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Monday, 3 September: 10.30 — 17.00

FORUM

SUSTAINABILITY
A concept for increasing enterprise value

Andreas Knözer
Head Sustainable Investment, Bank Sarasin & Co.

The principle of sustainability is increasingly becoming an essential part of corporate strategy, while environmentally and socially responsible investments are already a rapidly expanding market segment offering attractive returns.

These two trends are interlinked. Companies are now having to respond to consumers with a much higher level of awareness and deal with more demanding environmental and social challenges and crises. They also have to accommodate investors who are becoming far less prepared to accept risks without adequate rewards, and are therefore tending to invest far more in companies that are soundly managed according to sustainable principles. This is particularly true of institutional investors such as pension funds, who have large sums of money to invest.

Modern methods of sustainability analysis, such as those developed by Bank Sarasin, show that reasonable and economically justified environmental and social criteria can be applied that are also capable of highlighting areas where companies need to take appropriate action.

Both scientific research and investment returns achieved in practice increasingly demonstrate that sustainable business strategies produce tangible financial benefits

Bank Sarasin & Co.

• founded in 1841
• independent Swiss Private Bank specialized in investment advisory and asset management
• 10 partners with unlimited personal liability
• 800 employees
• main office in Basel
• offices in Zurich, Geneva, Lugano and London
• Euro 1.7 billion (total assets about Euro 27 billion) are managed according to sustainability criteria

Organization Chart Bank Sarasin & Co.

Contents

1. Sarasin Sustainable Investment
2. Sustainablity Concepts
3. Research and Investment Process
4. Product Concepts
5. Products & Performance
6. Benefits of Sustainable Investments

Sarasin Sustainable Investment

Market Leader in Sustainability

Market leader in terms of quality

• Dedicated Sustainability Research and Asset Management since 1989
• 14 international and interdisciplinary professionals with an average of 7 years’ experience
• Sophisticated and competent research & assessment process

Market leader in terms of quantity

• _1.7 billion (of total group assets of about _27 billion) are managed according to sustainability criteria (market leader in continental Europe)
• Biggest provider of sustainable products in Continental Europe in both absolute and relative terms
• Market Leader in Sustainability

Innovative Products - successful realization

• 1994 launch of «OekoSar Portfolio», the first eco-efficent fund worldwide
• 1997 co-manager of ethos pension foundation, in cooperation with Lombard Odier
• 1998 fund manager of «OekoVision», the equity fund of Ükobank-Versiko with very strict criteria
• 1999 launch of «ValueSar», a purely sustainability fund for international equities
• 2000 launch of «New Energies Invest» (private equity for renewable energies)
• 2001 launch of Sarasin FairInvest Universale Fund (balanced, Euro based)

Sarasin Institutional Banking – Organizational Chart

Sarasin Sustainable Investment: Interdisciplinary research team

2. Sustainability Concepts

Our understanding of sustainability

“Sustainable development means a development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

- Brundtland, 1987

Concepts of SRI

3. Research & Investment Process

Research and Investment Process- Overview
 

IV Portfolio Construction and Investment Procedure V Quality Control IV Sustainability Assessment		I Information Gathering II Prescreening (exclusion critieria) III Financial Analysis
	Headquarters of Bank of Sarasin & Co.

I. Information gathering

• General company information
• Monitoring of several hundreds of newspapers through news services
• Specialized electronic media and internet
• Research reports (financial and non-financial)
• Company visits and management contacts
• Information from specialized Swiss and foreign research institutions, NGO’s
• (Questionnaire with a total of 140 relevant industry-specific questions)

II. Pre-Screening

Ecological/social exclusion criteria

• Generally according to clients’ preferences
• Sarasin standard products:
• Production of nuclear energy, armaments, automobiles,chlorine and agrochemicals, pornography, tobacco.Genetic technology is decided upon on a case to casebasis

Financial exclusion criteria

• Liquidity (limited tradability)

III. Financial Analysis

Company analysis

• Quantitative: P/E (absolute and relative to the market and sector), earnings growth, PEG, CFPS, dividend yield, enterprise value/sales, margins, profitability ratios, balance sheet ratios, interest coverage, free cash flow
• Qualitative rating: Management, product range, earnings visibility, acceptance in the market, sentiment, momentum

Economic scenarios

• Definition of most likely economic scenario
• Forecasting horizon 3 and 12 months
• GDP, inflation, interest rates, currencies, equity markets

IV. Sustainability Assessment: principle
 

“relative” sustainability of a company within an industry Compared to its peers («Best-in-Class» )  How well does a company manage its environmental and social risks?

“eabsolute“ sustainability of the industry and its technologies Contribution to environmental & social risks  Compared to other industry sectors

Absolute Sustainability Assessment

• The absolute environmental impact of an industry sector is assessed according to the WBCSD-criteria: energy efficiency, material efficiency, toxicity, etc.
  e.g. Airlines have a high energy consumption, therefore even an efficient airline gets a low absolute rating.
  
• The absolute social relevance of an industry sector is assessed according to the stakeholder approach: clients, suppliers, employees, investors, etc.
  e.g. The tobacco and alcohol industries endanger the health of the consumers often at the expense of the general public. This leads to low absolute rating of the whole sector.

Example industry rating: Energy
 

Environmental Assessment: Life Cycle Approach

Environmental Assessment Matrix

Targeted accomplishments in % (fictional example)

*Targets of the WBCSD ElementsCriteria*

Social Assessment: Stakeholder Approach
 

Social Assessment Matrix

Targeted accomplishments in % (fictional example)


Example company rating: Unilever

Environmental

• mature environmental management systems with tough corporate targets
• focuses on three areas where it can make a real difference: fish, water and agriculture
• committed to buy fish only from sustainable stocks by 2005 and cooperate with suppliers and NGO’s (Marine Stewardship Council)

Social

• Various social and environmental projects in different regions of the world are supported with 1.5% of its world wide earnings.
• active in developing an understanding the need for responsible and ethical corporate behaviour

Valuebuilder: Example

Sustainable bond research

It is also desirable to manage funds sustainably within the bond market.

• Government bonds -> Sustainable country analysis
• Bonds of supranational institutions -> Sustainable institutional analysis
• Corporate bonds -> Sustainable company analysis

Sustainable country analysis

The management of natural and social resources as well as its stability affects the sustainable rating of a country

• Analysis of the quality of management of ecological, social and human resources
• Assessment of political and institutional structures
• Structure and efficient use of resources
• Absolute level of resources consumption

Example: country rating USA

V. Quality Control

4. Product Concepts

VI. Portfolio construction

Absolute «pure» Sustainability Portfolio

Investment style for a fully sustainable portfolio

• Active sustainable investment style (40 – 60 titles)
• Bottom up > top down
• Industry- and asset allocation influenced by Sustainability rating
• Asset allocation solely out of the defined accepted investment universe
• Title weithting according to financial attractivity (sector, company)
• Monthly performance control with benchmark comparison
• Findings of Sarasin‰es sector- and macro research as well as of the investment committees in Basel and London are included
• Implementation of the decisions taken within 3 days (depending on volumina)
• Tactical freedom of the portfolio manager = +/- 1%-point

Risk control

• Daily monitoring
• Monthly performance review based on SPPS data (Swiss Performance Presentation Standards) incl. analysis of difference to the composite
• Regular check of compliance with requirements

Research-Universe – Country Overview

Research-Universe – Sector- & Country Overview
 

	Number of titles – All titles
Sectors	Europe Eurozone	Europe ex Euro	America	Asia	Total
Data networks&process.	0	0	7	0	7
Construction	5	5	1	0	11
Healthcare	6	8	3	0	17
Telecommunication	9	4	5	2	20
Material	3	7	5	0	15
Food & beverage	7	7	14	2	30
Pharma	7	6	9	0	22
Energy	18	4	17	0	39
Utilities	8	11	10	2	31
Electrical eng. & electronics	9	8	7	6	30
Chemicals	15	9	10	1	35
Durable goods	11	8	15	9	43
Machinery&engineering	16	16	6	3	41
Business services	17	13	17	4	51
Finance	33	17	12	4	66
Consumer goods	14	15	21	2	52
Tourism & Leisure	1	3	3	1	8
Total	179	141	162	36	518

Limitations due to exclusion criteria

Exclusion criteria does not penalise

5. Products and Performance

Broad Product Range

OekoSar Portfolio - Characteristics

• Globally balanced:(End of July 2001: 44.3% Equities, 47.0% Bonds, 8.7% Cash)
• Ecological analysis is based on the life cycle concept (eco-efficiency)
• Social analysis follows stakeholder approach and judges the social sustainability
• Strictly applied negative criteria
• Interdisciplinary Advisory Board of five
• One of the leading Continental European funds, with assets of more than EUR 210m (as of 31 July 2001)

OekoSar Portfolio - Performance  
 

Risk/return profile in Euro

Since inception (March 1994 – July 2001) 67.91% Performance 1999 15.07% Performance 2000 19.18% Performance since 01.01.2001 -6.17% Return p.a. 7.24% Risk p.a. 7.48%

OekoSar relative to Peers

... Relative to balanced eco-funds
 

	31.12.99 – 31.12.00		31.12.97 – 31.12.00		31.12.95 – 31.12.00
	Total Return	Sharpe Ratio	Total Return	Sharpe Ratio	Total Return	Sharpe Ratio
OekoSar Portfolio	19.18	1.79	39.36	0.88	87.11	1.17
Prime Value	3.84	0.12	39.74	1.11	62.14	0.98
Julius Baer MI-Fonds Eco A	-2.07	-.59	--	--	--	--

... Relative to traditional balanced funds (global, neutral AA)
 

	31.12.99 – 31.12.00		31.12.97 – 31.12.00		31.12.95 – 31.12.00
	Total Return	Sharpe Ratio	Total Return	Sharpe Ratio	Total Return	Sharpe Ratio
OekoSar Portfolio	No. 1 of 79	No. 1 of 79	No. 6 of 49	No. 3 of 49	No. 9 of 28	No. 2 of 28
Average	-1.26	-0.42	29.1	0.57	78.14	0.89

Risk free rate: 3%
Source: Micropal

ValueSar Equity - Characteristics

• Only equities, investing globally

  • 2/3 in ecologically and socially sustainable blue chips
  • 1/3 in mid-sized sustainable growth companies
• Focus on promising future sectors and technologies
• Sustainability criteria according to OekoSar Portfolio
• Asset allocation offers conservative investors an ideal risk/return ratio
• Benchmark: 50% MSCI Europe, 50% MSCI World ex. Europe
• Assets: about EUR 86m (as of 31 July 2001)

ValueSar Equity - Performance
 

Performance Fund in Euro

Since inception (June 1999 - July 2001) 24.59% Performance 2000 18.15% Performance since 1.1.2001 -10.51% Return p.a 10.68% Volatility 16.27%

Performance Benchmark

Since inception 7.37% 2000 -6.76% Since 1.1.2001 -7.57% Return p.a 3.34% Volatility 16.59%

Active Asset Management pays off(since inception of Dow Jones Sustainability Group Index)

* 50% MSCI World ex Europe and 50% MSCI Europe

6. Benefits of Sustainable Investments

Sustainable Companies Outperform

Performance of European SRI funds
 

Funds	Performance as per 30.06.2001 in EURO a)
Blue Chip Funds international	-1 Year	-2 Years	-3 Years
Sarasin ValueSar Equity	-0.81%	30.32
UBS-Eco-Performance	-5.67%	23.68%	39.07%
Swissca Green Invest	-11.18%	9.64%
CS Global Sustainability	-13.99%	2.14%	4.23%
SAM Sustainability-Index Fonds b)	-15.76%
MSCI Welt Aktien Index	-9.75%	8.93%	32.38%
Mid / Small Cap Funds international (with large content of – classical – eco-stocks)
ÖkoVision c)	12.23%	39.01%	34.60%
Activest Lux Eco-Tech	0.93%	33.40%	33.47%
SEB Invest Ökolux	-6.63%	21.34%	20.81%
KD Fonds Üko-Invest	-13.80%	36.60%	55.09%
Balanced Fund international (with significant bond content)
Sarasin ÖkoSar Portfolio	1.02%	22.54%	24.10%
Prime Value	-0.45%	13.67%	25.47%
MI-Fonds Eco	-2.00%	5.09%

How sustainable is the food industry?

• Sarasin Study assessed 18 «conventional» food companies and6 organic food producers from US, Europe and Japan
• Two different peer groups with specific environmental and social issues were identified
• The focus lay clearly on the pre-production level (i.e. agriculture), where most environmental and social concerns arise
• A backtracking found « for both groups – that the environmentally and socially most compatible companies strongly outperformed the benchmark (MSCI Food Beverage & Tobacco)
• To meet the ever increasing demands and environmental & social awareness of consumers will prove decisive for the future success of food companies

Food industry: Company ranking

Above average conventional companies are outperforming

Organic food companies are outperforming

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