Impact Investing: Environmental, Social & Governance criteria promote sustainable, positive outcomes.

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1 Impact Investing: Envirnmental, Scial & Gvernance criteria prmte sustainable, psitive utcmes. By Lauryn Agnew Octber, 2010 The ld Scially Respnsible Investing (SRI) strategy has evlved t be mre practive and rewarding, incrprating brad cncepts like sustainability and gvernance acrss all asset classes. New investment strategies are appearing t meet the grwing demand by mre investrs fr financial instruments that ffer a cmpetitive financial return AND psitive utcmes in scial, envirnmental and crprate gvernance issues. Originally, Scially Respnsible Investing (SRI) applied nly t the public equity sectr and was abut negative screens: aviding cmpanies that behaved prly (apartheid) r made bad things (like tbacc prducts, bmbs, alchl, etc.) Such screens were believed t limit the available universe t the gd cmpanies by restricting the ptential investable universe t a smaller set, resulting in higher tracking errr against benchmarks, and ptentially lwer returns. Recent studies* f 18 years f SRI index perfrmance indicate neither a negative nr psitive alpha frm SRI screens: the lng term returns are cmpetitive. Frtunately, simple negative screening has evlved t be much mre practive in the past cuple f decades. These newer Envirnmental, Scial and Gvernance (ESG) strategies available t investrs are spread acrss all asset classes with a variety f structures and targeted impact. Nw it can be easier fr asset wners (pensin plans, fundatins, private prtflis) t align the bjectives f their investments with their wn values and missins, addressing such issues as mitigating climate change, imprving water quality r alleviating pverty cnditins. Impact Investing, is a very brad term that encmpasses the cncept that investrs can get cmpetitive financial returns AND make a psitive scial impact with their capital. Fiduciaries must seek market rate returns (and nt sacrifice the expected return fr a psitive impact), nr shuld they cnsider investments which wuld be cntrary t the current due diligence, asset allcatin and investment plicies in place. There are many large asset pls, bth private and public, that are successfully integrating their risk and return expectatins with the gal f channeling sme f their capital twards investments with a particular intended (thugh nn-financially quantifiable) impact. Picture Impact Investing as being a cntinuum f investment pprtunities. Traditinal investing wuld be at ne end f the spectrum, ffering a market return/n impact while the ppsite end f the cntinuum wuld be the grant: n financial return, all impact. Within each asset class, and with different cmbinatins f returns, risks, and liquidity, impact investments can be viewed alng the cntinuum f ptential return. Market return vehicles, like equity, fixed incme and alternatives (private equity, hedge funds, etc.) wuld share space n ne side f the scale, while belw-market rates f return investments like Prgram Related Investments (PRI) and Grants share the ther side. Sme investrs, like fiduciaries f retirement assets, will be lking nly at the market return side while private fundatins may be able t cnsider belw market return pprtunities like PRI and supprting grantees in unique ways with additinal capital. Public/Private partnerships culd prvide fr a range f financial returns t the participants wh cmbine their resurces fr a cmmn psitive impact. Still in its early stages, the Impact Investing cmmunity is addressing the issues f public awareness, impact measurement, plicy develpment, prduct develpment and cllabratin between investrs

2 and the creatrs f investment strategies. Each majr asset class brings unique structures and ptential impacts, s that sme level f Impact Investing culd be applied acrss all parts f the prtfli and all categries f targeted impact: e.g., sustainable cmmunities, envirnmental (clean energy, climate change, water), and scial (educatin, children s health, etc) issues. Public Equity Prtflis Equities markets give us a clear way t vte ur dllars. The Public Equity space is ften the largest asset class in ur institutinal prtflis. It prvides investrs with liquidity, grwth (inflatin prtectin) and transparency in pricing. Equities may be less efficient at being measured fr direct impact, but because we as sharehlders get t VOTE ur prxies, sharehlder activism can be a pwerful frce fr change in crprate behavir. Many large sharehlders, such as CalPERS, are active in the public equity sectr thrugh sharehlder activism: vting prxies, submitting reslutins, and wrking with management fr lng term psitive change. Other impactful public equity strategies have evlved t include practive, sustainable investing strategies and encmpass mre scial, envirnmental and gvernance issues. Fr example, funds can wn cmpanies that are develping prducts, technlgies and services with psitive envirnmental impact. Frtunately, mre recent academic studies are finding linkages between crprate ESG prgrams and gd stck perfrmance: gd crprate ESG management and gd risk mitigatin can be indicative f a cmpany s ability t respnd t lng term trends and maintain a cmpetitive advantage**. Cnsequently, we can lk at this kind f additinal criteria, like ptential impact, in chsing investments withut sacrificing ur fiduciary respnsibility t get gd returns. Investment strategies and mutual funds are nw ffered in many flavrs f ESG r Sustainability. It requires a bit f crprate sul-searching t identify the brad missin and values f the rganizatin as well as a prcess fr implementing thse values with investment vehicles. Apprpriate due diligence is needed t align the values and missin f an rganizatin with the investment bjectives f the chsen funds and strategies. Websites and databases cllect infrmatin n investment vehicles in each asset class that ffer a cmbinatin f financial return and scial impact. Fixed Incme Investments Fixed Incme is usually a big prtin f ur prtflis. In the past there were nt many pprtunities t use ur fixed incme assets t make a scial impact. Nw there are mre and mre bnds that can give us the attractive aspects f wning fixed incme securities, like the prmised cupn (yield), within a specific time frame (maturity), and within an understandable, quantifiable risk level (default risk) AND with the added benefit f sme psitive impact. Sme f these Impactriented fixed incme investments prvide liquidity directly t certain prjects, like affrdable husing, micr-investing/micr-lending, r glbal green bnds. We might be able t get better metrics frm ur fixed incme investments abut Impact (# f huses r clean water systems built) than we can in the public equity space. Knwing the terms f the Impact bnd prtflis will make it easier t knw where these investments can fit in ur asset allcatin (shrt r lng duratin, dmestic r glbal, investment grade r high yield). These assets can cntinue t act as a diversifier and lwer the risk f the entire prtfli because they have lw crrelatin t and less vlatility than equities. Understanding these attributes within ur whle prtfli cntext is part f the necessary due diligence prcess. When we mnitr the prtfli and perfrmance against its benchmarks ver time, we can track the Impact as well.

3 Alternative Investments Sustainable/Impact/ESG investment strategies can be fund in private equity funds, lan funds, hedge funds, venture capital, and ther funds f funds vehicles. In the Alternative space in ur prtflis, we can ften see the direct beneficiary f the capital investment: R&D fr vaccines, green and clean tech develpment like slar, electric cars, etc., cmmunity utreach prgrams and prviders. Cllabratin between private and public investrs may als yield different investment structures with different risk characteristics that achieve cmmn gals, like a public/private partnership fr affrdable husing, ecnmic develpment and pen space develpment. Impact Measurement and Gegraphical Fcus Different investing rganizatins (asset wners) will be challenged t define their desired utcmes when they try t align their missins with the investment bjectives f a particular investment strategy. Standards are develping fr cmparisn and measurement f impacts that investrs can use in their due diligence. Additinally, the gegraphical fcus f bth the investr and the investment strategy can be a largest factr in identifying the right fit between investr and investment. Sme rganizatins and sme investment strategies are mre glbal in nature, while thers are specific t a certain gegraphical regin. Summary Als smetimes called Duble r Triple Bttm Line Investing, Impact investing, in its many frms, is being embraced by leading private and public investrs. The current demand fr such strategies is estimated at $120 billin, but that still represents nly a very small percentage f the apprximately $30 trillin in ttal glbal financial assets. As demand fr such investment vehicles grws, s will the inventry f such pprtunities grw acrss all asset classes. Cllabratin between investrs and prduct prviders can help funnel glbal capital t new and sustainable business practices that can lead t lng term slutins t serius issues at the cmmunity, natinal r glbal level. Re-directing even sme f the liquidity f traditinal investment prtflis int sustainable cmpanies, innvative prducts and services, r creative slutins t existing scial prblems culd have a significant impact n the speed f imprvement in these areas. Fllwing nrmal existing due diligence and investment practices and plicies, fiduciaries can implement impact investing pprtunities int their prtflis withut sacrificing return expectatins r diversificatin benefits. LaurynAgnew@SealCveFinancial.cm Surces f infrmatin: The fllwing links are nt endrsements; they are prvided fr infrmatin purpses nly. *SRI return study: Llyd Kurtz and Dan Dibartlme The Lng Term Returns f a Scial Investment Universe, Wrking Paper 2010 CFA Sciety f San Francisc, 10/14/2010 United Natins Envirnmental Prgram: UN Principles fr Respnsible Investment: The Principles fr Respnsible Investment (PRI) is a best-practice framewrk designed t assist members f the investment cmmunity in incrprating envirnmental, scial and gvernance (ESG) issues int investment decisin-making and wnership practices.

4 **Equity returns studies: United Natins Envirnmental Prgramme Finance Initiative Asset Management Wrking Grup: Glbalizatin and the Envirnment: Mbilizing Finance t meet the Climate Challenge Presented by the UNEP Finance Initiative: Califrnia Public Emplyees Retirement System: CalPERS We believe gd crprate gvernance leads t better perfrmance. We seek crprate refrm t prtect ur investments. Envirnmental Investment Initiatives: Crprate Sustainability: Missin Statement f APG (largest pensin manager in the Netherlands with ~240 billin Eurs) Asset management plays an imprtant rle in crprate scial respnsibility. We are f the pinin that cnsideratin fr peple and the envirnment can g hand in hand with a gd financial perfrmance. In the cming years, APG will be paying a lt f attentin t investment prjects that have a sustainable character, such as alternative energy, envirnmentally friendly technlgy and infrastructure. Mrever, we actively see t it that this apprach is given as brad supprt as pssible. Pubic Equity strategies Impax Specialists Strategy Terra Verde Capital Management Fund f Hedge funds/envirnmental Baldwin Brthers Highwater Glbal Fund Bstn Cmmn Asset Management Fixed Incme Strategies: Wrld Bank Green Bnds: Nikk Asset Management Affrdable Husing, Transit Cmmunity Develpment Cmmunity Capital Management Enterprise

5 Rse Smart Grwth Investment Fund I, LP ticker: RSGF Green Real Estate: Gerdin Edlen Green Cities, I LP Private Equity Envirnmental EKO Green Carbn Fund, LP Scial Investr Netwrks: GIIN: Glbal Impact Investing Netwrk Investrs Circle (angels) Research Material: Rckefeller Philanthrpy Advisrs white papers n Impact Investing