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exponentphilanthropy.org#exponent17
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Let’s Make an Impact Investing Deal
Monday, October 16, 20179:30 a.m. – 11:45 a.m.
3|Responsible Investment at AB
Impacting the Headlines
“Why Measuring Social Impact Matters to Investors”—Josh Cohen, Entrepreneur.com
“Philanthropy’s New Tools for Innovation and Impact”—Susan Desmond-Hellmann, Stanford SOCIAL INNOVATION Review
“5 Ways to Boost Impact Investing in Family Offices”—Bernice Napach, ThinkAdvisor.com
“Making a case for impact investing”—James Lumberg, InvestmentNews
“Impact Investing: What Will It Take to Get to Scale?”—Fran Seegull, Conscious Company
“Impact Investors Plan to Deploy $17.7 bil. in 2016”—Chris Cumming, The Wall Street Journal
4|Responsible Investment at AB
Impact Assets Continue to Grow
Global ESG AUM $22,890 bil.
Growth of Strategies 2014–2016
Canada$1,086 bil.
Aus/NZ$516 bil.
Japan$474 bil.
Asia$52 bil
Europe$12,040 bil.
Africa*
US$8.723 bil.
101% increase in AUM globally, from 2012–2016
91% of the market AUM is in Europe and the US
Japan and Australia/New Zealand had largest regional growth
Exclusions and integration dominate
Source: Global Sustainable Investment Review 2014*New data not available for 2014, and excluded from report
5|Responsible Investment at AB
Source: Impact Engine, The Forum for Sustainable and Responsible Investment (USSIF)
Investors Have a Range of Options
Philanthropy
Social and/or environmental
needs outweigh any consideration for financial
return
Screening ESG Integration Sustainability Impact
Emphasis on social or
environmental needs, often
results in financial tradeoffs
Investment in companies
linked to long term
sustainable themes
Explicit inclusion of
ESG risks and opportunities
into traditional financial
analysis and investment decisions
Some consideration
of ESG risk and/or
personal values to
screen out investments.
TraditionalInvesting
Emphasis on profit
Generally, ESG factors
are notconsidered
Absence of ESG
ESG Risk Management
ESG Opportunities
Maximum-Impact Strategies
Responsible Investing Spectrum
6|Responsible Investment at AB
Making an Impact While Driving Your Mission
Source: AB; and Essentials of Impact Investing, Produced by Arabella Advisors, Exponent Philanthropy, Mission Investors Exchange.
Setting Goals
DEFINE What kind of impact do you want to make?
What specific issues align with your organization’s mission?
ASSESS Risk/Return assessment and trade-offs
Direct / Indirect
IMPLEMENT Identify investment opportunities
Ongoing reporting and measurement
8Impact Investing Happens Here
Early-Stage Impact Investments
• Saving lives through cardiovascular disease and diabetes prevention
• Empowerment of women entrepreneurs
• Quality job creation
Boston Heart Diagnostics
9Impact Investing Happens Here
Early-Stage Impact Investments
• Carbon emissions reduction
• Meaningful employment and upward mobility for the formerly incarcerated and other vulnerable populations
Wash Cycle Laundry
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Traditional Venture Investment Portfolio Theory
Alternative assets should make up to
10% of assets
The Rule of 10’s
Diversify in 10+ investments
Aim for 10x return on each deal, expect 1‐2 homeruns in 5‐7
years
11Impact Investing Happens Here
Early-Stage Impact Investments
• Traditional equity angel investment
• Grew quickly and raised additional rounds led by Bain Capital
• Grew from $120K to $97MM in revenue
• Acquired by Eurofins for up to $200MM
Boston Heart Diagnostics
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Average Portfolio Return = 2.3x
Home Run ‐10x (1 per 10 investments)
Doubles/Triples 5x (2 per 10 investments)
Singles 1x (3 per 10 investments)
Strike out ‐ 0x (4 per 10 investments)
Traditional Venture Investment Portfolio Theory
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Alternative Portfolio Strategies
• Must we expect the “traditional” exit?
• Can we achieve reasonable returns with less risk and/or more liquidity?
• Can we better align with entrepreneurs to achieve our impact objectives?
15Impact Investing Happens Here
Early-Stage Impact Investment
• Foundation member made seed-stage grant
•Angel investors made equity investments to grow into second market
• Foundation member made impact-driven debt investment
•On track to expand to Boston
Wash Cycle Laundry
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What is impact to you?• Inherent or intentional?• “Baked in” or “icing on the cake?”• Product/service and/or workforce/supply chain?• Innovation or accessibility?
What do you care about?• Specific industry (example: education)• Specific outcome (example: more low income students
enrolling in college)
Getting Started: Impact
Impact Investing Happens Here
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How will you build your portfolio?• Resources to invest• Active investing (and return) timeline• Time and interest in engaging with companies
What are your investment objectives?• What is your return expectation?• What type of risk are you willing to take?• What are your liquidity needs? • How do your impact goals influence your risk, return, and
time to liquidity expectations?
Getting Started: Investments
Impact Investing Happens Here
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• Find incubators and accelerators that focus on the industries, geographies, and impact areas you care about
• Attend pitch events and conferences that highlight early-stage investment opportunities
• Join groups with like-minded capital providers who share investments opportunities and work together on due diligence, investment, and portfolio management
Getting Started: Finding Deals
Impact Investing Happens Here
19Impact Investing Happens Here
• Boston Heart Diagnostics• Number of patients served• Number of diagnoses made
• Wash Cycle Laundry• Amount of laundry processed• Number of jobs created and promotions given
Getting Started: Measuring Impact
Work with entrepreneurs to track key metrics:
Tons ‐ CO2 Reduced
26,0001.5M
ENVIRONMENT
Lives Saved
HEALTH
Sustainable Global Thematic | 21
Source: United Nations Conference on Trade and Development – World Investment Report 2014
U.N. Sustainable Development Goals
A Powerful Framework for Sustainable Theme Selection
The UN Sustainable Development Goals (UNSDG’s) represent an aspirational view of what the world could look like by 2030
The 17 UNSDG’s address: Economic prosperity Environmental sustainability Social inclusion
193 nations collectively created and committed to achieving the goals, signaling broad political consensus
The estimated costs to achieve the UNSDG’s are massive, at roughly $6 trillion annually
Business alignment with the SDG’s can enhance long-term growth potential and reduce risk
We invest exclusively in themes derived from the UNSDG’s
22|Responsible Investment at AB
*Our portfolio holdings must fit within themes that are directly aligned with one or more UNSDG's. We believe that such alignment implicitly excludes several product categories from ownership consideration including those listed here. We also monitor companies for conduct-based violations, as generally defined by the UN Global Compact.
Sustainable Investment Themes
Weapons Coal, Nuclear Power Alcohol, Tobacco Pornography Gambling GMO’s Conduct-Based Violations
Financial Inclusion Gender Equality Economic Infrastructure Enabling Technologies
Medical Innovation Access to Affordable
Care Healthy Lifestyles Food Security Physical Safety
Low Carbon Generation Energy Efficiency Clean Transportation Water Sanitation & Recycling Sustainable Production Climate Health
Exclusions*Empowerment
Themes Are Derived from the UN Sustainable Development Goals
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Yuli is a 26-year-old single
shopkeeper in Surabaya
ResearchExample: Indonesia
24|Responsible Investment at AB
Low Carbon Footprint and High Sustainable Revenue Exposure
Sustainable Investing: Measuring Impact
As of March 31, 2017*Portfolio-level carbon emissions are not applicable to fixed income and multi-asset class portfolios. These metrics utilize an ownership methodology not relevant to bond holders.†An index or portfolio’s revenue exposure to sustainable themes is the weighted average of each company’s percent of revenue generated by themes. Sustainable Global Thematic revenue exposure represents AB’s proprietary estimates of portfolio holding’s revenue exposure to AB’s sustainable themes of climate, health and empowerment. MSCI uses their own definition of Sustainable themes, which includes climate change, resource scarcity, basic needs and empowerment. Note that these definitions are similar, but are not the same. MSCI only calculates revenue estimates for less half of Sustainable Global Thematic holdings. Therefore a direct comparison between our portfolio and the benchmark using the same theme definitions is not possible. Source: MSCI and AB
Carbon Footprint of The PortfolioMeasured as Tons CO2e/USD Millions Invested*
Sustainable Global
ThematicMSCI ACWI
Revenue Exposure to Sustainable Themes†
Percent Revenue Exposure to Sustainable Themes
86
6
15
Sustainable Global
ThematicMSCI ACWI
200
160
120
180
140
100806040200
160
25|Responsible Investment at AB
There can be no assurance than any investment objectives will be met. See a Word About Risk and Important Information and Disclosures at the end of the presentation.MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This document is not approved, reviewed or produced by MSCI.As of December 31, 2016Source: AB and MSCI
Third-Party Research is Growing Rapidly
ProviderAsset Class/Product Service Description
MSCI Fixed Income GMI ESG rating and research data
MSCI Equity and FixedIncome
MSCI ESG Manager rating and research dataNegative screening to implement client restrictions
Sustainalytics Equity Frontier market focused services
ISS-Ethix Luxemburg Fund Platform Controversial weapon screening
Bloomberg Fixed Income Built proprietary Sovereign issuer screening
FTSE Equity FTSE4Good Ethical Target Date Funds equity exposures
ISS Equity Proxy Research
Morningstar Equity Mutual Funds Scoring
26|Responsible Investment at AB
Green Bond Annual Issuance
0.8 0.4 0.9 3.9 1.2 3.1 11.0
36.6 42.2
81.0
150.0
020406080
100120140
2007 2009 2011 2013 2015 E2017
As of July 31, 2017Source: Climate Bonds Initiative and AB
USD
Billi
ons
Green Bonds—Issuance Has Taken Off in the Past Several Years
27|Responsible Investment at AB
Source: The Future of Green Bonds: Standards and Incentives, Climate Bond Initiative and Bloomberg and E3G, October 2016.Source: AB
Issuance is Dominated by Development Banks, the US, Europe and Rapid Growth in China
28|Responsible Investment at AB
Municipal Credit Risk Compares Favorably to Other Sectors
Muni Defaults Have Been Rare
Historical analysis does not guarantee future results. As of December 31, 2015
Payment defaults only
Source: Distressed Debt Newsletter, J.P. Morgan, Moody’s, Nelson A. Rockefeller Institute and AB
0.0 0.0 0.2 1.0 1.7
5.3
18.9
USTsy
IGMuni
BBBMuni
IGCorp
BBBCorp
HYMuni
HYCorp
Five Year Cumulative Average Default Rates1970–2015 (Percent)
29|Responsible Investment at AB
Environmental and Social Considerations Vary by Sector
As of March 31, 2017
Source: AB
Environmental Social
Mass Transit Carbon emission reduction
Access to low-income populations
Governance Stewardship of Capital Transparency
Energy Transition to renewables
Access/outreach for low-income populations
Economic/Community Development
“Green” use of proceeds
Underserved communities
Water/Sewer Conservation, water quality
Access/outreach for low-income populations
Healthcare Charity care
Quality/safety of care
Education Graduation rates,
attendance, outreach
32|Responsible Investment at AB
For investment professional use only. Not for inspection by, distribution to, the general public
As of August 31, 2016*Includes hydroelectric. **As of September 2015Opinions and estimates expressed are our present opinions only, reflecting prevailing market conditions. Such opinions involve a number of assumptions which may not prove valid, and are subject to change without notice. Not all investments in the securities identified should be assumed to be profitable and future recommendations may not be profitable. Source: Fitch, Moody’s, S&P and AB
Chicago Water (IL)
Nearly 50% of accounts unmetered—impedes tracking of non-revenue water and consumption
Very limited efforts at conservation
Not All Municipal Issuers Deliver Positive Impact
American Muni Power (OH)
Wholesale power supplier with large coal exposure Purchase of an existing hydroelectric dam on the Ohio
River does not alter the stock and flow of greenhouse gas emissions
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Legal Disclosure
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Challenges and Opportunities
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1. UN Water Facts and Trends. World Business Council for Sustainable Development
Impact Thesis: Population growth, climatechange, industrial pollution, andoverconsumption have led to rapid deteriorationin our natural water and land resources.
With the human population expected to continueto expand, and with the industrialization of largeemerging economies, significant measures needto be taken in order to restore and preservelimited resources.
» The success of the world’s economy depends on the sustainable management of water resources, adequate water supply and sanitation services globally (UN)
» Irrigation accounts for 90% of water consumption and frequently drives water stress.1
» Promote technologies that increase water productivity and water savings, and avoid practices which further stress water resources.
Step 1: Understanding Key Drivers
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» Inefficiency among utilities: water losses >40%. 1
» 60% loss in agriculture from waste and inefficiency2
» $90T future infrastructure spend globally3
Large Scale Drivers
» Urban population to grow by 3 billion by 2050, 90% in Asia and Africa4
» Up to $34 economic return generated for every $1 spent on water and sanitation5
Social Impact Drivers
» 50% of inland freshwater ecosystems lost during 1900s.6
» Financial and ecological benefits of green infrastructure
Environmental Impact Drivers
Sources: 1) Sensus Water 2020; 2012; page 12) FAO.org: http://www.fao.org/docrep/003/t0800e/t0800e0a.htm#TopOfPage 3) The Sustainable Infrastructure Report. The New Climate Economy, (2016) 8.
4) World Urbanization Prospects; United Nations; 2014; page 1 5) United Nations: http://www.un.org/waterforlifedecade/financing.shtml6) Millenium Ecosystem Assessment; page 6
http://www.millenniumassessment.org/documents/document. 358.aspx.pdf
Step 2: Develop Outcomes
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Outcome One
Outcome Two
Outcome Three
» Increased water efficiency and re-use occurring at scale
» Reduce water poverty
» Greater water availability through natural ecological function
Step 3: Identify Investment Strategies
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Outcome One: Increased water efficiency and re-use occurring at scale
Investment Strategies
» Modernize and rehabilitate urban infrastructure to reduce inefficiency
» Invest in companies that are reducing water use and increasing water efficiency in operations
» Invest in technologies that increase water efficiency and water re-use
Step 4: Identify Investment Options
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The investment types above are presented for informational purposes only. This presentation is not to be construed as a recommendation to buy or sell a specific security or type of security within a specific asset class.
Step 5: Test Efficacy Through Impact Reporting
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CHART SOURCE DATA: MSCI ESG RESEARCH AUGUST 2016. MEASURING AND COMPARING INTENSITY (UNIT/$MM REVENUES) ALLOWS FOR A COMPARIS BETWEEN SECURITIES WITH SIGNIFICANTLY DIFFERENT SCALES OF OPERATIONS OR MARKET CAPITALIZATIONS. AT THE TIME OF THIS PUBLISHING, 2014 THE LATEST AVAILABLE YEAR OF DATA FROM MSCI ESG RESEARCH.
NOTE: NOT EVERY COMPANY INCLUDED IN THESE INDICES REPORT ON WATER USE. EACH OF THESE CHARTS REFLECTS AVAILABLE DATA FOR THE STRATEGY AND ITS BENCHMARKS.
Illustrative Landscape of Impact Themes
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This information is provided for illustrative purposes only, and shall not be construed as a recommendation to buy or sell any particular security.
Impact Investing in Water
Sonen Capital :: 2017 CONNECT Conference 43
The investment types above are presented for informational purposes only. This presentation is not to be construed as a recommendation to buy or sell a specific security or type of security within a specific asset class.
Public Equity Municipal Bond Private Equity PRI
Rehabilitate and strengthen the life of existing infrastructure
» 3,300 municipal clients in North America.
Source: Aegion
$231 Million for waste water and drinking water infrastructure projects
» Rehabilitation of 75 year old water system
Source: Manager (Cedar Ridge)
Water treatment and purification technology
» Reduces industrial water use by 50%
Source: WM
Rural distribution of potable water and modular purification stations
» Reduces incidence of water-related disease
Source: Healthpoint
Types of Impact Creation - Defined
Sonen Capital :: 2017 CONNECT Conference
Systemic Change
Incremental Change
Policies or activities implemented at scale and that influence long-term outcomes
Unit or step-wise activities (e.g. ESG practices, technologies, services) with measurable changes or impacts; Near-term and at smaller relative scale
Syst
ems
Incr
emen
tal
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Types of Impact Creation - Defined
Sonen Capital :: 2017 CONNECT Conference
Direct Impact
Indirect Impact
› Specific underlying activities or impact objectives
› Investors help cause impact
EX: Private Equity, Thematic Municipal Bonds
› Large pools of investor resources
› Unspecified projects or activities
› Investors participate in impact creation
EX: Public Equity, General Issue Corporate Bonds
Indirect Direct
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Indirect Direct
Systemic Impact
Incremental Impact
Thematic Public Equity
(Water)
Thematic Public Equity
(Water)
Bubble size denotes Real or Potential Scale
of Impact
Private
Equity
Private
Equity
Thematic Municipal
Bonds
Thematic Municipal
Bonds
Program Related
Investment
Program Related
Investment
Types of Impact Creation by Asset Classes
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Sonen Capital :: 2017 CONNECT Conference 47
AIMS Across Asset Classes - WaterPublic Equity Municipal Bond Private Equity Prog. Related Inv.
Infrastructure Rehabilitation
Water and sewerage
infrastructure
Water treatment technology
Rural distribution of potable water
Additionality Low Medium High High
Intentionality Low High High High
Measurability Low Low/Medium Medium High
Scale High High Low Low
Investment Approach
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Top-Down Bottom-Up
» Investment strategy and process
» Team sector and strategy expertise
» Alignment of interests
» Track record and current portfolio analysis
» Governance and operational resources
IMPACT INTEGRATION
» Fundamental research on macroeconomic trends
» Sector and value chain analysis
» Country and regional analysis
» Competitive landscape and peer fund analysis
» Regulatory and policy drivers
» Currency, tax, capital repatriation, political risk assessment
Fundamental macro research on impact issues
Examine impact thesis and strategy
Analyze capability for meaningful environmental and social impacts
Evaluate impact reporting and measurement skills
Develop data aggregation and impact reporting methodology
Generating Deal Flow – The Hard Part
50Sonen Capital :: 2017 CONNECT Conference
PROFESSIONALNETWORKS
Individual networks of industry and personal
relationships
PROFESSIONALNETWORKS
Individual networks of industry and personal
relationships AFFILIATIONS & SUSTAINABLE INVESTMENT NETWORKS
US SIF, UN PRI, GIIN, B LAB, CDP, CERES
INCR, PDC, TONIIC, Thirty Percent Coalition, Confluence Philanthropy
AFFILIATIONS & SUSTAINABLE INVESTMENT NETWORKS
US SIF, UN PRI, GIIN, B LAB, CDP, CERES
INCR, PDC, TONIIC, Thirty Percent Coalition, Confluence Philanthropy
DATABASES
eVestment, Morningstar,
Bloomberg, Preqin, ImpactBase
DATABASES
eVestment, Morningstar,
Bloomberg, Preqin, ImpactBase
SUSTAINABILITY DATA PROVIDERS
MSCI, Bloomberg, Trucost, Sustainalytics,
ECPI, IRIS, GIIRS
SUSTAINABILITY DATA PROVIDERS
MSCI, Bloomberg, Trucost, Sustainalytics,
ECPI, IRIS, GIIRS
CONFERENCES AND INDUSTRY EVENTS
Sustainable Responsible Impact
Investing (SRI), SOCAP, CFA, CAIA
CONFERENCES AND INDUSTRY EVENTS
Sustainable Responsible Impact
Investing (SRI), SOCAP, CFA, CAIA
Due Diligence Process: Deal and Impact
Sonen Capital :: 2017 CONNECT Conference
» Past track record, current performance versus plan & future expectations
» How do they think and learn» Understanding unit economics
and true drivers of long term growth / return
» Strategy review, evolution, consistency and articulation
» Quality and repeatability
» Diversification policy, risk
» Organizational Viability & Background
» Team Dynamics & Alignment» Legal, Governance, and
Operational» Site visits and professional
reference checks
» Assess impact fit with strategy
» Evaluate extent internal impact evaluation and reporting
» Identify other impact-related activities
» Evaluate use and sources of relevant impact data
» Identify ESG or Thematic Key Performance Indicators used
» Assess how impact data are integrated into the process
» Identify social or environmental impact objectives
» Evaluate approach to ESG risk and opportunities
Impact DD
Financial DD
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Outcomes-Based Impact Reporting
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ImpactOutcome Definition
Sustainability» Environmental infrastructure and natural assets that promote resource optimization and the
conservation of limited natural resources
» Satisfying essential human and ecological needs amidst growing demand for natural resources, food, energy and growing urbanization alongside an ever-increasing global population
Efficiency» Infrastructure, technologies and services that optimize the use of limited natural resources
» Meeting the growing demand for energy and natural resources while continually decreasing the impact and footprint of the use of these resources
Renewability
» Expanded availability of renewable energy sources as part of the growing global demand for electricity and related infrastructure, particularly in emerging market economies, where demand will be greatest.
» Increased use of recycled and repurposed materials and resources to reduce waste and require fewer raw materials for production
Restoration» Protected land and water resources from the pressures of population growth and urbanization
» Increased global stock of natural ecosystems providing vital ecosystem services for the climate and for current and future generations
Impact Framework and Measurement
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Sector Core Impact Indicators Supplemental Impact Indicators
International Standards Possible Certification
Clean Power
› MWh generated through renewable sources
› GHGs offset through renewable production (tons)
› Geographic location and type ofrenewable energy source
› Number of people with newaccess to clean power
› Clean power beneficiaries, byincome strata or geographicregion
› Gold Standard for carbon mitigationprojects
› Project Protocol accounting standard› Geography-specific
renewable energy portfoliostandards
Sustainable Timberland
› Total land area undersustainable management
› Trees planted (native species)› Units/Volume of sustainable timber
sold
› Ecological RestorationManagement Area (Ha) including streams
› Ecosystem services› Jobs maintained at supported
enterprises
› FSC Certification› Programme for Endorsement
of Forest Certification(PEFC)
Green Real Estate
› Energy saved/conserved (KWh) via property improvements
› Total area with energy efficiency improvements (ft2)
› % of property with sustainable certifications
› Percent of propertieslocated in low-income geographies/census tracts,or providing services to disadvantaged populations(e.g. elderly, low-income)
› LEED Certification› Energy Star Certification› National Green Building Standard
(US)
Real Assets: Clean Power
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Data reflects investments made through 2016 for Sonen’s Global Sustainable Real Assets strategy
Real Assets: Sustainable Timber
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Data reflects investments made through 2016 for Sonen’s Global Sustainable Real Assets strategy
Real Assets: Green Real Estate
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Data reflects investments made through 2016 for Sonen’s Global Sustainable Real Assets strategy
exponentphilanthropy.org#exponent17
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Contact InfoTravis AllenSenior Portfolio ManagerBernstein Private Wealth ManagementWashington, [email protected]
Alexandra LaForgeInterim executive director Investors’ CircleDurham, [email protected] x107
Raúl PomaresFounder & Managing DirectorSonen CapitalSan Francisco, [email protected]