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Journal of Sustainable Finance & BankingSM

April 2014

©ssuaphotos/Shutterstock

Global Markets Strategy Global Markets Regional Equity Strategy Model Michael Geraghty … p.19

Global Sector Research Unleashing Impact Capital into Public Infrastructure and Building Projects John Williams … p.25

Smart Grid Infrastructure M. Pirovska, PhD & M. Shavel, CFA … p. 27

Building Sustainable Cities with New Design Processes and Open Data Brian Young … p.31

Social Stock Exchanges: Democratizing Impact Investing Durreen Shahnaz … p. 33

Transportation Facilities Focus on Sustainability Anthony Bernheim … p.40

Open Source Excellence Maersk: Sustainability as a Driver for Growth John Kornerup Bang & Annette Stube … p.42

Regional Imperatives Infrastructure Imperatives Drive Regional Competitiveness Marty Janowitz … p.45

Enhanced Analytics Filling the Infrastructure Data Gap in Impact Investing John Williams … p.49

Using Established Tools to Achieve Infrastructure Projects Valuation & Risk Assessment John Parker … p. 52

Accelerating Impact New Tools, New Tricks: Emerging Applications Are Becoming Game Changers Ryan Meyers … p.54

Sustainable Standout Trinity River Vision Authority Applies Sustainability Rating & Business Case Analysis M. Wilkins & K. Shepherd … p.56

San Diego Int’l Airport Named First LEED Platinum Certified Commercial Airport Terminal Jim Grant … p. 59

CEOs Letter on Sustainable Finance & Banking

Erika Karp Founder and Chief Executive Officer of Cornerstone Capital Inc. and Former Head of Global Sector Research at UBS Investment Bank

This month in the “Cornerstone Journal of Sustainable Finance & Banking” (JSFB), we take the opportunity to focus on the theme of “Infrastructure.” While global markets are in the thick of earnings reporting and proxy season, and investors absorb a raft of global manufacturing data showing growth differentials, we consider “Infrastructure” in its many manifestations. In fact, we would argue that the governance structures that contribute to the current environment for everything from technology sector valuations to pharmaceutical sector activism, need to be carefully scrutinized. Further, we argue that a great deal of insight can be drawn from one of the world’s great statesmen: Winston Churchill.

We begin this edition of the JSFB with our “Featured Domain,” which is ChurchillsVoice.com. In the mid-1940’s after the Battle of Britain when the House of Commons was being rebuilt following the bombings, Winston Churchill made the statement “We shape our buildings; thereafter they shape us.” In this article, we consider this comment in the context of business and resource allocation decisions and the “sunk cost” theory of economics. We argue that investment analysis can be enhanced by a heightened consciousness of the mental infrastructure governing our decisions. Despite the world having spent trillions of dollars on the current fossil-fuel based economy, the only rational course is to consider the future costs which are those relevant to investment decisions ahead.

Speaking of investment decisions and the frameworks for making them, with this edition of the JSFB we are pleased to introduce the Cornerstone Capital Global Markets Regional Equity Strategy Model from our Global Markets Strategist Michael Geraghty. In this report, Michael employs a quantitative multi-factor methodology to generate our Regional recommendations. In particular, we note that our process explicitly takes into account Corporate Governance metrics by Region. As the world watches Brazil face a massive test of its infrastructure with the 2014 World Cup and the 2016 Olympics, Michael walks through our investment methodology and framework. Based upon an unfavorable ranking in terms of the three metrics of valuation, earnings and corporate governance, on a relative basis to other regions of the world, LatAM is not currently among our preferred destinations for capital.

Turning now to the work of our partner John Williams of Impact Infrastructure LLC, we highlight a series of articles which explicitly address numerous areas of Infrastructure. In particular, in our Global Sector Research (GSR) section, John offers a perspective on the current state of America’s critical infrastructure and

Cornerstone Journal of Sustainable Finance & BankingSM / April 2014 / 2

the $2.2 trillion required over the next several years simply to close the maintenance gap. In this edition of the JSFB, John delineates some of the barriers to financing Infrastructure projects. Throughout the Journal, we engage colleagues including planners, engineers and program managers to shed light on trends and tools that can be used by capital markets participants from bankers to investors as we strive to “Unleash Impact Capital into Public Infrastructure and Building Projects.”

Also included in the GSR section of the report, our Analysts Margarita Pirovska and Michael Shavel look at the 21st century transformation underway towards Smart Grid Infrastructure. The team highlights the differences between the old utility model and the new smart-grid model. While discussing the changing roles of suppliers and customers in the development of distributed generation, they address investment opportunities ahead from both the supply side (e.g. smart metering and distributed automation from companies like ABB), the demand side (e.g. energy and building efficiency of companies like Johnson Controls), and the utility sector itself.

Within Infrastructure, we turn to an article from Autodesk’s Brian Young discussing how to model, analyze and build Sustainable Cities. He addresses how data is used to translate costs, risks and performance information into business cases with the potential to maximize societal value. We also present an article recently published about a critical piece of infrastructure in the Financial sector as Durreen Shahnaz discusses Social Stock Exchanges that can “democratize impact investing.” And further this month we turn to the Transportation industry with a piece from Anthony Bernheim addressing what facilities will look like in the decades ahead.

Speaking of Transportation this month, we include an article in our “Open Source Excellence” section from Annette Stube and John Kornerup Bang of A.P. Moller-Maersk. Annette and John clearly highlight how “sustainability adds value if it is tied closely onto the business and allows for a longer term perspective on material matters.” Companies such as Maersk, strive to deploy their knowledge and competencies to help drive the global trade agenda and simultaneously unlock growth for society and the company.

Also in the JSFB, we offer a number of reports addressing “Regional Imperatives” and “Enhanced Analytics,” which can be understood and employed as we recognize the interrelated and integrated systems that underpin the world’s infrastructure. Marty Janowitz of Stantec discusses regional competitiveness; John Williams highlights exciting progress on our ability to gather transparent, objective, comparable and affordable investment information; and John Parker also of Impact Infrastructure LLP stresses the potential benefits from combining Cost Benefit Analysis (CBA) with Building Information Modeling (BIM). And, as we at Cornerstone Capital Group look for ways of “Accelerating Impact”, we highlight the work of colleagues like Ryan Meyers, who offers new tools to drive infrastructure investing.


Finally this month, we offer a couple of “Sustainable Standouts” including Stormwater Management at Panther Island in Texas and Airport Terminal Excellence in San Diego, California. We look to other Regional Imperatives including access to clean water in Kenya and how Social Impact Bonds offer a promising outlook. And we offer perspectives from recent events around both our financial and healthcare “infrastructure.” As referenced at the very start of this letter, we define infrastructure as incredibly broad, complex and deserving of the extensive attention we offer it in this edition of the Cornerstone Journal of Sustainable Finance & Banking.

My sincere regards, Erika

Erika Karp Chief Executive Officer


Table of Contents

CEOs Letter on Sustainable Finance and Banking p. 2

Market Summary Overview Market & Global Sector Performance, Monetary Policy & ESG Data

p. 7p. 9

Featured Domain ChurchillsVoice.com Erika Karp CEO & Founder,

Cornerstone Capital p. 17

Global Markets Strategy Introducing the Cornerstone Capital Global Markets Regional Equity Strategy Model

Michael Geraghty Cornerstone Capital Global Markets Strategist

p. 19

Global Sector Strategy Unleashing Impact Capital into Public Infrastructure and Building Projects

John Williams Chairman & CEO, Impact Infrastructure LLC

p. 25

Smart Grid Infrastructure – Status, Opportunities, and Risks

Margarita Pirovska, PhD

Michael Shavel, CFA

Policy & Sustainability Analyst, Cornerstone

Capital Research & Business Analyst, Cornerstone

Capital

p. 27

Building Sustainable Cities with New Design Processes and Open Data

Brian Young Sustainable Infrastructure Program Manager at

Autodesk Inc.

p. 31

Social Stock Exchanges: Democratizing Impact Investing

Durreen Shahnaz Founder and Chairwoman, Impact Investment

Exchange Asia (IIX)

p. 33

Transportation Facilities Focus on Sustainability at Billion Dollar Scale.

Anthony Bernheim, FAIA, LEED Fellow

Principal & Director of Sustainability, Bernheim +

Dean Inc.

p. 40

Open Source Excellence Maersk: Sustainability as a Driver for Growth Annette Stube

John Kornerup Bang

Head of Group Sustainability, A.P. Moller

– Maersk A/S

Head of Positioning & Strategic Risk

Management, Group Sustainability, A.P. Moller –

Maersk A/S

p. 42

Regional Imperatives Infrastructure Imperatives Drive Regional Competitiveness

Marty Janowitz Vice President, Sustainable Development,

Stantec

p. 45

Enhanced Analytics Filling the Infrastructure Data Gap in Impact Investing John Williams Chairman & CEO Impact

Infrastructure LLC p. 49


CBA-BIM (Cost Benefit Analysis and Building Information Modelling) Using Established Tools to Achieve Standard for Infrastructure Project Valuation and Risk Assessment

John Parker Chief Economist, Impact Infrastructure LLC

p. 52

Accelerating Impact New Tools, New Tricks: How Emerging Applications are Becoming Game-Changers for Impact Investors and Infrastructure Development

Ryan Meyers Product Manager, Impact Infrastructure LLC

p. 54

Sustainable Standout Trinity River Vision Authority Applies Sustainability Rating and Business Case Analysis to Set Stormwater Management Principles

Mikel Wilkins

Kevin Shepherd

Environmental Engineer & Stormwater Management

Specialist, VERDUNITY

Principle, VERDUNITY

p. 56

San Diego International Airport Named First LEED Platinum Certified Commercial Airport Terminal

Jim Grant Energy and Fueling Systems Director, HNTB

Corp.

p. 59

Increasing Access to Clean Water in Kenya: The Case for a Social Impact Bond

Virtual Attendance WCX Finalizes Project Principles and Standards

Claire Champion

Clemence von der Schulenburg

Chris Taylor

President of Co-Emergence

Finance Director of Co-Emergence

Executive Director, West Coast Infrastructure

Exchange

p. 62

p. 66

Cornerstone Roundtable Discussion on the Global Pharmaceuticals Industry

Michael Geraghty Cornerstone Capital Group Global Markets Strategist.

p. 69

Upcoming Events Global ESG Calendar p. 73

Journal of Sustainable Finance & Banking Subscription Form Articles Cornerstone Capital Team

p. 74

p. 76p. 77


Market Summary

Overview

The first quarter of 2014 is in the books and global equity markets generally demonstrated a degree of resilience in the face of sporadic headwinds. We witnessed emerging-market volatility earlier in the year, followed shortly thereafter by the Ukraine-Russia crisis, all while attempting to interpret distorted U.S. economic data due to severe winter weather. Investors now find themselves heading into earnings season listening for forward-looking commentary that provides evidence of an acceleration in global growth and confirmation for a continuation of a bull market that is now in its fifth year.

In last month’s market commentary, we addressed increasing uncertainty pertaining to the U.S. equity markets and cited extreme valuations in specific industries, compressed credit spreads and elevated levels of investor optimism. As such, the pullback in some of the “frothy” corners of the market, such as biotech and social media, did not come as a complete surprise. While investors deeply exposed to the tech-heavy NASDAQ have experienced some short-term pain, the broad market remains relatively unchanged so far this year.

Looking forward, weather-related distortions are rolling off and economic data will provide investors with greater visibility into the state of the economy. Recently, both the Manufacturing and Non-Manufacturing Institute for Supply Management displayed strength, with the former rising to 53.7 from 53.2 and the latter increasing to 53.1 from 51.6. Not to be overlooked, the new orders component of the Manufacturing ISM improved as well, increasing to 55.1 from 54.5. Furthermore, the closely followed monthly employment report was encouraging, revealing that 192k jobs were added in March with prior months’ results being revised higher.

Across the pond, the European recovery story continues to take shape and gain traction with investors. Nowhere is this more evident than in Greece’s recent return to international markets with a

five-year bond sale. In a well over-subscribed auction, Greece sold $4 billion in bonds yielding just under 5%, a far cry from the 40%+ rates Greece was paying to borrow money during the darkest days of the European debt crisis. More broadly across the Eurozone, unemployment is stabilizing or improving, consumer confidence is recovering, and businesses are once again looking to spend, albeit cautiously.

Despite these tailwinds, history has taught us that debt traps are notoriously difficult to avoid, and we believe caution is warranted before assuming that Europe is entirely out of the woods. The ECB’s April meeting has some speculating that it will unveil a U.S. - style QE program, but we believe that structural and logistical impediments would make implementing such a program difficult. Without it (and perhaps even with it), however, deflation remains a very real risk.

After an extended period of underperformance, emerging market equity indices are showing signs of life. That said, a high degree of skepticism has accompanied the rally and many market pundits are labeling it a “dead-cat bounce” of over-sold and under-owned names. The emerging market bear arguments are numerous and vary based on country, but generally are premised on declining growth rates and negative earnings surprises, flat or inverted yield curves, debt concerns and economic imbalances. Still, we find it noteworthy that emerging market outperformance coincided with capital-raising by Chinese banks – a measure that perhaps provided investors with the confidence that a debt-driven crisis isn’t imminent. It’s also plausible that investors are taking this as a signal that China is ensuring the stability of the financial system ahead of what could be destabilizing, yet necessary structural reform.

As previously mentioned, emerging markets outperformed developed markets after an extended period of underperformance. On a one-month trailing basis, the MSCI Emerging Markets index


outperformed the MSCI World index (a developed market proxy) by approximately 6%, and narrowed the YTD relative underperformance to just under 20 basis points. Along with momentum names, small cap equities experienced selling pressure and underperformed their large cap counterparts by a considerable 4.6% over the last month. After

outperforming large caps in 2013, small cap equities now trail by about 3.4% on a YTD basis. From a sector perspective, performance was mixed between cyclicals and defensives. In the MSCI ACWI (broad index for both developed and emerging equities), energy and consumer staples outperformed, while healthcare and consumer discretionary lagged.

The Cornerstone Journal of Sustainable Finance & Banking SM / April 2014 / 8

Market Summary

Market and Global Sector Performance

MARKET / INDEX PERFORMANCE As of 4/17/14 (local currency) T1M (%) T3M (%) YTD (%) 2014E P/E 2014E P/B Div. Yield

US Equity Indices

DJIA 1.09 0.27 -0.36 14.9 2.7 2.3

S&P 500 0.46 1.95 1.49 15.9 2.4 2.1

Nasdaq -4.24 -2.14 -1.62 20.2 3.2 1.2

Russell 2000 -4.12 -2.30 -1.87 25.0 2.0 1.3

Developed International Indices

Euro STOXX 50 3.89 0.61 2.19 13.6 1.4 3.7

FTSE 100 1.10 -1.84 -0.62 13.6 1.8 3.8

CAC 40 3.96 2.65 3.40 14.0 1.4 3.5

DAX 2.49 -3.42 -1.49 13.2 1.6 3.0

Nikkei 225 1.64 -7.71 -10.86 16.2 1.4 1.8

ASX 200 2.63 4.61 3.23 15.4 2.0 4.4

Emerging Market Indices

IBOVESPA 15.50 5.96 1.17 10.5 1.1 4.1

Shanghai Comp 3.73 4.70 -0.80 8.1 1.1 3.6

KOSPI 2.67 2.45 -0.96 10.4 1.1 1.3

SENSEX 3.70 7.61 7.17 14.4 2.3 1.8

Global Market Indices

MSCI World 1.25 1.49 1.32 15.3 2.0 2.6

MSCI All-Country World 1.86 1.78 1.30 14.6 1.9 2.6

MSCI EAFE 2.41 0.71 0.98 14.2 1.6 3.3

MSCI Emerging Markets 7.31 4.23 1.11 10.9 1.4 2.9


MARKET / INDEX PERFORMANCE (CONTINUED)

As of 4/17/14 T1M (%) T3M (%) YTD (%) 2014E

P/E 2014E

P/B Div.

Yield Sustainable Indices DJ Sustainability World Comp 3.37 3.46 3.24 14.1 1.8 3.1 FTSE4Good 1.59 1.23 1.28 14.5 1.8 2.9 Bovespa Corp. Sustainability 11.72 4.5 1.28 14.5 1.8 2.9 Fixed Income Barclays US Aggregate 0.74 1.66 2.54

Commodities Levels 4/17/2014 10/17/2017 4/17/2013

WTI Crude 104.3 100.67 86.68 ICE Brent Crude 109.76 109.11 97.69 NYMEX Natural Gas 4.74 3.76 4.21 Spot Gold 1295.12 1320.32 1376.25 LME 3mth Copper 6619 7230 7080 CBOT Corn 4.95 4.43 6.6 CRB Raw Industrial Spot Index 541.45 515.41 527.97 Currencies Levels

4/17/2014 10/17/2014 4/17/2014 EUR/USD 1.38 1.37 1.30 USD/JPY 102.40 97.91 98.12 GBP/USD 1.68 1.62 1.52 AUD/JPY 95.51 94.34 101.03 DXY Index 79.85 79.65 82.68

Source: Bloomberg, Barclays. Equity Returns: All returns represent total return for stated period. Dividends and coupons are not included in the DAX and BOVESPA indices. Bond Returns: All returns represent total return for the stated period. Index characteristics: P/E, P/B, and Dividend Yield are based on Bloomberg consensus estimates for the stated period.


MSCI ACWI SECTOR PERFORMANCE

as of 4/17/14

1 Month Return (%)

Source: Bloomberg. Sector returns are based on GICS methodology. MSCI ACWI is a free-float weighted equity index that includes both emerging and developed world markets.

YTD Return (%)

Source: Bloomberg. Sector returns are based on GICS methodology. MSCI ACWI is a free-float weighted equity index that includes both emerging and developed world markets.

U.S. EQUITY STYLE PERFORMANCE

Style box returns are based on Russell Indices with the exception of the Large-Cap Blend box, which reflects the S&P 500 Index. All values are cumulative total return for the stated period including the reinvestment of dividends. The index used from left to right, top to bottom are: Russell 1000 Value Index, S&P 500 Index, Russell 1000 Growth Index, Russell Midcap Value Index, Russell Midcap Index, Russell Midcap Growth Index, Russell 2000 Value Index, Russell 2000 Index and Russell 2000 Growth Index.

1 Month

Source: Bloomberg

Year to Date

Source: Bloomberg

1.8

Value Growth Blend

-1.6

0.9

0.5

-4.1

-1.2

-1.5

-6.5

-3.1Mid

La

re

Smal

l


SECTOR SNAPSHOT – TOP 5 COMPANIES BY MARKET CAP as of 4/17/14

Company Name Ticker Country Industry Mkt Cap (US$ Bn)

Price (Local)

Total Return YTD % (local)

P/E 2013E

EV/EBITDA 2013E

Div Yield % 2013E

Consumer Disc.

Toyota Motor Corp 7203.JP Japan Automobiles 185.6 5512.00 -14.1 9.3 9.8 N/A

Amazon AMZN US Internet & Catalog Retail 149.5 324.91 -18.5 81.0 21.7 N/A

The Walt Disney Co DIS US Media 140.1 79.99 4.7 19.7 11.3 1.1

Comcast Corp. CMCSA US Media 127.2 49.10 -5.1 17.2 7.5 1.8

Volkswagen VOW3.GR Germany Automobiles 124.4 196.40 -3.8 8.9 7.2 2.1

Consumer Staples

Wal-Mart Stores WMT US Food & Staples Retailing 250.8 77.66 -0.7 14.6 8.1 2.5

Nestle SA NESN.VX Switzerland Food Products 245.8 67.25 6.3 19.3 13.1 3.2

The Procter & Gamble Co

PG US Household Products 221.7 81.76 1.2 19.4 12.8 3.1

The Coca-Cola Co KO US Beverages 179.4 40.72 -0.6 19.5 14.9 3.0

Anheuser-Busch Inbev

ABI.BB Belgium Beverages 174.5 78.52 1.6 20.2 11.5 3.7

Energy

Exxon Mobil XOM US Oil, Gas & Consumable Fuels

432.8 100.42 -0.1 13.4 6.1 2.5

Royal Dutch Shell RDSA.LN Netherlands Oil, Gas & Consumable Fuels

246.4 2244.00 5.0 11.0 4.7 5.0

Chevron CVX US Oil, Gas & Consumable Fuels

235.4 123.68 -0.1 11.4 4.6 3.2

Petrochina 857.HK China Oil, Gas & Consumable Fuels

223.1 8.78 3.3 9.7 5.1 4.6

Total SA FP.FP France Oil, Gas & Consumable Fuels

161.9 49.28 12.1 10.2 4.4 4.8

Financials

Berkshire Hathaway- CL B

BRK/B US Diversified Financial Services

313.5 127.18 7.3 19.8 N/A N/A

Wells Fargo & Co WFC US Commercial Banks 257.7 48.93 8.5 11.9 N/A 2.9

JPMorgan Chase JPM US Banks 209.0 55.22 -4.4 9.8 N/A 2.9

Ind & Comm Bank of China

1398.HK China Banks 201.9 4.81 -8.2 4.9 N/A 6.8

HSBC Holdings Plc HSBA.LN UK Banks 195.9 617.40 -5.0 11.0 N/A 5.5


SECTOR SNAPSHOT – TOP 5 COMPANIES BY MARKET CAP (CONTINUED)

as of 4/17/14


Price (Local)


P/E 2013E

EV/EBITDA 2013E

Div Yield % 2013E

Health Care

Johnson & Johnson JNJ US Pharmaceuticals 279.9 98.96 8.8 16.8 10.8 2.7

Roche Holdings ROG.VX Switzerland Pharmaceuticals 249.0 254.90 5.3 17.0 11.4 3.1

Novartis AG NOVN.VX Switzerland Pharmaceuticals 228.9 74.70 8.4 15.9 14.1 3.3

Pfizer PFE US Pharmaceuticals 193.4 30.25 -0.4 13.6 8.4 3.4

Merck & Co. MRK US Pharmaceuticals 165.4 56.47 13.7 16.4 9.9 3.1

Industrials

General Electric Co GE US Industrial Conglomerates 266.3 26.56 -4.4 15.6 20.1 3.3

Siemens AG SIE.GR Germany Industrial Conglomerates 118.8 97.61 1.4 14.4 9.2 3.1

United Technologies

UTX US Aerospace & Defense 108.7 118.57 4.7 17.3 10.5 2.0

The Boeing Co. BA US Aerospace & Defense 94.3 127.92 -5.7 17.5 9.6 2.3

3M MMM US Industrial Conglomerate 90.6 137.73 -1.2 18.4 10.8 2.5

Info Tech

Apple AAPL US Technology Hardware, Storage

468.2 524.94 -5.9 12.3 5.6 2.3

Google GOOG US Internet Software & Services

363.2 536.10 NA 20.0 11.7 N/A

Microsoft Corp MSFT US Software 332.1 40.01 7.8 14.8 8.5 2.8

IBM IBM US IT Services 197.9 190.01 1.9 10.6 8.6 2.0

Samsung Electronics

005930.KS South Korea

Semiconductors & Semiconductor Equip

194.3 1370000 -0.1 NA 3.2 1.0

Materials

BHP Billiton Ltd BHP.AU Australia Metals & Mining 182.0 38.10 2.1 13.2 6.6 4.9

Rio Tinto Ltd RIO.AU Australia Metals & Mining 103.8 63.37 -5.3 10.6 6.0 4.8

BASF BAS.GR Germany Chemicals 101.2 79.70 2.9 13.4 8.1 3.4

Saudi Basic Ind. SABIC.AB Saudi Arabia

Chemicals 90.9 113.63 4.6 12.0 6.6 5.3

Vale SA VALE3.BZ Brazil Metals & Mining 72.5 31.65 -8.8 6.5 4.8 5.8


SECTOR SNAPSHOT – TOP 5 COMPANIES BY MARKET CAP (CONTINUED)

as of 4/17/14


Price (Local)


P/E 2013E

EV/EBITDA 2013E

Div Yield % 2013E

Telecom

Verizon VZ US Diversified Telecommunication

197.1 47.60 -1.0 13.6 6.5 4.5

AT&T T US Diversified Telecommunication

187.7 36.04 5.2 13.3 6.0 5.1

China Mobile 941.HK China Wireless Telecommunications Ser

187.6 71.95 -10.5 10.5 3.1 4.6

Vodafone VOD US Wireless Telecommunications Ser

95.1 214.15 -16.9 15.0 6.3 5.4

Softbank Corp 9984.JP Japan Wireless Telecommunication Ser

89.2 7605.00 -17.1 18.6 9.4 0.5

Utilities

EDF EDF.FP France Electric Utilities 74.5 29.00 12.9 14.2 5.5 4.3

GDF Suez GSZ.FP France Multi-Utilities 66.5 19.94 16.6 14.4 6.7 5.9

Enel SpA ENEL.IM Italy Electric Utilities 53.1 4.08 28.7 13.0 7.0 3.2

National Grid Plc NG/ LN UK Multi-Utilities 51.6 824.00 4.6 15.9 10.1 5.5

Duke Energy DUK US Electric Utilities 51.3 72.57 6.3 15.9 10.4 4.3

Source: Bloomberg. The securities in each sector represent the largest companies by market cap in the MSCI ACWI in their respective sectors. Sector classification is based on GICS methodology. Equity characteristics: P/E, EV/EBITDA and Dividend Yield are based on Bloomberg consensus estimates for stated period.

GDP / CONSUMER PRICE INFLATION / RATES

Region/Countries Real GDP (% YoY) CPI (% YoY) Official Rates Long Rates

2012

A 2013

E 2014

E 2012

A 2013

E 2014

E 2012

A 2013

E 2014

E 2012

A 2013

E 2014

E United States 1.9 2.7 3.0 1.5 1.6 2.0 0.25 0.25 - 3.0 3.4 - Euro area -0.4 1.1 1.5 1.3 0.9 1.4 0.25 0.25 - 1.9 - - Europe 1.5 1.4 1.3 0.4 2.6 1.8 0.10 0.10 - 0.7 0.8 - Japan 1.5 1.4 1.3 0.4 2.6 1.8 0.10 0.10 - 0.7 0.8 - UK 1.9 2.8 2.5 2.6 2.0 2.0 0.50 0.50 - 3.0 3.4 - Australia 2.4 2.8 2.9 2.5 2.9 2.6 2.50 2.60 - 4.2 4.6 - China 7.7 7.4 7.3 2.5 2.9 2.6 6.00 6.00 - 4.6 4.5 - Brazil 2.3 1.8 2.2 6.2 6.2 5.8 10.00 11.10 - 10.9 - - India 4.6 4.7 5.4 10.9 9.5 8.1 7.75 7.88 - 9.2 8.5 -

Source: Bloomberg. Estimates are composite of Bloomberg contributor estimates. ** India fiscal year runs to March 31. Therefore, 2013E is India's FY13 GDP.


MONETARY POLICY

Apr – 14 Oct – 13 Apr – 13 Monetary Base growth (YoY) 31.0% 33.5% 13.8% M-2 growth (YoY) 6.2% 6.4% 7.0% Money multiplier (M-2/mon base) 2.9 3.1 3.5

4Q13 4Q12 4Q11 Velocity of money (GDP/M-2) 1.56 1.59 1.65

Source: Federal Reserve Bank of St. Louis

ESG DATA

2013 2012 2011 2010 Total Global Wind Installations (MW) 318,137.0 283,048.0 238,050.0 197,637.0

Annual World PV New Build (MW) 37007 29,865.0 30,282.0 17,107.0

1Q13 4Q11 4Q10 Global Aggregate % of Women on Boards 11.0 10.5 9.8

ESG DISCLOSURE SCORES OF LARGEST ECONOMIES (2013)

Composite Environ Social Governance 1. United States 14.3 17.3 14.9 48.8 2. China 18.2 9.7 20.3 44.0 3. Japan 21.3 26.6 20.7 44.6 4. Germany 26.9 29.4 37.7 39.1 5. France 35.4 34.0 47.1 52.5 6. Brazil 32.8 30.3 52.6 38.4 7. United Kingdom 27.8 20.6 32.1 52.3 8. Russia 17.5 21.6 28.7 39.9 9. Italy 32.7 34.9 45.0 43.0 10. India 14.4 14.7 17.7 44.8

HIGHEST ESG DISCLOSURE SCORES

Composite Environ Social Governance 1. Spain 41.3 46.1 56.2 46.8 2. Finland 36.3 33.0 38.3 55.3 3. France 35.4 34.0 47.1 52.5 4. Portugal 35.2 36.4 38.9 46.8 5. Colombia 34.9 37.7 48.2 35.1 6. Sri Lanka 34.8 33.2 39.9 56.5 7. Sweden 33.2 26.0 38.7 52.5 8. Brazil 32.8 30.3 52.6 38.4 9. Italy 32.7 34.9 45.0 43.0 10. Greece 32.3 36.4 43.1 45.6

Source: ESG Disclosure scores are sourced from Bloomberg ESG data which is collected from company sourced filings such as CSR reports, annual reports, company websites and a proprietary Bloomberg survey that requests corporate data directly. Source: Bloomberg, GMI Ratings


KEY ECONOMIC CHARTS

C&I Loan Growth (%)

Source: Bloomberg

University of Michigan Survey of Consumer Sentiment

Source: Bloomberg

NFIM Small Business Optimism Index

Source: Bloomberg

ISM Manufacturing Purchasing Managers Index

Source: Bloomberg

U.S. Treasury Yield Curve

Source: Bloomberg

U.S. Initial Jobless Claims

Source: Bloomberg


Featured Domain

ChurchillsVoice.com

By Erika Karp, Founder & CEO, Cornerstone Capital Inc.

Each month in the Cornerstone Journal of Sustainable Finance & Banking (JSFB), we will offer thoughts on a “Featured Domain,” which is selected from our proprietary “Sustainable Domain Bank.” The Cornerstone “Sustainable Domain Bank” contains 2,000+ addresses on the Internet, which are an articulation of business processes, business practices and aspirations for a more regenerative form of capitalism. Many of these domain names have the potential to be developed into business plans reflecting a robust interpretation of sustainable capitalism and finance. In particular, each “Sustainable Domain” captures a principle, or reflects a value inherent in the systematic understanding of the Environmental, Social and Governance (ESG) imperatives facing businesses and the economy today. Each Domain is intended to facilitate dialogue across functions and sectors of the capital markets; and each is available for collaborative partnership, purchase or transfer should it have particular appeal to Cornerstone clients and colleagues.

Among the many extraordinarily articulate statements from Winston Churchill is one which has exceptional resonance in today’s global economy and to today’s investment imperatives. In the mid-1940’s after the Battle of Britain when the House of Commons was being rebuilt following the bombings, Churchill made the statement: “We shape our buildings; thereafter they shape us.”

Churchill was simply expressing the truth that our infrastructures are a reflection of the knowledge and values of those who design and construct them. And once they are built, those who inhabit and use these frameworks are deeply affected by them in the present and future. In this note, we argue that drawing insight from “Churchill's Voice” offers an opportunity to more comprehensively consider the investment analyses associated with meeting the global challenges of the twenty-first century.

We consider both the broadest definition of “infrastructure” and the economic theory of “sunk costs” to argue that Churchill’s simple observation demands that we find ways to ramp up investments by both the private and public sector in areas including renewable energy, technology, education and healthcare. Churchill’s voice would tell us to be conscious of our own biases and be strong enough to make rational decisions going forward.

©V.J. Matthew/Shutterstock

A broad definition of infrastructure would include both the physical and organizational structures needed for the functioning of any economy or enterprise. While we think most obviously of buildings, roads, bridges, water, electric, technology, telecommunications, sewer and transit systems, a more complete definition would include management structures and operating practices and policies that weave all the physical elements together. It’s often this “soft” infrastructure which includes governance, regulatory, legal, economic, financial, education, healthcare, cultural and social standards that defines the resilience and endurance of an economy, industry, or company.

In other words, infrastructure can be extraordinarily


inclusive, complex and interdependant. And given this reality, for investors to make optimal investment decisions ahead, it’s even more important that we think hard about our biases and the incentive structures built into our organizations. And we need to be conscious of economics. So, turning the “sunk cost theory” in business decision-making, we need to come to terms with the fact that society has spent trillions of dollars to build the world’s current fossil-fuel based energy infrastructure. But it is serving us incredibly badly now. The costs already have been incurred. They cannot be recovered. In fact, we have not even been properly accounting for them. The real costs of the natural capital exploited have not been reflected. In moving forward for future infrastructure development, the only rational course is to consider future costs. As they are the only ones relevant to investment decisions ahead. Unfortunately, while we may rationally know that all players across all functions of the global capital markets shouldn’t let sunk costs influence future decisions, the reality is that investment decisions aren’t made exclusively on their own merits. Rational decisions for any given entity vary according to their own incentives and profitability profiles. We also know that people tend to allow the original price paid

for something to become a benchmark for real value. Further, people tend to overestimate investment returns on expenditures once they have been made. All of this represents the huge challenge of our day. Turning full circle back to the strong voice of that great British leader Winston Churchill, we are reminded of a piece of game theory referred to by some as the “Concorde Fallacy.” It refers to Britain’s continued funding of its joint development of the Concorde aircraft despite the dreadful commercial case for it. The political and legal framework, or infrastructure, around it made it unpalatable to pull out of the program. We wonder if Churchill himself had a say in the matter, would he have had the force of will and political capital to let go of a lost cause, recognize that throwing good money after bad makes no sense, and steer a better course for future investments. Drawing insight from Churchill’s Voice offers good business practice and good investment wisdom for the long term.

Erika Karp is the Founder & Chief Executive Officer of Cornerstone Capital Inc. and the former Head of Global Sector Research at UBS Investment Bank.


Global Sector Strategy / Global Markets Strategy

Introducing the Cornerstone Capital Global Markets Regional Equity Strategy

By Michael Geraghty, Global Markets Strategist at Cornerstone Capital Inc.

© StockThings/Shutterstock

In this note, we introduce the Cornerstone Capital Global Markets Regional Equity Strategy Model. As discussed in detail below, the model employs a quantitative multi-factor methodology to generate regional recommendations based on proprietary measures of valuation and earnings. The Cornerstone Capital model also takes into account corporate governance metrics by region. We will be updating the regional model on a monthly basis.

We will subsequently introduce the Cornerstone Capital Global Markets Sector Equity Strategy Model. In this model, we will rank the 10 GICS in the MSCI All Country World Index (ACWI). The two models will be consistent: a region (e.g., Japan) that has a heavy weighting of a sector with strong earnings momentum (e.g., Consumer Discretionary) will likely be overweight, while a region (e.g., Latin America) with a heavy weighting of a sector with weak earnings momentum (e.g., Materials) will likely be underweight.

Table 1: Cornerstone Capital Global Markets Equity Strategy Model Regional Overview

Latin America: Relatively Unattractive The MSCI Emerging Markets Latin America Index is comprised of companies from five countries, with Brazil having by far the largest weighting in terms of market cap (57%). Latin America is one of the seven regions / major economies in the Cornerstone Capital Global Markets Regional Equity Strategy Model.

Region/ Major Economy Weighting

Valuation (Relative)

Earnings Momentum

Earnings Revisions

Margin (Relative)

Share Buybacks

Governance (Relative)

Japan OW Positive Positive Neutral Negative Neutral Neutral

EM Asia OW Positive Neutral Neutral Negative Negative Negative

U.K. Neutral Neutral Negative Neutral Negative Negative Positive

U.S. Neutral Negative Positive Negative Neutral Positive Positive

CEEMEA Neutral Positive Negative Negative Positive Negative Negative

Europe ex. U.K.

UW Negative Negative Neutral Neutral Negative Neutral

Latin America

UW Negative Negative Negative Positive Negative Negative


Michael Geraghty is Cornerstone Capital’s Global Markets Strategist. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.

The model currently ranks Latin America relatively unfavorably, coming in last among the regions / major economies we rank. In fact, Latin America looks unattractive from all three perspectives: valuation, earnings and corporate governance.

Valuation: Still Not Cheap Even though the MSCI EM Latin America Index has declined 12% over the last twelve months (in dollar terms), valuation metrics suggest the region is still not cheap. So, for example, the region’s P/E ratio on 12-month forward EPS is 17x, which is twice the estimated P/E of the “Central and Eastern Europe, Middle East and Africa” (CEEMEA) region. And relative to its historical average P/E valuation levels, Latin America currently trades at a 20% premium.

Earnings Outlook: Unfavorable In terms of earnings, the Cornerstone Capital Global Markets Regional Equity Strategy Model takes into account a number of factors, including:

Earnings momentum: Latin America ranks poorly on this metric. Relative to the MSCI All Country World Index, the earnings momentum of the region has been negative, at the same time that other regions/major economies have experienced either positive (Japan) or neutral (Emerging Asia) earnings momentum.

Earnings revisions: The trend in earnings revisions in Latin America has been negative, meaning that downward earnings revisions have outnumbered upward revisions.

Margins: Although margins are relatively high in the Latin America region, this is the only positive factor in terms of earnings and is not, by itself, enough to offset the negatives of poor earnings momentum and negative earnings revisions.

Share buybacks: Given that corporate earnings are reported on a per share basis, we take into account the amount of net share buybacks that have occurred over the past 12 months in each region. On this metric, Latin America ranks poorly given that, like other emerging markets, corporate share issuance has significantly exceeded share buybacks.

Corporate Governance: Poor Latin America also ranks poorly in terms of corporate governance.

• The joint World Bank and International Finance Corporation“Doing Business 2014” report ranks the major economiesreasonably well relative to 189 countries globally in terms of


http://doingbusiness.org/

“ease of doing business:” Brazil (116), Mexico (53), Chile (34), Colombia (43), Peru (42).

• However, in terms of perceptions of corruption, the economiesrank much more poorly (out of 177 countries) by TransparencyInternational’s “Corruption Perceptions Index 2013:” Brazil(72), Mexico (106), Chile (22), Colombia (94), Peru (83).

Combining the scores for “ease of doing business” and “perceptions of corruption,” Latin America ranks last of the seven regions/major economies.

Latin America: Underweight In summary, Latin America ranks as relatively unattractive in the Cornerstone Capital Global Markets Regional Equity Strategy Model. In fact, of all seven regions/major economies we track, Latin America is unique in ranking unfavorably in terms of all three metrics: valuation, earnings and corporate governance.

The Underpinnings of the Cornerstone Capital Global Markets Regional Equity Strategy Model The Cornerstone Capital Global Markets Regional Equity Strategy Model employs a quantitative multi-factor methodology to generate regional recommendations based on proprietary measures of valuation and earnings. The Cornerstone Capital model also takes into account corporate governance metrics by region.

This is a dynamic model, with factors and factor weightings reviewed on a monthly basis for relevance. The key measures of valuation and earnings are also updated monthly; they can be updated more frequently (e.g., weekly) although a risk here is short-term “noise” in the data that does not persist for a longer period of time. (The corporate governance metrics currently employed are updated annually.) A variation of this model has been in use for a number of years, and has added value in the investment decision process.

The Key Fundamental Variables: Earnings and Valuation We start with the assumption that only two things ultimately determine the fair value of equities: earnings and valuation. In the short term, other factors may play a role – e.g., sentiment (“fear” or “greed”), politics (including geopolitical issues), macroeconomic variables (e.g., Central Bank tightening or easing) etc. – but, in the long run, we believe it all comes down to earnings and the valuation of those earnings. A number of factors drive valuation multiples at any point in time, including perceptions of corporate governance.


http://www.transparency.org/cpi2013

The Weighting of Regions versus Sectors The Cornerstone Capital global markets equity strategy model is comprised of a regional element and a sector element. The sectors are the 10 GICS in the MSCI All Country World Index (ACWI). In terms of regions, we focus on seven regions / major economies that account for 92% of the market cap of the MSCI ACWI. We choose to exclude Canada and Australia (each of which accounts for about 3% of world market cap) in order to focus on the developed and emerging regions that are tracked by most investors.

Table 2: Regional Weights in MCSI ACWI As of 3/31/14

The primary difference between the regional and sector models is the weights assigned to the valuation and earnings factors. The sector model gives a heavier weighting to earnings while, in the regional model, valuation and earnings have roughly similar weights. The reason for this is that, in our experience, investors look for sectors that primarily offer relatively strong earnings momentum, and for regions that offer a combination of attractive valuations and earnings momentum.

So, for example, an investor may choose to overweight Japan and be underweight Latin America primarily because of the relative valuations of the two markets. To be sure, however, a region (e.g., Japan) that has a heavy weighting of a sector with strong earnings momentum (e.g., Consumer Discretionary) will likely be overweight, while a region (e.g., Latin America) with a heavy weighting of a sector with weak earnings momentum (e.g., Materials) will likely be underweight.

Region Valuation Factors In terms of the valuation of a region, several factors are measured in order to come up with numerical values, which we label “positive,” “neutral,” or “negative” in summary tables.

These factors include: (i) P/E relative to other regions; (ii) P/E relative to the historical average for the sector;

U.S. 49%Europe exc. UK 17%UK 8%Japan 7%Emerging Asia 7%Latin America 2%Central & Eastern Europe, Middle East, Africa 2%Australia 3%Canada 4%


(iii) P/E on a “normalized” basis i.e., excluding cyclical peaks and troughs;

(iv) The potential for P/E expansion or contraction. The first three factors are self-explanatory, while the fourth factor is based on a number of momentum indicators.

Region Earnings Factors Turning to the earnings of a region, the model aggregates a number of measures under four broad headings:

• Earnings momentum: Relative to the MSCI All Country World Index, we calculate if the earnings momentum of a region has been accelerating, stable or decelerating. We then look at the earnings momentum of one region relative to another. We also take into account a predictor of earnings momentum by region. The resulting numerical values are labeled in Table 1 as “positive” (accelerating momentum), “neutral” (stable momentum) or “negative” (decelerating momentum).

• Earnings revisions: For each of the companies in a region, we look at the recent trend in earnings revisions by calculating the difference between the number of upward and downward estimate revisions. We also include a predictor of likely earnings revisions trends by region. The data are aggregated, and the resulting numerical values are summarized. A high ratio of upward-to-downward revisions is considered “positive” for a region; conversely a high ratio of downward-to-upward revisions is considered “negative.”

• Margins: We look at the margins of each of the companies in a region – both actual and estimated – and aggregate the data. We assume that relatively high margins are “positive” in that they should sustain earnings growth, while low margins are a “negative.”

• Share buybacks: Given that corporate earnings are reported on a per share basis, we take into account the amount of net share buybacks that have occurred over the past twelve months in each region. Once again, we aggregate data from the company level. A large amount of net share buybacks is “positive” for earnings per share growth in a region, while the opposite (i.e., share issuance) is “negative.”

Region Corporate Governance Metrics We derive corporate governance metrics for the regions by combining the scores of two widely-cited surveys:


• The joint World Bank and International Finance Corporation “Doing Business 2014” report ranks 189 countries globally in terms of “ease of doing business.”

• Transparency International’s “Corruption Perceptions Index 2013” ranks 177 countries in terms of perceptions of corruption.

Ranking Regions by Weighting Valuation, Earnings and Corporate Governance Scores The values derived from the various measures of valuation, earnings and corporate governance are weighted, and the regions are then ranked on the basis of their total “score.” Regions that are at the very top or very bottom of the distribution are typically ranked “overweight” or “underweight” respectively, while regions that fall in the middle are typically ranked “neutral.” Given the quantitative underpinnings of the model, we can look at the dispersion of the “scores” in order to decide on the relative weightings. In other words, a region’s score might be so high relative to the others in a given month that it is the sole overweight while, in another month, the scores of a number of regions are closely clustered and they are all assigned the same weighting (e.g., “neutral”).


http://doingbusiness.org/



Global Sector Strategy / Infrastructure

Unleashing Impact Capital into Public Infrastructure and Building Projects

By John Williams, Chairman & CEO, Impact Infrastructure LLC

© StockThings/Shutterstock

Our national economy is in a world of hurt when it comes to its very foundation: the public infrastructure and buildings that enable and support economic activity. Bridges, highways, transit, energy, and environmental infrastructure as well as social infrastructure including healthcare, education and administration buildings are no longer sufficient to provide the competitive advantage we have been used to in regional and even global trade. Make one trip from New York’s JFK or from Los Angeles LAX to Tokyo or Beijing and you will get it. Capacities are strained, facilities are crumbing. Congress is only motivated to cut investments that will reduce decay. With each year of neglect, the problem grows worse. According to the American Society of Civil Engineers, investments of more than $2.2 trillion are required over the next several years just to close the maintenance gap. For several years now, beginning with the 2008 recession, lawmakers have been hoping that the private sector including ESG, SRI and Impact investors would somehow step in to fill the investment gap. Prequin, an infrastructure data provider, reports that the eight largest U.S. based institutional investors, including CALPERS and TRS, have a target total allocation for infrastructure investment of more than $20 billion. No wonder, as the unique characteristics of infrastructure projects including long term, stable yields, low-market risk correlation, and inflation protection offer plenty to pension fund investors. Demand for investment opportunities is on the rise. An allocation of $20 billion could be easily consumed (and much more) if it weren’t for a few well-known barriers to unleashing impact capital into infrastructure projects. They include:

• the cost of impact capital as compared to tax exempt bonds, which dominate infrastructure funding;

• lack of standard metrics and analytical tools that can be used to assess risk adjusted value or, impact, associated with infrastructure projects making due diligence time consuming and expensive; the relatively small size of projects often ranging from $5m to $100m that make financing inefficient unless projects can be bundled; and

• the challenge of comparability among disparate projects.


John Williams is the Chairman & CEO of Impact Infrastructure LLC. He has over 33 years as an advisor to infrastructure development programs and 16 years as a principal owner of an international architecture and engineering company.

This issue of The Cornerstone Journal of Sustainable Finance & Banking is focused on the challenge of financing sustainable infrastructure and specifically the four barriers listed above. We have turned to professionals that bankers and finance specialists often overlook as they prospect at the finance – or downstream end - of the project pipeline. These professionals dominate the space at the other end of the pipeline and include the planners, engineers, architects and program managers that come on the scene first, leave last and work closest to project sponsors. They have access to a host of project information as they guide sponsors to delivery approaches that can either set the stage, or stand in the way of private financing once the bankers come on the scene. This issue will shed light on how these professionals and the array of tools at their disposal can close the information gap that is the common denominator behind financing barriers. Readers will gain a feel for the magnitude of capital programs, their relationship to regional and global competitiveness, trends in green investing and tools that harvest data have proven valuable in due diligence within state-of-the-art building information modelling. These professionals and tools could be the answer to many of the current challenges. By highlighting these key players that are available through, and at the expense of project sponsors, our audience can see sources of comprehensive valuation data that will help financing teams unleash impact capital into public infrastructure projects.


Global Sector Research / Energy

Smart Grid Infrastructure – Status, Opportunities, and Risks

By Margarita Pirovksa PhD, Policy & Sustainability Analyst, Cornerstone Capital & Michael Shavel CFA, Research & Business Analyst, Cornerstone Capital Photo Caption ©TBC

©alphaspirit /Shutterstock

The large utility infrastructure networks that were built throughout the 20th century underpinned the expansionist model of the linear economy. Centrally monitored electricity, gas and water networks ensured that supply matched demand, and the wires and pipelines were tailored and expanded to meet all customers’ needs. These infrastructure assets were often organized under a monopoly regime, even in deregulated industries, so that the system operator could make all the necessary investments needed to develop the market. But as we strive towards a system change, replacing linear business models with circular, impact-integrating strategies, network infrastructures are at the core of a major shift. From low-risk, low-return physical assets, they are being transformed into smart grids. Coined in the 1990s to describe the intertwining of electricity and telecommunication infrastructure, “smart grids” refer to the aggregation of technologies, including smart metering, distribution automation and advanced grid applications. Investment in smart grid technologies has risen exponentially for the last decade, reaching $13.9 billion in 2012, and is projected to increase to $25 billion in 2018, of which $4 billion is in North America1. The benefits of making the pipes and wires smarter are multiple. Economically, their cost-saving potential has a multiplier effect through the value chains in which they are embedded. Environmentally, they are central to climate change mitigation strategies, in realizing energy efficiency and allow proponents or municipalities to fine-tune demand and supply balancing. They are also a key driver in the expansion of renewable energy and energy storage technologies. Socially, they allow customers to reduce their energy bills while making networks more resilient and flexible. Before addressing the investment ramifications of smart grid technology, it’s critical to underscore the potential differences in the old utility model versus the new “smart grid” model. An example best illustrates this point: with the development of distributed generation, the roles of suppliers and customers are merged, and even reversed. A homeowner with rooftop solar panels becomes the supplier of the utility company, which buys the electricity produced by its residential client. The network itself transforms from a passive transmission

1 Tracking clean energy progress (IEA, 2013)


Margarita Pirovksa PhD is the Policy & Sustainability Analyst at Cornerstone Capital. Michael Shavel CFA is the Research & Business Analyst, Cornerstone Capital.

infrastructure to an active element of the balancing system. This reorganization of the energy markets opens up new opportunities for investors. The increased interdependence of the energy market with the rest of the economy and the added global value of smart grid technologies explain the variety of new players entering the energy infrastructure market. From IT hardware and software to telecommunications companies, these new players want a share of the energy market previously reserved by utilities, as well as direct access to their customers. From an investor standpoint, however, we believe investment implications will be realized over varying time horizons. Rather than a full-scale transformation of the grid, we see a gradual shift taking place, as there are complex (though not insurmountable) barriers to implementation in addition to a multifaceted ecosystem of stakeholders.2 There won’t be a turnkey, single-point solution; in contrast, smart grid technology will be deployed on a piecemeal basis depending on various considerations including geography, market structure and regulatory regime. To break down the “smart grid” market, supply-side investments include smart metering, distributed automation and advanced grids, while demand-side applications include demand-response and energy efficiency technologies. When accounting for time horizon and technology risk, some of the immediately addressable low-hanging fruit can be found in demand-side solutions. A particularly intriguing end market is building efficiency, as buildings account for 40% of the world’s energy use.3 Johnson Controls, a US-based global conglomerate, addresses this market with its Building Efficiency business. Their Metasys product provides central instrumentation and control and collects data from sensors in applications such as HVAC and lighting. It also administers air temperature and lighting needs based on occupancy and schedules equipment to optimize energy use. The company’s complimentary cloud-based product, Panoptix, connects customers to an online community of peers and delivers standardized data from multiple systems to provide insight into building performance. The Building Efficiency segment accounted for approximately 34% of Johnson Controls’ revenues in FY13. While these products do not constitute the entire segment, they clearly are an important strategic business driver for the company. On the supply side, we believe upstream investment (upstream of the meter) will account for a significant portion of smart grid expenditure.

2 Accelerating Smart Grid Investments (WEF, 2009) 3 www.johnsoncontrols.com/content/us/en/products/building_efficiency/products-and-systems/building_management.html


In particular, distributed automation could be a primary focus due to the fact that it enables utilities to realize greater value from their existing networks without engaging customers. Distributed automation is the software and hardware that allows utilities and grid operators to extend influence over grid functions to the distribution level and beyond. With this in mind, it appears Swiss-based ABB is well positioned to capitalize on distributed automation equipment. The company’s Power Systems segment offers turnkey solutions for traditional and renewable energy-based power generation plants, transmission grids and distribution networks. Furthermore, ABB has developed a high-voltage DC (HVDC) circuit breaker that disconnects parts of the grid in the event a problem, allowing the rest to keep working. This has the potential to be disruptive as HVDC has only been used for point-to-point transmission – not to form integrated grid networks.4 It’s also worth noting that ABB’s Power Products unit supplies the Power Systems segment with equipment. Together, these two segments accounted for 46% of ABB’s revenues in 2013. Investment opportunities for some represent congruent risks for others. It’s no surprise, then, that some are questioning the sustainability of the traditional utility business model. It’s easy to characterize utilities as being intransigent, but the situation cannot be so easily summarized. Utilities face an inherent dichotomy – they are required to operate in a conservative and steady manner (i.e. keep the lights on), but are simultaneously expected to be on the leading edge of new technology. Some industry experts suggest that utilities bifurcate their model, but the practicality of such a suggestion at scale is not yet clear. In the meantime, increased customer focus on energy efficiency and demand response, falling costs of renewables generation and anemic or negative power demand growth (the latter applying more to developed markets) are converging to create an unfamiliar set of risks for traditionally risk-averse utility investors. We believe utilities operating in regulated markets that own and integrate renewables and distributed generation into downstream infrastructure (T&D) are less exposed to long-term business risk relative to utilities that operate in non-regulated markets that are heavily dependent on centrally located, commodity-based generation without exposure to downstream assets. In surveying the utilities sector landscape, the Portuguese electric utility EDP also stands out as being well positioned. Despite some exposure to countries with a weak macroeconomic backdrop (i.e. Portugal), EDP derives more than 90% of EBITDA from long-term contracts and regulated activities. It has significant distribution assets

4 www.technologyreview.com/featuredstory/513736/supergrids


and, since 2009, more than half the electricity produced by EDP comes from renewable sources (64% in 2011).5 On the other hand, we are concerned with the business risks facing Dynegy, a US-based electric utility that owns and operates natural gas-fired and coal-fired power plants. Dynegy is facing several headwinds in that more than half of its fleet is coal-fired and significant capital expenditure may be required to meet environmental regulations, second it competes in competitive power markets, and there are downstream (transmission) constraints that limit Dynegy’s ability to capture additional value.

5 http://www.edp.pt/en/sustentabilidade/ambiente/energiasrenovaveis/pages/energias_renovaveis.aspx


http://www.edp.pt/en/sustentabilidade/ambiente/energiasrenovaveis/pages/energias_renovaveis.aspx

Global Sector Research / Infrastructure

Building Sustainable Cities with New Design Processes and Open Data

By Brian Young, Sustainable Infrastructure Program Manager at Autodesk Inc.

New data and technology advancements in the infrastructure design industry have the potential to revolutionize how finance and banking professionals screen opportunities for impact investments. Whereas gleaning project insight from the design process was once impractical or impossible, the investment community can now access a treasure trove of information on these project opportunities, including their costs, benefits and risks. Tapping into today’s technologies and the abundance of open data can drastically improve the ability of cities, designers and financing partners to build the right projects and build the projects right. The design industry is rapidly moving from the practice of drawing lines and circles to an intelligent, model-based design process called Building Information Modeling (BIM). BIM is about visualizing and simulating how projects will look and perform before they’re built. It supercharges stakeholder outreach to mitigate investments risks related to delay and political uncertainty, and its wealth of data can be leveraged to calculate a project’s business case and risk-adjusted value.

Building the right project begins with understanding a city’s existing conditions, needs, and opportunities. Many cities support this practice by providing open data that planners can use to recreate digital maps of the built environment. With BIM, however,

this same data can be converted into an interactive three-dimensional model for a much stronger understanding of the existing conditions.

Figure 2 BIM Converts San Francisco Data into 3D

Figure 1 Building Information Modeling


Brian Young is a Sustainable Infrastructure Program Manager at Autodesk Inc.

Modeling open city data also means it’s easier to identify needs and opportunities. By bringing in other types of geospatial information such as building age,planners can fly through neighborhoods to locate candidates for energy retrofits.

This same discovery process can be applied widely ─ from seeing where better transit is needed, to finding space for new rain gardens. The ability to model existing conditions and use them as the basis for analysis is helping planners and non-technical stakeholders unearth valuable new insights about their cities. For engineers and bankers, building the project correctly means maximizing social and environmental impacts, reducing risks and ensuring it can be financed. With BIM, purpose-built infrastructure design tools are coupled with a variety of simulation capabilities to assess and optimize these factors. For example, designing a road can involve analyzing its impacts on stormwater runoff, traffic congestion and the cost of materials. Once the design is complete, construction processes can be simulated to reveal any potential clashes or issues that could pose a risk to an investor’s return. This design process reveals more insight into projects than ever before. However, this is just the beginning of a new era; soon BIM will be able to translate all this disparate project cost, risk, and performance information into a comprehensive business case that quantifies social, environmental and economic returns. The more engineers know about what they’re building and how to build it, the more likely the project will come in on time, under budget and perform as expected. And the more the banking community knows about project value and risk, the more likely they will participate in financing.

Figure 4 Simulating Construction

Figure 3 Analyzing Opportunities for Energy Retrofits. Courtesy City of Vancouver


Global Sector Research / Finance

Social Stock Exchanges: Democratizing Impact Investing

By Durreen Shahnaz, Founder and Chairwoman, Impact Investment Exchange Asia (IIX) This article first appeared in the World Economic Forum’s report “From Ideas to Practice, Pilots to Strategy: Practical Solutions and Actionable Insights on How to Do Impact Investing.”

Today, impact investing is still the field of a few; to participate directly often requires a “sophisticated investor”1, given the potential illiquidity of the investments2. There are few retail investment opportunities available on a broader basis3 for several reasons. First, too few social enterprises (SEs) are truly investment ready. Major impact investing funds invest in only 1% of the thousands of socially conscious companies that they evaluate.4 The low volume of deals results in high transaction and operational costs for all stakeholders, curbing the sustainability of trading platforms, impact investors and investees. Second, measuring impact is more of an art than a science, as it is still the early days of creating quantifiable and comparable metrics. Tools such as the Global Impact Investing Rating System (GIIRS) and Impact Reporting and Investment Standards (IRIS) are steadily advancing standardized measurement and reporting5

Third, legal concerns related to tax structures and uncertainties around exit strategies prevent impact investors from making investment decisions.6 Tax issues become considerations in investment decisions because impact investments can be made into both for-profit and not-for-profit entities. As not-for-profit entities can benefit from special tax treatment in their local jurisdictions, such as 501(c)3 status in the US, tax implications of impact investments will need to be considered. On the flip side, if a 501(c)3 is investing in a for-profit SE, it will still have to pay capital gains tax. And, to retain its status, the organization will need to ensure that investments fit under its bylaw requirements and tax-exempt status. While impact investing is still far from being an accessible opportunity for the general population, investor demand for greater liquidity (see Figure 1) and platforms such as Kiva and Kickstarter make it clear that the potential for involving retail investors in the sector is immense.


http://www.weforum.org/reports/ideas-practice-pilots-strategy-practical-solutions-and-actionable-insights-how-do-impact-inv





Durreen Shahnaz, is Founder and Chairwoman, Impact Investment Exchange Asia (IIX).

Figure 1: Degree of Interest for Impact Investment Structures and Structural Features: Investor Demand for Liquidity in Impact Investments

Source: Global Impact Investing Network (GIIN), J.P. Morgan A social stock exchange, which can create a liquid market for private investments that generate social and environmental value, is one approach to unlocking a greater supply of impact investment capital.7 From a demand side, social stock exchanges can enable SEs to access global mission-aligned investment from diverse investors. Moreover, a social stock exchange platform can accelerate the transition towards consistent and widely accepted social and environmental impact reporting. Democratizing Capital Markets Similar to regular stock exchanges, social stock exchanges operate by facilitating the listing, trading and settlements of shares, bonds and other financial instruments. However, alongside traditional financial reporting, impact issuers must comply with social and environmental impact criteria. Listing on a social stock exchange enables financially sustainable entities that address social and environmental issues, including SEs, non-governmental organizations, impact funds and inclusive businesses, to raise capital and expand their operations. Social stock exchanges provide a mechanism for listed companies to raise capital through primary placements of securities, and liquidity to investors through secondary trading of securities. Moreover, for all those looking to make a difference, they provide the opportunity to purchase a security. Thus, these exchanges open up impact investment to retail investors, and make the field more attractive to institutional investors. Evolution of Social Stock Exchanges The notion of a social stock exchange has been developing for some time. In Brazil, the Bolsa de Valores de São Paulo (BOVESPA) was the first philanthropic donation arm of the Brazilian stock exchange. The South African Social Investment Exchange (SASIX) was a similar philanthropic initiative with the Johannesburg Stock Exchange. A more recent initiative is London’s Social Stock Exchange (SSE). Launched in June 2013, SSE exhibits information on socially responsible companies


already listed on regulated stock exchanges. While shares cannot be bought or sold on SSE, impact information is available on the currently listed 11 companies. In North America, Social Venture Connection (SVX), a Canadian platform endorsed by the Government of Ontario in 2008 and approved by the Ontario Securities Commission in June 2013, recently had a public launch at the Toronto Stock Exchange and is now gearing up for issuances for small- and medium-sized social enterprises in Toronto. However, shares cannot be traded on SVX. It is a direct investment platform into not-for-profit entities.8 Launched in July 2013, Impact Exchange, a collaboration between Impact Investment Exchange (IIX) and the Stock Exchange of Mauritius (SEM), is the only full-scale social stock exchange with an ability to issue and trade shares and bonds of social enterprises from across the globe. Impact Exchange is the third market of the SEM and the only dedicated exchange board in the world for social impact investments. The Mechanics of Impact Exchange Impact Exchange works as a public trading platform, providing liquidity, transparency and efficiency while also ensuring that the social and environmental mission of the issuers is safeguarded and showcased.9 Impact Exchange is operated by the SEM and regulated by the Financial Services Commission, Mauritius. The SEM provides infrastructure and regulatory oversight while IIX prescreens potential issuers on the impact eligibility criteria and provides recommendations based on this assessment to the SEM. IIX also monitors ongoing social and environmental listing obligations of issuers listed on Impact Exchange. All issuers must demonstrate positive social and environmental impact to be listed on Impact Exchange. Impact Exchange will allow trading in securities (including shares and bonds) issued by social enterprises and by funds that invest in social enterprises. Social enterprises will be required to meet strict standards for disclosing information about their businesses (see Figures 2 and 3), their financial results and their social and environmental performance in accordance with the standards laid out in the listing rules for the Impact Exchange Board. The rules set out the minimum standards of behaviour to protect investors and ensure the market is fair, orderly and transparent. Impact Exchange-listed companies have a general obligation to disclose material information on a continuous basis and to release specific information periodically.


Figure 2: Overview of Impact Exchange Entry Requirements as per the Listing Rules10

Source: IIX

Figure 3: Ongoing Listing Obligations

Source: IIX

Impact-Exchange-listed companies have a general obligation to disclose material information on a continuous basis and to release specific information periodically. Each entity intending to list on Impact Exchange will be required to appoint an authorized impact representative (AIR). AIR is an accredited social adviser who will provide support through the listing process and ensure that the issuer complies with impact requirements. The assistance of the AIRs will boost investor confidence through independent verification of the social and environmental impact of the issuer, and increased transparency. Figure 4 shows the issuer’s steps to listing on the exchange.


Figure 4: Issuer’s Steps to Listing on Impact Exchange11

Source: IIX

AIRs include nominated impact advisers (NIA) and impact verification agents (IVA). Entities are required to appoint an accredited NIA for providing assistance and verifying the impact nature of the applicant prior to listing. NIAs assist prospective issuers in preparing for listing, meeting the market transparency requirements and fulfilling other listing obligations. An accredited IVA must also be appointed to verify impact reports at the end of each financial year. Only organizations accredited by and recorded on the SEM Register may act as NIAs and IVAs for the Impact Exchange Board. Impact Exchange Ecosystem As with any regular listing process, professional advisers assist in legal matters, accounting, valuation and due diligence. While a vibrant impact investing ecosystem has started to emerge on a global and regional level, this ecosystem will need to be developed, and advisers will need to build expertise for (public) social capital markets. AIRs are key players in this ecosystem; they work directly with the issuers to meet entry requirements and verify impact once an issuer is listed. As the market develops, more traditional capital market players will enter.12 Investment banks, brokers and financial advisers will be key to moving capital to scale, providing the market information to attract and connect institutional and retail investors to SEs listed on the social stock exchange. Only with these market linkages in place can capital markets democratize, and individuals as well as institutional investors use their investment funds to contribute to larger social impact. The Path to Developing a Vibrant Public Impact Investing Market The development of the public impact investing market is poised for a quick take-off if concerted effort is made among intermediaries (investment bankers, advisers and investment platform operators), the ecosystem


(lawyers, accountants and AIRs), policy-makers, issuers and investors. These stakeholders should use the road map of the following actions: Develop strong investment opportunities • Intermediaries need to work with potential issuers as well as

investment and social advisers to develop a strong pipeline of investment opportunities.

• Advisers may also look to create innovative financial instruments that pool together the financial needs of a group of SEs in a certain sector, and structure a bond around that, such as the Water Bond or Health Bond.

• Policy-makers and foundations may seek to coordinate support for the first issuers and develop the templates for further issuances.

Develop an enabling environment for impact investing An enabling environment encompasses a fluid ecosystem, a ready and able issuer, and willing and informed investors. For this to happen, much advocacy and education is needed as well as alignment of incentives among all the players. The list of priorities to initiate this virtuous cycle would be as follows: • Educate the ecosystem on the specific characteristics of the public

impact investment market and its potential to build early engagement • Provide incentives for the ecosystem to engage with first listings.

These incentives can be driven by DFIs, policy-makers or foundations that would like this space to get off the ground to help relieve their burden of developmental support over time.

• Educate and provide incentives (e.g. tax incentives) to retail and institutional investors to build awareness and steer investor behaviour

• Enable ease of access to impact investment opportunities for retail investors by engaging a broad range of global brokers

• Provide easier regulatory hurdles for issuances to be marketed in large retail and institutional markets such as the US and Europe

• Encourage institutional investors to play a role in moving the market for the issuances on the exchange

• Encourage consistent social and financial reporting based on listing requirements

• Work with information providers to establish information flows on investment opportunities and trading information between the market, ecosystem and investors

• Create the next generation of Impact Exchange participants by exposing them to simulation of the exchange academic institutions

Develop best practices and path to scale • Evaluate and develop best-in-class reporting standards based on

ecosystem, issuer and investor feedback • Collaborate with intermediaries, ecosystem, service providers and

policy-makers to share best practice


• Set up a task force, after demonstration effect of the first issuers, to develop and implement the roadmap to scale social stock exchanges – focused on replication of the Impact Exchange model

• Document the trials and successes in creating fully-functional social markets, and disseminate them to the public via media and academic institutions

• Encourage similar exchanges to be set up at the local level across the globe

Conclusion: Unlocking Mainstream Capital Social stock exchanges ensure alignment of a company’s social mission with the interest of its board and investors, making mission sacrifices that give way to higher profit margins a concept of the past. The first potential issuers – from mature SEs to international non-governmental organizations – are currently preparing issuances ranging from US$10-30 million for listing. These securities will unlock mainstream capital sources and give everyone a chance to invest in social good. When floated on Impact Exchange in the next few months, the first issue will not only unlock mainstream capital for social investment, but also set the stage for democratizing capital markets – a much needed task for creating sources of equitable growth in the world. This article first appeared in the WEF Report, “From Ideas to Practice, Pilots to Strategy: Practical Solutions and Actionable Insights on How to Do Impact Investing.” A special note to Michael Drexler, Abigail Noble, Marina Leytes, and Ann Brady, who contributed to the report.

1Sophisticated investors are eligible to participate in private placements under the relevant laws of their jurisdiction of residence. In Singapore, an accredited investor is an individual whose net personal assets exceed SGD 2 million or whose income was at least SGD 300,000 in the preceding 12 months, or a corporation with net assets in excess of SGD 10 million as per its most recently audited balance sheet. 2Perspectives on Progress: The Impact Investor Survey, 2013. J.P. Morgan and the Global Impact Investing Network (GIIN). 3Several mutual funds exist, such as Calvert Funds (US), responsAbility (Switzerland) or Ethex (UK). 4Triolo, P. “Are Social Stock Exchanges the Great Equalizer to Democratize Development Finance?” Devex, 15 July 2013. Second, measuring impact is more of an art than a science, as it is still the early days of creating quantifiable and comparable metrics. Tools such as the Global Impact Investing Rating System (GIIRS) and Impact Reporting and Investment Standards (IRIS) are steadily advancing standardized measurement and reporting. 5 Ibid. 6 Lee, A. “Impact Exchange: How It Will Change Investing”. International Financial Law Review, June 27, 2013. 7 Triolo, P. “Are Social Stock Exchanges the Great Equalizer to Democratize Development Finance?” Devex, 15 July 2013. 8 Anwar, T. “Social Stock Exchanges: A Global Perspective”. Social Enterprise Buzz, 10 September 2013. 9 See: http://impactexchange.asiaiix.com/. 10 Impact Exchange Board Listing Guide. 11 Step 7 applies only to companies seeking to raise capital through listing. 12 There have been early movers, such as Daiwa Securities Group, which has raised over US$ 5 billion to date for SRI funds and social bonds.





http://impactexchange.asiaiix.com/

Global Sector Research / Transportation

Transportation Facilities Focus on Sustainability at Billion Dollar Scale.

By Anthony Bernheim, FAIA, LEED Fellow, Principal, Director of Sustainability, Bernheim + Dean Inc. and Program Sustainability Manager for the Terminal 1 redevelopment program at San Francisco Airport When we commute and travel, do we think about the long-term sustainability of the facilities we use? Does it matter that these buildings are efficient and provide healthy environments? Up until now, we have considered multi-modal transit facilities as positive infrastructure since they facilitate public mass transit, reducing private vehicular use and greenhouse gas production. And we have known that while air travel was necessary, it is probably not sustainable from a greenhouse gas perspective. Now think ahead. What might transportation facilities look like in the next 10 or more years? This is the question a significant number of public agencies and their architects and contractors are asking as they create buildings that will be used for the next 50 to 60 years. A quick Google search for Sustainable Multi-Modal Facilities, Sustainable Airports, and Sustainable Airport Facilities produced 2.3m, 15.4m and 19.1m web pages respectively, suggesting there is a strong push to build sustainable infrastructure. The idea that public buildings should be designed, built, and operated for the long term can be justified as an appropriate use of public money. However, the reasons public agencies and their stakeholders look to sustainable infrastructure are more complicated. At the heart of their thinking is a triple bottom line approach with a focus on social sustainability, financial performance, and environmental responsibility. Simply stated, transportation facilities that provide a positive passenger experience will improve the developer’s financial performance, while reducing the facilities’ global and local ecological footprint. In other words, traveler comfort and convenience is good for business. Happy customers will frequent the local stores and businesses located in transit and airport buildings. In addition to improved customer service and satisfaction, added benefits

include improved work environments and employee productivity, reduced capital asset life-cycle and operating costs, improved relationship with the community, and compliance with local codes. A few examples will illustrate this trend. Many U.S. airports have developed sustainability guidelines for future development. San Francisco International Airport (SFO) is no exception. In fact SFO was recognized for its Sustainable Planning, Design and Construction Guidelines with an “Airports Going Green” award in 2013. This airport is in the planning stage of redeveloping its 1.1 million square foot Terminal 1 with a 10-year, $2.1b program, and is also planning to upgrade other terminals and facilities with an additional $2b in construction. Following the success of the LEED® Gold certification for Terminal 2, the airport has developed guiding sustainability principles to encourage its architects and contractors to deliver facilities to help the airport achieve its sustainability goals. SFO encourages creativity and innovation in facility design and construction with the aim of developing highly sustainable, long-term buildings focused on passenger experience, comfort, and health. The guidelines describe both sustainable mandatory requirements and voluntary expanded requirements for these categories – energy and atmosphere, comfort and health, water and wastewater, site and habitat, materials and resources, and equity and aesthetics. More importantly, the guidelines require design decisions for building systems and products in these categories to be informed through output information from life-cycle assessments, life-cycle cost, and return on investment analyses. Thus the selection of facility design, building systems, technology, and product


options will be made with an improved understanding of their social and environmental impacts and benefits, translated into capital investment costs and long-term cost savings. The $4.5b Transbay Transit Center now under construction in San Francisco is another example. Its design is intended to create value through inclusion of sustainability strategies. Publicly released information suggests that the building will be energy efficient (33% improvement on code standards – ASHRAE 90.1.2007s) and water efficient. Proposed energy efficiency and occupant comfort strategies include daylight harvesting, hybrid geothermal cooling, natural ventilation, and nitrogen dioxide (NO2) sensors for improved indoor air quality. Water efficient strategies include the capture of rainwater from the rooftop garden and graywater from sinks and showers to be used to flush toilets. Resource-efficient strategies include the use of environmentally preferable building products. When completed in 2017, the building is targeted to achieve LEED Gold certification.

Anthony Bernheim, FAIA, LEED Fellow, Principal, Director of Sustainability, Bernheim + Dean Inc. and Program Sustainability Manager for the Terminal 1 redevelopment program at San Francisco Airport.


http://transbaycenter.org/project/program-sustainability

http://transbaycenter.org/project/program-sustainability

Open Source Excellence

Maersk: Sustainability as a Driver for Growth

By Annette Stube, Head of Group Sustainability and John Kornerup Bang, Head of Positioning & Strategic Risk Management, Group Sustainability at A.P. Moller - Maersk A/S

©Maersk

A.P. Moller – Maersk is a global conglomerate with four core businesses in shipping, port infrastructure and oil & gas. Hence our business helps enable global trade and energy supply. Sustainability is a natural part of our business; whether we are building a new ship or drilling rig, or opening a new port in Africa ─ our investments are for the long-term. We always have to consider how our assets will perform in the next 20-30 years. For example, most of our assets consist of steel. The uncertainty about prices and the availability of a resource such as iron ore will increase in the future. Therefore, it makes sense for us to think long term about our resources. Ensuring high quality recycling of our new ships is a way of building resilience against increased volatility in steel prices. It is our experience that sustainability adds value if it is tied closely into business and is allowed to help the company take a longer-term perspective on material matters. At its core, it adds value through better risk management whether it is related to protecting reputation, avoid excessive OPEX by better efficiency, anticipating legislation or avoiding disruptions. Risk Management and Cost Savings Over the past five years, we have been working to integrate sustainability into the core business processes such as Enterprise Risk Management, leadership training and performance management. Furthermore, we have established a solid executive level anchored sustainability governance and minimum standards and strategies on material topics such as health & safety, climate change and environmental pollution, labour standards, anti-corruption and responsible procurement. There is substantial value at stake. Since 2007, our container shipping company has reduced Co2 emissions “per container moved” by 34% and saved more than USD 750m in fuel costs in 2013 alone. At a global level, the UN estimates that corruption adds 10% to the cost of doing business and 25% to the cost of procurement contracts in developing countries. This work forms the backbone of our efforts to manage sustainability related risks, which we will sustain going forward.


Annette Stube is the Head of Group Sustainability at A.P. Moller–Maersk A/S. John Kornerup Bang is the Head of Positioning & Strategic Risk Management, Group Sustainability at A.P. Moller–Maersk A/S.

Unlocking Growth for Society and Maersk However, we are convinced that sustainability holds a bigger promise and have the potential to add to growth and value creation if a company is capable of identifying and delivering on hot spots for synergies between societal needs and the company’s core capabilities. Just last month we launched a new sustainability strategy – Unlocking Growth – focusing on accelerating the positive impacts on society of our core business. The purpose of our new sustainability strategy is to address significant sustainability challenges in society, which at the same time constitute bottlenecks to our growth strategy. One of the areas where we will intensify focus is how we can enable more people to be pulled out of poverty by enabling more trade. Trade contributes to economic development and improved living standards; recently in Bali, political leaders reaffirmed the importance of facilitating trade with the WTO agreement on trade facilitation. Again, huge value is at stake. The World Economic Forum estimated in their 2012 ‘Enabling Trade Report’ that if non-tariff trade barriers were reduced only half way to global best practice, trade would increase by 15% and global GDP by 5%. With our transport and infrastructure companies, Maersk Line, APM Terminals and logistics provider, Damco, facilitating trade is part of our core business and we are working to make trade more efficient every day. However, in order to address larger bottlenecks to trade we need to engage with broader stakeholders outside our own gate. This will require patience and a longer time horizon but we believe it will also accelerate value creation for Maersk and society at the same time. In Kenya, for example, deployment of refrigerated container technology and teaching avocado farmers how best to package their avocados has expanded the avocado markets for smallholder farmers from the Middle East to all of Europe and Russia, and prices are up to five times higher. This result was also facilitated by investment in road infrastructure on the Government side as well as improved extension services, and it illustrates the point that proactive engagement with societal challenges can facilitate solutions and company growth at the same time. Kenya now has an avocado export of more than $300m USD. We will now put our knowledge and competencies in play to help drive the trade agenda beyond our own operations. This new direction is still unchartered territory and we will face challenges along the way. However, we are confident that this way of working can accelerate many of the positive impacts of our business and open up for more business for Maersk at the same time.


http://www.maersk.com/Sustainability/Documents/Maersk-Group-Sustainability-Strategy-2014-2018-V1-1.pdf

Most ESG-based valuation of companies focuses on governance and sustainability risk management. And rightly so given the many material risks facing global companies. However, building on the examination of risk management in their investment portfolio, investors could also consider to what extent their investment targets are harvesting the opportunities present in the space between sustainable development and their core business competencies – also at this level, to the benefit of society, the company and the investor.


Regional Imperatives

Infrastructure Imperatives Drive Regional Competitiveness By Marty Janowitz, Vice President, Sustainable Development, Stantec

©chungking/Shutterstock

Who would have thought that the various urban centers of North America were more like businesses in the same sector, in deep competition to thrive or survive? Of course, we know that virtually every city has long sought to present itself as more attractive than others – climate, amenities, culture, employment and business opportunities – as a way of attracting residents and businesses, the sources of tax revenue-based prosperity. Today, our urban areas face enormous threats and costs including those associated with the quality, integration and performance of their civil infrastructure systems. I use the word systems intentionally because we have slowly come to realize that our civil infrastructure was never really merely a collection of standalone pieces even though we typically designed, financed and built them that way. We now more clearly appreciate that infrastructure is in essence an interrelated and integrated system. Think of infrastructure as the skeletal, circulatory and digestive systems of the organisms we call communities. And like any organism, we are trying to maintain a healthy and functioning relationship between all the interdependent parts, which in today’s interconnected reality is most often at the regional rather than purely local scale. In the old world order, infrastructure owners made choices considering priorities, borrowing capacity and tax-based revenues, often building what could get funded or just part of what was needed, for lowest front-end cost. Municipalities lined up for formula grants from infrastructure funding pots, working their political connections to be the “lucky” recipient. This contributed to today’s perfect storm deteriorating patchwork of physical and social infrastructure, ever scarcer and debilitated natural resources, growing community demands for quality of life attributes, and a wave of natural calamities that have actualized the risks and effects of climate change. This is occurring just when municipal and state/provincial governments are woefully under-resourced to directly fund renewal capital. The few formula funding pots have either disappeared or have become increasingly difficult to access and new merit funding opportunities such as the $4.18B TIGER Grant Program generated thousands of applications resulting in more than $50B in demand. At this critical juncture when shortcomings in infrastructure could leave them in significant jeopardy, the traditional sources of public funding are wholly inadequate and cash-strapped communities, counties or regions must now compete globally in a nearly desperate race to attract and out-compete their cousins for impact capital.


Marty Janowitz is Vice President Sustainable Development at Stantec leading the sustainable initiative bringing holistic systems thinking to infrastracture renewal.

In this heightened competitive environment, the problems will be large if cities and regions fail to make the changes needed to solve their infrastructure deficits in new ways. Recognizing that the old approach can’t work, a new perspective, often encapsulated under the header of integrated sustainable infrastructure systems, is the emerging alternative, premised on view that the ‘triple bottom line’ of economics, environment and social benefits combine to be the real value proposition. In the past few years there has been impressive progress in this sphere of sustainable and systemic planning and design across the range of civil infrastructure. The most recent and compelling step forward is being shaped by the Envision™ Sustainable Infrastructure framework, rating system and economic companion tool created and implemented by the Institute of Sustainable Infrastructure and its industry-supported think tank, which operates at the Zofnass Program at the Harvard Graduate School of Design (www.sustainableinfrastructure.org). Despite a compelling business case born of lifecycle value the challenging obstacle is still in the sphere ‘of how to fund it’ particularly if we recognize that a major contributor must be private impact capital. This raises the question, “how attractive is public infrastructure” as a destination for impact and other forms of private capital? On the one hand, public infrastructure, if properly managed and maintained, offers a stable and visible long-term asset with a steady user base and well-known, potentially growing, inflation protectable revenue streams. But these attributes are counter balanced by obstacles. Most of the so-called impact capital market is in the hands or strongly influenced by institutional investors that include large pension funds, environmental, social and governance (ESG), socially responsible investor (SRI) and single family office (SFO) funds, consultants and trustees. These impact investors are seeking opportunities within the $53 trillion global infrastructure sector for the $26 trillion in capital they control and many have a hunger to place capital in public infrastructure. But the relatively small project size, long lead time, political risk and due diligence costs associated with these projects are keeping them away. In simple terms, they have struggled with quantifying the value and risk associated with specific projects. In addition, they have found the average project size well under the dollar amount needed to efficiently finance in the marketplace. Large constructor-operators able to participate in public private partnerships (P3) are also looking for opportunities that can meet their risk profiles and need for scale. Additionally, some elected officials, economists and labor leaders have opposed pension investments in infrastructure due to their perception of the unwise use of privatization with resulting job losses and negative community impacts.


http://www.sustainableinfrastructure.org/

The emergence of more holistic “triple bottom line” and “sustainable return on investment” analytic tools also challenge planning and design teams to create solutions that deliver for maximum social, environmental and economic impact. Business cases can guide designers to outcomes that deliver the greatest overall “bang” for the buck over project lifecycles while simultaneously helping to identify the interests of project stakeholders. Stakeholder interventions can often be the greatest immediate risk to project development – scheduling and permitting delay and construction inflation. By clarifying stakeholder objectives in risk-adjusted monetary units, project sponsors can more easily position and negotiate their initiatives for success thereby reducing the due diligence burden. The development of these analytic tools promise to transform the way that projects are developed, vetted and positioned for financing. These consistent frameworks will challenge sponsors to make a transparent case for funding, as investors realize that much of the value they seek exists but has heretofore not been accessible. By revealing answers to some of the questions posed in this approach, and by challenging all proponents, designers and financiers to look more closely, it will not be long before vetting based on transparent and objective business cases becomes standard practice. One tangible piece of the solution to this puzzle is regional thinking. As described, single standalone projects are rarely actually standalone. Taking a bigger view can lead to bundling projects that can be synchronized, compared and linked to distribute risk and create suitably sized financing packages better matched to impact investors’ or P3 requirements. These regionally based packages can meet other criteria that can lead to impact capital participation, primarily by the identification of trade-offs that can increase the return on investment to investors. Other benefits of regionalized systemic planning can include shortened overall schedules (from systemic plans and processes, and anticipation-response to stakeholder interests), political support (attracted to larger, geographically broad and potentially multi-jurisdictional initiatives) and a willingness to do what is needed to reduce the cost of due diligence so that P3 proponents can more easily participate. There are already examples, such as the current project to replace New York – New Jersey’s Tappan Zee Bridge where regionally based, holistic business case approaches have already contributed to expedited development, delivery and partnerships valued at nearly $4 billion. These progressive approaches can enhance infrastructure projects as attractive investments for impact capital. Project sponsors who understand and articulate the full value and risk associated with their projects will realize an advantage in the competition for merit funding


and impact capital. Over time, as comprehensive business cases become more common, users will realize additional benefits as projects are regionally bundled and systems are managed on a basis of value for money, defining opportunities that deliver reasonable returns at reasonable risk as compared to other investment options. Infrastructure projects can provide long-term predicable returns, inflation protection, and positive social and environmental impact. With these factors rapidly emerging, the stage is set for the new sources of private impact capital to step up and fill a role formerly played exclusively by public funding sources. As to whether this proposition is worth taking seriously, I can only share what I am seeing and discussing with my colleagues at Stantec and with others in the industry and academic circles. My Stantec colleagues and I exist in the realm of serious and long-term designers and planners used to working on variety of infrastructure projects from inception through planning, development and delivery. We see our profession and our clients changing in response to powerful forces and believe our industry can be shapers rather than followers within an inevitably altered future. We recognize the need and benefit of working closely with the finance and banking community to achieve our mutual goals.


Enhanced Analytics

Filling the Infrastructure Data Gap in Impact Investing

By John Williams, Chairman & CEO, Impact Infrastructure LLC

1 OECD Newsroom, Massive infrastructure investment needed to meet future demand says OECD, 05.03.2012 2 ACEC2013 Report Card for America’s Future 3 The Foundations of a Competitive Canada: The Need for Strategic Infrastructure Investment, December 2013 4 Global Pension Asset Study 2013 Towers Watson 5Ibid

©phipatbig/Shutterstock

Competing for Resources The OECD estimates USD $53 trillion in investment or the equivalent of an annual 2.5% of global GDP by the year 2030, to meet demand for infrastructure investment by 2030.61 According to ACEC, a $3.6 trillion investment is needed by the year 2020 in the U.S. alone,72 and the Conference Board of Canada recently stated that, “Canada needs to invest at least $293.8 billion in electricity infrastructure between 2010 and 203083. Those numbers are so large and intimidating that most people are tempted to ignore them with hopes they will go away. Public sector budget shortfalls and a lack of willingness to address funding through legislative measures will make the situation worse with failures looming on the horizon. One potential solution exists within the impact investing community which controls more than $29 trillion worldwide94. Roughly 56 percent or $16.24 trillion of that capital is from the U.S105, alone. Impact Investors have a growing interest in making long-term commitments to infrastructure and public building projects. Yet impact capital has not made significant progress in finding its way into these projects. One of the primary reasons is the lack of transparent, objective, comparable, and affordable investment information. That information is needed to decide whether to invest. Determining project value (including environmental, social and economic impacts) and risk is essential to the due diligence process. The information gap is also a barrier to success in winning public sector, merit-based funding. Project sponsors are used to formulate grant programs and are just now coming up to speed in articulating business cases needed to demonstrate and compare the value of merit with disparate competing projects. The good news is that things are changing rapidly, and soon, project sponsors will be making their cases for merit funds and private impact capital. They will be basing their case on the comprehensive value of


6 A distinction should be make between public private partnership (P3) or alternative procurement “Value for Money” (VfM) and overall value for money. VfM is a narrow concept that compares alternative procurement with traditional public sector build, own and operate. Overall value for money looks not just at the procurement but at the value of the project to the sponsors, the public, the environment, investors, etc. Rather than answering the VfM question of “Is this the best procurement method for the project?”, the overall value for money analysis answers the questions “is this the right project?”, “is it done right,” and “what’s in it for me?”

John Williams is the Chairman & CEO of Impact Infrastructure LLC. He has over 33 years as an advisor to infrastructure development programs and 16 years as a principal owner of an international architecture and engineering company.

cash as well as internal/external costs and benefits that are adjusted for risk to determine overall value for money.116 That value can be assigned across a range of stakeholder beneficiaries to address the interests of most of the entities that can make or break a project. Information Needs During times of scarce resources, there is intense competition. Value and risk information is needed to answer stakeholder questions. Credible input data is essential to building support and moving up the prioritization list. Capturing that data will require the use of existing, standardized tools that can be affordably harnessed and then applied early and often throughout a project’s life to provide relevant decision support information. Universally recognized Cost Benefit Analysis (CBA) is the best starting point. CBA is a standard approach to economic valuation used frequently in custom assessments associated with infrastructure projects. Custom studies are often commissioned via consulting economists who reinvent the wheel as they assess specific projects. Custom studies are expensive, and inherent “tweaking” make them difficult to compare. As a result, they are done early in the project development process to sell a project during concept stage. Once the project is sold, they are generally placed on a shelf and ignored as decisions are made that actually define and deliver final projects. CBA has been a proven tool in the quest for merit funding. Work has been done to create sector specific metrics (i.e., energy, transportation, water, social infrastructure including healthcare, military and educational facilities) that run in conjunction with an analytic engine that is “powered” by CBA and probabilistic analysis. AutoCASETM (automated business case) is a software plug-in solution that runs in conjunction with Autodesk project simulation and visualization tools used by millions of planning and design professionals around the world. Together, the metrics and engine run to translate tangible and intangible costs and benefits to risk adjusted monetary units that assign value by specific groups of stakeholder beneficiaries. For example, the Trinity River Visioning Authority recently completed a project working with consulting firm VERDUNITY, the Institute for Sustainable Infrastructure’s EnvisionTM. Sustainable Infrastructure Rating System,


and the Business Case Evaluator economic companion tool and AutoCASETM. Using these tools, they were able to compare a range of low impact development scenarios with traditional “grey” infrastructure to craft comprehensive business cases for each alternative. In Pima County and the City of Tucson, Arizona, stormwater managers and transportation planners are using AutoCASETM with Autodesk’s Civil 3D infrastructure design software to inform new planning guidelines that will subject infrastructure alternatives to comprehensive business case analysis. Reducing the Due Diligence Burden Professionals charged with overseeing investments of impact capital have been discouraged by the effort required to complete the due diligence process. They have struggled with quantifying the value and risk associated with specific projects. In addition, they have found the average project size well under the dollar amount needed to efficiently finance in the marketplace. By using standard CBA and probabilistic analysis tools, sector specific metrics, and recognized building information modeling (BIM) software, project sponsors can reveal impact value while supplying information that reduces the due diligence burden. At the same time, they can increase project comparability that can aid in bundling disparate projects. These three benefits will go a long way to making infrastructure projects attractive investments for impact capital. Further, by answering the “What’s in it” questions, they can reduce the risk of project delay through deal balancing and the allocation of financial and sustainable returns on investment. Making the Case Transparent, objective, credible and comparable value and risk assessments are key to making the case impact capital. Assessments should begin as early in the project development process as possible and continue through each stage of planning, design, construction, and operations in order to benefit from increasing levels of detail as decisions are made and implemented. Baseline data and the resulting decision support information from the business case will provide a foundation for performance measurement, monitoring and reporting throughout the entire life cycle. Those project sponsors who understand and articulate the full value and risk associated with their projects will realize an advantage in the competition for impact capital. Overtime, as comprehensive business cases become more common, users will realize additional benefits as projects are bundled and systems are managed on a basis of value for money as compared to other investment options.


Enhanced Analytics

CBA-BIM (Cost Benefit Analysis and Building Information Modelling) Using Established Tools to Achieve Standard for Infrastructure Project Valuation and Risk Assessment

By John Parker, Chief Economist, Impact Infrastructure LLC Building Information Modelling (BIM) is changing the planning, design, building, and operation of infrastructure. When Cost Benefit Analysis (CBA) is added to BIM investors get both transparency of value and understanding of risks in complex infrastructure projects. CBA-BIM has the potential to open up the infrastructure market to more private investors. There is no doubt that we have under-invested in infrastructure121 and a catch-up is required. Government fiscal constraints and the fact that the public benefits have not been well articulated to taxpayers mean that the public purse has not been opened to finance the infrastructure deficit. The private sector could fill the infrastructure funding gap132 and certainly investors want to invest in infrastructure - especially in impact projects - those with a social and/or environmental benefits. But currently impact investors lack a means of understanding the financial risk and a common set of metrics to value social and environmental benefits. BIM is a method for organizing and exchanging data on the physical and functional characteristics of infrastructure projects. BIM standardizes data, organizes it into useful information, and opens projects up to scrutiny. And with powerful visualizations it puts projects into context. BIM's standardization of information allows it be used throughout an infrastructure project – from when only proponents care, to when planners, economists, engineers, architects and designers are involved, and

1 Global Agenda Council on Infrastructure 2012-2014 http://www.weforum.org/content/global-agenda-council-infrastructure-2012-2014; Infrastructure productivity: How to save $1 trillion a year http://www.mckinsey.com/insights/engineering_construction/infrastructure_productivity 213Investing in infrastructure “The trillion-dollar gap” http://www.economist.com/news/leaders/21599358-how-get-more-worlds-savings-pay-new-roads-airports-and-electricity

©topstop/shutterstock to when bankers, lawyers and financiers enter the picture. BIM sounds like something for engineers and architects, why should investors care about BIM? The opportunity to add economic, financial and risk data into BIM can help infrastructure investors by:

• Providing the missing common financial metrics for infrastructure projects;

• Reducing risk and aiding in understanding risks for financial decision-making; and,

• Allowing for bundling of smaller infrastructure projects into similar risk-return packages that can be aggregated into pension-fund sized tranches.

In a public-private partnership, investors may be getting a return from an infrastructure project's operations, or their funds may be tied to delivering the


http://www.weforum.org/content/global-agenda-council-infrastructure-2012-2014

http://www.mckinsey.com/insights/engineering_construction/infrastructure_productivity

http://www.economist.com/news/leaders/21599358-how-get-more-worlds-savings-pay-new-roads-airports-and-electricity

http://www.economist.com/news/leaders/21599358-how-get-more-worlds-savings-pay-new-roads-airports-and-electricity

project on budget and schedule. Investors should be interested in BIM because it is cutting the project setup costs as it moves between project phases and is handed off (for example from planning to design, or construction to operation). BIM is also reducing the cost of design iterations and construction document errors because professionals can design, visualize, simulate, and analyze the project digitally—before they build it.143

Because BIM forces standardization, procurement agencies like the transparency this affords them when comparing competing projects. It is the increased standardization and transparency of infrastructure projects brought about by CBA-BIM that should be the real benefit to infrastructure investors. This is why the finance community should be pushing for the use of CBA-BIM. BIM can incorporate time or schedule as the fourth dimension and cost or budget as the fifth. CBA-BIM adds more dimensions – benefits, beneficiaries, and risk extend BIM and make it useful to the finance community. From a BIM model you can see who wins, who loses, who bears risks, where and when. Also when metric and risk measurement is done the same way across projects with the same inputs different projects can be evaluated and bundled together. Converting CBA and risk analysis to work with the spatial relationships in BIM is quite natural. For example, property values vary with the distance to a feature (such as a park) or to a detriment or risk (such as a pollution source). A new transit stop can reduce travel time and cost for transit users and drivers. It can increase job opportunities for those without cars. Transit can provide access to centralized, and less expensive, healthcare. It can also increase property values by making a neighbourhood more walkable. And more

3 “Realizing the Benefits of BIM” Autodesk - http://extreme.rs/wpcontent/uploads/2013/10/2011_realizing_bim_final.pdf

Figure 1: The Canada Line transit line in Vancouver shown in a whole city context in an Autodesk Infraworks BIM framework. This allows analysis of, for example, distance to city attractions, low-income housing, and jobs/business areas.

walking or cycling to transit reduces personal and public healthcare costs. All of these public and private benefits depend on distances – from houses to transit, from houses to businesses, from houses to healthcare and daycare centres. Pension funds want to tap into the inflation protection, low correlation with financial markets, and long time horizon of infrastructure investments. Impact investors want to understand the sustainable and community benefits of infrastructure. BIM provides transparency and standardization to infrastructure professionals. CBA-BIM offers investors the same standardized lens on the financial, stakeholder, and sustainable risk and returns. And for project proponents CBA-BIM allows for bundling of projects of the same risks so that smaller projects can be combined.

John Parker, is the Chief Economist, for Impact Infrastructure LLC. He has over 30 years of experience as an Economist, led the Canadian economics business for HDR and co-pioneered with John Williams, the development of the Sustainable Return on Investment (SROI) framework.


http://extreme.rs/wpcontent/uploads/2013/10/2011_realizing_bim_final.pdf

http://extreme.rs/wpcontent/uploads/2013/10/2011_realizing_bim_final.pdf

Accelerating Impact

New Tools, New Tricks: How Emerging Applications Are Becoming Game-Changers for Impact Investors and Infrastructure Development

By Ryan Meyers, Product Manager, Impact Infrastructure LLC

©RomanenkoAlexey/Shutterstock

Since its inception in 2007, Impact Investing as an asset class has grown rapidly; it is expected to represent over $500 billion in invested capital by 2020151. Despite this explosive growth, there are still issues surrounding the precise definition of an impact investment. The four core characteristics of impact investing include: intentionality, investment with return expectations, range of return expectations and asset classes, and impact measurement162. One of these characteristics in particular, intentionality of the investment, is one giant grey area. The lack of quantitative thresholds in impact investing is a product of a lack of standardization and a perceived inability to quantify externalities (the non-market, spill-over, benefits and costs of the project). For example, the choice between investing in a new transit project (producing large social, environmental, and economic benefits), a business creating carbon sequestration technology, or another business removing pollutants from water is relatively arbitrary; how can the investor know where their dollars would produce the greatest amount of impact? This is where new tools in the infrastructure space come into the picture. Emerging exchanges, such as the West Coast Infrastructure Exchange (WCX), are requiring the use of economic valuation tools to monetize externalities before infrastructure projects can be listed. This is increasing transparency for impact investors and allowing them to see how their dollars are creating social and environmental impact in dollar values. This is a huge step forward, but it still means that projects cannot be directly compared. This is due to the fact that the methods for quantifying and attaching dollar values to non-market costs and benefits may be different from one tool to another. This is being addressed by other exchanges, such as the Canadian Impact Infrastructure Exchange (or CiiX, currently in development), which is looking to use one economic valuation tool so that investors can make an apples to apples comparison of all projects on the exchange. This requires standardized methodologies.

1 Monitor Institute (2009). Investing for Social and Environmental Impact. http://www.monitorinstitute.com/downloads/what-we-think/impact-investing/Impact_Investing.pdf 2 Global Impact Investing Network (Accessed April 2014). About Impact Investing: What is Impact Investing? http://www.thegiin.org/cgi-bin/iowa/resources/about/index.html


http://www.shutterstock.com/gallery-444424p1.html

http://www.monitorinstitute.com/downloads/what-we-think/impact-investing/Impact_Investing.pdf

http://www.thegiin.org/cgi-bin/iowa/resources/about/index.html

Ryan Meyers is the Product Manager for Impact Infrastructure LLC. He is the lead developer of the AutoCASE™ software for infrastructure business cases.

A team at Impact Infrastructure is on the path towards standardizing methodologies used to monetize the externalities of infrastructure projects. These methodologies are being embedded in a business case analysis tool called AutoCASETM, which has a direct link into CAD software including Autodesk’s Civil 3D and soon their Infraworks software suite. This enables infrastructure design information to be extracted directly from the design itself, so the externalities quantified are as precise and up to date as possible. Using a standardized approach to quantifying costs and benefits in risk-adjusted dollar values means that when projects are listed on exchanges, such as the CiiX, impact investors have access to a range of metrics that they can use to measure the impact of their investment. The power that this kind of exchange offers is immense. Investors can go on an exchange and say, “we require a minimum direct financial ROI of x%, with an environmental and social benefit equal to $y.” This enables impact investors to increase the transparency to their shareholders, so they can clearly communicate how much social or environmental value is being created for each dollar they invest. The creation of standardized economic tools that can be used in the context of infrastructure exchanges may enable a new era of impact investing. Investors can use new standardized metrics to shape the definitions of new asset classes, including green bonds and impact investments in general. In turn, this can create a positive feedback loop as more infrastructure projects are listed and financed on exchanges such as the WCX and CiiX, accelerating the rate of impact investing. AutoCASE and these new exchanges can provide impact investors with the ability to increase transparency for shareholders, more clearly define impact investing, and leverage a largely untapped asset class that inherently produces social benefits while also meeting minimum return requirements and hedging against volatility in the global markets.


Sustainable Standout

Trinity River Vision Authority Applies Sustainability Rating and Business Case Analysis to Set Stormwater Management Principles

By Mikel Wilkins, PE, ENV-SP & Environmental Engineer Stormwater Management Specialist, and Kevin Shepherd, PE, ENV-SP & Principal at VERDUNITY

© VERDUNITY

©jessicakirsh/shutterstock

Panther Island is a master planned urban waterfront community north of downtown Fort Worth, Texas. The 320-acre redevelopment area is part of the larger Trinity River Vision project that provides for environmental cleanup, flood protection and infrastructure improvements for neighborhoods adjacent to the West Fork of the Trinity River. The planned public improvements within Panther Island will nearly double the size of downtown Fort Worth and is expected to generate more than $600 million in economic development activity by 2025. The redevelopment project features the creation of a new 33-acre lake that will be connected to a network of canals. The lake and canal network will provide connected public open space that will serve as a key amenity for the estimated three million square feet of commercial space and ten thousand mixed-income residences. Verdunity was contracted to evaluate three levels of green infrastructure implementation strategies for their effectiveness in protecting that water quality of the lake and canal network. The levels studied included implementations within just the street right of way, expanding into the open space areas and view corridors, and finally expanding to the individual site development parcels. The initial study determined that a large majority of the water quality treatment initiatives could be achieved by implementation of green infrastructure strategies within the street right of way and open space areas. This level of implementation also reduces the area required for storm water management on individual sites, thus allowing for denser development that functions better with the integrated open space network. A balance of green infrastructure on the surface to treat storm water runoff and grey infrastructure to convey additional flows is necessary to improve and protect the quality of our lakes and streams. A common roadblock to expanded use of green infrastructure is the misconception of higher construction and maintenance costs. Understanding that there are other advantages of expanded implementation of green infrastructure strategies related to quality of life, potential to attract new business, tourism, and new residents, Verdunity set out to quantify the expected benefits for the Panther Island implementation strategies by performing


http://www.verdunity.com/

Mikel Wilkins, PE, ENV-SP, is an Environmental Engineer & Stormwater Management Specialist for VERDUNITY. Kevin Shepherd, PE, ENV-SP, is a Principle at VERDUNITY. Kevin brings a unique combination of engineering and planning perspectives, along with expertise in business and municipal finance.

a business case evaluation of each level of green infrastructure implementation. The evaluations utilized the AutoCaseTM for Water Projects software that is being developed by Impact Infrastructure, LLC. The economic model provides a risk-based life cycle analysis and comparison of traditional storm water management utilizing grey infrastructure and multiple levels of green infrastructure implementation. The business case evaluations provided comprehensive economic data that detailed the potential financial gains associated with higher levels of green infrastructure implementation within the Panther Island development.

The economic models compared construction, operations and maintenance costs of traditional grey infrastructure development to both the right of way and open space green infrastructure implementation strategies. The net present value of costs associated with the most expansive open space strategy exceeded that of traditional development by $1.7 million. The AutoCase™ for Water Projects tool provided the key data to move beyond the common roadblock of higher up front and O&M costs by evaluating green infrastructure’s positive impacts on sales tax and property tax revenues for the development. The model also calculated the net present values of more subjective criteria including willingness to pay for improved water quality and the financial benefits of carbon sequestration and improved air quality. Based on projected commercial and residential development for Panther Island the results of the analysis indicated a net present value benefit of $3.5 million for the right of way implementation strategy and $5.4 million for the open space implementation strategy as compared to the projected benefits for traditional development relying completely on grey infrastructure systems and traditional landscaping. Utilizing these robust economic tools the project team was well equipped to present the overall life-cycle


benefits of incorporating green infrastructure into development strategies to the Trinity River Vision Authority. The financial benefits coupled with the benefits of maintaining the water quality of the lake and canals planned for Panther Island make a clear case for expanding the use of green infrastructure in North Texas that will benefit the development community and the community at large.



San Diego International Airport Named First LEED Platinum Certified Commercial Airport Terminal

Abridged article based upon SAN-provided data, courtesy of Jim Grant HNTB Corporation

©justasc/Shutterstock

San Diego International Airport has been awarded Leadership in Energy and Environmental Design Platinum certification for The Green Build terminal expansion from the U.S. Green Building Council. LEED certification is considered the industry standard in defining and measuring “green,” sustainable construction, with LEED Platinum being the highest certification attainable. The award, tallied via a points system that credits projects on the basis of materials used to innovation in design, makes SDIA home to the first LEED Platinum certified commercial airport terminal in the world. LEED Platinum was awarded for the terminal portion of The Green Build, including the 460,000 square-foot expansion of Terminal 2 West and 1.3 million square feet of new aircraft apron and taxiway areas. The design/build contractor for the project was Turner/PCL/Flatiron. Sustainable elements of the terminal and airside improvements include: Solar energy • On-site renewable energy – Solar panels being installed have the

capability of producing one megawatt of electricity to the building (12.5 percent of the terminal’s projected annual energy use).

• The San Diego County Airport Authority will rely on San Diego-based Borrego Solar to install and maintain the panels and related electrical equipment. Borrego, a specialist in financing and producing commercial solar projects, retains ownership of the array and sells power back to the airport at a lower overall cost that the local utility can provide. For more information about the system, visit: www.utsandiego.com/news/2014/Apr/04/san-diego-terminal-solar/.

Water conservation • Low-flow water fixtures – Low-flow fixtures will save the airport

approximately 4 million gallons of water annually. • Drought-tolerant landscaping – Landscaping incorporates a variety

of indigenous and drought-tolerant plants, shrubs and ground cover, minimizing watering needs.


Jim Grant is Energy and Fueling Systems Director at HNTB Corp.

Energy conservation • Natural light – Wherever possible, natural light (versus artificial)

was leveraged to illuminate the building interior; indoor spaces incorporate natural daylight and exterior views, including six of the eight public restrooms. The front of the building is made up almost entirely of windows, providing natural light for the ticket lobby, baggage carousel area and security checkpoint. Sunset Cove, the new concessions area, features floor-to-ceiling windows with high-performance glazing looking out on the airfield, which flood the seating area with natural sunlight during the day.

• Energy-efficiency – Energy-efficient lighting and equipment was used in locations needed for passenger processing.

• Reflective roof – Reflective rooftops were used to minimize the building’s heat absorption and reduce air conditioning needs.

• Lighting/HVAC controls – These utilize technology allowing for more efficient energy usage throughout the terminal.

• Reduction in aircraft on-the-ground energy usage – Power and preconditioned air units at the 10 new gates result in a reduced need for aircraft auxiliary power units and/or ground power units.

Storm water pollution prevention • The airfield storm drain filtration system is designed to remove 80

percent of the total suspended solids that accumulate on airfield pavements, preventing them from entering San Diego Bay.

Air quality • The terminal achieved improved indoor environmental quality

through the use of low volatile organic compound adhesives, sealants, paints and coatings.

From the beginning, the overall construction process for The Green Build was designed to be green. For instance, 54,000 tons of construction material waste—more than 95 percent—was diverted from landfills, much of it recycled or reused on site. Materials for the project were sourced, whenever possible, from within 500 miles of the airport, minimizing fuel usage and emissions in materials delivery. And construction teams used alternative-fuel equipment as part of the construction process, reducing on-site fuel usage and emissions. In addition, LEED Gold certification was achieved for the portion of the project which included the terminal’s roadway system, new dual-level roadway, curbside check-in and USO building. The design/build contractor for the project was Kiewit/Sundt. Sustainable elements in this portion of the project include:


Water conservation • Drought-tolerant landscaping – Landscaping incorporates a variety

of indigenous and drought-tolerant plants, shrubs and ground cover, minimizing watering needs.

• Water reuse – Storm water runoff from the parking lot and other paved permeable surfaces drains into numerous bioswales located throughout the landscape areas to irrigate plantings.

Energy conservation • Natural light – Wherever possible, natural light (versus artificial)

was leveraged. For example, the curbside check-in area is located outside, minimizing lighting needs during daytime hours.

• Naturally ventilated check-in pavilions – Taking advantage of San Diego’s temperate climate, the ventilated pavilions eliminate the need for heating/cooling /HVAC on the dual-level roadway.

• Energy Star equipment – Used in various locations to reduce energy usage.

• Support for alternative fuel vehicles – The parking lot includes electrical charging stations for electric vehicles.

Among the numerous contractors and designers who worked on The Green Build are Turner/PCL/Flatiron, Kiewit/Sundt, HNTB, URS, AECOM, and LEED experts: AEC and Drew George & Partners. The Green Build’s LEED certifications build on San Diego International Airport’s already robust sustainability efforts. The airport was the first in the U.S. to establish a sustainability policy, the first to publish a sustainability report adhering to Global Reporting Initiative (GRI) standards and recently became the first airport to sign the U.S. Climate Declaration, calling for action on climate change. The $907 million Green Build project was completed on time and approximately $45 million under budget. For more information about The Green Build, visit http://sandiegoairport.porternovelli.com/. For more on the airport’s overall sustainability efforts, visit http://media.porternovelli.com/airportsustainability/ or view the airport’s GRI sustainability report at http://sustain.san.org/. For more information on LEED, visit www.usgbc.org. Source: San Diego International Airport, Press release, dated April 9, 2014.


http://sandiegoairport.porternovelli.com/

http://media.porternovelli.com/airportsustainability/

http://sustain.san.org/

http://www.san.org/documents/pressreleases/2014/04-09-14%20San%20Diego%20Now%20Home%20to%20World%E2%80%99s%20First%20LEED%20Platinum%20Certified%20Commercial%20Airport%20Terminal.pdf


Increasing Access to Clean Water in Kenya: The Case for a Social Impact Bond By Claire Champion, President and Clemence von der Schulenburg, Finance Director of Co-Emergence

©Co –Emergence

With limited public funding available for socially and environmentally responsible programs, a variety of initiatives have been developed to attract private capital into sustainable development. Although still in their infancy, social impact bonds (SIBs) offer a promising outlook for sustained public-private partnerships. Social impact bonds are gaining momentum around the world. Also called “pay for success bonds” or “social benefit bonds,” SIBs are outcome-based contracts in which a commissioner (usually a public institution) agrees to pay private investors back if, and only if, pre-established social outcomes are reached. Specialized service providers are hired to carry out social interventions, and an independent firm measures the outcomes. An intermediary organization plays a critical role in structuring the SIB and coordinating the implementation of the interventions. In a context of limited public funding and increasing corporate responsibility, SIBs create a mutual “public-private partnership” benefit. By enabling the transfer of specific social interventions from public institutions to specialized providers, SIBs contribute to more effective and cost-efficient outcomes for the public good. They also draw private investment — repaid from net taxpayer savings — to fund projects. The first SIB was launched by Social Finance UK1 in 2010, aiming to reduce recidivism among ex-offenders leaving prison. Since then, more than 20 of those bonds (raising nearly $100 million) have been launched in the U.S., the U.K., Australia, and the Netherlands. They target a range of social issues, from homelessness to early childhood education. A similar financial tool, the “development impact bond,” is being created in emerging markets aiming, for example, at improving female education or reducing malaria prevalence. Development impact bonds differ from SIBs only in who repays the investors (donors, rather than public institutions). In parallel, “green” bonds (to finance environmental projects) saw massive growth in 2013. Historically, green bonds have been issued by institutions such as the World Bank, with relatively limited uptake. Last year, however, the International Finance Corporation (the World Bank’s private equity branch) raised a $1 billion green bond. Corporate


Claire Champion is President of Co-Emergence. Clemence von der Schulenburg, is Finance Director of Co-Emergence. Co-Emergence is a U.S. company whose mission is to nurture and scale market-driven solutions to increase access to high-quality, affordable health and education services in emerging markets.

bonds are also growing dramatically: in 2013, Électricité de France (EDF Group) raised a $1.9 billion green bond that was twice over-subscribed; and firms like Toyota and Unilever have raised billions in the last year.2 Dealogic recorded 29 deals worth a total of $11.2 billion last year and so far this year has reported more than $6 billion deals. Financial institutions also show growing interest: a consortium of leading banks recently published voluntary guidelines for such bonds. In late 2013, Zurich Insurance Group committed to investing $1 billion in green bonds, starting a new trend for private sector investors. Although SIBs represent a nascent market of a few hundred million dollars, their positive preliminary results offer significant opportunities to scale up interventions that have strong evidence of social impact and economic value in emerging markets. Through Co-Emergence work in those markets, we have identified access to water in Africa as one opportunity. Based on our preliminary research and interviews with water experts and a February 2014 field assessment in Kenya, we believe interventions to reduce water losses — thereby increasing access to clean water — are viable candidates for SIBs: execution risk is limited, benefits are clear and measurable, and, as far as Kenya is concerned, large areas of operation are “investment ready.” The Water Problem Around the world, 1.1 billion people have no access to any source of improved drinking water; billions more have access only to an interrupted supply or to water of uneven quality.3 A major barrier to increasing access to clean water is the high level of water loss in distribution networks. This loss, called non-revenue water (NRW), is the difference between the amount of treated water in the distribution system and the amount billed to consumers. NRW averages 40 percent in developing countries,4 significantly limiting water utilities’ ability to provide residents with 24/7 water services and extend water to new areas, including to poor communities.5,6 NRW is also associated with increased risk of contamination through broken pipes, posing “a significant public health risk.”7

Non-Revenue Water in Kenya

16 million Kenyans (39%) lack access to clean water

Illnesses and conditions related to water, sanitation, and hygiene are the No. 1 cause of hospitalization in children under age five

Non-revenue water averages 45%

Sources: World Health Organization, Kenya Water Services Regulatory Board


Evidence in developed and developing countries shows that a mix of technical and capacity building interventions can reduce NRW to less than 20 percent without massive capital investment.8,9 Such interventions include controlling physical losses through pipe maintenance and water-pressure optimization, ensuring customer metering accuracy, and improving governance and performance of water utilities through information and pay-for-performance management tools. Projects around the world, including those in emerging markets, have documented returns on investment in fewer than five years.10,11 To date, however, few NRW interventions have been implemented at scale. Reasons include the misperception that they require massive infrastructure-type investment (to replace all pipes), lack of financial capacity among local water utilities or governments to pay for NRW interventions up front, and the challenge of improving governance of water utilities to ensure that gains are sustained. Co-Emergence has selected Kenya as the first country qualifying for a SIB for the following reasons:

• Kenya’s central and local governments have expressed strong political will to reduce NRW, which averages 45 percent.12 Ongoing decentralization reform creates an urgent need for countries to improve their financial situations while increasing citizens’ access to clean water.

• Leading organizations from the nonprofit and commercial water sectors have prepared the ground, establishing reliable NRW baseline data, developing effective approaches to improve water utilities’ performance, and conducting successful pilots in collaboration with local governments and service providers. As our main partners, they bring years of experience and connections with the main stakeholders in Kenya.

• Impact investors have an increasing and stated interest in funding water and environmental initiatives. Kenya is a high priority for investment in Africa and a focus for institutions that provide debt guarantees, such as OPIC and USAID’s Development Credit Authority.

Repayment to private investors will be based on reaching key social and financial targets. A strong monitoring and evaluation system will therefore be embedded in the SIB structure. Indicators to measure social impact will include NRW level, hours of daily water supply, and additional people served (or clean water covered). Using lessons from this first SIB, we plan to scale the approach to other parts of Kenya and other African countries, leveraging capital from impact investors. The Monitor Group estimates that the impact


investing industry will grow from $50 billion to $500 billion in assets in the current decade,13 creating an increased demand for investment-ready social interventions like NRW. With a successful first SIB, we hope to structure an SIB fund that will invest in multiple NRW projects in selected countries in Africa, thus widening our impact. We also expect lessons from this SIB to have a demonstrative effect for the use of SIB in other sectors and other developing countries. 1 Social Finance UK: http://www.socialfinance.org.uk 2 The Economist. Spring in the air: Bonds tied to green investments are booming. 22 Mar. 2014. Accessed at www.economist.com/node/21599400/print on March 24, 2014 3 World Health Organization (2014). Health through safe drinking water and basic sanitation. Accessed at http://www.who.int/water_sanitation_health/mdg1/en/ on March 17, 2014. 4 Kingdom B., Liemberger R., Marin P. (2006). The challenge of reducing non-revenue water in developing countries. The World Bank. Accessed at http://siteresources.worldbank.org/INTWSS/Resources/WSS8fin4.pdf on March 17, 2014. 5 Ibid. 6 Frauendorfer R., Liemberger R. (2010). The issues and challenges of reducing non-revenue water. Asian Development Bank. Accessed at http://www.miya-water.com/user_files/Data_and_Research/miyas_experts_articles/2_NRW/92.pdf on March 17, 2014. 7 Frauendorfer R., Liemberger R. (2010). 8 Kingdom B., Liemberger R., Marin P. (2006). 9 Frauendorfer R., Liemberger R. (2010). 10 Kingdom (2006). 11 Ndirangu N., Ng’ang’a J., Chege A., Blois R.J., Mels A. (2013). Local solutions in non-revenue water management through north-south water operator partnerships: the case of Nakuru. Water Policy 15: 137-164. 12 Water Services Regulatory Board (2012). IMPACT Issue N.5. Performance Review of Kenya’s Water Services Sector – 2010/11. WSRB. Nairobi. 13 Freireich J., Fulton K (2009). “Investing for environmental and social impact”. Monitor Institute. Monitor Institute


http://www.economist.com/node/21599400/print

http://www.who.int/water_sanitation_health/mdg1/en/

http://siteresources.worldbank.org/INTWSS/Resources/WSS8fin4.pdf

http://www.miya-water.com/user_files/Data_and_Research/miyas_experts_articles/2_NRW/92.pdf

http://www.miya-water.com/user_files/Data_and_Research/miyas_experts_articles/2_NRW/92.pdf

Virtual Attendance

WCX Finalizes Project Principles and Standards

By: Chris Taylor, Executive Director of the West Coast Infrastructure Exchange

©Master_ArtShutterstock

On January 2nd, the West Coast Infrastructure Exchange (WCX) released the final version of “Infrastructure Project Certification –Principles and Framework” which was developed by the WCX Business Standards Committee. The principles and project standards are the first-ever attempt by multiple US states to jointly define the types of public infrastructure projects that would be most suitable for engaging private capital and to lay out a framework for how best to structure such investments to maximize public benefits while addressing the needs of investors. Based on experience in other jurisdictions with an extensive background in private investment in public infrastructure, the standards highlight the importance of such factors as transparency, high quality analysis, political support, competitive bidding, community labor standards, appropriate risk allocation and efficient processes. The Committee members include representatives from the private and public sectors from multiple jurisdictions, including:

• Sarah Clark, CEO and President, Partnerships British Columbia (Chair)

• John Williams, CEO, Impact Infrastructure, LLC • Laurie Weir, Senior Portfolio Manager, and David Merwin,

Investment Officer, Targeted Investment Programs, CalPERS • Margaret Tobin, Executive Director, NY Works Task Force • Lois Scott, CFO, City of Chicago and Chicago Infrastructure

Trust • Chris Taylor, Executive Director, West Coast Infrastructure

Exchange

The effort to develop these standards was initiated in early 2013 based on feedback from the market and expert studies that found the lack of standards and consistency was a problem that was inhibiting the growth of the US market for “investable infrastructure.” The Business Standards Committee previously issued a draft version for comment in September 2013 and input was received from a diverse array of over 20 different parties representing infrastructure fund managers, public sector procurement officials, pension funds, labor unions, NGOs, attorneys, advisors and other stakeholders. The comments received were varied and covered all aspects of the document but in general, they concurred that creating such standards was important and helpful to building a market


Chris Taylor is the Executive Director of the West Coast Infrastructure Exchange.

and that the proposed standards were on the right track. Most of the specific suggestions fell into one of the following categories:

• Modifying specific language related to the interests of different stakeholders (for example insurance companies suggested language addressing risk and labor unions suggested language addressing labor standards.)

• Recommendations for future actions or highlighting issues that the WCX should pay close attention to as specific projects move forward. Several experienced practitioners pointed out procedural or policy choices and challenges that will likely arise as deals are structured. The current document addresses principles rather than spelling out the details of a procurement process or how to conduct Value for Money analysis. The latter are vital elements of a successful infrastructure public-private infrastructure project and will need to be addressed as we move forward.

• WCX certification of a project’s financial viability also was proposed. This was a conscious and deliberate decision for WCX to avoid any confusion as to whether or not WCX plans to certify the financial due diligence for a proposed project. This is an area where investors and their advisors will need to form their own judgments and not rely on WCX as the arbiter of the financial soundness of projects.

• Clarifying and underscoring the need for projects to be structured so as to maximize its public benefits as the key goal of governments in the process. “Balancing” risk and rewards to each party is important, but government’s goal should be to get the best possible value for taxpayers at a price that allows a return that is acceptable to investors.

• The importance of design excellence and building projects that fit into the existing landscape of the community was raised and has been included.

• The critical nature of having strong support from decision makers on the political level, while insulating procurement process decision making from politics was highlighted, as was the need for transparency so that stakeholders can confirm the public interest is being protected.

• Broadening the definition of resilience beyond climate change to capture seismic and other risks.

• Treatment of unsolicited proposals received a lot of attention. The prior draft recommended against allowing them. In response to feedback and based on experience elsewhere, the revised draft acknowledges that unsolicited proposals may


result in valuable, innovative solutions that would not otherwise get considered but states that such proposals must be subject to a competitive bidding process before any contracts are awarded.

• Use of the term Public Private Partnership (P3) vs. Infrastructure Investment Partnership (IIP) and Performance-Based Infrastructure Solution (PBIS). Many parties commented on the introduction of new nomenclature for describing the types of financial and contract structures that WCX is seeking to facilitate. While it is true that the term P3 is already widely used, we believe it is also widely misunderstood and frequently misinterpreted and believe it is critical to define much more specifically the types of transactions that we are seeking to advance. Therefore we have chosen to stick with the terminology in the draft document.

The breadth of public and private-sector comments received helped refine the final document which is available on the WCX website at: http://www.westcoastx.org/home/discussion-forum The next step will be to screen proposed projects in the WCX region against these standards and to certify those that meet them, in order to raise their profile and help investors identify well conceived projects. WCX began accepting project proposals in January 2014 from public sector sponsors in the three West Coast states. For more information, contact Chris Taylor, WCX Executive Director at [email protected].


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Virtual Attendance

Cornerstone Roundtable Discussion on the Global Pharmaceuticals Industry

By Michael Geraghty, Cornerstone Capital Group Global Markets Strategist The “Biopharma” Industry The lines between the “pharmaceuticals” and “biotechnology” sectors are becoming increasingly blurred. With 35-40% of the earnings of global large cap pharmaceuticals companies coming from biologics, it is probably more accurate to refer to these companies as operating in the “biopharma” industry. Corporate governance has played a key role in the emergence of biopharma. The “old” business model of large cap pharmaceuticals companies, which was in place from about the 1990s to the mid-2000s, was comprised of five elements:

• Strategy: A focus on primary care areas.

• Drug development: A focus on “small molecule” drugs (i.e., non-biologics taken orally). As their patents expired, these drugs faced intense competition from the manufacturers of generics.

• Research & Development: A “shotgun” approach to R&D, with many projects underway at a given point in time with a goal of developing a handful of “blockbusters.”

• Mergers & Acquisitions: Mega deals e.g., Pfizer/Wyeth and Merck/Schering-Plough.

• Business model: A diversified healthcare model.

The “new” business model, which emerged in the late 2000s, modified those elements as follows:

• Strategy: A focus on specialty care areas, which offer relatively high margins.

• Drug development: A focus on “large molecule” drugs i.e., biologics.

Cornerstone Capital Group’s Roundtable Discussion on Global Pharma

• Research & Development: More targeted R&D focused on specialty care areas.

• Mergers & Acquisitions: Bolt-on M&A deals typically involving smaller biotech companies

e.g., Bristol-Myers Squibb / Medarex, Eli Lilly/Imclone, Novartis/Chiron.

• Business model: A pure drugs business model. One consequence of a less-diversified structure has been a large number of divestments lately e.g. Abbott Laboratories split in two and spun off its research pharmaceuticals business as a new entity (AbbVie); GlaxoSmithKline sold its Ribena and Lucozade drinks businesses; Novartis sold its blood transfusion diagnostics unit.

The ongoing shift to biologics in the biopharma sector is likely positive for secular earnings growth for a number of reasons:

• Longer product lives: Product cycles are relatively long in biotech, typically greater than ten years. Given the technical complexities involved, biologics are not easily replicated by generic manufacturers.


• New product areas: In large part because of the growth of biologics, the FDA has approved a significant number of new drugs in recent years─ 27 New Molecular Entities were approved in 2013 and 39 in 2012 contrasted by only 17 in 2002. In terms of new product areas, immunotherapy is a new way of treating cancer, which involves turning the body’s immune system against the cancer cells. Some analysts see immunotherapy doing to cancer what new therapies did to HIV i.e., dramatically transforming life expectancies.

• A better pricing environment: Although biotech products are typically very expensive, the level of innovation being delivered by many new biotech therapies likely justifies the cost. That said, as discussed below, the price of biologics is a growing issue for buyers of drugs, including employers and governments, as well as for health insurers.

Biopharma from an ESG Perspective: “S” Bristol-Myers’ Yervoy drug has shown very promising results for the treatment of melanoma. However, the price of Yervoy is $30,000 per injection, which translates to a cost of $120,000 for a course of therapy. Similarly, Gilead Science’s Sovaldi drug for hepatitis C is $84,000 per 12-week treatment course. By the estimates of IMS Health, biologics will account for 20% of total drugs by 2017, suggesting that biologic pricing will become an increasingly important issue. At some point, insurance companies and governments worldwide will not be able to handle these costs. In fact, some PBMs and corporations are already removing certain biologics from formularies in an attempt to control costs. Some observers speculate that health insurance will eventually evolve into a two-tier system: a “cheap” option that provides access to small molecule drugs and an “expensive” option that provides access to large molecule drugs.

Biopharma Valuation and Accounting Issues When accountants think of the pharmaceuticals industry, two things typically come to mind: intangibles and taxes. Intangibles are an issue because a large part of the valuation of pharmaceutical companies is derived from their products and pipeline. But this highlights one shortcoming with U.S. GAAP balance sheets – they are based on historical cost. Therefore, the intangibles that companies create are not recorded on the balance sheet (except in limited circumstances, such as with software.) There have been proposals through the years to require all intangibles to be recorded and, also, for the amounts to be updated periodically. The concerns about such requirements (including possible biases by companies in valuations and, also, having gains and losses from changes in valuation flow through earnings) have outweighed the benefits. Many investors would be in favor of having better disclosure about intangibles, so they can assess the potential risks and rewards on their own. So, any intangibles that do show up on balance sheets are the result of acquisitions. Let’s take a quick refresher on acquisition accounting. The fair value of the acquisition price is allocated to the assets and liabilities. First tangible assets – things we can touch – are recorded at fair value. Then we move to identifiable assets – things we can’t touch but can name. Accountants break these down into two categories.

• First is finite-lived intangibles: those that have a determinable life; they are amortized over that life.

• Next come indefinite-lived intangibles – those whose life extends beyond the foreseeable future. These are not amortized until their life becomes determinate. Included in this category is typically regarded as the largest intangible in pharmaceutical acquisitions – in process research and development (IPR&D). In a quick review of


pharmaceutical filings, it is easy to find acquisitions where 75% or more of the purchase price was allocated to IPR&D.

After the purchase price is allocated to tangible and identifiable intangible assets, any remaining consideration is recorded as goodwill (or potentially negative goodwill.) After some valuation abuses in the past, the American Institute of Certified Public Accountants issued guidance on valuing IPR&D. That guidance was recently updated in a December 2013 guide, “Assets to Be Used in Research and Development Activities.” There are three basic valuation techniques for IPR&D:

• The first is the cost method, which looks to the cost to replace an asset. Given the variable nature of the cost-to-benefit ratio for IPR&D, this metric is rarely used.

• Second is a market approach, where recent transactions of similar assets are analyzed. Because of the unique nature of IPR&D and infrequency of transactions, again, this factor is rarely used.

• Most valuations of IPR&D are calculated using an income approach. Under the income approach, the cash flows from the asset – both inflows (revenues) and outflows (expenses) – are analyzed, usually under different scenarios with probabilities assigned. They are then discounted using a risk-adjusted discount rate. Again, looking at a small sample of pharmaceutical financial reports, disclosed discount rates have been in the 12% to 17.5% range.

Under U.S. GAAP, costs to complete the research are expensed as research and development expense. The recorded asset is tested at least annually for potential impairment, and written down, if necessary. If and when a successful product is produced, the asset now has a finite life, and any recorded amount is amortized.

So recorded IPR&D has some serious limitations: it only includes acquired IPR&D, and is not revalued (except downward if impaired.) But it does give us some insight into the amount of value in the pharmaceutical or biopharmaceutical industries that is related to the pipeline. Turning now to taxes, there are at least three issues that have to be considered when analyzing the Pharmaceutical industry.

• In the March Journal of Sustainable Finance & Banking we wrote about the R&D credit, which expired at the end of 2013. Although it is highly likely to be extended retroactively, U.S. GAAP does not allow any anticipated earnings to be included in first quarter earnings. This will continue a multi-year distortion of first quarter earnings for impacted companies.

• In addition, concerns about taxation of foreign income continues to be a hot topic in Washington. There are numerous proposals to reform the U.S. international tax system – focusing on the U.S. taxation of non-U.S. subsidiaries. And closely related to this are concerns about use and abuse of tax havens by U.S. companies.

• The third tax issue comes not from Washington, but from Norwalk, Conn., where the FASB headquarters are located. There are occasional calls to amend an exception from U.S. GAAP’s treatment of the earnings of non-U.S. subsidiaries. Currently if those earnings are deemed to be indefinitely reinvested overseas, the U.S. parent does not accrue deferred taxes on any potential repatriation. If this exception is removed, earnings of multinational companies would decrease due to higher tax accruals.

Biopharma from an ESG Perspective: “G” Financial accounting (as just discussed) has been in use for around 150 years. But “ESG” accounting is


relatively new, having come into focus in the last 20 years or so. Reflecting this, Novo Nordisk is one of the few big cap pharma companies to employ a full-time ESG Data Manager, Cora Olsen. At the same time that some observers complain of “reporting fatigue” (i.e., companies spending a lot of time and effort to fill out ESG questionnaires) it seems that there is still a lot of work to be done, especially in the area of data quality. Reflecting the tremendous variability in terms of how companies report CO2 emissions, water usage etc., the Sustainable Accounting Standards Board (SASB) is working on the issue of ESG data standards. Then, too, ESG data is not of much use if they are gathered but not used by managements to address corporate governance issues. Corporations that actively incorporate ESG data in their decision making process, such as Novo Nordisk, believe it gives them a competitive advantage over other companies that don’t have a similar focus. From the perspective of investors, it seems that ESG data are not widely used by the mainstream

investment community. That said, there is a case to be made that investment managers focused on sustainable investing have consistently performed relatively well. In fact, some investors believe that their focus on ESG data gives them an edge over other investors that are solely focused on traditional financial accounting metrics. To be sure, not all investors agree on the “right” ESG metrics but many investors who choose to focus on one or two metrics believe that these are “value-added” data points in the investment decision process.

Michael Geraghty is Cornerstone Capital’s Global Markets Strategist. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.

For more on tangible and intangible assets, see Janet Pegg’s article in the Cornerstone Journal of Sustainable Finance & Banking, October 2013 “Things We Can Kick… And Things Which Are Precious.” For more on R&D tax credit, see Janet Pegg’s article in the March edition of the Cornerstone Journal of Sustainable Finance & Banking “Lack of R&D Tax Credit Will Complicate First Quarter Earnings.”


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