S O C I A L LY R E S P O N S I B L E I N V E S T I N G D o i n g W e l l W h i l e D o i n g G o o d March 23, 2011 Timothy P. O Donnell Senior Vice President
OVERVIEW Provide definitions and background information on socially responsible investing (SRI) Summary of the SRI marketplace (size, client type, etc.) Address preconceived notions and myths regarding investing in SRI 1
DEFINITIONS AND BACKGROUND 2
HISTORY OF SOCIALLY RESPONSIBLE INVESTING For decades, exclusion of sin stocks by religious organizations defined SRI Alcohol Tobacco Gambling Pornography Pharmaceutical Nuclear Weaponry Apartheid Over time the concept of Socially Responsible Investing grew to incorporate other factors Environmental Sustainability Social Issues Ethical Corporate Management The term ESG is commonly used 3
WHAT IS SOCIALLY RESPONSIBLE INVESTING? Integrates exclusionary screens plus environmental, social, and governance (ESG) factors into investment decisions Provides an opportunity for investors to have social impact while achieving their financial goals Enables investors to positively influence business practices Identifies and capitalizes on factors with the goal of impacting shareholder value 4
DEFINITIONS E S G Environmental Positive practices in environmental and energy matters. The term green investing is closely associated with this factor. Social Justice Fair dealing with employees, customers, communities as a metric of corporate performance. Corporate Governance How a company governs itself relative to investor interests. Climate change Hazardous waste Nuclear energy Environmental sustainability Diversity Human rights Consumer protection Sin stocks Animal welfare Entrenched boards Over-committed or interconnected directors CEO pay Excessive options, grants, perks 5
OTHER TERMS In addition to the term ESG, several other terms seek to define the same goals of a socially responsible investment strategy: Responsible Investing (RI) Mission Related Investing (MRI) Double- or Triple- Bottom Line Investing Ethical Investing Sustainable Investing Green Investing Cleantech 6
SOCIALLY RESPONSIBLE STRATEGIES Primary SRI approaches to investment: SHAREHOLDER ADVOCACY COMMUNITY INVESTING ESG STRATEGIES Using votes to promote change from within Capital is directed to communities underserved by traditional financial services Incorporating positive and negative screens in traditional portfolio construction Source: Rockefeller Philanthropy. Solutions for Impact Investors 7
ESG STRATEGIES Screening- Negative Exclusion Avoids Worst-in-Class in certain industries Avoids complete industries (sin stocks) Screening- Positive Inclusion Rewards Best-in-Class ESG Integration The explicit integration of ESG risks and opportunities into traditional financial analysis 8
PORTFOLIO SCREENING Portfolio screening is the most common ESG strategy. Most Common ESG Screens Product Safety Healthcare/ Pharma Equal Opportunity Community Investment Nuclear Power Human Rights Pornography Labor Faith Based Gambling Defense/ Weapons Environment Alcohol Tobacco Sudan $39 $40 $43 $49 $54 $59 $70 $77 $84 $86 $101 $101 $161 $235 $446 $- $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 Billions Source: Social Investment Forum Foundation. 2010 Socially Responsible Investing Trends in the United States. 9
THE MARKETPLACE FOR SOCIALLY RESPONSIBLE INVESTING 10
THE SRI MARKETPLACE Socially responsible assets represent over $3 trillion and is the fastest growing portion of the asset management market Since 2005, ESG assets have increased 34% Nearly one of every eight dollars under professional management is invested in a socially responsible manner Public plans, government sponsored retirement plans, educational endowments, and hospitals comprise the majority of SRI dollars Source: Social Investment Forum Foundation. 2010 Socially Responsible Investing Trends in the United States. 11
THE SRI MARKETPLACE Alternative Assets 1% Closed End Funds <1% Exchange Traded Funds < 1% Separate Account 4% Commingled Product 7% Mutual Funds 10% Public Funds 48% Individuals 13% Faith-Based Investors 1% Labor Unions 1% Private Foundations 2% Healthcare 2% Corporations 3% Educational Institutions 8% Source: Social Investment Forum Foundation. 2010 Socially Responsible Investing Trends in the United States. 12
INVESTMENT CONSULTANTS & RESPONSIBLE INVESTING REPORT In 2009, a survey of 45 investment consultants around the country was conducted to gauge client interest in ESG mandates Nearly 90% of investment consultants believe that client interest in responsible investing will continue to grow over the next three years None of the firms responded that they believe client interest would decline Source: Social Investment Forum Foundation (SIF). Investment Consultants and Responsible Investing 13
CAN ADDING SRI RESEARCH REDUCE RISK? Identifying externalized costs 14
SRI AND TRADITIONAL ANALYSIS ESG analysis is long-term in nature and helps managers overcome market myopia 1 ESG analysis does not reduce the ability to run a financially sound portfolio Identification of additional factors can reduce risk Move beyond the Tyranny of OR 2 1. Institute for Responsible Investment- Investment Across Asset Classes 2. Jim Collins Built to Last- Successful Habits of Visionary Companies 15
THE RESPONSIBLE INVESTMENT PREMIUM ESG mandates may minimize the potential for legal and legislative action As climate change risks increase, investors may demand more return Individuals with ESG values will seek employers with similar views ESG is not fully implemented in financial valuation, thus creating an inefficiency where early adopters could benefit 16
IDENTIFYING EXTERNALIZED RISK ESG analysis helps identify well-run companies that are seeking to limit legislative risk, reputational risk, etc. BP Massey Energy Arthur Anderson There are opportunities to do what is right for the community and shareholders at the same time 17
THE TECH SECTOR AND CONFLICT MINERALS Conflict Minerals: Tin, tungsten, tantalum, gold Often sourced from conflict regions, most notably the Democratic Republic of Congo (DRC) DRC is 6 th largest producer of tin and provides 20% of world s tantalum 1 Dodd-Frank Wall Street Reform and Consumer Protection Act Section 1502 Drafted in conjunction with the Electronics Industry Citizenship Coalition (EICC) IBM, Advanced Micro, Motorola, among others 1. Trillium Asset Management- Investing for a Better World 18
SHAREHOLDERS CAN HAVE AN IMPACT Investor action and involvement can affect change Carbon Disclosure Project 1 551 investors representing $71 trillion in assets Works to promote increased disclosure of Greenhouse Gas emissions (GHG) The Global Reporting Initiative 2 Works toward mainstreaming the disclosure on environmental, social and governance issues Provides a framework for third parties to conduct ESG analysis The Interfaith Center on Corporate Responsibility 3 engaging in dialogue with corporate management participate in public hearings 1. The Carbon Disclosure Project- www.cdproject.net 2. The Global Reporting Initiative- www.globalreporting.org 3. The Interfaith Center on Corporate Responsibility- www.iccr.org 19
COMMON SRI CONCERNS Are there enough investment options? 20
GROWTH OF SRI One of the most common concerns with investing in an SRI mandate is the belief that there are too few investment options Investment options for institutions and individuals grown considerably have 21
GROWTH OF SRI Assets in billions Represents ~$700b Alternative Assets $38 Closed End Funds $0.2 Exchange Traded Funds $4 Separate Account $122 Commingled Product $211 Mutual Funds $316 Public Funds $1,460 Individuals $400 Faith-Based Investors $40 Labor Unions $15 Private Foundations $54 Healthcare $72 Corporations $100 Educational Institutions $242 22
GROWTH OF SRI (Number of Products) ~$700 billion is invested in publicly traded mutual funds, exchange traded funds, alternative asset funds, and separate accounts 300 $350 $316 250 250 $300 232 200 150 100 Dollar Amount # of products 177 $122 $211 $250 $200 $150 $100 (Billions) 50 0 26 $4 5 $0.20 $38 35 $50 $- Mutual Funds Exchange Traded Funds Closed End Funds Alternative Assets Separate Account Commingled Product Source: Social Investment Forum Foundation. 2010 Socially Responsible Investing Trends in the United States. 23
GROWTH OF ESG FUNDS Growth of ESG Funds and Dollars Invested Number of Funds* Assets in Billions $569 $600 493 $500 $400 260 $300 55 144 $96 168 $154 181 $136 200 201 $151 $179 $202 $200 $100 $12 1995 1997 1999 2001 2003 2005 2007 2010 $0 Source: Social Investment Forum Foundation. 2010 Socially Responsible Investing Trends in the United States. (includes all mutual, exchange traded, commingled, closed-end and alternative funds) 24
SRI IS GLOBAL C A N A D A assets have grown to CDN $555 billion 2 ASIA there are more than 417 active SRI funds in China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Singapore, Taiwan, Thailand, and Vietnam. Rapid ESG expansion is occurring worldwide, most notable in E U R O P E. Assets within E U R O P E invested in sustainable and responsible investment is ~ 5 trillion, up 87% since 2007 1 A U S T R A L I A A N D N E W Z E A L A N D remain one of the leading ESG markets in the Pacific Rim with ~AU$80 billion 3 Source: 1. Eurosif. 2010 European SRI Study 2. Social Investment Organization. Canadian Socially Responsible Investment Review 2008 3. Responsible Investment Association Australia. Responsible Investment 2009 4. Korea Social Investment Foundation (KoSIF) 25
MAJOR DRIVERS IN GROWTH Major Drivers in ESG Growth In the last several years ESG has grown rapidly due to a number of reasons Increased growth in available products Existing managers are incorporating ESG factors Public funds are adding ESG mandates due, in part, to legislative action Increasing numbers of managers are addressing the crisis in Sudan A significant increase in community investing 26
COMMON SRI CONCERNS Does performance suffer? 27
PERFORMANCE Another common concern with investing in an SRI mandate is the belief that performance suffers. Several studies have shown that SRI does not negatively impact performance In 2007 an aggregate of 20 studies conducted indicated a positive relationship between ESG factors and portfolio performance in half of the studies. Only three studies indicated negative performance 1 In 2009 a follow-up study came to the same conclusion with ten of the sixteen studies showing a positive relationship and two showing a negative relationship 2 Funds that incorporate ESG analysis had a higher alpha and are less exposed to carbon costs 3 Sources: 1. The United Nations Environment Programme Finance Initiative. Demystifying Responsible Investment Performance October 2007 2. Mercer Consulting. Shedding light on responsible investment November 2009 3. Trucost- Carbon Footprints, Performance and Risk of U.S. Equity Mutual Funds 28
PERFORMANCE OF KLD 400 & S&P 500 Over time, the KLD Index has kept pace or outperformed the S&P 500 Index 16% 15.1% 14% 12% 10% 11.9% KLD 400 Index S&P 500 8% 6% 4% 2% 2.4% 2.3% 1.5% 1.4% 0% -2% -4% -1.4% -2.8% 1 YR 3 YR 5 YR 10 YR Source: MSCI - As of December 31, 2010 29
PERFORMANCE De-mystifying ESG- Performance Greater than half of all domestic ESG funds have outperformed the S&P 500. Number of Domestic ESG Funds 105 Number of ESG Funds to outperform S&P 500 95 Percent of ESG Funds to outperform S&P 500 Percent of all Domestic Stock Funds to outperform the S&P 500 73 57 54% 58% 61 64% 65% 58% 56% 42 1 Year 3 Year 5 Year Source: Morningstar Associates as of January 2011 30
WHAT S NEXT? 31
QUESTIONS TO ASK What kind of investor are we? 1 Impact First Financial First Both What is important to Our organization? Our trustees, donors, constituents? Our community Do we have the resources to execute this strategy successfully? Where do we go for help? Social Investment Forum Socialfunds.com Trucost.com Your consultant 1. The Monitor Institute. Investing for Social and Environmental Impact 32
CONCLUSION The socially responsible marketplace is $3 trillion and growing Access to mutual fund and ETFs (both index and actively managed) is large enough for most investors Studies suggest there are no significant data supporting a performance loss by adding an SRI/ESG mandate to a portfolio 33
DISCLOSURE This report was prepared by Fund Evaluation Group, LLC (FEG) an investment adviser registered under the Investment Advisers Act of 1940, as amended providing non-discretionary and discretionary investment advice to its clients on an individual basis. The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it. Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or sell any securities. FEG, its affiliates, directors, officers, employees, employee benefit programs and client accounts may have a long position in any securities of issuers discussed in this report. This report is prepared for general circulation and information only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report. 34
FIRM CONTACT INFORMATION 201 East Fifth Street Suite 1600 Cincinnati, OH 45202 Phone: 513.977.4400 Fax: 513.977.4430 information@feg.com www.feg.com Satellite Offices: Boston / Chicago / Detroit / Indianapolis 35