ESG Presentation Daniel Allen

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Impact on Capital Market Decisions

January 2011



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About the Ativo Group

e t vo roup escr es two separate, ut a ate rms nc u ng:

Ativo Capital Management LLC, an SEC-registered investment advisor offering

long-only equity asset management since 2001 in Separately Managed Accounts to

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other structured products.

Ativo’s approach begins with the principles originally developed by Merton Miller,Franco Modi liani, James Tobin and others at the Universit o Chica o. Ativo’s

unique contribution was the empirical validation that made these theoretical

principles useful in making investment decisions.

Ativo Research LLC, a Chicago based securities research firm that has been

producing independent equity research since 1971. Ativo Research is consistentlyranked as one of the top investment research firms in the industry by independent

rating agencies such as Investars. Ativo Research is an industry pioneer in the practical

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of securities.

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Why is this topic relevant?

–

“…in just four years, around US$ 22 trillion of assets have been

si ned u to the Princi les for Res onsible Investment PRI .

This is more than 10% of total global capital markets…”

. . nnua epor o e n a ve . ew or : n e a ons.


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Religious Roots

John Wesley, founder of the Methodist

Church, preached in his famous Sermon

" ", ,

moral in all dealings with money so that

we mi ht …

" gain all we can without hurting our neighbour."

“ ”- ,The Sermons of John Wesley 1872 Edition (Thomas Jackson, editor)


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Civil Rights Movement

e re g ous pro on aga ns

“sin stocks” continued to be the

,

during the Civil Rights

Movement, Dr. Martin LutherKing, Jr. and others began to use

economic power through boycotts

as a means to create pressure forchange."Martin Luther Kin - Bio ra h ". Nobel ri e.or . 23 Mar


2011

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Angst Over Vietnam War

,

for his photograph of a naked and badlyburned young Vietnamese girl, running

from her village after a napalm attack.

Outrage over the incident led to widespread protests and investor

revolts against Dow Chemical, the makers of napalm. The

impact was so great that Dow Chemical stop manufacturing thechemical and vowed never to do so again.


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Broader Impact of Social Issues

n e s an s, grow ng

investor avoidance of South

international investments in South

Africa by as much as 75% and isbelieved to have added to the

political pressure for that system

to change.


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Costly Environmental Disasters

e xxon a ez ran agroun on g

Reef at 12:04 a.m., March 24, 1989.

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,

Horizon explosion killed 11 men and

was stopped finally capped after it

had released about 4.9 millionbarrels, or 205.8 million gallons of


cru e o . on us9



Cost of Corporate Governance Misconduct

are o ers os near y on

when Enron's stock price, which hit a

- ,

plummeted to less than $1 by the end of

November 2001 due to fraud.

On July 21, 2002, WorldCom filed for Chapter 11

bankru tc rotection after it was discovered that there

financial records were fraudulent.


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More Irresponsibility in Governance

Copyright © 2011 Ativo Capital Management LLC All Rights Reserved11



DefiningSustainability




Traditional Triple Bottom Line

Environmental

Social


John Elkington, (Sustainability, Inc.) 1984



Broad Definition of Sustainability

Development that meets the needs of the present

generations to meet their own needs.(Brundtland Report – 1987)

but are inadequate for organizations.




An Organizational Definition

usta na ty s t e a ty o an organ zat on to

appropriately address direct and indirect risk

actors w e ncreas ng s are o er va ue.




Sustainability is Primarily about Risk

e s ory o sus a na y as een u upon

recognizing both direct and indirect risks associated.

If sustainability is about risk then it must also be about

order to evaluate risk and return you, of necessity, must

look at the cost of capital.




Cost of Capital

ost o ap ta s t e expecte return t at s

required on an investment to compensate for the

r s e ng ta en.

The question is, how do we fully measure risk?




How does Sustainability Impact Risk?

organization is managing indirect financial metrics (i.e. ESG)?What is the likelihood a com an will suffer a tail risk event?

Does the return on investment appropriately reflect the risk

profile of the investment?Does the company operate in a way that reflects investor

preferences?

advantage of emerging opportunities in the market?




Measuring Risk

Direct Direct

n recInternal

n recExternal




How is Sustainability being integrated?

for sustainability initiatives.1. Qualitative criteria – variations of “the right thing to do”

2. Profitability –Sustainable practices increase revenue and reduce costs,

leading to improved long-term profitability

3. Investor Preferences & Stock Price – Investors (e uity markets) shiftcapital to firms with higher sustainability rankings, resulting in higher

share prices and improved shareholder value performance

Linking sustainability to stock price provides a persuasive (andquantitative) case that sustainability initiatives help executives

achieve targets for creating shareholder value




Impact on Cost of Capital

is a 50-70 bps impact (depending on industry and sector)surrounding adherence to ESG best practices for those areas in

which there is economic opportunity for or risk to the company.

ven a on y a e over o e g o a cap a mar e s

looking at these factors, it is highly likely that the impact will

increase dramatically over time. Obviously, the exact amount

will depend on the elasticity of the various capital markets.




Summary

e concep s surroun ng sus a na y are no new.

The concept goes back thousands of years.

What is new is that the capital markets are now seeking

ways to quantify the opportunities and risks anddevelop meaningful ways to measure the financial

impact of corporate behavior.

Sustainability will impact every business in every


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Additional Information

For more information, please free to contact me:Daniel T. Allen

Director – ESG Initiatives

Ativo Research LLC

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[email protected]

ou are nv te to o n ESG Investing on n e n™




Fannie and Freddie

“

that we have in OCC [Office of the Comptroller of the Currency]and OTS [Office of Thrift Supervision]. I want to roll the dice a

little bit more in this situation towards subsidized housing. . . .”

House Financial Services Committee hearing, Sept. 25, 2003

It is not just corporations.


ESG Presentation Daniel Allen

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