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 Toyota 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, Lexus, Ranz, and Daihatsu. Toyota also partners with Subaru, Isuzu, and Mazda. Compared to industry peers, Toyota excels in addressing emissions and Financially Material Factors Emphasized fuel efficiency. In 2014 Toyota Motor Credit Corporation, the finan- 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 will 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.