1Portfolio Risk: Changing Perspectives

www.resourcient.com J. Stephan Dolezalek

2Life is About Making Intelligent Choices

Are you sure these new clean technologies will

float?

Cant those idiots see that their only hope

is onboard these new Tesla

electric lifeboats?

Time is running out you must divest now!

Sure, we might be listing a bit and have taken on some

water, but compared to those fools down there, life up here

on the coal, oil & gas deckchair is good!

I bet everything on biofuels

Trust me, these new yieldco boats

are safe!

Dont worry, our new gas turbines will have us up and running in no time!

Making money is about making them when they arent obvious

3The Conventional Wisdom:We have developed diversification and other business models to minimize risk

such as commodity and currency risk, inflation risk, and other economic factors, but future environmental or resource concerns are neither quantifiable nor should we account for them in our portfolio strategies except under general ESG principles.

The Emergent Wisdom:Resource risks (including, but not limited to climate) are likely to have a broader and

greater influence on portfolio outcomes than many risks we explicitly account for. However, our current portfolio models struggle to properly account for them, our

securities disclosures inadequately address them and liability insurance is unlikely to cover us for our shortcomings.

World leaders are increasingly concerned that a $6 trillion wave ofinvestment into the nexus of oil, gas, and coal since 2007 is based on falseassumptions, leaving companies with an overhang of debt and "strandedassets" that cannot easily be burned under CO2 emission limits.

4Energy is an Ever-Evolving Commodity

0%

25%

50%

75%

100%

1850 1870 1890 1910 1930 1950 1970 1990 2010

Perc

enta

ge o

f U.S

. Ene

rgy

Con

sum

ptio

n

50 years

Wood

Coal

Hydro

OilNatural Gas

Renewables

75% 75%

Sources: EIA, Annual Energy Review: 2008; EIA, Annual Energy Outlook: 2009 with Recovery Act Update

50 years

75%

Nuclear

50 years

?

Global economic growth has been based on upgrading 75% of our energy mix roughly every 50 years. If anything, we are late in making the next change and by resisting it, are likely slowing rather than protecting economic growth.

5Risk # 1: Newer & Cheaper Technologies

Both wind and solar already are, or are rapidly becoming cheaper than all fossil alternatives, even when (as chart below shows) one takes away all wind/solar subsidies, but leaves fossil subsidies in

Dont bet against technology progress: Subsidies may have been very important in driving down the costs of wind and solar technologies (as they were in driving down the cost of coal, oil, gas, nuclear and shale (fracking) technologies, but we have arrived at a point where the continuing cost declines of the newer technologies are simply outpacing the ability of conventional fossil fuels to compete.

6Risk # 2: Increasing Fossil Risk

Europe as leading indicator. Since 2008 the top 20 European utilities (then worth $1.3 trillion) have lost half their value. As major asset holders of conventional power generation, utilities are at enormous risk; to survive they must embrace new distributed generation and service business models. U.S. utilities now struggling with managing same changes.

Coal

Oil

Utilities

Dirtiest of fossil fuels has already taken biggest hit, from cheaper natural gas prices, the higher cost of building newer cleaner plants, the aging infrastructure of current plants and a growing set of policy shifts in the U.S., China and India; more reductions are likely, but much of the portfolio damage is already done.

Oil isnt going away, but extraction costs continue to increase, borrowing has risen rapidly and now, prices have fallen, potentially stranding the most expensive extraction methods, even without political pressures around carbon; all while transport efficiency increases. Think peak demand, not peak oil, and focus holdings on cheapest production.

GasGas remains the natural bridging fuel to renewables because of its ability to be used in the latest power turbines and to compensate for the intermittency of renewables. But, even here, margins are tight and supply forecasts suggest greater price pressures by 2020. In addition, gas is CO2 positive on the burning, but less so on the extraction side.

Notwithstanding these risks, investment in oil & gas is now almost 20% of total U.S. private fixed infrastructure investment its highest ever level.

7Risk # 3: Carbon Bubble Risk

Amount of carbon in proven coal, oil, and gas reserves of fossil-fuel companies, and countries that act like fossil-fuel companies

Maximum temperature increase to avert amplifying carbon cycle feedbacks

Amount of carbon we can emit into the atmosphere by 2050 with some reasonable hope of staying below 2 degrees. Coal is clearly largest loser.

According to IEA two thirds of all declared energy reserves ($28 trillion) become stranded over next 20 years if there is a binding deal limit to C02 levels to 450 particles per million by the year 2100.

2o Celsius

565 Gigatons

2,795 Gigatons

$28 Trillion

Former US Treasury Secretary Hank Paulson: When the credit bubble burst in 2008, the damage was devastating. Were making the same mistake today with climate change. Were staring down a climate bubble that poses enormous risks to both our environment and economy.

8Coal: Already Down, Unlikely to Recover Lower natural gas prices, greater flexibility

of natural gas turbines and aging plants all continue to threaten coal;

Coal economics worsen as usage declines. Even though cleaner coal plants are

possible, they require large new CAPEX investments and are less flexible than gas generation.

Employment in wind and solar sectors has now far outpaced coal employment, so there is far less ongoing political power in coal.

The divestment movement (13 universities, 31 cities, 41 religious institutions and 28 foundations and growing) that started in April 2012, came too late to prevent institutional stock losses, but continues to gain momentum.

European oil companies now banding together to push further coal reductions.

U.S. Coal - Commodity and ETF Valuations

Global Coal ETF Valuations

Coal versus Nat Gas in Power Generation

9Oil: Fundamentals Under Stress

The industry needs $100/barrel oil

Spending on Extraction Keeps Going Up

Capex per Barrel Growing at 10+% CAGR

Source: Douglas-Westwood, Barclays Capital

Rapidly rising supplies due to U.S. shale growth have reset pricing expectations, but not changed underlying fundamentals for most of the business.

Impact of lower prices is still working its way through system, but is likely to drive increased risk perception among lenders.

Likely result is continued volatility among many players and a reassessment of risk and reward under new normal.

Largest impact continues to be on transportation fuels, as oils contribution to power generation is small and shrinking.

IHS: Discoveries of new oil and gas reserves have dropped to their lowest level in at least two decades in 2014.

10

Utilities: Transform or ShrinkFalling wholesale electricity prices match falling equity values for German utilities

European Utilities Under Fire: E.On after reporting a $3.2 billion loss (largest in its history) splits its business in half, selling off its generation,

upstream and global commodities units. In same year, EONs wind and solar business saw a 20% growth. RWE, restructures its business to get out of generation assets and become an energy service company; saying big fossil

asset ownership is no longer attractive. GDF Suez takes $18Bn write-off on conventional generation assets

U.S. utilities are increasingly feeling the same pressures and some stock analysts are already downgrading

11

Transport: Incredibly Inefficient

Productive use

An American road reaches peak throughput only 5% of the time...

...and even then, it is only 10% covered with cars

Energy flow through a combustion engine

86% of fuel never reaches the wheels

0.8% looking for parking

0.5% sitting incongestion

Rolling resistance

Energy used tomove the person

Aerodynamics

Transmission losses

Idling

Engine losses

2.6% driving

The typical American carspends 96% of its time parked

Inertia

Auxilliary power

Deaths per year from transport

More than 33,000 in US$300B annually in cost

>95% Caused by human error

US Transit - 5% of trips, 77% on-time vs 90%+ OECD, frequencies of 20-60 min in most citiesStarved infrastructure: 2.4% of GDP on transportinfrastructure (vs. 5% Europe, 9% China, 5%+ US before 1960) and

12

Growth Impacts of Changing Energy MixActual 2012 Global Energy

Supply by TypeWhat EIA (US) Predicts for 2035 2035 Stranded Asset Scenario

Based on IEA (Global) Analysis

Oil Natural Gas Hydro Nuclear GeoThermal Wind SolarCoal

U.S. Energy Information Administration wind +960%; solar +1,600% in next 20 years. Global International Energy Agency, the Stranded Asset problem and needed

cutbacks in coal, oil and gas, implies growth rates of approximately +4,000% in wind and +4,500% in solar over same 15 years to produce necessary global energy output.

Even the more aggressive IEA numbers only require a 30% compounded growth rate, solar has averaged a 45% CAGR from 2007 to 2015.

Source: BP Energy Survey, Alliance Bernstein

13

Divestiture vs. Portfolio RebalancingShould you have divested from coal, oil and fracking stocks in mid 2011 (when the first calls for divestment were being made) or as late as Jan 2013?

If you held $10 million in each of KOL (the coal ETF), OIL (the US oil ETF), and FRAK (the US Fracking ETF) then and continued to hold it today, those three positions would be worth the following (all as of 5/29/2015):

KOL: $10,000,000 $2,504,000 $5,169,000OIL: $10,000,000 $4,813,000 $5,586,000FRAK: $10,000,000 $8,455,000 $9,569,000

But, if you divested those positions and bought three solar stocks instead (SolarCity (SCTY), SunEdison (SUNE) and SunPower (SPWR) then that $30,000,000 (assuming you bought $10M each of SCTY, SUNE, SPWR) would be worth:Divest: $30,000,000 $82,050,990 $154,600,000

If you split the $30 million four ways and bought the three solar stocks but you also bought Tesla (TSLA), splitting the investment in four, you today would have:Divest: $30,000,000 $118,257,750 $161,625,000

(7/2011 to 5/2015) (starting with $10M on 1/2013 to 5/2015)

14

What is Your Risk Mitigation Strategy?

Stay the Course Business as usual the world cant or wont face environmental and resource

limitation issues, new energy technologies will remain niche and population and GDP growth will drive up conventional energy values

Decrease Direct Exposure to Stranded Assets

Follow the lead of a growing number of funds, in starting with coal and gradually divesting fossil fuel positions

Invest in new publicly traded indices that avoid direct carbon exposure (i.e. Blackrock/NRDC/FTSE ex-Fossil Fuels Index)

Decrease Correlated Risk of Primary and Secondary Exposure

Recognize that much more than just fossil fuel companies face significant exposure and start limiting positions with direct as well as indirect risk

Shareholder activism encourage portfolio companies to themselves take necessary steps to mitigate carbon and resource risks.

Invest in New Energy Infrastructure Follow Buffet, KKR and others in owning wind farms, solar parks and YieldCos

Actively Hedge Risky Assets

Design the appropriate short position to cover a deflating carbon bubble Note: Hank Paulsen and the Bank of England have both recently described the

analogy to the sub-prime risk/opportunity

Intelligently Invest in the Upside AvoidPortfolio Correlation

Increasingly own and hold positions in companies and income yielding instruments that are creating and/or benefiting from the new energy paradigm

Focus a portion of portfolio on low holding costs and on positions that gain most from a rapid shift to lower carbon energy

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Portfolio Risk: Changing PerspectivesLife is About Making Intelligent ChoicesSlide Number 3Energy is an Ever-Evolving CommodityRisk # 1: Newer & Cheaper Technologies Risk # 2: Increasing Fossil RiskRisk # 3: Carbon Bubble RiskCoal: Already Down, Unlikely to RecoverSlide Number 9Utilities: Transform or ShrinkTransport: Incredibly InefficientGrowth Impacts of Changing Energy MixDivestiture vs. Portfolio RebalancingWhat is Your Risk Mitigation Strategy?