Impact Investing: The Next Big Thing?

Steven Ellis, CFA February 12, 2015

What is Success? One enduring version

u To laugh often and much

u To win the respect of intelligent people and the affection of children

u To leave the world a better place

u To know that even one life has breathed easier because you have lived

Ralph Waldo Emerson (1803-1882)

What is Investment Success?

These investors seek to:

u Combine purpose and profit,

u Own assets that are aligned with their values, and

u Address the most challenging issues of our time.

We call this impact investing.

For a rapidly growing number of individuals and foundations:

Investment Success ≥ Financial Return

What is Impact Investing?

u Investing for more than one purpose

u For both financial return and measurable, positive social/environmental impact

u Market rate vs. concessionary returns

u Also known as:

u Socially Responsible Investing (SRI)

u Sustainable or Green Investing

u Double or Triple Bottom Line

u Purpose Driven, Program Related, Mission Related, etc

Who is on the bandwagon?

I want to use our G8 Presidency to push this agenda forward —David Cameron

$1 billion commitment from the Gates Foundation

If you want to leave a mark on the world but are unsure of how to do it, I’d say take a look.

“It is urgent that governments throughout the world commit to…promoting a market of high impact investments”

My Journey towards Impact

Evolution of the Industry—3 Stages

1. 1970’s and 80’s: Negative Screening. Excluding unwanted

firms or industries. (SRI)

2. 1990’s and 2000’s: Positive (ESG) screens and shareholder

activism.

3. Since 2007: Impact investing—private equity & debt investments

Muhammed Yunus accepting Nobel Peace Prize

for work in microfinance in Bangladesh.

Common Investment Exclusions

Traditional:

u Alcohol, Gambling, Tobacco

u Weapons & Firearms / Genocide

u Nuclear power

u Animal Experimentation

Emerging:

u Fossil Fuels / Mining

u Agribusiness/GMO's

u Big Banks / Insurance Companies

u Packaged & Processed Foods / Fast Foods

u Client specific choices

Environmental, Social & Governance (ESG)

Positive screens for best in class performance considering:

Environmental Factors:

u Energy Usage

u Hazardous Waste / Pollution

u Resource Conservation / Sustainability

Social Factors:

u Treatment of employees & customers

u Treatment and expectations of vendors

u Community Service / contributions

Governance Factors:

u Executive Compensation / Board Independence

u Women in Senior Management / On Boards

u Transparency / Legal problems / Scandals

Types of SRI & Impact Investments by Asset Class

1. Public debt—muni bonds in schools, parks, hospitals, open space, water treatment, infrastructure

2. Private debt—often in non profits, often credit enhanced. Solar projects, microfinance, sustainable agriculture, affordable housing, small business loans, domestic & intl.

3. Pay For Performance—social impact bonds to reduce prison recidivism, improve health care outcomes, reduce chronic homelessness, etc.

4. Public Stocks: With industry and ESG screens.

5. Private Equity: Social enterprises, renewable energy, clean tech, medical devices, educational technology, water purification, services to bottom of pyramid,

6. Real Assets: Wind and Solar farms, green real estate, timberland, sustainable agriculture, water treatment.

Bonds ------------------------------------------------------------------------------------------------------------------------------ Equities

Track Record of Public SRI Funds Deutsche Bank Meta Study, 2012 Aggregate Results of 56 peer reviewed studies

u 100% of studies found companies with higher CSR (corp. social resp.) and ESG ratings have lower cost of capital—i.e. they are lower risk.

u 100% of studies found companies with high CSR ratings had financial outperformance.

u 89% of studies found companies with high ESG ratings had market outperformance.

u 85% of studies found companies with high ESG ratings had accounting outperformance.

u 88% of studies found SRI mutual funds had neutral or mixed results vs. market—not significantly outperforming or underperforming.

Sustainable Investing, Establishing Long Term Value and Performance, June 2012

DB Climate Change Advisors, Mark Fulton, et al.

Track record of MSCI KLD 400 (Domini) Index of Socially Screened Large US Firms � � � � � � � �� � � � � � � � � � � � � � � � � � �� � � � � � � � � � � � � �� � � � �� � � � � � � � � � �� � � �� �� ! � � � � � � � � � � � � � �" � � ! � � � � � � � �� � � �� # � $ � � % � % & � � � � � & �& "� #' � #� () � �& � * � �� *+ , - . / 01 2 . 3 01 3� � � � � � � � ' � � �" � � � �

Sector Weightings of MSCI KLD 400 Social Index Information Technology 22.8% Financials 15.5% Health Care 15.4% Consumer Discretionary 13.5% Consumer Staples 10.8% Industrials 9.2% Energy 4.4% Materials 3.2% Telecommunication Services 3.1% Utilities 2.1%

http://www.msci.com/resources/factsheets/index_fact_sheet/msci-kld-400-social-index.pdf

Examples of (Private) Impact Investments

Environmental:

u Alternative Energy (wind/solar/other)

u Clean Tech / fuel efficiency

u Land Conservation

u Organic Farmland

u Sustainable Forestry

u Green real estate (materials/efficiency)

u Natural products

Social:

u Microfinance Banks

u Small/mid-sized companies in emerging markets

u Small/mid sized companies with social benefit in US

u Affordable housing

u Charter Schools

u Social Enterprise

u Investing with a Gender Lens

u Quality Senior Housing

u Medical Technology / Biotech

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These investments are examples only provided for educational purposes. These investments involve risk, are uninsured, and could result in the complete loss of capital. CCM is not making any investment recommendations. Consult with a qualified advisor before making any investment decisions.

Close-up of an Impact Investment Friendship Bridge

u Microfinance loans to 22,000 women in Guatemala

u Non-profit with 25 Year history, Colorado office

u Grameen Bank model of group responsibility

u Strong educational component: business, health, human rights

u 3 Year loan, 4% interest, used to expand loan assets.

u Inside view of people and finances.

This example provided only for educational purposes. Such investments involve risk, are uninsured, and could result in the complete loss of capital. CCM is not making any investment recommendations. Consult with a qualified advisor before making any investment decisions.

Industry Size & Growth: SRI/ESG Investments

u $45 trillion. Assets managed by the 1,276 signers of the UN Principals of Responsible Investing. (G8 report)

u $13.6 trillion. Socially screened publicly traded stock & bonds approx, or perhaps 6-7% of private capital. (G8 report)

u $6.6 trillion. US SRI investments. 18% of professionally managed funds in US. Nearly 100% growth in 2 years, 1000% growth in 20 years. (2014 US SIF).

Private Impact Investments

2014 JP Morgan study of $46 billion at 124 organizations:

s 21% Microfinance s 21% Financial services (excluding microfinance) s 18% Other s 11% Energy s 8% Housing t 8% Food & agriculture (expected to be fastest growing) s 6% Healthcare (second fastest growing) s 3% Information and communication technologies t 3% Education s 1% Water & sanitation

Spotlight on the Market The Impact Investor Survey JP Morgan Social Finance, 2014

u 1999 Boston College Study by John Havens & Paul Schervish

u Initially estimated at $41 trillion (from 2007 to 2062).

u Raised in May 2014 to $59 trillion.

u Largest in history.

u 70% of this is expected to go to women

u And of course to younger generations.

The Opportunity Ahead: The Great Transfer of US Wealth

u Companies with three or more corporate directors who are women (in at least four out of five years) outperformed those with no women on the board1:

u Return on Sales +84%

u Return on invested capital +60%

u Return on equity +46%

u Micro finance institutions that have more women clients have lower write-offs and lower credit-loss provisions (meaning they are better credit risks).2

u A 2009 study in Silicon Valley found that venture-backed companies run by a woman had annual revenues that were 12% higher, used an average of one-third less committed capital, and had lower failure rates than those led by men.3

1.Catalyst, Lois Joy, et al, “The Bottom Line: Corporate Performance and Women’s Representation on

Boards 2004-2008,” 2011. 2. Roy Mersland, et al, “Women and Repayment in Microfinance,” March 2009. 3. Cindy Padnos, “High Performance Entrepreneurs: Women in High-Tech,” 2010,

Gender Lens Investing: Women, Wealth and Impact Veris Wealth Partners –Sept 2013

Gender Lens Investing: American College of Financial Services Study

Research by Mary Quist-Newins

u 45% of American millionaires are women

u $25 trillion will be passed to American women by 2030

u In 2030, women will control 66% of American wealth

Gender Lens Investing: Harnessing the Power of the Purse-- Female Investors and Global Opportunities for Growth, 2014

Results from Global large scale survey of high net worth investors (over $500k of investable assets or over $100k income):

u 53% of women surveyed do not have financial advisors

u 67% of women surveyed feel misunderstood by their financial advisor

u 75% of US women under 40 do not have financial advisors

u 77% of women surveyed want to invest in companies with diversity in leadership

u 90% of women surveyed say “making a positive impact on society is

important”

Gender Lens Sample Investments Publicly Listed:

u Pax World Ellevate Fund (pxwex)

u Barclays Women in Leadership ETN (wil)

u Nia Global Solutions (Domini S.M.A.)

u Calvert Foundation Win Win notes

Microfinance:

u Root Capital

u Accion

u Friendship Bridge (local)

u Microvest

Private Equity/Venture Capital:

u Incubators/Accelerators: Springboard Enterprises, MergeLane (local)

u Angel/VC Firms: Belle Capital, 37 Angels, Golden Seeds, Pipeline Fellowship

These investments are examples provided only for educational purposes. These investments involve risk, are uninsured, and could result in the complete loss of capital. CCM is not making any investment recommendations. Consult with a qualified advisor before making any investment decisions

Facts about Millennials u Younger wealth holders are more socially and environmentally conscious. Bank of America reports that half of their high-net worth clients want to reflect their societal values in their portfolios, and the younger the age group, the higher the interest. u According to the 2014 Deloitte Millenial Survey, millenials believe business can do more to address society’s challenges of resource scarcity (56%), climate change (55%) and income inequality (49%), and u Nearly 40% of GenX/Y millionaires give more than $30,000 annually to charity versus 6% of baby boomers.

The Times they are a Changin’

u Rise of the Participation Age, end of the Industrial Age (Blakeman)

u The Age of Transcendence (Sisodia).

u People increasingly looking for higher meaning in their lives,

u The signature trait of those midlife and beyond who are not battling basic survival issues

u Employee and societal expectations are changing in a way that is transforming the very soul of capitalism.

Firms of Endearment by Wolfe, Sheth & Sisodia

Cultural Characteristics

u Trust

u Authenticity

u Caring

u Transparency

u Integrity

u Loyalty

u Empowerment

“Consider the words affection, love, joy, authenticity, empathy, compassion, soulfulness, and other terms of endearment. Until recently, such words had no place in business. However, that is changing. Today, a growing number of companies—including every FoE cited in this book—comfortably embrace such terms.”

What Makes a Firm of Endearment? By Wolfe, Sheth & Sisodia, August 17, 2017 FT Press

It Pays to be Endearing

118% 262%

1681%

0%

200%

400%

600%

800%

1000%

1200%

1400%

1600%

1800%

S&P 500 Good to Great Firms ofEndearment

1998-2013 Stock Appreciation

FOE Corporate Vision criteria: v Broader purpose than just wealth generation v Dedication to servant leadership v Emotionally intelligent leadership v Commitment to exemplary citizenship v Recognition part of interdependent ecosystem.

Firms of Endearment & B Corporations Embracing Stakeholders

u Firms of Endearment are defined by treatment of stakeholders: society, partners (vendors), investors, customers, & employees (SPICE)

u They have a purpose beyond wealth generation.

u Certified B Corporations have this same focus.

(This certification is comparable to the “fair trade” or “Leed” certification for

corporate social responsibility.)

Trends in Impact Investing

u Gender Lens investing

u Fossil Fuel Free and Green Real Estate funds

u Sector funds: water, renewable energy, clean tech

u Improving technology—clean tech, health care, poverty alleviation…

u Democratization of Impact Investing to include smaller minimums

u Social Entrepreneurs / B Corporations

u Incubators like Unreasonable Institute & Global Social Benefit Institute (GSBI)

u Expanded use of ESG metrics and focus on corporate responsibility

Investing in a Better World

u Every investment has an impact.

u We help individuals, families and foundations align their resources

with their deeply held values and convictions.

u We vet compelling investment options across asset classes and issue

areas.

u We support the growth of impact investing through collaboration,

education, and implementation.

Advisors for Impact TM

Potential network of firms interested in sharing resources and offering impact investing services

u Passionate, dedicated and sophisticated

u Investment professionals

u Deploying assets to generate both financial returns and positive

social/environmental impact.

Our Firm:

u Independent Fee-only Advisors

u 15 Year track record

u Serve over 100 families and foundations

u Approaching $250 million in assets

Our Services:

u Portfolio Management

u Financial Planning

u Impact Investing

u A Certified B Corporation

u Contribute 5-10% of net income to non-profits thru CCM Foundation.

u Provide pro-bono services to individuals and foundations.

u Provide volunteer leadership in our community, and beyond.

About Colorado Capital Management

In the Community:

Steven Ellis, CFA

Steve is the president of Colorado Capital Management. He has 30 years of experience in the financial industry. His early work included teaching college courses in accounting and finance, consulting for a major accounting firm, and researching and acquiring investments as the chief due diligence officer of a national financial planning firm. Since 1989, he has managed large investment portfolios for individual and institutional investors. He is a Chartered Financial Analyst (CFA), holds a business degree from the University of Colorado, magna cum laude, and a masters degree from Cornell University. Steve heads up the firm’s impact investing practice, and is passionately committed to this work. Steve is married, with two daughters, enjoys hiking, biking, skiing and tennis, and is very active in the community. He has served on the board and/or the finance/investment/allocation committees of the Allied Jewish Federation, Boulder Jewish Community Foundation, Boulder Jewish Community Center, Horizons K-8 School, Congregation Nevei Kodesh, 18 Pomegranates Seed Council and the Rose Community Foundation. He currently volunteers for Jewish Family Service and Friendship Bridge, is an angel investor with the Unreasonable Institute, and actively supports Teach for America and La Puente Home.

Contact Info

Colorado Capital Management

4430 Arapahoe Ave., Suite 120

Boulder, CO 80303

303.444.9300

www.coloradocap.com

steve@coloradocap.com