The document discusses F&C Investments' approach to sustainable investment, emphasizing the importance of environmental, social, and governance (ESG) factors in driving long-term shareholder value. It outlines market drivers behind responsible investment, the role of active shareholder engagement, and case studies highlighting their commitment to ethical practices and risk management in various sectors. F&C demonstrates how engaging with companies can lead to positive outcomes for both investors and society, while addressing critical issues such as climate change, corporate governance, and labor standards.

1. Sustainable Investment: How active shareholders drive positive change
Karina Litvack, Director, Head of Governance & Sustainable Investment
Lisbon, 7th May 2012
www.fandc.com

2. Agenda
 F & C’s Approach to Responsible Investment
 Market Drivers of Responsible Investment
 What are the Hot Issues?
 Case Studies
 Q &A

3. F&C Investments – responsible investment
overview
Overview Leading European Fund Manager
 European asset manager with
€120bn* under management
 London-based
 Listedon London Stock
Exchange
 28-year track record in ethical
and sustainable investment
funds
*€120.1 bn as at 31.12..2011. ***Strategic partners
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4. F & C’s Ethically-Screened Funds
 Growingconsensus that best long-term performance will come from
companies that take seriously their wider environmental, social &
governance responsibilities
 Highenergy prices & awareness of climate change have spurred
investor interest in clean energy & related investments
 Need to meet ethical considerations that are becoming increasingly
important in the minds of investors
“
You cannot escape the responsibility of tomorrow
b
y evading it today”
A
braham Lincoln

5. Occupy percolates up to investment world
New York
London Lisbon
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6. Market Drivers Behind Responsible Investment
 Systemic concerns
 Investment drivers
 Corporate scandals and crises: downside protection
 Reducing risks, Spotting opportunities
 Regulations & Codes:
 From divestment to active investment
 Pensions laws and codes
 Corporate leadership: will investors follow?
 Stock Exchanges: JSE, Novo Mercado, Borsa Italiana Star Index
 Sell-side research: Integration of ESG into investment analysis

7. Changing Definition of Fiduciary Duty
 “Where fiduciary duties apply, there is no general requirement in law for
investment decision-makers to invest according to ESG considerations,
but ESG considerations are relevant considerations that must be taken
into account in the process of investment decision-making.
 The weight to be given to ESG considerations, however, is for the
investment decision-maker empowered to make discretionary
investment decisions in the interests of all beneficiaries.
 Itis not a breach of fiduciary duties per se to have regard to ESG
considerations while pursuing the purposes of the trust. Rather, in
our opinion, it may be a breach of fiduciary duties to fail to take
account of ESG considerations that are relevant and to give them
appropriate weight.”
Freshfield Bruckhaus Deringer, October 2005

8. A Philosophy: Shareholder Engagement
r
eo®: Responsible Engagement Overlay
 Responsible
 Uses shareholder influence to encourage adoption of best practices
 Focuses on risk reduction and long-term shareholder value
 Engagement
 Recognises common interests of company & shareholder
 Builds on constructive dialogue with companies
 Overlay
 Does not screen out companies = no impact on portfolio construction
 Investment decisions driven by financial considerations
A
pplies to all of F&C’s equity holdings + third-party funds

9. Where do investors engage?
Environment Social Governance
Environmental management Human rights Corporate Governance
 Environmental standards  Security  Remuneration
 Supply chain environmental  Privacy & free expression  Board structure
standards
 Community relations  Shareholder rights
 Pollution control
 Weak governance zones  Audit & control
 Waste & recycling
 Product opportunities
Labour standards Sustainability Management
 Health & safety  Disclosure & reporting
Ecosystem services
 ILO core conventions  Governance of sustainability
 Biodiversity management issues
 Diversity
 Water  UNGC compliance
 Supply chain labour
 Access to land standards  Stakeholder engagement
Climate change Public health Business Ethics
 Emissions management &  Nutrition  Bribery & corruption
reporting
 Access to medicines  Political influence
 Climate change strategy
 Product safety  Whistleblowing systems
 Access to land
 HIV/AIDS  Responsible marketing
 Biofuels
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10. Case Study: Tackling the Credit Crunch
E
ngaging with banks
 Banking sector has experienced a series of seismic shocks
I
ssue:
 Inadequate oversight of risk and link to pay
 Lack of transparency and accountable practices
 Disregard for systemic impacts
A
ction:
 Engage with banks – 4 key themes:
 Disposal of toxic assets and recapitalisation
 Reform of incentive structures to ensure pay-for-performance and appropriate risk-taking
 More robust boards that hold executives to account
 Cultural reform - Lobbying
 Using voting rights to challenge poor practices
 Tackling systemic factors: Dialogue and engagement with regulators
 Regulation that sets good governance standards and encourages greater transparency
without inhibiting competition.

11. Aligning bank remuneration with risk
Credit quality as a bonus underpin
 Excessive focus on Return on Equity for banks
 F&C pioneered Credit Quality Underpin as precondition for bonus awards
 Engaged over 50 banks globally
 To date: RBS and Barclays accept idea
 See F&C Viewpoint
“There is an underpin whereby awards will only
vest if the Remuneration Committee is satisfied
that risk management during the performance
period has been effective and that financial and
non-financial performance has been satisfactory”
“The Remuneration Committee has the
discretion to reduce the vesting of deferred
incentives and long term incentive awards (to nil
if appropriate) if, in its sole opinion, the financial
health of the Group has significantly
deteriorated”
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12. BP Golf of Mexico
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13. Fukushima
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14. Tokyo Electric Power Company - TEPCO
TEPCO and the Fukushima nuclear accident
Background
 In March 2011, Japan suffered a major earthquake and tsunami
 Fukushima nuclear power plant suffers a catastrophic safety
failure
Market Reaction leads to plant shutdown and subsequent rolling
 Safety failure
power outages
 Share price has fallen 80% since the earthquake
 TEPCO’s credit rating is downgraded by Moody’s from A1 to Baa1 and
remains under review
 TEPCO’s credit default swaps peaked at 400bps over risk-free, in line
with sub-investment grade risk, compared to 8bps pre-disaster
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15. TEPCO
F&C Acts
 Meeting with TEPCO at Tokyo offices to discuss ESG strategy, practices
and reporting
 Recommendations to:
 Improve independent oversight of the company through appointment of outside
board directors
 Enhance safety and reporting systems at key nuclear facilities
 Implementcomprehensive climate change policy to include emissions targets,
renewable energy goals
 Encourage responsible consumer behaviour towards energy use
 F&C leading collective engagement on behalf of UK investors to:
 Urge management strategies to lead business out of the crisis
 Safety review and post-mortem will shape F&C’s ongoing engagement
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16. ESG risks and Credit risk: BP and TEPCO
ESG risk hits investors in the wallet
Impact of Macondo oil spill on
BP’s cost of credit Impact of nuclear blast on
Tepco’s cost of credit
Source: Bloomberg.

17. Technology and media industries
Since 2004, active involvement in Global e-Sustainability Initiative (GeSI)
and Electronics Industry Citizenship Coalition (EICC).
EICC: de facto standard for technology hardware companies to improve
labour and environmental standards in electronics factories
From an initial group of three US computer companies, now over 40 global
companies throughout value chain.
 Majorcriticism of factory labour standards of Apple’s popular
iPhone and iPod
 F&C engaged Apple and Foxconn, its outsourced manufacturer
 Encouraged both to join the EICC, implement policies and publish
factory audits.
 Dell
introduced a comprehensive take-back programme for its
obsolete products as early as 2004.
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18. Deforestation & Climate Protection
Forest protection essential to safeguard rainfall and
avoid soil erosion
Poor government enforcement and company practices
High-profile scandal linking Unilever to rainforest
destruction
F&C Acts
 Site visits: Indonesian palm oil plantation
 Pressed Unilever, Golden Agri and 12 companies to curb deforestation
 Collaborative engagement : Forest Footprint Disclosure Project, government action
Results & Next steps
 Golden Agri undertaken remedial action
 Unilever will halve environmental footprint of its products by 2020
 Consumer Goods Forum goal: zero net deforestation by 2020
 78 participants in a new Forest Footprint Disclosure Project
 Government support for forest protection at Cancun
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19. Market failure: “Universal investor” factors
The challenge: Diabetes an escalating social and economic burden
Cost to
health
service
($ billion)
47
26
China to see 80%
increase in diabetes
15 cases by 2030
2007 2011 2030 Years
Investor engagement:
 ood & beverage companies:
F
 Incl. Access to Nutrition Index (ATNI)
 etailers and restaurants
R
 arge employers on employee general health
L 19

20. Global Engagement: Examples of Milestones
UK: Standard UK: Petrofac France: Danone NL: Heineken Germany: Adidas Italy: Bulgari Pledged to
Chartered actively addressed implemented a committed to new joined SEDEX, an responsible jewelry
incorporated humanitarian and strict policy not to ideas for limiting initiative to promote sourcing, addressing Russia: Novatek
climate risk into human rights market to children water usage in labor standards human rights concerns increased the
UK: HSBC
its lending issues in Sudan breweries over conflict diamonds number of
Improved board
criteria and Burmese gems independent
independence
board directors
enhancing
oversight of
group risk
management
Japan: Mitsubishi
leveraged
suppliers to
US: Pfizer raised improve labour
animal welfare standards
standards
throughout its
supply chain
Korea:
Shihan Financial
improved shareholder
rights
US: Motorola
introduced more
energy efficient China: China Telecom
batteries into its took active steps to
mobile phones eliminate corruption by
India: TATA
Brazil: BM&F enhancing employee
Consultancy
Mexico: Alsea Bovespa protected conduct standards
developed Australia: Arrow Energy
integrated the rights of minority
capacity to lead committed to comprehensive
US: Hewlett-Packard environmental impact shareholders in the
clients in biodiversity management
Supported US laws to targets into company Brazil Stock
sustainability throughout its supply chain
improve shareholder performance goals Exchange
influence over executive strategies
compensation

21. Thematic investment approach
Alternative energy Energy efficiency Sustainable mobility
Solar, wind, Insulation, energy Alternative fuels,
geothermal… demand management… efficient cars…
Mitigation
Waste Advanced materials Forestry & agriculture
Recycling, landfill, Bioplastics, Forestry
gas capture… silicon… projects…
Water Acclimatisation
Adaptation Desalination, water New crop varieties,
purity testing… catastrophe insurance…
Supporting services
Supporting
services
Consultancy, carbon trading...
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22. Investment themes
Theme: Energy efficiency
 Huge untapped scope for energy efficiency
improvements
 Doubling
the rate of energy efficiency
improvement worldwide could save energy
equivalent to 2,000 coal-fired plants by 2030 –
and save consumers $500bn/yr
 Governments are becoming increasingly bold
in their approach, using regulation to set
minimum standards in buildings and products
(e.g. EU action on the old-style lightbulb)
 Improvements to electricity distribution systems
also critical – over $90bn of fiscal stimulus
money directed towards investments in grids
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23. Mitigation: Energy Efficiency and Informatica
Climate Change Rationale
 Running servers at higher utilization
rates means less total energy usage,
which results in lower carbon
emissions. Cloud data centres are
also more energy-efficient compared
with more decentralised systems.
 Large UK companies that use cloud
computing could reduce CO2
emissions associated with their IT
estate by 50% compared to predicted
levels without the adoption of this
technology. This would be equivalent
to the annual emissions of over 4
million passenger vehicles, and that’s
the potential for UK companies alone.
1
 Data is power hungry: the average
data centre consumes as much
energy as 25,000 households. 2
1Source: Carbon Disclosure Project 23
2 Source: McKinsey Analysis
Investment Rationale

24. Waste
 3.6% of global greenhouse
gas emissions come from
waste: largely gases from
landfill sites
 Recycling also offers
significant energy savings
compared with producing
goods from new
 The sector is already subject
to heavy regulation (eg EU
Landfill Directive). Climate
change concerns are adding
to the pressures
 Growth opportunities include
recycling and waste-to-energy
projects
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25. Q&A
Your Questions?

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