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Gold, oil and moneyHow Ethical Funds is engaging for change

Robert Walker, Vice President Ethical Funds & ESG ServicesAugust 2012

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Agenda

• Investment thesis

• Engagement – Gold, Oil and Money– Gold and Conflict Minerals– Oil sands, Enbridge– Executive pay

• Competitive advantages

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Make Money. Make A Difference.

• Companies integrating best ESG practices will: – Provide higher risk-adjusted returns for shareholders over the long term– Contribute to creation of long term sustainable value for stakeholders

• Reduce risk in the funds (“make money”)

• Create better companies (“make a difference”)

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ESG services

Jamie BonhamManager, Extractives Research & Engagement

Omar DominquezESG Analyst, health care, industrials, utilities

Randy EvansESG Analyst, consumer staples, consumer discretionary

Genevieve St. DenisESG Analyst, materials, information technology, telecommunications

Robert Walker Vice President, Ethical Funds & ESG Services

Michelle de CordovaDirector, Corporate Engagement & Public Policy

Christie StephensonManager, ESG Evaluations & Research

Rob GrossManager, ESG Operations

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Our program

o Material Risk Assessment

o Baseline Expectations

o Targeted Analytics

o Headline Risk

o Management Breach Investigations

o Improve target company ESG policy and performance

o Structured engagements

o Solutions-oriented and sensitive to internal challenges

o Can involve use of shareholder proposals

o Establish ESG program policies

o Refine evaluations

o Support corporate engagement and public policy

o Create enabling regulatory regime

o Focus on corporate disclosure, transparency and the right to file proposals

o Address systemic risk

o Address other key areas of regulation

EvaluationsEvaluations Corporate EngagementCorporate EngagementResearchResearch Public PolicyPublic Policy

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TSX Composite Index: Sectors

4%3%

27%

30%1%

6%1%

22%

5%

2%

Consumer DiscConsumer StaplesEnergyFinancialsHealthcareIndustrialsInfo TechMaterialsTelecomUtilities

Corporate engagement

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EngagementEngagement

• The ESG Services team carries out engagement activity with the companies in the Ethical Funds portfolio on behalf of investors

• Each year about 50 companies (20% of our assets) are placed on our Focus List based on assessment of significance and severity of ESG risks and the extent of our portfolio exposure

• We engage in direct discussions on material ESG issues ranging from climate change to human rights to executive compensation

• This enables the team to gain insight into how management is addressing various risks to the business and encourage positive change where gaps exist

Why not divest?

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• You can’t change a company you don’t own

• We will divest if we see unacceptable risks and no chance to mitigate or if companies refuse to change

• Divestment fails to create positive change in a globalized world

• We focus on driving change at large corporations

• Consequentialist ethics – focused on outcomes

EngagementEngagement

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The challenge of gold and conflict minerals

• Big part of our stock market

• TSX and Canadian mining companies are significant global players

• Mining companies contributing to severe human rights violations?

• Extraction of gold and other minerals not contributing to impacted communities

• Culpability of manufacturers of other products and consumers

• Mining companies at risk of losing their social license to operate

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Gold and conflict minerals strategy

Goal Improve the human rights performance of the mining sector

and ensure benefits are secured by communities

Companies – Establish supply chain due diligence, human rights policies, due diligence procedures, and ensure you are benefiting impacted communities Government – Establish voluntary initiatives and where necessary regulation to advance human rights and ensure community benefits

Multi-stakeholder initiatives – Human Rights Committee, Interfaith Center on Corporate Responsibility; National CSR Roundtables on Human Rights and the Extractives Sectors; Human Rights Working Group, Global Reporting Initiative

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Gold and conflict minerals progress

• Human rights standards for electronics, jewelry and mining– Electronics Industry Code of Conduct, Global e-Sustainability Initiative, World

Gold Council Conflict-Free Gold Standards, Responsible Jewelry Council systems underway

• Governments supporting key initiatives and legislation – Extractives Industry Transparency Initiative, Mines Act (Ontario), SEC

rules on Conflict Minerals and Revenue Transparency

• Corporate policies and performance improving– Mining companies adapting to rapidly evolving expectations

• Recognition that mining must provide benefits and seek consent

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Goldcorp: Marlin Human Rights Assessment

Timeline Corporate Engagement

2006 Dialogue begins after Goldcorp acquires Glamis Gold – Marlin mine

2007 Dialogue – multiple meetings

2008 Marlin mine visitFiled shareholder proposal: Human Rights Impact AssessmentProposal withdrawn: Goldcorp agreed to commission third-party HRIA

2008-10 Participated in HRIA Steering Committee

2010 Public release of Marlin Human Rights Assessment – industry firstGoldcorp responds to recommendations; sets the bar for extractives

2011 Relations improving with local communities; Goldcorp initiates ‘Sustainable Prosperity’ strategy; very strong impact benefit agreement with Cree

Today

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• Goldcorp voluntarily increased royalty from 1% to 5% of gross revenues (interim measure until new mining law reform is complete)

• 80% flows to local communities for economic development• Proposed mining law (supported by Goldcorp) includes 5% royalty, requirements for

community consultation and closure bonds• Of Marlin’s 1905 employees, 98% are Guatemalan and 60% are from the local

communities• Local sourcing – 70% of supplies equaling US$85 million in purchases in 2009• Local job stability has increased school enrollment by 82% (2002-2009)• Sustainability Department is supporting more than 100 local projects (schools, sport

fields, medical centre)• Monthly roundtables (company, national government, local municipalities) will continue• Local municipalities have asked for Goldcorp’s assistance in creating an economic

development plan• Guatemala has adopted Extractives Industry Transparency Initiative (March 2011)

The challenge of oil

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• Major part of our stock market and economy

• It will take decades to break our reliance on fossil fuels

• The search for oil is increasingly “difficult, dirty and dangerous”– High country risk – Extreme operating environments– Heavier oil/unconventional extraction methods

• Alberta oil sands represent a significant resource in safe jurisdiction

• Global controversy over oil sands; potential for restricted market access

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Oil sands strategy

Goal Ensure the oil sands are developed as responsibly as possible

Companies – R&D acceleration; reduce emissions; tailings pond reclamation; acceptance by First Nations; lobby responsibly

Government – regional land-use plan; world class monitoring system; baseline studies; acceptance by First Nations; meaningful carbon regulation

Multi-stakeholder initiatives – Boreal Leadership Council, CAPP Stakeholders

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Oil sands progress

• Accelerate innovation– New tailings reclamation systems are operational and industry leaders

have created Canadian Oil Sands Innovation Alliance (COSIA)• Establish credible monitoring system

– A new jointly-operated monitoring system is in place• Establish a comprehensive land use plan

– Government of Alberta has announced a land use plan that will include assessment of cumulative impacts and that increases conservation

• Address the challenges of climate change– Leading oil sands companies are using carbon pricing scenarios for

capital investments and are openly stating support for a meaningful price on carbon

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Enbridge: Northern Gateway ProjectTimeline Corporate Engagement

2005 Dialogue begins on Northern Gateway ; ask company to improve consultation with First Nations and improve impact benefits offer

2009 Re-initiate dialogue: same solutions-set plus free, prior and informed consent for First Nations advances

2010 Continuing dialogueFiled shareholder proposal: withdrawn when Enbridge agreed to provide more open discussion of risks; improved offer to First Nations

2011 Shareholder proposal: proceed in the face of First Nations opposition?Vote no on executive compensation – no link to safety or asset integrity

2012 Shareholder proposal: will the company proceed without consent?40% of shareholders oppose Management’s position;Meeting with Management in September; Board in NovemberEquity ownership offers now used more widely (e.g. Pacific Trails)

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Executive compensation challenge

• Links between pay and performance are often shaky

• Executive Compensation encourages short-term thinking

• Executive compensation design contributing to Global Financial Crisis

• Executive compensation quantum is contributing to income polarization

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Executive compensation strategy

Goal Advance say on pay and communicate concerns

Integrate ESG metrics into executive compensation designInitiate a dialogue on quantum

Government – get the right to an advisory vote on executive payCompanies – file shareholder proposals to secure the voteMulti-stakeholder initiatives – advance say on pay at the CCGGOil and gas companies – Focus on most obvious metrics such as safety and environmental performance

Responsible investors – raise awareness of our work in this area and pressure others to begin to engage

Banks – initiate a conversation about design and quantum

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Executive compensation progress

• Say-on-pay – Say-on-pay is now the law in the US – An increasing number of Canadian companies are now voluntarily

adopting say-on-pay votes– We are writing to companies to communicate where they are failing

• ESG Metrics– Oil and gas companies are beginning to integrate ESG metrics

• Influencing other responsible investors– We hosted opening plenary at SIO conference on executive pay

• Quantum– We have written to five major banks asking for a vertical comparison

between executive and employee pay

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Competitive advantage @ NEI

Dedicated and sustained expertise

Focus on material ESG issues revealing company-specific risks

Active on government policy and standards-setting

Responsive to real-time market and media events

Procedures for assessing credibility of sources

Takes the investment process from thought to decision to action

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Competitive advantage @ NEI

A deliberate theory of change based on the learning firm

Expertise in collaborative, interest-based negotiation

Solutions-oriented and mindful of internal barriers to change

Globally-recognized expert on key risks and strategies

Impressive track record for driving change

Robust, sophisticated, proven

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Make Money. Make A Difference.

• Reduce risk in the funds (“make money”)

– Avoid ‘black swans’– Enhance ESG risk management at the companies we own through – Expand the investment universe for our portfolio managers

• Create better companies (“make a difference”)

– Companies implementing solutions to key problems– Companies providing a rate of return to all stakeholders – Setting regional, global and industrial standards to raise the bar

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AppendixESG Evaluation Methodology

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Material risk

Our evaluation methodology starts with an identification of sector-specific material ESG risks

Material ESG risks are a function of the company’s sector, country exposure, ecosystem presence, or specific product and services mix

ESG analysts assess these risks and identify mitigation best practices

We use external panels and expert organizations to assist

EvaluationsEvaluations

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Baseline expectations

Baseline expectations specify ESG policies and performance tests that companies must fulfill in order to satisfy us that they are managing material ESG risks to industry standards

Companies must fulfill baseline expectations in order to qualify

EvaluationsEvaluations

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Monitoring – headline risk

Companies we own are monitored constantly for Headline Risks

ComponentsMedia coverage (national, regional, international)Credibility of sourceCountry riskSector riskNature of controversyName recognition

An elevated headline risk score can trigger a management breach investigation

EvaluationsEvaluations

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Monitoring – management breach

Serious headline risk will trigger Management Breach Investigations if issue and company are not currently on the Focus List for corporate engagement

Components of the investigationSeverityScopeManagement culpabilityManagement responseDuration and frequencyLegality

Results of investigation can lead to engagement, divestment or no action

EvaluationsEvaluations

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Targeted analytics

In many sectors, there are material ESG risks that few companies are addressing adequately at present (reclamation in the oil sands)

In these cases, we identify targeted analytics that allow us to assess identify policy and management measures companies should take to mitigate risks

Targeted analytics can also appear in the form of benchmarked performance tests (historic performance and compared to peer group).

Targeted analytics are used as a foundation for engaging the companies we own to improve their ESG policies and performance

EvaluationsEvaluations Corporate EngagementCorporate Engagement

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Research and public policy

In some cases, material ESG issues are new and emerging

In these cases, we conduct primary research in order to enhance our understanding of the issues and establish an internal position and action plan — before communicating with companies

In other cases, we conclude that a regulatory response is required to incentivize companies to act

We then engage policy-makers to adopt appropriate legislation and regulation

Public PolicyPublic PolicyResearchResearch

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Multi-Stakeholder Initiatives