Investors and the Environment

Lloyd KurtzPrincipalNelson Capital Management

Environmental Sustainability in Business & Law ConferenceUC Davis School of LawFebruary 12, 2008

Topics

Background

Can Environmental Investing Work? (An Academic Review)

Recent Performance, Prospects for the Future

Background

1971: Pax World Fund

founded, first socially

screened mutual fund

1980s: Religious investors join

forces with the Nuclear Freeze

Movement and church groups in

South Africa

1989: Launch of Domini Social

Index, first broad-based social index

1971 1980 1989 – DSI 400

19th Century: Religious investors

avoid investing in alcohol, tobacco,

gambling, weapons manufacturing,

and other objectionable activities

Social Investing Has a Long History

Money and Faith

“In the New Testament, Jesus had more to say about money matters than any other single subject, be it worship, sexual behavior, violence and peace, or even eternal life...for those who would follow Jesus, economic questions are really spiritual questions.”

- Burkholder (2002)

Source: Social Investment Forum, SRI Trends Report 2005

ShareholderAdvocacy Only

26%$586 billion

Socially Responsible Investing in the U.S.

Screening + Shareholder Advocacy

5%$117 billion

Screening Only68%

$1,568 billion

Community Investing

1%$20 billion

Socially Responsible Investing in the U.S. reached $2.3 trillion in 2005

Socially Screened U.S. Mutual Funds

0

50

100

150

200

250

1995 1997 1999 2001 2003 2005

Source: Social Investment Forum

Can Environmental Investing Work?

Arguments Against

Hard, if not impossible, to implement. Theory says: own everything. Reduces the opportunity for outperformance. Moves focus away from risk and return.

Expect performance problems.

Theory Says: Own Everything

In modern portfolio theory, the market portfolio (point P) offers the best combination of risk and return. This can be accessed via a low-cost index fund.

The argument theorists make against social investing is the same one they make against active portfolio management.

Long-Term Performance

Slightly Higher beta Modest growth bias Sector weights

Overweighted in Technology, Consumer

Underweighted in Energy, Utilities

Annualized ReturnsSince 5/1/90

+11.2%

+10.7%

Domini Social Index

S&P 500

Domini Return Differences Likely Due To:

Source: KLD Website, as of January 31, 2008.

Complex Attribution Studies

Equities Kempf and Osthoff (2006)

1992-2004 Small Positive SRI effect

Geczy (2003) 1963-2006 No SRI Effect

Bauer, Koedijk, and Otten (2002) 1963-2001 No SRI Effect

Fixed Income Derwall and Koedijk (2006)

No SRI Effect

These studies all use the Carhart model, which accounts for style, market capitalization, and momentum effects.

Show them the chess slide

Arguments For Environmental research is getting better. Perhaps good environmental management is an

indicator of good management. Reduces the risk of earnings disappointments due

to environmental problems. Moves focus away from the near term to the long

term.

It’s worth a shot.

A Few Supportive Studies

Dowell, Hart, and Yeung (2000) Found that companies with the highest stated environmental

standards tended to be awarded higher valuations by the market.

Guenster, Derwall, Bauer, and Koedijk (2005) Find that firms with high environmental ratings (Innovest) had

superior earning power and stock performance.

Edelen (2004) Showed that the investment universe of the Sierra Club Stock

Fund outperformed the S&P 500 from Q1:2003 to Q3:2004.

How Urgent is the Problem?

“Studies by the World Resource Institute and many others show that, with some regional exceptions, every life support system on the planet is in decline (i.e.: clean air, clean water, forests, topsoil, aquifers, fisheries, wetlands, biodiversity, etc.).”

- Frank Dixon, 2004

Recent Performance

A Rough Three Years

Slightly Higher beta Modest growth bias Sector weights

Overweighted in Technology, Consumer

Underweighted in Energy, Utilities

Annualized Returns

Source: KLD Website, as of January 31, 2008.

3 Yrs Ended 1/31

+5.5%

+7.3%

Domini Social Index

S&P 500

Domini Return Differences Likely Due To:

The Price of Oil

0

10

20

30

40

50

60

70

80

90

100

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Source: Bloomberg

05 06 07

100

110

120

130

140

150

160

170

180

190

200

210

S&P 500 (TR) / Energy - SEC (SPN01.R) 177.4 S&P 500 (SP50) 110.7

Indexed Price11-Feb-2005 to 8-Feb-2008 (Weekly)04-Feb-2005=100; Local

Data Source: Prices / Exshare ©FactSet Research Systems 2008

05 06 07

80

90

100

110

120

130

140

150

160

170

180

S&P 500 (TR) / Energy - SEC (SPN01.R) 154.5PowerShares WilderHill Clean Energy Portfolio (PBW) 134.8S&P 500 (SP50) 108.9

Indexed Price11-Feb-2005 to 8-Feb-2008 (Weekly)04-Mar-2005=100; Local

Data Source: Prices / Exshare ©FactSet Research Systems 2008

Sierra Club Stock Fund Performance

100

105

110

115

120

125

130

135

140

145

2003 2004 2005 2006 2007 2008 YTD

Val

ue o

f $10

0 (I

nves

ted

12/3

1/03

)

Sierra Club Stock Vanguard Growth Index Vanguard 500 Index

Source: Morningstar, Nelson Capital analysis

Winslow Green Growth Performance

Source: Morningstar, Nelson Capital analysis

100

110

120

130

140

150

160

170

180

2003 2004 2005 2006 2007 2008 YTD

Val

ue o

f $10

0 (I

nves

ted

12/3

1/03

)

Winslow Green Growth Vanguard Growth Index Vanguard 500 Index

Generation Asset Management “On course.”

Source: “When principles aid performance”, Financial Times, April 30th, 2007

Further Information

Social/Environment Investment New Service www.socialfunds.com

Annotated Bibliography of Academic Research www.sristudies.org

JP Morgan Climate Change Investment Research http://www.jpmorgan.com/pages/jpmorgan/investbk/

solutions/research/climatechange

Notes

Bauer, Rob, Kees Koedijk, and Roger Otten. "International Evidence on Ethical Mutual Fund Performance and Investment Style." Working Paper, January 2002.

Derwall, Jeroen, and Kees Koedijk. "Socially Responsible Fixed-Income Funds." Working Paper, Erasmus University, May 2006.

Dowell, Glen, Stuart Hart, and Bernard Yeung. "Do Corporate Environmental Standards Create or Destroy Market Value?" Management Science, August 2000.

Edelen, Roger. "Benchmarking an Environmentally Responsible Investment (ERI) Portfolio." Sierra Club Funds presentation at SRI in the Rockies conference, October, 2004.

Geczy, Christopher C., Robert F. Stambaugh, and David Levin. "Investing in Socially Responsible Mutual Funds." Wharton School, Working Paper, May 2003.

Guenster, Nadja, Jeroen Derwall, Rob Bauer, and Kees Koedijk. "The Economic Value of Corporate Eco-Efficiency." Working Paper, Erasmus University, July 25, 2005.

Kempf, Alexander and Peer Osthoff. "The Effect of Socially Responsible Investing on Financial Performance." Working Paper, University of Cologne, Germany. June, 2006.