The document discusses the growing importance of sustainability for businesses and investors. It notes that companies face increasing complexity, transparency, and disruptive innovation. Sustainability issues like resource demand from population growth present both risks and opportunities. Investors are also increasingly focused on sustainability factors. Analyzing sustainability can provide early warnings of risks and identify outperforming companies. Issues like climate change impact broad sectors and fiduciary practice now demands considering sustainability. Global best practices include addressing social and environmental issues for both risk management and opportunities.

1. The Competitive Imperative of Sustainability:
Causes, Risks, and Strategic Opportunities
ADFIAP Annual Meeting
Dr. Matthew J. Kiernan
Vancouver, Canada Chief Executive
Inflection Point Capital Management
May 11,2010 mjk@inflectionpointcm.com
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© Matthew J. Kiernan

2. A New World Order for DFIs – and their clients!
• Dramatically increased complexity, transparency, and velocity of change in
SME’s competitive environments.
• Accelerating pace of “disruptive innovation.”
• Shift in the world’s center of economic gravity towards emerging markets,
where “sustainability”-driven risks and opportunities are greatest.
• Dramatically increased demand for energy, water, and other critical natural
resources. Caused by:
• explosive population growth
• urbanization
• industrialization
• demographic shifts and
• growing consumer affluence and consumption, particularly in
emerging markets.
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3. Environmental Pressures The New Competitive Environment
Environmental Impact
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4. The New Competitive Environment
And also . . .
• Substantially increased expectations for improved sustainability
performance
• Wider variety of more credible, better-resourced stakeholders – especially
regulators and NGO’s.
• Much greater information transparency with which stakeholders can assess
companies.
• More powerful and pervasive communications tools for disseminating
criticism of companies.
• Emergence of a new fiduciary paradigm.
Success in this new competitive environment therefore demands new and
different capabilities from companies – and from their bankers:
• Better strategic management
• Better stakeholder management
• Faster innovation
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5. The Investment Logic –
It’s All About Competitiveness!!
• “Management quality” is arguably the #1 factor most critical to companies’
competitiveness and profitability.
• “Sustainability” issues are among the most complex and demanding
management challenges of the 21st century. Therefore:
• Companies with superior positioning and performance on Sustainability factors
tend to be:
> More forward-looking and strategic
> More agile and adaptable
> Better managed companies in general; and therefore:
Likely to be financial out-performers as well
• Powerful global megatrends will make “sustainability” factors even more critical
to companies’ – and investors’ – competitive and financial success over the
next 3-5 years.1
1. UNEP Finance Initiative Working Group (2004) members included Goldman Sachs, HSBC, Deutsche Bank and UBS.
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6. Why Do Your CLIENTS Need To Address ESG?
1. “Carrots”:
• “Social license to do business” – relationships with regulators,
government, communities, NGO’s, customers, and – increasingly –
investors
• Market differentiation and competitive advantage
• Building human capital – recruitment, retention, motivation of top talent
• Strengthened sales, cash flow, and ROCE; cost reduction and
efficiencies
• Improved risk management – regulatory, supply chain
• Access to “green” government stimulus funds
3. “Sticks”:
• Growing regulatory and compliance requirements
• Customer insistence – “The WALMART Effect” 6
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7. It’s NOT Just the Environment:
A New, Broader Conception of Corporate Sustainability
IPCM’s “Iceberg Balance Sheet” – 5 Keys to Sustainable Competitiveness
Today, 75-80% of companies’ true risk profile
and value potential lies below the surface, and
cannot be captured by traditional financial
analysis.
Inflection Point Capital’s proprietary 5-Factor
Model has the proven ability to generate alpha
from these “non-traditional” drivers of risk and
return:
 Environmental Sustainability
 Human Capital
 Organizational Capital
 Adaptability & Responsiveness
 Innovation Capacity
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8. Growing International Investor Momentum. . .
• Globally, 50% growth since 2006.1 PLUS . . .
 Over 700 major institutional investors have adopted the UN Principles for
Responsible Investment (PRI) - $20 trillion.
 Over 400 leading global financial institutions have formally expressed strong
concern about climate change as an investment risk through the global Carbon
Disclosure Project (CDP) - $60 trillion.
 An October 2008 study by Booz Allen Hamilton predicts that SI will be 20% of
global assets by 2015 – over $15 trillion.
 In 2009, both Bloomberg and Thomson Reuters begin offering ESG
(sustainability) data to their (mainstream) clients.
“SUSTAINABILITY” investment is going mainstream – DFI’s will need to keep up.
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Lipper/FERI, 2010
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9. But Some Common Misconceptions
Still Persist Among Some Investors . . .
• ESG/SRI considerations are immaterial or actually injurious to companies’
competitiveness and financial returns
• Including ESG considerations is, therefore, incompatible with fiduciary
responsibility
• ESG/SRI research is inevitably more “wooly”, imprecise, and unreliable than
mainstream investment research
EACH of these 3 myths has now been categorically disproved!
But STILL the misconceptions persist . . .
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10. Sustainability Analysis Can Provide
Early Warning Signals on Risk . . .
Innovest Very Early Advance Warning on Bear Stearns
Since initiating coverage on Bear Stearns in April of 2005, Innovest never rated Bear above `sub-
investment grade’ – using Innovest’s `four pillar’ ESG methodology - through to its eventual
absorption by JP Morgan Chase. 10
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11. …and Better Performance on the Upside
The IPCM Global 100 Index
Daily and Accumulated Performance: 5 year live results
Out-performance: 300 bps/year
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12. Climate Change: the “Mother of All” Sustainability Issues
Why should you care?
• Growing impact on your portfolio companies’ competitiveness and
financial performance. Climate change is NOT about SRI!
• Climate risks affect a much broader range of industry sectors than one
would think – not just heavy industry.
• Same-sector climate risk can vary by 30 times!
• Fiduciary best-practice increasingly demands it.
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13. Climate Risk: Can YOU Afford to Ignore It?
CO2 Regulatory Cost of Compliance
as Percentage of EBITDA
>50.00% CMS >50.00%Hanson
20.00% 19.21% Nova 50.00%
Energy
46.25% Kinross
Gold Corp.
37.85% Drax
40.00%
Cost of Compliance as EBITDA%
Cost of Compliance as EBITDA%
15.00%
13.69% Tosco
for CCh, Steel, and IO & G
12.90% Allegheny
Tech.
30.00%
10.00%
20.00%
Rautaru
5.00% ukki
Toray
10.00%
2.72% Statoil CRH
Centrica Umicore Fortum
2.00% ASA
2.91%
2.00% 1.48%
0.43% 1.26%
0.00% 0.00%
Commodity Steel Integrated Oil & Gas Multi-Utilities & Metals & Mining Electric Utilities - Construction
Chemicals Unregulated Power International Materials
Max case Min case
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14. And There is a Performance Premium for Top Performers:
Annualized Out-Performance: 300 bps
Source: Innovest
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15. So Why Should YOU Consider ESG?
• Identify/minimize risk in portfolio companies; lower default rates
• Better understanding of management quality in borrower companies
• Identify new commercial opportunities – both for clients and for YOU
• Increase client “stickiness” though added-value advice
• Differentiation and competitive advantage – for YOU!
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16. What Does Global Best-Practice Look Like?
• Focus both lending and equity investing not just on downside risk but also
on upside opportunities – eg. Renewable energy; health water
• Address social issues as well as environmental – eg. “Base of Pyramid”
entrepreneurs
• Building human capital – training: both clients and DFI staff
• Sector-specific lending guidelines
• Evaluate own ESG impacts from lending
• Advisory services for clients
• Power of collaboration – NGO’s; academe
• Reduce own operational footprint (secondary)
• Your own pension fund – how is THAT invested?
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17. An Asia Pacific “Leapfrog” Opportunity . . .
• Generally, less devotion to unfettered capitalism; more of a “social contract”
• No intellectual/organizational baggage, unlike the West
• Acknowledged size and strength of SME sector and entrepreneurs
• Korea, Thailand, Malaysia public pension funds – investor awareness ahead
of the West
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18. A New “Hierarchy of Organizational Self-Actualization”
Action
Hollow, Pious
Hollow
Rhetoric
Embryonic Understanding
Awareness
Denial
Ignorance
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19. And There’s Always THIS To Consider . . .
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21. For More Information, Please Contact:
Dr. Matthew Kiernan
Chairman & Chief Executive
416-399-2861
kiernanmj@gmail.com
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© Matthew J. Kiernan