** Remove from final presentation ** Broken Models? Economics and Ecosystem Services A collaborative research project between Rick Stathers Head of Responsible Investment Schroders May 2013 Neil Brown Investment Manager Alliance Trust Investment Ashim Paun ESG Investment Analyst Newton Investment Management

** Remove from final presentation ** Background to Responsible Investment Integration of ESG Broken Models Contents 1 Broken Models| May 2013 *

** Remove from final presentation ** A Brief History of ESG… 2 Broken Models| May s1920s1950s and 1960s 1960s1970s1970s and 1980s 2000s2006 Quakers:Methodist Church: Shariah:Baptist Church, Sweden PAX World Fund (US) Europe and US EuropeUN Principles of Responsible Investment War or slave trade Gambling or alcohol Alcohol, gambling, tobacco, defense, financials, pornography First public fund excluding alcohol, tobacco, weapons Excluded stocks related to Vietnam war Anti- apartheid screens National legislation in various countries implementing SRI Key driver – ESG arrives Traditional exclusionary SRI approachESG appearsESG embraced

** Remove from final presentation ** Launched in 2006 Set of 6 Principles covering: Integration of ESG analysis into investment process (e.g. idea generation, portfolio construction) Promoting ESG disclosure amongst entities invested in Reporting on progress towards implementing these principles (see appendix for full list of principles and Schroders compliance with them) US$31tr AUM signed up 1,111 signatories (Schroders signed in 2007) Drivers behind RI Client Demand – UN Principles of Responsible Investment 3 Broken Models | May 2013 Source: Annual Report of the PRI initiative 2012, UNPRI

** Remove from final presentation ** Impacts of different RI strategies on portfolio diversification 4 Broken Models| May 2013 Source: Socially Responsible Investment, A Global Revolution by Russell Sparks, Schroders 2008 Screening Thematic Investments ESG Integration & Engagement High Low Degree of ESG Integration Degree of portfolio diversification

** Remove from final presentation ** Integration Linking ESG issues to valuation 5 Broken Models | May 2013 Source: Annual Report of the PRI initiative 2012, UNPRI MATERIAL ESG ISSUES Demand for efficient products – SALES Taxes reduce demand – SALES Droughts raise costs of raw materials – COGS Marketing spend needed to re brand – SG&A New technology needed to compete – R&D

** Remove from final presentation ** Integrating ESG analysis into equity analysis The 5 stages of stock review 6 Broken Models| May 2013

** Remove from final presentation ** Ecosystem service questions for economists How do you incorporate a consideration of ecosystem services into your economic models? What impact do you estimate the current change in these ecosystem services is having on global economic performance, in terms of output, inflation and other metrics? If you incorporate ecosystem services into your models, what is the valuation methodology you use where there is currently no market value for specific environmental goods or services? If you have incorporated a consideration of the change in ecosystem services into your models, what are the results for your short and long-term (40 year) models? What are your expectations of the economic response to ecosystem service changes in terms of market volatility, policy shifts and technological innovation? If you have not addressed these factors in your models, please could you explain why not? 7 Broken Models| May 2013

** Remove from final presentation ** Ecosystem service- economist survey Responses 2011 “this subject is too big for us to even contemplate” “economic growth in the emerging markets will be inflationary on commodity prices, but externalities are typically underweighted” “these factors are already integrated into our outlook” 8 Broken Models| May 2013

** Remove from final presentation ** Ecosystem service – economist survey Responses 2012 All acknowledged ecosystem service change would have economic impact Reluctance to put price on ecosystem services Preferred to focus on adaptation costs than mitigation All acknowledged limitations of GDP Need for more data Client demands are generally too short term 9 Broken Models| May 2013