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Environmental Finance 2004:

An Investor’s Perspective on Environmental Finance

TorontoOctober 28, 2004

Michelle McCullochDirector, Client Relations

225 East Beaver Creek RoadSuite 300

Richmond Hill, ON L4B 3P4(+) 905-707-0876

mjmcculloch@innovestgroup.com

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“There is a growing body of empirical evidence that

companies which manage environmental, social, and

governance risks most effectively tend to deliver better risk-

adjusted financial performance than their industry peers.

Moreover, all three of these sets of issues are likely to have

an even greater impact on companies’ competitiveness and

financial performance in future.”

Jean FrijnsChief Investment OfficerABP, Netherlands

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The Investment Logic for “Environmental Analysis”

• What is the #1 determinant of companies’ financial performance? Answer: MANAGEMENT QUALITY

• Why is companies’ performance on “environmental” issues an excellent PROXY and leading indicator for management quality? Answer:

• Environmental issues represent one of the most complex challenges facing company management today

• High level of technical, market and regulatory uncertainty

• Many complex issues, stakeholders and non-financial measures to address

• Success in these high-complexity areas implies ability to excel in other business areas, and thereby earn superior returns

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Superior Earnings Growth and Share Price Performance

Differentiation and Competitive Advantage

• Stakeholder Relations • Market Share Growth

• Cost/Liability Reduction • Brand Value

• Time to Market Reduction • Innovation Capacity

• Human Capital – Recruitment and Retention

The Company Perspective: Why Bother?

Best-in-Class Performance on Environmental Issues

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The Investor’s Perspective

Risk Control – identifies hidden risk and opportunity factors

Fiduciary Benefits – meets or exceeds emerging global fiduciary requirements – e.g. new U.K., Swedish, German, French, Swiss pension regulations

Alpha Generation – can generate consistent excess returns at comparable or lower levels of volatility

Strategic Alignment – aligns investment strategy with stakeholders’ social and environmental concerns

Reputational Capital – enhances institution’s reputational capital with internal and external stakeholders

Management Proxy – helps investors identify companies with superior management and agility on a wider range of issues

Trend Anticipation – positions investors well to anticipate other powerful investment trends in future

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Including the latest from SSgA. . .

The performance shown does not represent actual performance, but is hypothetical performance created through a back-test. The results shown do not represent the results of actual trading but were achieved by means of the retroactive application of a hypothetical model that was designed with the benefit of hindsight. These hypothetical results should not be considered indicative of the skill of the adviser.Historic performance is not necessarily indicative of future performance, which could differ substantially. The performance figures are reported on a gross basis, but net of transaction and custody charges. Additional fees, such as the advisory fee, would reduce the return. For example, if an annualized gross return of 10% was achieved over a 5-year period and a management fee of 1% per year was charged and deducted annually, then the resulting return would be reduced from 61% to 54%. The performance includes the reinvestment of dividends and other corporate earnings and is calculated in U. S. dollars. The S&P 500 is an unmanaged index of common stocks which assumes the reinvestment of dividends and distributions. It does not include any management fees or expenses. One cannot invest directly in an index. The trademark is property of Standard and Poor’s.

US Core Env. 41.52% 6.95% 40.82% 6.82% 5.04% 1.35 64.52%80.00%

Baseline Portfolio 29.12 5.07 28.42 4.94 5.80 0.85 61.30 100.00

S&P 500 Index 0.70 0.13

-40%

-20%

0%

20%

40%

60%

Environmental Fund Baseline Fund S&P500 Index

1999 2000 2001 2002 2003 2004 (2 mos)

Performance Comp Annual Cum Annual Tracking Info Monthly AnnualResults Return Return Ex Rtn Ex Rtn Error Ratio Hit Ratio Hit Ratio

Over 60 Independent Studies Provide the Evidence . . .

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And Seem to be Independent of Investment Style . . .

0.00

0.50

1.00

1.50

2.00

2.50

1Q - 8Q Tilt = 50 0.06 0.22 0.28 0.39 0.69 0.14

1Q - 8Q Tilt = 100 0.39 0.50 0.66 0.65 0.96 0.47

1Q - 8Q Tilt = 200 1.41 1.77 0.21 1.14 2.05 1.03

U.S. Large Cap Growth U.S.Large Cap Value EAFE U.S. Small/MidCap U.S. Large Cap Average

Figure 1 - Relative Performance of Innovest Enhanced Portfolios vs. Underlying Portfolios

24 months March 02 – March 04

Source: Innovest’s EcoValue21® Rating Model and databases.

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And Sustainability Factors Will Become Even MORE Important to Investors in Future . . .

• Growing recognition of the limitations of traditional accounting-based investment analytics

• Tightening global, regional, and domestic regulatory and disclosure pressures (e.g. Kyoto Protocol, new EU directives, U.S. clean air regulations, Sarbanes-Oxley).

• Rapidly changing consumer/investor demographics – post-baby boom bulge of younger consumers and investors with greater environmental and social consciousness.

• Growing institutional shareholder activism on sustainability issues, and therefore growing demand for supporting company research – eg. Carbon Disclosure Project ($10 trillion in assets, INCR, dramatic growth in U.S. shareholder resolutions).

• Convergence of the sustainability, fiduciary, and corporate governance agendas - broadening interpretation of fiduciary requirements by public and corporate pension funds to include sustainability issues. This is already enshrined in legislation in at least 7 European countries.

• Increasing pressure from NGO’s and other external stakeholders, armed with better and faster company information, greater credibility, and global communications capabilities.

• Growing CEO/CFO awareness of the competitive and financial benefits of sustainability.

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“ Over the longer term, investments based on environmental criteria are expected to outperform those based on traditional performance resources.”

Roderick Munsters

Chief Investment Officer

PGGM, Netherlands

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How We Work – Innovest’s Research Process

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2Collection of DataFrom Companies - Annual Reports, 10Ks, Sustainability Reports, websitesFrom Government – EPA data, DOE data, other gov’t dataFrom NGOs, industry associations, “think tanks”, other research organizations, and many other sources

In-Depth Sector AnalysisAnalyst reviews general information on the sector which is being analyzedAnalyst assesses competitive dynamics, major risks and opportunities of the sector, which will determine the focus of the analysis

Preliminary Work on Rating MatrixAnalyst fills in data and scores each of 100+ factors in the rating matrix for each company in a sector

“Reality Check”Analyst defends final ratings in front of Directors or MD of Research. Process analogous to a presentation to an Investment Committee at an asset manager.

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Company InterviewAnalyst interviews each company, honing in on questions resulting from preliminary analysis

5Completion of Rating MatrixAnalyst fills in data and scores each of 100+ factors in the rating matrix for each company in a sector. Industry-specific factor weightings determined by empirical stock market research

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Portfolio Construction: Integrating the Innovest Overlay

TSX 300

Financial Screens• Valuation measures: P/E, Price/Free Cash Flow

• Momentum Factors: Earnings growth & consistency• Historical Returns: ROE, ROCE

• Balance sheet analysis• Market Sentiment: Estimate revisions

Environmental Overlay

Environmentally-Enhanced Portfolio

Innovest

( 120 Companies)

Sector Views

Portfolio Risk Control/ Optimization

(40-60 Companies)

Investment House

Investment House

Investment House

Investment House/Innovest