1

You Are What You FinanceESG Risk in the Finance Sector

New York

Paris

Toronto

London

San Francisco

Sydney

Tokyo

Innovest UncoveringHidden Value forStrategic Investors

2

Redefining and Recalculating Risk

Investors now have to recalibrate and recalculate what risk is:

What is the cost of eco-inefficiency when oil is $160/brl?

What is the cost of climate change when carbon costs $60/tonne?

What is the cost of predatory lending in the wake of the subprime collapse?

Who will be hurt?

Who will thrive?

3

How Sick is the American Consumer?

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

1999Q1 2001Q1 2003Q1 2005Q1 2007Q10.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Household net savings rate (moving average, right scale)

Household debt service ratio (left scale)

US Household Net Savings Rate

vs Debt Service Ratio

12,000

13,000

14,000

15,000

16,000

17,000

18,000

19,000

20,000

1995

Q1

1996

Q1

1997

Q1

1998

Q1

1999

Q1

2000

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

US Real Wages

Growth in Credit Card Debt

vs Growth in Real Wages

60

80

100

120

140

160

180

200

1999Q1 2001Q1 2003Q1 2005Q1 2007Q1

real wage (1999=100)

credit card debt outstanding(1999=100)

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve.

4

How Big and How Soon?

Innovest forecasts:

-First Quarter 2009 Charge Offs of $18.6 billion

-Total 2009 Charge Offs $96 billion

-Estimate: Net Charge Off Rate peaks at 10% in Q1 2009

5

Subprime Exposure as % of Credit Card Loans

(subprime = FICO score below 660)

Who Are the Borrowers?

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Amex JP

MHSB

C

Discov

er Citi

Cap O

ne

B of A

WaM

u

% o

f re

ceiv

ab

les

Source: SEC Filings of Master Trust Data, S&P.

6

What happens when emitting carbon isn’t free?

The Cost of Carbon

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Allegheny Progress Energy Duke Energy TXU Calpine Exelon

0%

5%

10%

15%

20%

25%

30%

35%

40%

Cost of Carbon Abatement (left scale)

US bn

carbon costs as % of earnings (rt scale)

7

You Are What You Finance

High ESG risk deal exposure

-

20

40

60

80

100

120

140

160

180

200

Citigro

upJP

M

Deutsc

he B

ank

Bank o

f Americ

aRBS

Credit

Suis

seBNP

UBS

HSBC

Barcla

ys

Soc G

en

Mits

ubish

i

Credit

Agr

icole

Mizu

ho

Sumito

mo

Stand

ard

Charte

red

BBVABNS

Fortis

Banco

Santa

nder

KBC

0

20000

40000

60000

80000

100000

120000

140000

160000

Number of Deals Value of Deals

# of deal

s

USD mn

8

You Are What You Finance

high risk deals as % of tier 1 capital

-

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

BNP

Citigro

up

Credi

t Agr

icole

Mizu

ho

Deuts

che

Bank

Credi

t Sui

sse

JPM

UBSBNS

Soc G

en

Bank o

f Am

erica

Sumito

mo

Barcla

ys

Stand

ard C

harte

red

BBVA

Mits

ubish

iRBS

HSBC

Banco

San

tand

er

9

Stock Performance of US Consumer Finance Companies

Above-Average vs. Below-Average Innovest Rating

Winning and Losing Strategies

-20

0

20

40

60

80

100

120

Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08

above BBB

below BBB

difference

Source: Innovest, Bloomberg.

10

Three Year Stock Performance

Three Year Stock Performance

(40.000)

(20.000)

0.000

20.000

40.000

60.000

80.000

100.000

120.000

140.000

160.000

180.000

9/6/

2004

11/6

/200

4

1/6/

2005

3/6/

2005

5/6/

2005

7/6/

2005

9/6/

2005

11/6

/200

5

1/6/

2006

3/6/

2006

5/6/

2006

7/6/

2006

9/6/

2006

11/6

/200

6

1/6/

2007

3/6/

2007

5/6/

2007

7/6/

2007

9/6/

2007

11/6

/200

7

1/6/

2008

3/6/

2008

5/6/

2008

Top Half

Bottom Half

Difference

11

Twelve Month Stock Performance

Stock Performance Since Rating

-20.000

0.000

20.000

40.000

60.000

80.000

100.000

120.000

9/6/

2007

9/20

/200

7

10/4

/200

7

10/1

8/20

07

11/1

/200

7

11/1

5/20

07

11/2

9/20

07

12/1

3/20

07

12/2

7/20

07

1/10

/200

8

1/24

/200

8

2/7/

2008

2/21

/200

8

3/6/

2008

3/20

/200

8

4/3/

2008

4/17

/200

8

5/1/

2008

5/15

/200

8

Top Half

Bottom Half