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Sasha Burstein, Partner, San FranciscoSonia Gioseffi, Partner, San FranciscoMichael McGrath, Partner, BostonTeresa Wells, Managing Director – Tiedemann Advisors

Socially Responsible, ESG, and Impact Investing

2019 SAN FRANCISCO INVESTMENT MANAGEMENT CONFERENCE

TRENDS IN ESG, SRI AND IMPACT INVESTING Investors are increasingly focused on Environmental,

Social and Governance Issues (ESG), Socially Responsible Investing (SRI) and Impact Investing

Global Sustainable Investing Alliance reports that $23 trillion in assets around the world have been committed to socially responsible investing strategies

The 2018 GIIN Annual Impact Investor Survey estimates that 229 of the world’s leading impact investor organizations collectively manage over USD $228 billion in impact assets across the globe

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1.6%1.6%

3.2%3.2%3.2%

4.8%8.1%8.1%

9.7%17.0%

20.0%21.0%

27.0%39.0%

67.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

MedicalHedge funds

Cash and cash equivalentsCommodities

Development bank bondsPublic Equity (funds)

Fixed incomeGreen bonds

Public equity (direct)AlternativesPrivate debt

MicrofinanceReal Estate

EquityPrivate equity

Figure 1.28 Most common asset classes for impact investing

Source: The UBS / Campden Wealth Global Family Office Report 2018 Note: Respondents were able to select multiple options

Chart1

Medical

Hedge funds

Cash and cash equivalents

Commodities

Development bank bonds

Public Equity (funds)

Fixed income

Green bonds

Public equity (direct)

Alternatives

Private debt

Microfinance

Real Estate

Equity

Private equity

Series 1

Figure 1.28 Most common asset classes for impact investing

0.016

0.016

0.032

0.032

0.032

0.048

0.081

0.081

0.097

0.17

0.2

0.21

0.27

0.39

0.67

Sheet1

Series 1

Medical1.6%

Hedge funds1.6%

Cash and cash equivalents3.2%

Commodities3.2%

Development bank bonds3.2%

Public Equity (funds)4.8%

Fixed income8.1%

Green bonds8.1%

Public equity (direct)9.7%

Alternatives17.0%

Private debt20.0%

Microfinance21.0%

Real Estate27.0%

Equity39.0%

Private equity67.0%

To resize chart data range, drag lower right corner of range.

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1.6%

12.0%

15.0%

21.0%

22.0%

24.0%

25.0%

28.0%

30.0%

43.0%

49.0%

49.0%

51.0%

0%

10%

20%

30%

40%

50%

60%

Technology

Access to finance

Sustainable infrastructure

Healthcare and wellness

Job creation

Sustainable consumer products

Base of pyramid services

Environmental conservation

Energy and resource efficiency

Women's empowerment

Housing and community development

Agriculture and food

Education

Figure 1.29 Most common areas of impact investments

Source: The UBS / Campden Wealth Global Family Office Report 2018 Note: Respondents were able to select multiple options

*McCreless, Michael. ’Toward the Efficient Impact Frontier’, Stanford Social Innovation Review. Winter 2017, Volume 15, Number 1.

Chart1

Technology

Access to finance

Sustainable infrastructure

Healthcare and wellness

Job creation

Sustainable consumer products

Base of pyramid services

Environmental conservation

Energy and resource efficiency

Women's empowerment

Housing and community development

Agriculture and food

Education

Series 1

Figure 1.29 Most common areas of impact investments

0.016

0.12

0.15

0.21

0.22

0.24

0.25

0.28

0.3

0.43

0.49

0.49

0.51

Sheet1

Series 1

Technology1.6%

Access to finance12.0%

Sustainable infrastructure15.0%

Healthcare and wellness21.0%

Job creation22.0%

Sustainable consumer products24.0%

Base of pyramid services25.0%

Environmental conservation28.0%

Energy and resource efficiency30.0%

Women's empowerment43.0%

Housing and community development49.0%

Agriculture and food49.0%

Education51.0%

To resize chart data range, drag lower right corner of range.

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Source: The UBS / Campden Wealth Global Family Office Report 2018 Note: Respondents were able to select multiple options

Chart1

High costs

Scale of the deals (too big / too small)

Insufficient knowledge / skills

High levels of risk

Lack of time / staff resources

Lack of government support

Returns don’t meet expectations

Lack of supportive / knowledgeable advisers

Lack of track record data on performance

Market at early stage / immature

Difficulties identifying attractive deals / funds or lack of deal flow

Due diligence challenges

Difficulties measuring social / environmental impact

Series 1

Figure 1.30 Most common challenges faced in impact investing

0.11

0.17

0.2

0.2

0.2

0.22

0.22

0.29

0.31

0.32

0.4

0.43

0.52

Sheet1

Series 1

High costs11.0%

Scale of the deals (too big / too small)17.0%

Insufficient knowledge / skills20.0%

High levels of risk20.0%

Lack of time / staff resources20.0%

Lack of government support22.0%

Returns don’t meet expectations22.0%

Lack of supportive / knowledgeable advisers29.0%

Lack of track record data on performance31.0%

Market at early stage / immature32.0%

Difficulties identifying attractive deals / funds or lack of deal flow40.0%

Due diligence challenges43.0%

Difficulties measuring social / environmental impact52.0%

To resize chart data range, drag lower right corner of range.

GREENWASHING Greenwashing is the practice of making an

unsubstantiated or misleading claim about the environmental benefits of a product, service, technology or company practice.

Greenwashing can make a company (or an investment strategy) appear to be more environmentally friendly than it really is.

GREENWASHING Advisers Act Rule 206(4)-1(a)(2):

“It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business

within the meaning of section 206(4) of the Act for any investment adviser … to publish, circulate, or

distribute any advertisement … which contains any untrue statement of a material fact, or which is

otherwise false or misleading.”

ERISA INVESTORS ARE LARGE ASSET OWNERS

Source: Investment Company Institute, “Retirement Assets Total $29.1 Trillion in First Quarter 2019”. https://www.ici.org/research/stats/retirement/ret_19_q1

https://www.ici.org/research/stats/retirement/ret_19_q1

DEPARTMENT OF LABOR GUIDANCE The Department of Labor (“DOL) has a longstanding position that

ERISA fiduciaries may not sacrifice investment returns or assume greater risks as a means of promoting collateral social policy goals

Series of DOL guidance. Most recent guidance issued in April (Field Assistance Bulletin 2018-

01). Clarification? Warning bell? ERISA fiduciaries must not too readily treat ESG factors as

economically relevant; rather, an evaluation of an investment opportunity should be focused on financial factors that have a material effect on return and risk.

ERISA CONSIDERATIONS Can ESG-themed investments be included in a 401(k) investment

lineup? Can ESG-themed investments be a default investment option? Can a target date fund allocate to ESG-themed investments? What should an investment policy statement say about ESG

factors? What process should a fiduciary follow in considering ESG factors? Does the DOL’s guidance apply to IRAs? Public plans? Are there any specific considerations for defined benefit plans?

ERISA AND THE POLITICAL CLIMATE “Are these shares being voted to drive

productivity in our economy and increase investors' return on their hard-earned investments, or are intermediaries using other people's money unbeknownst to them in order to advance environmental, social and other political policies?”

-Sen. Mike Crapo, chairman of the Senate Banking Committee

SIGNIFICANT SHAREHOLDER REPORTING Section 13 of the Securities Exchange Act of 1934

requires reporting of efforts to influence or control a public issuer Schedule 13D filings are cumbersome and require disclosure of

the investor’s intent Filing obligations can also be imposed when acting as a “group”

with others Impact and engagement investing for environmental and

social goals Advocating for specific actions Advocating for governance goals

IMPACT INVESTING DEFINED

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Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.

Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals.

- Global Impact Investing Network

DIFFERENT APPROACHES TO IMPACT INVESTING

INTEGRATED ESG (ENVIRONMENTAL, SOCIAL & GOVERNANCE)Active public equity and fixed income strategies that integrate impact evaluation into investment process

VALUES ALIGNED STRATEGIESPassive public equity and fixed income strategies that use negative and positive screens

THEMATIC STRATEGIESPrivate equity, venture capital, and private debt strategies within specific impact themes

EXAMPLE:Account that invests in stocks to replicate the S&P 500 Index, but client chooses to screen out coal stocks, gun manufacturers, and tobacco companies, and positively shift the portfolio towards companies with female representation in board and firm leadership.

EXAMPLE:Taxable bond strategy offering broad market exposure but seeks to invest proactively in bonds benefitting affordable housing or green initiatives but evaluates the use of proceeds on every bond in the portfolio to ascertain both the credit worthiness of the borrower and their impact on the community.

EXAMPLE:Regionally focused private timber strategy focused exclusively on sustainable practices. Offers ancillary benefits via wetland mitigation banking, ecosystem services and conservation, and also works in partnership with indigenous communities to restore tribal lands.

For those seeking to advance environmental, social, or governance outcomes through active shareholder engagement, we offer a robust shareholder engagement solution – including proxy voting and co-filing resolutions in partnership with leading advocacy organization, As You Sow. We believe effective impact investing is not just about what you own, but also your role as an investor/ owner. We help clients develop strategies to elevate your voice to enhance corporate transparency, drive environmental outcomes, and advance corporate social responsibility.

SHAREHOLDER ENGAGEMENT

LEVEL 1: Vote Client drives

proxy voting No restriction on

$ value, # shares, or time owned

Anonymous

LEVEL 2: Proxy Vote Impact Manager

votes proxies No restriction on $

value, # shares or time owned.

Anonymous

LEVEL 3: Co-file Utilize company

such as As You Sow to co-sign resolutions

Must own $2,000 of the stock for 1 year+

Name is public

LEVEL 4: File Utilize company

such as As You Sow to file a resolution.

Must own $2,000 of the stock for 1 year+

as public

HOW Shareholders

CAN ENGAGE

QUESTIONS FOR

Shareholders

Do you have stocks in your

portfolio that are available for proxy

voting. Do these stocks represent

companies that are negligent or

lack transparency in their business

practices?

If you are not voting your proxy

vote, who is? What are the guidelines by which they are

voting and are these guidelines in

line with your values?

Do you wish to participate in co-filing

resolutions and co-resolutions?

Do you wish to directly engage with

corporations by filing your own

resolutions.

1. Changing Demographics – 65% of women and 85% of millennials are interested in impact investing

A generational shift in social attitudes is driving the adoption of impact strategies generally.

A 2013 survey of 5,000 investors found that 40% of Millennial respondents felt “improved society” is the foremost business imperative.

2. Climate Change is almost universally acknowledged as a reality

3. Increasing corporate transparency –greater access to ESG data has enabled rapid integration of ESG factors into investment decisions

4. Growing evidence that ESG factors are material to financial performance

WHAT’S DRIVING DEMAND?

Source: PIMCO, June 26, 2017: “10 Reasons Impact Investing is Growing”

Source: World Economic Forum

Source: Deloitte, 2018

Primary Purpose of Business According to the Millennial Generation, % of Survey

Impact investing is growing rapidly. In 2016, ~$8.8 trillion is subject to SRI versus $19.2 trillion in US domiciled assets in total. (USSIF, ICI, 2016)

U.S. IMPACT ASSETS UNDER MANAGEMENT GROWING

US Professionally Managed Assets That Incorporate ESG, SRI, Impact Or Shareholder Engagement

Practices

Source: USSIF, ICI, 2016

ESG: Environmental, Social, GovernanceSRI: Socially Responsible Investment

PROBLEM AND OPPORTUNITY

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