Presentation Title

Broken Models? Economics and Ecosystem ServicesA collaborative research project betweenRick Stathers Head of Responsible InvestmentSchrodersMay 2013Neil BrownInvestment ManagerAlliance Trust InvestmentAshim PaunESG Investment AnalystNewton Investment Management ** Remove from final presentation **0Background to Responsible InvestmentIntegration of ESGBroken ModelsContents1Broken Models| May 2013* ** Remove from final presentation **1A Brief History of ESG2Broken Models| May 20131600s1920s1950s and 1960s1960s1970s1970s and 1980s2000s2006Quakers:

Methodist Church:Shariah:Baptist Church, SwedenPAX World Fund (US)Europe and USEuropeUN Principles of Responsible InvestmentWar or slave tradeGambling or alcohol

Alcohol, gambling, tobacco, defense, financials, pornographyFirst public fund excluding alcohol, tobacco, weaponsExcluded stocks related to Vietnam warAnti-apartheid screensNational legislation in various countries implementing SRIKey driver ESG arrivesTraditional exclusionary SRI approachESG appearsESG embraced ** Remove from final presentation **SRI is not a new concept - In the 17th Century Quakers would not invest in anything that was connected to the slave trade or war In the 1920s the Methodist church avoided investments in stocks involved in gambling or alcohol As colonialism ended in the Islamic world, Islamic finance developed which excluded stocks related to alcohol, tobacco, gambling, defence/weapons, park related products, financial institutions and pornography. The Baptist church in Sweden launched the first publicly available fund in the 60s excluding alcohol, tobacco and weapons. In the 70s the PAX world fund was launched in America which excluded any stocks with involvement in the Vietnam war. As the anti-apartheid movement spread during the late 70s and early 80s it lead to the launch of numerous funds excluding any companies operating in South Africa. The UK had its first retail pension fund launched in 1984 - The FIS Stewardship fund. At the time City observers stated that the SRI market would not exceed 2m 2000 saw the amendments to the UK Pensions legislation requiring them to state how SEE was taken into account, and similar legislation was adopted across Europe (as shown overleaf)However the biggest driver at the moment appears to be from the UNPRI initiative

2Launched in 2006Set of 6 Principles covering:Integration of ESG analysis intoinvestment process(e.g. idea generation, portfolio construction)Promoting ESG disclosure amongst entities invested inReporting on progress towards implementing these principles(see appendix for full list of principles and Schroders compliance with them)US$31tr AUM signed up1,111 signatories (Schroders signed in 2007)Drivers behind RI Client Demand UN Principles of Responsible Investment3Broken Models | May 2013Source: Annual Report of the PRI initiative 2012, UNPRI ** Remove from final presentation **3Impacts of different RI strategies on portfolio diversification4Broken Models| May 2013Source: Socially Responsible Investment, A Global Revolution by Russell Sparks, Schroders 2008ScreeningThematic InvestmentsESG Integration&EngagementHighHighLowDegree of ESG IntegrationDegree of portfolio diversification ** Remove from final presentation **4IntegrationLinking ESG issues to valuation5Broken Models | May 2013Source: Annual Report of the PRI initiative 2012, UNPRIMATERIAL ESG ISSUES

Demand for efficient products SALES

Taxes reduce demand SALES

Droughts raise costs of raw materials COGS

Marketing spend needed to re brand SG&A

New technology needed to compete R&D

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Integrating ESG analysis into equity analysis The 5 stages of stock review6Broken Models| May 2013 ** Remove from final presentation **6Ecosystem service questions for economistsHow do you incorporate a consideration of ecosystem services into your economic models?What impact do you estimate the current change in these ecosystem services is having on global economic performance, in terms of output, inflation and other metrics?If you incorporate ecosystem services into your models, what is the valuation methodology you use where there is currently no market value for specific environmental goods or services?If you have incorporated a consideration of the change in ecosystem services into your models, what are the results for your short and long-term (40 year) models?What are your expectations of the economic response to ecosystem service changes in terms of market volatility, policy shifts and technological innovation?If you have not addressed these factors in your models, please could you explain why not?

7Broken Models| May 2013 ** Remove from final presentation **7Ecosystem service- economist surveyResponses 2011this subject is too big for us to even contemplate

economic growth in the emerging markets will be inflationary on commodity prices, but externalities are typically underweighted

these factors are already integrated into our outlook

8Broken Models| May 2013 ** Remove from final presentation **8Ecosystem service economist surveyResponses 2012All acknowledged ecosystem service change would have economic impactReluctance to put price on ecosystem servicesPreferred to focus on adaptation costs than mitigationAll acknowledged limitations of GDPNeed for more data Client demands are generally too short term9Broken Models| May 2013 ** Remove from final presentation **9