1. The Competitive Imperative of Sustainability:
Causes, Risks, and Strategic Opportunities
ADFIAP Annual Meeting
Dr. Matthew J. Kiernan
Vancouver, Canada Chief Executive
Inflection Point Capital Management
May 11,2010 mjk@inflectionpointcm.com
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© Matthew J. Kiernan

2. A New World Order for DFIs – and their clients!
• Dramatically increased complexity, transparency, and velocity of change in
SME’s competitive environments.
• Accelerating pace of “disruptive innovation.”
• Shift in the world’s center of economic gravity towards emerging markets,
where “sustainability”-driven risks and opportunities are greatest.
• Dramatically increased demand for energy, water, and other critical natural
resources. Caused by:
• explosive population growth
• urbanization
• industrialization
• demographic shifts and
• growing consumer affluence and consumption, particularly in
emerging markets.
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3. Environmental Pressures The New Competitive Environment
Environmental Impact
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4. The New Competitive Environment
And also . . .
• Substantially increased expectations for improved sustainability
performance
• Wider variety of more credible, better-resourced stakeholders – especially
regulators and NGO’s.
• Much greater information transparency with which stakeholders can assess
companies.
• More powerful and pervasive communications tools for disseminating
criticism of companies.
• Emergence of a new fiduciary paradigm.
Success in this new competitive environment therefore demands new and
different capabilities from companies – and from their bankers:
• Better strategic management
• Better stakeholder management
• Faster innovation
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5. The Investment Logic –
It’s All About Competitiveness!!
• “Management quality” is arguably the #1 factor most critical to companies’
competitiveness and profitability.
• “Sustainability” issues are among the most complex and demanding
management challenges of the 21st century. Therefore:
• Companies with superior positioning and performance on Sustainability factors
tend to be:
> More forward-looking and strategic
> More agile and adaptable
> Better managed companies in general; and therefore:
Likely to be financial out-performers as well
• Powerful global megatrends will make “sustainability” factors even more critical
to companies’ – and investors’ – competitive and financial success over the
next 3-5 years.1
1. UNEP Finance Initiative Working Group (2004) members included Goldman Sachs, HSBC, Deutsche Bank and UBS.
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6. Why Do Your CLIENTS Need To Address ESG?
1. “Carrots”:
• “Social license to do business” – relationships with regulators,
government, communities, NGO’s, customers, and – increasingly –
investors
• Market differentiation and competitive advantage
• Building human capital – recruitment, retention, motivation of top talent
• Strengthened sales, cash flow, and ROCE; cost reduction and
efficiencies
• Improved risk management – regulatory, supply chain
• Access to “green” government stimulus funds
3. “Sticks”:
• Growing regulatory and compliance requirements
• Customer insistence – “The WALMART Effect” 6
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7. It’s NOT Just the Environment:
A New, Broader Conception of Corporate Sustainability
IPCM’s “Iceberg Balance Sheet” – 5 Keys to Sustainable Competitiveness
Today, 75-80% of companies’ true risk profile
and value potential lies below the surface, and
cannot be captured by traditional financial
analysis.
Inflection Point Capital’s proprietary 5-Factor
Model has the proven ability to generate alpha
from these “non-traditional” drivers of risk and
return:
 Environmental Sustainability
 Human Capital
 Organizational Capital
 Adaptability & Responsiveness
 Innovation Capacity
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8. Growing International Investor Momentum. . .
• Globally, 50% growth since 2006.1 PLUS . . .
 Over 700 major institutional investors have adopted the UN Principles for
Responsible Investment (PRI) - $20 trillion.
 Over 400 leading global financial institutions have formally expressed strong
concern about climate change as an investment risk through the global Carbon
Disclosure Project (CDP) - $60 trillion.
 An October 2008 study by Booz Allen Hamilton predicts that SI will be 20% of
global assets by 2015 – over $15 trillion.
 In 2009, both Bloomberg and Thomson Reuters begin offering ESG
(sustainability) data to their (mainstream) clients.
“SUSTAINABILITY” investment is going mainstream – DFI’s will need to keep up.
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Lipper/FERI, 2010
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9. But Some Common Misconceptions
Still Persist Among Some Investors . . .
• ESG/SRI considerations are immaterial or actually injurious to companies’
competitiveness and financial returns
• Including ESG considerations is, therefore, incompatible with fiduciary
responsibility
• ESG/SRI research is inevitably more “wooly”, imprecise, and unreliable than
mainstream investment research
EACH of these 3 myths has now been categorically disproved!
But STILL the misconceptions persist . . .
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10. Sustainability Analysis Can Provide
Early Warning Signals on Risk . . .
Innovest Very Early Advance Warning on Bear Stearns
Since initiating coverage on Bear Stearns in April of 2005, Innovest never rated Bear above `sub-
investment grade’ – using Innovest’s `four pillar’ ESG methodology - through to its eventual
absorption by JP Morgan Chase. 10
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11. …and Better Performance on the Upside
The IPCM Global 100 Index
Daily and Accumulated Performance: 5 year live results
Out-performance: 300 bps/year
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12. Climate Change: the “Mother of All” Sustainability Issues
Why should you care?
• Growing impact on your portfolio companies’ competitiveness and
financial performance. Climate change is NOT about SRI!
• Climate risks affect a much broader range of industry sectors than one
would think – not just heavy industry.
• Same-sector climate risk can vary by 30 times!
• Fiduciary best-practice increasingly demands it.
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13. Climate Risk: Can YOU Afford to Ignore It?
CO2 Regulatory Cost of Compliance
as Percentage of EBITDA
>50.00% CMS >50.00%Hanson
20.00% 19.21% Nova 50.00%
Energy
46.25% Kinross
Gold Corp.
37.85% Drax
40.00%
Cost of Compliance as EBITDA%
Cost of Compliance as EBITDA%
15.00%
13.69% Tosco
for CCh, Steel, and IO & G
12.90% Allegheny
Tech.
30.00%
10.00%
20.00%
Rautaru
5.00% ukki
Toray
10.00%
2.72% Statoil CRH
Centrica Umicore Fortum
2.00% ASA
2.91%
2.00% 1.48%
0.43% 1.26%
0.00% 0.00%
Commodity Steel Integrated Oil & Gas Multi-Utilities & Metals & Mining Electric Utilities - Construction
Chemicals Unregulated Power International Materials
Max case Min case
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14. And There is a Performance Premium for Top Performers:
Annualized Out-Performance: 300 bps
Source: Innovest
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15. So Why Should YOU Consider ESG?
• Identify/minimize risk in portfolio companies; lower default rates
• Better understanding of management quality in borrower companies
• Identify new commercial opportunities – both for clients and for YOU
• Increase client “stickiness” though added-value advice
• Differentiation and competitive advantage – for YOU!
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© Matthew J. Kiernan

16. What Does Global Best-Practice Look Like?
• Focus both lending and equity investing not just on downside risk but also
on upside opportunities – eg. Renewable energy; health water
• Address social issues as well as environmental – eg. “Base of Pyramid”
entrepreneurs
• Building human capital – training: both clients and DFI staff
• Sector-specific lending guidelines
• Evaluate own ESG impacts from lending
• Advisory services for clients
• Power of collaboration – NGO’s; academe
• Reduce own operational footprint (secondary)
• Your own pension fund – how is THAT invested?
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© Matthew J. Kiernan

17. An Asia Pacific “Leapfrog” Opportunity . . .
• Generally, less devotion to unfettered capitalism; more of a “social contract”
• No intellectual/organizational baggage, unlike the West
• Acknowledged size and strength of SME sector and entrepreneurs
• Korea, Thailand, Malaysia public pension funds – investor awareness ahead
of the West
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18. A New “Hierarchy of Organizational Self-Actualization”
Action
Hollow, Pious
Hollow
Rhetoric
Embryonic Understanding
Awareness
Denial
Ignorance
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19. And There’s Always THIS To Consider . . .
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21. For More Information, Please Contact:
Dr. Matthew Kiernan
Chairman & Chief Executive
416-399-2861
kiernanmj@gmail.com
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© Matthew J. Kiernan