Socially Responsible Investing 101 for Asset Managers Isabel Dische, Michael Littenberg and Melissa Bender October 26, 2017

Polling Question #1 Are you: An asset owner An asset manager A consultant/other

ESG Factors – An Overview Common ESG Factors Frequently Asked Questions Is ESG integration consistent with fiduciary duties to investors? Is there a difference between ESG integration and ethical investing? What factors should we focus on?

Polling Question #2 Are you receiving pressure from asset owners or stakeholders to implement an ESG program? Yes No Don’t Know

Reconciling ESG Integration with Fiduciary Duties Regulators have begun to clarify that regulatory frameworks do not prohibit ESG integration DOL Interpretative Bulletin 2015-1: “[P]lan fiduciaries should appropriately consider factors that potentially influence risk and return. Environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investment. In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.” Other regulators have articulated similar views: IRS (2015); UK Pensions Regulator’s Defined Contribution Code (2016); South Africa: Amendment to the Pension Funds Act (2011)

Expectations of Asset Owners Historically: Exclusionary screens Does a manager have policies? Expectations are rising: How is ESG integrated into day-to-day investment decisions and asset management What issues is a manager focused on? What data sources do they use? How is ESG incorporated into investment decisions? How are ESG risks monitored? How does manager engage with portfolio companies? More detailed reporting Link ESG performance to manager’s incentives

Pre-investment Considerations Is manager aligned with asset owner’s ESG policy Assess manager’s ESG policies and practices for identifying and managing ESG risks and opportunities Understand if/how a manager influences and supports its portfolio companies’ management of ESG risks and pursuit of ESG opportunities What is manager’s approach to voting and engagement? Assess how a manager will support the asset owner’s monitoring of ESG approach Assess the manager’s approach to handling and disclosing ESG issues at the manager- and portfolio company-level How coordinated and integrated are the manager’s ESG efforts?

Post-investment Asset Owner Considerations Confirm manager is acting in a manner consistent with agreed upon ESG approach Understand ESG-related developments applicable to investment Remain informed of ESG-related events in the portfolio Assess if manager and investment incidents are consistent with described ESG approach

How Asset Owners Use ESG Data Inform risk and return potential Evaluate management – e.g., ESG as a proxy for management quality Engage with companies and inform proxy voting Shareholder proposals Engaging with management Develop customized portfolio reflecting asset owner’s specific concerns

Data Challenges for Asset Owners Inconsistent formats; benchmarking Comparability – need standardized, comparable, sector-based metrics that are consistently and comparably defined and calculated e.g., Global Reporting Initiative (GRI) are not necessarily comparable across industries and sectors Availability - data is often buried in regulatory filings, included with other information, or simply not disclosed Disclosure may be inadequate / boilerplate Timeliness – need to be able to integrate ESG with financial and operational data Reliability Need for clear conclusions – what are the strategic, competitive and/or financial implications of ESG data? Internal capabilities and costs

Do you currently consider ESG factors in your investment decisions? Polling Question #3 Do you currently consider ESG factors in your investment decisions? Yes No Don’t Know

Approaches to Integrating ESG Factors Pre-Investment Exclusionary screening General ESG integration/risk assessment Thematic investing Inclusionary screening Post-Investment Ongoing monitoring/ assessment Engagement Divestment

Polling Question #4 Do you currently have an ESG program? Yes No, but in process or contemplated No Don’t Know

Elements of an ESG Program ESG policy Assessment, monitoring and engagement procedures Training Internal accountability, monitoring and KPIs Communication

Guidance for Private Equity Investors BVCA Responsible Investment Toolkit Guidance for: House level Pre-investment phase Hold period Exit phase PEGCC Guidelines Consider environmental, public health, safety, and social issues associated with target companies when evaluating whether to invest as well as during ownership. Seek to be accessible to, and engage with, relevant stakeholders. Seek to grow and improve the companies in which they invest for long-term sustainability and to benefit multiple stakeholders. Seek to use governance structures that provide appropriate levels of oversight in the areas of audit, risk management and potential conflicts of interest and to implement compensation and other policies that align the interests of owners and management. Remain committed to compliance with applicable national, state, and local labor laws in the countries in which they invest; support the payment of competitive wages and benefits to employees; provide a safe and healthy workplace in conformance with national and local law; and, consistent with applicable law, respect the rights of employees to decide whether or not to join a union and engage in collective bargaining. Maintain strict policies that prohibit bribery and other improper payments to public officials. Respect the human rights of those affected by their investment activities and seek to confirm that their investments do not flow to companies that utilize child or forced labor or maintain discriminatory policies. Provide timely information to their limited partners on the matters addressed herein, and work to foster transparency about their activities. Encourage their portfolio companies to advance these same principles in a way which is consistent with their fiduciary duties.

No, but in process or contemplated Polling Question #5 Are You a PRI Member? Yes No, but in process or contemplated No Don’t Know Never heard of it!

PRI – An Overview The Six Principles Consistent with our fiduciary responsibilities, we commit to the following: We will incorporate ESG issues into investment analysis and decision-making processes We will be active owners and incorporate ESG issues into our ownership policies and practices We will seek appropriate disclosure on ESG issues by the entities in which we invest We will promote acceptance and implementation of the Principles within the investment industry We will work together to enhance our effectiveness in implementing the Principles We will each report on our activities and progress towards implementing the Principles An investor initiative in partnership with UNEP Finance Initiative and the UN Global Compact 1,700 signatories, representing ≈ 1/3 of global private capital Signatories required to publicly report on responsible investment activity

Implementing the Six Principles We will incorporate ESG issues into investment analysis and decision-making processes We will be active owners and incorporate ESG issues into our ownership policies and practices We will seek appropriate disclosure on ESG issues by the entities in which we invest We will promote acceptance and implementation of the Principles within the investment industry We will work together to enhance our effectiveness in implementing the Principles We will each report on our activities and progress towards Address ESG issues in investment policy statements Support development of ESG-related tools, metrics, and analyses Assess the capabilities of internal investment managers to incorporate ESG issues Assess the capabilities of external investment managers to incorporate ESG issues Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis Encourage academic and other research on this theme Advocate ESG training for investment professionals Develop and disclose an active ownership policy consistent with the Principles Exercise voting rights or monitor compliance with voting policy (if outsourced) Develop an engagement capability (either directly or through outsourcing) Participate in the development of policy, regulation, and standard setting (such as promoting and protecting shareholder rights) File shareholder resolutions consistent with long-term ESG considerations Engage with companies on ESG issues Participate in collaborative engagement initiatives Ask investment managers to undertake and report on ESG- related engagement Ask for standardized reporting on ESG issues (using tools such as the GRI) Ask for ESG issues to be integrated within annual financial reports Ask for information from companies regarding adoption of/adherence to relevant norms, standards, codes of conduct or international initiatives (such as the UN Global Compact) Support shareholder initiatives and resolutions promoting ESG disclosure Include Principles- related requirements in RFPs Align investment mandates, monitoring procedures, performance indicators and incentive structures accordingly (for example, ensure investment management processes reflect long- term time horizons when appropriate) Communicate ESG expectations to investment service providers Revisit relationships with service providers that fail to meet ESG expectations Support the development of tools for benchmarking ESG integration Support regulatory or policy developments that enable implementation of the Principles Support/participate in networks and information platforms to share tools, pool resources, and make use of investor reporting as a source of learning Collectively address relevant emerging issues Develop or support appropriate collaborative initiatives Disclose how ESG issues are integrated within investment practices Disclose active ownership activities (voting, engagement, and/or policy dialogue) Disclose what is required from service providers in relation to the Principles Communicate with beneficiaries about ESG issues and the Principles Report on progress and/or achievements relating to the Principles using a ‘Comply or Explain’ approach Seek to determine the impact of the Principles Make use of reporting to raise awareness among a broader group of stakeholders

Specialized Policy Networks and Guidelines Climate Change/Environment Ceres Investor Network on Climate Risk (INCR) https://www.ceres.org/networks/ceres-investor-network advances leading investment practices, corporate engagement strategies and policy solutions to build an equitable, sustainable global economy and planet CDP (formerly Carbon Disclosure Project) https://www.cdp.net/en/info/about-us runs a global disclosure system that enables companies and other entities to measure and manage their environmental impacts; maintains self-reported environmental data Institutional Investors Group on Climate Change (IIGCC) http://www.iigcc.org/ provides investors with a collaborative platform to encourage public policies, investment practices, and corporate behavior that address long-term risks and opportunities associated with climate change

Specialized Policy Networks and Guidelines Sustainability The Forum for Sustainable and Responsible Investment (US SIF) http://www.ussif.org/about seeks to shift investment practices towards sustainability Governance International Corporate Governance Network (ICGN) https://www.icgn.org/ promotes effective standards of corporate governance and investor stewardship to advance efficient markets and sustainable economies

Polling Question #6 Has your firm adopted a written ESG policy? Yes, available on our website Yes, available to assets owners Yes, internal policy only Work in progress Don’t know No

ESG Policies and Reporting Many asset owners and investment managers have adopted policies and make them available on their website Availability of policies for public review is more prevalent among large asset owners and private equity funds Hedge fund ESG policies are less common but are an area of increasing focus Standalone annual ESG reports made available to investors and/or public are becoming more common

Polling Question #7 Does your firm prepare reporting on ESG matters? Yes, external to public Yes, shared with asset owners Yes, internal only Work in progress No

ESG Policies -- Key Features Purpose Typically defines firm’s overall ESG approach Reference to signatory status to PRI or participation in other relevant networks/frameworks Scope of policy and activities to which the policy applies Roles of firm professionals including description of committees ESG goals and manner of implementation Diligence, monitoring, asset owner and stakeholder transparency Performance standards Description of methodology used to assess ESG risks and opportunities

Polling Question #8 Has your firm invested in or formed a fund pursuing a dedicated SRI, ESG or impact strategy? Yes Considering No

SRI/ESG/Impact Fund Formation Trends Mutual funds ETFs Private equity Impact-focused managers/separate account strategies

About Isabel Dische Isabel Dische is a partner at Ropes & Gray. Isabel focuses her practice on issues relating to hedge funds, private equity funds and derivatives. She has experience structuring and advising a range of hedge funds and other private funds and their sponsors, and regularly assists funds and their sponsors with legal and risk management questions (including Advisers Act compliance issues) and with fund restructurings when necessary. As part of the Supply Chain Compliance and Corporate Social Responsibility practice, Isabel advises investment advisers and institutional investors on ESG policies and procedures. Isabel represents a number of large investors (both U.S. and non-U.S.) with respect to their private equity, commodity, infrastructure, real estate and hedge fund investments. She also advises clients in connection with co-investment, mezzanine, and secondary transactions. Isabel Dische Partner T +1 212 841 0628 F +1 646 728 1620 Isabel.Dische@ropesgray.com

About Michael Littenberg Michael Littenberg is a partner at Ropes & Gray. As part of his practice, for more than 25 years, Michael has been active in advising public and private companies and asset managers on ESG and corporate social responsibility matters, and he is widely viewed as the leading practitioner in this emerging area. In the ESG and CSR space, Michael advises clients on, among other things: Compliance with a wide range of enacted, pending and proposed regulatory requirements; “soft law” instruments; and industry and NGO codes of conduct, standards, frameworks and guidance Due diligence Risk and impact assessments Structuring and implementation of tailored compliance policies, procedures, programs and codes of conduct  Training Benchmarking Regulatory and voluntary disclosures and other communications Stakeholder engagement Grievance mechanisms  Michael R. Littenberg Partner T +1 212 596 9160 F +1 646 728 2554 Michael.Littenberg@ropesgray.com 28

About Melissa Bender Melissa Bender is a counsel at Ropes & Gray. Melissa advises hedge funds and other private funds (both domestic and offshore) on all aspects of their business with a focus on fund formation and regulatory compliance matters. Recent fund formations include innovative hybrid vehicles as well as more traditional hedge fund structures. Melissa’s experience also includes advising fund managers on and negotiating various contractual arrangements, such as side letters with investors, administrator and other service provider agreements and placement agent agreements. She also has extensive experience representing U.S. and international institutional and other investors (including endowments, funds of funds, private foundations, sovereign wealth funds and family offices) in connection with all aspects of their investments in private funds. Melissa previously worked in-house at a Fortune 500 company advising on securities compliance and corporate governance matters. Melissa Bender Counsel T +1 415 315 6340 F +1 415 315 4828 Melissa.Bender@ropesgray.com