kiernan, speaker, plenary 1

© Matthew J. Kiernan© Matthew J. Kiernan1

The Competitive Imperative of Sustainability:

Causes, Risks, and Strategic Opportunities

ADFIAP Annual Meeting

Dr. Matthew J. KiernanChief Executive

Inflection Point Capital [email protected]

Vancouver, Canada

May 11,2010

mailto:[email protected]


• Dramatically increased complexity, transparency, and velocity of change in SME’s competitive environments.

• Accelerating pace of “disruptive innovation.”

• Shift in the world’s center of economic gravity towards emerging markets, where “sustainability”-driven risks and opportunities are greatest.

• Dramatically increased demand for energy, water, and other critical natural resources. Caused by:

• explosive population growth• urbanization • industrialization• demographic shifts and • growing consumer affluence and consumption, particularly in emerging markets.

A New World Order for DFIs – and their clients!


The New Competitive EnvironmentEn

viro

nmen

tal P

ress

ures E

nvironmental Im

pact


And also . . .

• Substantially increased expectations for improved sustainability performance

• Wider variety of more credible, better-resourced stakeholders – especially regulators and NGO’s.

• Much greater information transparency with which stakeholders can assess companies.

• More powerful and pervasive communications tools for disseminating criticism of companies.

• Emergence of a new fiduciary paradigm.

Success in this new competitive environment therefore demands new and different capabilities from companies – and from their bankers:

• Better strategic management• Better stakeholder management• Faster innovation• Greater adaptability

The New Competitive Environment


• “Management quality” is arguably the #1 factor most critical to companies’ competitiveness and profitability.

• “Sustainability” issues are among the most complex and demanding management challenges of the 21st century. Therefore:

• Companies with superior positioning and performance on Sustainability factors tend to be:

> More forward-looking and strategic> More agile and adaptable> Better managed companies in general; and therefore:

Likely to be financial out-performers as well

• Powerful global megatrends will make “sustainability” factors even more critical to companies’ – and investors’ – competitive and financial success over the next 3-5 years.1

1. UNEP Finance Initiative Working Group (2004) members included Goldman Sachs, HSBC, Deutsche Bank and UBS.

The Investment Logic – It’s All About Competitiveness!!


Why Do Your CLIENTS Need To Address ESG?

1. “Carrots”:

• “Social license to do business” – relationships with regulators, government, communities, NGO’s, customers, and – increasingly – investors

• Market differentiation and competitive advantage

• Building human capital – recruitment, retention, motivation of top talent

• Strengthened sales, cash flow, and ROCE; cost reduction and efficiencies

• Improved risk management – regulatory, supply chain

• Access to “green” government stimulus funds

3. “Sticks”:

• Growing regulatory and compliance requirements

• Customer insistence – “The WALMART Effect”


IPCM’s “Iceberg Balance Sheet” – 5 Keys to Sustainable Competitiveness

Today, 75-80% of companies’ true risk profile and value potential lies below the surface, and cannot be captured by traditional financial analysis.

Inflection Point Capital’s proprietary 5-Factor Model has the proven ability to generate alpha from these “non-traditional” drivers of risk and return:

Environmental Sustainability

Human Capital

Organizational Capital

Adaptability & Responsiveness

Innovation Capacity

It’s NOT Just the Environment:A New, Broader Conception of Corporate Sustainability


Growing International Investor Momentum. . .

• Globally, 50% growth since 2006.1 PLUS . . .

Over 700 major institutional investors have adopted the UN Principles for Responsible Investment (PRI) - $20 trillion.

Over 400 leading global financial institutions have formally expressed strong concern about climate change as an investment risk through the global Carbon Disclosure Project (CDP) - $60 trillion.

An October 2008 study by Booz Allen Hamilton predicts that SI will be 20% of global assets by 2015 – over $15 trillion.

In 2009, both Bloomberg and Thomson Reuters begin offering ESG (sustainability) data to their (mainstream) clients.

“SUSTAINABILITY” investment is going mainstream – DFI’s will need to keep up.

1 Lipper/FERI, 2010


• ESG/SRI considerations are immaterial or actually injurious to companies’ competitiveness and financial returns

• Including ESG considerations is, therefore, incompatible with fiduciary responsibility

• ESG/SRI research is inevitably more “wooly”, imprecise, and unreliable than mainstream investment research

EACH of these 3 myths has now been categorically disproved!

But STILL the misconceptions persist . . .

But Some Common Misconceptions Still Persist Among Some Investors . . .


Sustainability Analysis Can Provide Early Warning Signals on Risk . . .

Since initiating coverage on Bear Stearns in April of 2005, Innovest never rated Bear above `sub-investment grade’ – using Innovest’s `four pillar’ ESG methodology - through to its eventual absorption by JP Morgan Chase.

Innovest Very Early Advance Warning on Bear Stearns


…and Better Performance on the Upside

The IPCM Global 100 Index

Daily and Accumulated Performance: 5 year live results

Out-performance: 300 bps/year


Why should you care?

• Growing impact on your portfolio companies’ competitiveness and financial performance. Climate change is NOT about SRI!

• Climate risks affect a much broader range of industry sectors than one would think – not just heavy industry.

• Same-sector climate risk can vary by 30 times!

• Fiduciary best-practice increasingly demands it.

Climate Change: the “Mother of All” Sustainability Issues


Climate Risk: Can YOU Afford to Ignore It?

CO2 Regulatory Cost of Compliance as Percentage of EBITDA

13.69%12.90%

19.21%

0.43%

2.72%2.00%

37.85%

>50.00%>50.00%

46.25%

2.91%1.26%2.00% 1.48%

0.00%

5.00%

10.00%

15.00%

20.00%

CommodityChemicals

Steel Integrated Oil & Gas Multi-Utilities &Unregulated Power

Metals & Mining Electric Utilities -International

ConstructionMaterials

Cos

t of C

ompl

ianc

e as

EB

ITD

A%

fo

r CC

h, S

teel

, and

IO &

G

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

Cos

t of C

ompl

ianc

e as

EB

ITD

A%

Max case Min case

Allegheny Tech.

Rautaruukki

CRH

Hanson

Centrica

CMS Energy

Drax

Fortum

Toray

Nova

Statoil ASA

Tosco

Umicore

Kinross Gold Corp.


And There is a Performance Premium for Top Performers:

Source: Innovest

Annualized Out-Performance: 300 bps


• Identify/minimize risk in portfolio companies; lower default rates

• Better understanding of management quality in borrower companies

• Identify new commercial opportunities – both for clients and for YOU

• Increase client “stickiness” though added-value advice

• Differentiation and competitive advantage – for YOU!

So Why Should YOU Consider ESG?


• Focus both lending and equity investing not just on downside risk but also on upside opportunities – eg. Renewable energy; health water

• Address social issues as well as environmental – eg. “Base of Pyramid” entrepreneurs

• Building human capital – training: both clients and DFI staff

• Sector-specific lending guidelines

• Evaluate own ESG impacts from lending

• Advisory services for clients

• Power of collaboration – NGO’s; academe

• Reduce own operational footprint (secondary)

• Your own pension fund – how is THAT invested?

What Does Global Best-Practice Look Like?


• Generally, less devotion to unfettered capitalism; more of a “social contract”

• No intellectual/organizational baggage, unlike the West

• Acknowledged size and strength of SME sector and entrepreneurs

• Korea, Thailand, Malaysia public pension funds – investor awareness ahead of the West

An Asia Pacific “Leapfrog” Opportunity . . .


A New “Hierarchy of Organizational Self-Actualization”

Ignorance

Awareness

Hollow Rhetoric

Action

Denial

Ignorance

Embryonic Understanding

Hollow, Pious Rhetoric

Action

Denial


And There’s Always THIS To Consider . . .


For More Information, Please Contact:

Dr. Matthew KiernanChairman & Chief Executive

[email protected]

kiernan, speaker, plenary 1

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