3D Investing Principles

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1 3D Investing Principles 3D Investing is underpinned by a set of deeply held beliefs. These frame everything we do and understanding what we believe will help you to decide whether 3D Investing is for you. Principle 1 It s about more than money We don't just see 3D investing as a business opportunity we believe in it and invest our own money for social impact. Our prime motivation comes out of wanting to do something about the critical social and environmental challenges that we face and see 3D Investing as a key part of the solution where we can add value. We do it because it s right, because it s one of the best ways of tackling social and environmental problems and because we want to re-engage with our money. Principle 2 It really makes a difference 3D investing is the very antithesis of impersonal benchmark driven investing that characterises much of conventional investing. It is long-term, holds social impact as a core purpose and utilises capital to make something good happen that might very well not do so without investment. 3D investing makes a big difference to people like these 1

2 Principle 3 Investors are re-connected with their money Typically, non-professional investors have little real understanding of their investments and are distanced from their money, knowing very little about the underlying businesses that their money supports. In an increasingly complex financial landscape, even professional investors were caught napping when the financial crisis broke, not fully appreciating how profits were being earned and focussing on financial ratios that say little about the actual business. In stark contrast, 3D investing involves investment in businesses and organisations that investors understand and want to support. It represents a real partnership between investor and investee whereby money is clearly invested in known organisations that are making a measurable social impact. Principle 4 100% of an investment portfolio can be invested for social impact Many investors put a proportion of their money in socially responsible investments, but to us, this is a cop out. If you hold social values, why wouldn't you apply them across your whole portfolio, rather than a small portion of it? To do less, reveals a lack of conviction and there are sufficient options to adequately reduce risk. We can help you to deliver a portfolio service that allows all of an investor s assets to be managed according to a 3D Investing strategy. Principle 5 All investments need to be transparent One of the reasons for the financial crisis was a distinct lack of transparency, leading to complex structures that few really understood. The hedge fund industry, banks and others claim a need for commercial confidentiality that leads to a 'black box' approach to investment. In the world of social investment, the need to see through each and every investment is paramount, since how can an investor really know if their concerns are being met without detailed information that describes each and every investment. Principle 6 - Social impact is a core principle. It s not good enough to simply avoid the 'bads' or to put a small amount of the portfolio in positively screened stocks. Within the given financial parameters, its possible to maximise social returns, albeit at different levels. This can be done in different ways. For example, when allocating to income generating equities, the investor can adopt an approach of actively seeking out those stocks that demonstrate clear social and environmental leadership, whilst for the high risk, high social impact component, impact investing is the most obvious solution, both of which fall within the philosophy of looking to maximise social impact within the given risk parameters. We profile each investment so that nothing is hidden 2

3 Principle 7 Ethical compromise must be defensible Some level of ethical compromise is inevitable but must be justified and acknowledged. Management of risk invariably involves compromise, but in the spirit of transparency, we believe that any shortcomings should be acknowledged and declared, and if necessary, justified. Conventional Investing 3D Investing Short-term Trade Long-term Investment Disconnected with individual investors Engaged with individual investors Social Impact, if any, is secondary Social impact is integral to every investment No new capital is introduced (other than new and rights issues) Impact investment feeds new capital into social innovation Investors are focussed on financial returns alone Investors are focussed on both social and financial returns Low capacity to make a difference High capacity to make a difference Low transparency little detail on holdings High transparency full rationale for all holdings Risk dictated by financial circumstances and personal outlook Appetite for risk is also governed by a third factor: social impact Principle 8 Investment can deliver a greater social impact than philanthropy 3D investing complements philanthropy, since the impact investment element can achieve social change on a scale not possible by philanthropy alone. There will always be a place for outright gifts for emergency appeals, non-profit making ventures that can't be served commercially and for seed funding where the risks are just too high. However, impact investment can meet the needs of the poor and help to resolve environmental issues on a scale that philanthropy will never be able to achieve. Likewise, wider social investments can provide the level of finance necessary to deliver a more sustainable economy. 3

4 Principle 9 - Investments are not short term trades Many portfolios operate on the principle of trading to take advantage of perceived underpricing, but in our experience the results of this are mixed at best. Timing is notoriously difficult and we therefore prefer approaches that do not rely on timing to generate long-term returns. For investors as a whole, returns decrease as motion increases - Warren Buffett Instead we like investment strategies that revolve around identifying and sticking with long-term investments that benefit from sustainable tailwinds. This is a low turnover, high conviction approach. Source: LPL Financial, NYSE, 8/6/12 Principle 10 Maximising financial returns isn't the only objective There is no doubt that excluding some investments on ethical grounds leads to a smaller investment universe and therefore the potential for profit. Furthermore, given that the majority of fund managers apply no form of ethical screening, the selection of funds is correspondingly limited and means that the vast majority of top performing funds are not available. However, socially motivated investors are not usually preoccupied with maximising returns, but are more concerned to meet their broad financial objectives whilst also making a social impact. Principle 11 3D Investments can be good investments In any case, there is a substantive body of evidence (see 'Performance' above) that 3D investments are no better or worse than conventional investments. Like the wider market, there are good and bad investments and a 3D Investing strategy seeks to identify reliable investments that meet investor expectations. 3D investing benefits from sustainability tailwinds, that provide a helpful backdrop for well-managed companies. The reverse is also true, in that sustainability strategies can help to avoid long-term headwinds. 4

5 Principle 12 Income generation is important 3D investing is not about speculating. As such, it often involves investing in relatively mature businesses that are generating cash and distributing these cash flows to investors. Dividends and income streams from real assets are therefore a really important component of overall investment returns. This gives more certainty than taking the risk of fast growing businesses that have not yet reached profitability. Income and the capacity to grow income is a key factor in choosing investments. Impact of re-invested dividends on cumulative UK and US Equity Returns Source: Source: Triumph of the Optimists: 101 Years of Global Investment Returns, Dimson, Marsh and Staunton, Princeton University Press, 2002 Principle 13 Making money means not losing it It only takes one bad investment to drag down the performance of the whole portfolio. Aside from impact investment where it's taken for granted that investment capital may be lost in its entirety, we prefer an approach where long-term preservation of capital is a cornerstone principle. In our experience, seemingly attractive direct investments in smaller companies ultimately prove to be less rewarding than larger companies or in managed funds focusing on specific sectors. We prefer to use funds for higher risk exposure, as this reduces the risk of capital loss associated with relatively small individual companies. Principle 14 Listed Funds aren't the only game in town Listed equities and bonds are the mainstay of most portfolios, and these are usually held by way of collective funds, but we believe that its important to look outside regular markets to benefit from the 'cutting edge' of 3D Investing and to truly diversify a portfolio. This might include unlisted bonds and shares, direct property or funds that aren't listed on main markets. These afford access to real physical assets and impact investments, that can provide both diversification and social impact. 5

6 It's also important to consider direct investment as opposed to investing via collective funds. Collective funds have the advantages of diversification, transparent performance comparison and competition that often leads to better fund management, but they carry the major disadvantage of inflexibility in the application of their ethical approach. This often means that funds hold stocks that fail to meet a socially motivated investors' concerns. There is a balance to be struck, but by combining direct investment with collectives, an investor can better realise their social objectives whilst maintaining financial discipline. Principle 15 - Attitude to risk is informed by social impact A socially motivated investor is likely to take more risk if they know that this will allow them to make a bigger social impact. In particular, they may well be prepared to dedicate a proportion of their portfolio to risky, high impact investments. The impact investor who can afford to lose capital is usually willing to trade social impact for an increased risk of capital loss. The issue is more one of taking good risks. No-one wants to throw their money away on a whim or ill-considered project. A risk is only a good risk if it is properly understood and accepted. 'Good' risks are managed and known Ethical Money Limited dinvesting.com