SUSTAINABILITY A N I N V E S T M E N T P E R S P E C T I V E

presented by

GLENN SILVERMAN

Chief Investment Officer

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1 SUSTAINABILITY

What is it? What is being said?

2

3

UNSUSTAINABLE TRENDS?

4 key themes

INVESTMENT IMPLICATIONS

So what does this mean?

4 CONCLUSION

The way forward

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1 SUSTAINABILITY

What is it? What is being said?

2

3

UNSUSTAINABLE TRENDS?

4 key themes

INVESTMENT IMPLICATIONS

So what does this mean?

4 CONCLUSION

The way forward

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[Source: United States Environmental Protection Agency]

SUSTAINABILITY . . .condi t ions under which

[definition]

humans and nature can ex is t in product ive harmony

“The Capacity to Endure...”

Envi ronment , Soc ia l and Governance (ESG) Copyr

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Our new technologies,

combined with our

numbers, have made us,

collectively, a

force of nature ...

Where it began

• 2007 Nobel Peace Prize winner

• Former Vice President of the US

• Book/Film – 2006

[Source: nobelprize.org; An Inconvenient Truth, 2006]

“

”

AL GORE

an inconvenient truth “the crisis of global warming”

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• Independent writer, advisor & advocate for sustainability

• Built and led two companies

• Advised both Fortune 500 corporations and NGOs

• Former head of Greenpeace

THE EARTH IS

FULL... ”

“

[Source: The Great Disruption, 2011; http://paulgilding.com]

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- Paul Gilding The Earth is Full

is using

1.5

Earths

Human

Kind

”

“

“ ”

When you try to create infinite growth on a finite planet,

…either the planet gets bigger

or the economy stops growing.

[Source: The Great Disruption, 2011; http://paulgilding.com]

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COMPOUND

GROWTH IS NOT

SUSTAINABLE ... ”

“

JEREMY GRANTHAM

.

”

“ Rapid growth is not ours by

divine right; it is not even

mathematically possible over a

sustained period ..

• Co-founded Boston-based asset

manager GMO in 1977

• $106 billion AUM as of Dec 2012

[Source: www.gmo.com, GMO Quarterly Letter, April 2011]

]

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.

”

“ The challenges facing the planet

today are unprecedented ...

climate change, water scarcity,

poverty, growing inequality of

income & wealth, demographic

shifts ...

• Founded in 2004

• Assets Under Management : $7.6 billion (Dec 2012)

• Al Gore - former presidential candidate

• David Blood - former CEO Goldman Sachs AM

GENERATION INVESTMENT

MANAGEMENT

AL GORE AND DAVID BLOOD

SUSTAINABLE CAPITALISM...

”

“

[Source: GIM White Paper– Sustainable Capitalism, Feb 2012; www.generationim.com]

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GENERATION FOUNDATION White paper - The key requirements (Feb 2012)

1

2

3

4

5

Incorporate risks from stranded assets,

externalities

Mandate integrated reporting

Avoid short-term focus, quarterly reporting

Encourage long term investing

SUSTAINABLE CAPITALISM...

”

“

Align compensation structures

with long term sustainable performance

[Source: GIM White Paper– Sustainable Capitalism, Feb 2012]

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A simple adage...

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A simple adage...

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The Technology Bubble 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

-75 % 734 %

92 00 03

[Source: I-Net]

NOT SUSTAINABLE

Nasdaq Index

‘96: Greenspan’s

“irrational exuberance”

Most money entered here

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The Implications

1

2

75% loss of capital

> 50% of companies perished

However, the strong survived

e.g. Amazon; Google etc.

Example of

Joseph Schumpeter’s

Creative Destruction ” “

[Source: Was there too little entry during the Dot Com Era? B Goldfarb, D Kirsch, D Miller, 2006]

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The US housing Bubble

1995 1996 1997 1998 1999 2001 2002 2004 2006 2007 2009 2011

-42 % 83 %

95 06 11

[Source: Yale School of Management]

NOT SUSTAINABLE

100

110

120

130

140

150

160

170

180

190

200

210

Nominal House Price Index

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The Implications

1

3

2

Foreclosures

US Banking crisis

Then:

A Global Financial Crisis!

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The “Medicine”?

1

3

2

Sovereign bailouts

Zero interest rates (ZIRP)

All the acronyms

- QE 1, 2, 3, LTRO...

If debt is the problem, then more

debt is unlikely to be the solution!

- Chris Hart

(Investment Solutions Chief Strategist)

“

”

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The Implications - ZIRP

1

2 Punishes savers

Mis-allocation of capital/

distorts capital markets

3 Reduces future returns

Effectively

“FINANCIAL REPRESSION”

4 West becoming “Japanified”

[Source: Clay Bennett, 2010]

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1 SUSTAINABILITY

What is it? What is being said?

2

3

UNSUSTAINABLE TRENDS?

4 key themes

INVESTMENT IMPLICATIONS

So what does this mean?

4 CONCLUSION

The way forward

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KEY trends unsustainable ?

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KEY trends unsustainable ?

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Finite Planet – Many Issues

and

more...

Energy

Food

Water

Biodiversity

Climate Ocean

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Finite Planet – Oceans

[Source: World Bank, Fisheries and Aquaculture; UNEP; www.bbc.co.uk]

200 million people rely on

fisheries & related activities

30% of ocean fisheries have

collapsed - producing <10%

of their original ability

Overfishing costs EU €3.2bn

each year in subsidies

Fish could be extinct by 2050

1

2

3

4

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Finite Planet - Climate

[Source: Carbon Tracker Initiative; Business Day, 29/03/2012]

“The Stone Age didn't end because of a shortage of stones.”

- Paul Gilding

Total estimated cost = $22 TRILLION !!

If the UN’s 2C target is taken seriously then:

up to 80% of declared global coal, oil and gas

reserves would be ‘inaccessible’

“

”

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There are other more NB issues!

Another perspective:

• Adjunct professor - Copenhagen Business School

• Thought Leader – Bloomberg Summit 2011

• Voted one of the Top 100 most influential people

[Source: www.lomborg.com]

Finite Planet - Climate

Global warming is real & man made

Consequences often wildly

exaggerated

Need simpler, smarter & more

efficient solutions

1

2

3

4

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Lloyds: Worst year ever for natural

catastrophe event claims - £516 million

”

“

2011 - A Year of Extremes

[Source: Business Day, 28/03/2012]

2011

- Lloyds

28/03/2012

Worst Monsoon Ever

Costliest Flood Ever

Costliest Flood Ever

Deadliest Flood Ever

Heaviest Monsoon Ever

Two ‘one in 100 year droughts’

in 5 years

”

Pakistan Sri Lanka Thailand

Brazil Australia Amazon

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KEY trends unsustainable ?

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“Whilst we strive for larger televisions, DVD screens in our

cars and perfectly grilled tender steaks ...

... they die for a clean glass of water or a bowl of rice ...”

INEQUALITY ... ”

“

- Paul Gilding

[Source: The Great Disruption, 2011]

1.5bn people live off < $1.25 per day

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Inequality

HAVE WE CROSSED AN ‘INVISIBLE LINE?’

“... Goldman Sachs sets

aside $15bn for pay;

the state of California cuts

$1.5bn from education

...”

[Source: www.guardian.co.uk, 20/01/2011]

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[Source: Gallup, 2011. Sample of 1 012 adults across 50 US states]

Inequality – Sustainable?

Pharmacists

Nurses

Percentage ranked high/very high for honesty and ethics

High school teachers

Medical doctors

Clergy

Police officers

Accountants

Funeral directors

Journalists

Building contractors

Real estate agents

Bankers

Lawyers

Business executives

100 0 80 60 40 20

62%

25%

18%

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[Source: New York Times; Bloomberg, 2012]

Inequality – Sustainable?

Investment

Banker/s

High School

Teacher

Do these salaries reflect the value-add to society?

11 times Cop

yrigh

t. Do

Not D

istrib

ute

Furth

er.

[Source: The Great Disruption; thesolutionsjournal.com]

Inequality – Sustainable?

Top

Corporate

Salary

Bottom

Corporate

Salary

Spread between top and bottom salary in US corporate

500 times! Cop

yrigh

t. Do

Not D

istrib

ute

Furth

er.

The Implications ...

1

2

People are angry

Governments will fall 3

Redistribution policy a risk 4

The ‘social contract’

is being severely tested

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KEY trends unsustainable ?

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[Source: UN World Population Prospects, 2010]

1830

1960

1989

2011

Billions of people on Earth Time Span (Years) Year

0 160 80 40 120

> 5000

130

29

22

2050 39

Demographics – Time to get to each 2 billion

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[Source: Total Fertility Rate, CIA Factbook, 2013 estimates]

Demographics – Fertility Rates

Country Fertility Rate Rank

India 2.55 81

South Africa 2.25 101

United States 2.06 122

Brazil 1.81 154

Russia 1.61 179

EU 1.58 182

China 1.55 184

Japan 1.39 209

World 2.47 84

Replacement

Rate: 2.1

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1980

2012

2050 1.57

0.56

Demographics – 2 Major Issues...

World Population aged 65 or over

(billions) Youth (15 – 24 years)

unemployment rates

[Source: US Census Bureau 2012; Eurostat 01/2013]

39% 56% 39% 58%

Portugal Spain Italy Greece

0.26

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The Implications ...

1

2

The pyramid is inverted

Slower growth, increased taxes

Tax base

Dependants

“Delayed” retirements 3

Rising social tensions 4

5 Best: Africa

Worst: Japan, China, Europe

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KEY trends unsustainable ?

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US Earnings – Sustainable?

[Source: I-Net, Dec 2012]

100

80

60

40

20

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

S&P 500: Nominal Earnings vs. Trend

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US Earnings Sustainable? – The Other Side of the Coin

1

5

3

8.8m lost jobs post GFC

3m remain unemployed; 3m now part-time

+/- 50m Americans on food stamps (12/12)

Alternate data: US unemployment at 23%

(incl. discouraged)

[Source: Bloomberg; Global Research, March 29, 2013; shadowstats.com; http://dailyreckoning.com]

2

“Corporate efficiency” retrenchments

4

49% of US households receive some form

of govn benefit

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1998 2000 2002 2004 2006 2008 2009 2010 2011 2012 2013 Debt - Growth of FED/ECB Balance Sheets

UNINTENDED CONSEQUENCES?

ECB (€)

Fed ($)

Has this gone too far? [Source: Bloomberg]

1998 2008 2009 2010 2011 2012 2013

0.5

1.0

1.5

2.0

2.5

3.0

3.5

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0 200 400 600 800 1000

Japan

Greece

France

US

Portugal

UK

Germany

Ireland

Italy

Spain

Official Government Debt Unfunded liabilities

Sovereign Debt – Beyond the “danger zone”

[Source: Bloomberg; UBS, 2012; Growth in a Time of Debt, C Reinhart, K Rogoff, 2010]

% of GDP

90

More than Greece

Reinhart &

Rogoff’s ‘90% Threshold’ • From “Growth in a time of debt”

Reinhart – Professor of the

International Financial System at

Harvard Kennedy School

Rogoff - Professor of Economics

at Harvard University.

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The Implications

1

2

Promises can’t be met!

Outcome: Unlikely to be pleasant!

Welfare state being challenged

3

4 Hobson’s choice:

Default, In/Deflation, Financial

Repression ...

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KEY trends unsustainable ?

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Priced into markets? Probably not...

1

2

Most struggle with “slow burn” issues

It’s not in “our time frame!”

3

Majority are “bottom-up” stock-pickers

4 Some disagree, don’t or wont believe,

Or say “Just too damn hard”!

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1 SUSTAINABILITY

What is it? What is being said?

2

3

UNSUSTAINABLE TRENDS?

4 key themes

INVESTMENT IMPLICATIONS

So what does this mean?

4 CONCLUSION

The way forward

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... ultimately it will be

companies and investors

that will mobilise the capital

needed to overcome them ...

”

“

Implications – Asset Managers

[Source: GIM White Paper– Sustainable Capitalism, Feb 2012; www.generationim.com]

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• Global asset management

arm of Aviva plc

• £274bn AUM June 2012

Non-profit organisation working globally with business and

government to create a sustainable future

[Source: Sustainable economy in 2040, AVIVA]

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IS Responsible Investing (RI) Survey – The responses

5% 7%

9%

23%

57%

No impact Negative impact Enhances decision making process

Unknown Enhances returns

57% of managers said:

Incorporating ESG into the investment

process “enhances returns”

[Source: IS RI Survey, 2012]

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[Source: www.ft.com; Alliance Global; Generation Investment Management]

• First State GEM Sustainability fund: cumulative

outperformance of 40% since inception 2009

• Alliance Global study: “ESG investing increased

returns by 1.6% ... “

• Generation Investment Management: “... out-

performance since inception, circa 5.5%

And you can reduce risk too ...!!

Implications – The Evidence!!

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1 SUSTAINABILITY

What is it? What is being said?

2

3

UNSUSTAINABLE TRENDS?

4 key themes

INVESTMENT IMPLICATIONS

So what does this mean?

4 CONCLUSION

The way forward

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1 The issues can no longer be ignored

2

Final outcome/timing/impact very hard to predict 3

Headed towards multiple “tipping points” & on OUR watch! 4

Conclusion ...

We have a “system design” problem

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The Way Forward – What Are We Doing?

1

2

4 Key approach: “Active engagement”

5

Engaging directly with all our managers

3

Established the IS RI Committee

Integrating directly into our investment

process

Next focus area: ESG Systems

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The Way Forward – What Should You Be Doing?

1

2

3

4

Can no longer avoid the subject

- Time to make the leap!

Engage as an active owner

- Ask the hard questions!

Join the global debate/journey

- The small steps count too!

Attend IS Sustainability Version 2

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The sooner we start, the better!

The Way Forward

[Source: Ben Goode, 2009]

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FAIS-compliance statement

• Investment Solutions Limited is a licensed financial services provider in terms of Section 8 of the Financial Advisory and

Intermediary Services Act, 37 of 2002, as amended

• The information contained in this presentation in respect of any product is factual information and does not constitute

financial advice as contemplated in section 1 of the FAIS Act

• Opinions and views expressed on various issues such as, but not limited to, economic, legal or regulatory overviews

during this presentation should not be construed as advice nor should it be construed as express or implied

recommendations, guidance, or proposals that any particular transaction in respect of a product is appropriate for your

particular investment objectives, financial situation, or particular needs

• Therefore, the opinions expressed during this presentation should not be relied on for the purposes of making any

financial, investment or other decision and you should consult with your own independent expert advisor, such as

an economist, legal or tax advisor or financial services provider, before entering into any transaction

• Certain divisions within Investment Solutions Limited may have been appointed by the client to furnish advice to the

client.

• A portion of this presentation may deal with the advice furnished by the relevant division within Investment

Solutions Limited

• The individual giving this presentation is not necessarily part of that division

• Any advice and/or recommendation is not advice and/or recommendation of the presenter, but of the division

within Investment Solutions Limited, authorized to provide the advice

• Reliance should not be placed on the information in this presentation, but rather on the official report containing

the advice

• Investment Solutions Limited shall not be liable for any damage or loss suffered resulting from any action taken by any

person based on this presentation, information provided in it or any discussions relating to it

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