios. Shareholders can’t micromanage companies and shouldn’t try. However, they can encourage rules of the game that hold corporate leaders accountable to shareholders, offer incentives for long-term, sustainable value creation, and encourage consideration of how corporate decisions affect society as a whole.

We call these rules of the game corporate governance, defined as the relationship among all corporate stakeholders that determines how decisions are made about the strategic direction of the firm. Corporate governance defines the roles and responsibilities of shareholders, management, and boards.

Sustainability is a core element of good corporate governance. Cornerstone Capital defines sustainability as “the relentless pursuit of material progress towards a more inclusive and regenerative economy.” Companies become more sustainable by maintaining constructive relationships with stakeholders such as employees, suppliers, customers, and society as a whole. These relationships matter for corporate business performance because a company’s stakeholders are the ultimate source of its ability to create value.

For this reason, although some stakeholders may not have a formal role in corporate decision-making, companies that fail to incorporate legitimate concerns of stakeholders into strategic and operational decisions do so at their own peril—as companies such as BP, Valeant Pharmaceuticals, Volkswagen and many others have learned.

While historically many investors saw proxy voting and engagement as a low priority, a growing number now view this oversight function as critical to the effective functioning of the capital markets. This guide is intended to help investors learn how to use the power of proxy voting and engagement to influence companies and bring about a more sustainable economy.

Please click here for the executive summary of A Voice in the Boardroom. The complete report is available to clients of Cornerstone Capital Group.

John K.S. Wilson is the Head of Corporate Governance, Engagement & Research at Cornerstone Capital Group. He leads a multidisciplinary team that publishes investment research integrating Environmental, Social and Governance (ESG) issues into thematic equity research. He also writes and presents widely about the relevance of corporate governance and sustainability to investment performance for academic, foundations, corporate and investor audiences. Caleb Ballou is a Research Associate at Cornerstone Capital Group. He recently completed a dual MBA and MA in international affairs at Columbia University.

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Our Response to the SEC on Sustainability Disclosures By John Wilson and Cornerstone Capital Group Research Team

Cornerstone Capital Group recently responded to the US Securities and Exchange Commission’s invitation to submit comments in response to its concept release, “Business and Financial Disclosure Required by Regulation S-K.” We reprint our response below.

Founded in 2013, Cornerstone is a financial services firm based in New York. The mission of the firm is to apply the principles of sustainable finance across the capital markets and enhance investment processes through transparency and collaboration. In offering investment advisory, investment banking and corporate advisory services, Cornerstone works with asset owners, corporations and financial institutions to promote new research in the field of Environmental, Social and Governance (ESG) analysis, and facilitate capital introductions for organizations around the world engaged in sustainable business practices.

Because our clients are long-term investors, we have a strong interest in the quality of corporate disclosures, and how well they enable us to evaluate risks and make decisions that will affect the long-term health of our clients’ portfolios. We believe that although current disclosure standards require companies to report on all material issues, companies currently have insufficient guidance regarding disclosure of long-term issues, particularly those related to ESG concerns.

Voluntary sustainability reports separate from financial disclosures have been commonplace for several years. Standards for voluntary reporting have risen considerably, and these reports are valuable to many stakeholders such as employees, communities and customers. Yet current ESG disclosures fail the test of quality, comparability, consistency and

materiality that would make them useful to investor decision-making.

Our comments reflect our views on how ESG disclosures could be incorporated into corporate disclosures in a manner consistent with existing disclosure standards and expectations.

III. B. Nature of Disclosure Requirements

Materiality We concur with the standard of materiality as the Commission has traditionally interpreted it. However, we believe that current disclosure standards

tend to emphasize short-term, tangible factors that may not fully capture the information that may be relevant to the decision-making of long-term investors.

In particular, a class of investors called “universal owners” may have information needs that are not satisfied by current disclosures. Universal

owners are large asset owners, usually pension funds, insurance companies or sovereign wealth funds, who because of their size and the nature of their liabilities tend to hold all or most companies in the market. (Smaller institutions that are long-term stewards of capital and are at least partially passively invested may also share some interests with universal owners.)

Distinct from some investors, universal owners are less dependent on the short-term performance of companies than on the long-term performance of the market as a whole. These characteristics have implications for what kinds of information universal owners may consider material. Universal owners are limited in their ability to optimize return or manage risk solely through trading, and as a result may see themselves as responsible for holding management

©www.BillionPhotos.com/Crystal Graphics


and boards accountable through “active ownership.” Part of the benefit of engagement is that it allows shareholders to address issues that may be material for long-term company performance but are unlikely to drive short-term price movements. Proxy voting is a primary tool of active ownership, but many such investors also consider engagement in dialogue with companies to be an important complement to proxy voting. Many companies now routinely reach out to shareholders on matters that are or could be the subject of proxy votes.

While current materiality standards include information relevant for voting, standards should clarify that “reasonable” investors may expect information relevant for both voting and engagement.

Because of their exposure to the market, universal owners are also concerned about the potential systemic risks posed by certain corporate activities. We note, for example, that while the financial crisis of 2007-2008 originated in the banking sector, it eventually affected the performance of companies in every industry. Also, the Deepwater Horizon oil spill affected not only the share prices of BP, Transocean and others directly involved, but also other companies in the same sector that faced additional regulatory scrutiny and a temporary deep water drilling ban as a result of the crisis.

Because environmental and social issues reflect the impact of the company on markets, many “reasonable” universal owners consider some of this information material, particularly if it also has the potential to drive company performance over the long term. We recommend that the Commission recognize the potential impact of systemic issues on portfolio performance through standards of what constitutes material information.

Principles-Based vs. Rules-Based Disclosure An approach to disclosure that places greater emphasis on longer term creates uncertainty in reporting, because the factors that drive long-term performance may differ across industries and companies. We therefore support movement towards a more principles-based approach to disclosure that places responsibility on management for exercising judgment and establishing which issues matter for company performance. Principles- based disclosures

avoid “check the box” approaches common to rules-based systems and can be tailored to specific company circumstances.

Principles-based disclosures have the disadvantages of lacking clarity and consistency across companies as well as creating opportunities for management to conceal unfavorable information. However, rules-based systems are no guarantee against misleading disclosures. We believe that a balanced “comply or explain” approach, combined with explicit standards which are voluntary but understood as best practice, will encourage meaningful disclosures. This approach will allow companies the flexibility to tailor disclosures to their own individual circumstances while encouraging enough consistency in reporting to allow investors to compare information across companies.

IV. F. Sustainability

According to some estimates, the value of intangible assets makes up on average 80% of corporate assets. We believe that material sustainability factors are an important component of both a company’s intangible assets and its market value. We also have observed in our research that sustainability factors are particularly useful in determining the long term (>3 years) component of market value and also the likelihood of an event, such as an industrial accident or accounting scandal, which can materially impact share price in the immediate term. Sustainability reporting could therefore fill gaps in current disclosure requirements, which mostly emphasize tangible factors (such as property, plant and equipment) and the intermediate time frame (one quarter to one year).

“Sustainability” is an umbrella term for a vast array of issues relating to the impact of the company’s activities on human society and the natural environment, including climate change, diversity, human rights and resource scarcity. Some sustainability issues may be of great concern to stakeholders such as consumers, employees and communities, but only a subset are of importance to investors. While some of these material issues will be relevant for all companies (e.g. human capital, board diversity), many will vary in importance from company to company and industry to industry (e.g. safety, cybersecurity, labor rights).


For this reason, we believe that “one size fits all” disclosure requirements will fail to provide an accurate picture of the company for investors, and will impose unreasonable cost and time burdens on companies. Instead, we recommend that the Commission consider adopting industry-specific, principles-based disclosure standards for companies. Currently, numerous bodies are developing these standards, including the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), CDP (formerly the Carbon Disclosure Project) and the International Integrated Reporting Council (IIRC).

At this time, we do not endorse any one of these standards over the others, believing that each has its own merits and limitations. We recommend that companies be allowed flexibility in using these standards to present an accurate narrative that makes clear how the company’s approach to sustainability reflects its business circumstances and strategy. We believe that this approach will be clear and meaningful as well as comparable across companies, and will also allow a unified and more mature set of best practices to emerge over time.

Many companies now produce stand-alone sustainability reports. We do not believe that these disclosures are a meaningful substitute for reporting that is integrated into financial disclosures. The audience for “corporate social responsibility” reporting comprises a range of stakeholders other than investors, and their needs may not align with the needs of investors. Moreover, there are no accepted standards for the formats, key performance measures or assurances of the quality of these reports.

We recommend that the Commission integrate sustainability reporting into three sections of disclosures: the Company Business Information, the Management Discussion and Analysis (MD&A), and the Risk disclosures.

IV. A. Core Company Business Information

Sustainability concerns should form a component of the narrative description of the business, especially the ways in which these issues inform the overall long-term strategy of the company. Disclosure should clearly link business strategy to the risks identified separately, to make clear how the company is managing the high-priority risks that it faces.

As discussed above, we believe that the proper approach would not be to expand significantly on the enumerated line items already in place, but to allow companies to determine the appropriate indicators for their particular business, as informed by the external standards and best practices. Given this flexibility, it is also important that companies explain the process by which they determined which ESG issues are relevant and how these are linked to overall business strategy.

We also believe that it would be useful for companies to include general information about the overall industry structure in their business description. Identification of sustainability issues that are common to the entire industry would also be useful to investors and perhaps help to avoid boilerplate disclosures. Some companies consider certain sustainability concerns to be “pre-competitive,” meaning that companies have a common interest in managing and addressing them (for example, community opposition to hydraulic fracturing might be understood to be a “pre-competitive” issue for the oil & gas industry). This information is useful to investors in understanding management’s perspective on the context within which the business operates.

Although we believe that sustainability information should be industry specific, we do believe that a small subset of issues is common to all industries.

First, we believe that human capital is a key intangible factor for all companies. We believe that the following information would provide investors with a richer perspective on the company’s management of human capital:

• Number of employees

• Total payroll

• Turnover

We also believe that additional diversity information would be useful. In particular, we believe that companies should provide information about the diversity of the board of directors that goes beyond current disclosure requirements to include a description that includes gender and ethnic diversity, by including any other factor the board considers relevant for the diversity of its composition.


Second, we believe that all companies should provide transparency about political contributions, including a description of how decisions about contributions are made, as well as all direct and indirect expenditures for political campaigns, including donations to third party groups that use the funds for political purposes.

IV. B. Company Performance, Financial Information and Future Prospects

We observe briefly that the MD&A can be used to complement core company business information with a discussion of how stakeholder relations were impacted over the last year. The MD&A section may be the appropriate location for qualitative and quantitative results of key performance indicators, while the core business information may be a more appropriate place to discuss the process for how decisions regarding sustainability are made.

IV. C. Risk and Risk Management

We recommend that the SEC add a category of “stakeholder risk” to the list of risks that companies should identify. Stakeholder risk relates to the impact

that company activities have on those with a formal or informal relationship with the company, such as employees, customers and communities. A company’s relationships with these stakeholders have an impact on its ability to deliver value for shareholders, and a decline or improvement in these relationships may be material for investors over the long-term, even if there is no immediate effect on profitability.

We also suggest that companies identify the risks that are priorities for the company. In general, risks are measured by their likelihood of coming to pass, and their potential impact if they do come to pass. While the most concerning risks are those that are both likely and high-impact, the financial crisis shows that low-probability, high impact risks may also be important for investors. We also suggest that companies be allowed to choose to omit low probability, low impact risks at their discretion.

We appreciate the opportunity to respond to this concept release, and appreciate the Commission’s interest in these important issues.



Food Safety: In a State of Transformation (Executive Summary) By Michael Shavel, Global Thematic Analyst, Sebastian Vanderzeil, Research Analyst, and Dehao Zheng, Research Associate, Cornerstone Capital Group

A number of highly publicized food scares have swept through the global food chain in recent years. Headlines include the outbreaks of E. coli and norovirus at Chipotle, Salmonella linked to Foster Farms poultry, melamine adulterated infant formula in China, and Salmonella-contaminated peanut butter leading to the imprisonment of the former CEO of Peanut Corporation of America. These events highlight vulnerabilities in the food safety chain that present opportunities and risks for investors.

To this end, the food industry is undergoing a transformation as it addresses food safety risks in an increasingly global, complex supply chain. Food safety encompasses the practices and conditions promoted across a food supply chain with the intention of ensuring food quality and preventing contamination and foodborne illness.

In this report (access to full report available here), we examine major food safety events that have affected publicly traded US companies over the last 25 years. We identify the behavioral/demographic, regulatory, and technological factors acting as catalysts for the food industry’s transition towards increasingly proactive and innovative food safety strategies. To assess the opportunities and risks associated with this transition, we evaluate the food safety practices of nearly 60 companies throughout the food supply chain. Data is aggregated at each level of the supply chain and key findings are discussed.

We highlight three areas of food safety innovation for investors wishing to gain exposure to the food safety theme: 1) Food testing and analysis; 2) supply chain technology; and 3) automation and robotics. We present a list of 30+ companies that offer food safety solutions and rate their level of exposure. We also offer industry-level observations that may lead to additional avenues of inquiry.

Cornerstone Capital Group produced this report on behalf of The Investor Responsibility Research Center Institute (IRRC Institute or IRRCi). The materials in this report may be reproduced and distributed without advance permission, but only if attributed. If reproduced substantially or entirely, it should include all copyright and trademark notices.

Michael Shavel is a Global Thematic Analyst at Cornerstone Capital Group. Prior to joining the firm, Michael was a Research Analyst on the Global Growth and Thematic team at Alliance Bernstein.

Sebastian Vanderzeil is a research analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM.

Andy Zheng is a Research Associate at Cornerstone Capital Group. Andy graduated from Bowdoin College with an interdisciplinary major in Mathematics and Economics and a minor in Visual Arts.

http://cornerstonecapinc.com/wp-content/uploads/2016/07/Cornerstone_IRRC-Future-of-Food-Safety-July-2016-FINAL-REPORT.pdf



Tracking Our Thesis on Food Safety Opportunities: A Look at Neogen By Michael Shavel, Global Thematic Analyst, Sebastian Vanderzeil, Research Analyst, and Dehao Zheng, Research Associate, Cornerstone Capital Group

Food safety innovation offers growth opportunities for investors. As we discussed in our July 2016 report Food Safety: In a State of Transformation, the global food safety testing market is expanding due to the enactment of government regulations such as the Food Safety Modernization Act (FSMA), quality improvement initiatives by food processors, and consumer demand for safer food.

Our optimistic view on growth in food safety testing is supported by Neogen’s fourth quarter earnings release. Neogen is flagged in our report for having high exposure to the food safety theme.

• Revenues for the fourth quarter of Neogen’s 2016 fiscal year (ending May 31) were $90.08 million (+15% YoY), versus a consensus estimate of $86.3 million. Revenues for fiscal 2016 increased 13.5% over fiscal 2015. Fiscal fourth quarter EPS was $0.26 (+4% YoY), in line with consensus estimates. Fiscal 2016 EPS increased 7.8% over fiscal 2015.

• Food Safety segment revenues increased 11% during fiscal 2016 versus the prior year. Growth was driven by rapid tests for food allergens and AccuPoint Advanced Sanitation Monitoring System products.

• Animal Safety segment revenues increased 16% during fiscal 2016 versus the prior year (14% organic). Growth was driven by agrigenomics testing and biosecurity products.

Biosecurity benefiting from consumer trends. Neogen’s Animal Safety business is positioned to benefit from growing demand for poultry raised without antibiotics. As antibiotic use is reduced, there’s a growing need for biosecurity products such as cleaners, disinfectants, rodenticides and insecticides. These maintain control over any infections that would become food safety problems as the food products pass through the farm gate (from the farm to the consumer).

Prospective opportunities in seafood testing. Neogen CEO Jim Herbert believes the FSMA will have more impact on imported seafood than any other part of their market. The company offers products for salmon and trout genotyping, but it is interested in expanding further into the aquaculture market.

This is an excerpt from a report published on July 21, 2016. Access the full report here.

Michael Shavel is a Global Thematic Analyst at Cornerstone Capital Group. Prior to joining the firm, Michael was a Research Analyst on the Global Growth and Thematic team at Alliance Bernstein.

Sebastian Vanderzeil is a research analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM.

©trans 961/Crystal Graphics

http://cornerstonecapinc.com/2016/07/food-safety-in-a-state-of-transformation/

http://cornerstonecapinc.com/2016/07/food-safety-in-a-state-of-transformation/

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Global Sector Research Exploring the Challenges in Maritime Financing By David Lepper, Founding Partner and Chief Investment Officer, IPSA Capital

Consider these facts:

• 90% of world trade is transported by sea,

• The world will ship by sea 2.5 times more iron ore per year in 2018 than in 1998,

• Transporting a pair of jeans from Asia to the US costs less than the taxi ride to go and buy them.

So, what would happen if the traditional investors in maritime financing downsized their commitment to funding the construction or secondary sale and purchase of the ships that the global economy relies on for international trade? It could be reality, if the current apathy towards the industry continues and alternatives are not sought. In this article we explore the possibilities, including the role

alternative finance may play.

Unprecedented Forces of Change Are Afoot We all acknowledge that the business cycle faces periods of growth, followed by adjustment phases correcting misallocations, usually caused by credit-fueled expansion. The 2002-08 maritime asset investment boom was no exception, but was also driven by China’s 2001 ascendancy to the WTO. The reality is that eight years on, we are still faced with a large dislocation between supply, demand and asset prices that are outside of traditional trend levels. In a broad sense this is actual (in dry bulk ships particularly), but in some other sub-sectors it is perceived (container feeder). These perceived dislocations are building more immediate upside risk into the asset class, which is a positive that has been missed by many. In areas of actual overcapacity, with asset life averaging 20-25 years, the industry is fast approaching the halfway period of much of tonnage deployed around the time of the credit crisis. With ongoing low levels of profitability, there is a strong likelihood of accelerated scrapping of older or less well maintained vessels.

Adding to the pressures on financing for the maritime industry is the debate around the global trade fundamentals that drove much of demand, specifically whether the reliance on export-oriented strategies and the associated trade imbalances are correct. This is not helped by the collapse of asset inflation, the decline in debt-based consumer consumption, and new banking rules surrounding the financing of risk-weighted assets. This controversy will not be solved overnight. Therefore, no matter who the maritime tonnage owners are, they are going to have to change their approach towards finance in order to survive.

©khunaspix/Crystal Graphics


Chart 1: New Build Prices Index

Source: IPSA, Clarksons

Change, but with Wider Consequences In 2014, Deutsche Bank estimated the value of the maritime tonnage responsible for cargo transportation to be US$820 billion.1 Traditionally, maritime assets have seen equity funding provided by high net worth individuals, family offices and privately held corporates who operate outside of the main institutional investment forums. This has been matched by a small number of banks who are comfortable with shipping providing junior and senior debt facilities. Of this last group, circa 80% of the senior funding was historically supplied by banks in Europe, some of which were severely hit by the credit crisis and have formally announced lower exposure going forward. Many of the capital providers to the industry have fewer financial resources at their disposal.

Heightening the pressure on maritime industry financing are Basel Banking Accords surrounding risk-weighted assets. Maritime asset funding is in one of the higher-cost categories. Some of largest traditional senior and junior debt providers are, as a result of these rules, forced to downsize their commitments. Moreover, Asian and Middle Eastern banks face the same rules, and also tend not to have the expertise and therefore the risk appetite to fill the gap. But even excluding these constrained balance sheets, it is estimated that the industry is still facing a US$100 billion shortfall in funding2.

Yes, press headlines highlight oversupply and that’s fine when global economic growth is anemic; but what happens when it isn’t? After all, there is on average a two-and-a-half-year lead time for delivery of new ships, and supply dynamics are beginning to adjust back towards equilibrium. As referred to above, industry assets have a finite life.

With current low returns in certain sub-sectors and a broader perceived uncertainty, there is an increasing risk of under-investment in the sector in the next decade. A prolonged disruption to finance, be it origination or refinancing of the maritime sector, could create systemic risk and cost of capital implications for industries reliant on global trade.

1 Deutsche Bank (DB) Arab Maritime Forum May 21, 2014 2 Makan, Ajay, and Mark Odell. “Wave of Private Equity Money Flows into Shipping” — FT.com, October 27, 2013


When Passive Participation Moves Toward Active Finance has been a key driver for the maritime industry for centuries, be it the building of vessels sent to explore new worlds and find trade opportunities, or risk mitigation through Lloyds of London, which was established in 1871.

Whilst historically finance has played a passive role, it has been an active tool in developing global trade. Despite the current macro debates, the themes of outsourcing, an emerging middle class and urbanization are driving more active participation for a number of reasons:

The equipment and its infrastructure are more capital intensive than two decades ago. Not only have ports needed to be constructed to handle oil and petrochemicals, iron ore, coal and containers, but the assets in their own right are now larger in size, as trade volumes have increased and lower unit costs are demanded by end customers. The sheer size and cost of these assets is requiring financiers to consider the amortization of investments over longer periods of time. In some cases, the traditional seven-year tenors are now as long as 12-17 years. Traditional commercial banks have struggled to accommodate these demands. Alternative finance can meet this demand, if matched to the right counterparty, but in these circumstances investment management needs to be more active and industry specialized.

Direct ownership through default: Traditional and alternative financial firms are becoming increasingly involved in the ownership and operation of intermodal assets. Initially, this arose from the evolution of international trade, but more recently it has been a result of the credit crisis and the untimely demise of some traditional owners who over-indulged in cheap credit.

With real-world assets, diversification is required: Aircraft leasing, water treatment plants, PPP/PPE assets, ports and airports in the late 1990s fell into the illiquid bucket of many pension, insurance, private equity and sovereign wealth funds, and therefore were considered non-mainstream. However, over the 2000’s, assets were acquired at multiples not to be imagined a decade earlier as funds looked for new asset classes. As a result, these assets were increasingly perceived as liquid and mainstream, a perception encouraged by the active involvement of a variety of financial firms and ratings agencies. International commercial vessel fleets have not yet shifted to this profile, mainly because they didn’t need funding prior to the credit crisis. However, due to the above-mentioned changes to the financing of these assets, maritime asset owners and operators are beginning to review the structuring of asset cash flows and residual values. This move, coupled with returns in other real world assets being bid away by the competition for a smaller number of deals, is beginning to build a more active and direct focus by traditional investors.

Maritime asset exposure offers portfolio diversification and lower volatility for multi-asset and alternative investment managers: This profile is starting to drive investment in commercial maritime assets, particularly those that offer steady income, as they provide institutional investors, such as pension and insurance firms, with a tool for asset-liability matching, portfolio diversification and competitive yield. Moreover, the asset class offers lower volatility over time to investors, if specialist management is deployed. Furthermore, it is in most cases compliant with the principles of Islamic financing.


Chart 2: Industry unlevered returns IRR% versus New Build Prices

Source: IPSA Capital, Clarksons. The Average IRR is a weighted average of 3-, 5-, 7- and 10-year holding period return across the three key sub-sectors -- Dry Bulk, Container, Tanker -- weighted on fleet capacity measured in dead weight tonnes. Purchase price is the new build price.Exit price is taken as secondhand price corresponding to the holding period. Revenues are 12-month time charter rates. Operating expenses include dry docking expenses amortized over the appropriate period. S&P commission: 1% charged on purchase price and exit price, allowing for deal expenses. Charter commission: 2.5% of 12-month charter rates is deducted from cash flows. Past returns are not a predictor of the future. Furthermore, typically new build vessels can be delayed, meaning returns are estimates and allow for a framework for discussion. Rates are assumed at 12-month/1-year charter rates; in practice contracts can be for shorter or longer periods, which could smooth volatility and boost returns.

Chart 3: Portfolio diversification provision

Source: IPSA Capital, Clarksons, Reuters. Average risk and return of various asset classes starting from 1990 until December 2015. Global Bond Index is comprised of JP Morgan GABI index from 1990-2013 and Barclays aggregate bond index for 2014 and 2015. Commodities Index is CRB index up to 2005 and Thomson Reuters Index to Dec.2015.

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Risk management is no longer just through insurance, but via synthetic financial instruments and provision of regulatory capital as well: Shipping derivatives, while relatively young compared to mainstream assets, evolved out of the high volatility seen in the maritime markets and are designed to help manage risk. This risk emanates from fluctuations in freight rates, bunker prices, vessel prices, scrap prices and the more traditional areas of interest rates and foreign exchange rates. Maritime principals cannot provide this liquidity or expertise.

Often, direct exposure by financial institutions is not preferred or needs to be investment grade. However, the benefits of industry financing can also be enjoyed through regulatory capital relief trades. This arises from the evolution of the Basel banking rules. It is widely expected that alternative investment managers, with expertise in the shipping arena, could shortly deploy equity relief capital to well-managed shipping banks. This has been recently seen in the SME funding, infrastructure and auto finance sectors to name a few. The benefit to the banks is a lower cost of equity and a multiplier effect on existing equity allocated to their shipping portfolios. The benefit for the investor is a return competitive to alternative sectors and assets and greater protection from any asset price pressure. This is similar to Collateralized Loan Obligation trades, but allows for the underlying bank to remain the front-facing name. Although the success of this trade is going to highlight the need for specialist investment managers should the loan fall into default. This way, investors have a manager with the knowledge of how to protect capital in a work-out scenario through their knowledge of the asset and network to redeploy it.

What Is Required to Achieve Best Practice?

Acceptance by the maritime trade that its relationship with the financial community is set to change will take time. Once seen as an industry that repelled mainstream institutional investors providing direct or alternative finance, it is likely that inclusion is to be driven by necessity. This, we believe, will take another three to five years. Meanwhile, challenges will need to be overcome, namely:

• Transparency: With the allure of high returns in 2002-07, uninitiated alternative asset investors made a headlong rush into maritime sub-sectors with low barriers to entry, particularly dry bulk. This saw the fleet more than double in tonnage terms. With charter rates now at or below breakeven, cost management and governance is ever increasingly being examined by the finance industry.

• Governance: From 2001 to 2008, the maritime industry benefited from the large sums of capital available. This came through a number of high-profile alternative debt and equity offerings, the avenues of which are likely to remain a component of the new investment landscape. Due to the mainstream profiles that this capital deployment has brought, there is now an increasing amount of pressure to deliver better governance.

• Acceptance by ratings agencies: Investors and industry participants are slowly demanding an improved hearing and profile by ratings agencies. However, this is likely to be difficult, not only because of ownership fragmentation in various subsectors, but also because the wave of cheap credit and asset inflation in the 2002-08 period and subsequent collapse has left the maritime industry struggling to deliver investment grade characteristics. If the ratings agencies are willing to adapt to accepting the industry’s importance to world trade and operators are able


to provide stable cash flows via longer-term contracts and credit enhancement, then relative to other industries there is no reason parts of the industry cannot be investment grade.

Is the Current Approach Best Practice? To date, regrettably for some limited partners, alternative investment has come from mainstream alternative investment houses, some of whom have limited industry knowledge or networks, and have in some cases ignored fees and costs or available strategic knowledge investments. This high-cost approach comes at the detriment to limited partners’ returns, which has therefore curtailed investor appetite for the asset class. Moreover, it has for now slowed maritime owners’ and operators’ acceptance of alternative funding.

The simple fact is that investors in this space are best served by using specialist real world asset managers in navigating the maritime industry to achieve optimal risk/reward parameters. The industry, while critical to global trade, remains small and is at its simplest based on relationships. Use of specialist managers who have these networks and relationships helps considerably to bridge the current gaps in knowledge and expectations that exist in both the finance and maritime industry.

One way or another we expect change to occur. The reality is demand for finance by operators is at a cyclical low. As such, we are yet to see the true demand for finance in the brave new world that is coming over the horizon. It is hard, though, to imagine that the cost of capital for operators and owners is set to be lower in the medium term than it is today. Therefore, the true rewards are going to be reaped by those prepared to act now to be positioned for the coming up-cycle and do so with specialist advice and industry partnerships.

David Lepper is Founding Partner and CIO of IPSA Capital, a global asset management and advisory group specializing in alternative assets and special situations. He is formerly Head of MENA Research for HSBC and Pan Regional Head of Asian Small-Mid Cap Research and Global Coordinator for Shipping Research for UBS.


Accelerating Impact Bitcoin and Ethereum: Exploring How Smart Contracts Work

By Chris Burniske, Analyst, ARK Invest

This article assumes a basic understanding of blockchain technology. For background information please see this overview from the founder of Bitcoin.

Blockchain-based smart contracts have generated ample buzz recently as they could eventually build entirely autonomous organizations, enable self-regulated peer-to-peer insurance models, and facilitate the renting of all internet-connected things. This article explores how smart contracts work. It provides a brief primer on smart contracts, then compares the coding, storage and execution of smart contracts on

Bitcoin and Ethereum, the two permissionless blockchain protocols that have achieved scale thus far. While plenty of healthy skepticism still exists around smart contracts, ARK Invest believes Bitcoin and Ethereum will be instrumental in validating the potential of this budding innovation.

Primer on Smart Contracts A smart contract refers to coded logic that moves digital assets when triggered by necessary events. It is akin to a series of “IF, THEN” statements, where the “ifs” are preconditions that must be met in order to trigger the “thens.” The idea fits well within blockchain technology because blockchains offer a guarantee of future execution, in a decentralized manner,1 once the smart contract logic is stamped within a block.

The term “smart contracts” often puts mental imagery of complex documents in peoples’ minds, which ARK believes is misleading. This misconception explains why Mike Hearn, an early pioneer within the Bitcoin space, called smart contracts a misnomer in a November 2013 conversation on the matter. While he preferred the term conditional payments, ARK prefers broadening the term to conditional transactions to capture the idea that this technology can facilitate more than the transfer of money for goods and services.

Conditional transactions executed via a blockchain are computationally expensive because every computer that is part of the network needs to execute the same logic and update the state of the blockchain. In other words, each time a smart contract is triggered every computer has to perform the same task, consuming considerable resources and making the process inefficient when compared to parallel processing architectures. Therefore, not every conditional transaction will be appropriate for execution via a blockchain, but rather only those use cases that demand the distributed and secure nature of a shared ledger. Once more sophisticated solutions are implemented — like sharding, which can help to better parallelize computing tasks and storage — conditional transactions may prove less

1 If the blockchain is permissionless— providing open access to participants that would like to join it— ARK believes it will maintain greater decentralization than if it is a permissioned blockchain.

©3DSculptor/Crystal Graphics

https://bitcoin.org/bitcoin.pdf

https://slock.it/dao.html

http://www.coindesk.com/blockchain-p2p-insurance-models/

https://slock.it/

http://bitfury.com/content/5-white-papers-research/public-vs-private-pt2-1.pdf

http://www.multichain.com/blog/2016/04/beware-impossible-smart-contract/

http://szabo.best.vwh.net/smart_contracts_idea.html

https://www.youtube.com/watch?v=zSWFqC-0hK8

https://docs.mongodb.com/manual/sharding/


computationally expensive to the network, further widening the scope of applications.

Coding of Smart Contracts While Nick Szabo conceived the concept in the 1990s, Ethereum popularized the idea of smart contracts. It remains a common misconception that Bitcoin can’t facilitate the same range of functionality. Even though Ethereum currently has more flexibility in the programming languages that can be used — because it was designed with developers keenly in mind — the two blockchain platforms can accommodate the same smart contract functionality.

With its source code written in C++, coding for Bitcoin applications often occurs at a more granular layer, making it a less desirable sandbox for many new-age web and application developers. The high-level languages readily available within Ethereum, however, make smart contracts accessible to most developers. For example, Geth is available to Ethereum developers; it is implemented in Go, the easy-to-learn open source programming language that Google released in 2009. Go was created in part because the founders hated the complexity of C++. ARK believes people confuse “difficult” and “impossible” with regard to encoding complex smart contracts in Bitcoin. While it may currently be more difficult to encode complex smart contracts in Bitcoin, that does not mean it is impossible.

Storage and Execution of Smart Contracts Bitcoin and Ethereum differ in the storage and execution of smart contracts, which became clear to us during conversations with relevant parties at Coala’s NYU Blockchain Workshops in April this year. We will start with Ethereum because it was designed specifically with smart contracts in mind and therefore easier to understand, whereas while smart contracts are cleverly layered into Bitcoin transactions.

Ethereum users load smart contracts into its blockchain via a transaction to the network that has a payload containing the logic of the contract. The transaction is not sent to a particular address. Instead, the nodes processing the transaction on the network recognize the “smart contract payload,” and create a smart contract address. The underlying logic and interactions for smart contracts can be seen on blockchain explorer sites like Ether.Camp. Once uploaded to the blockchain, the logic underlying a smart contract can be activated by sending to its address a transaction with the preconditions necessary to trigger it. Triggering a smart contract can lead to the sending of another transaction, triggering another contract, theoretically ad infinitum.

With Bitcoin smart contracts, it’s important to understand that each transaction exists as a data structure composed of inputs and outputs, as can be seen in a Bitcoin block explorer. In order to send bitcoin, users must provide certain inputs meeting pre-determined requirements that prove they own, and therefore have the authority to send, the bitcoin they claim to own. Users can also create contract transactions that require a more complex set of inputs in order to trigger the release of bitcoin. A simple example of more complex inputs is a multi-signature transaction, which requires more than one entity to sign off on the release of bitcoin, proving useful in escrow situations where perhaps two of three parties must vouch for a transfer.

http://szabo.best.vwh.net/formalize.html

https://bitcoin.org/en/development

https://github.com/ethereum/wiki/wiki/Ethereum-Development-Tutorial

https://github.com/ethereum/go-ethereum/wiki/geth

https://golang.org/

http://techcrunch.com/2009/11/10/google-go-language/

http://techcrunch.com/2009/11/10/google-go-language/

http://www.drdobbs.com/open-source/interview-with-ken-thompson/229502480

http://www.stern.nyu.edu/experience-stern/news-events/new-york-blockchain-workshop

https://live.ether.camp/account/748defc02aa6221ae4db129bbe7e6a97537a6f45/contract

https://blockchain.info/tx/0408953d670d0f268b70f449772bd3d1c1b80c690be6f3017e3f9bdaa01c0b6c

https://en.bitcoin.it/wiki/Multisignature

https://en.bitcoin.it/wiki/Multisignature


Often surprising is the complexity of operations that can be created from the combination of simple operators. With the introduction of Segregated Witness (SegWit), the flexibility of Bitcoin’s scripting system will increase. Since the scripting system is responsible for creating the logic embedded within Bitcoin transactions, making the scripting system more dynamic will allow transaction types to be more dynamic as well. Additionally, Rootstock is working on building an easy-to-use smart contracts platform atop Bitcoin. Given the many ways to construct and execute a smart contract using the Bitcoin network, we recommend those further interested to read BitFury’s white paper, “Smart Contracts on the Bitcoin Blockchain.”

Summation The promise of smart contracts is that once the logic is live, the underlying blockchain guarantees future execution as long as the necessary conditions are met. For example, a company employing smart contracts within Ethereum is Slock.it, which ties the unlocking of real world devices with blockchain technology. Imagine a world where you rent a house via Airbnb and all of the internet-connected-devices within the house are updated with information about your digital wallet and date of arrival. Then, whenever you want to release a service within that house, whether unlocking the fridge to get a beer, the WiFi to sip megabytes of data, or the autonomous car for a trip, you send a transaction to the house with a request for that service. The funds are deducted automatically from your account and the device is unlocked with no credit card intermediaries and perfect record keeping via the decentralized ledger of the underlying blockchain. If the house were connected to the bank which services its loan, you can imagine homes that pay off their own mortgages with the funds they accrue from renters.

One of the more abstract implementations of smart contracts is The DAO, with “DAO” standing for decentralized autonomous organization. Such an organization has no concrete leader, but is instead composed of a series of logic and rules embedded in an interconnected web of smart contracts. While it may seem like science fiction, in May 2016 The DAO raised $160 million in the world’s largest crowdfunding to date. It was promptly hacked in June 2016 as an attacker drained $50+ million in funds, only for that breach to be reverted in July by a hard fork of the network. The space remains young, and now security is rightly top of mind for smart contracts and DAOs

Smart contracts could increase capacity utilization of houses and other assets, decrease legal disputes thanks to flawless ledgers, and cut intermediary costs across the board. Given the efficiency, transparency and economic value that smart contracts will provide to a multitude of sectors and services, they could enable a productivity boost from currently stranded assets. ARK Invest believes Bitcoin likely will be the environment of choice for mission critical contracts requiring utmost security, while Ethereum will continue to push consensus past what previously was thought possible.

Chris Burniske is an analyst with Ark Invest, specializing in big data, cloud computing, cybersecurity, bitcoin, and blockchain technology. He can be reached via his Twitter handle @ARKBlockchain if you have any questions, concerns, or would like to discuss further.

https://bitcoincore.org/en/2016/01/26/segwit-benefits/

https://en.bitcoin.it/wiki/Script

http://www.rootstock.io/

http://bitfury.com/white-papers-research/page:2

http://bitfury.com/white-papers-research/page:2

https://slock.it/

https://daohub.org/

http://www.econotimes.com/BTC-Markets-To-Enable-Trading-Of-The-DAO-Token-On-May-28-211069

https://bitcoinmagazine.com/articles/the-dao-raises-more-than-million-in-world-s-largest-crowdfunding-to-date-1463422191

https://bitcoinmagazine.com/articles/the-dao-raises-more-than-million-in-world-s-largest-crowdfunding-to-date-1463422191

https://blog.ethereum.org/2016/06/17/critical-update-re-dao-vulnerability/

https://blog.ethereum.org/2016/07/20/hard-fork-completed/


Accelerating Impact

Enhancing Food and Feed to Boost Nutrition Efficiency By Karla Canavan, CAIA, Director of Sustainable Finance, Bunge

Technology has changed the world — yet our diets are behind the times, especially when it comes to efficiency. We base our diets on calories, not nutrients, and our food conversion leaves a lot of unhelpful material inside the body and a lot of waste.

But improving nutrition efficiency is possible. We can improve the amount of nutrients we extract from our food by introducing supplementary enzymes.

Supplemental Enzymes: Proven Benefits

Our body naturally produces enzymes designed to break down the components of the foods we eat into molecules our body requires to survive, repair, and protect itself. As one ages, and as one eats a narrower variety of foods, these enzymes become less effective, preventing optimal uptake of nutrients from foods and increasing the volume of waste products produced from digestion and metabolism. The same process occurs in livestock, and it is through research and development in the agricultural sector that the industry has discovered the effects of feed and supplemental enzymes on animal health and digestion.

The results of feed and feed combinations on cows have been exhaustively studied, documented, and applied in the agribusiness industry for years. Cattle on a grass-fed diet, the optimal calorie source for their digestive systems, have been shown to be healthier and produce better quality yields than those on corn- or soy-based feed. However, when supplemental enzymes were added to the latter diet, those cows produced around 30 percent less greenhouse gas emissions (in the form of methane through flatulence) and delivered increased protein weight versus

unsupplemented corn- or soy-based feed. Because cows are not naturally disposed to consuming these feeds, their digestive systems lack the enzymes to properly extract nutrients from them. Cattle producers discovered that the innovation of enzyme supplementation allowed livestock to adapt to a diet

their systems were not necessarily designed for. Nutrient efficiency isn’t just a matter of good livestock health – it’s also good business, as animals that can better digest their food produce more milk, more meat, and less waste per kilogram of feed. They require less pasture land and water as well.

These innovations in enzyme supplementation can be applied in other sectors too. Farmed tilapia, the new darling of the aquaculture industry, suffers from a significant drop in protein quality and beneficial omega-3 fatty acids, not to mention bland flavor, as a result of switching from their natural insect- and fish-based protein sources to the commonly used soy- and grain-based feed many fish farms rely on to keep costs down and profits up. Supplemental enzymes provided along with the feed of these new “chickens of the sea” may be the key to maximizing the nutrient quality of farmed fish, which continues to be dwarfed by that of wild varieties.

Challenges to Extending Impact to People

Finally, at the top of the food chain, nutrition experts and health gurus have been exploring the possibility of supplemental enzymes to improve the quality of nutrition human beings gain from the food they eat. There are many challenges for the earnest pursuit of enzyme supplementation, however. One of the greatest is the lack of a regulatory framework to properly categorize and validate the content of

©xuanhuongho/Crystal Graphics


supplements. The US supplements industry is notoriously unregulated, leaving a difficult environment for consumers to navigate, with little to rely on for guidance other than manufacturers’ claims and anecdotal evidence from testimonials. The Food and Drug Administration’s hands-off approach simply does not encourage the supplements industry to pursue the costly scientific research necessary to provide consumers with proof of their products’ effectiveness in the form of hard data and results.

Regardless of the well-placed doubts about the supplements industry as it operates today, we should not throw the baby out with the bathwater. Serious consideration should be given towards the study of the potential positive effects of enzyme supplementation on our own ability to optimally extract nutrients from the foods we eat. “As above, so below,” the axiom goes, and it would make little sense to assume that enzyme supplementation, which has been proven effective for years in livestock, would not yield the same or similar benefits for our species.

Nutritional Efficiency’s Role in Combating Malnourishment

Previous articles I’ve written have spoken at length on the success gap between solving the hunger crisis and the continuing problem of malnutrition. In many of the instances where famine was ended through hardy hybrid crops and improved farming practices, monoculture has led to mono-nutrition. Eating cassava root fried in palm oil, for instance, might be a

cheap supply of calories, but the quality and variety of nutrients provided by such a meal are limited by how our bodies are designed to extract nutrients from these foods. The same goes for the nutrient-poor diets of Western and emerging markets, where obesity and malnutrition are rising in tandem. Food producers invest a great deal of resources in “fortifying” their products with vitamins or minerals, but these efforts are fruitless if we cannot properly extract the added nutrients from these foods. Perhaps enzyme supplementation would be a way to bridge this divide in human diets? Medical science has already proved the positive effects of dietary probiotics to aid in digestion and metabolism in people. Enzymes may be the solution for improving nutrition across the wide spectrum of human diets across the world.

One of the primary guarantors of food security is efficiency. Making sure that resources we put towards food production are used optimally is just one part of the equation. The other part lies in increasing the efficiency of nutrient extraction by those that consume the food we produce. For every calorie consumed, we must ensure the maximum nutrient yield to ensure our resources don’t ultimately end up as waste; and this is true whether you are a cow, a fish, or a person walking down the street.

Karla Canavan is Director of Sustainable Finance for Bunge, where she develops new opportunities in the food and energy sectors to achieve triple-bottom-line returns for investors. She has been involved in trading, finance, and agribusiness for more than 20 years.


Enhanced Analytics Decision-making in a Context of Uncertainty – Why Investors Should Look at Forced Labor in Their Portfolios

By Felicitas Weber, KnowTheChain Project Lead, Business & Human Rights Resource Centre Forced labor is a risk that can affect shareholders drastically, in light of increasing regulation, litigation, media and consumer attention. Take the case of Signal International, a US marine-services company, which went bankrupt following compensation payments to victims of forced labor –leading to a US$70 million loss for two Alabama public pension funds that held shares in the company.1

Reputational risks of forced labor are particularly high in the supply chains of consumer-facing companies. In Malaysia, for example, nearly a quarter of workers employed in the production of electronic goods are working under conditions of forced labor2. Non consumer-facing companies may still come under scrutiny as business partners of consumer-facing companies. In May this year, US Customs and Border Protection seized imports from PureCircle, a Malaysia-based supplier of sweeteners to companies such as Coca-Cola, under a new law banning imports of products produced with forced labor. News of the seizure reduced PureCircle’s market value by almost US$100 million, and forced Coca-Cola to respond to the issue.3

The US Customs legislation is just the latest in a growing number of regulations on this issue. As many as 62% of companies in the MSCI ACWI Index will be subject to the UK Modern Slavery Act, the California Transparency in Supply Chains Act, or the proposed

1 ShareAction 2016 – “Investor briefing June 2016: Forced labour: What investors need to know” 2 Verite 2014 – “Forced Labor in the Production of Electronic Goods in Malaysia: A Comprehensive Study of Scope and Characteristics”

Business Supply Chain Transparency on Trafficking and Slavery Act in the US.4

In order to make informed investment and active ownership decisions, investors need access to information on how well companies are addressing

forced labor risks. However, the information provided by many companies is patchy at best. This is worrying considering the size of corporate supply chains. Global corporations impact millions of workers through their supply chains – for example, Apple alone reported that since 2008 its suppliers have trained over nine million workers.5

Benchmarking companies can help fill this gap. KnowTheChain, an initiative of Humanity United, in partnership with Business & Human Rights Resource Centre, Sustainalytics and Verité, has ranked the policies and practices of 20 global information and communications technology (ICT) companies to address forced labor and human trafficking in their supply chains. This will be followed by sector benchmarks in the food and beverage, and apparel and footwear sectors later in 2016.

KnowTheChain has already led to increased corporate disclosure, supporting investors’ decision-making. By engaging companies ahead of the ICT benchmark analysis, many companies increased their disclosure, and others are using the benchmark to evaluate gaps in their policies and practices. By creating a race to the top, KnowTheChain hopes to drive increased corporate transparency and action on forced labor over time. This allows companies to understand how

3 ShareAction 2016. 4 MSCI (2015) – “Slaving away in hiding”. 5 Apple – Supplier responsibility. Accessed 12 July 2016.

©kikkerdirk/Crystal Graphics

https://shareaction.org/wp-content/uploads/2016/06/ForcedLabour-InvestorBriefing.pdf

https://shareaction.org/wp-content/uploads/2016/06/ForcedLabour-InvestorBriefing.pdf

http://www.verite.org/sites/default/files/images/VeriteForcedLaborMalaysianElectronics_2014_0.pdf

http://www.verite.org/sites/default/files/images/VeriteForcedLaborMalaysianElectronics_2014_0.pdf

https://knowthechain.org/benchmarks/

https://knowthechain.org/benchmarks/1/



https://business-humanrights.org/en/knowthechain-ict-company-disclosure

http://www.apple.com/uk/supplier-responsibility/empowering-workers/


they are doing in comparison to peers, and provides investors information on, say, how IBM and Microsoft compare to each other (with 57/100 in the ICT index, Microsoft is scoring 12 points higher than IBM).

Benchmarking can influence companies in all regions. While Asian ICT companies on average scored lower than their Western peers, many responded during the engagement process and disclosed additional information. Benchmarking is also used in countries such as China to encourage cities to improve air and water quality.6

More specifically, investors can use the KnowTheChain benchmarks to:

• Identify which companies in their portfolio are taking appropriate steps to address risks and comply with legislation (and which don’t);

• Identify company-specific gaps and opportunities for improvement;

• Understand which policies, processes and practices a company should have in place to address forced labor – including in areas such as recruitment practices, worker empowerment, and purchasing practices.

Investors themselves can also help accelerate change, and fill the information gap they are currently facing by engaging investee companies on their efforts to address forced labor in the supply chain.

6 The New York Times: Edward Wong (7 July 2016): “China to Pillory, or Praise, Cities Based on Water Pollution”.

With an average company score of 39/100 in the ICT benchmark, much improvement is still needed across the sector. Even among 20 of the largest global ICT companies, six either did not have a public supplier code of conduct in place, or the code did not require suppliers to adhere to international standards prohibiting forced labor.

That said, some companies are taking notable action. For example, Apple has ensured that more than US$25 million in recruitment fees were paid back to supply chain workers. HP reduces high-risk purchasing practices by establishing multi-year agreements with its major suppliers. Its Foreign Migrant Worker Standard requires that supply chain workers are employed by the factories rather than agencies, reducing the risk of exploitation.

KnowTheChain’s ICT benchmark demonstrated that across the sector, awareness of forced labor is already high. The benchmark can be a tool for investors to leverage this awareness, encourage companies to take action and improve disclosure and practices, and to make better decisions and safeguard the value of their investments by reducing the risk of exposure to forced labor.

Felicitas Weber is KnowTheChain Project Lead, Business & Human Rights Resource Centre. Prior to joining KnowTheChain in May 2016, she worked for the ESG Engagements team at the UN supported Principles for Responsible Investment (PRI). In her role, Felicitas was responsible for managing the PRI’s investor-company engagements on social issues.

https://knowthechain.org/benchmarks/

http://www.nytimes.com/2016/07/08/world/asia/china-water-pollution.html?_r=0

http://www.nytimes.com/2016/07/08/world/asia/china-water-pollution.html?_r=0

https://knowthechain.org/companies/1/

https://knowthechain.org/companies/10/


Enhanced Analytics

Materiality Fuels Aspirations for Future Generations By Michael Kinstlick, Head of Standards Setting Organization, Sustainability Accounting Standards Board

Human ingenuity has, over the centuries, created our extraordinary global economy. Technological progress affords the average citizen of highly developed (i.e., G7) economies a standard of comfort unavailable to even the wealthiest mere decades ago. And the market satisfies evolving consumer wants and needs with supply chains that move people, capital, goods, and services across borders at ever-quickening paces. People around the world are now clamoring to join the middle class.1 But academics, policy makers, and leaders in the business and investment communities are increasingly realizing that enabling those lifestyles without significant changes in our production systems could risk our planet’s ability to support us.

As those billions express their aspirations to join the integrated global economy, we who have already enjoyed the fruits of progress must set our sights higher still: ensuring that future economic growth is sustainable and meets “the needs of the present without compromising the ability of future generations to meet their own needs.”2 Delivering the sustainable economic growth necessary to enable those global citizens to participate fully in a stable, middle-class lifestyle is not a pipe dream, but it will require long-term vision from the economic leaders of today.

Fortunately, both asset owners (that is, providers of investment capital), investment managers, and corporate decision makers have realized that sustainability is a critical consideration in planning for the future.

Asset owners, particularly Millennials3, aspire to invest their savings in a way that fulfills their values while earning the return that will enable them to achieve the things all savers want: to pay for their children’s education, fund their retirement, and build a nest-egg for their other needs. Responding to this demand, investors have begun shifting considerable assets into sustainably driven strategies. In 2014 more than one out of six (18%) of investment dollars in US equities were devoted to sustainable strategies, doubling the percentage from only a few years prior.4

Corporate leaders also aspire to devote resources to those aspects of their business that will build long-term value. They increasingly recognize that sustainability is not an afterthought, but rather is integral to their business.

1 “The Emerging Middle Class in Developing Countries” Homi Karas, OECD Development Center Working Paper #285, Jan 2010: https://www.oecd.org/dev/44457738.pdf 2“Our Common Future,” 1987 Brundtland Report of the UN’s World Commission on Environment and Development: http://www.un-documents.net/our-common-future.pdf 3 82% of HNW Millennials (vs 45% HNW overall) are interested in sustainable investing. (“Investing in the Future: Sustainable, Responsible and Impact Investing Trends,” Morgan Stanley Wealth Management, April 2016: http://www.morganstanley.com/ideas/sustainable-investing-trends] See also: “Rise of the Millennials (and the impact on values-based investing)” from Standard Life, October 2015: http://www.standardlifeinvestments.com/WP_Rise_of_the_Millennials/getLatest.pdf 4 Forum for Sustainable Investing.

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https://www.oecd.org/dev/44457738.pdf

http://www.un-documents.net/our-common-future.pdf

http://www.un-documents.net/our-common-future.pdf

http://www.morganstanley.com/ideas/sustainable-investing-trends

http://www.morganstanley.com/ideas/sustainable-investing-trends


In McKinsey’s 2014 Global Survey on Sustainability5, the percentage of CEOs who made sustainability their #1 priority has gone from 3% to 13% since 2010. Further, 43% of responding organizations address sustainability because it “Aligns with company business goals, mission, or values,” more than double the percentage from 2010 (21%).

However, investors and senior management still lack the tools to fully integrate sustainability into their investing and management activities. Business leaders properly have the sense that capital investments in sustainability issues may not yield results and investors have seen mixed outcomes from values-driven investing. Recent work at Harvard Business School used SASB’s industry-specific methodology to reveal that the materiality of those sustainability efforts provides the missing piece of the puzzle.

In HBS working paper 15-073 “Corporate Sustainability: First Evidence on Materiality (2015),” Mozaffar Kahn, George Serafeim, and Aaron Yoon applied the SASB methodology (controlling for Fama-French and industry effects) to 45 industries across 6 sectors and showed significant outperformance, in both market returns, and revenue and income growth, to companies that properly distinguish between material and immaterial issues and invest only in the former. In a forthcoming follow-up paper, “Shareholder Activism on Sustainability Issues,” Jody Grewal, Serafeim and Yoon suggest that shareholder proposals on material issues lead to improved performance while those related to immaterial issues may actually be value-destroying to the extent that they push management to devote resources (capital, etc.) inefficiently to sustainability projects that don’t impact business outcomes.

SASB, the Sustainability Accounting Standards Board, has developed standards and metrics for companies to report on only those sustainability issues that are material to investors, and for investors to get the decision-useful information they need to draw meaningful conclusions around performance on these critical issues. Focusing on materiality aligns the aspirations of investors to allocate capital to organizations that meet their criteria for sustainability with those of business leaders to build companies that create long-term value, thereby maximizing the chances of fulfilling the aspirations of emerging consumers to participate fully in global wealth.

Michael Kinstlick is the Head of Standards Setting Organization for the Sustainability Accounting Standards Board. He oversees research, analytics, consultation, and codification and maintenance of the SASB standards.

5 McKinsey Global Survey on Sustainability 2014: http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/sustainabilitys-strategic-worth-mckinsey-global-survey-results


Enhanced Analytics

Exploring Ways to Close the ESG Info Gap: Perspective from Canada By Catherine Gordon, President, SimpleLogic Inc.

A growing body of research confirms that investors around the world are incorporating environmental, social and governance (ESG) issues into their investment decision-making.1 Adding to the evidence, a recent study of institutional investors in Canada found that investors do consider ESG issues when making investment decisions. And that’s not surprising considering the growing evidence that sustainability is linked to corporate performance.2

But investors have made it clear they’re not getting the information they need from companies’ securities filings or from their CSR reports. What they want is a clear link between ESG issues and a company’s strategy, risk management and operations.

This doesn’t mean Canadian companies aren’t already considering ESG issues in their corporate strategy, risk management and operational context, and even in their executive compensation programs. What it tells us is that it isn’t coming through in their reporting.

Key Highlights We surveyed a group of 24 institutional investors representing over $1.7 trillion in assets under management, including some of Canada’s largest pension funds, mutual and pooled funds and other investment managers. The survey was completed by members of the investment team (40%), senior management (30%), the governance team (20%), and one board director. Key takeaways are:

• 65% of investors often or always consider environmental and social issues, and 95% consider governance issues for all investments.

• Investors want to see a clear link between ESG issues and corporate strategy, risk management and operational context.

• 75% said they prefer to get ESG information from third parties, but that they’re not getting what they need to understand materiality.

• Only 30% of investors find the ESG information companies provide good enough to help them assess materiality to the company’s business.

• 85% agree or strongly agree that the quality of ESG disclosure has an impact on their perception of management and/or the board.

What This Tells Us The study made it clear to us that there’s a gap between the ESG information companies are providing, and what Canadian investors need to know to make informed investment decisions. So what’s the solution?

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There are different ways to approach it. One is to include material ESG metrics in the 10-K or MD&A. The Sustainability Accounting Standards Board (SASB) has already issued provisional sustainability accounting standards for 90 industries in 11 sectors, and a guide for companies to implement them in their 10-K reports.3 The Global Reporting Initiative (GRI) is also providing guidance on materiality.4 Another is to publish an integrated report following the principles of the International Integrated Reporting Council (IIRC). But to date, very few North American companies have taken the leap.

While the concept release issued by the U.S. Securities and Exchange Commission in April 2016 is encouraging,5 it’s likely going to be a while before there’s any change in regulations in the U.S. or in Canada.

So we think investors should be letting companies know what will help them the most. We also think that companies can and should be taking a critical look at their own reporting – MD&A or 10-K, proxy and CSR reports – to make it consistent and useful to the people who rely on it.

Click here to read the full report.

Catherine Gordon is President and Founder of SimpleLogic Inc., a communications firm that has been bringing clarity to business communication since 1997.

Working group

The 2016 Canadian investor survey was developed by representatives of the following organizations:

• SimpleLogic Inc.

• RR Donnelley

• Canadian Coalition for Good Governance

• Clarkson Centre for Business Ethics and Board Effectiveness, Rotman School of Management

• CPA Canada

1 G. Unruh, D. Kiron, N. Kruschwitz, M. Reeves, H. Rubel, and A.M. zum Felde, “Investing for a Sustainable Future,” MIT Sloan Management Review, May 2016. 2) 2015 study of Environmental, Social and Governance (ESG) Survey. June 2015. 3) https://www.cfainstitute.org/ethics/Documents/issues_esg_investing.pdf. 4) Principles for Responsible Investment member statistics: https://www.unpri.org/about.

2 Corporate Sustainability: First Evidence on Materiality. March 9, 2015. Khan, Mozaffar and Serafeim, George and Yoon, Aaron. hbswk.hbs.edu/item/corporate-sustainability-first-evidence-on-materiality

From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance. March 5, 2015. Clark, Gordon L. and Feiner, Andreas and Viehs, Michael. http://ssrn.com/abstract=2508281

3 sasb.org 4 globalreporting.org 5 SEC Concept Release on Business and Financial Disclosure Required by Regulation S-K – SASB commentary http://www.sasb.org/wp-

content/uploads/2016/05/Reg-SK-Key-Messages-FINAL.pdf

http://simple-logic.com/?p=1389

https://www.cfainstitute.org/ethics/Documents/issues_esg_investing.pdf

https://www.unpri.org/about

http://www.sasb.org/wp-content/uploads/2016/05/Reg-SK-Key-Messages-FINAL.pdf

http://www.sasb.org/wp-content/uploads/2016/05/Reg-SK-Key-Messages-FINAL.pdf



Corporate Sustainability Through Shared Value and Innovation By Gugu McLaren, Senior Sustainability Specialist, Discovery Limited

Discovery Ltd. is an innovative insurance company that was founded over 20 years ago. Today, its core purpose – making people healthier and enhancing and protecting their lives – is central to its shared-value business model.

When Discovery was founded in 1992, the complexity of the South African healthcare environment at the time provided a powerful incubator for innovation. South Africa’s high disease burden, an undersupply of doctors, and the vision of changing the way healthcare works required a new framework for addressing healthcare challenges. Health promotion and chronic disease prevention, as opposed to healthcare during illness, offered such a framework.

Incentivizing Behavior Change to Bring Down Insurance Costs

As reflected in its business model, Discovery’s focus has always been on placing the needs of society at the core of its strategy. Discovery designs its innovative insurance products around its shared-value approach, which manifests in its health-promoting integrated insurance programme, Vitality. These products use behavioral economics to translate positive behavior into immediate rewards, which in turn inspire long-term positive behavior change. Changed behavior results in lower insurance costs, and the savings are

used to fund incentives that encourage the positive change in behavior. Members benefit from better health, increased insurance value and financial rewards; the insurer benefits from lower costs, and customer loyalty and retention.

Expanding Business Model

Discovery’s shared-value insurance model has become even more relevant in the context of the growing importance of the societal trends shaping the insurance industry.

Shared-value health, protection and savings products that are dynamic in nature, offer people the opportunity to manage their evolving health needs throughout their lives and be rewarded for improvement. This will become increasingly important as populations age. For example, as the latest WHO report on aging has highlighted, effective health promotion programs that reduce the risks in older people for cognitive and mobility-related functional impairments save costs for individuals, families and society, as they allow people to live their lives to the fullest. On this chassis, Discovery can grow the business further in existing sectors and expand into new territories in adjacent sectors. The financial and societal success of the Vitality model has led to shared-value insurance becoming a compelling proposition for other insurers. Discovery recently established the Global Vitality Network, comprising partner insurers that employ the Vitality business model and participate in collective network assets such

Behavioral trends that are shaping the insurance industry 1. Risk is predominantly driven by behavior. 80% of the disease burden and 60% of deaths result from lifestyle choices, yet most underwriting systems are static and fail to adjust for lifestyle changes and improvements.

2. Technology is having an increasing impact on people’s everyday lives, with wearable tech personalizing the promotion of healthy behavior.

3. The increasing complexity of the economic environment and evolving client needs presents insurers with a growing social responsibility.

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as global rewards partnerships, technology collaborations, and academic and media partnerships. Over the past five years, Discovery has partnered with AIA in Asia and Australia, Generali in Europe, John Hancock in the United States, Manulife in Canada, and Ping An Health in China – all of whom have evolved into ambassadors and proponents of shared-value insurance.

Targeting New Territory to Inspire Positive Change

By applying the same shared-value model, Discovery aims to expand into adjacent industries. Our evidence-based insights about many peoples’ inherent short-termism and seemingly “irrational” behavior has implications well beyond health insurance and applies, for example, to motor vehicle insurance. Discovery’s vehicle insurance business uses technology to track and measure clients’ driving behavior. The rewards programme incentivizes clients to improve their driving behavior and lower their risk.

Current available results validate the relevance of the shared-value approach in this area too: Driving behavior improves significantly, leading to fewer claims and lower claims costs for the insurer, and immediate and long-term benefits for clients in the form of financial rewards and savings, as well as increased safety on the roads. Considering the “irrationality” people generally display in their savings behavior, an opportunity exists to disrupt traditional

business models in Discovery’s next targeted adjacency, the banking industry, through a shared-value model.

With this global expansion and because Discovery leverages personalized technologies to enable Vitality members to monitor their health and driving behaviors, the privacy and confidentiality implications from collecting large amounts of data are significant. To address this, Vitality has released a set of guiding principles for the responsible innovation of personalised technologies and the appropriate stewardship of data from these devices.

Our Ambition

In August 2015, Discovery ranked 17th on Fortune’s first Change the World List, which recognizes organisations that have made significant progress in addressing major social problems as part of their core business strategy. This recognition for and impact of our model propels Discovery to continue to work towards and beyond our 2018 ambition of being the best insurance organization in the world and a powerful force for social good.

Gugu McLaren is Senior Sustainability Specialist at Discovery Limited. She has 10 years’ experience in driving the development and delivery of sustainability strategic frameworks and projects.



Aspiring to the Gold Standard in Mining Management By Brent Bergeron, Executive Vice President Corporate Affairs and Sustainability, Goldcorp

For Goldcorp Inc., one of the world’s largest gold producers with operations throughout the Americas, sustainable and responsible mining is a company-wide commitment. We aspire to be a leader in finding innovative ways to create long-lasting social and economic benefits through every phase of the mining lifecycle – from exploration to operation to the eventual closure and reclamation of a mine. Ultimately, we strive to make sure that the places where we operate are left in as good or better condition than how we found them.

To make our commitments a reality, we’ve established international guidelines, standards and benchmarks to help us set our objectives and track progress. These include the International Council on Mining and Metals (ICMM), the World Gold Council’s Conflict Free Gold Standard, and the United Nations Global Compact (UNGC). In 2015, the UN and its member states adopted 17 Sustainable Development Goals (SDGs), which address issues such as poverty, inequality and justice, and climate change. The goals are ambitious, but they provide an important framework for government, industry and communities to collaborate and achieve progress – together – by the year 2030.

As a signatory to the UNGC, Goldcorp embarked on a materiality analysis to understand issues of key importance to our diverse set of stakeholders, and then mapped our top issues, internal initiatives and strategies to the SDGs. This mapping exercise helped us to understand where synergies exist, where gaps should be addressed, and how our current activities can support the achievement of the Goals. As a result, we’ll be better able to align our efforts with the SDGs over time, in areas such as environmental protection, human rights, education and community building.

While there are multiple SDGs that Goldcorp identified as aligning with our corporate priorities, a few in particular emerged among our most material topics.

Goal #4: Education - Ensure Inclusive and Equitable Quality Education and Promote Lifelong Learning Opportunities for All Having worked for many years in partnership with communities to improve access to training and skills development, we’ve seen first-hand just how

important education can be in creating sustainable legacies. Some of our most innovative educational programs are the first of their kind, such as AMSTEP, a partnership with the Oshki-Pimache-O-Win Education and Training Institute (OSHKI) to provide career skills to Aboriginal youth in signatory communities of the Musselwhite Agreement in Ontario, Canada. The program involves five months of intensive training and work experience to earn industry-recognized accreditation. The experience is

uniquely immersive for students, exposing them to daily mining activity from surface to underground operations. For the community of Carrizalillo near our Los Filos site in Mexico, Goldcorp created a local scholarship program, constructed a kindergarten classroom and community computer center with equipment and internet access, and also improved sanitation in the local primary school.

Goals #7 and #13: Energy and Climate – Ensure Access to Affordable, Reliable, Sustainable and Modern Energy for All, and Take Urgent Action to Combat Climate Change and Its Impacts Mining is energy-intensive; however, there is great potential in our industry to invest in energy efficiency measures, incorporate renewable energy into our power supply and reduce our carbon footprint.

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http://www.goldcorp.com/

http://www.icmm.com/about-us/about-us

http://www.icmm.com/about-us/about-us

http://www.gold.org/gold-mining/responsible-mining/conflict-free

http://www.gold.org/gold-mining/responsible-mining/conflict-free

https://www.unglobalcompact.org/what-is-gc

https://www.unglobalcompact.org/what-is-gc

http://www.undp.org/content/undp/en/home/sdgoverview/post-2015-development-agenda.html

http://www.undp.org/content/undp/en/home/sdgoverview/post-2015-development-agenda.html


Goldcorp’s Energy Stewardship Strategy ensures that we continue to take active steps to manage our energy use and minimize greenhouse gas emissions. We have made significant progress, with GHG emissions trending downward both on an absolute basis and intensity, since 2013. At our Musselwhite mine, reducing base load electrical consumption and managing peak demand allowed the mine to eliminate the use of diesel in production, which saved approximately 13,000 tonnes of CO2 in 2015 alone.

Goal #12: Consumption - Ensure Sustainable Consumption and Production Patterns Goldcorp has made several advances in minimizing the waste generated from the mining process and improving the way we transport, use and dispose of waste. Key among these initiatives is a comprehensive Tailings Stewardship Strategy implemented in 2015 as part of our Sustainability Excellence Management System. At our reclaimed Equity Silver site in British Columbia, Canada, we introduced automated monitoring to track information on water levels, pore water pressure, structural integrity of the tailings dam, and other important parameters in real-time, in order to ensure tailings dam safety and reliability. If the pilot program is successful, this innovation will be evaluated for deployment at all of Goldcorp’s sites.

Goal #16: Peace & Justice - Promote just, peaceful and inclusive societies Last year, we updated our Human Rights Policy to reflect the changing social context in which we operate. Our revised policy better defines Goldcorp’s good business practices as well as our external commitments to the ICMM, the UNGC and the World

Gold Council’s Conflict Free Gold Standard. New additions to this policy include clauses on community consultation, grievance mechanisms, resettlement planning, and potential measures in the event of non-compliance.

When we update our policies, each of our sites is trained on how to integrate human rights into its business practices. An example of our approach in action is at our Marlin mine in Guatemala, where all security staff are required to undergo annual training on the Universal Declaration on Human Rights and regularly scheduled reviews conducted by third-party experts include assessments of the background checks, training and interviews with security contractors. We aspire to ensure that every site upholds fundamental human rights and respects local cultures, customs and values.

Companies like Goldcorp have a tremendous impact on communities through the local jobs and supply chains we create. By aligning our sustainability strategies with global initiatives such as the UN Sustainable Development Goals – and working in partnership within our industries and with governments – we can multiply positive impacts for communities worldwide.

Brent Bergeron joined Goldcorp in November 2010 and was appointed Executive Vice President of Corporate Affairs and Sustainability in January 2015. Prior to joining Goldcorp, he served as a senior executive with international experience in the fields of construction and infrastructure development, broadcast and media.

http://csr.goldcorp.com/2014/strength-governance.php?article=3

http://csr.goldcorp.com/2014/strength-governance.php?article=3


Sustainable Editorial Why Is Everyone Angry at Wall Street?

By Jon Lukomnik, Executive Director, Investor Responsibility Research Center Institute

Wall Street is catching hell from the left and the right during this U.S. presidential campaign. “No one should be too big to jail,” notes Hillary Clinton, and Donald Trump believes “the hedge fund guys get away with murder.” Yet finance performs essential functions that businesses and citizens need — from safekeeping our money to facilitating payments to mitigating risk. Perhaps the most important is what is known as “intermediation,” or, as the third Lord Rothschild put it, “taking money from point A where it is, to point B where it is needed.” This can mean pooling savings to fund a mortgage, helping build an efficient power plant, or facilitating retirement savings. In other words, finance is a service business. Finance provides neither food nor shelter, but without it, we could have neither, at least not at a scale appropriate for the modern world.

So why is there such a strong belief that financial types reap an unfair share of the financial rewards without a care for the rest of us? Perhaps because finance has lost its sense of purpose, and serves itself at least as much as it does the real economy.

It costs about 2% to move money from point A to point B. That doesn’t sound like much, but it has cost the same 2% since the age of the railroads. In those 130 years, we have invented computers, cars, and telephones; landed people on the moon, eradicated diseases; increased life expectancy. In almost every human endeavor, we have become more productive. Except in finance.

Partially as a result of that lack of efficiency, almost one out of every 12 dollars in the U.S. economy finds its way into the pockets of the financial sector.

This is not to say there have been no efficiencies at all. We have electronic payments, automatic teller machines, affordable mortgages, efficient trading markets, and a host of other improvements. But, the benefits of these efficiencies have stayed within the financial sector. Why? A number of explanations are relevant, but two have pride of place.

First, the number of financial intermediaries has grown exponentially. One study shows that it takes 16 intermediaries to escort your money from A to B. Each intermediary needs to be paid, so that while each transaction may be more efficient, the aggregate is not. This adds up. Consider, for example, that British banks make about $7 trillion in loans each year. But only $2 trillion of that is with non-financial borrowers, or, as economist John Kay terms it, “businesses that do things.” The remaining $5 trillion is intra-financial sector, and in each of those transactions, finance people get paid. Ultimately, the real economy pays fees on $7 trillion, but gets $2 trillion of service.

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The second reason is that there are misalignments between the financial system and the needs of the real economy. For example, there are 79,669 mutual funds in the world. I do not know the optimal number, but I am pretty sure it's less than 79,669. Why so many? They serve an important marketing purpose. But the lack of economies of scale makes investing more expensive. High frequency trading is another example. Some argue that it increases liquidity in the market. Even if you accept that premise — and my opinion is that it increases liquidity for large capitalization stocks during quiet markets, where and when extra liquidity is needed least — it is hard to see what benefit the real economy gets from being able to trade shares of Apple 3,000 times a minute.

Make no mistake about it: The people who work in finance are largely hard-working and decent. But they work in a system that has become inwardly focused on the needs of the intermediaries. The question is how to realign it so that efficiencies accrue outwardly, to benefit us all.

Here are three pragmatic ideas which can do just that. They, and scores of other ideas, are detailed in our new book, What They Do With Your Money: How the Financial System Fails Us and How to Fix It.

1) Reduce the number of agents: Large asset owners, such as a number of Canadian pension plans, are increasingly making direct investments into “businesses that do things,” rather than going through intermediaries.

2) Make the fees we pay explicit: Markets move on information. Making fees transparent encourages investors and borrowers to select lower cost alternatives. Denmark and Holland passed legislation forcing pension managers to say exactly how much is being taken out of their account — not in percentage terms, but krone and euro. The U.S. Department of Labor estimates that a similar “financial nutritional label” would save U.S. citizens some $1.2 billion a year ... and that is just from savers not having to search for the data. That $1.2 billion in savings doesn't even include what would be saved from our making more informed decisions.

3) Stop advantaging high frequency trading by providing it faster, differentiated access to order flow.

In sum, we can "fix" finance. We can cut that two percent incremental cost of capital. And that would increase economic growth, create jobs, and provide a tailwind in financing the infrastructure of the future. It’s time to refocus finance on its purpose: Serving the real economy.

Jon Lukomnik is the co-author of What They Do with Your Money: How the Financial System Fails Us and How to Fix It and executive director of the Investor Responsibility Research Center Institute.


Virtual Attendance Forest Ecosystems and Climate Uncertainty: Investment Implications

By Sebastian Vanderzeil, Research Analyst, Cornerstone Capital Group, and Dr. Bruce Kahn, Portfolio Manager, Sustainable Insight Capital Management

On June 2, Sustainable Insight Capital Management (SICM) hosted Dr. Robert Scheller of Portland State University and Charles Bullard, Fellow at Harvard Forest, as part of an event titled “Forest ecosystems and climate uncertainty: investment implications along the supply chain.” Investors, data providers and consultants who are active in forestry convened to hear a presentation from Dr. Scheller and discuss the role investors in forestry and forest management can play in addressing climate change impacts.

Dr. Scheller is a leading scientist on the impact of climate change on forests. His team has developed a forecasting tool, Landis II, which models different scenarios to forecast the impact of climate change and forestry management activities for forests around the world. His research focuses on the role of people and management actions in addressing the impacts of climate change on forests.

Dr. Scheller discussed the spectrum of forests’ response to climate change, from resistance to adaptation, with resilience the key factor in a forest’s response. Resilience is further categorized as organic (how much the forest can absorb change by itself) and managed (how much can human management activities help the forest absorb change). At one end, resistance seeks to preserve the forests in a pre-climate-change state while adaptation sees major change in the forests to adapt to climate change.

The view expressed during the presentation is that the fate of forests under climate change goes beyond the physical impacts and, more importantly for us, depends on management actions of we take in response. The questions, therefore, are: 1) How can management shape the trajectories of forested

landscapes? 2) What management strategies are reasonable and effective? 3) When and where should they be deployed? 4) What role should managed resilience play?

Management actions are linked to the economic value of the forest, its cultural significance and legislated mandates; the value humans place on a

particular forest will guide its stewardship. Therefore, forestry management in the face of climate change is rooted in what we value about the forest, what it can adapt to naturally, and what management actions we can cost-effectively take to build resilience and adapt.

Dr. Scheller did note that some forests may not be able to be saved at all. Recent studies predict that the southwest of the U.S. will be too hot for forests in 50-70 years. Therefore, it may not be practical to undertake management actions and these forests may be lost. In other parts of the country, such as the Oregon Coast, climate change could actually benefit the forests and management actions may not be necessary. Modelling by Landis II showed that the high rainfall and relatively connected landscape of the Oregon Coast engendered relatively high natural resilience. A practical application of the Landis II tool could be the identification of forests that would benefit the most from management activities and then developing carbon projects (linked the Californian carbon trading scheme) that fund these activities.

Sebastian Vanderzeil is a Research Analyst at Cornerstone Capital Group. Previously, Sebastian was an economic consultant with global technical services group AECOM. Bruce Kahn, Ph.D., is a Portfolio Manager at Sustainable Insight Capital Management. Bruce has over 26 years of academic, environmental and investment management experience. For more information on this event please contact [email protected].

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Upcoming Events Global ESG Calendar

Date/Time Event Location Information

7.29.16 – 7.31.16 The 2016 Green Economics Institute Conference

Kellogg College, University of Oxford, Oxford, UK

http://www.greeneconomics.org.uk

8.2.16 “Food Safety in Transition” – Webinar Cornerstone Participating Event

New York / online event https://attendee.gotowebinar.com/register/260071159637268993

8.31.16 The Women in Green Forum Luxe Hotel, Los Angeles, CA http://womeningreenforum.com

9.13.16 – 9.16.16 Social Capital Markets Conference SOCAP16 Cornerstone Participating Event

Fort Mason Center, San Francisco, CA

http://www.socialcapitalmarkets.net

9.19.16 – 9.25.16 Climate Week Various, New York City http://www.climateweeknyc.org/

9.19.16 – 9.22.16

VERGE 2016 Conference Convention Center, Santa Clara, CA

http://www.greenbiz.com/event/2016/09/19/verge-2016

9.21.16 – 9.23.16 The 2016 Food Tank Summit Hyatt Regency Sacramento Sacramento, CA

http://foodtanksummit.com/sacramento

9.21.16 – 9.23.16 Yale Sustainability Leadership Forum – From Environment to Sustainability

Yale University, New Haven, CT

http://sustainability-forum.yale.edu

9.26.16 – 9.28.16 Climate Chance – Climate Actors World Summit

Convention Centre, Nantes, France

http://www.climatechance2016.com/en

9.26.16 – 9.28.16 Corporate Renewables 2016 Conference Westin Hotel, Washington DC http://www.corporate-renewables.com

9.26.16 – 9.28.16 Sustainable Brands ’16 Amager Blvd. 70 Copenhagen, Denmark

http://events.sustainablebrands.com/sb16cph

9.27.16 – 9.29.16 The 2016 SFI Annual Conference – Linking Forests to Communities

Hilton Hotel, Clearwater Beach, FL

http://www.sficonference.org

9.28.16 – 9.29.16 SEED Africa Symposium 2016 – From Innovation to Imitation

Safari Park Hotel, Nairobi, Kenya Africa

http://www.seed.uno/seedas16

10.9.16 – 10.12.16 Sustainatopia 2016 Conference – Boston Hyatt Boston Harbor, Boston, MA

http://www.sustainatopia.com/boston2016

10.15.16 Lauder Institute / Wharton Global Alumni Cornerstone Speaking Event

New York http://alumni.lauder.wharton.upenn.edu/events/EventDetails.aspx?id=723060

10.17.16 – 10.19.16 Esca Bona Sheraton Austin Hotel at the Capitol, Austin, TX

http://www.escabona.com

10.17.16 RIA Foundation and Endowment Forum Investing for Impact

Metro Convention Centre, Toronto, Canada

http://www.riaforum.ca


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The Cornerstone Capital Group Erika Karp* Founder and Chief Executive Officer [email protected]

Cornerstone Capital Investment Research John Wilson Head of Corporate Governance, Engagement & Research [email protected]

Michael Geraghty Global Equity Strategist [email protected] Betsy Emerson Head of Research Operations [email protected]

Craig Metrick, CAIA Director, Manager Due Diligence and Thematic Research [email protected]

Jennifer Leonard, CFA Director of Manager Due Diligence [email protected]

Michael Shavel, CFA * Global Thematic Analyst [email protected]

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Cornerstone Capital Investment Management Phil Kirshman, CFA, CFP ® * Chief Investment Officer [email protected]

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Janet Morgan Managing Director, Strategic Business Development [email protected] Margarita Pirovska, PhD Policy & Sustainability Analyst [email protected] Andy Zheng Investment Operations Analyst [email protected]

Cornerstone Capital Institutional Business Development Alice Petrofsky * Executive Director, Institutional Business Development [email protected]

Mauricio Barbeiro Head of Latin America Business Development [email protected]

Cornerstone Capital Management & Operations

Joel Beck * Chief Operating Officer & Chief Compliance Officer (CCIM) [email protected]

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