State Street Presentation Template

State Street Presentation Template

Why and How Investors Use ESG Information George Serafeim, Charles M. Williams Professor of Business Administration Copyright President & Fellows of Harvard College From Agency to Value Logics 1970s: Agency logic: a corporation is merely a nexus of contractual arrangements between individuals 1970 1970: The social

responsibility of the firm is to increase its profits 1984: Emergence of stakeholder theory 1997: GRI founde d 1990 2000: Language of

CSR shifting: corporate sustainabilit y 2000 1999: The Dow Jones Sustainability indices established 2014: Establishment 2010: In 15 of CSO years from 20 to

positions 5,000+ 2015: sustainability 2012: Investmen SASB reports t fiduciary created guidance 2005 2010 2018: Push education : CFA

institute etc. 2014 2016: First 2012: UN PRI includes evidence on financial more than 1,000 materiality of signatories with AuM ESG issues of ~$35 trillion 2006: UN Secretary General Kofi Annan launches UN PRI 201

Why and How Investors Use ESG Information Why they use? Why they do not use? How they use it? 3 Sample Amel-Zadeh, A. and Serafeim, G., 2018. Why and how investors use ESG information: Evidence from a global survey. Financial Analysts Journal, 74(3), pp.87-103. 4 Why? Amel-Zadeh, A. and Serafeim, G., 2018. Why and how investors use ESG information: Evidence from a global survey. Financial Analysts Journal, 74(3), pp.87-103.

5 Why Not? Amel-Zadeh, A. and Serafeim, G., 2018. Why and how investors use ESG information: Evidence from a global survey. Financial Analysts Journal, 74(3), pp.87-103. 6 Barriers Amel-Zadeh, A. and Serafeim, G., 2018. Why and how investors use ESG information: Evidence from a global survey. Financial Analysts Journal, 74(3), pp.87-103. 7 Current Practices

Amel-Zadeh, A. and Serafeim, G., 2018. Why and how investors use ESG information: Evidence from a global survey. Financial Analysts Journal, 74(3), pp.87-103. 8 Impact on Investment Returns 9 Amel-Zadeh, A. and Serafeim, G., 2018. Why and how investors use ESG information: Evidence from a global survey. Financial Analysts Journal, 74(3), pp.87-103. Investors exhibiting different ESG investment styles 10 Decarbonization Factors George Serafeim

Charles M. Williams Professor Harvard Business School with Alex Cheema-Fox, Bridget LaPerla, David Turkington & Hui (Stacie) Wang State Street Associates Information Classification: Limited Access 11 2741982.2.1.GBL. $69 trillion Climate change is estimated to cost the global economy $69 trillion by

2100, assuming a breach of the 2C threshold Moodys Analytics The impacts of climate change: Investors see climate change as an economically significant and ongoing event. New Zealand Superannuation Fund shifted NZ$14 billion ($10.2 billion) to be managed against a low-carbon benchmark. NZ Super sets a carbon-emission intensity reduction target of least 20% by 2020. New York State Common Retirement Fund allocated $4 billion to a low emissions index. CalSTRS commits $2.5 billion to be managed against a low-carbon index. AP4 benchmarks $3.8 billion against lowcarbon indices, 24% of global equity investments.

Source: 2018. Low-carbon indices. UNPRI Information Classification: Limited Access 12 2741982.2.1.GBL. Carbon Dioxide Levels Over Past 800,000 Years Carbon dioxide levels today are higher than at any point in at least the past 800,000 years Source: NOAA Climate.gov, based on EPICA Dome C data (Lthi, D., et al., 2008) provided by NOAA NCEI Paleoclimatology Program Information Classification: Limited Access 13 2741982.2.1.GBL. Regulatory Responses and Global Emissions Share of global greenhouse emissions covered

by carbon pricing initiatives Global energy related CO2 emissions, Gt CO2 52 initiatives 20% 18% China 15% 35 30 25 13%

20 10% 15 8% 10 5% 5 2% 8 initiatives 0 0% 04 0 5 06 0 7 08 09 10 11 12 13 14 1 5 16 17 18 19 20 20 20 20 20 20 2 0 20 2 0 20 20 2 0 20 20 2 0 20 2 0 20

-3% 00 01 02 03 0 4 05 0 6 07 08 09 10 11 12 13 14 15 16 17 20 20 2 0 2 0 20 2 0 20 20 20 20 20 2 0 20 2 0 2 0 2 0 2 0 20 -5 Previous Year CO2 Emissions Yearly Increase Source: World Bank Carbon Pricing Dashboard ; International Energy Agency (IEA) Information Classification: Limited Access 14 2741982.2.1.GBL. Progress Needed CO2 Intensity of GDP (Tonnes CO2/$m GDP)

60 50 Historical CO2 Intensity 40 Business as Usual 1.6% Annual Reduction Average G20 NDC Met 3% Annual Reduction 2DC Scenario Met 6.4% Annual Reduction 30 20 10

0 1990 2000 2010 2020 2030 2040 2050 2060

2070 2080 2090 2100 Source: IRENA; EIA ; BP; World Bank; PWC Note: NDC refers to Nationally Determined Contributions and reflects the Paris agreement emission reduction goals Information Classification: Limited Access 15 2741982.2.1.GBL. Building decarbonization factors Methodology Investable Universe:

Spans 2009 through 2018 and includes 2,149 companies and over 34 trillion US dollars of mid- and large-cap listed equities, covering ~1,400 US and ~750 European listed equities. In 2018, these US and European firms released 2 and 2.2 billion tonnes of CO2, respectively. Decarbonization Factors Strategy Construction We designed 6 strategies for US and 6 strategies for Europe, for a total of 12 strategies. Buying (selling) low (high) carbon intensity sectors, industries, or firms. Carbon intensity: a firms (scope 1 and scope 2) carbon emissions per million $ of revenue. Operations vs supply chain vs product footprint Source: Alexander Cheema-Fox, Bridget R. LaPerla, George Serafeim, David Turkington, and Hui Wang. 2019. Decarbonization Factors. Working paper available on SSRN. Information Classification: Limited Access 16 2741982.2.1.GBL. Decarbonization strategies greatly reduce portfolio carbon intensity Measured by portfolio carbon intensity to market intensity ratio

Source: Alexander Cheema-Fox, Bridget R. LaPerla, George Serafeim, David Turkington, and Hui Wang. 2019. Decarbonization Factors. Working paper available on SSRN. Source Data: S&P Trucost environmental data and MSCI market data. 17 Information Classification: Limited Access 2741982.2.1.GBL. Decarbonization Alpha Controlling for other effects in the US and Europe Information Classification: Limited Access 18 2741982.2.1.GBL. Decarbonization factors - US Cumulative abnormal returns Information Classification: Limited Access

19 2741982.2.1.GBL. Decarbonization factors - Europe Cumulative abnormal returns Information Classification: Limited Access 20 2741982.2.1.GBL. Portfolio decarbonization The most aggressive low carbon strategies do more than just survive Source: Alexander Cheema-Fox, Bridget R. LaPerla, George Serafeim, David Turkington, and Hui Wang. 2019. Decarbonization Factors. Working paper available on SSRN. Source Data: S&P Trucost environmental data and MSCI market data. 21 Information Classification: Limited Access

2741982.2.1.GBL. Cumulative decarbonization factor flows Timing and the tale of two regions continued Source: Alexander Cheema-Fox, Bridget R. LaPerla, George Serafeim, David Turkington, and Hui Wang. 2019. Decarbonization Factors. Working paper available on SSRN. Source Data: S&P Trucost environmental data, MSCI market data and, State Street Global Markets. 22 Information Classification: Limited Access 2741982.2.1.GBL. Going with the flows on low carbon strategies Factor performance conditional on contemporaneous flows Noting * indicates the t-statistic is significant at the 5% level. Calendar regression for the 12 decarbonization factors. Alphas are annualized. Regressions use non-overlapping monthly data from July 2009 through December 2018, controlling for the Fama-French 5 factors (market, size, value, profitability, and investments), momentum and the NYMEX oil spot

returns. Noting * indicates the t-statistic is significant at the 5% level. Calendar regressions for a synthetic factor that goes long on the decarbonization factor in months with positive decarbonization flows and short on the decarbonization factors in months with negative flows. Alphas are annualized. Regressions use non-overlapping monthly data from July 2009 through December 2018, controlling for the FamaFrench 5 factors (market, size, value, profitability, and investments), momentum and the NYMEX oil spot returns. Source: Alexander Cheema-Fox, Bridget R. LaPerla, George Serafeim, David Turkington, and Hui Wang. 2019. Decarbonization Factors. Working paper available on SSRN. Source Data: S&P Trucost environmental data, MSCI market data and, State Street Global Markets. 23 Information Classification: Limited Access 2741982.2.1.GBL. Relationship between regional factor returns Correlation matrix US

Europe The heatmap features the lowest correlation in the lightest color grey and the highest correlation in the darkest color blue. Noting ** indicates the t-statistic is significant at the 5% level and * indicates at the 10% level. Source: Alexander Cheema-Fox, Bridget R. LaPerla, George Serafeim, David Turkington, and Hui Wang. 2019. Decarbonization Factors. Working paper available on SSRN. Source Data: S&P Trucost environmental data and MSCI market data. 24 Information Classification: Limited Access 2741982.2.1.GBL. Going with the flows Combining factors across regions within strategies conditional on positive flows Source: Alexander Cheema-Fox, Bridget R. LaPerla, George Serafeim, David Turkington, and Hui Wang. 2019. Decarbonization Factors. Working paper available on SSRN. Source Data: S&P Trucost environmental data, MSCI market data and, State Street Global Markets. 25 Information Classification: Limited Access

2741982.2.1.GBL. Going with the flows Investing in all factors with positive flows Source: Alexander Cheema-Fox, Bridget R. LaPerla, George Serafeim, David Turkington, and Hui Wang. 2019. Decarbonization Factors. Working paper available on SSRN. Source Data: S&P Trucost environmental data, MSCI market data and, State Street Global Markets. 26 Information Classification: Limited Access 2741982.2.1.GBL. Going with the flows for the best bets Investing in the factor with the strongest positive flows Source: Alexander Cheema-Fox, Bridget R. LaPerla, George Serafeim, David Turkington, and Hui Wang. 2019. Decarbonization Factors. Working paper available on SSRN. Source Data: S&P Trucost environmental data, MSCI market data and, State Street Global Markets. 27 Information Classification: Limited Access 2741982.2.1.GBL.

Decarbonization factors Key insights Flows matter. This paper for the first time examines institutional flows into and out of decarbonization factors, and their impact on alpha. Timing matters. We see clear inflection points in regional flows, particularly 2012 and 2016. Regional exposure matters. The low correlation between the US and European decarbonization factor returns creates an opportunity for investors to rotate across decarbonization tilts on a sector, industry and firm level, maintaining continuous low carbon exposure with more attractive returns. Decarbonization matters. Our results suggest that low carbon strategies can deliver alpha. We found that the most aggressive decarbonization strategies also performed the best.

Source: Alexander Cheema-Fox, Bridget R. LaPerla, George Serafeim, David Turkington, and Hui Wang. 2019. Decarbonization Factors. Working paper available on SSRN. 28 Information Classification: Limited Access 2741982.2.1.GBL. Disclaimer and Important Risk Information The information provided herein is not intended to suggest or recommend any investment or investment strategy, does not constitute investment advice, does not constitute securities, futures, or swap research, is not market commentary, and is not a solicitation to buy or sell securities, derivatives, foreign exchange or any financial product. It does not take into account any investor's particular investment objectives, strategies or tax status. Clients should be aware of the risks trading foreign exchange, equities, fixed income or derivative instruments or in investments in non-liquid or emerging markets. Derivatives generally involve leverage and are therefore more volatile than their underlying cash investments. Past performance is no guarantee of future results. This communication is not intended for and must not be provided to retail investors. The products and services described in this communication may not be available in all jurisdictions and this communication is not intended for distribution in any jurisdiction where such distribution would be prohibited. The products and services outlined herein are only offered to professional clients or eligible counterparties through State Street Bank and Trust Company, authorized and regulated by the Federal Reserve Board. State Street Bank and Trust Company is registered with the Commodity Futures Trading Commission as a Swap Dealer and is a member of the National Futures Association. Please note that certain foreign exchange business (spot and certain forward transactions) are not regulated. This document is a marketing communication, and the information contained herein has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It is for clients to determine whether they are permitted to receive research of any nature. The products and services outlined in this document are generally offered in the United States, Latin America, and Japan, by State Street Bank and Trust Company. EMEA: (i) State Street Bank and Trust Company, London Branch, authorised and regulated by Federal Reserve Board, authorised by the Prudential Regulation Authority, subject to regulation by the Financial Conduct Authority and limited

regulation by the Prudential Regulation Authority. Details about the extent of regulation by the Prudential Regulation Authority are available upon request; and/or (ii) State Street Bank International GmbH, authorised by Deutsche Bundesbank and the German Federal Financial Supervisory Authority and, in respect of State Street Bank International GmbH, London Branch, subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of regulation by the Financial Conduct Authority and Prudential Regulation Authority are available upon request. Brazil: The products in this marketing material have not been and will not be registered with the Comisso de Valores Mobilirios - the Brazilian Securities and Exchange Commission ("CVM"), and any offer of such products is not directed to the general public within the Federative Republic of Brazil ("Brazil"). The information contained in this marketing material is not provided for the purpose of soliciting investments from investors residing in Brazil and no information in this marketing material should be construed as a public offering or unauthorized distribution of the products within Brazil, pursuant to applicable Brazilian law and regulations. The products and services outlined in this document are generally offered in Canada by State Street Bank and Trust Company. This communication is made available in Hong Kong by State Street Bank and Trust Company which accepts responsibility for its contents, and is intended for distribution to professional investors only (as defined in the Securities and Futures Ordinance). This communication is made available in Australia by State Street Bank and Trust Company ABN 70 062 819 630, AFSL 239679 and is intended only for wholesale clients, as defined in the Corporations Act 2001. This communication is made available in Singapore by State Street Bank and Trust Company, Singapore Branch (SSBTS), which holds a wholesale bank license by the Monetary Authority of Singapore. In Singapore, this communication is only distributed to accredited, institutional investors as defined in the Singapore Financial Advisers Act (FAA). Note that SSBTS is exempt from Sections 27 and 36 of the FAA. When this communication is distributed to overseas investors as defined in the FAA, note that SSBTS is exempt from Sections 26, 27, 29 and 36 of the FAA. The products and services outlined in this document are made available in South Africa through State Street Bank and Trust Company, which is authorized in South Africa under the Financial Advisory and Intermediary Services Act, 2002 as a Category I Financial Services Provider; FSP No. 42671. This communication is made available in Israel by State Street Bank and Trust Company, which is not licensed under Israels Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 1995. This communication may only be distributed to or used by investors in Israel which are eligible clients as listed in the First Schedule to Israels Regulation of Investment Advice, Investment Marketing and Portfolio Management Law 1995. This communication is made available in Qatar by State Street Bank and Trust Company and its affiliates. The information in this communication has not been reviewed or approved by the Qatar Central Bank, the Qatar Financial Markets Authority or the Qatar Financial Centre Regulatory Authority, or any other relevant Qatari regulatory body. This communication is made available in Malaysia by State Street Bank and Trust Company, which is authorized and regulated by the Federal Reserve Board. State Street Bank and Trust Company is not licensed within or doing business within

Malaysia and the activities that are being discussed are carried out off-shore. The written materials do not constitute, and should not be construed as constituting: 1) an offer or invitation to subscribe for or purchase securities or futures in Malaysia or the making available of securities or futures for purchase or subscription in Malaysia; 2) the provision of investment advice concerning securities or futures; or 3) an undertaking by State Street Bank and Trust Company to manage the portfolio of securities or futures contracts on behalf of other persons. This communication is made available in Turkey by State Street Bank and Trust Company and its affiliates. The information included herein is not investment advice. Investment advisory services are provided by portfolio management companies, brokers and banks without deposit collection licenses within the scope of the investment advisory agreements to be executed with clients. Any opinions and statements included herein are based on the personal opinions of the commentators and authors. These opinions may not be suitable to your financial status and your risk and return preferences Information Classification: Limited Access 29 2741982.2.1.GBL. Disclaimer and Important Risk Information Cont. Therefore, an investment decision based solely on the information herein may not be appropriate to your expectations. This communication is made available in United Arab Emirates by State Street Bank and Trust Company and its affiliates. This communication does not, and is not intended to, constitute an offer of securities anywhere in the United Arab Emirates and accordingly should not be construed as such. Nor does the addressing of this communication to you constitute, or is intended to constitute, the carrying on or engagement in banking, financial and/or investment consultation business in the United Arab Emirates under the rules and regulations made by the Central Bank of the United Arab Emirates, the Emirates Securities and Commodities Authority or the United Arab Emirates Ministry of Economy. Any public offer of securities in the United Arab Emirates, if made, will be made pursuant to one or more separate documents and only in accordance with the applicable laws and regulations. Nothing contained in this communication is intended to endorse or recommend a particular course of action or to constitute investment, legal, tax, accounting or other

professional advice. Prospective investors should consult with an appropriate professional for specific advice rendered on the basis of their situation. Further, the information contained within this communication is not intended to lead to the conclusion of any contract of whatsoever nature within the territory of the United Arab Emirates. This communication has been forwarded to you solely for your information, and may not be reproduced or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose. This communication is addressed only to persons who are professional, institutional or otherwise sophisticated investors. This communication is made available in South Korea by State Street Bank and Trust Company and its affiliates, which accept responsibility for its contents, and is intended for distribution to professional investors only. State Street Bank and Trust Company is not licensed to undertake securities business within South Korea, and any activities related to the content hereof will be carried out off-shore and only in relation to off-shore non-South Korea securities. This communication is made available in Indonesia by State Street Bank and Trust Company and its affiliates. Neither this communication nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens wherever they are domiciled or to Indonesian residents except in compliance with applicable Indonesian capital market laws and regulations. This communication is not an offer of securities in Indonesia. Any securities referred to in this communication have not been registered with the Capital Market and Financial Institutions Supervisory Agency (BAPEPAM-LK) pursuant to relevant capital market laws and regulations, and may not be offered or sold within the territory of the Republic of Indonesia or to Indonesian citizens through a public offering or in circumstances which constitute an offer within the meaning of the Indonesian capital market law and regulations. This communication is made available in Oman by State Street Bank and Trust Company and its affiliates. The information contained in this communication is for information purposes and does not constitute an offer for the sale of foreign securities in Oman or an invitation to an offer for the sale of foreign securities. State Street Bank and Trust Company is neither a bank nor financial services provider registered to undertake business in Oman and is neither regulated by the Central Bank of Oman nor the Capital Market Authority. Nothing contained in this communication report is intended to constitute Omani investment, legal, tax, accounting, investment or other professional advice. This communication is made available in Taiwan by State Street Bank and Trust Company and its affiliates, which accept responsibility for its contents, and is intended for distribution to professional investors only. State Street Bank and Trust Company is not licensed to undertake securities business within Taiwan, and any activities related to the content hereof will be carried out off-shore and only in relation to off-shore non-Taiwan securities. Peoples Republic of China (PRC). This communication is being distributed by State Street Bank and Trust Company. State Street Bank and Trust Company is not licensed or carrying on business in the PRC in respect of any activities described herein and any such activities it does carry out are conducted outside of the PRC. These written materials do not constitute, and should not be construed as constituting: 1) an offer or invitation to subscribe for or purchase securities or futures in PRC or the making available of securities or futures for purchase or subscription in PRC; 2) the provision of investment advice

concerning securities or futures; or 3) an undertaking by State Street Bank and Trust Company to manage the portfolio of securities or futures contracts on behalf of other persons. State Street Global Markets is a registered trademark of State Street Corporation used for its financial markets businesses. State Street Associates is a registered trademark of State Street Corporation, and the analytics and research arm of State Street Global Markets. Please contact your State Street representative for further information. SSA MMD 2019-08 2019 State Street Corporation All Rights Reserved Information Classification: Limited Access 30 2741982.2.1.GBL.

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