Obvious with Hindsight Investment Challenges for the Next Decade For Investment Professionals Only Mike Appleby SRI Analyst

Five Sustainability Challenges How To Protect Your Investments How To Benefit From Thinking Long Term Sustainable investing for the next decade 2

3 The ‘perils of predictions’ Why most investors dislike long-term forecasting ‘It will be alright in the end’ – companies will adapt to changes in society ‘Someone else’s problem’ – whatever happens will be beyond my time frame ‘Impossible to quantify’ – just too many moving parts to understand

Kodak invent the CCD image sensor. It has a 90% share of the film market. Kodak dominates the market for camera film. Digital cameras replace film. Kodak fails to gain share in digital cameras. Shares fall to zero. Collapses are obvious with hindsight; companies frequently fail to adapt Source : Bloomberg 04/10/ Three decadesMid 2000s2012 Kodak Share Price 4 Lessons from history

5 Decarbonising our Economies Source: Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble, Carbon Tracker Initiative, 2013 Obvious with hindsight example: Carbon

Sustainable Future UK, EU ex UK and Global Growth Equity Fund Average Carbon Dioxide Emitted Relative to Conventional Benchmark Who wins: Portfolios with low Carbon exposure: 6 Source: Internal Obvious with hindsight example: Carbon Carbon dioxide intensity (Index equals 1)

The view from Investment Bank economists: “The subject is too big to meaningfully contemplate” “One of the most significant variables we are not capturing is the natural resources with which an economy is endowed and how this drives its relative terms of trade and its bargaining power in the global economy” Looking away from a train coming down the track won’t make the train go away Natural capital is finite 7 Source of quotes: Broken models? Economies and ecosystem services, Alliance Trust Investments, Newton Investment Management & Schroders, 2013 Obvious with hindsight example: Ecosystems

‘ Just how business is done over there’ – Just accept it! Corruption is bad for business, bad for society and very risky for investors Transparency is coming – will the companies you invest in be affected? Oil, Gas and Mining, Forestry, Shell Companies and International Banking 8 NO! Obvious with hindsight example: Corruption

Global Obesity: The World Health Organisation has declared Obesity to be a global epidemic Big = 35.7% of US adults are obese Growing fast = number of obese adults in Britain to double by 2030, a 3.8% CAGR2 Costly = “obesity kills thousands of New Yorkers a year and costs $4 billion a year in health care costs.” 9 Source: Chang J et al. Diabetes Care 1994;17:961. Colditz G et al. Ann Intern Med 1995;122: Relationship Between BMI and Risk of Type 2 Diabetes Obvious with hindsight example: Lifestyle disease

Key 1.2m people die each year in road accidents with anything from 20m to 50m injured 90% of fatalities occur in low and middle income countries UN Decade of Action for Road Safety targets halving the forecast fatalities for 2020 (1.8m) 10 Obvious with hindsight: Too many road deaths

Chassis & Safety Division (26% EBIT) Produces electronic stability controls, emergency brake assists systems, tire pressure monitoring, brake boosters and anti skid control. Vehicle production forecast = 4% globally Safety systems for 2015 models = 2012/2013 sales for parts providers above 4%. 11 Source: Automobiles & Parts, Kepler Research, October 2011 Integration - safety drives returns at Continental

12 Source: Internal analysis Continental Analysis – Chassis & Safety Division Integration

13 Continental share price since September 2012 Source: Bloomberg 04/04/2014 Continental AG Euros (€)

Our societies and economies are adapting to major challenges: Favours Companies Which Are: Low Carbon and Resource Efficient Transparent and Intolerant Corruption Preventing Lifestyle Diseases Keeping People Safe For Those Negatively Exposed: Take no comfort from current share prices Change will be rapid and value destructive Many companies will fail to adapt 14 ‘The future ain’t what it used to be!’

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