Sustainable Thematic Funds and Long-Term Investment Returns

TBLI Conference Europe 2008TBLI Conference Europe 2008

Steven Falci, CFASteven Falci, CFA

Vice President Sustainable InvestmentKBC Asset Management Limited

Amsterdam Nov 13th & 14th 2008

2

Environmental Issues on the Agenda

3

Sustainable Thematic Funds

AgribusinessRenewable Energy

Water Climate Change

4

Global Mega Trends- Sustainability Imperatives

• Population Growth/ Industrialisation/ GDP Growth

• Supply and Demand for Natural Resources

• Climate Change

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Sources of Long-Term Return

• Sustainable Themes Sustainability Solutions

• Sustainable Strategic Framework - Selection of sectors within each theme best positioned to outperform over the long run

• Selection of best stocks within each sector

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Alternative Energy: the central issues

Fossil Sources Renewable Energy

Long-Term Supply Constraints

Security of Fuel Supply

Climate Change

Falling Costs/Rising Demand

Local

Environmental / Political

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Investment Driver:Current Market Share

Renewable Energy• Wind• Solar • Biofuels• Fuel Cells • Waste to Energy

International Energy Agency:30% of all energy related

Investments in next 30 years willbe in renewables

Renewable electricity capacity, share of 2005 electricity production

Source: REN 21 “Renewables Global Status Report 2006 Update”

Other3.6%

Ocean (tidal)0.0%

Nuclear16.0%

Conventional65.5%

Large Hydro14.9%

Small hydro1.3%

Wind Power1.2%

Solar Thermal0.0%

Solar PV0.1%

Geothermal0.2%

Biomass0.9%

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Investment Driver:Falling Renewable Energy Costs

Renewable energy actual cost of production — cents/kWh

Expected cumulative reduction in costs of renewable technologies by 2020

Source: United Nations Economic and Social Council

Source: EIA, American Wind Energy Association

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What Do We Mean By Investing In Water?

Stage 4 Secondary disinfection

treatment prior to discharge into the

environment

Stage 3 Residential, commercial

and industrial water use

Stage 2 Filtration and disinfection process

Stage 1 Sources of water: ground or surface water

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0

100

200

300

400

500

600

700

800

900

1000

1900 1940 1950 1960 1970 1980 1990 1995 2000 2010 2025

Global Population Global Water Consumption

Sources: US Census Bureau / German Ministry of Environment

Investment Driver Water Demand

Economic Growth

Population Growth

Standard of Living

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Global Supply versus Demand for Water

Source: UNESCO

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2006 Projected Capital Expenditure

Projected expenditure on water infrastructure, 2006

Current exp on waterinfrastructure (US$bn)

Current exp on waterinfrastructure (% GDP)

Projected exp on waterinfrastructure as % GDP by 2025

Average annualinvestment (US$bn) by 2025

Annual avg real growth rate (2006–25) by 2025

North America 109.6 0.75% 1.08% 246.4 4.4%

South America 18.0 0.94% 1.52% 61.6 6.7%

Europe 135.5 0.83% 0.94% 284.2 4.0%

Asia 85.2 0.97% 2.06% 606.1 10.9%

Australasia 7.3 0.85% 1.10% 14.8 3.8%

Total 355.6 0.84% 1.38% 1,213.0 6.4%

Source: OECD, IMF, Credit Suisse estimates

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Climate Change – No Longer Fringe Issue

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Climate Change Sectors

Water

Cleaner Energy Sources

Energy Efficiency

Better Waste Management

Carbon Credits Trading

• Physical

temperature, wind, precipitation

• Regulation

environmental legislation, subsidies

• Behavioral

Voluntary actions, client behavior, reputational risk

15 Source: World Resources Institute

Source of Greenhouse Gas Emissions: Energy Break-down

Other21%

Transportation22%

Electricity & Heat40%Industry

17%

Focus on Energy Generation,Usage and Transportation

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Focus Now Shifting to Energy Efficiency

• Focus has been on alternative energy

BUT

Energy Efficiency!

- Immediate Impact

- Multiplier effect

Definition = Delivering the same or better output with reduced power consumption

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Energy Efficiency Multiplier Effect

Fuel = Coal

Transmission Lines

Power Plant65% Loss

10% Loss

Every 1 unit of energy saved at home or business represents up to 4 units saved at the power plant

Source: Sustainable Energy, Choosing Among Options (Tester, Drake, Driscoll, Golay, Peters), UBS Research

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2/3 of Projected Co2 emission savings to come from energy efficiency

Source: International Energy Agency

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Case study – Alternative Energy

10%

Utilities

Wind Energy

Solar

Fuel Cells

Bio Fuels

20%

25%

25%

10%

Other (Emerging Technologies) 10%

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Wind Industry – US$30billion Market

Expected growth rate – 20%+ growth a year

Global Wind Energy Growth forecast

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Investment Driver:Falling Renewable Energy Costs

Renewable energy actual cost of production — cents/kWh

Expected cumulative reduction in costs of renewable technologies by 2020

Source: United Nations Economic and Social Council

Source: EIA, American Wind Energy Association

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Stock Selection Framework

• Sector Analysis Life cycle of sector Structure of value chain Bottlenecks in value chain

• Company Analysis Life Cycle of company Structure & quality of management Product & services range Positioning in value chain

• Financials Balance Sheet Access to capital

• Valuation FCF Models Valuation Multiples

• Price Targets

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Wind Sector Value Chain

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Correlation with Global Equities

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• Climate change and natural resource shortages will impact on our investments

• Contribute to solutions to our sustainability challenge

• Enhance the potential for long-tem returns