TODAY’S STUDY: HOW INVESTORS CAN KICK THE FOSSIL FUEL HABIT AND KEEP MAKING MONEY

Beyond Campus Conflict: How Impact Venture Capital Can Address Student Concerns While Furthering Endowment Investment Goals

Nancy E. Pfund, February 6, 2014 (slide presentation for a lecture at the National Association of College and University Business Officers Endowment and Debt Managers Forum)

Section 1: The History of Divestment and Background of the Fossil Fuel Divestment Movement

Fossil Fuel Divestment is a Modern, Growing Movement: Fastest growing divestment movement in history - 305 campuses in 18 months v. 165 over 10 years with anti-apartheid - 5 universities have completely divested…Social media is a major catalyst - Twitter utilized in a manner similar to the Arab Spring…Municipalities and other organizations have followed - Commitments to divest within 5 years from 4 universities, 22 cities, 2 counties, and 20 religious organizations…17 family foundations controlling $1.8B in assets among the first to divest - Schmidt Family Foundation, Russell Family Foundation, Wallace Global Fund, and The Merck Fund announced…they are divesting from fossils.

Fossil Fuel Divestment Movement Initiated by Students Has Begun to Influence Institutional Investors’ Thinking… Fossil Fuel Stocks’ Value Based on Assets Likely to be Stranded: UN budgeted allowable carbon at 2°C through 2050…80% of carbon is “unburnable” and these assets will be “stranded”…Global fossil fuel reserves on which the stocks are valued far exceed this limit, creating a huge pool of stranded assets and risk for those who hold these stocks.

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$20 Trillion Carbon Bubble from Stranded Assets Creates Portfolio Risk: Fossil fuel stocks are potentially mispriced as they neglect the discrepancy between burnable carbon and proven reserves - Difference between burnable carbon and proven carbon reserves amounts to $20T - By comparison, in the 2007-2009 timeframe the US home equity bubble was $7T…Fossil fuel companies spend $674B/year discovering new reserves, many of which are likely to be stranded…Future price on carbon is also not reflected in current fossil fuel stocks…Downward spiral of coal stocks suggests the bubble is beginning to pop…Tight credit conditions for carbon-intensive projects…Market Vectors Coal ETF (tracks Stowe Coal Index) has dropped from >$45 to <$20 in the past three years…Five coal mining bankruptcy filings between 2007 and 2013 equating to nearly $4B in assets.

Federal Subsidies Have Historically Favored Oil & Gas Over Renewables… And Yet… Renewables are Winning the Crowd… Fossil Fuel Divestment is a Story of Stranded Assets, Mispriced Stocks and Burgeoning Innovation: Although divestment may currently be a student movement, it is founded on sound math…The coming Carbon Cliff will likely render the majority of fossil fuel assets stranded and unburnable…The financial system built on the expectation that all carbon is burnable is unsustainable…Fiduciaries will need to reposition themselves due to this substantial and mispriced portfolio risk, irrespective of any ethical view on fossils…Building a carbon-free portfolio does not imply a high risk or high volatility allocation…Fossil fuel investments make up only 4% of portfolios, on average…Key demands of student movement: freeze new investments, divest over 5 years, 5% reinvestment in community and energy…

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Section 2: Innovation Cycles

Energy Industry is in the Midst of an Innovation Cycle Akin to Computers, Telecom, Radio and Autos: Themes in Innovation Cycles of the Past are Present in the Energy Sector. After 100 years of being a relatively steady state industry, now is the era of transformation for the energy sector… Concentrated energy investment in fossil fuel stocks creates portfolios that are lacking exposure to innovation within the energy industry…In 10 years, oil companies will be “energy” companies - Masdar Capital spending billions to diversify economic future of Abu Dhabi and the UAE away from fossils…Literacy of carbon supply chain is increasing daily and therefore changing consumer behavior - Cars, clean electricity, storage, climate control…Energy price certainty is a major factor in driving renewable energy investment - Renewable energy provides energy price security whereas it is reasonable to expect increased volatility in fossil fuels and increased regulation due to the carbon cliff.

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Corporations Increasingly Transparent about Carbon and Sustainability: Companies beginning to disclose carbon risks and adopt new accounting practices - Puma’s environmental P&L…Coke sees climate change as a force that contributes to increased financial risk…Part of broader movement towards total supply chain transparency…Major brands leveraging sustainability as a differentiator - Intel manufacturing “conflict-free” microchips - McDonald’s moving to produce sustainable beef - Safeway moving to paper bottles.

The Next Tesla and SolarCity Will Be Built on Advanced Energy Storage… Energy’s Innovation Cycle Both Unseats Incumbents and Creates Unique Investment Opportunities…

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Section 3: Cleantech Investment Thesis

Cleantech Assets are Now Available Across the Risk Spectrum: Once upon a time, cleantech was largely only available to venture investors and wind project financiers. Today, early companies have matured and exited, creating many asset classes to access this enormous and growing opportunity…Traditional institutional investors can now participate across ETFs, Bonds, Private Equity and Real Assets - Zurich Insurance Group AG (a $39B company) has invested over $1B in green bonds, making it the largest investor in such clean power securities…The NASDAQ Clean Edge Green Energy Index Fund was up +88.72% in 2013…New vehicles are enabling greater financing opportunities for participation in financing clean energy - Long awaited securitization of solar leases has begun - The power of the crowd is coming to energy: crowdfunding via Mosaic and CommonAssets (acquired by SolarCity) - Property Assessed Clean Energy (PACE) could have widespread utilization in CA and other states through a newly proposed insurance product that will make Freddie Mac and Fannie Mae whole in case of foreclosure…

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Institutional Investors Are Gaining Awareness of Overexposure to Carbon… Investment Tools Now Equipped With Carbon Risk Assessment… 2014 Fossil Free Investment Opportunities Abound Across Asset Classes…

Green Fixed Income Investments Are Evolving…Increased Allocations from Leading Asset Managers to Clean Power…Green Bonds Issued for Renewable Energy Generation Development - $20B in Green Bonds Expected in 2014…Innovative Financing Mechanisms Designed to Reduce Risk…Municipal Bonds for Distributed Solar on Public Buildings.

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Sustainable Real Assets Have Outperformed Peers: Green buildings reduce operating expenditures and minimize future capital expenditures - 4-8% net operating income increase over standard construction…Green REITs are a growing trend - Post-IPO performance of Hannon Armstrong REIT: +14% (incl. yield)…Green improves real estate value - Researchers estimate that each 1kW of residential solar system equates to a $5,911 higher premium in real estate value

In Sum, There is Something for Everyone, and Cleantech Investments Can Produce Attractive Returns: The energy innovation cycle has produced tremendous investment opportunities…The cycle is evolving, providing opportunities for exposure from a variety of asset classes…Across the risk spectrum, cleantech has proved to be a compelling investment area…A new transparency paradigm is improving our understanding and disclosure of carbon risks…Reallocating from fossils not only reduces portfolio risk, but can provide a substantial return benefit

Energy Innovation Creates Opportunities for Outsized Returns While Climate Change Brings Outsize Risk to Fossils: We’ve seen many examples of innovation cycles, but energy may be the most important yet…We’re facing an inevitable Carbon Cliff, which makes the urgency to be on the right side of disruption even greater…Fiduciaries should seek to measure and reduce carbon- associated portfolio risk…

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