Editor: Environmental and social issues affect valuation and financial performance.

If your investment decisions focus

only on the financial disclosures, you will not be looking at the complete picture. Share prices of firms that endorse
sustainability have been proven to outperform those who have not in the long run (source: Harvard Business School
(2012)). 81% of market value in the S&P 500 is due to intangible factors (environmental capital, human capital,
sustainability governance and stakeholder relationships). Only 19% is accounted for by physical and financial
assets.

Environmental risks can have significant costs, in terms of clean up costs and legal costs. Social risks such as
employee strikes, third-party investigations and community protests may result in delays. Sustainability risks also
have potential reputational damage.

By investing in companies that incorporate sound environmental and social practices, you are proactively endorsing
companies that are investing in their future. Would you knowingly invest in companies that are emitting excessive
toxic chemicals, polluting water sources or have poor labour practices? Or would you rather use your investments to
support companies that are embracing sustainability and investing in their future?

IMPACT OF ENVIRONMENTAL ISSUES IN INVESTING DECISIONS

Environmental issues are a game changer for investors

The environment plays a pivotal role in the functioning of our global economies and is a growing risk that needs our
immediate attention. Understanding these environmental risks is key to maximising returns over the long term. The
Global Risk Report 2016 published by the World Economic Forum has listed the top 5 global risks of highest concern
for the next 10 years. They include water crisis, failure of climate change mitigation/adaptation, extreme weather
events, food crisis and profound social instability. These risks can be broadly grouped under 2 categories - climate
change and over exploitation of natural resources.

Climate change is currently accepted as the most pressing global environmental issue that needs to be addressed.
Climate change refers to a gradual rise in temperature of the Earth’s atmosphere and oceans caused by increasing
concentrations of greenhouse gases. A report by The Economist has estimated the Value at Risk (VAR) to
manageable assets from climate change at US$4.2 Trillion.

Climate change is expected to manifest itself in the form of rising sea levels and increasingly unpredictable and
extreme weather patterns.

Rising sea levels will result in the submerging of low-lying islands, impacting coastal communities. Other
consequences will include increasing salinity of ground water, erosion, and changes to coastal landscapes. At risk
from rising sea levels are our major ports and related infrastructure, real estate, tourism, fisheries with impacts on the
insurance sector.

Erratic global weather will have a direct effect on agriculture and food production impacting agri- businesses and their
supply chains. Severe flooding and droughts will impact property and infrastructure resulting in higher insurance
claims. A report by the World Bank estimates damages from extreme weather related events of US$200Bn a year
over the past decade, up from US$50Bn in the 80’s.

An important trend that is gathering momentum is the change in our energy consumption – the shift from fossil fuels
to more renewable sources. This will impact carbon intensive industries such as electricity, oil and gas, construction
and transport. Share prices of energy companies evidence this. Recently US coal giant Peabody filed for bankruptcy
primarily due to falling coal prices and the shift to alternate sources.

Governments over the world are slowly realising the need to be better stewards of the environment. They are
increasingly imposing stringent emission and pollution standards and calling large companies to account. Examples
include GE and their efforts to clean up the Hudson River of PCBs (at a cost of over USD 1.6 Billion) and VW and
their transgressions with emission standards. Late last year Volkswagen’s admission of the transgressions led to its
share prices dropping 23 %. The U.S Justice department has sued VW for up to $46 billion for breaching US
Environmental laws. Locally, SGX listed Linc Energy’s shares have plummeted 79% this year in the wake of the
collapse in oil prices, it’s debt burden and from being caught up in one of the biggest environmental prosecutions in
Australia.

The recent COP21 talks were a landmark event with 195 countries agreeing to embark on measures to voluntarily
reduce emissions in an effort to contain the impacts of climate change.

Along with climate change, the other major challenge is the over-exploitation of natural resources. Our planet’s
resources are being used at a rate much faster than the rate at which it can be replenished. This will have a direct
impact on the long-term viability of businesses.

Of these, our overuse of fresh water is of immediate concern. According to the Water Resources Group, in 2015,
fresh water consumption mostly for agriculture increased to about 5,000 cubic km while sustainable annual supply is
only 4,200 cubic km. Almost all of the world’s major rivers and water bodies have been taken up for agricultural
purposes and are under varying levels of stress. It is projected that by 2030, the world will face a 40% global water
deficit assuming the current climatic conditions continue.

Approximately 70% of the planet’s fresh water sources are used for agriculture, often for the growing of crops such
as cotton, rice, sugar cane and wheat. As water scarcity grows as an issue, this could result in sudden shifts in the
price of these commodities.

Poor land management leads to deforestation and biodiversity loss. The annual haze that chokes S.E Asia is
primarily due to poor land management and slash & burn techniques used to clear forests for palm oil and paper.
Apart from the impact on human health and the environment, the annual haze causes losses in millions to the retail
and tourism sectors.

An underlying problem is that we do not have the mechanisms in place to value natural capital. Natural capital is the
stock of nature’s assets such as land, air, water, biodiversity and ecosystems. Poorly devised government subsidies
and incentives mask or distort the true cost and lead to over-exploitation of these resources. For example water is not
priced according to its scarcity. Fuel subsidies exist in many countries for specific industries such as agriculture and
fisheries.

What would be the return to investors if these externalities were to be fully factored in? A PRI Report says that up to
50% of company earnings could be at risk from environmental externalities. As an example, it is estimated that bees
contribute 200 million pounds a year to the UK economy through the pollination of commercially important crops.

Global efforts to manage the above risks are growing, through the use of alternate energy sources and technological
innovation for effective use of scarce resources. There is increasing demand on businesses from governments,
investors and consumers to measure and report the environmental impact of their operations.

Specific studies have shown that by managing these risks and adopting sustainable practices progressive companies
outperform their more conventional counterparts. A January 2016 report in The Guardian mentions 9 companies
globally, that are generating a billion dollars through sustainable practices. These include companies such as IKEA,
Nike, Unilever and Tesla.

On the down side businesses that do not adapt lose out. A recent example in our region is that of Malaysian
conglomerate IOI. It was recently suspended by RSPO (certifying body for sustainable palm oil) leading to companies
like Nestle, Hershey’s and Unilever cutting back on their purchases from IOI. IOI’s shares have lost 18 % in value
since the suspension.

Institutional investors like the Norwegian Sovereign wealth fund, Allianz, Aviva are already taking these factors into
consideration. They have robust ESG (Environmental, Social and Governance) standards in place to guide their
investment strategy. As an example, in 2015, the Norwegian Government Pension Fund, one of the world’s largest
sovereign wealth funds dropped 11 companies because of their link to deforestation.

Investors are important stakeholders who can bring about change by demanding greater transparency, better
accounting for externalities and overall better governance. A company’s sustainability report is a good first step in
understanding how an organisation is dealing with environmental issues. Also available are specific indices such as
the Dow Jones Sustainability Index and the Global Compact 100 Index.