Cary Steven Krosinsky

Lecturer, Yale and Brown University;

President, Sustainable Finance Institute

The State of Sustainable Finance

Systemic Global Challenges Largely Remain Unsolved (ESGFQ)

A System Wide Approach is Required,

including and especially Global Cooperation, involving:

1/Global Investment Practices (taken to necessary scale),

• 2/Supportive Global Policies (that can stick over time),

3/Global Corporations Ongoing Transformations,

4/Adequate and Necessary Innovation

and 5/the buy in of the majority of the world’s people

How to Solve Systemic Challenges?

1. Ethical/Negative Screening – Values First (most of $35T)

2. Positive/Best In Class – Value First (Generation/HBS) ($3T)

3. Impact Investing (community investing) (~ $1T)

(Leapfrog/Temasek 500M)

4. Thematic Investing across asset class($300-500B/yr. BNEF)

(TPG Climate/Brookfield 15B, REPF-Banks 1T+ commits)

5. ESG Integration strategies ($100T w/caveats – DWS etc.)

6. Shareholder Advocacy & Engagement ($50T)

7. Minimum Standards (***)

The 7 Tribes of Sustainable Investing (recently claims: $35 out of 500T)

Tribe 1 - Values First (Negative Screening)

*** Just tell me what you don’t to own, and let me get on with

my business ***

> Divestment from Apartheid, Weapons, Fossil Fuel producers

➢ Can be financially challenging for asset owners.

➢ > Someone will buy shares if you are selling “brown-

washing,” arguably just passing the problem to someone

else.

> Negative Screening is the 1.0 of what used to be called

Socially Responsible Investing

Our Books

➢ Sustainable Investing w/ Robins 2008

➢ * Evolutions in Sustainable Investing w/ Robins 2011

➢ Sustainable Investing: Revolutions w/ Purdom 2017

➢ Sustainable Innovation and Impact w/ Cort 2018

➢ Modern China 2020

The Cooperation Imperative(SSIR, 2020)

Calling for more cooperation between the US, China and the rest of the world for solving sustainability challenges, together.

Foreword by Dr. Ma Jun – chairman of China’s Green Finance Association under the central bank.

Book was a partnership between the Sustainable Finance Institute and top students from Brown University.

Tribe 2 - Value First (Positive/Best in Class)

Generation Investment Management

https://youtu.be/466fbtEKWSA

(similar managers include Brown Advisory, Mirova, Impax,

Stewart Investors, Parnassus, Ark Innovation ETF)

*** Value first focused fund managers rising fastest - above

all managed 20B+ up from under 1B not long ago ***

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This fund invests in companies which effectively implement sustainable business strategies to

drive future earnings growth, a concentrated portfolio of companies whose:

> Internal sustainability strategies help generate tangible business benefits, in the form of revenue

growth, cost improvement, or enhanced franchise value

> Products have a competitive advantage as a result of sustainability drivers, such as resource-

efficient design or manufacturing;

> Products or services offer solutions to long-term sustainability challenges.

Tribe 2 Example – Recent financial outperformer -

Brown Advisory Sustainable Growth (ESG + Expertise)

Further to Positive Sustainable Investing @

Brown University

Our Own Portfolios:

> 2016: +75% vs 36% S&P 500 and almost all active fund managers including Parnassus

Endeavor (our partner at the Brown Endowment) (MMM, GOOG, AMAT, XYL, HASI)

> December/Fall 2019 portfolio up through July 2020 + 27% vs. S&P 500 +2%, MSCI World -2%

(Vestas, Orsted, Beyond Meat, Chr. Hansen, TOMRA, Xylem)

> Fall 2020, established just prior to US election: MSFT, Orsted, BYND, TSLA, NIO + 28.8%

vs.13.4%/15.7% for benchmarks

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Tribe 3 - Impact First & Impact Prioritization

Impact Investing (The Global Impact Investing Network)

AUM: past few

years in specific

impact categories:

250->700B-> 1T US$

Primarily via

private markets

Environmental Impacts

Source: UK Government Environmental Reporting Guidelines

15 Categories of Scope 3 –

www.ghgprotocol.org 1: Purchased Goods and Services

2: Capital Goods

3: Fuel- and Energy-Related Activities Not Included in Scope 1 or Scope 2

4: Upstream Transportation and Distribution

5: Waste Generated in Operations

6: Business Travel

7: Employee Commuting

8: Upstream Leased Assets

9: Downstream Transportation and Distribution

10: Processing of Sold Products

11: Use of Sold Products

12: End-of-Life Treatment of Sold Products

13: Downstream Leased Assets

14: Franchises

15: Investments

Measuring Impact: KPMG/Safaricom (2014)-> TPG Rise

How to Measure Impact as an Investor

TPG Rise Fund

(6 Step Process:

Themes, Social Economics, Relevance, Context, End of Life/Ownership, minimum multiple of net positive societal impact beyond just financial profit) – also an opportunity to quantify good jobs

IRIS+, Navigating Impact, SFI-GIIN Clean Energy Theme among many others

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Impact Opportunities in a country such as China

Rural per capita income 1/3 of urban in 2017

80% of underground water and 20% of farmland is contaminated

Only 3% of over 60 population can be covered by hospital beds

29% of labor force in Ag contributing 9% of GDP

63% of rural children drop out before Jr HS

Rural finance gap est. at 3T RMB

Policies & Targets:

Poverty: to be eliminated by 2020

Air: Cities must achieve pollution index below 100 for 80% of the year by 2021

Water: 80% of major waterways to meet tier 3 standard by 2020

Soil: 90% of contaminated land to be treated 2020

Healthcare Reform: one clinic and one medical service centre for each community with a population over 30,000

Measurable Financial Services-related Impact

Metrics

Access to financial services

Improved financial resiliency

Increased firm / household income

Measurable Food and Agriculture-related

Impact Metrics

Higher crop yields and lower crop loss

Increased farmer margins and income stability

Improved access to healthier nutrition

Measurable Health Impact Metrics

Increased rates of care in various demographics

Improved health status

Lower death rates

Measurable Technology-related Impact

Metrics

Increased digital connectivity

Increased usage of technology

Improved business productivity

Efficiency (including Human Capital)

Revenue of sustainable products

Risk Management & Renewable Energy use across all 3 Scopes

Measurable Energy-related Impact Metrics

(GIIN-SFI/IRIS+)

Increased # of households with reliable access

Increased % of clean energy

Increased earnings for households & individuals, and # of incremental

good jobs

Renewable Energy Across Asset Class (i.e.; Climate Infrastructure, Distributed

Solar, Offshore Wind)

Water Infrastructure (Europe’s largest public sustainable investment fund)

Enabling Technology (i.e.; Batteries and Energy Storage, Microgrid Technology)

Sustainable Agriculture (i.e.; Soil & Forest Regeneration; Efficient Techniques)

Climate Tech VC

New Resources (i.e.; non invasive Mining)

Renewable Energy Across Asset Class (i.e.; Climate Infrastructure, Distributed

Solar, Offshore Wind)

Tribe 4 - Thematic

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3-5x Underinvested Vs. What is Seemingly Required

Ceres & the “Clean Trillion”

Stanford & “Derisking Decarbonization”

IPCC, the IEA and “Carbon Budgets”

Banks such as BofA, MS, Wells, Citi, JPM (GS often winning US deals

2018-20) commitments to environmental solutions = $1-2T, helpful but

more is needed - a further flow of intentional capital is essential,

especially in the developing world

Creative Finance is likely to be required to raise $50T

The Value of Everything ($500T as of now,

50% Inst, 50% Real Economy)

The other three “Tribes”

5) ESG Integration with specific strategy (not just buying ESG data) – customized in practice/algorithms/real time/activism –concerns about greenwashing (DWS, Blackrock, Real Impact Tracker examples)

6) Shareholder Engagement & Advocacy (i.e.; CA100+, NA100?)

7) Minimum Standards (i.e.; where engagement and the business case fail – NYS Common, Yale)

Challenges: Third party ESG ratings not consistent

(or relevant?) - Ex-Blackrock; MIT

Source: GPIF 2017. Universe for the analysis are 430 Japanese companies commonly surveyed FTSE and MSCI (as at July 2016). The plot of the diagram shows the ranking of ESG evaluation

of each company (from 1st to 430th)

Comparison of ESG evaluation between FTSE and MSCI

(High evaluation) ← MSCI → (Low evaluation)

(Low

evalu

ati

on) ←

FTSE →

(Hig

h

evalu

ati

on)

Current situation of ESG

evaluation:• The correlation of ESG evaluations

by FTSE and MSCI is very low.

• Use a single global model, ESG+ will

allow for local differences

ESG ratings

Investors should not treat ESG scores as settled facts…

…but worthwhile analysis that needs to be understood

before being acted on

The problem here isn’t the ESG ratings…

…but that they can be mistaken for objective truth

* Also explains why ESG is often practiced Actively not

Passively (Mobius – Invest for Good)

Source: WSJ: Is Tesla or Exxon More Sustainable? It Depends Whom You Ask, MSCI, Sustainalytics, FTSE. As at 17.09.2018.

People and Culture

➢ Incentives

➢ Training & Understanding of staff/Credentials

➢ Capacity to Execute

➢ Strategies Development/Gap Analysis

➢ Leadership Training

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SASB™

Strategy and Culture Transformation

Envision/Question Development

Build Capacity – Training/Hiring

Implement & Execute

Measure Progress

Re-envision/Re-question

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To achieve important systemic goals, we need well constructed, thoughtful

processes

Sustainable Investing Where Outperformance is Found –

Negative vs Positive approaches to ESG w/ Expertise

Source: Krosinsky, 2008

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14

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Sustainable Investing MSCI World S&P 500 FTSE 100

%

One-year average percentage return (2007)

Three-year average percentage return (31 December 2004 - 31 December 2007)

Five-year average percentage return (31 December 2002 - 31 December 2007)

Good ESG performance of companies results in:

• Lower cost of capital (90%)

• Better operational performance (88%)

• Better stock price performance (80%)

• Asia: MSCI Emerging Markets ESG has performed extremely

well financially, but what are they measuring; Fidelity

International/Singapore recently also found outperformance

for ESG in 2020

• CSI and the Sustainable Finance Institute: ESG+

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Correlation Between ESG And Financial Performance - Arabesque & University of Oxford Meta-analysis of 200 Academic Studies

Co-founded the World Sustainable Finance Association (https://sfina.org), connecting leaders and professionals from around the world to share leading sustainable investing theory and practice.

Co-developed the Certified Sustainable Finance Analyst (CSFA) certification program, providing participants with the experience, tools and community of practice they will need to become an important part of the global business and investment transition towards a sustainable future.

The CSFA designation

The 7th Tribe: Minimum Standards

> NYC Restaurants – Letter Grade

> China & Food Integrity

> Product Safety & Supply Chain (UL, NSF

International, VW, Nike, Boeing)

Yale and Pension Funds such as NYS Common

https://sfini.org/reports

Conclusions

> Interest in sustainable investing is at record levels, its true size today remains a question while thoughtful ESG strategies outperform financially (if they would only try)

> Older strategies left a sense of underperformance limiting historic uptake, but the market is rapidly figuring this out

> Every US & European fund manager of size is now working on this, unlike 5 years ago – now a major competitiveness & value issue – and Asia is getting into the game with outsized potential for societal and financial benefit