Will sustainable investing survive the recession?

1. Will sustainable investing survive the recession?

2. Will sustainable investing survive? Winning the battle… but losing the war? A decade of transformation lies ahead Looking through the lens of climate change

3. Winning the battle?

4. Sustainable investing: micro and macro Micro: The best way of generating superior risk-adjusted returns in the 21st century is to fully incorporate long-term economic, social and environmental factors into investment and ownership decision-making Macro: capital markets themselves need to be recast to confront the risks of financial collapse posed by long-term economic, social and environmental realities From inside out to outside in

5. Coping with the alphabet soup Ethical investment screening the status quo Responsible investment extending the scope of risk management Sustainable investment repositioning for long-term growth USD5 and USD15 trillion now contain elements of ESG

6. The seven tribes of SRI 1.Negative screening – ethical, social, environmental 2.Positive screening – ethical, social, environmental 3.Community/social investing 4.Best in class 5.Integrated analysis 6. Sustainability themes 7.Investor activism and engagement From inside out to outside in

7. Distinguishing features Seeks to identify ‘predictable surprises’ Regards as tangible what others see as intangible Views factors as financial that others view as non-financial Reaffirms the imperative of prudence Prospective not retrospective, anticipating the key challenges for management quality And weakness? Being right too early

8. Sustainable investing – equity out-performance Source: Krosinsky, 2008

9. The long-term really matters SRI fund turnover and performance over 5 years to December 2007 Source: Krosinsky, 2008

10. Sustainable investing – updated performance analysis

11. Losing the war?

12. The end of an era - 1 “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result not a strategy. Your main constituencies are your employees, your colleagues, your products” Jack Welch

13. The end of an era - 2 “The financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were largely built, and in particular the theory of rational and self-correcting markets” Adair Turner

14. The end of an era - 3 “EMH is the financial equivalent of Monty Python’s dead parrot. No matter how much you point out that it is dead, the believers simply state that it is just resting” James Montier

15. Flying blind? Traditional investment and climate change Asset prices do not reflect climate costs Market behaviour discounts the long-term Driving capital misallocation Risking financial stability “Climate change is the greatest market failure the world has ever seen” Lord Nicholas Stern

16. Aligning time-scales… “It is the long-term investor, he who most promotes the public interest, who will in practice come in for the most criticism wherever investment funds are managed by committees or boards or banks. It is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion.” J.M Keynes, General Theory, 1936

17. Market myopia? Average holding period for shares on the NYSE in years Source: James Montier, 2008

18. Driving capital misallocation… UK is responsible for 2% of world emissions But emissions from the facilities and products of five fossil fuel companies listed on the London Stock Exchange – Anglo, BP, Rio Tinto, Shell and Xstrata - responsible for over 10% of global emissions Less than half proven economically recoverable oil, gas and coal reserves can be emitted to stay below 2 degrees warming

19. Risking financial instability… “According to current estimates, the possible extent of losses caused by extreme natural catastrophes in one of the world’s major metropolises or industrial centres would be so great as to cause the collapse of entire countries’ economic systems and could even bring about the collapse of the world’s financial markets” Munich Re, March 1997

20. Transformation ahead

21. Resetting responsibilities… “Financial markets remain crucial as the circulatory system for commerce, but they must be reset to enable long-term sustainable performance in the real economy. This mean less leveraged finance, a fundamental repricing of risk, the ability to account for externalities like greenhouse gas emissions and a realignment of executive responsibility and compensation with long-term performance” GE, July 2009

22. Mapping the future investment transformation Already disrupting valuations, but more still to come

23. Time for acceleration: the coming investment shift Clean energy needs x9 2007 levels; energy efficiency x50 Source: IEA, Energy Technology Perspectives, 2008; UNEP/NEF, Global Trends in Sustainable Energy Investment, 2008

24. Building a green recovery - USD512bn allocated Asia leads the way with almost 2/3rd of green stimulus Total Package- $32bn Green- 9% CC-39%, EE-51%, WW-10% Total Package- $640bn Green- 6%) CC-39%, EE-61% Total Package- $648bn Green- 33% EE-84%, WW-16% Total Package- $537bn Green- 10% CC-30%, EE-68%, WW-2% Total Package- $977bn Green- 12% CC-33%, EE-50%, WW-17% Total Package- $76bn Green- 79% CC-51%, EE-25%, WW-23% Total Package- $8bn Green Component- 11% EE-88%, WW-12% CC- Low carbon power EE- energy efficiency WW- water & waste Total Package- $27bn Green- 21% CC-34%, EE-66% Source: HSBC estimates, government websites, others

25. Growing international climate commitment Copenhagen conference in December 2009 expected to confirm this trend Turning the Corner Plan 2007 Emission-20% below 2006 by 2020 White Paper 2008 Efficiency – 20% by 2010 Renewable- 20% by 2020 Forest growth- 20% by 2020 EU Climate Energy Plan 2008 Emission- 20% below 1990 by 2020; 80% by 2050 Renewable- 20% by 2020 Efficiency- 20% by 2020 Obama Administration 2008 Emission- 20% below 2005 by 2020; 80% by 2050 Renewable- 20% by 2020 Efficiency – 8% by 2020 Climate Change Plan 2009 Emission- 15% below 2005 by 2020 Renewable- 3% by 2010 National Action Plan 2008 Emission- per capita emissions not to exceed developed countries Renewable- 15% by 2020 National Plan (PNMC) 2008 Renewable- 7 GW between 2008-2010 Efficiency- 10% by 2030 Deforestation- 30% below 1996-2005 by 2010-13 Climate Change Plan 2008 Emission- Emissions to peak by 2020-25 Renewable- Long term goal of zero-carbon electricity sector Climate Change Policy 2008 Emission- 60% below 2000 by 2050 Renewable- Mandatory Renewable Energy Target- c15GW by 2020 Source: Government websites, others

26. Short-term: Closing a deal in Copenhagen 2050 targets: 2 degrees 2020 targets for industrialised countries: 15-20% Low carbon plans for emerging markets Taking action on tropical forests Adapting to climate impacts Promoting clean tech cooperation Mobilising private capital Reforming carbon markets Avoiding ‘carbon protectionism’ A close run thing…but a deal will be done

27. Long-Term: Confronting the tough issues Markets: Making climate change a standard part of accounting, disclosure and listing rules Responsibility: Modernising fiduciary duty to reflect the reality of climate change Incentives: Rewarding the investment chain for long-term sustainable performance Transparency: Reporting fund and institutional ESG performance alongside financial returns

28. In the end: confidence and conviction “There is no reason why we should not feel ourselves to be bold, to be open, to experiment, to take action, to try the possibilities of things. And over against us, standing in the path, there is nothing but a few old gentlemen tightly buttoned-up in their frock coats, who only need to be treated with a little friendly disrepect and bowled over like ninepins. Quite likely they will enjoy it themselves, once they have got over the shock” J.M Keynes, A Programme of Expansion, 1929

29. Thank you….

30. Thank you… Nick Robins, Head of Climate Change Centre of Excellence nick.robins@hsbc.com