innovest strategic value advisors, inc. energy efficiency screening enhances investor returns green...

InnovestStrategic Value Advisors, Inc.

Energy Efficiency Screening Enhances Investor Returns

www.innovestgroup.com

Green Mountain SRI Summit

Stowe, VT, September 10, 2002

Frank DixonManaging Director

4 Times Square, 3rd Floor New York, N.Y. 10036

Tel. 1 212 421 2000 [email protected]

Agenda

• Challenges of Measuring Energy Efficiency

• Overcoming Challenges -- EcoValue’21™

• Energy Efficiency Performance in the

Retail Food and Real Estate Sectors

I N N O V E S T Strategic Value

Advisors

The Major Barrier to Providing Accurate Analysis of

Energy Efficiency Performance is Poor Data Quality

Data is often:

• Lagged

• Missing

• Inaccurate

• Biased


Advisors

A leading-edge, specialized international financial information services firm with offices in New York, Toronto, and London.

Now have 30+ staff with backgrounds in finance, industry and sustainability

Over $3.5 billion in funds managed with Innovest research

Forward-looking, alpha generating investment approach

Proprietary EcoValueEcoValue'21™

and IVA™

performance rating systems focus on competitive risks and opportunities driven by environmental and social trends

Leveraging research into private equity, specialized funds, custom advisory work and more

Innovest BackgroundI N N O V E S T Strategic Value

Advisors

Historical Contingent Liabilities:- Superfund

- State and hazardous waste sites

- RCRA

- Toxic torts

Strategic Management Capacity:- Strategic corporate governance

capability

- Environmental management

systems strength

- Environmental audit/accounting

capacity

- Social issues performance

- Supply chain management

- Stakeholder relations

Operating Risk Exposure:- Toxic emissions

- Product risk liabilities

- Hazardous waste disposal

- Waste discharges

- Supply chain management risk

Sustainability Risk:- Energy intensity and efficiency

- Resource use efficiency and intensity

- Product life-cycle durability and recyclability

- Exposure to shifts in consumer values

- Social/community “license to operate”

EcoValueEcoValue'21

RATING

Sustainable Profit Opportunities:- ability to profit from

environmentally and socially -

driven industry and market trends

Multi-factor EcoValue’EcoValue’2121 algorithms integrate over 60 key data points, including:

EcoValue’21 Overlay I N N O V E S T Strategic Value

Advisors

Research Process

Framing the Sector

Contacting the Company

Reviewing Third-Party Data

Reviewing Company Data

Interviewing the Company

Completing the Rating Process

Writing Company Reports


Advisors

-2

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Pe

rce

nt

100 bp

75 bp

50 bp

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This chart shows four alternative portfolios constructed to maximize EcoValue'21 ratings

subject to tracking error limits as shown (25 bp to 100 bp). Over an 18 month period, the 25

bp TE portfolio outperformed the Standard & Poor's 500 by 181 bps, while the 100 bp TE

portfolio outperformed by 444 bps. Optimization techniques were used to neutralize any

other tilts or "bets" on factors such as market capitalization, P/E, beta, industry sector, and

value/growth. The analysis was undertaken by external consultants to maximize objectivity.

EcoValue’21: Time Series EvaluationRelative Performance Since 12/31/98

Vs. S&P 500

EcoValue’21:Time Series Evaluation


Advisors

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Petroleum SectorTop Half Outperforms by 16%

Mining SectorTop Half Outperforms by 23%

Steel SectorTop Half Outperforms by 38%

Alpha Generation

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Semiconductor Sector

Top Half Outperforms by 27%


Advisors

Electric Utilities

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Difference Top Half Average Bottom Half Average


Advisors

Stakeholder Capital:• External stakeholder input, community boards• Plant closure policies / practices• Local recruitment• Local suppliers, contractors• Corporate philanthropy

Human Capital Development:• Employee Retention Rate• Work policy, diversity, job sharing, flexible schedule, telecommuting.• Training and Skills Development• Benefits, wellness programs, healthcare, child care, etc.• Health & Safety performance

Products / Services:• Human safety / Risk• Environmental harm / Risk• Product stewardship• Life cycle analysis• Social impact assessment• Respect of local culture

Supply Chain:• Screening standards• Education / training• Audits / Verification• Third Party Reviews• Positive Discrimination

International:• Developing country policies, standards and practices.• Human rights / Child Labor• Social and Environmental impact• Local economic/social benefits• Skills/Technology transfer

IVAIVA

RATING

Social Strategy & Policy:• Social/ethical standards• Codes signatory / Child labor• Human Rights, SA 8000, ETI, ILO, etc.• Integration with Core Business• Consistency / International• Performance Indicators and Targets• Accounting /Reporting/Disclosure/Auditing

Intangible Value Assessment I N N O V E S T Strategic Value

Advisors

Carbon Policy and Strategy:- Climate Change Policy

- Mitigation and Innovation Measures

- Emission Trading Competence

- Voluntary Charters and Working Groups

Carbon Risks:- Direct Carbon Risks

(from in house operations)

- Indirect Carbon Risks (from suppliers)

- Carbon Liability (embedded in products)

- Financial Exposure (calculated)

CarbonValueCarbonValue'21

RATING

Strategic Carbon Opportunities:

- Project Involvement (JI, CDM, etc.)

- Geographic Involvement

- Phase-Out Risk of Products and Services

due to Climate Change

- Carbon Improvement Potential

- Involvement in Carbonless Businesses

or Products

CarbonValue’CarbonValue’2121 algorithms integrate over 25 key data points, including:

CarbonValue’21 Overlay I N N O V E S T Strategic Value

Advisors

Company Risk Exposure

Results of recent benchmarking exercise in the US energy sector…...

0.00%

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DY

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Expected Carbon Exposure as a % of Market Cap.

Light

High

Kyoto


Advisors

Energy Efficiency Research Objectives

• Determine whether or not superior energy management adds value for investors

• If value is added, raise financial community awareness

• Encourage investors to consider corporate energy efficiency performance


Advisors

Barriers

• Poor Data Quality and Availability

• Limited Reliability of Existing Research

• Low Financial Relevance of Energy Costs in Many Sectors


Advisors

Overcoming Barriers

• Multi-factor Analysis

• Independent Energy Efficiency Rankings

• High Credibility


Advisors

Research Methodology

• Develop Models

• Analyze and Rate Companies

• Analyze Correlations to Financial Performance


Advisors

REIT Sector Energy Efficiency Ratings

Ticker Company ScoreRelativeScore Rating Rank

ARI Arden Realty 1804 6.0 AAA 1

EOP Equity Office Properties 1658 5.4 AAA 2

TZH TrizecHahn Corp. 1490 4.7 AA 3

LQI La Quinta Corp. 1447 4.5 AA 4

CLI Mack-Cali Realty Corp. 1405 4.4 AA 5

HOT Starwood Hotels & Resorts 1220 3.6 A 6

FCH FelCor Lodging Trust 1191 3.5 A 7

RA Reckson Associates Realty 1177 3.4 BBB 8

HMT Host Marriott 979 2.6 BBB 9

BXP Boston Properties 975 2.6 BBB 10

HIW Highwoods Properties 538 0.8 CCC 11

DRE Duke Realty Corp. 345 0.0 CCC 12

AVG Average 1424 3.5 A

Energy Rating Matrix


Advisors

Stock Market Performance of

Top Half vs. Bottom Half REITs


Advisors

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Difference 0.0% -0.3% 5.1% 7.8% 6.1% 2.9% 11.2% 11.0% 14.2% 17.1% 23.4% 25.2% 24.9% 26.5% 30.5% 32.6% 30.9% 32.6% 39.5% 33.8% 34.3% 35.6% 37.2% 36.5% 34.8%

Top Half Average 0.0% -4.7% 3.9% 0.4% 1.4% 6.0% 14.2% 10.0% 10.0% 15.8% 22.3% 26.7% 22.8% 25.3% 15.0% 14.2% 20.8% 24.8% 33.7% 31.2% 39.2% 40.5% 40.4% 39.1% 30.3%

Bottom Half Average 0.0% -4.3% -1.1% -7.4% -4.6% 3.1% 3.0% -1.0% -4.3% -1.4% -1.2% 1.5% -2.1% -1.2% -15.5% -18.4% -10.1% -7.8% -5.9% -2.6% 4.9% 4.9% 3.2% 2.6% -4.6%

Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01May-

01Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02

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Stock Market Performance of ENERGY STAR Activevs. Inactive vs. Non-active REITs


Advisors

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Active Partners 0.0% 6.8% 6.3% 13.7 6.1% 7.3% 18.6 16.9 14.6 13.5 18.2 19.6 22.9 19.7 21.5 11.3 10.0 16.4 23.9 25.8 29.1 39.0 39.4 37.1 33.1

Less Active Partners 0.0% 7.0% 3.1% 5.3% -0.4% 0.1% 7.0% 8.0% 5.0% 3.5% 5.3% 8.2% 15.0 12.5 14.1 2.0% -2.8% 6.2% 10.4 12.1 16.1 23.9 25.3 25.4 26.5

Nonpartners 0.0% 4.5% 2.0% 3.1% -1.6% -1.5% 0.3% 6.3% 8.8% 8.7% 9.9% 15.5 20.0 16.4 17.0 7.7% 5.0% 8.5% 9.8% 10.9 14.1 17.0 17.9 18.6 20.4

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Tobin’s Q Performance of ENERGY STAR Activevs. Inactive vs. Non-active REITs


Advisors

0.99

1.17

0.91

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ACTIVE PARTNERS

AVERAGE

LESS ACTIVE PARTNERS

AVERAGE

NON-PARTNERS AVERAGE

Business Case - REITs

• Reduced Operating Costs

• Enhanced Property Values

• Increased Productivity and Potential Labor Cost Savings

• Enhanced Tenant/Guest Satisfaction

• Improved Image as a Responsible Corporate Citizen

• Enhanced Image as a Well-Managed Company

• Greater Appeal to Socially-Responsible Investors


Advisors

Symbol Company Name Ranking Rating

Top Half GroupSBRY.L J. SAINSBURY PLC 1 AAAAHLN KONINKLIJKE AHOLD NV- ADR 2 AAAABS ALBERTSON'S, INCORPORATED 3 AAA

DELB ETABLIS. DELHAIZE FRERES & CIE LE LION 4 AAAOATS WILD OATS MARKETS, INC 5 AWFMI WHOLE FOODS MARKET, INC. 6 BBB

Bottom Half GroupSWY SAFEWAY INC. 7 BBBGAP GREAT ATLANTIC & PACIFIC TEA CO., INC. 8 BBBWIN WINN-DIXIE STORES, INC. 9 BBSVU SUPERVALU INC. 10 BB

NAFC NASH FINCH 11 CCCKR KROGER CO. (THE) 12 CCC

Retail Food Sector Energy Efficiency Ratings


Advisors

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Top Half

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Difference

Stock Market Performance of

Top Half vs. Bottom Half Food Companies


Advisors

Price Earnings Ratio

16.18

26.46

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Price - Book Ratio

1.44

4.39

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Return On Equity Per Share

3.28

16.90

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Return On Assets

5.92

7.07

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Return On Invested Capital

9.76

10.45

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Tobin's Q

1.55

1.68

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Top Half Group Bottom Half Group

Financial Performance of

Top Half vs. Bottom Half Food Companies


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Difference 0.0% 0.3% 1.2% 5.4% 7.5% 2.1% 0.9% 0.7% 4.7% 10.4 13.8 9.0% 13.5 11.4 19.0 18.1 20.6 27.2 22.3 26.8 19.4 19.5 9.9% 20.2 18.9

Retail ENERGY STAR Partners 0.0% 7.2% 6.2% 8.2% 6.5% 0.0% -0.9% -1.8% 0.7% 1.3% 3.1% 14.5 21.9 21.0 26.7 28.9 33.0 38.0 30.4 21.8 14.0 19.8 14.3 37.0 32.9

DJ BroadLine Retail Index 0.0% 6.9% 5.0% 2.7% -1.0% -2.1% -1.8% -2.5% -4.1% -9.1% -10.7 5.5% 8.4% 9.6% 7.8% 10.8 12.5 10.8 8.1% -5.0% -5.4% 0.3% 4.4% 16.8 14.0

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ENERGY STAR Companies vs. Broadline Index


Advisors

Business Case - Retail Food

• Reduced Costs

• Increased Productivity and Sales

• Reduced Regulatory Exposure

• Reduced Vulnerability to Energy Price Fluctuations

• Improved Image as a Responsible Corporate Citizen

• Enhanced Image as a Well-Managed Company

• Greater Appeal to Socially-Responsible Investors


Advisors

innovest strategic value advisors, inc. energy efficiency screening enhances investor returns green...

Documents

sector f

company f

ecovalue ecovalue

research process f

energy efficiency screening

energy intensity

risk exposure

poor data quality data