Glossary of Sustainable Investment Terms

Active Ownership: Investors actively using their vot- businesses, quality affordable housing, and essential ing rights and/or directly engaging with company community services throughout the U.S. Four types management on ESG issues, as well as wider matters of institutions are included in the definition of a CDFI: of business strategy, to ensure the company’s inter- Community Development Banks, Community Devel- ests are aligned with their own. Active ownership opment Credit Unions, Community Development efforts can help reduce risk and enhance long-term Loan Funds (most of which are non-profit), and Com- shareowner value. munity Development Venture Capital Funds. Some, Best-in-Class but not all, CDFIs are certified by the CDFI Fund. Cer- : Focusing investments on companies tification is often necessary in order to receive sup- that have historically performed better than their port from the CDFI Fund, which is an agency of the peers within a particular industry or sector, based on U.S. Department of the Treasury. Community Invest- analysis of ESG factors. This typically involves positive ing/Community Impact Investing: Providing capital or negative screening. to communities that are underserved by traditional Bottom-Up Integration: This is the integration of ESG sources of investment. Community investing general- factors into security-specific fundamental analysis in ly provides credit, equity, and basic banking functions the context of security valuation and selection. Inves- to communities that would otherwise have no access. tors may apply bottom-up ESG techniques to inform Controversy: Collection of observation points reflect- their assessment of a particular company’s manage- ing the controversial behavior of a company regard- ment quality, growth prospects, and risk profile. ing Environment, Social, and Governance issues. Business Impact : Assesses the magnitude of the po- Corporate Engagement: Using shareholder pow- tential impact that an ESG issue may have on the fi- er to directly influence corporate behavior or deci- nancial performance of a company. sion-making. This includes actions such as communi- Carbon Neutrality: Carbon neutrality, or having a net cating with company management, filing shareholder zero carbon footprint, refers to achieving net zero car- proposals, and proxy voting. bon emissions by balancing a measured amount of car- Corporate Governance bon released with an equivalent amount sequestered : Procedures and processes or offset, or buying enough carbon credits to make up by which an organization is directed and controlled. the difference. It is used in the context of carbon di- The corporate governance structure specifies the dis- oxide-releasing processes associated with transporta- tribution of rights and responsibilities among the dif- tion, energy production, and industrial processes, such ferent participants in the organization and identifies as the production of carbon-neutral fuel. procedures for decision making. Clean Energy Corporate Social Responsibility (CSR): An approach : Energy from non-polluting sources, in- to business that takes into account economic, social, cluding solar, wind, and water. environmental, and ethical impacts for a variety of Clean Tech: An investment theme, rather than an in- reasons, including mitigating risk, decreasing costs, dustrial sector, that may include investments in ag- and improving brand image and competitiveness. riculture, energy, and manufacturing. It represents Corporate Sustainability Report (CSR): A report a range of products and services that either reduce produced by an organization to inform stakeholders or eliminate ecological impact, or require lower re- about its policies, programs, and performance re- source inputs. garding environmental, social, and economic issues. Climate Risks: Risks stemming from climate change Sustainability reports are usually voluntary and are that have the potential to affect companies, indus- sometimes independently audited and/or integrated tries, and whole economies. There are a range of busi- into financial reports. ness risks associated with climate change, including Disclosure: Assesses whether a company’s ESG re- regulatory developments, growing natural resource porting meets international best practices, including, scarcity, and potential reputational damage. for example, the ESG reporting standard and its veri- Community Development Financial Institutions fication, but also tax disclosure, board remuneration (CDFI): mission-driven financial institutions that cre- disclosure, or CDP participation. ate economic opportunity for individuals and small Divestment: Selling or disposing of shares or other ects taking place on the lands they own and should be assets in certain investments. This is currently most included in the conversation about its use. readily associated with divestment from companies Freshfields Report: Freshfields is an international involved in the extraction of fossil fuels. Active own- law firm based in London. The original report, A Le- ership investors often view divestment as a last resort. gal Framework for the Integration of Environmental, Double Bottom Line: Measurement of financial per- Social, and Governance Issues into Institutional In- formance in terms of financial profit or loss along vestment (2005), provided assurance to institution- with positive social impact. al investors that the consideration of ESG issues is Engagement firmly grounded within the bounds of fiduciary duty. : Regular and sustained discourse with This landmark report was followed by Fiduciary Re- a company or regulator and other central authori- sponsibility – Legal and Practical Aspects of Integrat- ties in order to seek long-term positive ESG-related ing Environmental, Social, and Governance Issues outcomes. into Institutional Investment (2009). The report pro- Environmental Justice: The fair treatment and inclu- vides a legal roadmap for fiduciaries looking for con- sion of all people, regardless of their race, color, na- crete steps to operationalize their commitment to tional origin or socio-economic stature. This inclusion responsible investment. is comprehensive of all issues, from development, Global Compact (United Nations Global Compact): A implementation, and enforcement of environmental corporate sustainability initiative asking companies to laws, regulations, and policies. align strategies and operations with universal princi- Environmental, Social, Governance (ESG) Investing: ples on human rights, labor practices, environmental Investment analysis that incorporates environmen- concerns, and anti-corruption, while taking actions tal, social, and governance factors into the invest- that advance societal goals. ment process. ESG terminology was developed and Green Investing: An investment philosophy that promulgated by the United Nations Principles for Re- considers the environmental impact of an underly- sponsible Investing (UNPRI). ing investment. ESG Integration: It is generally understood to mean Impact the incorporation of environmental, social, and gov- : Refers to the effects a company’s activities ernance factors within financial analysis and deci- may have on environment and/or society and to the sion-making for the purposes of enhancing invest- effects ESG issues may have on a company’s bottom ment performance. line, i.e. business impact. Ethical Investing Impact Investing: An investment philosophy that sup- : An investment philosophy guided ports companies working to provide significant socie- by moral values, ethical codes, or religious beliefs, tal or environmental benefit, and the impact is often generally associated with negative screening. considered more important than the financial return. Event: A series of incidents that refers to the same Incident controversial topic, tracked in one events indicator, for : A single observation point reflecting the con- example “labor relations” or “environmental impact of troversial behavior of a company regarding ESG issues. products.” An event assessment is based on the highest Key ESG Issue: Sector-specific areas of exposure that impact or risk score assigned to the related incidents. are most material from a sustainability impact and/or Exposure: Defines an area of potential impact a com- business impact perspective and hence define the key pany faces due to its business activities. Exposure to management areas for a company. key ESG issues is assessed at a sector level and is fur- Key Indicator: A sector-specific ESG indicator that one ther refined at the company level. would regard as most important to assess how well a Extra-Financial Factors: Factors beyond those includ- company manages areas of exposure as reflected by ed in traditional financial analysis. In particular, en- the identified key ESG issues. vironmental, social, and governance considerations Materiality: It is a fundamental principal of mandat- taken into account when evaluating the potential of ed disclosure in the United States. The concept of an investment. materiality recognizes that certain forms of ESG infor- Financial Materiality: Financially material is any fac- mation can be considered important to investors in tor that might have a present or future impact on an making investment decisions. organization’s value drivers or competitive position Microcredit: Small, typically low-interest loans to en- and thus on long-term shareholder value creation. trepreneurs who have little or no access to capital or Free, Prior and Informed Consent (FPIC): Named by financing, typically within developing counties. the Forest Peoples Program, this stipulates that a Mission-Based Investing: Incorporating and reflect- community has the right to voice an opinion on proj- ing an organization’s mission in its investment deci- sion-making process. Generally, these organizations socially responsible investing, sustainable investing, are 501(c)(3) nonprofits. green investing, community investing, mission-based Moskowitz Prize: The only global academic award investing, and impact investing, among others. that recognizes outstanding quantitative research in Risk: Refers mainly to the reputational risk a company areas of interest to responsible investors. Since 1996, is exposed to and forms one part of a company’s in- prize winners have explored topics such as shareown- cident assessment. The reputational risk assessment er engagement and the question of whether SRI in- measures the sustainability impact, notoriety, and vestment strategies inhibit or enhance financial per- media exposure of incidents. formance. The Moskowitz Prize is awarded annually Shareholder Advocacy: Shareholder advocacy in- by The Haas School of Business at UC Berkeley. volves the filing and co-filing of shareholder resolu- Negative Screening: The exclusion from a fund or tions on such topics as corporate governance, climate portfolio of certain sectors, companies or practices change, political contributions, gender/racial discrim- based on specific ESG criteria. ination, pollution, and labor practices. Norms-Based Screening: Screening of investments Social Bond Principles: Social Bonds enable capi- against minimum standards of business practice tal-raising and investment for new and existing proj- based on international norms. ects with positive social outcomes. The Social Bond Overall ESG Score Principles (SBP) are voluntary process guide¬lines : Evaluates a company’s overall ESG that recommend transparency and disclosure and performance on a scale of 0 to 100, based on generic promote integrity in the development of the social and sector-specific ESG indicators that are grouped bond market by clarifying the approach for issuance in three ESG themes and four dimensions, derived by of a social bond. The SBP are intend¬ed for broad multiplying the raw scores for the relevant indicators use by the market: they provide issuers guidance on with the respective weight matrix. the key components involved in launching a credible Positive Screening: Investment in sectors, companies, social bond; they aid investors by ensuring availabil- or projects selected for positive ESG performance rel- ity of information necessary to evaluate the positive ative to industry peers. impact of their social bond invest¬ments; and they Preparedness: Assesses a company’s management assist underwriters by moving the market toward systems, policies, and programs designed to manage expected disclosures that will facilitate transactions. material ESG risks, such as bribery and corruption Socially Responsible Investment (SRI): Socially Re- policies, environmental management systems, or di- sponsible Investment is the process of using negative versity programs. screening to avoid companies and/or sectors that Proxy Voting: Entitled shareowners delegate their participate in certain activities. SRI became standard- proxy votes to others who vote on their behalf. Proxy ized and popularized in the 1980s. voting allows shareowners to exercise their right to Socially Screened Funds: These funds integrate ESG vote their proxies without committing the time in- analysis into the investment process, generally seek- volved to actually attend company annual meetings. ing to avoid owning companies that are deemed Qualitative Analysis: Analysis of an organization’s harmful to society or the environment, while seek- policies, practices, behaviors and impacts that may ing to own the most responsible companies with help portfolio managers avoid undesirable invest- the highest potential for return on investment. Such ments and identify the best managed organizations in funds may represent any asset class and a variety of each industry group. Often used interchangeably with different investment strategies. “positive screening.” Stranded Assets: Stranded assets refers to those that Qualitative Performance: Assesses a company’s lose value or turn into liabilities before the end of ESG performance based on an analysis of incidents, their expected economic life. In the context of fossil events, and controversies in which the company has fuels, this means those assets that will not be extract- been involved. ed or burned and will remain stranded in the ground. Quantitative Performance Sustainability Impact: Assesses the potential impact : Assesses a company of a company’s activities on stakeholders, including based on quantitative performance metrics, such as the environment and society. The sustainability im- carbon intensity or employee turnover rate. pact assessment captures the severity of impacts Responsible Investment: Responsible Investment is (measured in terms of depth, breadth, and dura- the incorporation of ESG factors into the selection tion), taking into consideration accountability and and management of investments. Over time, it has exceptionality. come to encompass a range of strategies, including Sustainable Development: The concept of meeting ESG integration, thematic investing, ethical investing, present needs without compromising future gener- ations. It encompasses social welfare, protection of the environment, efficient use of natural resources, and economic well-being. Sustainable Investing: Long-term investment in a company, asset, or sector that makes a positive con- tribution to the environment, economy, or society, in order to improve conditions over time. Thematic Investment: Thematic investment involves se- lecting assets on the basis of investment themes, such as climate change, gender diversity, or social justice. Top-Down Integration: This is the development and execution of an investment thesis based on a general view of how ESG factors may create macro and sector investment risks or opportunities. Triple Bottom Line: A holistic approach to measuring a company’s performance on environmental, social, and economic issues. The triple bottom line approach to management focuses companies not just on the economic value (profit) they add, but also on the en- vironmental (planet) and social (people) value they may add or detract. Universal Owner: A large investor that holds a broad selection of investments in different public compa- nies as well as other assets, and whose performance is, therefore, tied to the performance of markets or economies as a whole – not just to the performance of individual holdings. These investors have a vest- ed interest in the long-term health of the economy, making public policy issues and cross-market ESG concerns particularly relevant.

Sources: www.ceres.org; www.mercer.com/ri; www.parnassus.com; www.ussif.org; www.mandg.com; www.sasb.org; www.irrcinsti- tute.org; www.sustainalytics.com; www.icmagroup.org

Disclosures Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. The information included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. Sustainable investing limits the types and number of investment opportunities available, this may result in the Fund investing in securities or industry sectors that underperform the market as a whole or underperform other strategies screened for sustainable investing standards. No part of this Material may be produced in any form, or referred to in any other publication, without our express written permission. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530. 5900 Southwest Parkway, Building 1 • Austin, TX 78735 • Phone | 512.327.5530 Fax | 512.327.5702 | www.sageadvisory.com