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Transcript:

Guest: Win J. Neuger - AIG Global Investment Group

Announcer
It is my honor and privilege to introduce to you Win Neuger of AIG Global Investment Group.

Win J. Neuger - AIG Global Investment Group
Thank you, Bob and Good Morning to all of you. At this conference you’re going to hear from a lot of speakers who know much more about Cleantech than I do. In fact in the two sessions that we’ve already had, you’ve learned more about Cleantech then I know, but what I am going to try to do is put some context around Cleantech in an over all investment portfolio and to talk about social responsible investing as an integral part of any investment decision. I would promise that no investment should be made without taking into consideration, social responsible issues. Why is that? There are really three primary reasons.

The first is risk. Socially irresponsible companies are bad businesses and bad businesses are high risk businesses. Secondly, as we’ve talked about already today, there are huge opportunities in social responsibility in terms of return potential and not only in new technologies but in repackaging. Thirdly and finally, more and more people care and as an Investment Manager, it creates business opportunities for us to pay attention.

So, I’m going to talk about all three of those to try to put some context into this. Now I noticed as I was sitting down there and I saw my cover slide come up, you will notice two things here. First of all the building that has AIG on it, is a brand new building that we built in Hong Kong, it is a clean building, a highly successful clean building and of course we have the Wind Power there in the sale. So, to complete, I didn’t choose this slide, but I would have if I’d thought of it. So, let’s start by talking about risks.

As we all know, when we’re looking at investments, there’re many risks that we consider on a regular basis. We talk about financial risk, what’s the business plan, what are the operating risks of the company. I think all of us as investors have generally considered these risks in everything we’ve done. We do extensive modeling on those risks. We look at various sensitivities. We grow our companies both public and private on their business plan and on the degree of leverage, but most of us historically have ignored the social risks. I mean we start by saying well it’s not our job as main stream investors to look at the social risk.

That’s the job of social responsible investors, as SRI Funds, that’s what they do. They look at those risks. That’s not my job, I’m supposed to pick the best companies and pick the best return from my investors, so I don’t have to worry about those risks. Now, I’m no more of an expert on Global Warming that I’m on clean technology, but at least my risk criteria are rapidly evolving relative to these kinds of environmental risks. Companies that are irresponsible carbon emitters are paying a price for that or will pay a price for that, in fact in most of the world they do pay a price. US I think eventually they will pay a price.

Now, people who emit excess carbon in Europe, pay a true price and people who are — who generate carbon credits get paid for it. So, that’s our true dollars and cents or I guess in this case Euros and cent, transfer of wealth and in fact I believe even in the US that transfer of wealth takes place. I as an investor have to start to look at that potential legislation, that will put that tax on, for me and if I’m going to have that potential risk, I better start to factor that into, to my return equation.

So, in fact I will do that. Just as importantly, industry is pushing towards greater environmental responsibility and accountability. There’s no question in my mind that green buildings receive premium rents and a premium price on sale. This becomes even more so, when that high energy price and high energy consumption is tied in. You get that double whammy of a dirty building and a high priced rent because of energy cost.

Lastly, of course the risk of fines and other sanctions can be significant cost for companies that follow environmentally on some practices. GE, as we all know has paid something around $80 million so far. Many people think that will go to $150 million for dumping glutens into the Hudson River and just this week I received a publication called Executive Council which is on legal issues related to corporation and you see the two headlines here that were two articles in that journal, for those who can’t see it in the back. They’ve talked about criminal charges and criminal prosecutions. So, not only are we running the risk as polluters of civil sanctions, but also criminal sanctions.

So this is a very real risk to us as investors. Okay, so you say — okay maybe environmental issues, we really should take environmental issues into consideration. I’ll accept that as a risk, but that’s kind of the end of the line, I mean don’t talk to me about these other social risks.

Okay, where do you want me to start, I’ll start as I’m doing this slide with child labor. Now, I get two excuses that people use in terms of why they have child labor that produces product for them. The first is the three monkey defenses, hear no evil, see no evil and speak no evil. I outsourced this, I didn’t know that my suppliers were using child labor. So that’s not my fault. The other — which I think is equally bad, well it actually is a good thing because it’s bringing up the living standard in XYZ country. If it weren’t for the fact that we had cheap labor and child labor, we wouldn’t produce this good in that country. We will produce it somewhere else, so in fact that country and those kids would be worse-off.

So we’re actually doing a public service by hiring these kids. Now, I think they’re both equally bad, but in reality it doesn’t matter what I think. What matters is what consumers think? When you show up on 60 minutes with child labor, when you get experience and the revulsion of your clients or your customers, it has a real bottom line impact and you just have to ask Nike, who showed up on CBS with labor problems in Indonesia and in Life magazine with this 12-year-old boy in Pakistan sowing a Nike soccer ball. What the impact was on their sales, their margins and their stock price and what the impact was ultimately on the company and the changes and practices that they had to put in place.

GAP is another example, I’m sure all of you’ve read about the report that GAP did on their social responsibility report, where they reveal terrible working conditions in several countries in which they operate. Mexico, China, India and Russia. GAP actually had to cancel contracts with 136 different suppliers around the world in order to become compliant, a very true cost in terms of implementing that. In addition, I really belief that unsafe, unclean, working conditions ultimately have an impact in terms of social unrest and labor unrest in the country and eventually as people’s living standards come up to a certain level, lets say, I’m not going to take this anymore and you end up with labor unrest, you end up with strikes and certainly you have poor quality merchandise from that.

The Limited, which has made a commitment to a high quality working conditions and its suppliers and a commitment and forcing them to make a commitment that they will impose that all the way through the supply chain, is absolutely convinced that the net result of that, even though they pay a little more, the net result of that is high quality merchandise and far fewer returns and far more satisfied customers at the end. So, they make sure that all of their strategic partners have these processes throughout, as I said throughout their supply chain.

The final risk that I’ll discuss briefly is corporate governance. I think we have enough examples in the past couple of years of companies that have met there demise in the US, in Europe and in Japan, just to pick on the developed countries and a lot of that has been driven by poor corporate governance. Companies that have greater transparency have greater stability and predictability of their financial results and that’s not just greater transparency in terms of financial results, but also social, environmental and governance. Organizational stability as I said leads to predictability of corporate profits, which leads to risk reduction on their investments.

So, now I want to turn to the opportunity side of the equation. You will hear a lot about new Cleantech ideas at this conference, but it’s clear to me that between Kyoto and high oil prices, great opportunities are being created not just with new technologies, although I guess — if I look at that earlier slide, I guess it’s still considered new, things like wind and solar, ethanol, roughage to energy and carbon devouring forestry. All these are great new if you will, investment opportunities.

Furthermore, if you ought to respond to whole new trading up market in carbon emission. So, Co2 emissions are now an actively traded commodity. New social responsibility and concerns are also bringing new customers to green products. I presume that there’s a reason that BP and GE are using the themes of beyond petroleum and Ecomagination in their ad campaigns. I don’t think it’s just because they want to show themselves in a good light to the government or to the people that might prosecute them, they do it because their customers care is my belief. Their customers truly care.

So, while GE recognizes its past wrong doings, the company also recognizes the opportunities presented through climate change initiatives. Plans to double its revenues to $20 billion in 2010 from the sale of environmentally friendly products and is committed to double its annual investments in Cleantech to $1.5 billion by 2010. Even Wall-Mart, as the earlier slide shows, has gotten the message that being social responsible matters to their clients or to their customers and that people won’t show up in the store if they don’t take a better stand.

I mentioned earlier that tenants care about their carbon footprint and are willing to pay for green space. Mentioned earlier, customers are paying for premium — are paying a premium rather for hybrid cars. Furthermore, cleaning up the environment is good business. At AIG, we were able to take a — an environmentally contaminated site in Atlanta, Midtown Atlanta which is — if you know Atlanta is prime infield location and turn it from a brown field into a green field and a truly green investment. Green both in terms of the environment and green in terms of the profit to the investors. We talked — if you look at the insert or the cover page in the packet for today’s meeting, it talks about the second industrial revolution.

Well, in the first industrial revolution, great productivity produced by a wonderful steel plant outside of Atlanta which, of course, now is pretty much in the middle of Atlanta — very important to the growth of the region and to the country. By 1999, that old steel plant was an environmentally contaminated, blighted, urban location that no one would touch and today it’s a thriving green development that has in this fabulous location, close to Downtown Atlanta with a multi-use project with office, retail and residential. Atlantic Station received recognition from various organizations including the EPA’s 2004 Phoenix Award for the best national brown field development, the U.S. Green Building Counsel, LEED’s prototype credits, developments within buildings within Atlantic Station and the first high-rise building that we built was the first office building in the US to receive LEED’s Silver Core and Shell Certification, our second high-rise building was pre-certified as LEED Gold and the Sierra Club identified this as America’s best new development project in 2005.

Now, I’ll just run through those not to toot our own horn, but really decide that building a project like this, taking a blighted site, re-mediating it and building a quality project, enables you to not only do good but to do extremely well from an investment point of view. Social responsible investing socially responsible companies have also done well in the market. Nick talked about his new Cleantech index. I mean there are a couple of other industries that we have looked at that show this. For example, the Dow Jones sustainability index has significantly outperformed the general market. Over the past 12 months, the Dow Jones sustainability index outperformed the SNP by over seven-and-a-half percentage points and over the past 3 and 5 years by 16% and 10%, respectively.

So it’s paid again to make these investments. In Japan, the Morningstar Japanese SRI index has outperformed the Nikkei 225 over the past year by almost 2 percentage points and again for 3 and 5 year periods has significantly outperformed as well. So, there clearly is not a social responsible investment penalty, in fact it’s been clear up side. Lastly, I want to talk a little bit about what’s in it for us as an asset manager. The first thing is, as I said, it does matter, it matters to the results, I mean in terms of your investment performance and if you think about it, that‘s our product, that’s what we are outselling to our clients and selling to our affiliated insurance companies. These are investment results.

But, it’s also important in terms of other factors, for example, retention and hiring of people. A lot of studies have been done in terms of employees wanting to work for companies that are socially responsible. It’s interesting, I learned recently that Google as an example will pay any employee who buys a hybrid car, $5000. I’m sure they do that because of their concern and their commitment about the environment, but I’m sure also they do it because it’s a great recruiting tool, because again as I say, people want to work for a company that cares. So, the reputational advantages for SRI are also important. It’s clearly been a success or been an indicator of success as I said for hiring, for retaining, it reduces absenteeism, improves work and productivity and the quality of product. The flip side is also true. People don’t want to work for companies that have poor records in terms of social responsibility. They don’t want to have to go tell their friends, “Oh I work for this dirty company,” it’s just not where people want to work.

As we all know hiring and retaining quality workforce is one of the biggest challenges I think we have in every industry in this country and around the world. Our position on sustainability, which I’ll talk about a little bit more, in fact, was developed by an employee task force. I mean a lot of our position was developed by taking a group about ten people and saying, “Look I think this is important, you all develop what you think our practice strategy should be.”

So couple of years ago we put this team together and they came up with significant recommendations, most of which we have implemented at their recommendation. Some of the things that AIG has done you may have read, AIG has a clear policy now on environment and climate change, we have established an office of environment and climate change which is headed by my colleague Alice LeBlanc who’s here. We have worked to minimize our own green house gas emissions and we have committed to communicating and monitoring the results.

Furthermore, we have developed risk management and derivative products in Co2 trading. Again, there are clear business opportunities in all these areas. We have insured a project’s ability to generate tradable carbon credits and we have provided consulting and technical services for energy in carbon reduction programs. Within AIG Global Investment Group, I’ve already talked about our green building. All of our buildings are green. We’re committed to remediation and recoupment and brown field projects. We use environmentally sustainable construction materials, energy efficient design, etcetera. In our public and equity indebt products, we’re committed first to finding companies that meet the dual objectives, but also committed to evaluating the social issues on every single company in which we invest.

In our private equity side, we make investments in emerging markets that develop those countries, in Asia, in developing Europe and Latin America. We have a social responsible hedge fund that we sell to clients. We have social responsible equity products in the US and Japan and we have committed a significant portfolio to sustainable investments in Europe, which is run by another one of my colleagues who is here, Julia Balandina.

So, all of these things we think are opportunities for us and for other investors. So, let me conclude by saying that I believe that the evidence is increasingly clear. Any investor who fails to consider environmental, social and governance issues in all of it’s investments, is taking out risks, that it’s not paying — that it’s not accounting for and not getting paid for. Furthermore, they’re missing the upside potential of clean technology, green buildings and other product developments and finally, by missing the reputational opportunities that are important to many of their shareholders, they’re failing to satisfy employees, shareholders, and customers. Investors can in fact do well by focusing on social, environmental and governance issues and by doing good, they can do very well, so thank you very much.

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Tags: Cleantech Venture Forum, AIG, Win Neuger

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-Matt Kelly

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