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Cornerstone Journal of Sustainable Finance & BankingSM / December 2013 / 1

Journal of Sustainable Finance & BankingSM

December 2013

Brazil nut extraction process. ©Natura

Featured Editorial The Value of Community Relations Andrew MacLeod … p.17 Regional Imperatives Acting in the Present with an Eye on the Future Marina Grossi … p.22 Integrated Financial Reporting in Brazil Robert G. Eccles … p.24 Global Sector Research Next-Generation Brazilian Consumer Focusing on Sustainable Actions Gustavo Piras Oliveira … p.27 Open Source Excellence Natura: A Sustainable Story João Paulo Ferreira … p.32 A Construction Co. Can Be Sustainable Carlos Terepins … p.34 Enhanced Analytics A New Approach to Looking at ESG Risk at the Country Level – Using Brazil as an Example A. Mihailescu Cichon, Anna Tuson … p.36 Virtual Attendance Sustainable Leadership Platform: Stories of People Who Lead Through Values… Ricardo Voltolini … p.38 Corporate Governance Insights Respecting Human Rights: Urgent, Necessary… Julie Tanner … p.40 Accelerating Impact Changing Dynamics of the Family Susan Golombok … p.42


CEOs Letter on Sustainable Finance & Banking

Erika Karp Founder and Chief Executive Officer of Cornerstone Capital Inc. and Former Head of Global Sector Research at UBS Investment Bank

This month in the Cornerstone Journal of Sustainable Finance & Banking (JSFB), we witnessed softer global markets with continued anticipation of interest rate normalization. Some relief came as the Fed finally unveiled the timing of the “taper.” Aside from this tension, and that of the implementation of the Volcker Rule with its consequences for the banking sector, we grapple with geopolitical stress around China Japan airspace, debates on the constitutionality of NSA data collection, and the prospects for European banking sovereignty. All that being considered though, it seems that every thing paled next to the depth of emotion expressed in honor of Nelson Mandela with his passing this month. In the context of global markets, and in particular as it relates to aspirations for capitalism, we refer to a comment from the American poet May a Angelou in response to a question about what she most respected about Mandela. She stated that is was his courage. Angelou said that courage is the most important v irtue; because without courage all the other v irtues can’t be practiced consistently . Mandela was a paragon of courage. We would suggest that if investors could show some portion of this courage of conviction in their analy tical processes, the best purposes of capitalism could be fulfilled to a greater degree...and Mandela could be proud. In considering aspirations to have an extraordinary societal and economic legacy , we turn our attention to Brazil this month. In a series of notes highlighting that nation’s tremendous challenges and opportunities, we start with a report from Marina Grossi, the President of CEBDS, the Brazilian Council for Sustainable Development. In our “Regional Im peratives” section of the JSFB, Marina highlights the extent to which the most courageous companies and business leaders are seeking tools and finding way s to articulate the need to “break away from immediacy .” Also this month in our “Regional Im peratives” section we feature a report from Harvard Business School Professor Robert Eccles addressing progress in Brazil around “Integrated Reporting” and corporate disclosure of financial performance. Given that the market structure in Brazil is still characterized by founding shareholders with significant control, Professor Eccles weighs the extent to which greater transparency will be embraced and adopted by the Boards of Brazil’s listed companies. Corporate Governance is the deciding factor here, and if the signals from the Institituto Brasileiro de Governança Corporativa (IBGC) give any insight, Brazil may very well strive to lead the way.


In this “Visão Brasil” referenced by Marina, attention is paid to the real costs and rewards of business, and the impact and dependence on natural and societal capital. This evolution is highlighted in our “Global Sector Research” section this month with discussions by Cornerstone’s Policy & Sustainability Analyst, Margarita Pirovska, on Brazil’s Energy Outlook, and by UBS Latam Director of Research and Consumer Analy st, Gustavo Piras Oliveira. While Margarita addresses the nation’s ability to reconcile its socio-economic and environmental imperatives in the context of its energy policy , Gustavo highlights the transformation of Brazil’s consumer landscape as the focus shifts from volume to value. This new generation of more sophisticated consumers will need to see corporations articulate their sense of heightened responsibility. Gustavo argues that innovations from companies like Ambev, Lojas Renner, Pão de Açúcar, and Natura will indeed pay off and drive demand and profitable growth in the long run. In leading the way this month, we offer two “Open Source Excellence” articles. The first from João Paulo Ferreira, Vice-President of Natura, treats us to insight into Natura’s pioneering business practices which leverage the beauty of the Brazilian genetic heritage. The second article is from the CEO of Brazil’s Even Construtora e Incorporadora SA. Carlos Terepins offers a shining example of setting a company ’s sights on sustainability where innovative management concepts and the courage of conviction can drive long-term success. Both of these notes highlight the inextricable link between long-term corporate profitability and a heightened consciousness of societal imperatives. In fact, many examples of corporate excellence are sighted by Ricardo Voltolini, the President of Ideia Sustentável in his “Virtual Attendance” report. Here Ricardo leverages the Sustainable Leadership Platform to seek out real business model evolution rather than rhetoric. With regard to the long-term success of investors, we turn this month to the “Enhanced Analy tics” section of the JSFB. In an article from Alexandra Mihailescu Cichon and Anna Tuson of RepRisk AG, we get introduced to a powerful new tool to analy ze ESG risk at a country level. Using Brazil as an example, the team highlights the ability to assess macroeconomic and political risk while leveraging a comprehensive database capturing criticism, controversy and incidents related to environment, labor and community issues. Turning even more explicitly to the “S” in ESG this month, we feature a number of articles beginning with a “Sustainable Editorial” from Cornerstone Board Director Andrew Macleod arguing that the financial industry must be sy stematic in factoring in community risk (which has potentially enormous destructive power over Net Present Value if poorly handled). The same can be argued for handling demographic trends in society and a company ’s ability to fully engage its workforce. So this month in our “Accelerating Im pact” feature, we turn to one of the world’s leading authorities on the outcomes for children of families using assisted reproductive services. Here, we have a “call to action” for participation in a new study of children of same-sex couples by


Dr. Susan Golombok of Cambridge University. We accompany this article with a new “Sustainable Product Review” on the wildly successful telev ision show “Modern Family .” Additionally we consider the critical issue of Human Rights in the context of corporate performance. In “Corporate Governance Insights”, Julie Tanner of CBIS articulates the steps needed in corporate engagement to optimize performance and in turn adequately protect shareholder value. As Julie states, respecting human rights is urgent, necessary , and not optional. Finally this month, we offer a “Featured Dom ain” which highlights the intangible value of human capital: ideas and relationships. “Domain Arbitrage.net” doesn’t seem to fall under the Volcker Rule and will hopefully have the not-so-unintended consequences of greater collaboration and transparency for the capital markets of the future. We wish a happy , healthy and prosperous New Y ear to our clients, colleagues and friends. We inv ite continued dialogue and feedback as we evolve this publication. And, as noted in the past, the above summary is being distributed to a broad group of capital markets participants. To receive the complete Cornerstone Journal of Sustainable Finance & Banking, we inv ite y ou to subscribe – click here for more information. My sincere regards, Erika Erika Karp Chief Executive Officer

http://www.cornerstonecapinc.com/CornerstoneJSFB_SubscriptionForm.pdf


Table of Contents

CEOs Letter on Sustainable Finance and Banking

p. 2

Market Summary Overview Market & Global Sector Performance, Monetary Policy & ESG Data

p. 7 p. 9

Featured Editorial The Value of Community Relations

Andrew MacLeod

Board member of

Cornerstone Capital, advisor to Gane Energy,

Critical Resource, author and former General

Manager at Rio Tinto

p. 17

Featured Domain DomainArbitrage.net

Erika Karp

CEO & Founder,

Cornerstone Capital and Former Head of Global Sector Research, UBS

Investment

p. 20

Regional Imperatives Acting in the Present w ith an Eye on the Future

Marina Grossi

President of CEBDS, the

Brazilian Business Council for Sustainable

Development

p. 22

Integrated Financial Reporting in Brazil

Robert G. Eccles

Professor of Management

Practice at Harvard Business School,

Chairman of SASB and member of the Steering

Committee of the International Integrated

Reporting Committee

p. 24

Global Sector Research Next-Generation Brazilian Consumers Focusing on Sustainable Actions

Gustavo Piras Oliveira

Latam Director of

Research and Consumer Analyst, UBS

p. 27

Brazil’s Energy Outlook – Reconciling Socio-Economic & Environmental Progress

Margarita Pirovska

Policy & Sustainability Analyst, Cornerstone

Capital

p. 29

Open Source Excellence Natura: A Sustainable Story

João Paulo Ferreira

Sales Vice-President,

Natura

p. 32

A Construction Company Can Be Sustainable

Carlos Terepins

CEO & Chairman of the

Board of Directors, Even Construtora e

Incorporadora SA

p. 34


Enhanced Analytics A New Approach to Looking at ESG Risk at the Country Level – Using Brazil as an Example

Alexandra Mihailescu Cichon Anna Tuson

Head of Business

Development, RepRisk AG Media and

Communications Lead, RepRisk AG

p. 36

Virtual Attendance Sustainable Leadership Platform: Stories of People Who Lead Through Values and Sustainability

Ricardo Voltolini

President-Director of

Sustainable Idea: Strategy and Intelligence in

Sustainability

p. 38

Corporate Governance Insights Respecting Human Rights: Urgent, Necessary, Not Optional

Julie Tanner

Assistant Director of Socially Responsible

Investing, Christian Brothers Investment

Services

p. 40

Accelerating Impact Changing Dynamics of the Family

Susan Golombok

Professor and Director,

Centre for Family Research, University of

Cambridge

p. 42

Sustainable Product Review The Television Series: “Modern Family”

Michael Shavel, CFA

Research & Business Analyst, Cornerstone

Capital

p. 45

Upcoming Events Global ESG Calendar

p. 47

Journal of Sustainable Finance & Banking Subscription Form Articles Cornerstone Capital Team

p. 48

p. 50 p. 51


Market Summary

Overview

As 2013 comes to a close, we reflect on a y ear that has rewarded owners of risk assets handsomely despite muted global economic growth. The savvy investor would remind us that the market is a discounting mechanism and, in fact, the market and economy do not alway s move simultaneously . Conversely , the savvy investor may warn that with greater expectations comes the risk of market volatility , should economic growth disappoint. With only a few ty pically quiet trading weeks remaining, the major U.S. indices have returned well bey ond their historic annual averages; the S&P 500 is currently up about 27% versus a historical annual average of 11-12%. Still, Fed policy around tapering remains the focal point, enabling the tug-of-war between “good news is good news” and “good news is bad news” market play ers to continue. The solid November jobs report was met with a positive market reaction, but the apparent U.S. budget deal has increased investor angst around a December taper announcement. (Note: As we go to print this morning, the Fed announced it will lower monthly asset purchases to $75B from $85B – more to come in next month’s market commentary ). In Europe, we are seeing marked improvement in PMIs and forward looking sentiment data. Despite what appears to be a simple case of profit taking over the last month, European indices have responded constructively to these improvements, and the Euro Stoxx 50 has returned 15% this y ear. This earnings season, we observed an increasing number of companies calling out Europe as a source of strength, or at least no longer an area of weakness. Meanwhile, Japan has rallied over the last month and added to its already remarkable +50% y ear-to-date performance (albeit Japan is “only ” up ~24% in local currency). The priority in Japan is to generate growth momentum and inflation, crucial precursors to the potential short-term deflationary effects of the third and ultimately most important leg of Abenomics – structural reform.

China’s debt-driven investment boom will likely continue to decelerate, but we are focused on developments around structural reform. The Chinese government’s commitment to allow markets to play a “decisive role” in the allocation of resources could have enormous ramifications. We’re keen to see whether this proclamation manifests itself in improved governance; in particular, we’d be encouraged by less wasteful spending and excess capacity, more focus around returns on investment, and enhanced transparency. Of course these reforms won’t happen overnight, but the market takes notice of changes on the margin. Market apprehension around Fed tapering jarred emerging markets earlier this y ear with equities, fixed income, and currencies all witnessing significant volatility . Investors arguably have become slightly more comfortable with the idea of tapering and certain emerging markets have correspondingly recovered. Others, such as Brazil, have continued to experience pressure across all asset classes. Brazil’s economic growth has slowed substantially – an economy that expanded at a rate of 7 .5% in 2010 registered growth of 1% last y ear and is forecast to grow at a pedestrian 2.5% this y ear. Disappointing economic growth coupled with higher than expected inflation has led to capital induced outflows, a weaker Brazilian real, and higher interest rates. Rising government intervention is also keeping investors at bay . One only has to look at Petrobras’ refining unit which has incurred massive costs due to government directed fuel subsidies. To add to Brazil’s market woes, the collapse of Eike Batista’s oil company , OGX, not only represents Latin America’s largest default ever, but has triggered a federal investigation into suspicious trading activ ity leading up to the bankruptcy filing. These headwinds have led to the Bovespa index declining 18% and 27 %, in dollar and real terms, respectively . Notwithstanding market nervousness around the ramifications of Fed policy

The Cornerstone Journal of Sustainable Finance & Banking SM / December 2013 / 8

on Brazil’s capital markets, the country ’s attractive demographics and emerging middle class continue to attract investor attention to certain industries, such as education, retail, healthcare, and banking. On a trailing one month basis, emerging markets managed to close the year-to-date performance gap with developed markets, with the MSCI Emerging Markets index outperforming the MSCI World index by approximately 50 basis points. Large cap

outperformance continued as the S&P 500 returned 0.6% and outperformed the Russell 2000 by about 40 basis points. From a sector perspective, there wasn’t a clear preference for cy clical or defensive sectors. In the MSCI ACWI (broad index for both developed and emerging equities), technology , healthcare, and consumer discretionary outperformed while utilities, materials and consumer staples lagged.


Market Summary

Market and Global Sector Performance

MARKET / INDEX PERFORMANCE

As of 12/13/13 (local currency) T1M (%) T3M (%) YTD (%) 2014E P/E 2014E P/B Div. Yield

US Equity Indices

DJIA -0.12 3.08 23.22 13.8 2.6 2.4

S&P 500 -0.17 5.72 27.05 14.5 2.3 2.2

Nasdaq 1.03 7.86 34.20 17.5 2.8 1.3

Russell 2000 -0.34 5.38 31.95 21.1 1.9 1.3

Developed International Indices

Euro STOXX 50 -3.17 2.47 15.24 12.0 1.3 4.0

FTSE 100 -2.66 -1.48 13.69 12.1 1.6 4.1

CAC 40 -4 -0.86 15.31 12.0 1.2 3.9

DAX -0.53 5.84 18.31 12.1 1.5 3.1

Nikkei 225 5.74 7.53 50.51 17.4 1.6 1.7

ASX 200 -4.11 -1.63 14.29 13.3 1.8 5.0

Emerging Market Indices

IBOVESPA -4.17 -6.96 -17.88 10.2 0.9 4.1

Shanghai Comp 5..18 -1.78 -0.24 8.5 1.2 3.4

KOSPI -0.03 -1.57 -1.53 9.2 1.0 1.3

SENSEX 2.64 5.17 8.34 12.8 2.2 1.9

Global Market Indices

MSCI World -0.70 4.09 21.77 14.0 1.8 2.7

MSCI All-Country World -0.5 3.71 18.4 13.4 1.8 2.8

MSCI EAFE -1.21 2.37 17.24 13.0 1.5 3.5

MSCI Emerging Markets 1.16 0.73 -3.65 10.0 1.4 3.0


MARKET / INDEX PERFORMANCE (CONTINUED)

As of 12/13/13 T1M (%) T3M (%) YTD (%)

2014E P/E

2014E P/B

Div. Yield

Sustainable Indices DJ Sustainability World Comp -1.82 3.02 17.31 12.5 1.6 3.3

FTSE4Good -0.69 4.11 21.07 13.3 1.7 3.1 Bovespa Corp. Sustainability -3.4 -3.12 -0.91 10.4 1.3 4.1 Fixed Income

Barclays US Aggregate -0.07 1.57 -1.82 Commodities Levels

12/13/2013 6/13/2013 12/13/2012

WTI Crude 96.6 96.69 85.89 ICE Brent Crude 108.88 104.25 107.91 NYMEX Natural Gas 4.4 3.81 3.35 Spot Gold 1238.69 1386.15 1697.1 LME 3mth Copper 7226 7050 8074 CBOT Corn 4.21 6.44 7.12 CRB Raw Industrial Spot Index 529.61 526.98 525.53 Currencies Levels

12/13/2013 6/13/2013 12/13/2012

EUR/USD 1.38 1.34 1.31 USD/JPY 103.38 95.37 83.26 GBP/USD 1.64 1.57 1.61 AUD/JPY 92.39 91.93 87.88 DXY Index 80.21 80.75 79.82

Source: Bloomberg, Barclays. Equity Returns: All returns represent total return for stated period. Dividends and coupons are not included in the DAX and BOVESPA indices. Bond Returns: All returns represent total return for the stated period. Index characteristics: P/E, P/B, and Dividend Yield are based on Bloomberg consensus estimates for the stated period.


MSCI ACWI SECTOR PERFORMANCE

as of 12/13/13

1 Month Return (%)

Source: Bloomberg. Sector returns are based on GICS methodology. MSCI ACWI is a free-f loat weighted equity index that includes both emerging and developed w orld markets.

YTD Return (%)

Source: Bloomberg. Sector returns are based on GICS methodology. MSCI ACWI is a free-f loat weighted equity index that includes both emerging and developed w orld markets.

U.S. EQUITY STYLE PERFORMANCE Style box returns are based on Russell Indices with the exception of the Large-Cap Blend box, which reflects the S&P 500 Index. All values are cumulative total return for the stated period including the reinvestment of dividends. The index used from left to right, top to bottom are: Russell 1000 Value Index, S&P 500 Index, Russell 1000 Growth Index, Russell Mid Cap Value Index, Russell Mid Cap Index, Russell Mid Cap Growth Index, Russell 2000 Value Index, Russell 2000 Index and Russell 2000 Growth Index.

1 Month

Source: Bloomberg

Year to Date

Source: Bloomberg

Cons Disc.HealthcareIndustrialsInfo Tech

MSCI ACWITelecom

FinancialsCons Staples

EnergyUtilities

Materials

-10 0 10 20 30 40

27.4

28.4

28.4

27.1

32.0

29.4

27.9

35.7

35.7

Value GrowthBlend

Smal

lLa

rge

Mid

-0.3

Valu

Growt

Blen

0.2

-1.1

-0.2

-0.3

-0.6

0.0

-0.9

-0.1

Mid

La

rge

Sm

all


SECTOR SNAPSHOT – TOP 5 COMPANIES BY MARKET CAP as of 12/15/13

Company Name Ticker Country Industry Mkt Cap (US$ Bn)

Price (Local)

Total Return YTD % (local)

P/E 2013E

EV/EBITDA 2013E

Div Yield % 2013E

Consumer Disc.

Toy ota Motor Corp 7203.JP Japan Automobiles 203.0 6060 54.7 10.3 9.7 N/A

Amazon AMZN US Internet & Catalog Retail 178.1 389 55.1 158.4 34.4 N/A

Comcast Corp CMCSA US Media 128.5 49 34.2 19.8 8.0 1.6

The Walt Disney Co DIS US Media 123.8 70 43.3 17.8 10.3 1.2

Volkswagen VOW3.GR Germany Automobiles 120.3 192 14.5 9.5 7.6 1.8

Consumer Staples

Wal-Mart Stores WMT US Food & Staples Retailing 252.2 78 17.0 15.1 8.3 2.4

Nestle SA NESN.VX US Food Products 230.1 63 9.5 18.5 13.0 3.2

The Proctor & Gamble Co

PG Switzerland Household Products 223.2 82 24.7 19.1 12.6 2.9

The Coca-Cola Co KO US Bev erages 174.3 39 12.0 18.9 14.1 2.8

Anheuser-Busch Inbev

ABI.BB Belgium Bev erages 164.0 74 16.3 21.3 12.5 1.6

Energy

Exxon Mobil XOM US Oil, Gas & Consumable Fuels

427.2 98 16.1 13.2 5.8 2.6

Petrochina Co 857.HK China Oil, Gas & Consumable Fuels

231.8 9 -17.9 9.9 5.3 4.3

Chev ron CVX US Oil, Gas & Consumable Fuels

231.3 120 14.9 10.5 4.4 3.3

Roy al Dutch Shell RDSA.LN Netherlands Oil, Gas & Consumable Fuels

218.1 2071 3.0 9.6 4.3 5.5

BP Plc BP/ LN UK Oil, Gas & Consumable Fuels

143.1 472 16.9 10.2 4.3 5.5

Financials

Berkshire Hathaway - CL B

BRK/B US Div ersif ied Financial Serv ices

281.6 114 27.3 18.7 N/A N/A

Wells Fargo & Co WFC US Commercial Banks 231.6 44 32.4 11.4 N/A 2.7

Ind & Comm Bank of China

1398.HK China Commercial Banks 219.5 5 2.2 5.6 N/A 5.7

JPMorgan Chase JPM US Div ersif ied Financial Serv ices

213.9 57 33.0 10.2 N/A 2.7

HSBC Holdings Plc HSBA.LN UK Commercial Banks 200.3 652 5.3 11.2 N/A 5.3


SECTOR SNAPSHOT – TOP 5 COMPANIES BY MARKET CAP (CONTINUED)

as of 12/15/13


Price (Local)


P/E 2013E

EV/EBITDA 2013E

Div Yield % 2013E

Health Care

Johnson & Johnson JNJ US Pharmaceuticals 257.8 91 34.3 16.7 10.5 2.9

Roche Holdings ROG.VX Switzerland Pharmaceuticals 228.8 235 32.3 15.7 10.9 3.1

Nov artis AG NOVN.VX Switzerland Pharmaceuticals 208.1 68 23.1 15.0 13.1 3.4

Pf izer PFE US Pharmaceuticals 195.8 30 24.5 13.9 7.7 3.2

Sanof i SAN.FP France Pharmaceuticals 134.0 73 6.1 14.3 9.8 3.8

Industrials

General Electric Co GE US Industrial Conglomerates 272.9 27 31.6 16.5 10.0 3.3

Siemens AG SIE.GR Germany Industrial Conglomerates 116.4 96 25.0 14.2 9.3 3.1

The Boeing Co BA US Aerospace & Def ense 101.1 135 82.0 20.7 11.0 1.4

United Technologies

UTX US Aerospace & Def ense 99.3 108 35.0 17.6 10.8 2.2

United Parcel Serv ice

UPS US Air Freight & Logistics 94.7 102 42.2 21.4 10.9 2.4

Inf o Tech

Apple AAPL US Computers & Peripherals

505.3 562 8.2 12.9 6.4 2.2

Google GOOG US Internet Sof tware & Serv ices

358.0 1072 51.5 24.3 14.2 N/A

Microsof t Corp MSFT US Sof tware 307.9 37 42.3 13.9 7.9 3.0

Samsung Electronics

005930.KS South Korea

Semiconductors & Semiconductor

195.9 1400000 -8.0 10.7 3.2 0.6

IBM IBM US IT Serv ices 192.1 177 -5.9 10.5 8.1 2.1

Materials

BHP Billiton Ltd BHP.AU Australia Metals & Mining 164.4 36 -0.6 12.2 6.2 4.9

Rio Tinto Ltd RIO.AU Australia Metals & Mining 99.5 65 1.3 11.4 6.7 4.1

BASF BAS.GR Germany Chemicals 94.7 75 9.1 14.0 8.2 3.5

Saudi Basic Ind. SABIC.AB Saudi Arabia

Chemicals 88.2 110 29.5 12.5 7.0 3.6

Vale SA VALE3.BZ Brazil Metals & Mining 77.5 35 -14.0 7.0 4.7 0.7


SECTOR SNAPSHOT – TOP 5 COMPANIES BY MARKET CAP (CONTINUED)

as of 12/15/13


Price (Local)


P/E 2013E

EV/EBITDA 2013E

Div Yield % 2013E

Telecom

China Mobile Ltd 941.HK Hong Kong Wireless Telecommunication Ser

208.2 80 -7.2 9.8 3.3 4.3

Vodaf one Group VOD.LN UK Wireless Telecommunication Ser

180.0 228 55.5 16.4 10.5 5.1

AT&T T US Div ersif ied Telecommunication

180.2 34 6.5 13.8 6.2 5.4

Verizon Communications

VZ US Div ersif ied Telecommunication

138.5 48 16.8 17.2 5.6 4.4

Sof tbank Corp 9984.JP Japan Wireless Telecommunication Ser

100.6 8620 176.6 24.6 9.8 0.5

Utilities

EDF EDF.FP France Electric Utilities 64.6 25 92.8 13.7 5.2 4.9

GDF Suez GSZ.FP France Multi-Utilities 54.7 16 15.3 11.8 6.9 9.1

Duke Energy DUK US Electric Utilities 48.5 69 12.5 15.9 10.5 4.5

National Grid Plc NG/ LN UK Multi-Utilities 46.7 768 15.3 14.8 9.7 5.9

Enel SpA ENEL.IM Italy Electric Utilities 39.9 3 4.4 9.7 6.4 4.9

Source: Bloomberg. The securities in each sector represent the largest companies by market cap in the MSCI ACWI in their respective sectors. Sector classif ication is based on GICS methodology. Equity characteristics: P/E, EV/EBITDA and Dividend Yield are based on Bloomberg consensus estimates for stated period.

GDP / CONSUMER PRICE INFLATION / RATES

Region/Countries Real GDP (% YoY) CPI (% YoY) Official Rates Long Rates 2012A 2013E 2014E 2012A 2013E 2014E 2012A 2013E 2014E 2012A 2013E 2014E United States 2.8 1.7 2.6 2.1 1.5 1.9 0.25 0.25 0.25 1.8 2.8 3.4 Euro area -0.7 -0.4 1.0 2.5 1.4 1.2 0.75 0.25 0.25 1.3 - - Europe -0.3 0.1 1.4 2.3 1.4 1.4 0.70 0.34 0.35 2.6 2.7 3.1 Japan 1.5 1.8 1.6 0.0 0.3 2.4 0.10 0.10 0.10 0.8 0.7 0.9 UK 0.1 1,4 2.4 2.8 2.6 2.2 0.50 0.50 0.50 1.8 2.8 3.3 Australia 3.6 2.5 2.7 1.8 2.4 2.6 3.00 2.50 2.63 3.3 4.2 4.5 China 7.7 7.6 7.5 2.7 2.7 3.2 6.00 6.00 6.00 3.6 4.5 4.4 Brazil 1.0 2.5 2.5 5.4 6.2 5.8 7.25 10.00 10.25 9.2 - - India 5.1 5.0 4.8 9.3 9.6 9.1 8.00 6.88 6.75 8.2 8.7 8.4 Source: Bloomberg. Estimates are composite of Bloomberg contributor estimates.


MONETARY POLICY

Dec-13 Jun-13 Dec-12 Monetary Base grow th (YoY)

39.3% 21.1% 1.4%

M-2 grow th (YoY)

6.0% 6.9% 7.5% Money multiplier (M-2/mon base)

2.95 3.26 3.9

3Q13 3Q12 3Q11 Velocity of money (GDP/M-2) 1.54 1.63 1.66 Source: Federal Reserve Bank of St. Louis ESG DATA

2012 2011 2010

Total Global Wind Installations (MW)

282,587.0

238,050.0

197,637.0

Annual World PV New Build (MW)

31,095.0

30,391.0

16,817.0

1Q13 4Q11 4Q10 Global Aggregate % of Women on Boards

11.0 10.5 9.8

ESG DISCLOSURE SCORES OF LARGEST ECONOMIES (2013)

Composite Environ Social Governance 1. United States 14.4 19.7 14.5 48.8 2. China 16.5 10.3 20.1 43.2 3. Japan 19.8 28.8 21.7 43.3 4. Germany 26.3 29.4 38.0 38.0 5. France 36.5 34.9 46.9 52.1 6. Brazil 32.7 30.8 53.6 39.8 7. United Kingdom 29.1 20.7 32.3 53.5 8. Russia 17.3 19.6 32.7 40.9 9. Italy 32 35.4 42.5 42.5 10. India 14 10.8 11.8 42.4

HIGHEST ESG DISCLOSURE SCORES

Composite Environ Social Governance 1. Spain

41.5 46.4 56.9 46.7

2. Finland

38.4 33.9 38.2 56.6 3. France

36.5 34.9 46.9 52.1

4. Portugal

34.9 37.7 38.7 47.1 5. Jersey

33.7 24.3 44.6 55.4

6. Sw eden

33.6 26.9 39.3 53.5 7. Brazil

32.7 30.8 53.6 39.8

8. Colombia

32.0 36.2 46.8 33.7 9. Italy

32.0 35.4 42.5 42.5

10. South Africa

30.8 24.0 40.0 55.1 Source: ESG Disclosure scores are sourced from Bloomberg ESG data w hich is collected from company sourced f ilings such as CSR reports, annual reports, company w ebsites and a proprietary Bloomberg survey that requests corporate data directly. Source: Bloomberg, GMI Ratings


KEY ECONOMIC CHARTS

C&I Loan Growth (%)

Source: Bloomberg

University of Michigan Survey of Consumer Sentiment

Source: Bloomberg

NFIM Small Business Optimism Index

Source: Bloomberg

ISM Manufacturing Purchasing Managers Index

Source: Bloomberg

U.S. Treasury Yield Curve

Source: Bloomberg

U.S. Initial Jobless Claims

Source: Bloomberg

-25

-20

-15

-10

-5

0

5

10

15

20

25

3019

6019

6219

6419

6619

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Featured Editorial

The Value of Community Relations

By Andrew MacLeod, a Board member of Cornerstone Capital, advisor to Gane Energy (Australia), Critical Resource (UK), former General Manager at Rio Tinto and author.

Community school in India ©Andrew MacLeod

Com munity risk is the one area of risk that can destroy 100% of Net Present Value. So why doesn’t the finance industry agree on how to factor in that risk? Here is a challenge of the investment industry: When valuing assets for prospective investment, are fund managers properly measuring community risk? If a company has a good community relationship that is not being valued properly then Net Present Value of company assets (NPV) will be underestimated and a good investment opportunity may be missed. On the other hand, if a poor community relationship is not being measured then the NPV may be artificially inflated and an investor may be buy ing into a dud. When looked at this way community development programs are more than just green-washing, they are value creating. Some in the left wing find it hard to accept that there is a growing role of the private sector in play ing a genuine and real role in community development. They are skeptical and think such programs are only window dressing. Equally some hard-nosed business leaders think such programs are done to protect the corporate reputation but provide little measurable benefit to the bottom line. Both of these v iews are wrong. While many companies have ‘Corporate Social Responsibility ’ (CSR) programs, leading companies have moved bey ond CSR to ‘Shared Value’. Leading companies do this not because they have taken a ‘be nice’ pill, but rather because leading companies now understand truly effective and non ‘green-washing’ community programs reduce community risk and thereby increase the NPV) of their assets in non OECD economies. In the resource sector for example, the value of a mine, ore body or natural resource is often expressed in terms of NPV. Put simply , NPV of the asset is calculated by subtracting Net Present Cost from the Net Present Revenue. Net Present Revenue, in simple terms, is calculated by estimating future


Andrew MacLeod is a Board member of Cornerstone Capital Inc (New Y ork), advisor to Gane Energy (Australia), Critical Resource (UK), former General Manager at Rio Tinto and a former senior official of the United Nations and the International Committee of the Red Cross. He is the author of ‘A Life Half Lived’ by New Holland Press.

revenue over the life of an asset and subtracting from that figure a discount for things such as cost of holding money , sovereign risk and community risk. Net Present Cost is calculated in a similar way for costs looking at the best estimates of asset construction and running costs over life of mine. Genuinely reducing community risk can increase the value of assets as measured in today ’s balance sheets. Let me take y ou through a hy pothetical and simplified example. Let’s say a mining company is looking to develop a new copper mine in a remote region with an estimated life of mine of 100 y ears. The Rio Tinto operated Oy u Tolgoi mine in Mongolia would be such a mine. Let’s hy pothetically say the future costs of construction and operating the mine expressed in today ’s terms is $100 billion over the life of the mine. Let’s now say that estimated future revenue is $150 billion. Let’s now discount that amount by 10% for the cost of holding money , 10% for community risk and 10% for sovereign risk factors. This would give a total discount on future revenue of $45b leav ing Net Present Revenue (NPR) of $105b. Taking from this the $100b in Net Present Cost (NPC) leaves a NPV of $5b. If the company were to implement a genuine community risk reduction process, and genuinely involve the community in discussions around issues of concern such that the community risk rating could be reduced from say 10% to 5%, let's see what happens to NPV. NPR of $150b discounted by 10% for cost of holding money , 10% for sovereign risk and only 5% for community risk gives a 25% discount of $37 .5b instead of $45b. NPV rises from $5b to $12.5b, more than doubling the value in today ’s balance sheet. BHP Billiton and Rio Tinto, the two largest global mining companies, are well known for their risk reduction approach. They see this as a critical element of maintaining their positions among the lowest quartile cost producers in the commodities of their choice. A focus on cost reduction and risk reduction is the reason that commodity prices tend to stabilise above their cost of production ensuring long term profitability . Let’s examine another example. Recently I was approached by a Chilean mining company and asked to advise on the transport of sulphuric acid from port to mine. The company had the choice between road and rail freight, with the rail

http://www.amazon.com/Life-Half-Lived-Andrew-MacLeod/dp/1742572529/ref=sr_1_1?ie=UTF8&qid=1386602941&sr=8-1&keywords=A+Life+Half+Lived


option being slightly more expensive than road. Management were leaning towards the road option because of the lower freight rate. But how does risk factor into the overall value? The lower freight rate of road will reduce the NPC of the operation and thereby increase NPV. But road transport has three significant risk factors that rail does not: Catastrophic spill, community dissatisfaction of road congestion and community dissatisfaction on particulate pollution. The road option is likely to have a higher risk rating than rail, hence there should be a higher discount rate applied to future revenue and therefore reduce NPR. Hence the road option will both reduce NPC and NPR. The question is what happens to NPV? Does risk impact on value more than freight rate? Would rail, on balance be a better option? This is a question management often avoid answering because the calculation involves some degree of artistry rather than science. Good management must tackle this question though. Here is another example. BHP Billiton, the world’s largest mining company runs one of the world’s most effective anti-malaria programs in Mozal Mozambique, not because it is nice, but because it increases value. The company’s program has reduced adult malaria infection from above 90% of the adult population to below 10%. The improved community health has lowered absenteeism in the work force and that has increased the productivity of their operation by a measurable amount higher than the cost of the program itself. When measured well, one can demonstrate that the anti-malaria program is directly , measurably profitable. Additionally the company can lower the risk rating as the community genuinely values the mining company impact hence increasing NPV still further. How much does this really matter? Well ask y ourself this: Rio Tinto wrote off $3b in value from their Mozambique Coal assets recently . The asset was purchased for $4b, less than half a decade ago. That is ¾ of the value lost. How much of that write down was caused by the lack of gaining permits to use the Zambezi River as route to port for the coal? According to the company , a lot. And how much was community dissatisfaction involved in not gaining the permits?


Featured Domain

DomainArbitrage.net

By Erika Karp, Founder & CEO, Cornerstone Capital Inc.

Each month in the Cornerstone Journal of Sustainable Finance & Bank ing (JSFB), we will offer thoughts on a “Featured Domain” which is selected from our proprietary “Sustainable Domain Bank”. The Cornerstone “Sustainable Domain Bank” contains 2,000+ addresses on the Internet which are an articulation of business processes, business practices, and aspirations for a more regenerative form of capitalism. Many of these domain names have the potential to be developed into business plans reflecting a robust interpretation of sustainable capitalism and finance. In particular, each “Sustainable Domain” captures a principle, or reflects a value inherent in the systematic understanding of the Environmental, Social, and Governance (ESG) imperatives facing businesses and the economy today. Each Domain is intended to facilitate dialogue across functions and sectors of the capital markets; and each is available for collaborative partnership, purchase or transfer should it have particular appeal to Cornerstone clients and colleagues.

In recent times the world’s banking entities have been analy zing the finalization of the Volcker Rule portion of the Dodd-Frank Act. The rule, which includes the restriction of banks from engaging in proprietary trading of certain securities, derivatives and options, effectively bars these entities from behaving like hedge funds. One particular activ ity often associated with hedge funds is “risk arbitrage.” Is this note, we take a moment to consider that term which might seem to be an oxymoron: “risk riskless profit.” Arguably there’s no such thing. The reality is that there can be something fairly close…but it takes real expertise and precision to profit. Webster’s dictionary defines “arbitrage” in finance as “the simultaneous or near simultaneous purchase and sale of the same or closely linked securities or commodities in different markets to make a profit on the (often small) differences in price.” But, in evaluating the profit opportunity , both financial costs and opportunity costs need to be considered as arbitrageurs would seek to make enough money to justify not working on other productive activ ities requiring an equivalent skill set.

As an example, risk arbitrageurs (a/k/a merger

arbitrageurs) do indeed bring a unique skill set to their discipline. In a corporate merger, until the

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Nagy-Bagoly Arpad ©Shutterstock acquisition is completed, the stock of the target ty pically trades below the purchase price. If the arbitrageur buy s shares of the target plenty of expertise is needed to assess the risks of the deal failing based on any thing from the two parties ability to satisfy the deal conditions, shareholder approvals, antitrust or regulatory clearance etc. In other words, there’s plenty of risk in risk arbitrage. As is there in other hedge fund strategies such as convertible arbitrage, volatility arbitrage, and statistical arbitrage. In considering a new kind of arbitrage, one which also leverages an important skill set, we suggest that “domain arbitrage” comes close to offering the promise of something approaching “riskless profit.” The skill set here would be the ability to recognize the value of intangibles. In particular, we argue that there is huge value in intangibles such as intellectual property , ideas, relationships, and collaboration. Domain names, or the sequence or words comprising an internet address, have real value. Words matter. The ability to combine words and create recognizable, memorable, meaningful spaces in the internet, and then make them available to others who would use them to their best and highest purpose is the essence of “domain arbitrage.” At Cornerstone Capital Group we applaud the capitalist profit motive associated with creativity and

innovation. We suggest that new ideas should be well-articulated, commercialized and protected…and given the space to prosper. The internet allows for this. We will proudly engage in the free exchange of ideas represented by “domain arbitrage.” The principles and images associated with Gandhi’s Voice (GandhisVoice.com), Mandela’s Voice, Aristotle’s Voice and Churchill’s Voice have much that is aspirational for business leaders. The need to articulate the value of the world’s species to our eco-sy stems is essential. We do not want to see the Last Panda (TheLastPanda.org), the Last Chimpanzee, The Last Starfish, The Trillionth Ton (of CO2), or The Last Woman. And we want to encourage and embrace great governance (GovernanceGames.com), better regulatory frameworks (JudicialOversight.us), and excellent long-term business practices (SustainableShipping.com). We suggest that all companies engage in some Sustainability Mapping (.com) and seek to optimize their performance along the lines of the most material Environmental, Social and Governance (ESG) metrics applicable for their respective industry and business, and which drive their long-term profitability .

Erika Karp is the Founder & Chief Executive Officer of Cornerstone Capital Inc. and the former Head of Global Sector Research at UBS Investment Bank.


Regional Imperatives

Acting in the Present with an Eye on the Future

By Marina Grossi, President of CEBDS (Conselho Empresarial Brasileiro para o Desenvolvimento Sustentável), the Brazilian Business Council for Sustainable Development.

© NatUlrich/Shutterstock

In Brazil the sustainability agenda has been gaining traction through the action of the more daring businesses that have a clear v ision for the future. A select group of some 70 of these big businesses is represented by the Brazilian Business Council for Sustainable Development (CEBDS: Conselho Empresarial Brasileiro para o Desenvolvimento Sustentável in Portuguese), a civ il association founded in 1997 to promote sustainable development in the country through tools, qualification, articulation, special projects and by championing the subject to businesses, governments and civ il society . One of the more recent contributions, a document titled Visão Brasil 2050, was released during Rio+20 and contains a set of recommendations of what actions need to be undertaken by governments, businesses and civ il society , so we can reach the midway point of this century with the ability to offer a decent quality of life to 260 million Brazilians without exceeding the planet’s limits. The document quickly gained acceptance amongst academics, environmentalists and, naturally , businesses. It has drawn the attention of governments and is slowly influencing the way business is conducted and the way sustainability is approached in the country . But breaking away from immediacy is a large, perhaps the largest, challenge in building a better country like Visão Brasil 2050 proposes. Government officials only address the more immediate demands made by their constituents, often compromising mid or long term results. Business leaders are pressured to prov ide answers and short-term returns to investors and stock holders, often reducing the decision making process to a purely economic dimension, in other words, to the immediate cost and benefit of an action. The goal of documents like Visão Brasil or even the World Business Council for Sustainable Development’s (WBCSD) original document: Vision 2050 – The New Agenda for Business – that inspired studies adapted to local realities by a good part of this network of more than 60 national councils, is to aid leaders in government, business and other sectors of society to not commit the same mistakes of the past. The most sy mbolic of these mistakes is making decisions based on short term results and on outdated metrics about the real costs and rewards, about the impact and dependence of natural and social capital.


Marina Grossi is the President of CEBDS (Conselho Empresarial Brasileiro para o Desenvolvimento Sustentável), the Brazilian Business Council for Sustainable Development.

Big businesses in Brazil have already begun to consider the study ’s recommendations in their strategic planning, but it is only natural that after identify ing with a long term v ision that they should seek a plan of action to achieve those goals in a shorter period of time. This, then, is the concept for the WBCSD’s network new project, called Ação 2020 (Action 2020), a global platform for the consolidation of a business agenda for the end of this decade. The project seeks to identify the business actions capable of responding to the urgent needs of societies in areas that are a priority for sustainable development, pursuing both scale and speed in reaching goals shared by businesses, governments and people. With the support of scientists at the Stockholm Resilience Center, Action 2020 is developing an agenda with nine areas of overriding importance for a v ision of global development, but that depending on local demands, can and should be applied to a greater or lesser extent by all countries. The areas that must be debated during the course of developing Action 2020’s propositions are: Climate Change, Phosphorus and Nitrogen Cy cle, Ecosy stems and Environmental Serv ices, Emission of Harmful Substances, Water, Human Development, Employ ment and Qualification, Well Being and Sustainable Lifesty les and Food Safety . In Brazil the CEBDS has already begun to develop a methodology to adapt the project to the local realities. The project will depend greatly on the involvement of specialists, academics and businessmen for the creation of the first draft of the platform to be launched in 2014. The importance of these partnerships sy mbolizes our willingness to undertake an audacious and crucial project that proposes a common agenda, highlighting successful initiatives capable of giv ing this new model of development a sense of scale and speed, bringing businesses and society together to create a more ethical, just and sustainable country .


Regional Imperatives

Integrated Financial Reporting in Brazil

By Robert G. Eccles, Professor of Management Practice at Harvard Business School, Chairman of the Sustainability Accounting Standards Board, and member of the Steering Committee of the International Integrated Reporting Committee. Photo Caption ©TBC

©alphaspirit /Shutterstock

According to the International Integrated Reporting Council (IIRC) in its recently released The International <IR> Framework, “The primary purpose of an integrated report is to explain to prov iders of financial capital how an organization creates value over time. It therefore contains relevant information, both financial and other.” (p. 7 ). There are many different ty pes of financial capital, starting with the basic distinction between equity and debt. To the extent that investors are interested in integrated reporting, at this early stage of its development it is primarily on the equity side. Of course, equity investors are not a homogenous group since they represent very different investment strategies (e.g., value vs. growth) and differ in the time frames in which they intend to own a company ’s shares. Some hold stocks for such a short period of time—such as those using algorithmic trading programs—that they really aren’t investors at all; they ’re simply traders. They won’t care about integrated reporting. In fact, they don’t even care about a company’s financial performance, only about how its stock price is moving with respect to some market comparison. At the opposite extreme are founding shareholders, most of whom have an inherently long-term v iew while also caring about short-term results since these provide an important discipline to prevent the “hockey stick” phenomenon of excusing poor short-term results with the illusory promise of long-term gains. In Brazil, it is common for founding shareholders to still have effective control even after the company has gone public. Of the 500 companies listed on BM&F BOVESPA, many if not most of them are controlled by their founders and/or a family group. What are the implications of this market structure for the adoption of integrated reporting in Brazil? One argument would be that companies there will be more likely to adopt integrated reporting because it will prov ide the controlling shareholders with the ty pe of information they need. Due to their long-term orientation, these controlling stakeholders will be more likely to engage in “Integrated thinking” which “takes into account the connectiv ity and interdependencies between the range of factors that affect an organization’s ability to create value over time” and how to manage “the capitals that the organization uses or affects, and the critical interdependencies, including tradeoffs, between them” (p. 2 ) The IIRC identifies six capitals as the basis of value creation over

http://www.theiirc.org/wp-content/uploads/2013/12/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf


Robert Eccles is a Professor of Management Practice at the Harvard Business School. He is a member of the Steering Committee of the International Integrated Reporting Committee, Chairman of the Sustainability Accounting Standards Board and co-author of The ValueReporting Revolution: Moving Beyond the Earnings Game, Building Public Trust: The Future of Corporate Reporting and One Report: Integrated Reporting for a Sustainable Strategy.

the short, medium and long term: financial, manufactured, natural, human, intellectual, and social and relationship. Further to this argument, integrated reporting might also help the company attract a remaining investor base that has a larger proportion of long-term shareholders, thereby mitigating short-term market pressures which Brazilian companies are still subject to. The converse argument is that this market structure will impede the adoption of integrated reporting. To the extent that founding shareholders or succeeding generations of family members are still involved in the management of the firm, they can get the information they need. They can provide themselves and their board with “internal” integrated reports but will not feel the need to publish them externally . In fact, they might be especially reluctant to do so. For example, companies often express some nervousness about the Guiding Principles of “Strategic focus and future orientation” and “Materiality ” and the Content Elements of “Business model” and “Strategy and resource allocation.” The concern is that prov iding such information will be useful to competitors. Founding shareholders and subsequent generations of family owners are even more likely to be wary of such levels of transparency than are executives of companies whose shares are widely dispersed. One piece of ev idence that Brazil’s market structure will contribute to a more rapid adoption of integrated reporting in this country than in others is the fact that Brazil has the largest number of most of companies (tied with the United Kingdom at 12) in the IIRC’s “Pilot Programme.” The companies are AES Brasil, BNDES, BRF S.A., CCR S.A., CPFL Energia, Fibria Celulose S.A., Grupo Segurador Banco di Brasil e Mapfre, Itau Unibanco, Natura, Petrobras S.A., Via Gutenberg, and Votorantim. Of these, a majority of them have a controlling shareholder, including Natura which is one of the best-known early adopters of integrated reporting. Like Novo Nordisk, they started practicing this some 10 y ears ago. This formulation ignores an important—and determinant—variable: corporate governance. In Brazil, as in the United States, the board’s responsibility is to represent the interests of the corporation as an entity hav ing its own legal identity separate from management, shareholders, and other stakeholders. In the United States, the prevailing ideology is that directors have to put shareholders’ interests first, even though this is not the law. In Brazil, directors also represent the interests of the corporation and in practice recognize that this means taking into account the demands and expectations of shareholders and all other stakeholders. However, a market structure of concentrated ownership means that directors often end up being appointed by the controlling shareholder and representing their interests over those of other

http://www.amazon.com/ValueReporting-Revolution-Moving-Beyond-Earnings-ebook/dp/B000PY4VTW/ref=sr_1_4?ie=UTF8&qid=1387206354&sr=8-4&keywords=robert+eccles



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shareholders, even though they may take account of how stakeholders’ interests affect those of the controlling shareholders. Whatever the ownership structure, it is the board’s responsibility to determine what information it needs to properly exercise its fiduciary duty . Integrated reporting will help it do so. It is also the board’s responsibility to ensure that shareholders and other stakeholders are getting the information they need to make their resource allocation decisions. For shareholders this is capital in its various forms and for stakeholders it is how they allocate their time to engage with companies on the issues that are important to them. Again, integrated reporting is the mechanism for prov iding shareholders and stakeholders with the information they need in order to assess the company ’s prospects for creating value over the short, medium, and long term and how it is using the six capitals in order to do so. Is it adding to these capitals or creating negative externalities whose cost to society is greater than the value being created for shareholders? So will Brazil’s market structure make it a country leader in adopting integrated reporting? It’s all up to the boards of its listed companies. Encouragement can from the fact that the day after the IIRC issued its <IR> Framework, the Instituto Brasileiro de Governançe Corporativ a (IBGC) sent a notice to its members about this publication. Also encouraging is that the IBGC’s President, Sandra Guerra, is a member of the Steering Committee of the IIRC and organized an event in São Paolo on December 11 , two day s after the release of the <IR> Framework to have this discussion. Time will tell, but the signs are good.


Global Sector Research / Consumer

Next-Generation Brazilian Consumers Focusing on Sustainable Actions

By Gustavo Piras Oliveira, CFA and UBS LATAM Director of Research and Consumer Analyst

Over the last decade, Brazil’s solid economic growth story has

transformed the consumer landscape dramatically and permanently . Moderate inflation expectations allowed the Central Bank to cut rates, triggering a positive consumer credit cycle and strong job creation. With that, rising income growth added more than 50 million consumers to the mainstream market, up from just 40 million in 2000. It has also created a new premium market with minimum scale to justify larger corporate investments. Average Brazilian consumers are more demanding and premium Brazilian consumers cannot wait until their next trip to Miami to indulge. Over the last decade, existing companies (mostly Brazilian based/owned) have benefitted from growing and steady demand for their products. This was a cy cle driven purely by volume and low penetration. New plants were built. New employ ees were hired. Logistics capabilities were added. In a country with continental dimensions and precarious infrastructure, all these efforts sounded like herculean tasks. The pay off was clear: consumers switched from one competitor to another when demand was not met. The Brazilian consumer growth story of the next decade is gradually shifting from volume to value. While volume and penetration growth opportunities still abound, Brazilian consumption is no longer simply about fulfilling basic consumer needs and bringing outdated imported products to the country . Consumers don’t just want to buy what’s available at the store; they want to buy what’s right for them. Brazilian consumers are becoming more sophisticated. Like their developed market counterparts, Brazilian consumers are focusing on products from companies that drive socially responsible actions. They want to buy products that are meaningful to their lives as well. Again, companies are already learning how to communicate their strategies and actions to meet these new consumer needs. In the Brazilian consumer space, corporate sustainability has different faces:

• Ambev ’s focus on responsible drinking has translated into “designated driver” campaigns and the successful rollout of

©Debra Hughes/CrystalGraphics.com

Gustavo Piras Oliveira, CFA is


the Latam Director of Research and Consumer Analyst at UBS Investment Bank.

Brahma 0,0% (no alcohol beer).

• Lojas Renner has been one of the pioneers in creating a Sustainability Report, where it uses inputs from several opinion-makers to guide new environment-friendly product launches, monitor relationships with suppliers and improve corporate culture.

• Some large food retailers, including Pão de Açúcar, have strict

internal policies that force them to source beef from packers that do not damage the Amazon Biome.

• Coca-Cola Brazil has been openly communicating to consumers

that it has a global policy of not advertising on TV shows that target children y ounger than 12 y ears old.

• Sustainability is in Natura’s business essence, permeating the

entire organization Those are just a few examples of companies that are innovating to respond to the needs of next-generation Brazilian consumers. We think these investments will pay off. Consumers are becoming highly alert to socially responsible and sustainable actions. Consumers want things that are meaningful for their lives. Sustainable actions should drive demand and profitable growth in Brazil. Fund managers are pay ing more attention to these trends. UBS Disclosure:

The view s and opinions expressed in this material are those of the author and are not those of UBS AG, its subsidiaries or aff iliate companies ("UBS"). Accordingly UBS does

not accept any liability for the content of this material or for any claims, losses or damages

arising from the use of or reliance on all or any part thereof.


Global Sector Research / Energy

Brazil’s Energy Outlook – Reconciling Socio-Economic & Environmental Progress

By Margarita Pirovska, Policy & Sustainability Analyst at Cornerstone Capital Inc. and former Project Manager at GDF SUEZ at the Sustainable Development Division Challenges for the energy industry are emblematic of a misconception that economic and social development, and environmental sustainability , do not converge. The growing world population needs more energy, especially in developing and emerging countries, in order to pursue social and economic progress. At the same time, energy use is responsible for two-thirds of greenhouse gas emissions, and of considerable local pollution, thus threatening ecosy stems and altering the climate over the long term. As last y ear’s Earth summit in Brazil, Rio+20, clearly showcased, many people believe indeed that a “green growth” economic model, integrated within the long-term v ision of sustainable development, is incompatible with the economic growth countries like Brazil strive to achieve in order to bring prosperity and progress to all. Is this antagonism relevant, or is there a way to reconcile these major objectives? Brazil’s long-term energy outlook poses all of these questions. The country has a huge renewable energy resource base that it already exploits to its advantage, hav ing one of the cleanest energy balances in the world (nearly 45% coming from renewable energy sources). It also has the potential to become the 6th largest oil producer in the world, according to the recently published World Energy Outlook (WEO) by the International Energy Agency (IEA)1 , with access to some of the largest offshore reserves, along the Atlantic coast. The WEO report states that Brazil’s energy resources are abundant and diverse, and that by 2035 they have

1 World Energy Outlook 2013, International Energy Agency (OECD). http://www.iea.org/

©Frontpage/Shutterstock the potential to move the country into the top-rank of the world’s energy producers. To make this happen, the country needs to invest on average $90 billion a y ear – to fulfill its energy supply potential, but also to respond to national energy consumption which grows robustly , led by industry (80% increase by 2035). This should also lead to reaching the national goal of prov iding energy access to all early on in the forecast period. Thanks to hy dropower and despite significant oil developments, CO2 emissions per capita reach only 70% of the world average in 2035. Overall, from an energy resource perspective, Brazil is a very lucky country . Having a huge hy droelectricity potential means the country should be able to rely on a stable long-term supply of clean energy at low marginal cost. And at the same, hav ing access to such oil reserves should lead to potentially high revenues in the next decades. But Brazil also bears a major responsibility towards the rest of the world, by possessing the majority of the Amazon rainforest which is paramount in preserv ing the carbon balance of the planet. Therefore the country

http://www.iea.org/


needs to achieve an optimal combination between industrial development, social progress, and preserv ing the environment. Brazil’s national hy dropower potential, Amazon included, is estimated by the IEA to be 245 GW (two-thirds of which is undeveloped). But if the Amazon were off limits, due to environmental concerns, then the forecasted hy dro developments by 2035 will exhaust the remaining non-Amazon hy dropower potential. From an ESG perspective, there is an apparent clash between the E (environment), standing for preserving ecosy stems and the climate balance, and the S (social), where social and economic progress is sought for communities often having no access to energy and modern facilities. Bringing such progress, with energy supply , media access, schools and hospitals is valuable, but its impacts are being questioned by NGOs working to also preserve ethno-diversity and traditional way s of life. The “E” in ESG is itself at the core of the dilemma: Brazil needs to build dams in order to tap into this invaluable clean energy source, but by doing this it risks disrupting ecosy stems, and more importantly , if projects are inside the Amazon, putting the rainforest at more risk. Also, some hy dropower technologies, notably involv ing reservoirs, are suspected of actually being large sources of CO2 from stagnating water. How can this dilemma be solved? While developing dams deep inside the Amazon seems to be quite challenging, even unwise, dam project developers have seized this as an opportunity to build up social and environmental competencies, bey ond just managing the usual risks associated with such endeavors. Indeed, massive projects such as hy dropower plants disrupt their environment; it is therefore paramount that companies understand that, and take action. The Jirau hy dropower plant, for example, has led to a significant investment, both human and financial, to ensure the negative impacts of the dam construction are properly known, and where possible, addressed. The company has earmarked 10% of the funds invested in the project – over BRL 1 billion (USD 430 million) – for the 34 social and environmental programs as well as for all

the mitigation activ ities, including programs on public health, deforestation and fauna rescue, indigenous communities support, affected population resettlement and ichthy ofauna, among many others2. Allying environmental and economic performance at the basis of business strategies is a prerequisite for a stable, long-term success of energy projects, towards local populations, customers, shareholders and the international community . But there is much more than the hy dro-oil duo in the country ’s energy potential: wind and solar are abundant, and there are also alternative energies such as wave power, of which a prototy pe is being tested on the north coast of Brazil 3. Bey ond developing renewable energies on a larger scale, one major item should also figure high up in the national energy agenda: energy efficiency . The WEO reminds in their central scenario that the potential of energy efficiency remains largely untapped, while it could prov ide an affordable policy answer to both economic growth concerns and climate change imperatives. According to the IEA, with appropriate energy efficiency solutions it is possible to reduce final energy consumption of the country by 11%, which corresponds to 100 TWh of power consumption in 2035, equivalent to the output of the Itaipu hy dropower plant (14 GW of installed capacity ). Last but not least, the “G” in ESG is key if Brazil is to succeed in becoming an outstanding energy producer and consumer. More transparency and better accountability are expected from energy companies. Petrobras has for example adopted the ISO 26000 reference for communicating on social responsibility, and discloses ESG data according to GRI principles. 4 EDP, the Portugal-based electricity operator with substantial operations in Brazil, not only discloses data according to GRI, but has specific eco-efficiency

2 Source: GDF SUEZ Latin America; http://www.energiasustentav eldobrasil.com.br/ , http://www.gdf suezla.com

3 http://www.coppenario20.coppe.uf rj.br/english/?p=805 4 Petrobras; http://www.inv estidorpetrobras.com.br/en/gov ernance/sustainability-report/relatorio-de-sustentabilidade-detalhe-4.htm

http://www.energiasustentaveldobrasil.com.br/

http://www.gdfsuezla.com/

http://www.coppenario20.coppe.ufrj.br/english/?p=805

http://www.investidorpetrobras.com.br/en/governance/sustainability-report/relatorio-de-sustentabilidade-detalhe-4.htm

http://www.investidorpetrobras.com.br/en/governance/sustainability-report/relatorio-de-sustentabilidade-detalhe-4.htm


and environmental protection goals that include reducing CO2 specific emissions by 7 0% until 2020 (vs. 2008 levels). 5 Such a proactive stance matters for investors, but it is also important for customers, to ensure better and more efficient energy use, to create confidence that Brazil will use its energy potential wisely , sustainably , and safeguard its resources for future generations.

5 EDP; http://www.edp.pt/en/Investidores/publicacoes/relatorioecontas/2013/Annual%20Report%202013/Interim%20Report%201H13.pdf

Margarita Pirovska is a Policy & Sustainability Analyst at Cornerstone Capital Group and former Project Manager at GDF SUEZ at the Sustainable Development Division.

http://www.edp.pt/en/Investidores/publicacoes/relatorioecontas/2013/Annual%20Report%202013/Interim%20Report%201H13.pdf

http://www.edp.pt/en/Investidores/publicacoes/relatorioecontas/2013/Annual%20Report%202013/Interim%20Report%201H13.pdf


Open Source Excellence

Natura: A Sustainable Story

By João Paulo Ferreira, Sales Vice-President at Natura responsible for the areas of Business, Sustainability, Customer Relationship and Management & Innovation of the Commercial Model.

The Brazil Nut Extraction Process ©Natura

Since the beginning of Natura, our essence in looking for “well being well” was already explicit in our way of doing business. The direct sales model in Brazil – with a far-reaching relationship with our Consultants – has helped us in building a business trajectory that reaches bey ond economic results. In this path, we looked for an agenda of sustainable development, looking further than mere business behavior that would be imbricated in our business model. We were the pioneers in using refills back in the 1980’s, and in developing more sustainable packages with the use of lifecy cle analy sis and in the development of our products. In the 1990’s we launched the Crer para Ver (Believe It to See It) line – products to be sold by our consultants with an exclusive purpose of investing in elementary education in Brazil. For over 13 y ears the sustainable use of products and serv ices originated from the Brazilian socio-biodiversity (SBD) has y ielded lessons learned about a wider v iew and led to the launch of the Ekos line, a line that values traditional cultures and the Brazilian genetic heritage. According to this business model – unheard of until then – we began to relate with traditional communities, who provide raw materials and are remunerated by sharing benefits (for prov iding access to traditional knowledge and genetic heritage). Recently , with the evolution of our strategic choices with SBD, we launched the Amazon Program in 2011 and intend to contribute to changing the current model, which still prioritizes economic growth by destroy ing natural resources, and to strengthen local organizations. In time, we evolved in our sustainable use of socio-biodiversity towards a vegetation-inclusive strategy in our formulations, replacing various non-renewable supplies. Since 2006, we adopted the carbon-neutral principles and established a corporate program to reduce emissions throughout our extended chain and a specific program to mitigate emissions that we are still unable to reduce with programs that y ield positive social as well as environmental impacts. Through the y ears we looked to implement sustainability in an increasingly transversal way throughout all our processes. The financial, social and environmental crises we have been experiencing have become more acute in the last decade, which brings us to believe that in the coming y ears we will go through profound changes in the current development model – which is still based in a


João Paulo Ferreira is the Sales Vice-President at Natura responsible for the areas of Business, Sustainability, Customer Relationship and Management & Innovation of the Commercial Model. He joined Natura as Operations & Logistics Vice-President and was previously at Unilever where he was the Supply Chain Vice-President.

linear v iew that presupposes all natural resources are infinite and that social inequalities are admissible. We believe sustainability is a journey, and therefore, there’s always something more we can do. We are renowned by our practices until now, but we understand that since we are a company that believes “well being well” we can alway s improve and enlarge our way of doing things. Our strategic planning cy cle prov ides for annual rev iews and adjustments based on external and internal assessments. Sustainability provides guidelines for the company’s business strategy. We regularly define priority issues for our sustainability actions as a result of a collaborative process that includes discussion panels with various publics, for example consumers, consultants, and supplier communities. Therefore, we are constantly rev iewing our positioning regarding sustainability , as well as our business strategy . When we launched the Carbon-Neutral program in 2007 we established our ambition to reduce our CO2 emissions by 33% until 2013. We achieved a reduction of 28.4% between 2007 and last y ear, which was within our expectations, and with remarkable economic results (gross sales of 1 .3 Bn in 2007 against 6.8 Bn in 2012). This feat was possible only after we established this ambition and rethought our business looking for initiatives to reduce environmental impacts, such as: increasing the vegetation content of our products, reducing the use of packaging materials, triple bottom line assessment of our suppliers, and rev iewing our logistics grid, among others. This is merely an example of how sustainability commitments are imbricated in our business. We believe sustainability should serve as a guideline to direct innovation and create results and businesses consistent with the TBL approach. The most recent example is the launch of the new “Sou” (I am) product line, presenting minimalist formulas and packaging that inv ite the consumer to think about consuming, “why do I need what I don’t need”? We are in a new journey , designing a strategy looking towards the future of Natura and our leading role in sustainable development. We believe that with our relationship network – especially our consultants – we can create value not only through our products and services, but also fostering well-being to all publics with whom this network relates.


Open Source Excellence

A Construction Company Can Be Sustainable

By Carlos Terepins, CEO & Chairman of the Board of Directors, Even Construtora e Incorporadora SA When Even started, over 10 y ears ago, from the merger of two smaller companies, I saw the opportunity for a significant civil engineering project that could be very successful in Brazil. At the age of 47 and with over 20 y ears of experience, I wanted to do something different: to set my sights on sustainability. In 2007 , we had been implementing isolated social responsibility actions that lacked a greater purpose. We started with an in-depth analy sis of the company . With this perspective, we identified what was already available in our initiatives and prepared to make long-term plans. The idea gained strength with the arrival of y oung professionals who brought with them innovative management concepts. But it was not an easy process: the idea of investing efforts (and resources) into this project did not thrill shareholders, nor was it unanimously approved by the board. It would require more work to do every thing differently , incorporating values and procedures rooted in sustainability , than to launch, build and deliver conventional projects. The problem also extended to the supply chain. Another aggravating circumstance hindering the consolidation of a sustainability -based business model was the global crisis of 2008. The business world was devastated by an economic whirlwind that could have served as pretext to abandon the project. But we held fast. We were at that moment lay ing the foundations of sustainability within our corporate culture. Today , this is an exciting and irresistible subject for Even’s team: executives and employ ees incorporate sustainable thinking into their daily decisions and strategic thinking. Our activ ity impacts many stakeholders: the communities surrounding our sites, shareholders, employees, clients and suppliers. A practical example

Sidew alk at an Even project w hich provides recycling access for neighborhoods through their "Ação Vizinho" or "Neighbor Action" project. ©Even Construtora e Incorporadora SA of the impact of sustainability on our employ ees came to light when I was v isiting one of our sites: I saw that our employees had hung up towels to dry in the changing rooms. Though these were spaces with good infrastructure, the hot showers and tiled surfaces meant that these towels remained damp and could harbor diseases, in addition to being uncomfortable. Thus the Towel Project came about. We started providing a clean, dry towel each day to all of our construction workers, just like in gy ms. This is just one example of innovation, turning opportunities into initiatives that improve people’s lives. Today, thanks to our continuous effort to work sustainability into our business, we are proud to be the first company in the industry to be part of BM&FBOVESPA’s ISE (Corporate Sustainability Index) portfolio. We were pioneers in reporting on our greenhouse gas emissions and were the first company to achieve AQUA Entrepreneur certification in the country , incorporating practices into our projects that will make the lives of residents healthier and less burdensome.


Entrepreneurs who have doubts about the feasibility of implementing sustainable practices should first know that this process is driven from the top down in the organization and demands presence and persuasion from its leadership. Just as relevant is realizing that this is a long-term process, requiring perseverance, education and coherence. Turning away from market opportunism is essential to preserving this program, as is demonstrating a firm hand at times of circumstantial crisis. Lastly , note that we are talking about a movement that has no room for setbacks, which would risk destroy ing the corporate culture. The reasoning that should propel environmental initiatives is the certainty that society is increasingly recognizing and rewarding companies imbued with true social and environmental duty and responsibility .

This will be the major difference distinguishing y our company from the competition in terms of results, attractiveness and respect. Financial success, even though it depends on other factors, will ensue naturally .

Carlos Terepins is CEO & Chairman of the Board of Directors, Even Construtora e Incorporadora SA.


Enhanced Analytics

A New Approach to Looking at ESG risk at the Country Level – Using Brazil as an Example

By Alexandra Mihailescu Cichon, Head of Business Development, and Anna Tuson, Media and Communications Lead, at RepRisk AG.

©michal812/Shutterstock RepRisk AG (www.reprisk.com) is a leading provider of dynamic ESG business intelligence on environmental, social and governance (ESG) risks.

There is a sense of hope and excitement in South America’s largest and most populous country. Vibrant and dynamic, Brazil’s economy spans a wide range of sectors and is tipped to become one of the five largest in the world. Rapid growth, however, frequently comes hand-in-hand with volatility, and striking the balance between opportunity and risk can be tricky – often more so when it comes to environmental, social and governance (ESG) risks. With a significant economic gap between rich and poor and a fast pace of development, Brazil has seen its fair share of social unrest and multinational corporations doing business there have often found themselves caught up in this unwittingly . Moreover, Brazil’s rich natural heritage has come under constant and substantial pressure from multinationals looking to capitalize on its abundant resources. ESG issues, such as environmental degradation, poor labor conditions, and corruption, have increasingly come into the spotlight over the last y ears as stakeholders – from shareholders to investors to customers – are ever more aware of and concerned with the potential impacts of their business and consumer decisions. Information technology and accompany ing trends such as social media have created an increasingly transparent and inter-connected world that serves to amplify these issues, placing them on the global agenda. With access to information that was prev iously kept behind closed doors, stakeholders of all ty pes are more likely to be cognizant about the social and environmental impacts associated with a particular company . As in all investment decisions, but even more critical when emerging markets are concerned, comprehensive research and timely information about what’s happening on the ground are key . Companies like Swiss-based RepRisk, a global prov ider of business intelligence on ESG issues, have developed solutions that address the need of capturing and quantify ing ESG risk. Born as a due diligence tool in the Investment Banking industry , RepRisk runs the most comprehensive database on ESG risks associated with companies and projects. As of this month, RepRisk has captured criticism, controversy and negative incidents on over 38,000 companies, both listed and non-listed, from all sectors and all countries.

http://www.shutterstock.com/gallery-444424p1.html

http://www.reprisk.com/


Alexandra Mihailescu Cichon is the Head of Business Development at RepRisk AG. Anna Tuson is the Media and Communications Lead at RepRisk AG.

To facilitate the assessment of country -specific ESG risk, RepRisk recently launched its Country ESG Risk Index which builds upon the seven y ears of data gathered since January 2007 . Developed in collaboration with a research team from the Zurich University of Applied Sciences, the index is an indicator of the ESG risk as well as the associated reputational, compliance and investment risk at the country level. Not only does it take into account the macroeconomic and political risks of a particular country , related to factors such as rule of law and political stability, it also works from the bottom up by incorporating RepRisk’s ESG data on companies operating in respective countries. Updated daily , the index prov ides accurate, dy namic information on what really happens on the ground and how it affects companies who do business or invest there. “RepRisk’s new Country ESG Index offers an innovative perspective for addressing ESG risks at the country level by coupling a top-down approach with a bottom-up one – offering the user an accessible tool to assess ESG issues when making business decisions,” say s RepRisk CEO, Philipp Aeby . When looking at Brazil in RepRisk, ESG issues such as negative impacts on communities and the environment, labor issues, and land use controversies feature heav ily in Brazil’s economic environment. Brazil’s biggest industry is agriculture, contributing much of the global coffee supply and a significant amount of beef exports. Recently palm oil production has also taken off, and it is now the world’s third largest producer, after Indonesia and Malay sia. Land acquisition for these activ ities has been controversial, as crops are being produced to supply international corporations where locals would have once farmed food for their own populations. The monoculture plantations in which palm oil is produced have also been depleting local biodiversity . The utilities sector has also attracted negative attention. The construction of the Belo Monte dam on the Xingu River in Pará has been suspended twice. The dam project ignited indigenous protests over compensation disputes and the alleged pollution of the river. It has been criticized for altering the complex river ecosy stem on which the communities depend, as well as the clearance of 5,000 hectares of rainforest. These are just a handful of numerous examples of the ESG issues that are impacting and will continue to impact the people, environment and economy of Brazil. Companies investing or doing business there and in similar countries will benefit from being equipped with the right information at the right time, such as that offered by RepRisk – ultimately , with the goal of striking that perfect balance between opportunity and risk.


Virtual Attendance

Sustainable Leadership Platform: Stories of People Who Lead Through Values and Sustainability

By Ricardo Voltolini, President-Director of Sustainable Idea: Strategy and Intelligence in Sustainability (Ideia Sustentável: Estratégia e Inteligência em Sustentabilidade) The skepticism through which a business’ sustainability actions are v iewed is not new. In Brazil and throughout the world there is a certain suspicion, often justifiable, that because of their interest in associating their brands and reputation to a theme that is often admired by society , corporations exaggerate in their rhetoric but skimp on their actions, with the ignoble intention of seeming more responsible than they actually are. I confess that this sort of judgment has alway s bothered me because of its generalizations. In over 15 y ears working as a corporate sustainability consultant I’ve seen a little of every thing: from corporations clearly resistant to the theme – those that reject it for being an extra cost and a dev iation from its goal, to corporations that are genuinely interested in making a change towards sustainability, even if it is at a slower than ideal pace given the scientific warnings about climate change and the depletion of natural resources. This discomfort was, without a doubt, one of the reasons I chose to create, in 2011, the Sustainable Leadership Platform. Based on accounts by CEOs, I registered the history of corporations that are transitioning to a more sustainable business model, showing what values their “sustainable leaders” believe in and how they think, act and make decisions.

But why focus on a leader’s anecdotes instead of on traditional business cases? Leadership is usually a fundamental factor for success in sustainability issues. This became ev ident in 2010, after a long study that resulted in the book “Conversations with Sustainable Leaders” (Conversas com Líderes Sustentáveis – Senac-SP/2011) in which I verified that sustainability progresses further in corporations

where it is v iewed as an opportunity , is present in business strategy, where there is a desire to involve

Annual Meeting of Sustainable Leadership Platform, October 2013 interested parties and above all, where there are in leadership roles, one or more representatives involved with the theme and the challenge of incorporating it into the business culture. Recently introduced documents within the scope of the United Nations Global Compact address the need for a new ty pe of leader to face the challenges of the 21 st century. More than an adept manager they must be capable of employ ing business strategies that result in economic, environmental and social benefits, therefore influencing in the transition to a new ty pe of economy , one that is less carbon intensive and more efficient in its use of natural resources. According to our experiences this “sustainable leader”, who is still an exception in Brazil and through the world, dev iates from the conventional profile through four basic aspects: (1) believes in the values that constitute the concept of sustainability , and practices them diligently in their every day decisions; (2) does not v iew as legitimate any profit made to the detriment of the planet and society ; (3) has the courage to promote change to mental models forged in the old economy ; (4) v iews sustainability

http://www.editorasenacsp.com.br/portal/produto.do?appAction=vwProdutoDetalhe&idProduto=21326



through the lens of opportunity and works tirelessly to insert it into core business practices. The Sustainable Leadership Platform is made up of 30 leaders of large Brazilian corporations, some that count amongst the most emblematic in sustainability. Such is the case with Guilherme Leal (Co-Founder) and Alessandro Carlucci (President) of Natura, a cosmetics manufacturer that respects biodiversity and the value chain. Carlos Fadigas, Paulo Nigro, Franklin Feder and Carlos Terepins are also members of the movement, respectively Presidents of Braskem (global leader in the production of green plastic), T etra Pak (whose packaging is, today , 100% recy clable), Alcoa (who implemented one of the most documented experiences of responsible mining in Juruti at the heart of the Amazon), and Even (the first construction company to environmentally certify part of their residential enterprises). It is also worth noting the experiences of Britaldo Soares, President of the energy distributor AES Brasil, as it includes challenging sustainability themes in the company ’s strategic planning, as well as Marcos Madureira and Roberto Setúbal, leaders of Santander and Itaú , banks internationally recognized for their practices and commitment to sustainability .

It is fair to ask ourselves what leaders such as these and others, of corporations such as; Promon, Fibria, Unilever, Pepsico, Whirlpool, Masisa, IBM, Votorantim Metais, Duratex, Samarco, Itaipu and Schneider Eletric are doing present in a movement such as the Sustainable Leadership Platform? Their stories help to educate y oung business leaders and to make them aware of the importance and urgency of leading with values. They contribute to prove that profit and sustainability should move forward together.

Ricardo Voltolini is President-Director of Sustainable Idea: Strategy and Intelligence in Sustainability (Ideia Sustentável: Estratégia e Inteligência em Sustentabilidade). He was one of the first corporate sustainability consultants in Brazil and was the creator of the Sustainable Leadership Platform (Plataforma Liderança Sustentável) and author of “Conversations with Sustainable Leaders” (Conversas com Líderes Sustentáveis - Senac-SP/2011) an “Schools for Sustainable Leaders” (Escolas de Líderes Sustentáveis - Elsevier,2014)



http://www.elsevier.com.br/site/produtos/Detalhe-Produto.aspx?tid=95203&seg=5&cat=182&tit=ESCOLAS%20DE%20L%C3%8DDERES%20SUSTENT%C3%81VEIS

http://www.elsevier.com.br/site/produtos/Detalhe-Produto.aspx?tid=95203&seg=5&cat=182&tit=ESCOLAS%20DE%20L%C3%8DDERES%20SUSTENT%C3%81VEIS


Corporate Governance Insights

Respecting Human Rights: Urgent, Necessary, Not Optional

By Julie Tanner, Assistant Director of Socially Responsible Investing, Christian Brothers Investment Services (CBIS) Twenty y ears ago the U.N. General Assembly proclaimed December 10th as Human Rights Day to bring attention to the Universal Declaration of Human Rights as the common standard of achievement for all peoples and all nations. Many of us may not have acknowledged let alone celebrated this day but it demands our recognition and full attention. With the Rana Plaza building collapse, the Tazreen factory fire, the Deepwater Horizon explosion, and the Foxconn suicides now part of our lexicon, never has the onus on business to uphold environmental and human rights standards been more acute or the risk more obvious. These are red flag events. Lives have been lost. How quickly and effectively all companies learn from these tragedies and develop sy stemic responses to them can mean the difference between success and failure. Investors recognize the risk to companies from human rights v iolations, including financial, regulatory , legislative, legal and reputational risks. Given the complexity of supply chains and the multitude of contractors, recruiters, and suppliers used throughout a company ’s production process and at its facilities, CBIS, along with members of The Interfaith Center on Corporate Responsibility and the U.S. Forum for Sustainable and Responsible Investment, encourage companies to adopt comprehensive, transparent, and verifiable human rights policies and sy stems for their direct operations and supply chains. Like the leading companies tackling this issue, we believe that attention to the way s that v iolations can occur through a company ’s products, services or workplaces can help to prevent adverse impacts, and in turn, more adequately protect shareholder value.

©Corgarashu/Shutterstock In our engagements with companies we raise questions like those below to better understand where companies are along the continuum to improve human rights performance:

1. Does the com pany have a com prehensive corporate-wide human rights policy? Robust policies state respect for human rights and fundamental freedoms as articulated in The International Bill of Human Rights and the Declaration on Fundamental Principles and Rights at Work, outline the responsibilities of staff, suppliers, business partners and other actors, are embedded throughout the operation, and are rev iewed and updated periodically .

2. Has the com pany created a long-term

and holistic hum an rights due diligence process? Due diligence based on an analy sis of company activ ities and relationships and how these affect people and their rights, allows companies to better manage their responsibility to respect human rights, a key requirement outlined in

http://www.un.org/en/events/humanrightsday/index.shtml

http://www.un.org/en/documents/udhr/

http://www.un.org/en/documents/udhr/

http://www.iccr.org/

http://www.iccr.org/

http://www.ussif.org/

http://www.ussif.org/

http://www.ohchr.org/Documents/Publications/Compilation1.1en.pdf

http://www.ohchr.org/Documents/Publications/Compilation1.1en.pdf

http://www.ilo.org/declaration/thedeclaration/lang--en/index.htm

http://www.ilo.org/declaration/thedeclaration/lang--en/index.htm


“The Guiding Principles on Business and Human Rights” Implementing the United Nations ‘Protect, Respect and Remedy ’ Framework”. The process should include assessing actual and potential human rights impacts, addressing and integrating findings, monitoring results, and reporting how impacts are addressed. Information gleaned can determine high-risk regions, levels of impact, likelihood of occurrence, and influence policies, training programs and audit instruments.

3. Is the board tasked with oversight of

hum an rights perform ance? To demonstrate accountability , a board committee should be responsible for oversight of human rights performance and the Committee’s charter should acknowledge these duties. To be most effective, boards should recruit members with human rights expertise and educate board members on the issue.

4. Do long-term incentive plans and

perform ance reviews include financial incentives for effective management of hum an rights issues? By building human rights performance into incentive plans and performance evaluations, companies and boards demonstrate the value the institution places on these issues.

5. Does the sustainability report disclose

how hum an rights policies are im plemented? Detailed annual disclosure is ev idence of proactive and attentive

management and a critical tool for building trust with investors and the public. Companies must prov ide ev idence that policies are being implemented, including information on the outcomes and impacts of programs on people and communities.

6. Is hum an rights embedded throughout the organization and into business strategies? To ensure that policies approved by senior management percolate throughout the firm and are well understood, companies need to embed human rights into all departments and in all aspects of operations.

Human rights are too important to relegate to one day of the y ear. Every day we must act with urgency —investors, companies, consumers, civ il society and government—to respect the rights of people and communities so that the human rights disasters of recent y ears will not be repeated or forgotten.

Julie Tanner is the Assistant Director of Socially Responsible Investing, Christian Brothers Investment Services (CBIS). She is a member of the governing board of the Interfaith Center on Corporate Responsibility.

http://www.ohchr.org/documents/issues/business/A.HRC.17.31.pdf





Accelerating Impact

Changing Dynamics of the Family By Professor Susan Golombok, Director, Centre for Family Research, University of Cambridge

©vic dd/Shutterstock If you are a gay or lesbian family with a child aged between 3-8 years please consider participating in this study by clicking here.

Since the latter part of the 20th century , dramatic changes have taken place to the structure of the family so that the traditional nuclear family headed by a heterosexual married couple is now in the minority . A number of factors have contributed to the diversity of family forms in which children are raised today including women’s enhanced educational and career opportunities, the increasing numbers of women employed outside the home, the introduction of the contraceptive pill, the rise of the women’s and gay liberation movements, greater involvement of fathers in the day -to-day lives of their children, and the introduction of assisted reproductive technologies. As a result, a growing number of children are being raised by cohabiting, rather than married, parents, by single parents, by stepparents, and by same-sex parents, with many children moving in and out of different family structures as they grow up. More remarkably , it is now possible for a child to have up to five “parents” instead of the usual two - an egg donor, a sperm donor, a surrogate mother who hosts the pregnancy and the two social parents whom the child knows as mom and dad, or mom and mom in the case of lesbian mothers and dad and dad when the parents are gay fathers. So what is known about the psy chological well-being of children raised in alternative family forms? Is it the case that the traditional two-parent family is best for children? Or can children do as well, or perhaps even better, in certain new family forms? Research has shown that some family ty pes are more associated with negative outcomes for children than are others. Single-parent families, stepfamilies, and families with cohabiting parents, are generally more likely than traditional families to result in difficulties for children. In contrast, children with lesbian or gay parents, and children conceived using assisted reproductive technologies, appear to be functioning well. So how can we explain these differences? The answer seems to lie in the circumstances surrounding the different family forms. Whereas the former set of families generally experience greater adversity than do traditional families, in terms of financial hardship, marital or relationship difficulties, and mental health problems - all of which are associated with impaired parenting and children’s emotional and behavioral problems - this is not the case for families formed by same-sex parents and through assisted reproductive technologies. It may also be relevant that the latter ty pes of family are, by necessity , planned. Thus, it is not family structure in itself that influences the psychological well-being of children. Instead, the quality of parent–child

http://www.cfr.cam.ac.uk/involvement/ResearchonNewFamilyForms.pdf


Susan Golombok is a Professor of Family Research and Director, Centre for Family Research, University of Cambridge. She is the author of Parenting: What really counts? and co-author of Bottling it Up, Gender Development, and Growing up in a Lesbian Family

relationships, the quality of parents’ relationships with each other, and the quality of the wider social environment appear to be more important for children’s adjustment. Whether children have one parent or two, whether they have a genetic or gestational link to their parents, whether their parents are married or cohabiting, whether their parents are male or female, and whether their parents are of the same sex or opposite sex, seem to matter less for children than does the quality of family life.

Historical time and place are especially relevant to the study of family forms that either did not exist or were invisible before the latter part of the 20th century —lesbian mother families and families created by assisted reproductive technologies—and highlight the role of societal attitudes in family functioning. In the 197 0s, prejudice and discrimination were features of non-traditional family life; lesbian mothers lived in fear of losing custody of their children, donor insemination was shrouded in secrecy and “test-tube” babies were v iewed with suspicion. Although prejudice has not been eliminated, more positive attitudes generally prevail today , creating a more favorable environment for children. Since the turn of the century, same-sex marriage has been introduced in several countries and in some US states, donor conceived half-siblings growing up in different families have begun to make contact with each other, and “test-tube” babies have become commonplace. Nevertheless, children’s experiences will depend, to a large extent, on their immediate social environment, including their extended families, their community and the geo-political context in which they are raised. Family forms that are currently emerging, or that are still on the horizon, will provide novel way s of addressing questions about family influences on children’s socio-emotional development. The demographic shift toward older motherhood is a topic of current interest, with women beginning to freeze their eggs in order to postpone pregnancy , as is the new phenomenon of gay fathers hav ing children through surrogacy and egg donation. Even single heterosexual men are beginning to have children in this way . In addition, men and women who were prev iously unknown to each other are now using the internet to create families together. In the not too distant future, scientific advances will enable children to be born through mitochondrial DNA transfer and thus, for the first time, with genetic material from three people—a mother, a father, and a woman who donates her mitochondrial DNA. This procedure is being developed to allow women at risk of hav ing children with serious mitochondrial disease to have healthy children. Moreover, artificial gametes will soon make it possible for women to produce sperm and for men to produce eggs. This will enable both partners in same-sex couples

http://www.amazon.com/Parenting-Really-Counts-Susan-Golombok/dp/041522716X/ref=sr_1_1?s=books&ie=UTF8&qid=1386603820&sr=1-1&keywords=Parenting%3A+What+really+counts%3F

http://www.amazon.com/Parenting-Really-Counts-Susan-Golombok/dp/041522716X/ref=sr_1_1?s=books&ie=UTF8&qid=1386603820&sr=1-1&keywords=Parenting%3A+What+really+counts%3F

http://www.amazon.com/Growing-Up-Lesbian-Family-Development/dp/157230412X




to be genetically related to their children. Research is also being conducted on “artificial wombs,” and human cloning remains a theoretical possibility. These are just some of the family circumstances in which children of the future will be raised. For more information about the study see the attached f lyer at:

http://w w w.cfr.cam.ac.uk/involvement/ResearchonNew FamilyForms.pdf

http://www.cfr.cam.ac.uk/involvement/ResearchonNewFamilyForms.pdf


Sustainable Product Review

The Television Series: “Modern Family”

By Michael Shavel, CFA, Research & Business Analyst, Cornerstone Capital Inc. As we enter the holiday season, many of us look forward to holiday -themed episodes of our favorite telev ision shows. This week, a re-run of a “Modern Family ” holiday episode aired and, in ty pical fashion, ended with a brief monologue from one of the characters. In this instance, Gloria (play ed by Sofia Vergara) say s, “Family is family . Whether it’s the one y ou start out with, the one y ou end up with, or the family y ou gain along the way . Which makes every day December 16th.” While the December 16th reference may be confusing to our readers who haven’t seen this episode, the commentary about family is one example of the show’s unique ability to thread social commentary into the clever and humorous story lines. Debuting in 2009, the mockumentary sty le sitcom received critical acclaim and has since won the Emmy Award for Outstanding Comedy Series in each of the past four y ears- a feat matched only by “the Dick Van Dy ke Show.” The show rev olves around three interrelated families and the non-traditional family tree that connects them. The patriarch is re-married to a much y ounger Colombian immigrant, with whom he has an infant son and a teenage son from her first marriage. The patriarch’s daughter is a stay -at-home mom in a traditional suburban household of five, while the patriarch’s son is engaged to his partner and has an adopted Vietnamese daughter. Interestingly, in investigating the background of the cast, we found that they , too, represent diverse social backgrounds and family structures: Ed O’Neil and Julie Bowen are married with children (no pun intended in Ed O’Neil’s case); Sofia Vergara is divorced with one child; and Ty Burrell is married with two adopted children. Of the two cast members that portray a married gay couple, Eric Stonestreet is heterosexual and single while Jesse Ty ler Fergusen is homosexual and married.

Photo by PR Photos The show strikes an appropriate balance between humor and emotion and manages to touch on some hot-button social issues without leav ing the v iewer feeling that their Wednesday evening sitcom has been hi-jacked by an agenda. To illustrate, here’s an example of a conversation between Cameron and Mitchell regarding their adopted daughter’s attitude on adoption: Cameron: [play ing with Lily on his lap as Mitchell comes in] Hey daddy , how was the farmer's market? Mitchell: Well, it was great but...guess what the new spinach is? Cameron: Umm..radicchio? Mitchell: [pulling a bunch out of his basket] Kale! Cameron: [gasps] No! Mitchell: I know, I was just as blown away as y ou are. Cameron: Well, I guess we're going to have to...[leans close to Lily , claps and speaks in a very happy voice]...adopt, y ay , a new attitude towards kale. May be we'll ev en adopt!! [clap clap clap] a new v inaigrette! Adopt! Y aaay ! Mitchell: K, what's going on here? Cameron: I'm taking the negative charge out of the word adopted [to Lily ] Y ay ! Mitchell: What did Oprah do now?

http://en.wikipedia.org/wiki/Characters_of_Modern_Family#Cameron_Tucker

http://en.wikipedia.org/wiki/Characters_of_Modern_Family#Mitchell_Pritchet


Cameron: Well, she had a girl on who, at sixteen, found out that she was [covers Lily 's ears] adopted and felt betray ed and ran away and became a stripper. And not the heart-of-gold kind, the by -the-airport kind. Mitchell: [strained grin] Okay . Cameron: Alright, go get y our gavel, Judge Judy . Mitchell: No, not at all. I'm adopting [cheers, Cam claps near Lily ] a tolerant attitude towards y our flights of lunacy . Cameron: [to Lily ] Adopting! Y ay ! In taking a moment to reflect on this conversation, it’s striking in how far we’ve come that a major telev ision network is able to telev ise “Modern Family ” without significant backlash. In fact, it wasn’t so long ago that “Three’s Company ,” a sitcom based on two single women liv ing with a male roommate, was considered quite scandalous. Simply put, Modern Family ’s success is a sign of the times where diversity is not only acknowledged, but is embraced well. Just as telev ision programming and family structures have evolved (see Professor Golombok’s article on

page 42), the manner by which we invest is an evolutionary process, too. In a prior article titled, “Investing in Diversity…Painful but Profitable” we submit that acknowledging diversity as an economic imperative is central to sustainable capitalism and investing. We also believe the systematic integration of environmental, social and governance factors into investment processes is critical in producing better risk-adjusted returns. To some, this may not be considered the conventional approach, but look at what a little unconventionality did for “Modern Family .”

Michael Shavel, CFA is a Research & Business Analyst at Cornerstone Capital Inc. and a former Research Analyst on AllianceBernstein’s Global Growth & Thematic team.

http://www.wallstreetweek.com/guest-post-investing-in-diversity-painful-but-profitable/


Upcoming Events

Global ESG Calendar

Date/Time Event Location Information

1.15.14 – 1.15.14 2014 Investor Summit on Climate Risk United Nations Headquarters New York, NY U.S.A

http://www.ceres.org/investor-netw ork/investor-summit/investor-summit-2014

1.22.14 – 1.23.14 The Sustainable Foods Summit Hotel Nikko San Francisco, California U.S.A

www.sustainablefoodssummit.com

2.4.14 – 2.5.14 Solar Pow er Generation USA Conference San Diego Marriott Del Mar San Diego, California U.S.A.

www.greenpowerconferences.com

2.3.14 – 2.5.14 World Biomass Pow er Markets Amsterdam, The Netherlands

http://w orldbiomasspower.com/

2.2.14 – 2.5.14 Beyond Sustainability – Expanding the Footprint of the Regenerative Economy

The Sanctuary Hotel Kiaw ah Island, South Carolina U.S.A.

www.alabasterjarfoundation.org

2.5.14 – 2.6.14 Agrion Disrupt 100+ New York, NY U.S.A. http://www.agrion.org/new-york2014/

2.17.14 – 2.18.14 The World CSR Congress – Corporate Social Responsibility

Taj Lands End Mumbai, India

www.worldcsrcongress.com

3.5.14 – 3.6.14 Responsible Investor: RI Asia 2014

Tokyo Stock Exchange Tokyo, Japan

http://www.responsible-investor.com/events/events_page/ri_asia_2014/

3.19.14 6th Annual ICSA Corporate Governance Conference

ExCel London, United Kingdom

https://www.icsa.org.uk/events/conferences/the-6th-icsa-corporate-governance-conference

3.31.14 The Wall Street Green Summit Columbia University Club New York, NY U.S.A.

http://www.wsgts.com/

4.9.14 – 4.11.14 Conscious Capitalism Conference 2014 San Diego, California U.S.A.

www.consciouscapitalism.org

4.16.14 – 4.18.14 5th Annual Impact Conference Sustainable Strategies Conference Cornerstone Speaking Event

Miami Beach Convention Center Miami, Florida U.S.A.

2 conferences running concurrently www.connectionmiami.com

4.30.14 – 5.1.14 Ceres Conference 2014 ‘The Future is Now ’

Westin Waterfront Boston, MA U.S.A.

http://www.ceres.org/conferences

5.19.14 – 5.21.14 US SIF Annual Conference Cornerstone Sponsored Event

Capital Hilton Washington, D.C. U.S.A.

www.ussif.org/conference

5.29.14 – 5.30.14 TBLI ConferenceTM New York 2014

United Federation of Teachers Headquarters

http://www.tbliconference.com/

http://www.ceres.org/investor-network/investor-summit/investor-summit-2014




http://www.sustainablefoodssummit.com/

http://www.greenpowerconferences.com/

http://worldbiomasspower.com/

http://www.alabasterjarfoundation.org/

http://www.agrion.org/new-york2014/

http://www.worldcsrcongress.com/








http://www.wsgts.com/

http://www.consciouscapitalism.org/

http://www.connectionmiami.com/

http://www.ceres.org/conferences

http://www.ussif.org/conference

http://www.tbliconference.com/


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Recent Articles from Cornerstone Capital Group

Cornerstone Journal of Sustainable Finance & Banking – November 2013 http://www.cornerstonecapinc.com/CornerstoneJournal_Nov2013.pdf Cornerstone Journal of Sustainable Finance & Banking – October 2013 Inaugural Edition http://www.cornerstonecapinc.com/CornerstoneJSFB_October2013.pdf Wall Street Week: “Embrace the Grey” by Erika Karp, Derek Yach – September 2013 www.wallstreetweek.com/guest-post-embrace-the-grey Forbes: “The Pow er to Convene” by Erika Karp – December 2012 http://www.forbes.com/sites/85broads/2012/12/10/the-power-to-convene/ Forbes: “Sustainable Capitalism…If Not Now, Then When?” by Erika Karp – November 2012 http://www.forbes.com/sites/85broads/2012/11/08/sustainable-capitalism-if-not-now-then-when/ Forbes: “Could Sustainability by Unsustainable?” by Erika Karp – September 2012 http://www.forbes.com/sites/85broads/2012/09/26/could-sustainability-be-unsustainable/?utmsource=allactivity&utm_medium=rss&utm_campaign=20120926 Wharton Magazine: “The Clients of my Clients....Sustainable Selling” by Erika Karp – July 2012 w hartonmagazine.com/blog/sustaining-selling-success/ Wall Street Week: “Leaving Rio....and Going Tow ards Corporate Sustainability” by Erika Karp – June 2012 http://www.wallstreetweek.com/leaving-rio-and-going-towards-corporate-sustainability/ Harvard Business Review | HBR Blog Netw ork "Why Go it Alone in Community Development?" by Andrew MacLeod – June 2012 http://blogs.hbr.org/2012/06/why-go-it-alone-in-community-d/ Forbes: “Sustainable Investing and Moments of Truth” by Erika Karp – March 2012 http://www.forbes.com/sites/85broads/2012/03/28/sustainable-investing-and-moments-of-truth/ Wall Street Week: “Investing in Diversity…Painful but Profitable” by Erika Karp – March 2012 http://www.wallstreetweek.com/guest-post-investing-in-diversity-painful-but-profitable/ Wall Street Week: “Noise Cancelling Investment Research - ESG Analysis and Sustainable Investing” by Erika Karp – February 2012 http://www.wallstreetweek.com/noise-cancelling-investment-research-esg-analysis-and-sustainable-investing/ Forbes: “Superheroes of Capitalism” by Erika Karp – January 2012 http://www.forbes.com/sites/85broads/2012/01/13/superheroes-of-capitalism/ Forbes: “Superheroes of Capitalism: Part II - The Women” by Erika Karp – January 2012 http://www.forbes.com/sites/85broads/2012/02/01/superheroes-of-capitalism-part-ii-the-women/ Wharton Magazine: “The Poetry of Sustainable Investing” by Erika Karp – January 2012 http://www.whartonmagazine.com/blog/writing-the-verses-of-sustainable-investing/

http://www.cornerstonecapinc.com/CornerstoneJournal_Nov2013.pdf

http://www.cornerstonecapinc.com/CornerstoneJournal_Nov2013.pdf

http://www.cornerstonecapinc.com/CornerstoneJSFB_October2013.pdf

http://www.wallstreetweek.com/guest-post-embrace-the-grey

http://www.forbes.com/sites/85broads/2012/12/10/the-power-to-convene/

http://www.forbes.com/sites/85broads/2012/11/08/sustainable-capitalism-if-not-now-then-when/

http://www.forbes.com/sites/85broads/2012/09/26/could-sustainability-be-unsustainable/?utmsource=allactivity&utm_medium=rss&utm_campaign=20120926

http://www.forbes.com/sites/85broads/2012/09/26/could-sustainability-be-unsustainable/?utmsource=allactivity&utm_medium=rss&utm_campaign=20120926

http://www.wallstreetweek.com/leaving-rio-and-going-towards-corporate-sustainability/

http://blogs.hbr.org/2012/06/why-go-it-alone-in-community-d/

http://www.forbes.com/sites/85broads/2012/03/28/sustainable-investing-and-moments-of-truth/

http://www.wallstreetweek.com/guest-post-investing-in-diversity-painful-but-profitable/

http://www.wallstreetweek.com/noise-cancelling-investment-research-esg-analysis-and-sustainable-investing/

http://www.forbes.com/sites/85broads/2012/01/13/superheroes-of-capitalism/

http://www.forbes.com/sites/85broads/2012/02/01/superheroes-of-capitalism-part-ii-the-women/

http://www.whartonmagazine.com/blog/writing-the-verses-of-sustainable-investing/


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Cornerstone Capital Inc. doing business as Cornerstone Capital Group is a Delaw are corporation w ith headquarters in New York, NY. The Cornerstone Journal of Sustainable Finance and Banking (JSFB) is a service mark of Cornerstone Capital Inc. All other marks referenced are the property of their respective owners. The JSFB is licensed for use by named individual Authorized Users, and may not be reproduced, distributed, forw arded, posted, published, transmitted, uploaded or otherw ise made available to others for commercial purposes, including to individuals w ithin an Institutional Subscriber w ithout w ritten authorization from Cornerstone. The view s expressed herein are the view s of the individual authors and may not reflect the view s of Cornerstone Capital Group or any institution w ith w hich an author is aff iliated. This publication is for informational purposes only and nothing in this publication is intended or should be taken as investment advice. This is not an offer or solicitation for the purchase or sale of any security, investment, or other product and should not be construed as such. References to specif ic securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. Cornerstone Capital Group cannot accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.








