Contact: Jon Naimon, CEOLight Green Advisors800 Fifth Avenue, Suite 4100Seattle, WA 98104 USATel (206) 547-8645Fax (206) 505-5815 www.lightgreen.com

This presentation contains proprietary information and is company confidential. Any use or distribution of material, including but not limited to trade names, analyses, and explanatory material contained within requires the written consent of Light Green Advisors.

Integrating Environmental

Considerations Into

Investment Decisions:

Opportunities, Constraints & Case Studies

The National Association of State Auditors, Comptrollers, and Treasurers

NASACT 2008

Chicago, IL

1

Agenda

• LGA Background• The Investment Integration Thesis• Differences between Environmental and Social Issues• Climate Change• Investment Risks and Opportunities• Planning and Fiduciary Issues for Public Funds• Case Studies• Appendix

– Eco Performance Portfolio– Responsible Investor and Environmental Finance articles

3

About Light Green Advisors (LGA)

• Best in class asset management (all economic sectors)• Investment advisory (environmental focus)• Specialist with over 100 years combined experience

4

Best in Class Asset Management

• LGA pioneered investment strategy focused superior environmental management by major companies in every industry sector – Manages funds for institutional investors, e.g. California State Teachers

Retirement System (CALSTRS)– Longest track record of any U.S. firm with true best-of-class approach

• Eco Performance Portfolio™ demonstrates the concept of environmental alpha:

• Eco Performance Portfolio™ outperformed its benchmark, the S&P 500, by almost 6% in 2008

• 1.5% per year annualized performance advantage relative to S&P 500 since inception in 2000

• No other asset manager we are aware of offers a U.S. environmental sustainability strategy that invests in every sector

5

Investment Advisory and Consulting Services

• LGA’s principals managed development of two specialized environmental research services

• IRRC – now part of Risk Metrics Group• Innovest Strategic Value Advisors

• Advised Treasurer and funds involved in California Green Wave Initiative

• LGA research cited

• Advised DLC/PPI on market-oriented approach to climate change• LGA paper published

• Advised Sun Edison, a top US distributed solar company

6

The Integration Investment Thesis

• The tension between rising global demand for goods and rising environmental standards (corporate, governments, and consumers) generates opportunities

– Companies that are able to integrate environmental opportunities and constraints into their business models have a source of competitive advantage

• Diversified portfolios of companies exemplifying superior environmental management will outperform industry peers

– Environmental issues impact the entire economy - not just one ‘clean’ sector– Successful application of clean technologies confers a competitive advantage – Eco-efficiency of LGA portfolio companies contributes to higher returns – LGA track record suggests active management adds value in the U.S.

• Institutions that say companies should integrate environmental concerns into their businesses should be able to integrate E-concerns into their investments

7

Recent Developments

• CERES, INCR, CEG, CDP, UN PRI coalitions – Multiple opportunities to register concerns regarding public

policy, corporate policy and corporate investments– Mature industry provides proxy voting advice and software– Voting proxies is a common first step for public funds

• Four state funds are moving ahead with investing– CALPERS, CALSTRS, Pennsylvania, New York, & others – Consulting firms and other confirm that integration into asset

management is the future– Cutting-edge for traditional financial service industry players

8

Differences between Environmental and Social Issues

• Superficial similarities between environmental and social issues– Headline risks common to both– For cynics, the watermelon analogy: “outside it is green, inside it is red”

• Significant differences– Broader agreement about threats from environmental problems – Lack of agreement re: alcohol, tobacco, defense, birth control, media

content

• Multiple opportunities to generate return– Stock Portfolios– Fixed income– Private equity– Commodities– Real estate– Alternatives

• Positive vs. negative approach

9

Climate Change: Key Indicators for Public Funds

• Major regulatory initiatives in multiple markets– 30 states, U.S. EPA, U.S. DOE, 100 countries, EU ETS– Major companies have plans in place to leverage opportunities– Leading investors are gearing up to take advantage of new markets

• Creation of new regulatory markets – Carbon, renewable energy credits, ethanol, etc– Carbon market now larger than the size of the U.S. wheat market– Companies competing to “green” their offerings

• Combination of civic, corporate, and investor interest are driving the creation of a new market dynamic impacting multiple sectors

10

Investment risks

• Lessons from history– Environmental regulations have created new markets but…

– Boom and bust cycles of prior waves of environmental regulation and innovation

– Internet, collateralized mortgage, and perhaps credit default swap ‘bubbles’ show innovations do not always trend upwards

– Winners can be “tortoises” as well as the IPO “hares”

• “This time is different”– Whenever you hear it, remember that risk needs to be managed

• Special issues for larger funds– Potential impact on trade volume and pricing

– Research examining South Africa divestment impacts suggests higher risks resulted from negative screening

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Investment Opportunities by Asset Class

• Equities– Sector, Thematic, SRI, and Best of class funds

• Debt– Senior, convertible, junk, project finance, venture

• Private equity– Venture, mezzanine, project finance, and buy-out

• Real Estate– New development and existing portfolios

• Alternatives– Hedge funds, carbon funds, OTC exotics

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• Establishing goals– Aligning interests

• Defining responsibilities– Working with existing resources– Identifying specialist resources

• Organizing the information– Determining where it makes sense to start– Evolution not revolution

• Defining objectives– Developing an execution plan

• Implementation– Monitoring

• Evaluation– Public reporting

Planning Issues for Public Funds and Trustees

13

• Prohibition of imposing personal goals that are inconsistent with the goals of the fund– Negative screening is highly subjective and thus runs close to the

personal goals prohibition– Some DC plans allow individuals to select screened funds– Religious fund trustees generally exempt

• Financial responsibility to fund – Long term best interest of fund beneficiaries– Maximization of investment returns– Minimization of risk

• Evolution of standards over time– What is financially important to risk and return changes with market

views– For example, corporate governance was viewed as irrelevant in 1980s,

and is now a source of return for several funds

Fiduciary Constraints for Public Fund Trustees

14

Case Study: CALSTRS

• Largest teachers pension plan in US; #3 by AUM• Independent governance, not part of CALPERS• Longtime leader in responsible investing• 2004 Green Wave Initiative adopted by board

– Trustees built policy guidance– Investment staff built investment case– Investment objectives include adding financial value

• Allocations to public equity, venture, and real estate– Individual managers responsible for portfolio construction

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Case Study: Pennsylvania

• 2006 Initiative

• Energy and Energy Efficiency Focus

• Multiyear program intended to :– Maximize in-state benefits from environmental progress – Minimize adverse impact of energy use

• Categories include :– Debt– Public Equity– Private Equity – Emerging Managers– Real Estate Energy Efficiency

• Implementation is beginning now

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What should you be discussing with your consultants?

• It’s no secret that specific investment strategies are typically reviewed by consultants– California is often a bit different since they have greater staff resources

• What type of staff expertise, if any, do they have in environmental investment issues?– Do they equate environmental issues with SRI?– Climate change with venture capital?

• Can they help your board answer questions like how climate change may impact returns in various asset classes over the working life and retirement of a young beneficiary?

• Do they have staff with expertise in private equity? Public equity? Alternatives?

• Could they distinguish between a manager that integrates E-considerations into asset management and a traditional manager that simply uses an SRI black list?

• Is the information in their databases is relevant to your requests?

• Do they know what additional resources are available? Can they identify gaps?

• Is the staff consultant the best suited to help the board with policy issues such as new asset allocations?

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Summary: The Time to Begin is Now

• California, Pennsylvania, New York and others have demonstrated that US investors are now involved in sustainable investing in the USA

• Best of class strategies provide a means for investors to benefit from corporate progress– Beneficiaries of climate change include major companies in S&P 500 as well as smaller “pure plays”– Alternative energy is a substantially higher risk investment alternative (Kennetech, Nordex, etc)

• Theories are not new– LGA principals involved in leading EU best-in-class approach in Norway, Sweden, and Switzerland– Risk management and return-driven orientation is different than old-fashioned religious SRI

• Integration into portfolio management is the cutting edge– Separation of ESG research from portfolio management is still the status quo in industry– Mercer and others predict integration into asset management will be required more in next 3 years

• The US promise is bright for financially sound, environmentally responsible strategies– There is evidence for alpha generation that can be exploited further– LGA performance has been best in markets with higher commodity and resource prices– Commodity demand growth expected by many to continue in emerging markets such as China

• Public funds in Europe, Asia and the Middle East are defining environmental allocations

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Appendix

• About the LGA Eco Performance Portfolio™• Additional investor resources• Responsible Investor article• Environmental Finance article

19

LGA People

• John Cusack, Managing Director, Sustainability. Formerly CEO Innovest, Chief Technology Officer, Combustion Engineering, Civil Engineering, Manhattan College and MBA Finance, New York University

• Michael DeFelice, Managing Director, Real Estate. Formerly Managing Director, Real Estate, Deutsch Bank, Engineering, Dartmouth, and Law, University of Chicago

• Jack Jolly, Senior Advisor, Formerly Partner, Quellos Group (now part of Blackrock) and former VP, Treasury, Microsoft. BA Accounting, University of Washington

• Tom Lord, Managing Director, Commodities. Formerly VP, Gas Trading, BP, Responsible for gas trading at Transco. BA Civil Engineering and Government, Cornell, and Law, University of Denver

• Chris Murphy, Managing Director, Public Policy. Formerly Economic and Trade Advisor, Government of Canada, and Director, Corporate Conservation Council. Law, University of San Diego, and MBA, Notre Dame

• Jon Naimon, Managing Director, Investments, Formerly Visiting Professor, Carnegie Mellon, Director, IRRC Environmental Service (now part of Risk Metrics), Economic and Technology Analyst, ICF, ABB, House Energy & Power Committee. Biology, MIT and Environmental Management, University of North Carolina

20

Investment Thesis - Environment & Share Value

Efficiency

• Lower environmental costs • More efficient resource utilization • Responsible management• Consistent earnings

Risk

• Litigation risk• Regulatory risk• Reputation risk• Accounting irregularities

Corporate environmental leadership conserves capital and improves cash flow, as well as reducing litigation, regulatory, and reputation risk

21

Alternate Approaches to Environmental Investing

• Socially Responsible Investing– Screen out companies with visible environmental or social liabilities – Give “restriction lists” to traditional asset managers– Rewards corporate philanthropy and corporate social responsibility statements– E.g., Domini, Citizens, Calvert – Lower exposure to natural resource sector

• Alternative Energy and “Cleantech” Funds– Sector funds (Alternative energy focus, small cap growth orientation)– Government subsidies essential to profitability in several segments (biofuels)– E.g., Wilderhill Powershares ETF, New Alternatives Fund– Riskier investment profile, lower impact on

The LGA Best in Class or Eco-Efficiency Approach• Invest in corporate eco - leaders in all sectors of the economy• Focus on environmental performance rather than PR greenwash• Exploit material information on comparative performance trends (e.g.,

carbon emissions) as a financial factor• Maintain exposure to all sectors, benefit from progress in all sectors

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Corporate expenses associated U.S. environmental statutes Frequency and cost of corporate chemical and oil spillsToxic chemical releases to the environment and associated expensesSuperfund and hazardous waste cleanup liabilitiesCorporate waste generation and trends in waste reduction

LGA integrates many metrics for corporate environmental performance into an E-score.

23

LGA Investment Process

Determine material

financial and environmental

factors by industry sector

Extract financial and

environ-mental data

Research inputs:- Compustat- S&P, Multex- Risk Metrics, Trucost- Govt. agencies - Company interviews

Integrate information into LGA Eco-Metrics

model to develop firm-

specific rankings for

each industry

For top firms, assess

litigation, management programs and sustainability

challenges

Combine qualitative

assessment w/ Eco-Metrics rankings to

select securities for

portfolio

Constrain industry

weights to match S&P

500 benchmark

Continually monitor

portfolio and re-balance as

necessary

Identify top 50% of firms

in each industry

based on Eco-Metrics

comparison

LGA Value-Added Step

Key

24

Eco Performance Portfolio Since Inception Vs. S&P 500 , Russell 1000, and KLD 400 Benchmarks(

Annualized Return Comparison: 12/31/1999 - 12/31/2007

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

1

An

nu

aliz

ed R

etu

rn %

(g

ross

bas

is)

Eco PerformancePortfolio™

S&P 500

KLD DS 400Social Index

25

Eco Performance Portfolio™ and Traditional Benchmarks(12/31/1999 - 6/30/2008)

Month Quarter Year Latest 1 Latest 3 Latest 5 Inception

To Date To Date To Date Year Year Year To Date

--------- --------- --------- --------- --------- --------- ---------

Eco Performance Portfolio™ composite -5.09 2.12 -6.47 -5.02 6.48 7.98 1.54

S&P 500 adjusted for dividends -8.43 -2.73 -11.92 -13.12 4.41 7.57 0.05

Russell 1000 -8.31 -1.89 -11.2 -12.36 4.81 8.22 0.63

KLD 400 -8.99 -3.83 -12.88 -15.12 2.5 5.81 -1.36

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Financial Performance: Attribution

• Positive returns from stock selection in energy-intensive sectors– Utilities– Industrials– Energy– Health Care– Consumer Staples– Financial sector was the greatest source of negative returns

• Attribution analysis results are consistent with LGA eco-efficiency investment thesis:– Eco and energy efficiency as assessed by LGA on industry and size

neutral basis is relevant to equity returns at portfolio level

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LGA Value Add

• Excess return from stock selection primarily

• Reduced environmental risk; more important going forward

• Corporate environmental progress drives model

• Positive incentive for companies

• Channeling funds to LGA demonstrates that the investor values integration of sustainability into portfolio management.

28

Summary

• LGA Eco Performance Portfolio has proven that best-of-class investing can work in the US

– Investors have a proven institutional quality environmental specialist partner

• Best of class strategies provide a means for investors to financially benefit from corporate progress

– Beneficiaries of climate change include major companies as well as smaller “pure plays”– Alternative energy is a substantially higher risk investment alternative (Kennetech, Nordex, etc)

• Theories are not new– LGA principals involved in initiating best-in-class investing in Norway, Switzerland in 1990s– Capacity to distinguish signal from noise is critical

• Integration into portfolio management is the cutting edge– Separation of ESG research from portfolio management is still the status quo in industry– Mercer and others predict integration into asset management will be required more in next 3 years

• LGA 7 year live track record distinguishes it from other managers seeking to market traditional or SRI investment platforms with new green clothing

– Outperforming both S&P 500 and KLD DS 400 benchmarks illustrates that LGA is different style than SRI

• The US promise is bright for financially sound, environmentally responsible strategies– There is evidence for alpha generation that can be exploited further– LGA eco-efficiency investment rationale supported by strong commodity pricing– Commodity demand growth expected by many to continue in emerging markets like China

29

Additional Resources for Sustainable Investing

• Enhanced Analytics Initiative– Company specific thematic research from EU brokerage firms– Participation by several asset owners– www.enhancedanalytics.com

• Innovest– Corporate rating of extra-financial factors, climate risk assessments– www.innovestgroup.com

• Trucost– Estimates of greenhouse gas emissions and associated costs– Carbon footprinting and greenhouse gas emission estimates for funds and corporations

www.trucost.com

• Risk Metrics Group– Tools for managing multiple types of market risk– Information on social and environmental risks from IRRC and ISS– www.riskmetrics.com