Highlights & Holdings Case Studies in ESG Highlights & Holdings provides a thoughtful analysis for some of the hold- ings in Sage’s Environmental, Social, and Governance (ESG) portfolios. We provide a Sage ESG Leaf Score for each holding and an analysis from an E, S, and G perspective. Our goal for our ESG portfolios is to choose 3/5 well-run companies (governance) that care about their employees and Sage ESG Leaf Score NYSE: TM customers (social), and have policies in place to create a net positive effect Market Cap: $210 B on their environment. Sage’s ESG holdings are all best-in-class companies that are leaders within their sectors. Bond Rating: A+/A1 Neutral Outlook

Toyota Motor Corporation Motor Corporation is a Japanese multinational automotive company that designs, manufacturers, and sells passenger and commercial vehicles. The company also has a financial services branch that offers financing to vehicle dealers and customers. Toyota is the second-largest car manufacturer in the world and ranked the 11th largest company by Forbes — and produces vehicles under five brands: Toyota, Hino, , , and . Toyota also partners with Subaru, Isuzu, and .

Compared to industry peers, Toyota excels in addressing emissions and Financially Material Factors Emphasized fuel efficiency. In 2014 Toyota Motor Credit Corporation, thefinan- E – greenhouse gas emissions, air pollution cial arm of Toyota Motor Corporation, introduced the auto industry’s S –product quality and safety, labor practices, lending practices first-ever asset-backed green bond and has since issued five total green bonds. The newest $750 million bond go toward developing new G – board independence, lobbying Toyota and Lexus vehicles to possess a hybrid or alternative fuel power- train, achieve a minimum of 40 highway and city miles per gallon, and receive an EPA Smog Rating of 7/10 or better. The bond program was reviewed by Sustainalytics, which found that Toyota leads its competi- Environmental tors in supporting its carbon transition through green bond investments.

Motor vehicles are one of the largest contributors to greenhouse gas In addition to curbing emissions caused by Toyota’s vehicles, the com- (GHG) emissions and, as a result, climate change, with the transpor- pany seeks to reduce plant emissions to zero by 2050 by utilizing re- tation sector accounting for a third of U.S. GHG emissions in 2018. Al- newable energy and equipment optimization. In automaking, water though most emissions come from vehicle usage rather than the process is used in painting and other manufacturing processes. Toyota has of manufacturing vehicles, government regulations place the burden on implemented initiatives to reduce the amount of water used in man- auto companies to improve fuel efficiency and reduce overall emissions. ufacturing and has developed technology that allows the painting While climate change regulations present financial risk to automakers, process to require no water. In 2019, Toyota reduced water usage by they also offer opportunities; increased fuel efficiency requirements 5% per vehicle, with the goal of 3% further reduction by 2025, for an are likely to lead to more sales of electric vehicles and hybrid systems. overall reduction of 34% from 2001 levels. To reduce the environmen- Toyota pioneered the first popular hybrid vehicle with the 1997 release tal impact of materials purchased from suppliers, Toyota has launched of the Prius, the world’s first mass-produced hybrid. Since then, Toyo- Green Purchasing Guidelines to prioritize the purchase of parts and ta has sold 15 million hybrids worldwide . In 2018, hybrids accounted equipment with a low environmental footprint. We would like to see for 58% of Toyota’s sales, contributing to Toyota reaching substantially Toyota continue to develop its supply chain environmental policies. better carbon dioxide (CO2) emissions from new vehicles than regula- tory standards and the best levels in the industry (102.1g/km compared As the global population grows, so does number of cars on the road, to U.S. regulation of 119g/km). In 2020, Toyota reduced global average which creates waste when they’ve reached the end of their useful CO2 emissions from new vehicles by 22% compared to 2010 levels by lives. Toyota’s Global 100 Dismantlers Project was created to estab- improving vehicle performance and expanding its lineup. Toyota’s goal lish systems for appropriate treatment of end-of-life vehicles through is to increase that number to 30% by 2025, with the goal of 90% to- battery collection and car recycling. Toyota aims to have 15 vehicle tal reduction by 2050. The company aims to offer an electric version recycling facilities by 2025. Toyota is also working to minimize waste of all Toyota and Lexus models worldwide by 2025. (Toyota does not by prolonging the useful life of its vehicles. Toyota has a strong repu- yet sell any all-electric vehicles to the U.S., but it does outside the U.S.) tation for producing quality, reliable vehicles. Consumer Reports lists Toyota’s overall reliability as superb, and Toyota and Lexus often take In addition to greenhouse gases, cars emit smog-forming pollutants the top spots in Consumer Reports Annual Auto Reliability Survey. that contribute to poor air quality and trigger negative health - ef An Iseecars.com study found that Toyota full-size SUV models are the fects. Recently, a London court ruled that air pollution significant- longest-lasting vehicles and most likely to reach over 200,000 miles. ly contributed to the death of a nine-year-old girl with asthma who had been exposed to excessive nitrogen dioxide (NO2) levels. NO2 is a toxic gas emitted by cars that use diesel fuel, and although Euro- Social pean Union laws set regulatory levels for NO2 in the air, Britain has missed its targets for a decade due to a lack of enforcement. As Toy- ota expands into European markets, the smog rating of its cars will Driving is an activity with inherent risk. The World Health Organization be financially material and an important aspect of risk management. estimates that 1.35 million people die in car accidents each year. Acci- dents are worse in emerging nations where transportation infrastructure has not kept up with the increase in the number of cars on the road; without countermeasures, traffic fatalities are predicted to become the seventh-leading cause of death worldwide by 2030. Demand for person- Toyota’s Sustainable Development al vehicles will continue to increase as developing countries experience Goal (SDG) Alignment higher standards of living, and product safety will be paramount to au- Decent Work and Economic Growth tomaker’s reputations and brand values. Toyota has put forth a goal of Zero Casualties from Traffic Accidents and adopted an Integrated Safety Toyota’s extensive supply chain exposes the compa- Management Concept to work toward eliminating traffic fatalities by ny to risk of human rights violations and increases providing driver support at each stage of driving: from parking to nor- the importance of having strong labor policies. mal operation, the accident itself, and the post-crash. Toyota and Lexus models regularly earn top safety ratings by the National Highway Traffic Industry, Innovation, and Infrastructure Safety Administration (NHTSA) and the Insurance Institute for Highway Safety. In addition to traditional safety features, Toyota actively invests We expect to see Toyota continue to improve its in the development of autonomous vehicles, including a $500 million vehicle lineup fuel efficiency and increase its hybrid investment in Uber and autonomous ridesharing. If fully developed, au- and electric vehicle offerings to reduce greenhouse gas emissions that contribute to climate change tonomous driving can offer increased safety to passengers, lower acci- and other emissions that contribute to pollution dent rates, and provide mobility for the elderly and physically disabled. and smog.

Accidents caused by defective vehicles can have significant financial Responsible Consumption and Production repercussions for auto manufacturers. Toyota experienced significant With increasing demand for personal vehicles there damage to its reputation and brand value in 2009 when unintended will be a rising number of vehicles at the end of their acceleration caused a major accident that killed four people riding in useful lives. Toyota has established programs that a dealer-loaned Lexus in San Diego. Toyota subsequently began recall- both lengthen the useful life of its models and recy- ing millions of vehicles, citing problems of pedal entrapment from un- cle and/or re-use end-of-life vehicles. secured floor mats and “sticky gas pedals.” Toyota’s failure to quickly respond resulted in a $1.2 billion settlement with the Justice Depart- ment and $50 million in fines from the NHTSA. The scandal generated an extraordinary amount of news coverage, and the Toyota recall sto- ry ranked among the top 10 news stories across all media in January Governance and February 2010. Litigation costs, warranty costs, and increased marketing to counter the negative publicity of the event were estimat- ed to cost Toyota over $5 billion (annual sales are about $275 billion). Toyota shows strength in its transparency, and its Corporate Sustainabil- As a result of bad press, Toyota’s 2010 sales fell 16% from the previ- ity Report (CSR) is prepared in accordance with multiple sustainability ous year and its stock price fell 10% overall, while competitors like Ford reporting agencies, including the Global Reporting Initiative, Sustainable benefitted and experienced stock price growth of 80% over the same Accounting Standards Board, and the Task Force on Climate-Related Fi- period. Future recalls and quality issues are certain to prove costly for nancial Disclosures; the CSR data is also verified by a third party. Start- Toyota and may continue to negatively impact its consumer reputation. ing in 2021, Toyota’s CSR will be updated whenever necessary to ensure timely disclosure, rather than annually. In 2019 Toyota created a Sustain- Another social issue that can be financially material for automakers is ability Management Department and added the role of Chief Sustainabil- human rights. Automobiles consist of about 30,000 parts, making their ity Officer to its executive management team in 2020. Toyota’s CSR offers supply chain extensive and at high risk for human rights abuses. Toyota thorough information on its executive compensation policies, however; addresses human rights concerns in its Corporate Sustainability Report the composition of Toyota’s board of directors is an area of weakness (CSR) and cites Migrant Workers and Responsible Sourcing of Cobalt for the company. There is a lack of independence among board mem- as its priorities for 2020; however, Toyota does not have a clean labor bers, and the chair of the board is not independent. In general, when record. A 2008 report published by the Institute for Global Labour and compared to the U.S., Japanese companies have a smaller percentage Human Rights accused Toyota of a catalog of human rights abuses, in- of outside directors due to a history of corporate governance empha- cluding stripping foreign workers of their passports and forcing them sizing incumbency and promotion from within. However, since the re- to work grueling hours without days off for less than half of the legal lease of the Japanese Corporate Governance Code in 2015, companies minimum wage. Toyota was also accused of involvement in the suppres- have felt pressure to make meaningful board composition changes. We sion of freedom of association at its plant in the Philippines. Toyota’s hope to see Toyota strengthen its board composition and adopt execu- CSR lists a host of external nongovernmental organizations the company tive renumeration policies that are tied to sustainability performance. partners with to promote fair working conditions, however; due to the high-risk present in its supply chain and its past offenses, we would like Like other automakers, Toyota has lobbied aggressively to weaken to see the company further develop its labor and human rights policies. Obama-era fuel economy standards. In 2017, the Environmental Pro- tection Agency announced plans to work with Toyota to overhaul inter- Lastly, we would mention that Toyota has been accused of discrim- nal management practices at the agency. Inviting a company regulated inatory practices. In 2016, Toyota Motor Credit Corporation, thefi- by the agency to alter internal practices has been previously unprece- nancial arm of Toyota Motor Corporation, agreed to pay 21.9 mil- dented and raises concerns over how Toyota could wield influence over lion in restitution to thousands of African American, Asian, and EPA functions. Toyota is a member of the Alliance of Automobile Man- Pacific Islander customers for charging them higher interest rates on ufacturers, the most powerful lobbying associa- auto loans than their white counterparts with comparable creditwor- tion, which has strongly opposed climate change motivated regulation thiness. Toyota has since taken measures to change its pricing and since 2016, contradicting the company’s public stance on emissions. compensation system to reduce incentives to mark up interest rates.

2 Risk & Outlook

Sage believes Toyota to be well adapted to manage sustainability chal- lenges, despite the high environmental and social risks in the automo- tive industry. We expect the auto industry to see an increase in regula- tory risk surrounding vehicle emissions and fuel efficiency; however, we believe Toyota will continue to innovate to meet and exceed emission standards and the company is well positioned to benefit from future fuel efficiency regulations. We hope to see Toyota continue to improve its social performance and expand on its recently introduced human capital policies. In addition to regulation, the auto industry faces dis- ruption caused by new areas of technology such as automated driving, electrification, and shared mobility, and these areas will be important to monitor. Toyota’s strong management of ESG issues makes the com- pany a leader amongst its peers; however, due to risk present in the automotive industry we rank Toyota a 3/5 for its Sage ESG Leaf Score.

Sage ESG Leaf Score Methodology No two companies are alike. This is exceptionally apparent from an ESG perspective, where the challenge lies not only in as- sessing the differences between companies, but also in the differences across industries. Although a company may be a leader among its peer group, the industry in which it operates may expose it to risks that cannot be mitigated through company management. By combining an ESG macro industry risk analysis with a company-level sustainability evaluation, the Sage Leaf Score bridges this gap, enabling investors to quickly assess companies across industries. Our Sage Leaf Score, which is based on a 1 to 5 scale (with 5 leaves representing ESG leaders), makes it easy for investors to compare a company in, for example, the energy industry to a company in the technology industry, and to understand that all 5-leaf companies are leaders based on their individual company management and the level of industry risk that they face.

Industry Company Sage Level Level Exclusions Leaf Score Analysis Analysis

For more information on Sage’s Leaf Score, click here.

Sources: 1. ISS ESG Corporate Rating Report on Toyota Motor Corporation. 2. Environmental Report 2020 Toyota Motor Corporation. 3. Sustainability Data Book 2020 Toyota Motor Corporation. 4. Lambert, Lisa. “Toyota Motor Credit settles with U.S. over racial bias in auto loans” Reuters. February 2, 2016. 5. “Automobiles” Sustainability Accounting Standards Board. September, 2014. 6. Kaufman, Alexander. “Scott Pruitt’s Plan to Outsource Part Of EPA Overhaul to Automaker Raises Concerns” HuffPost. December 12, 2017. 7. “How the US auto industry accelerated lobbying under President Trump” InfluenceMap. November, 2017. 8. Charles Kernaghan, Barbara Briggs, Xiaomin Zhang, et al. “The Toyota You Don’t Know” Institute for Global Labour and Human Rights. 2008. 9. Road Safety World Health Organization. 10. Toyota Motor Credit Corporation Green Bond Framework Second-Party Opinion Sustainalytics. January 21, 2020. 11. Toshihiko Hiura and Junya Ishikawa. “Corporate Governance in Japan: Board Membership and Beyond” Bain & Company. February 23, 2016. 12. Taylor, Lin. ”Landmark ruling links death of UK schoolgirl to pollution” Reuters. December 16, 2020.

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 infor- mation 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. 3 5900 Southwest Parkway, Building 1 • Austin, TX 78735 • Phone | 512.327.5530 Fax | 512.327.5702 | www.sageadvisory.com