The Risks and Opportunities of ClimateChange in Capital Markets

Bren School Corporate Partners SummitMay 2007

Risk and Reward Drivers

Policy EconomicsCapital Market Opportunities

Fiduciary Responsibility

Investment Fiduciary Definition: a person who has the legal responsibility for managing someone else’s money.

— Members of investment committees of retirement plans, foundations, and endowments

— For Trustees of private trusts— Advisors who provide comprehensive and continuous investment

advice

Investment Fiduciaries manage more than 80% of the nation’s liquid investable wealth.

As climate change policy is implemented, fiduciaries will be required to consider risks and opportunities.

“Maginot Mentality”

Traditional investors fail to see that company valuation will need to incorporate climate change risk and reward

Will investment fiduciaries recognize the impacts that climate change will have on their investments?

New factors must be accounted for in corporate reporting

Source: www.maginot-line.com

Policy Response

Future regulatory framework will encompass the following themes:

Policy response to account for externalities

Support for alternative energy (e.g., subsidies and tax breaks) improves the cost competitiveness of new technology, reduces costs through economies of scale, and promotes further technological advances

Reduce the dependence of foreign energy sources

Policy Response

Investment strategies of all types will need to consider the impact of policies and forces related to climate change and their effect on the future business and regulatory environment.

— Command and control— Cap trading system— Tax incentives— Voluntary measures

Corporate leaders are incorporating climate change criteria into their business plans and strategies in anticipation of policy and regulatory changes.

Investors are discovering ways to account for the implications of climate change within their investment process.

Economic Considerations

Direct exposure— Industries and sectors that produce greenhouse gas emissions as

a result of their processes.Mitigation Measures: Invest in low-carbon technology, trade

emissions rights, invest in offsetting projects, and lobby to block or challenge regulation.

— Companies with low greenhouse gas exposure within a particular polluting industry are in a relative strong position.

Economic Considerations

Indirect exposure— Sectors that either manufacture products that emit greenhouse

gases during their use, or offer services that are affected by greenhouse gas regulations

— Sectors with direct greenhouse gas emissions from point sources bear the highest regulatory risks, as these sources are easily monitored and controlled

— Limited ability to adapt— Increasingly located in developing countriesMitigation Measures: Effective policies may need to target the

sectors with high indirect emissions and high ability to adapt

Economic Considerations

Physical Exposure— Sectors whose operations depend on climate conditions— Estimation of physical impacts involves a high level of

uncertainty— Some industries may need to drastically reinvent their business

model — While effects may not be realized for quite some time, certain

industries will take a long time to adapt

Banks Manufacturing Insurance Healthcare

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Tourism Agriculture

Real estate Water utilities

Off-shore oil Fisheries

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Physical exposure to climate change and ability to adaptBy sector or activity

Corporate Analysis

Considerations for corporate success:— If a company operates in a regulatory environment where

greenhouse gas emissions are regulated, when and in what form is regulation expected?

— Has the company’s top management acknowledged that climate change is a fact and a risk?

— Does the company track emissions throughout it’s supply chain? Has the company set reduction targets and a strategy for how to implement them?

— How high are a company’s emissions on an absolute level and relative to its peers?

— Are there business opportunities for climate change mitigation and increased regulation?

Corporate Analysis

Increased corporate disclosure will allow company’s to comply with greenhouse gas regulations and assist investor in making decisions

Company’s with poor track records relative to their peers will carry a higher risk of being negatively affected by carbon regulations

Opportunities for carbon mitigation will emerge— Improving energy efficiency— Increasing the use of low- and no-carbon fuels

Investment Opportunities

Political support is currently the most important driver of outcomes— Which industries will be affected and when?— Financial support? (e.g., subsidies, tax breaks)

Investors will be focused on a “best in class” approach

Emerging greenhouse reduction technologies will come and go. — Some will be wildly successful, but most won’t make it— Those that are not yet profitable are at a higher risk— Those that are supported by R&D spending from large

corporations will have a better chance of sustaining themselves

Investment Opportunities

Building Investment area

Thermal insulation Producers of insulation materials; high performance materials

Lighting LED, fiber optics, compact fluorescent light bulbs

Heating, cooling, and ventilation Integrated systems, IT management, metering devices

Household and electronic goods Energy efficient appliances, built-in power systems

Transport Investment area

LIghtweighting Carbon fiber, composite and lightweight materials

Drive trains Automotive suppliers with innovative technologies, fuel cells

Technology and electronics GPS systems, traffic management systems

Electricity production Investment area

Combined heat and power Independent power producers

Industrial process and materials us Investment area

White Biotechnology Industrial biotechnology, enzyme producing companies

Renewable and low-carbon energies Investment area

Wind Turbine manufacturers, wind park developers

Photovoltaic Entire photovoltaic supply chain

Geothermal Geothermal project developers

Biofuel Biodiesel and bioethanol producers

Hydropower Turbine manufacturers

Investment Products

Equities Bonds Private Equity / Venture Capital

Real Estate

Hedging Instruments

Others

Portfolio screening

Thematic funds

SRI funds

Renewable energy and efficiency stocks

Portfolio screening

Renewable energy bonds

SRI funds

Environmental venture capital

Improved energy efficiency within property portfolios

Green mortgage-backed securities

Insurance

Catastrophe bonds

Weather derivatives

Emissions indexes

Carbon funds

Structured products

Investment Products

* Annualized Returns

Domini 400 Social IndexIndex Total Returns As of 04/30/07

  April 2007 Last Qtr YTD One Year* Three Year*Five

Year* Ten Year*

Since 5/1/90 Inception*

KLD's DS400 Index

4.56% -0.18% 4.37% 13.74% 10.16% 7.60% 8.01% 12.13%

S&P 500 4.43% 0.64% 5.10% 15.24% 12.25% 8.54% 8.05% 11.54%

Investment Products

Index Total Returns As of 04/30/07

  April 2007 Last Qtr YTD One Year* Three Year*Five

Year* Ten Year*

Since 7/1/05 Inception

KLD GC 100 Index

3.61% 5.87% 9.69% 12.02% N/A N/A N/A 23.63%

Russell 3000 3.99% 1.28% 5.32% 14.48% 13.08% 9.25% 8.59% 15.07%

* Annualized Returns

KLD Global Climate Index 100

Investment Products

Index History (%)Since

Inception1 Year 3 Year 5 Year

WilderHill Clean Energy Index

8.64 -13.08 7.23 2.93  

Nasdaq Composite Index 8.14 3.50 6.69 5.59  

S&P 500 Index 10.04 11.83 10.05 6.27  

* Annualized Returns

WilderHill Clean Energy Portfolio

Market Wisdom - Benjamin Graham

“The intelligent investor is likely to need considerable willpower to keep from following the crowd.”

Benjamin Graham

US-R