Your Guide to Impact Investing by Swell Investing

Impact Investing YO U R G U I D E TO

When youâ&#x20AC;&#x2122;re just beginning to dive into the investing waters, it can be tough to navigate through the terms and ideas being tossed around. Impact Investing creates an intentional selection of holdings with a keen eye toward progress.

G U I D E T O I M PA C T I N V E S T I N G

INDEX 02............................................Impact Investing 101 03.......................................................Performance 04............................................................Portfolios 04................................................Selection process 05................................................Journey of a dollar 06................................................Measuring impact 07.............................................Investment strategy 07..............6 things to know about Impact Investing 08................................So where do I go from here? 09................................................Glossary of terms

I M PA C T I N V E S T I N G 1 0 1

Impact Investing 101 What is impact investing? Impact Investing refers to investments “made into companies with the intention to generate a measurable, beneficial, social or environmental impact alongside a financial return.” In other words, to invest in

and two, you want to use your

market, but that’s about to change.

companies that are doing brisk

dollars to support social change.

Newer finance companies aim

business and making a positive

Impact Investing has historically

to democratize the SRI (Socially

change in the world. There are two

been available only through high-

Responsible Investing) industry by

primary reasons that you might

net-worth financial advisors and

offering ethical investment options

choose Impact Investing. One,

expensive, complicated mutual

to everyone, with approachable fees

you are conscious about how

funds. Everyday investors have

and no-nonsense guidance.

your money impacts the world,

been largely shut out of the

D I D YO U K N OW

What’s the difference between this and all the other terms out there?

Intentionality is key An investor’s desire to have a

SRI is a term that describes the entire socially responsible investing industry. So while Environmental, Social and Governance Investing (ESG), and Impact Investing are a part

positive social or environmental impact with their dollars is essential to Impact Investing.

of SRI, they all work a little bit differently. There are merits to each, but Impact does it all.

F I LT E R

BEST OF SECTOR

FIX

Socially Responsible Investing

ESG Investing

Impact Investing

ESG Investing screens companies

Impact Investing solves global

SRI filters out companies involved in

for various environment, social, and

challenges by investing in

harming our planet and our health.

corporate governance policies. No

companies developing solutions to

matter the sector, they want the

those challenges.

best ESG performers.

This guide is provided by Swell Investing LLC, an SEC registered investment adviser. Brokerage services provided to clients of Swell Investing LLC by Folio Investments, Inc., an SEC registered broker-dealer and member FINRA/SIPC. The information contained in this guide is provided for general informational purposes. Nothing is this guide should be construed as tax advice, an offer, solicitation or recommendation to purchase or sell any security. This guide is not intended as investment advice, and Swell does not represent in any manner that the circumstances described herein will result in any particular outcome. Investment advisory services are only provided to investors who become Swell clients. Any past performance provided is for illustrative purposes only and is not indicative of future investment results. As with any investment, there is the potential for profit and the risk of loss.

03 PERFORMANCE

Companies with high ESG ratings

Performance Will I have to sacrifice returns?

MSCI KLD 400

‘90

10.35%

Traditional Benchmark

RUSSELL 300

10.08%

Not at all. You absolutely can make an impact without sacrificing returns. Extensive academic research and empirical data have shown that socially responsible investing can have a positive impact on your returns.1

Traditional Benchmark

S&P 500

9.94%

The MSCI KLD 400 Social Index is comprised of companies with high ESG ratings. Created in 1990, the index aims to serve as a benchmark for investors whose objectives include owning companies with very high ESG ratings and avoiding companies incompatible with specific

05/01/90 through 08/31/17

values-based criteria. Good to know: If you had invested $100 in

Annualized Return

1990, you would have $1,477 today. This index, which is the oldest ESG index in the US, has shown that ESG can create added value – by outperforming the S&P 500 for the last 27 years. Inclusion in this index is based exclusively on ESG factors.

D I D YO U K N OW

75 percent of individual investors are interested in sustainable investing 2

CHOOSING PORTFOLIOS

You aren’t alone in your good

Choosing Portfolios Impact Investing vs. the comparative market

intentions - lots of people want to do good, but don’t know how. Impact makes it easy to create change.

It’s all about diversification. Adding in stocks that have been successfully growing alongside ones poised for growth create a mix that generally weathers the ups and downs of the market. Impact investing portfolios generally have themes that are focused on

D I S E A S E E R A D I C AT I O N Think immunizations and research.

R E N E WA B L E E N E R G Y Think windturbines and solar panels.

C L E A N WAT E R Think water filters and pipe repairs.

H E A LT H Y L I V I N G Think nutritious foods and fitness centers.

GREEN TECH Think electric cars and LED lights.

Z E R O WA S T E Think recycling and repurposing.

issues such as curing cancer, managing our water and energy resources, and reusing materials to prevent excess waste going to landfills and polluting water ways.

1 Gunnar Friede, Timo Busch & Alexander Bassen. ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment Vol. 5 , Iss.4, October 2015. 2 Sustainable Signals: The Individual Investor Perspective, Morgan Stanley Institute for Sustainable Investing, 2017. The S&P 500 Index, MSCI KLD 400 and Russell 3000 performance shown above is shown for illustrative purposes only. Swell’s portfolios differ from these benchmarks in that, among other factors, Swell’s portfolios are managed, primarily comprised of small and mid cap stocks, undiversified, bear fees and may vary materially in volatility. Past performance is not indicative of future results.

04 PORTFOLIO PERFORMANCE

Impact portfolio performance

According to a McKinsey & Co. report, thematic investing could yield benefits for investors because thematic strategies single out the companies that will benefit most from long-term trends. For example,

On average and in the aggregate, impact portfolios have performed on par with, and sometimes better than, the broader market.

when the 193 countries of the UN all agreed to move forward with the Sustainable Development Goals (SDGs), themes like climate change, energy efficiency, and health may garner long-term support. 3

Since inception 09/30/2016 through 08/31/2017* +0%

+5%

+10%

+15%

+25%

+20%

+30%

+32.41%

GREEN TECH

+21.36%

C L E A N WAT E R

+20.07%

R E N E WA B L E E N E R G Y

+18.53%

D I S E A S E E R A D I C AT I O N

+17.68%

Z E R O WA S T E

+16.21%

S&P 500

+15.88%

RUSSELL 3000 H E A LT H Y L I V I N G

+35%

+4.33%

D I D YO U K N OW

Sustainable investing has seen a 14-fold increase since 1995 4

SELECTION PROCESS

Selection process How are the companies selected?

Those are huge numbers! The Impact market is more accessible now than ever before, the time is right to get

For example, Swell Investing manages to combine financial expertise with a deep passion for impact. The questions are: What is the global issue these companies are solving and are they making money?

in on it.

A N A LY S I S

SCREENING

VA L U AT I O N

By analyzing the global challenges

The companies we include are

Finally, we analyze each company’s

affecting our environment and our

screened for a commitment to

financial health and valuation.

health we have identified the high-

positive impact and derive revenue

impact themes that we believe will

from environmental or social impact

also make strong investments.

as part of their business.

3 From indexes to insights: The rise of thematic investing, Mckinsey & Co. 2014. 4 US SIF, US Sustainable, Responsible and Impact Investing Trends (2016). *The performance shown is the actual result of an investment account held by an affiliate of Swell and assuming a 0.75% annual advisory fee. Performance figures shown are net of fees and transaction related expenses and include reinvestment of dividends greater than $1. Comparison to the Russell 3000 Index and S&P 500 are shown for illustrative purposes only. Swell’s portfolios differ from these benchmarks in that, among other factors, Swell’s portfolios are managed, primarily focused on small and mid cap stocks, undiversified, bear fees and may vary materially in volatility. Past performance may not be indicative of future results.

05 JOURNEY OF A DOLLAR D I D YO U K N OW

Journey of a dollar Where does my money go when I invest?

There are tons of different options when it comes to classes of investing There are public equity, private equity, fixed-income, and community

When you invest in a company by purchasing stock, you own a little part of that company. Here’s how it all works:

1. When you invest in a portfolio of stocks When you choose to invest your money in a company, they use it to grow their business and fund new projects. Take the water technology company, Xylem, for example: They use your investment money to create newer, more innovative technology for smallholder farmers.

investment strategies available in the Impact Investing space.

2. You’re investing in innovation With the money they’ve received from investors, they’ve created the Saajhi Pump – a pedal powered water pump that helps farmers irrigate their crops and increase their yield by 3 times as much compared to rain fed crops.

3. The technology helps the people who need it most

4. As profits increase so do potential returns

It’s a good product that works well,

Xylem turns a profit and the value of their

thanks to research and development.

company increases; so, in turn, does the

The demand for the the pump is high

value of their stock. Because you own a

because it reduces labor time by 25% or

piece of the company, you are entitled to

more and allows communities to reduce

a share of the profits. You can choose to

their water usage by 40%.

sell your stock and reap the immediate rewards or hold on to them with faith they will be worth even more in the future. 5

5 Marie Von Hafften, “How a Profit Focus is Expanding Water Access: Xylem sought to ‘upend’ the traditional business model, aiming for the BoP” NextBillion.

06 M E A S U R I N G I M PA C T

Measuring Impact What impact are the companies making? One advantage of investing with an impact-focused company is that their portfolio managers do the heavy lifting. They identify the companies that are both making an impact and are poised for growth, and include them in their basket of holdings. This marriage of purpose and profit sits at the heart of Impact Investing.

C A L I F O R N I A A M E R I C A N WAT E R

BLUEBIRD BIO

FITBIT

Reduced water use in California by 15 billion gallons 6

Bringing down the cost of expensive medical treatments 7

Fitbit is teaming up with major medical device maker, Dexcom 8

This utility company helped their

This biotech company specializes in gene

Together they help people manage

customers reduce water use by more

therapy and aims to reduce the cost for

diabetes directly on their wrists, where

than 15 billion gallons over an 18

those who need it the most. Their new

glucose levels will be accessible right

month period through social media

payment model will save patients many,

alongside steps, heart rate, and other

and app integration. Saving money,

many thousands of dollars over the

stats tracked by the device.

saving water: A win for everyone.

course of their treatment.

TESLA

E D I S O N I N T E R N AT I O N A L

M O H AW K I N D U S T R I E S

The average range you can get from a full charge in a Model X is 250 miles 9

Ecobee customers saved an average of 23% on their heating and cooling costs 10

Their products include a collection of carpets made from 100% plastic bottles 11

So much more than an automotive

They’re modernizing the grid and

They specialize in waste reuse. Their

company, Tesla is also a technology

partnering with industry innovators

products include a collection of carpets

and design leader with a focus on

like Nest and Ecobee. Keeping your

made from 100% PET plastic soda

energy innovation. An electric car

energy use low when you’re not

bottles and a program to repurpose

emits about one third of the carbon

home means saving money and

all process waste from their facilities.

emissions of its gasoline-fueled

resources – about 25% less.

They’ve recycled 25 million pounds of

counterpart. 6 7 8 9 10 11

old tires into new doormats.

California American Water Applauds Customers for Saving More Than 15 Billion Gallons During Drought, Business Wire, April 07, 2017. Ruth J. Hickman, MD and James Radke, PhD, “Struggling with the High Cost of Gene Therapy”, Rare Disease Report, May 10, 2016. Brett Williams, ”Fitbit’s new partnership will bring diabetes monitoring to the Ionic smartwatch”, Mashable, Sep 7, 2017. Jeff Desjardins, 41 Interesting Facts About Tesla Motors, Business Insider, Oct. 1, 2016. Based on an internal analysis conducted on October 2, 2013, www.ecobee.com/savings. Mohawk Industries, “Mohawk Industries 2016 Sustainability Report Highlights How The Company Leverages Innovation To Push The Boundaries Of Sustainability” April 24, 2017.

07 I N V E S T M E N T S T R AT E G Y

Impact Investing and you How this fits into your investment strategy

ESG 401(K), 403(B) (Employer sponsored)

Take a look at where your money is now. Are you unknowingly supporting companies that aren’t aligned with your values? It is possible to invest with your head and heart. It is possible to align your investments with your values across asset classes. Liquid savings, Impact IRAs, company sponsored 401k programs, and stock investments are all meant to work together. ESG and Impact strategies exist in a variety of products. By

Impact Flexible (Individual, Joint, Trust)

Impact IRA (Roth, SEP, Traditional)

mixing up what you’ve put your money into, you’ll set yourself up for success down the road. Pre-tax, posttax, and cash – all working together for your future.

6 T H I N G S T O K N O W A B O U T I M PA C T I N V E S T I N G

6 things to know about Impact Investing

PERFORMANCE

PROGRESS

You don’t have to say no to profit when you say yes to progress

There’s just one mission and that’s joining purpose and profit

That’s the amount invested in some

On average, Impact Investment

Whether it’s ESG, SRI, Sustainable,

type of sustainable investment

portfolios have performed on par

or Impact – it all means one thing:

strategy in the U.S. That’s more

with, or better than, conventional

Progress. The focus for all is on

than $1 out of every $5 under

strategies. 14

marrying positive financial returns

MARKET

The Impact market is worth $8.72 trillion dollars 12

professional management! 13

with social objectives.

12 US SIF, Sustainable Impact Investing in the United States Overview: An Infographic. 13 US SIF, US Sustainable, Responsible and Impact Investing Trends (2016). 14 Kimberly Gladman, CFA, PhD. Ten Things to Know about Responsible Investment & Performance. GovernanceMetrics International, 2011.

08 6 T H I N G S T O K N O W A B O U T I M PA C T I N V E S T I N G

R E S U LT S

FOCUS

CHANGE

Economy and ecology working together means measureable results

Impact Investing focuses on the solution rather than the problem

You can make real change by voting with your dollars

The global economy is powered by

Impact investors focus on the

Impact investors shift corporate

the Earth’s finite natural resources

world’s most pressing social and

behavior by moving money to

and ecosystem. Impact investors

environmental issues and drive

companies developing solutions-

understand this and use strategies

capital into the companies that

based strategies to societal

to mitigate resource risk in their

produce products and services that

problems and by engaging in

portfolios.

are addressing those issues.

shareholder advocacy. Making change starts from within.

SO WHERE DO I GO FROM HERE? D I D YO U K N OW

I’m in, let’s do this! So where do I go from here?

There’s brain power behind the decision making, not just algorithms Impact specialists are able to assess the

When you’re ready to invest your money, you’ll want to do it the right way.

risks and opportunities that may arise in specific industries and companies.

Managing your own investments may not be right for you, and perhaps you don’t want to work with a financial advisor either. New companies, like Swell Investing, are making it easier for people to invest with their values. Dip your toe into Impact Investing with $50 or $50,000, whatever feels right to you. Low fees and thematic portfolios make it nice and easy to dive in and make a difference.

www.swellinvesting.com

09 GLOSSARY OF TERMS

Glossary of terms All you need to know

Decoding the secret language of investing.

AYS: As You Sow

PRI: Program-Related Investment

A non-profit that promotes environmental and social corporate responsibility through shareholder advocacy, coalition building, and innovative legal strategies.

An investment made by a foundation that qualifies as a charitable expense. They may then include the investment as part of the 5% of assets it distributes philanthropically each year to maintain its non-profit status.

CDFI: Community Development Finance Institution These are institutions that seek to reduce poverty in economically depressed areas through credit, financial, and other services.

CSR: Corporate Social Responsibility A management concept where companies integrate social and environmental concerns into their business model. The goal is to embrace responsibility for how a company’s business activities impact people and the planet.

ESG: Environmental, Social, and Governance

Russell 3000 The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire US stock market. It measures the performance of the 3,000 largest publicly held companies incorporated in the US based on market capitalization. It represents approximately 98% of the American public equity market.

SASB: The Sustainability Accounting Standards Board

ESG issues are central to measuring the sustainability and ethical impacts of a company.

These standards are intended as a complement to financial accounting standards, such that they can be evaluated side by side to provide a complete view of corporate performance and prospects.

GIIN: Global Impact Investing Network

SDG: Sustainable Development Goals

This network drives thought leadership on a variety of key topics and themes within the impact investing industry.

These 17 international development goals were established by the United Nations following the expiration of the MDG in 2015.

GIIRS: Global Impact Investing Ratings System

SGB: Small and Growing Business

This assesses the social and environmental impact (but not the financial performance) of companies and funds, using a ratings method.

A commercially viable business that has significant potential for expansion and social impact in the communities where it operates.

GSIA: Global Sustainable Investment Alliance A collaboration of membership-based sustainable investment organizations from around the world.

IRIS: Impact Reporting and Investment Standards A set of standardized metrics that can be used to describe an organization’s social, environmental, and financial performance. These are increasingly accepted by the impact industry as a universally accepted set of measurement principles.

KPI: Key Performance Indicators KPIs are a commonly used measurable value by which an organization can evaluate its success or the success of a particular activity.

MDG: Millennium Development Goals These 8 international development goals were established following the United Nations Millennium Summit in 2000 with measurable targets and clear deadlines for improving the lives of the world’s poorest people. They’ve since been updated by the 2016 UN SDGs.

MFI: Microfinance Institution Any kind of financial institution that provides banking products and services to low-income clients.

SME: Small and Medium Enterprise (aka Small- to Mid-Cap Markets) Generally, a company characterized by the number of its employees or annual sales or assets. A small enterprise meets two of the these three criteria: minimum 50 employees, under $3 million in each assets and sales. A medium enterprise meets two of the following three criteria: up to 300 employees, total assets and total sales of up to $15 million.

S&P 500 “S&P 500” is an abbreviation for the Standard & Poor’s 500 Total Return Index, a market-value weighted index of 500 stocks chosen to reflect the risk/return characteristics of the large cap universe and one of the common benchmarks for the US stock market.

Socially Responsible Investing SRI is an investment approach that considers environmental, social, and governance (ESG) factors in portfolio selection, typically avoiding companies whose profit generating activities are believed to result in negative social or environmental outcomes.

USSIF: United States Social Investment Forum This forum leads the talks in advancing sustainable, responsible, and impact investing across all asset classes.

MRI: Mission-Related Investment An investment made using assets from a foundation’s endowment to create social impact as well as financial returns.

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