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The Competitive Imperative of Sustainability:

 Causes, Risks, and Strategic Opportunities

                     ADFIAP An...
A New World Order for DFIs – and their clients!


• Dramatically increased complexity, transparency, and velocity of chang...
Environmental Pressures   The New Competitive Environment




                                                            ...
The New Competitive Environment
And also . . .

     • Substantially increased expectations for improved sustainability
  ...
The Investment Logic –
                                                                        It’s All About Competitiven...
Why Do Your CLIENTS Need To Address ESG?
1.   “Carrots”:

        •    “Social license to do business” – relationships wit...
It’s NOT Just the Environment:
                    A New, Broader Conception of Corporate Sustainability



IPCM’s “Iceber...
Growing International Investor Momentum. . .

• Globally, 50% growth since 2006.1 PLUS . . .

       Over 700 major insti...
But Some Common Misconceptions
                                      Still Persist Among Some Investors . . .


•   ESG/SR...
Sustainability Analysis Can Provide
                                             Early Warning Signals on Risk . . .



  ...
…and Better Performance on the Upside

             The IPCM Global 100 Index

Daily and Accumulated Performance: 5 year l...
Climate Change: the “Mother of All” Sustainability Issues

Why should you care?

•    Growing impact on your portfolio com...
Climate Risk: Can YOU Afford to Ignore It?


                                                                       CO2 Re...
And There is a Performance Premium for Top Performers:




Annualized Out-Performance: 300 bps




                       ...
So Why Should YOU Consider ESG?




•   Identify/minimize risk in portfolio companies; lower default rates

•   Better und...
What Does Global Best-Practice Look Like?

•   Focus both lending and equity investing not just on downside risk but also
...
An Asia Pacific “Leapfrog” Opportunity . . .


•   Generally, less devotion to unfettered capitalism; more of a “social co...
A New “Hierarchy of Organizational Self-Actualization”




               Action




              Hollow, Pious
         ...
And There’s Always THIS To Consider . . .




                                           19
                    © Matthew ...
20
© Matthew J. Kiernan
For More Information, Please Contact:




     Dr. Matthew Kiernan
   Chairman & Chief Executive
           416-399-2861
 ...
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Kiernan, speaker, plenary 1

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Kiernan, speaker, plenary 1

  1. 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 1 © Matthew J. Kiernan
  2. 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. 2 © Matthew J. Kiernan
  3. 3. Environmental Pressures The New Competitive Environment Environmental Impact 3 © Matthew J. Kiernan
  4. 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 4 • Greater adaptability © Matthew J. Kiernan
  5. 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. 5 © Matthew J. Kiernan
  6. 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 © Matthew J. Kiernan
  7. 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 7 © Matthew J. Kiernan
  8. 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. 1 Lipper/FERI, 2010 8 © Matthew J. Kiernan
  9. 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 . . . 9 © Matthew J. Kiernan
  10. 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 © Matthew J. Kiernan
  11. 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 11 © Matthew J. Kiernan
  12. 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. 12 © Matthew J. Kiernan
  13. 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 13 © Matthew J. Kiernan
  14. 14. And There is a Performance Premium for Top Performers: Annualized Out-Performance: 300 bps Source: Innovest 14 © Matthew J. Kiernan
  15. 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! 15 © Matthew J. Kiernan
  16. 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? 16 © Matthew J. Kiernan
  17. 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 17 © Matthew J. Kiernan
  18. 18. A New “Hierarchy of Organizational Self-Actualization” Action Hollow, Pious Hollow Rhetoric Embryonic Understanding Awareness Denial Ignorance 18 © Matthew J. Kiernan
  19. 19. And There’s Always THIS To Consider . . . 19 © Matthew J. Kiernan
  20. 20. 20 © Matthew J. Kiernan
  21. 21. For More Information, Please Contact: Dr. Matthew Kiernan Chairman & Chief Executive 416-399-2861 kiernanmj@gmail.com 21 © Matthew J. Kiernan

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