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The Integration of Environmental, Social andGovernance issues in Investment Decision-making

A License to Operate issue?

Leola Ross, Ph.D., CFA

Senior Investment Strategist

Member, Russell Sustainability Council

September 15, 2011

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Important Information

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding theappropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted uponwithout obtaining specific legal, tax, and investment advice from a licensed professional.

These views are subject to change at any time based upon market or other conditions and are current as of the date at the beginning of thedocument. The opinions expressed in this material are not necessarily those held by Russell Investments, its affiliates or subsidiaries. While allmaterial is deemed to be reliable, accuracy and completeness cannot be guaranteed. The information, analysis and opinions expressed hereinare for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at aneven rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase returncould, at certain times, unintentionally reduce returns.

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Copyright© Russell Investments 2011. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed inany form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

First used: August 2011

USI-10673-08-12

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Agenda

The drivers of change

Russell and Sustainability

Environmental, Social and Governance (ESG) factors

United Nations Principles for Responsible Investment(UN PRI)

Universal Owner concept

ESG integration vs. SRI

ESG integration around the world

Russell’s approach

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What are the drivers of change?

Value-seeking through sustainability

Accommodating social and environmental issues

ESG risks can deliver financial loss

A desire for “Stewardship”

Moving from considerations of only quantity (more) towardsquality (better)

The credit crunch

Regulation

Is the meaning of fiduciary responsibility evolving?

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Russell and Sustainability

Sustainability Council established in Sep 2009

Born out of the work of the Innovation Council

Mandate: Drive Russell’s Sustainability workexternally (client investment needs) and internally(work practices)

13 members in 7 offices

Russell signed UN PRI in September 2009

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UN Principles for Responsible InvestmentUN PRI – Six Principles

1. We will incorporate ESG issues into investment analysis anddecision-making processes

2. We will be active owners and incorporate ESG issues into ourownership policies and practices

3. We will seek appropriate disclosure by the entities in which weinvest.

4. We will promote acceptance and implementation of thePrinciples within the investment industry

5. We will work together to enhance our effectiveness inimplementing the Principles

6. We will each report on our activities and progress towardsimplementing the Principles

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UN PRIA growing force

Over 900 signatories, $35trn assets

Mostly Asset Owners and Investment Managers

PRI business model moving from advocacy body toservice provider

Annual Report & Assessment Survey

Freshfields Report (2005)

Considered fiduciary duty re ESG in nine jurisdictions

Followed by “Fiduciary II” (2009)

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ESG IssuesWide-ranging – financially material?

Suicides Sparks Inquiries (Foxconn)- Wall Street Journal 27 May 2010

Nine charged over Satyam fraud scandal- The Times 8 April 2009

Coastal assets worth $226 billion at risk: Combet- Sydney Morning Herald 5 June 2011

Spain’s solar power subsidy cuts attacked- Financial Times 22 December 2010

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Universal Owner concept

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Not treating wastesaves $1

Treating waste costs$1.50

The largest 3,000 public companiescaused over $2.15 trillion of globalenvironmental costs in 2008, whichequates to nearly 7% of theircombined revenues.

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ESG integration vs SRIValue vs values

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ESG integrationSocially Responsible

Investment (SRI)

Sustainable financial value

Mainstream, though slow

UN PRI

Aligns with fiduciary role

Internalize economicexternalities

End-investor has valuesbeyond only financial goals

Often leads to securityexclusion

Pooled fund challenges

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How do different countries stack up?

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Country Evaluation on E, S and G criteria

Source: Goldman Sachs Research, February 2010

Bars show scores achieved as % of maximum (100%)

Emerging Countries

Data is as of the specified date. Current data may be different.

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What is happening around the world?Responsible Ownership

UK Stewardship Code

Seven principles of Responsible Ownership

Regulatory requirement for every asset manager to publish response

European Commission: Corporate Governance Green Paper

Europe: Regulator (ESMA) consulting on proxy advisor role

Netherlands: Eumedian as collective investor voice

Australia: ACSI similar

South Africa

Code on Responsible Investing (CRISA)

Growing Russell client interest in proxy outcome reporting

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Around the World (2)

Netherlands: Frijns Report (March 1, 2010)

“The pension fund cannot avoid being aware of the broader socialconsequences of its conduct”, yet

“Socially responsible conduct does not yet form an integrated part ofrisk policy and investment policy”

Landmine and cluster bomb production increasingly avoided

Denmark: Corporate social legislation leading to consideration ofESG issues in sponsor’s pension plan

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Who influences whom?

Government / Regulators

Asset Owners(Trustees, Bancassurers

etc.)

InvestmentManagers

Companies

Beneficiaries Citizens Customers / Employees

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Case Study: US & Pan-Europe Core RE FundsRussell research

Applying ESG to private real estate

Interviews with fund managers conducted in winter 2009/10

Tracking sustainability elements in portfolios

Major themes

Emphasis on “E” in ESG

Regulatory pressures and push/pull on tenants

Getting paid to be green

Development of frameworks / scorecards

Future proofing

Source: Russell research

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Carbon risk – One to watch?

CO2 emissions (“carbon”) are often a negativeeconomic externality

Some governments are developing a pricing regime

EU ETS (Emissions Trading Scheme)

Australia: fixed carbon price, market price from 2015

UK: escalating minimum carbon price

China: latest Five Year Plan

Evolution towards a global carbon price?

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Russell responseClient-driven

Funds*

Climate Change, Shariah, Environmental Technology

Responsible Ownership

Extension of global Proxy Policy to E&S issues; Engagement

Appointment of ESG data provider

Publications

Local office Sustainable Work Practice groups

Responsible Investment Policy (in progress)

* Fund names provided for illustrative purposes only. This is not an offer or solicitation to purchase any type of security. Please note that not all funds are available to all types of investors.

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Summary

ESG factors need to be considered for financialmateriality

ESG Integration is taking place

Different countries/markets focus on differentissues…

…and tackle them in different ways

A client’s specific SRI requirements need acustomised solution