Generation Investment Management
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  • 1. Generation Investment Management Global Compact COP: An Investor View Lila Preston April, 2007
  • 2. Introduction to Generation • Independent, private, employee owned partnership established in April 2004 Sustainability Traditional • Chairman - Al Gore, Managing Partner - Themes Equity Analysis David Blood • Global equity investor, institutional clients • Concentrated (30-50 stocks), long-only & long term • 5% of profitability goes to Generation Portfolio Foundation Management & Stock Selection • Our Advisory Board plays an important part in our long-term research agenda
  • 3. Our investment philosophy Long term investing implies identifying companies with an enduring capability to create value and sustain competitive advantage. > Long Term Focus > High Conviction Investing > Integrated Sustainability Research Examples of Sustainability Issues Systematically Addressed > Climate Change > Lobbying > Pandemics / HIV/AIDS > Corporate Governance > Poverty / Real Needs > Stakeholder Engagement > Water > Bribery / Corruption > Human Capital > Demography / Urbanization
  • 4. Identifying material issues - both traditional and non-traditional Food Manufacturing Sector Traditional Themes Sustainability Themes > Retail Consolidation > Sustainable Agriculture > Rise of discounters > Organic Food > Rise of private labels > GMOs > Tightening price environment > Fair Trade > JVs & partnerships > Obesity Oil & Gas Sector Traditional Themes Sustainability Themes > Reserve replacement rate > Reducing CO2 footprint > Country risk > Stakeholder engagement > Finding and development costs > Leadership on climate change > Transparency and reporting > Carbon capture and storage > Talent attraction and retention > Renewable Energy R&D
  • 5. We only “see” a portion of what is really going on… Visible Light Radio Microwaves Infrared Ultraviolet X-rays Gamma Waves rays This analogy also goes for investing…. If all we look at is financial reports, we may miss the broader picture.
  • 6. What we look for in companies? We buy high quality businesses with high quality management teams, at the right price. Generation’s definition of Quality: • Business Quality (1-5) • Management Quality (1-5) – Dominant market position – Culture of Integrity – Strong entry barriers – Long term strategy – Pricing power – Respect for shareholders – Secular growth trends – Well managed for the – Part of the solution long-term
  • 7. Role of the COP in our Investment Process • An indicator of Management Quality • A way to check if consistency between what a company says and does (also look at lobbying practices) • A research tool to learn more about a company • … But it is only part of the broader picture – Talking with management – Primary research with suppliers, customers, NGOs, other stakeholders – Talking with the broker community – Looking at other indicators (holistic view of a company) – Linkages between sustainability performance and compensation (and discipline) • The COP is a part of the two-way communication between companies and investors – We see the COP as an important way for investors to communicate how they address the principles (i.e. Generation’s COP)
  • 8. Some Indicators of Investment Community • UN Principles for Responsible Investment – Commitment by asset owners to incorporate environmental, social, and corporate governance (ESG) issues into investment decisions. • CERES and Investor Network on Climate Risk (INCR) letter to Congress – Institutional investors managing $4 trillion in assets called on US lawmakers to enact legislation on CO2 emissions. • Carbon Disclosure Project’s (CDP5) – Signed by more than 280 institutional investors with assets of more than $41 trillion. The 2007 request was sent to 2,400 companies to ask for disclosure around climate change. • The Enhanced Analytics Initiative – Collaboration of asset owners and managers aimed at encouraging better, longer-term, investment research, in particular research that take account of the impact of extra-financial issues on long-term investment (represents $2.4 trillion AUM) We are seeing early stages of investor collaboration, but much is still focused on single issue (climate change) – this may be a template for addressing other issues.
  • 9. Conclusion: What we wish we saw more of… • Move away from focus on the short term – investors and companies both to blame – The average mutual fund in America turns over 100% of its portfolio every 11 months – 78% of financial executives surveyed said they would give up economic value in exchange for smooth earnings and 55% of managers would avoid initiating a project with a very positive return if it meant falling short of the current quarter's consensus earnings.* • Companies need to talk about long term strategy and non-financial drivers of performance from the top – COP, GRI, Sustainability Reports, Annual (event Quarterly) Reports – Analysts will follow the company lead – A long-term focus is better for the economy and society *National Bureau of Economic Research
  • 10. Appendix
  • 11. Our Commitments • Asian SRI Association • Carbon Disclosure Project • Enhanced Analytics Initiative • European SRI Association • Extractive Industry Transparency Initiative • Global Business Coalition on HIV/AIDS • Institutional Investors Group on Climate Change • International Corporate Governance Network • UK Social Investment Forum • UN Global Compact • United Nations Environment Programme, Finance Initiative — Principles for Responsible Investment • US Social Investment Forum
  • 12. Step 2: VII. Step 2: Investment Decision Example Sector examples show how we integrate sustainability research with fundamental analysis in our assessment of Management and Business Quality. Industrials Financials Healthcare Johnson Controls Inc T. Rowe Price Novo Nordisk Automation and Efficiency Investment Advisory Services Diabetes Treatment BUSINESS QUALITY > Transition to energy efficiency in > Long-term customer relationships, > Market w/ good LT volume growth buildings and hybrid battery business product innovation > Strong barriers to entry in diabetes due to > Pricing power, stable recurring > Funds have strong track record, with manufacturing capabilities, patient loyalty, revenues, lower capital intensity versus some of the lowest fees across the patent protection peers industry > A sustainable insulin strategy in developing > Business model built around customer > Growing market share of fund inflows markets that is built around prevention relationships on the back of reputation of integrity MANAGEMENT QUALITY > Proven management with track record > Leading human capital management – > Sustainability embedded with senior of execution broad equity ownership support (triple bottom line) > Educate consumers on energy > High level of investment in training and > Low staff turnover, culture of innovation efficiency retention > Strong track record in stakeholder > Leadership on energy saving as a > Avoided market timing scandals due to engagement solution to climate change ethical culture The use of specific companies does not represent investment advice, they are used purely as examples to assist in the explanation of Generation’s investment process and they may or may not be held in portfolios managed by Generation Page 14 | October 2006
  • 13. Example in Industrials Sector  climate change focus Johnson Controls Inc: Portfolio of businesses, including automotive interiors, building efficiency and batteries for hybrid vehicles. Business Quality – Management Quality – – Strong market for – Recognized as demand-side efficiency sustainability leader with (rising energy costs, LT mindset increased regulations) – Educate customers on – Boom in green building energy efficiency design, urbanization trends – Hold annual energy efficiency conference – Growth in the hybrid car market
  • 14. Example in Financial Sector  human capital focus T. Rowe Price: Financial services firm providing investment advisory services Business Quality – Management Quality – • Solid, long-term track record, • Avoided the market timing low fees and trading scandals – which has grown market share • Traditional market leader in direct distribution • Well regarded management, high level of client alignment, • No current debt and a large culture of integrity and accumulating cash balance • Strong human capital management (stock options broadly shared)
  • 15. Generation Investment Management Disclaimer Disclaimer This material is for information only and for the use of the recipient. It is not to be reproduced or copied or made available to others. Under no circumstances is it to be considered as an offer to sell, or a solicitation to buy any investment referred to in this document. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and it should not be relied upon as such. Generation accepts no liability for loss arising from the use of this material. Any opinions expressed are our current opinions only. This report is not meant as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client's accounts should or would be handled. This report is for general information purposes only and does not take into account your individual circumstances nor your financial situation or needs. Stocks can be volatile and entail risk and individual stocks presented may not be suitable for you. You should not buy or sell a stock without first consulting your financial advisor or considering whether it is appropriate for you and your respective portfolios. Certain information presented may be provided by third-parties. Generation believes that such third- party information is reliable, but does not guarantee its accuracy, timeliness or completeness, and it is subject to change without notice. Generation, their employees, directors, consultants, and/or their respective family members may directly or indirectly hold positions in the securities referenced. Therefore, this research material is not to be considered impartial. Nothing in this report should be interpreted to state or imply that past results are an indication of future performance