Capital Flow & Sustainable Brands:How Investors are Driving New Opportunity

Maria KaminProduct Manager, Research

Responsible Investment

"We are proud to endorse the Principles, which recognize that social and environmental issues can be material tothe financial outlook of a company and therefore to the value of our shares in that company,”

- Denise Nappier, Treasurer of the State of Connecticut

Socially Responsible Investing (SRI) is an investmentprocess that considers social and environmentalconsequences of investments, both positive and negative,within the context of rigorous financial analysis.”

Origins lie in 18th century Quaker investors

Today’s investors include:

The U.S. SRI Market

Source: Social Investment Forum 2007 Report on Socially Responsible Investing Trends in the United States – March 2008

Today, $2.71 trillion market in the US (March 2008) Total SRI assets represent ~ 1 in 9 dollars under professional

management in the U.S. Growth rate of SRI asset flows has exceeded non-SRI growth rates. From

1995-2007, total SRI assets rose 324% while total assets underprofessional management increased 260%.

Source: Social Investment Forum 2007 Report on Socially Responsible Investing Trends in the United States – March 2008

The U.S. SRI Market

SRI Practice: Screening

Screening is……avoiding companies with poor ESG track records,…positively filtering a portfolio for companies that have stronger CSR policies and practices, or…otherwise incorporating ESG, CSR, and sometimes ethical factors into the process of investment analysis, decision-making and management

Examples of Screening:•ESG Issues: Discrimination, Employee & Product Safety

•Divestment: Sudan, Iran•Best-in-class: Industry leaders•Industry Restrictions: Healthcare•Harmful Products: Tobacco•Convention Compliance: Global Compact, ILO•Religious Concerns: Christian, Jewish, Islamic•Controversial Business Practice: Retail marketing of alcohol•Other special concerns: Animal Welfare

Source: Social Investment Forum 2007 Report on Socially Responsible Investing Trends in the United States – March 2008

SRI Research

• KLD covers 4,000+ global firms

• Environmental, Social & Governance(ESG) coverage includes:

– Climate change– Alternative energy– Human rights– Supply chain– Workforce diversity– Political accountability– Transparency

• 280+ datapoints collected percompany

• 70 scored indicators

Brand as a Factor

• Importance of brand is reflected in severalareas of KLD’s CSR coverage:– Employees: Retention & hiring risks ST/ LT– Customers: Sales & competitive risks ST/ LT– Communities: Implementation risk ST/ LT– Investors: Valuation risk ST/ LT– Goodwill: Acquisition valuation risk LT

• Example: Nike

Valuing Brand with CSR

• Using KLD research, CoreBrand has done analysis to better understand how CSR issues impact the brand

• CSR is one of the positive drivers of Brand Power• Of the factors CoreBrand studied CSR was the only favorabilitymeasure to grow in importance over time from 2003 - 2006• Percentage of the variance in Brand Power can be attributed to KLD’sCSR data

• Can estimate the value of CSR issues to an individual company through their brand equity model

• Failure to deliver on important CSR messages will result in a diminished investment potential

CSR & Brand: Best Practice

• Transparency & Disclosure– Learn what’s in order at your house

• Past, present and goals• Positives & negatives

– Avoid green washing

• Engage Your Stakeholders– Stakeholders: Shareholders, Communities,

Employees, Customers, etc.– Look for internal CSR champions– Incorporate CSR into the corporate culture

• Metrics– Clarify & reuse your baseline– Meet minimum standards (GRI)– Focus on Key Issues for your industry– Measure impact– Improve performance over time

“We’ve been amazed by thevolume of positive,thoughtful comments fromXerox people worldwideafter we released our firstcomprehensive globalcitizenships report lastyear… We’ve learned thatnot being shy about tellingour CSR stories resonatesincredible well withemployees.”

-Hector Motroni, ChiefEthics Officer, XeroxSource: The CRO Magazine,www.thecro.com

Ben AllenDirector of Research

Firm Overview

• Research-centric boutique• Bottom-up research

•Fundamental analysis• Value-based investment approach

• Attention to risk in portfolio construction

• Corporate social responsibility

•Established 1984 and privatelyowned

• Boutique culture

– In-depth, in-person fundamental research

– Dedicated & responsive client service

• 26 employees

– 8 investment professionals

– 18 support personnel

Fund Assets in $MM % of Total

Equity Income Fund 926.8 72.0%Parnassus Fund 256.3 19.9%Fixed-Income Fund 87.0 6.8%Small-Cap Fund 7.1 0.5%Mid-Cap Fund 5.6 0.4%Workplace Fund 4.2 0.3%

Total net assets: 1,287.0

As of 3/31/08

Mid-Cap Fund Workplace Fund

Small-Cap FundFixed-Income

FundParnassus Fund

Equity Income Fund

Environmental, Social & Governance Assessment:The 3 P’s

1. Product / Service

2. Production / Operations

3. Planning

Where do we look for ESG information?

Sources

• CSR/Sustainability Reports

• SEC filings

• Corporate website

• Management interviews

• Sell-side ESG research

• Government data

• Social networks

Verification

• KLD Research

• David Gardiner & Assoc.

• More Management Interviews

• Third-party audits

• NGO & SRI collaboration

• Sector surveys

• Industrial property developer and owner

• Strong connection between business goals and CSR goals

• Branding through case studies, Sustainability Report, websites

• Third party recognition for efforts

Country’s largest waste services company

Public trust, sustainable services are crucial for business

Branding through TV advertising, Sustainability Report, websites

Uses specific numbers to drive home sustainability commitment

www.thinkgreen.com

www.wmgreensquad.com

Lloyd KurtzSenior Portfolio Manager

At the Center…

CONTROLGROUP(MGMT)

Stakeholder theory can beviewed as a constellation of‘Hirschman relationships’between a Control Group anda variety of groups...

A Case Study in Reputational Risk

Commercial Relationships

CUSTOMERS

CONTROLGROUP(MGMT)"There is only one boss. The customer.

And he can fire everybody in the companyfrom the chairman on down, simply byspending his money somewhere else."

- Sam Walton

Commercial Relationships

CUSTOMERS

SHAREHOLDERS

EMPLOYEES

SUPPLIERS

CONTROLGROUP(MGMT)

In the 80s and early 90s itwas popular to say that if youtook care of these groups,you didn’t need to worryabout much else.

Social/EnvironmentalRelationships

ENVIRONMENT

LOCALCOMMUNITY

GOVERNMENT CUSTOMERS

SHAREHOLDERS

EMPLOYEES

SUPPLIERS

CONTROLGROUP(MGMT)

Thomas and Friends

Thomas the Tank Engine

James the Red Engine

Henry the Green EnginePercy the Small Engine

Toby the Tram Engine

Wooden Railway

Good gross margins Set above lists for $44.99 Manufactured inexpensively abroad

Bright colors, detailing faithful to books and tv show Bundled with trading cards Sometimes included as a ‘bonus’ with DVD purchase

The Company

Learning Curve was founded in Chicago in 1993

Key Product Lines The First Years Lamaze Playtown Thomas & Friends

In 2003, Learning Curve was acquired by RC2 Corp (ticker: RCRC)

Firm Strategy

“RC2 builds consumer loyalty by fulfilling the passions oftargeted consumers with branded toys, collectibles, hobby orinfant products that encourage repeat purchases and are funto own and use.

“Our goal is to achieve leadership in targeted marketsworldwide by acting on significant consumer trends,continuously applying innovation and developing consumer-preferred brands and products distributed through multiplechannels.”

- RC2 Website, accessed 8/1/2007

Four Focus Areas “Building our own brands”

First Years, Lamaze, Learning Curve, and Johnny Lightning

“Differentiation” “…more segmentation, more niche marketing…”

“Distribution…” Including international expansion, Internet distribution, inventory

planning and management.

“Consumer communication” “…the shopper is in more control than ever over where, when, what, and

how the products are being purchased.”

Excerpted and adapted from Streetevents transcript of Feb. 13, 2007 earnings conference call.

An Analysts’ View of RC2

“Management’s consistent track record ofsolid execution (securing new licenses anddeveloping new products) along with pastacquisitions, gives us confidence that corerevenues and EPS growth is sustainable inthe 5%-10% and mid-teens, respectively,over the next several years…”

- Timothy Conder, A.G. Edwards, January 12, 2007

Bad News, 6/13/2007

“The U.S. Consumer Product Safety Commission, incooperation with [R2C], today announced the recallof the following consumer product. Consumersshould stop using recalled products immediatelyunless otherwise instructed…”

“Name of Products: Various Thomas and Friends™Wooden Railway Toys” [1.5 mm units]

“Hazard: Surface paints on the recalled productscontain lead. Lead is toxic if ingested by youngchildren and can cause adverse health effects.”

An Incident in China

“A manager at the RC2 factory detained aNew York Times reporter for more than ninehours after he had been admitted to thepremises by security guards to ask questionsabout the operation…”

“RC2’s Train Wreck”, The New York Times, 6/19

Analyst Comment

“These recalls happen fairly often. It’s whenthe recall becomes botched and children arehurt when it takes on a life of its own… [Thisrecall] should not have any long-termdamage.”

“RC2’s Train Wreck”, The New York Times, 6/19

RCRC: Spot the ReputationalEffects

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12/2

9/20

06

1/5/

2007

1/12

/200

7

1/19

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1/26

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2/2/

2007

2/9/

2007

2/16

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2/23

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3/2/

2007

3/9/

2007

3/16

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7

3/23

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3/30

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4/6/

2007

4/13

/200

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4/20

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4/27

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5/4/

2007

5/11

/200

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5/18

/200

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5/25

/200

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6/1/

2007

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2007

6/15

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6/22

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6/29

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7

7/6/

2007

7/13

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7/20

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7

7/27

/200

7

8/3/

2007

8/1 - Disappointingrevenues and earnings.

6/13 – Joint press release w/ ConsumerProduct Safety Commission.

7/4 – Lawsuit alleges lead paint problemswith metal train toys.

6/19 – New York Timesstory: reporter detained atChina factory

Subsequent Performance

Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

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100

RC2 Corp. (RCRC) 43.2 S&P 500 (SP50) 91.3

Indexed Price25-May-2007 to 28-May-2008 (Daily)25-May-2007=100; Local

Data Source: Prices / Exshare ©FactSet Research Systems 2008

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