Sustainable Investing Across Emerging MarketsApril 2012

Lloyd Kurtz, CFASenior Portfolio Manager

Nelson Capital Management

Lisa Leff Cooper, CFASenior Portfolio Manager

Nelson Capital Management

Alison ShimadaAssociate Portfolio ManagerWells Capital Management

1For a full discussion of UNPRI, please see the appendix2Kurtz and DiBartolomeo, “The Long-Term Performance of a Social Investment Universe,” Journal of Investing, Fall 20113The amount of carbon dioxide or other carbon compounds emitted into the atmosphere by the activities of an individual, company, country, etc.

Executive Summary

Once considered an investment strategy that catered to a few socially concerned investors, sustainable investing is now an important discipline for mainstream investors, investment managers, and consultants. Sustainable investing is the concept that environ-mental, social, and governance (ESG) factors impact long-term financial performance. An important catalyst for the evolution of sustainable investing has been the overwhelming growth in support for the United Nation’s Principles for Responsible Investing (UNPRI) which was launched in 2006 as a framework for asset owners, asset managers, and service providers to demonstrate their commitment to sustainable investing.1

Critical to the groundswell of support for sustainable investing has been the academic work to dispel preconceptions that integrat-ing ESG factors into investment processes is detrimental to performance. The debate has centered on the intuitive assumption that limiting the opportunity set of investable companies to only those meeting ESG criteria would lead to a less diversified portfolio with lower returns compared to the broader universe. Research studies have not been unanimous in their conclusions but have introduced enough positive support to further the fiduciary merits of ESG—long-term investment performance is not hindered2 in the pursuit of success on environmental, social, and corporate governance issues.

Today, sustainable investing, with its focus on identifying strong corporate performance with regards to the environment, social equity, and corporate governance, provides a unique and important set of tools for emerging markets investors. For example, countries like Brazil and China are placing an emphasis on environmental protection and innovation. Hydropower generates 70 percent of the power in Brazil contributing to a low carbon footprint,3 while China is struggling with high levels of air pollution. Social issues are important in South Africa and India as the governments of both countries work to bring basic services to all of the residents of these countries. Meanwhile, the South Korean government has mandated certain levels of energy efficiency which has led to South Korean companies becoming global leaders in exporting this technology.

This paper will explore how each of these countries is rising to meet these challenges and how a skillful investment approach that focuses on ESG can be a great opportunity in emerging market investing.

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4UNPRI Report on Progress, 20105SRI as an Asset Class, Bank of America Merrill Lynch, August 12, 20116eVestment 12/31/117“Mercer’s ESG ratings update – 5,000 and counting” Mercer Consulting, 2012

Growth of Sustainable InvestingOne major impact of the UNPRI has been to ‘mainstream’ the concept of sustainable investing rather than consider it as just a specialized asset class. Indeed, over 70 percent of the asset managers signing the UNPRI consider themselves mainstream managers with the balance considering themselves dedicated socially responsible investing (SRI) or ESG specialist managers.4 Therefore, while the support for sustainable investing has the clout of $30 trillion in assets owned/managed/advised, estimated actual AUM invested related to sustainability is about 7 percent across asset classes (up from 4 percent in 2008).5 Globally, the popularity of sustainable investing has some notable regional differences. Interest is highest among European asset owners and investment managers, followed by Sub-Saharan Africa and North America, as seen in Table 1 on page 3.

There is little doubt that specialized sustainable investing strategies are poised for further growth, as new products and strategies are being developed across markets and asset classes. According to eVestment Alliance—a leading third-party database for institutional asset management—46 new strategies have been added to the database since the beginning of 2009 that focus on ESG investing within the global, international, and emerging markets universes, with five specifically focusing on emerging markets.6

Mercer Investment Consulting has a dedicated practice to responsible investing and they assign ratings to the strategies in their database based on how well the manager incorporates ESG into the investment strategy. Managers are categorized into four groups—ESG1 (the highest rating) to ESG4 (the lowest rating). Mercer currently rates 466 strategies, or 9 percent, with the two highest ratings.7 This would be indicative of how many strategies broadly have an ESG focus—the combination of mainstream strategies not designating them specifically as ESG specialists and those that are designating themselves as ESG specialists.

The ESG Investment Proposition for Emerging MarketsUntil recently, ESG information on emerging markets com-panies was difficult, if not impossible, to obtain, and many young and fast-growing emerging markets companies were more focused on rapid growth than management quality and corporate responsibility. However, as emerging markets have been increasingly challenged by resource constraints, social unrest, global standards, and demands for corporate account-ability, companies that understand the challenges and evolve will differentiate themselves from those that do not. This differentiation is potentially an important factor in evaluating earnings growth potential over both the short and long term. In particular, emerging markets companies providing innovative solutions to environmental and social challenges may present particularly attractive investment opportunities.

In the emerging markets, population growth and economic development are creating both challenges and large-scale opportunities related to the environment and social equity. Threats to the ecosystem, social advancement, and a trustworthy business environment now also threaten to limit the potential for future economic growth. At the same time, companies within emerging markets have the potential to lead the world in developing lower-cost, innovative solutions to the biggest social and environmental problems. Just as emerging markets have become a key driver of global growth, they are quickly becoming the focal point for sustainable economic development.

ESG Themes Across Emerging MarketsSome of the world’s leading sustainability solutions and ESG practices are now coming from developing countries, creating promising opportunities for investors. Three of the more developed emerging markets economies—Brazil, South Africa, and South Korea—are recognized in one or more ways as global sustainability leaders, and all three countries have introduced “sustainable investment indexes” setting high stan-dards for corporate ESG practices. China and India are earlier on the evolutionary scale of sustainability, but share enormous

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opportunities and vulnerabilities related to sustainable economic development. The following discussion takes a closer look at some of the most important sustainability-related opportunities and risks across these five key emerging markets from both a corporate and government perspective.

Brazil – Valuing Its Natural ResourcesBrazil is uniquely blessed with many natural resources—dense forests rich with biodiversity, substantial oil and mineral deposits, and some of the world’s largest and most pristine rivers, including the Amazon. But as the world’s fifth-most populous country, Brazil also faces major environmental challenges related to growth and development—deforestation, air and water pollution, and an expanding carbon footprint. The goals of development and conservation are often at odds with each other, but Brazil has unique opportunities to both protect and leverage its rich natural resources.

As an example, Brazil generates more than 70 percent of its elec-tricity from hydropower, contributing to the country’s low carbon profile. Brazil also generates a significant and growing portion of its energy needs with biodiesel, in particular sugar cane ethanol, which is a relatively efficient source of energy. In addition, Brazil is a global leader in developing high-speed railways and other forms of mass transit. With this energy mix, Brazil is on target to meet its greenhouse gas emission reduction goals for 2020.

Brazil’s government has established regulations and policies to protect the country’s environment as its economy rapidly develops. Brazil’s National Plan for Climate Change calls for

conserving and reclaiming national ecosystems; expanding legally protected natural areas; slowing the rate of Amazon deforestation (with a target set in 2009 for reductions of 80 percent by 2020); improving energy efficiency in construction, farming, and industry; and enhancing the production of sugar cane ethanol. Similarly, Brazil has set other major initiatives around improved sanitation, more efficient transportation, and better water management.

Against this backdrop, environmental management at Brazil-ian corporations has become, as a whole, more advanced than in many developed countries. The Dow Jones Sustainability Index, which strives to include best-in-class sustainability leaders from around the world, now includes seven Brazilian companies (Australia is the only Southern Hemisphere country with more). Brazilian companies have relatively high adoption of international sustainability standards such as the Global Re-porting Initiative, the Carbon Disclosure Project, and the UN Global Compact. Major Brazilian companies across sectors are attracting investors and earning respect as global sustainability leaders. We see particularly promising opportunities for inves-tors in Brazilian electric utilities, green consumer products, railroads, and sustainability-focused banks and real estate.

South Africa – Building a More Equitable SocietyNearly two decades after the end of apartheid, South Africa is still working to repair societal inequities of the apartheid era. No doubt, there has been good progress on many fronts. But South Africa, blessed with many resources, will need to lift the veil of inequality to realize its full economic potential. As

Table 1: Sustainable Investing Assets Around the WorldMarket and Period Estimated Total AUM Related to Sustainability (US$) % of Total Estimated AUMEuropean Union, 2010 $7.26 trillion 47

United States of America, 2010 $3.07 trillion 12

Canada, 2010 $531 billion 19

Sub-Saharan Africa, 2010 $125 billion 20

Australia and New Zealand, 2010 $115 billion 13

Brazil, 2009 $70 billion 12

Middle East and North Africa, 2010 $54 billion 2

China, 2009 $4 billion 1

South Korea, 2009 $2 billion 1

India, 2009 $1 billion 1

Source: Sustainable Investment in Sub-Saharan Africa, International Finance Corporation, 2011

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South Africa continues to close the gaps that exist along both racial and socioeconomic lines, there will likely be many promising opportunities for investors.

The challenges that remain for South Africa include high over-all unemployment, the gap in the quality of education between public and private systems, and wide disparity in access to medical care across the income spectrum. The South African government has initiated many programs to address the gaps in education, employment, and access to services, in many cases, with very strong support across the corporate sector. Notable improvements have been made over the period from 1993-2008 as access to sanitation, potable water, and electricity have seen significant increases. South Africa’s goal is to have access to water and electricity for all people by 2014.8

Perhaps the most prominent of these programs is the Broad-Based Black Economic Empowerment (B-BBEE) initiative. As outlined in the Black Economic Empowerment Act of 2003, the aim of the program is economic transformation to enable meaningful participation of black people in the South African economy. More specifically, the objectives of B-BBEE include equal access to jobs, greater participation in stock and compensation plans, increasing asset ownership, and improved representation of black people in upper management positions. As one indicator of B-BBEE’s impact, the number of senior managers in South African companies who are black has increased from 12.7 percent in 2000 to 32.5 percent in 2008.9 Another major corporate initiative launched by the South Afri-can government is the King Code of Corporate Governance—or “King III” as the most recent (2009) version is known. With King III, the South African government aims to strengthen corporate behavior and encourage adoption of internationally accepted standards of corporate governance with regards to reporting, accountability, independence, transparency, and social responsibility. While King III is still voluntary, the government would like to see more companies embrace such standards in order to attract capital to South African capital markets and improve credibility of its public companies.

South African corporations have widely embraced B-BBEE and King III, setting aggressive targets to improve advancement and opportunity for black workers and overall corporate social sustainability. Companies across sectors have implemented extensive training and development, stock ownership, local sourc-ing, and community economic development programs aimed at promoting the role of black employees and communities. King III has helped spur companies to measure, monitor, and report on specific sustainability metrics, not just around employment and B-BBEE progress but also concerning environmental impact, human rights, and corporate governance. King III encourages companies to become signatories to the Global Reporting Initiative, and 97 percent of South Africa’s largest corporations now publish annual sustainability reports that meet or exceed global standards.10 The Johannesburg Stock Exchange (JSE) has recognized B-BBEE, King III, and other measures of sustainability as important differentiators of corporate behavior, launching the JSE SRI Index in 2004 to highlight exchange-listed sustainability leaders. South African companies, who are better positioned to manage a diverse workforce, build strong community relationships, and communicate progress to stake-holders, are likely to thrive as South Africa continues along the upward-but-rocky path to a more equitable society. For investors, we see some of the most promising opportunities in retail, banking, and healthcare companies positioned to serve South Africa’s transforming population.

South Korea – Exporting Sustainable TechnologiesSouth Korea is one of the more developed emerging markets and is a major export economy. The country has a strong industrial base, with construction, engineering, technology, and other industrial firms that compete on a global playing field primarily with developed market companies. Following Japan’s lead and spurred by initiatives from the South Korean government, South Korean companies are emphasizing leadership in environmental sustainability as an important competitive advantage.

Large industrial groups in South Korea are making energy efficiency and alternative energy use central parts of their

8Development Indicators, The Presidency of the Republic of South Africa, 20099Development Indicators, The Presidency of the Republic of South Africa, 200910KPMG International Survey of Corporate Responsibility Reporting 2011

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business strategy. South Korean construction and engineering companies are winning bids to build alternative energy plants, energy-efficient manufacturing and transportation facilities, and eco-friendly storage and waste removal facilities around the world. South Korean companies in the technology and industrial sectors are becoming global leaders in production of rechargeable batteries, LED lighting and energy-saving IT components, polysilicon and solar cell manufacturing equipment, and lower fuel-consuming LNG tankers.

These technologies also have important applications at home in South Korea, as the government responds to the many envi-ronmental challenges related to development (e.g., air pollution, water scarcity, deforestation, and a large and growing demand for fossil fuels). The South Korean government is aggressively addressing these challenges through a host of green initiatives, including programs to build millions of new green homes and improve energy efficiency of existing ones, replace light bulbs in all public buildings with efficient LED lighting, install rainwater harvesting systems in all new buildings to conserve water and mitigate flooding, and build one of the world’s most energy effi-cient transportation networks with new high-speed railways and infrastructure supporting electric cars. In addition, South Korea is shaping the corporate playing field by introducing tough new greenhouse gas emissions targets which, beginning in 2012, companies must meet or pay fines. Against this backdrop, we see South Korean technology and industrial companies with strong environmental management and innovation around sustainability as especially attractive opportunities for investors.

These three countries have shown a strong commitment to ESG principles and have exhibited strong leadership in the field. Other emerging market countries, including the two largest (China and India), still face significant challenges. However, a focus on ESG principles can help to identify companies that will lead these economies.

India – Moving People Out of PovertyIndia typifies the challenges facing many less-developed emerging markets—a high poverty rate, poor sanitation, inad-equate roads and other infrastructure, demand for water and energy that exceeds supply, and a large unskilled labor force.

Yet, the potential for economic growth in India is enormous. It is widely noted that India is about 10 years, behind China in its economic development. If India follows a similar trajectory, over the next 10 years a large proportion of its population will move out of poverty and towards the middle class. Right now, 64 percent of Indians have no access to financial services, less than 10 percent have health insurance,11 and free education for children was not made compulsory until 2009.12

The Indian government has implemented many programs to spur equitable economic development, with varying levels of effectiveness. India’s large rural population of farm households has an especially high rate of poverty—the vast majority of households earn less than $1 per day—and the government is working to address rural poverty in particular, with programs providing minimum price supports for crops, subsidies for fertilizers, and in certain circumstances guaranteed employ-ment. The Indian government is also increasingly focused on boosting financial inclusion for the poor, through support for programs to expand rural banking and microfinance, and on providing food security for people in rural areas. Perhaps the most important ongoing government initiative to help the poor is rural electrification, which apart from generally improving the quality of life of the rural population also enables people to use computers and eventually to gain internet access which has been demonstrated to be a major factor in economic progress. To the extent initiatives like these are successful, the transfor-mation of India’s poor to a better educated and healthier emerging middle class of consumers will be accelerated.

Companies providing products and services to this developing market are positioned to benefit. However, many Indian compa-nies also understand the critical role they play in creating the country’s economic development. Leading Indian companies are recognizing that growth is limited by the size of India’s skilled labor base, and in response have established training programs to bring vocational skills to thousands. To help improve the standard of living for India’s marginalized farm population, companies in the agriculture sector are helping farm households find ways to conserve water and other resources and boost incomes. Indian corporations and government are working together to address critical social needs through public-

11Creating Shared Value in India, FSG Social Impact Advisors, 201112Joining Hands in the Interest of Children, The Hindu, 2010

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private partnerships. One prominent example is the AADHAAR project which intends to provide unique identification numbers for Indian citizens, which should help improve the effectiveness of anti-poverty programs, delivery of healthcare and banking services, and fairness of elections.

Through programs like these, India’s corporate sector is helping to build a more cohesive social fabric and to formalize economic systems that could radically transform India and drive growth in financial services, education, healthcare, and many other sectors. We see this providing especially promising long-term investment potential for Indian companies providing financial services, education, healthcare, and agricultural services.

China – Working to Clear the Pollution HurdleAs the world’s fastest growing economic superpower, China faces some of the world’s most daunting environmental chal-lenges. Pollution in China is enormous—air quality in cities is very poor, water and food are regularly contaminated, environmental regulations are non-existent or weakly enforced, and development-related deforestation has led to large-scale desertification and mudslides. Pollution presents enormous costs for China and potentially a major limitation to growth. The World Bank has reported that 16 of the world’s 20 most polluted cities are in China,13 an estimated 650,000 people in China die from air pollution-related illness each year,14 and a recent survey of wealthy Chinese citizens ranked “fear of pollution” as one of the top reasons they would emigrate.15 Climate change presents special challenges for China: In 1990, China and India combined accounted for 13 percent of total global carbon dioxide emissions. By 2005, their share had risen to 25 percent. By 2030, they are estimated to represent 34 percent of total emissions with China alone at 29 percent.16 Environmental protection is among the Chinese government’s top strategic economic priorities. In its recent policymaking, China has clearly recognized that to effectively combat pollu-tion, it needs to both mitigate existing pollution in rivers and landscapes, and dramatically reduce ongoing emissions of toxic chemicals and other polluting substances into air, water,

and land. Indeed, the Chinese government expects to increase spending on environmental cleanup by 14.5 percent annually through 2020 in order to sustain 8 percent growth in GDP.17 Much of China’s pollution is related to its consumption of coal and other fossil fuels, so altering its energy mix and improving energy efficiency are critical goals. China’s 12th Five-Year Plan, announced in 2011 and covering the 2011-2015 time period, includes environmental sustainability as a primary theme. The plan sets aggressive targets to reduce energy consumption, water consumption, carbon intensity, and air pollutants, and increase the percentage of energy from renewable sources. These targets imply a critical need for improved energy efficiency, a metric on which China now significantly lags the developed world, as one dollar of GDP growth costs China seven times more energy than Japan and six times more than Germany.18 Importantly, China appears to be taking measures to improve its historically weak oversight and enforcement of environmental regulations and targets. The government also appears to be lifting price subsidies for water and energy that have only encouraged over-consumption of these scarce resources, and has talked of soon implementing a carbon tax.

If effectively implemented, these policies will raise costs for heavily polluting companies and industries (e.g., coal utilities and heavy manufacturing) and create great opportunities for those operating with a focus on environmental sustainability. In particular, there are promising opportunities for Chinese companies with businesses related to improving efficiency of energy and water use—through products like high-efficiency motors, next-generation electric cars, water-saving devices, and renewable energy generation—and companies implementing technologies for pollution control and clean-up (e.g., wastewater treatment, battery recycling, denitrification, and emerging technologies like carbon capture). Further, across industries, Chinese companies are improving environmental management to comply with government guidelines. Paper producers, which are large consumers of water, are now working to recycle most of their waste water for reuse. Cement manufacturers, among the heaviest of energy users, are now recycling residual heat for

13World Bank, 200714World Health Organization, 2007, also “Chinese Air Pollution Deadliest in World, Report Says,” National Geographic News, July 9, 200715“Many Rich Chinese Consider Leaving,” Wall Street Journal, November 2, 201116OECD, 2009 17Bloomberg News, September 201018“Choked By Its Own Success,” FinanceAsia, September 2010

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production purposes. Independent power producers are buying larger and high efficient thermal power equipment to use coal more efficiently in the production of electricity.

To continue its evolution from an emerging economy to a more developed, higher income one, China will need to clean up the way it does business. The environmental policies set recently by the Chinese government will take the country in the right direction and help it protect the viability of its cities, air, landscape and waterways, and the livability of its cities. These policies, if effectively implemented, should also create very promising opportunities for sustainability-focused investors in China.

Sustainable Investing and Investment PerformanceWe believe there is a strong and compelling case for the attrac-tiveness of sustainable investing in the five markets analyzed in this paper and, indeed, across emerging markets as a whole. But the question remains: can a focus on sustainability enhance investment performance? More specifically, can ESG factors help identify opportunities for investors to add alpha, or to minimize risk? And do ESG factors have different investment impact in emerging markets versus developed markets?

There is a well-established body of data now showing that sustainable investing in developed markets does not hurt in-vestment returns and that it may, in many cases, help improve investment returns and/or reduce investment risk. Academic research widely supports the competitive performance of sustainable investing in developed markets. Studies have also shown positive relationships between better environmental management and both capital efficiency and higher firm value,19 and between superior workplace practices and both earnings and company stock performance.20

The MSCI/KLD Social Index (originally called the Domini Social Index), the longest lived index of sustainable investing in the U.S., has delivered modest outperformance over the S&P 500 in the period since its inception in 1990 (see Chart 1 below).21

Chart 1: Outperformance of MSCI/KLD vs. S&P 500

1990 1995 2000 2005 2010

7006005004003002001000-100

S&P 500MSCI/KLD Social Index

While no rigorous studies have been published, we have early evidence of the performance of sustainable investing in emerg-ing markets, and the indications are positive. In the past few years, several country-specific sustainability indexes have been developed. In Brazil, the Novo Mercado was launched by Bovespa, the Brazilian stock exchange, in 2001 to track firms with better corporate governance. To date, the Novo Mercado Index has outperformed the broader BOVESPA Index (see Chart 2 below).

Chart 2: Outperformance of Novo Mercado vs. Ibovespa

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Bovespa also launched the Corporate Sustainability Index (ISE) in 2005, to track the performance of Brazilian companies identified as having the strongest sustainability profiles. The ISE is comprised of approximately 35 percent of the companies listed on the broader exchange. Since inception in December 2005 through December 2011, the ISE index outperformed the broader Bovespa Index by 24.5 percent in local currency. In

19Guenster, Derwall, Bauer, and Koedijk, “The Economic Value of Corporate Eco-Efficiency,” European Financial Management, March 2010.20Edmans, Alex, “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices,” Journal of Financial Economics, September 2011.21For a full attribution analysis of this index from 1992-2010, see Kurtz and DiBartolomeo, “The Long-Term Performance of a Social Investment Universe,” Journal of Investing, Fall 2011.

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addition, research indicates that firms included in the ISE trade at a premium relative to other publicly traded firms.22 Similarly, in South Africa, the Johannesburg Stock Exchange launched the JSE SRI Index in 2004 to identify exchange-listed companies with the strongest sustainability practices. Much like the Brazilian Novo Mercado and Corporate Sustainability Indexes, the JSE SRI Index provides foreign investors with a spotlight on companies that can be considered of superior quality for their proactive stance on ESG matters. There are also new efforts to measure the performance of Sustainable Investing in South Korea. In 2007, a group of investors created an index—the SolA Sustainable 50—to track the performance of South Korean companies deemed to be among the top 50 on a range of ESG metrics. The SolA 50 has shown superior performance over the main KOSPI Index over the time period 2007-2011.23 Also, in 2009, the Dow Jones Sustainability Index family created an index specifically covering South Korea.

ConclusionFor many developing countries, the first phase of economic growth is based on exports and the second phase is based on domestic consumption. We believe many emerging markets are now entering a third phase, developing regulatory structures, governance standards, and social foundations that will strongly influence economic development over the coming years. Emerging markets corporations will need to adjust quickly to this new playing field. Some companies are very prepared for this, while others not at all. We believe ESG factors can help investors identify companies operating from the positions of greatest strength.

We further believe corporate governance merits special attention from emerging markets investors. A large body of literature supports the idea that good governance improves firm value generally.24 We have found that in emerging markets, where governance standards are far less consistent, governance can be a significant performance factor.

More generally, investors around the world increasingly view corporate responsiveness to sustainability issues as an important indicator of management quality—and may be willing to pay a premium for more sustainably managed companies. This effect

may be strongest in developing markets, where quality of man-agement is a key indicator of a company’s ability to compete for market share and investment on a global playing field.

We are still in the early days of sustainable investing in emerging markets, but the prospects for investors look very promising. Globally, sustainable investing is growing rapidly as the investment community more widely embraces the concept that sustainability issues—the environment, social equity, and corporate governance—are critical business issues. To date, investors have been slow to apply sustainable investing strategies to emerging markets primarily due to lack of good ESG research, but that, too, is changing rapidly. Indeed, developing countries face some of the world’s greatest environmental and social chal-lenges, but companies across emerging markets are also develop-ing some of the world’s most innovative and cost-effective ways of addressing those challenges. In more developed emerging markets like Brazil, South Korea, and South Africa, we find many companies recognized as global sustainability leaders. In large, rapidly developing countries like China and India, we find enormous opportunities related to sustainable economic develop-ment. It is worth reiterating this point: Just as emerging markets have become a key driver of global growth, they are quickly becoming the focal point for sustainable economic development.

We believe that incorporating sustainability factors into an emerging markets investment discipline can enhance returns. However, in order to fully leverage these opportunities, there must be a rigorous process of integrating environmental, social, and governance analysis with macroeconomic and company-specific financial factors. Very few investment teams currently have the unique combination of capabilities necessary to achieve this level of integration. As a result, this approach is not yet widespread, which creates investment opportunity. We believe integrating sustainability into an emerging markets strategy can help uncover unique and uncorrelated opportuni-ties for generating superior investment performance.

For further reading, see “Emerging Markets – A New Paradigm for ESG Investing,” Wells Capital Management and Nelson Capital, May 2011

22Jose Luiz Rossi Jr at the 2009 Second International Research Conference on Corporate Governance in Emerging Markets. 23SolAbility website, http://www.solability.com/eng/SRI/Performance.htm24See, for example: Gompers, Ishii, and Metrick, “Corporate Governance and Equity Prices,” National Bureau of Economic Research Working Paper 8449, 2001, and Barber, “Monitoring the Monitor,” Journal of Investing, 2007.

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25www.unpri.org

Appendix

United Nations Principles for Responsible Investment25 The United Nations Principles for Responsible Investment (UNPRI) Initiative was launched in 2006 as a framework for asset owners, investment managers, and service providers involved with sustainable investing. The goal of this partnership between the United Nations and investment professionals is to promote and mainstream the practice of responsible investing. While responsible investing can mean different things to different people, the primary factors that the UNPRI focuses on are environmental, social, and governance (ESG) issues.

The Six PrinciplesTo this end, each signatory commits to uphold six principles, consistent with their fiduciary duty. The Principles are:w To incorporate ESG issues into investment analysis and

decision-making processesw To be active owners and incorporate ESG issues into our

ownership policies and practicesw To seek appropriate disclosure on ESG issues by the entities

in which they investw To promote acceptance and implementation of the Principles

within the investment industryw To work together to enhance effectiveness in implementing

the Principlesw To individually report on activities and progress towards

implementing the Principles

While the Principles are only to be applied in ways that are consistent with each signatories’ individual fiduciary duties, they “are based on the premise that ESG issues can affect investment performance and that the appropriate consideration of these issues is part of delivering superior risk-adjusted returns and is therefore firmly within the bounds of investors’ fiduciary duties.”

The Principles also require signatories to take an active role to effect change that is consistent with ESG ownership policies and practices. Over time, this activist investing should increase the potential pool of investments that will pass ESG screens.

In addition to guidelines on investment activity, the Principles also require signatories to promote the Principles within the broader investment industry and to collaborate with other signatories to better implement the Principles. These requirements could be the driving force behind the long-term success of the initiative.

Growth of SignatoriesAs of the 2011 annual report, there were over 900 signatories representing 49 countries, and more recent data shows more than 1,000 signatories. Chart A.1 below details the growth of signatories and asset owned/managed/advised by the signatories. While total reported assets are more than $30 trillion, it should be noted that these are total assets of the signatories, and not a reflection of ESG assets.

Chart A.1: Growth of Signatories and Firm AUM

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AUM of SignatoriesNumber of Signatories

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Signatories by Country and TypeAs seen in Table A.1 on page 10, signatories are broadly distributed around the globe. While the U.S. has the most number of signatories, there is deep commitment to the Principles of UNPRI across Europe (e.g., England, France, and the Netherlands) and some of the more advanced emerging markets (e.g., Brazil and South Africa).

Each signatory belongs to one of three separate categories:w Asset Owners: This category is for the actual owners of

assets. Examples can include pension funds, foundations, endowments, and insurance companies.

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w Investment Managers: This category is for third-party managers of assets that are owned by the asset owners. These companies can serve both the institutional and/or retail markets.w Service Providers: This category is for companies that

provide services or products to asset owners or investment managers and do not necessarily own or control assets.

Signatories are able to self-select the category in which they fall; however, the PRI Board reserves the right to re-categorize a company. Which category a company falls in does not affect the commitment to the Principles.

Table A.1: Number of Signatories by Country and CategoryCountry Asset Owners Investment Managers Service Providers TotalUSA 20 92 22 134

UK 27 79 24 130

Australia 34 75 16 125

France 9 63 12 84

Netherlands 27 32 5 64

Brazil 17 27 14 58

Switzerland 6 34 11 51

Canada 17 23 4 44

South Africa 2 26 8 36

Denmark 17 13 3 33

Other 73 133 47 253

Total 249 595 169 1,013

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This investment strategy is a partnership between the Wells Capital Management Emerging Markets team and Nelson Capital Management.

Nelson Capital provides its ESG scoring expertise to maintain a universe of companies with significant earnings from sustainable solutions, strong

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portfolio management and combining the ESG input from Nelson Capital with its fundamental research on emerging market companies to provide

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