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TBLI CONFERENCE™ EUROPE 2011Workshop 12 – Integrating ESG Into Portfolios #2

November 11, 2011

Christopher C. McKnett

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Integrating ESG from the Perspective of an (Mega-) Institutional Manager

The material contained in this presentation is current as of the presentation date, unless otherwise indicated.The views expressed in this material are the views of Chris McKnett through the period ended 11/11/11 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are notguarantees of any future performance and actual results or developments may differ materially from those projected.United Kingdom: State Street Global Advisors Limited. Authorised and regulated by the Financial Services Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. Telephone: 020 3395 6000. Facsimile: 020 3395 6350.

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A Leading Provider of Financial Services to Institutional Investors

State StreetGlobal Advisors

A global leader in asset management

• Subsidiary of State Street Corporation, one of the world's leading providers of financial services to institutional investors, with a heritage dating back over two centuries

• Entrusted with over $1.8 trillion* in assets worldwide

• Clients include governmental entities, corporations, endowments and foundations, third party asset gatherers, multi employer plans, pension funds and sovereign wealth funds

• ETF industry pioneer and leader since 1993 with $247 billion* in AUM

SSgA is a global leader

in asset management relied

on by sophisticated

institutions worldwide for

their investment needs

State StreetGlobal Markets

A global leader in research and trading

State StreetGlobal Services

A global leader in asset servicing

As of September 30, 2011* This AUM includes the assets of the SPDR Gold Trust (approx. $64 billion as of September 30, 2011), for which State Street Global Markets, LLC, an affiliate of State Street Global Advisors, serves as the marketing agent.

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3As of September 30, 2011

A Global Perspective with Local Expertise

New York

Munich

ParisZurich

Hong Kong

Singapore

Tokyo

London

Frankfurt

Atlanta

San Francisco

Brussels

Dubai

Melbourne

MontrealChicagoToronto

Sydney

Wilton, CTBoston

Rye Brook

Bangalore

Amsterdam

MilanSeoul

Geneva

Dublin

Hangzhou Shanghai

Investment Center

Marketing/RelationshipManagement Office

Global Alliance Company

• 29 local offices, bringing a global perspective to managing client needs

• 24 hour global trading capability with trading desks in Boston, London, Hong Kong and Dublin

• 10 investment centers, promoting diversity of ideas

• Acquired Bank of Ireland Asset Management in Q1 2011

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A Broad Range of Investment Solutions and Products

As of September 30, 2011

We offer broad-based market exposure in highly specialized active and passive strategies across the risk return spectrum

Equity Fixed Income AlternativesCash Currency

Enhanced

Fundamental

Indexed

Managed Volatility

Active Active

Enhanced

Indexed

Hedged

Indexed

Active

Indexed

Enhanced

Absolute Return

Hedge Fund of Funds

Private Equity

Real Estate

Commodities

ETFs

Core, sector, industry, style, international and fixed income funds

Industry leader

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Investor Motivations and Strategies

Two primary motivations with multiple pathways to implementation

ESGFinancial Motivation

Integration“ESG Inside”

Value Motivation

Active OwnershipEngagement and Proxy Voting

NegativeScreening

Faith Based or Ethical Screens

Impact Investing

Positive ScreeningBest-In-Class and Themed Investing

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Evolution of ESG Investing

Phase Goal Motivation Primary Techniques Management StyleRepresentative Capabilities

First Generation

• Avoid investments in companies that are not compatible with mission and goals

• Align investments with values or mission

• Exclusionary screening

• Active or Passive • Screened S&P 500

• Socially Responsible US Credit Index

Second Generation

• Incorporate ESG factors into investment decisions

• Recognize materiality of some ESG issues

• Improve standards of corporate behavior

• Positive screening

• Best in class selection

• Engagement

• Proxy voting

• Active or Passive • Dow Jones SustainabilityWorld Index

• US Community Investing Index

Third Generation

• ESG issues can be used to seek enhanced performance and manage risk

• Generate alpha

• Risk management

• Use ESG data to identify companies that managers believe are expected to outperform

• Mainly Active • Europe SRI Alpha

• Australia Sustainable Yield

From values-based to value-creating approaches

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ESG Resources

* ISS, a subsidiary of MSCI Inc., is contracted for proxy voting policy development and voting execution when clients wish to retain proxy voting discretion in separate accounts. F&C’s Responsible Engagement Overlay can be licensed when clients seek ESG engagement in separate accounts. Vendors shown are those with which State Street Global Advisors has a commercial relationship with and are subject to change. reo is a registered trade mark of F&C Asset Management plc.

Vendors: multiple relationships enable broad coverage and increased flexibility to satisfy multiple ESG objectives

Team: Champion ESG investing through portfolio management, product management, governance and strategy

• Chris McKnett– Vice President– Sr. Product Engineer, ESG Investments

• Mahesh Jayakumar– Principal– Portfolio Manager, Global Fixed Income

• Selim Dekali– Principal– Portfolio Manager, Global Equity Beta

Solutions

• Andrew Letts– Managing Director– Director, Corporate Governance and

Global Proxy Voting

• Laura Aarnio– Principal– Senior ESG/Governance Analyst

• Research– EIRIS– Ethix SRI Advisors AB– GovernanceMetrics International – MSCI Inc. – Sustainalytics BV

• Indexes– Dow Jones Sustainability Indexes– MSCI ESG Indexes– FTSE4Good Indexes

• Proxy voting and engagement*– ISS – F&C’s Responsible Engagement

Overlay (reo®)

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Research and Publications

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Historical ESG Research Insights

• Highly ranked ESG companies did not outperform poorly ranked ESG companies

• However, selective application of ESG factors may add value

Source: State Street Global Advisors, 2010. This information is not intended as investment advice. Information Coefficient: A correlation value that measures the relationship between a variable's predicted and actual values. An IC of 1.0 indicates a perfect linear relationship between predicted and actual returns.

Key finding: The relationship between ESG performance in share price is variable yet there are pockets of alpha power within the broader result

-0.10

-0.08

-0.06

-0.04

-0.02

0.00

0.02

0.04

2003 2004 2005 2006 2007 2008 2009 Average

1 mo 3 mo 6 mo 12 mo

Yearly Average Information Coefficient of “Super ESG" RatingMSCI All Country Index 2003 – 2009

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Contemporary Research Insights

Emerging findings explore implications of ESG on risk protection

Source: State Street Global Advisors, 2010. This information is not intended as investment advice.

3-Month Quintile Spreads versus Market ReturnsMSCI All Country

World Index Returns %Quintile

Spread %

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Quintile Spread MSCI All Country World 3M Return

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ESG Data Coverage: Improving but Challenges Remain

0

500

1000

1500

2000

2500

200301 200307 200401 200407 200501 200507 200601 200607 200701 200707 200801 200807 200901 200907

Universe Eco Social Gov

CMINST-5760Source: SSgA, May 2011. This information is not intended as investment advice.

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Efficacy of ESG Factor across Global Developed Market Universe

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

2003 2004 2005 2006 2007 2008 2009

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

ESG 6m IC ESG 6m IR_IC

ESG Factor 6-month Information Coefficient (IC) and Information Ratio of IC

CMINST-5760Source: SSgA, May 2011. This information is not intended as investment advice.

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Efficacy of ESG Factor across Developed Market Regions

-4.00%-3.00%-2.00%-1.00%0.00%1.00%2.00%3.00%4.00%5.00%

Asia/Pac Europe Japan North Am

-0.4-0.3-0.2-0.100.10.20.30.40.50.6

6m IC 6m IR_IC

ESG Factor 6-month Information Coefficient (IC) and Information Ratio of IC by Region (January 2003 – December 2009)

CMINST-5760Source: SSgA, May 2011. This information is not intended as investment advice.

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Integration of ESG Rating into Stock Selection Process for Europe Active Equity

Live Returns Spread (SRI Alpha - Alpha)

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

03-2

005

06-2

005

09-2

005

12-2

005

03-2

006

06-2

006

09-2

006

12-2

006

03-2

007

06-2

007

09-2

007

12-2

007

03-2

008

06-2

008

09-2

008

12-2

008

03-2

009

06-2

009

09-2

009

12-2

009

96

97

98

99

100

101

102

103

104

Monthly Spread Cumulative Index

Rolling 3 years VolatilityEurope Alpha vs. Europe SRI Alpha vs. MSCI Europe

10%

12%

14%

16%

18%

20%

22%

24%

02-2

008

04-2

008

06-2

008

08-2

008

10-2

008

12-2

008

02-2

009

04-2

009

06-2

009

08-2

009

10-2

009

12-2

009

cum

ulativ

e re

turn

Europe Alpha Europe SRI Alpha MSCI Europe

SRI Alpha strategy displayed similar total risk patterns

Sources: SSgA Active Quantitative Equity as of December 2009. This information is not intended as investment advice.

Returns spread varied year-over-year and quarter-over-quarter

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Transitioning to a Low Carbon Economy

• Greenhouse gas emissions need to decrease substantially relative to a business as usual scenario to avert the direst consequences of climate change

• Transitioning to a low carbon economy is possible using a variety of technologies and policy mechanisms

• Investors face significant threats and opportunities as the transition unfolds

• International Energy Agency estimates $600 billion to $1 trillion in incremental investment in climate solutions is required per annum through 2035

• Private investment must be mobilized to supplement public funds

• Narrowing the capital gap to finance environmental solutions requires financially sound investment products

Sources: Stern Review: The Economics of Climate Change, 2006; McKinsey & Co, International Energy Agency, World Energy Outlook 2010; Bloomberg New Energy Finance. The information is not intended to provide investment advice. SSgA does not guarantee the suitability or potential value of any particular investment. The information contained above is for illustrative purposes only.

61.947.7

41.2

70.259.4

50.5

75.5

48.662.4

94.4

65.8

82.8

EMEA Americas Asia & Oceania2007 2008 2009 2010

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Total New Investment in Clean Energy by Region (US$ Billion)

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Green Bond Concept: Pillars of Green Bond Investing

Bond types

Conceptual Diversified Green Bond Strategy

Supranational andMultilateral Financial Institution Green bonds - EIB, IBRD, IFC etc.

OtherMultilateral Financial

InstitutionsCorporateState and

MunicipalHousing and Real Estate

Issuer types

Long term objective

GSE Backed Energy Efficient MBS

LEED certified (or equivalent) CMBS

Military Base Housing Retrofits

PACE

Other Retro-fit Finance Opportunities

Energy and resource efficient infrastructure

Other Project Debt

Clean Energy Project Finance

Other Environmental CapEx

General issues from green screened issuer

Sovereign Green Bonds - GB, AU, NL, US etc.

Near-term

Mid/long term

The information is not intended to provide investment advice. SSgA does not guarantee the suitability or potential value of any particular investment.The information contained above is for illustrative purposes only.

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Market for Green Bonds

.

Asset Backed

Supranational(IBRD

IFCEIB

EBRDADBAfDBIADB)

Municipal

Other (US CREB, Retail

etc.)

$12 billion in total issuance at mid 2011

Supranational green bonds• AAA issuances• Investors do not assume project risk• Funds are ring fenced and/or earmarked for green projects• Rely on the issuer to conduct due diligence to identify and monitor green

projects • Trading similar to Agencies in spread over UST• Multiple currencies including USD, EUR and a host of local currencies

• Estimates for climate change funding needs range greatly but all are substantial

• Our estimates for supranational green bond issuance stands at $25 to $30 billion by 2015

Estimated Mulilateral Green Bond Issuance

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

2011 2012 2013 2014 2015

$ B

illio

ns

IBRD IFC EIB EBRD ADB

~45%

~25%

~5%

~25%

Green bond issuance data was calculated based on external data from supranational institutions and internal estimatesThe information is not intended to provide investment advice. SSgA does not guarantee the suitability or potential value of any particular investment.The information contained above is for illustrative purposes only.

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“Valuing Non-financial Performance” — Project Delphi Antecedent

• Absence rate• Staff turnover• Health and safety• Fair restructuring• Training• Performance

management• Equality and diversity• Reputation• Commitment to customer• Talent recruitment

and retention

• Customer loyalty• Retention• Reputation• Trust• Price, product,

service quality• Competitive positioning

• Opinion former perception

• Media coverage• Community investment• Stakeholder dialogue• Legal/regulatory

breaches• License to operate• Inclusion• Social capital

• Energy efficiency• Deployment of

renewables• Waste reduction• Recycling• Environmental impacts• Environmental breaches• Lifecycle assessment

• Value of patents• Customer perception• Talent recruitment and

retention• Training• R&D expenditure

• Ethical code deployment• Board composition• Equality and diversity• Talent development• Audit processes• Reporting and

transparency• Reputation• Shareholder interests• Anticorruption

policy/practice• Competitiveness

• Ethical integrity• Processes and

procedures

• New product and process development

• Carbon emissions• Waste

management

• Public perception• Supply chain

management

• Customer satisfaction

• Employee engagement

Eenvironment

Ssociety

Ggovernance

ESG factors

Key metrics

Core non-financial factors

Market value

Corporate governanceInnovationEnvironment SocietyCustomer

relationsHuman capital

Risk management

Revenue growth Cost of capitalBrand equityOperational

efficiencyFinancial drivers

Primary objective

Adapted from CSR Europe, retrieved from http://www.investorvalue.org/framework.htmCMINST-5760

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Project Delphi — Investor section of “Valuing Non-Financial Performance”

ESG “Super Factors”, Metrics, KPIs and Validation with Investors

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Overview of Project Delphi

Initial <<Straw-man>> hypothesis drawn from VNFP Laboratory (Including corporate and initial asset owner input)

Proposed Super-factors + metrics

Asset Managers Short-list of material

factors + weights

Recommended Framework for ESG investment criteria, relative importance and metrics to be included in VNFP Collaborative Venture report

Dialog with panel of investment consultants

EFFAS + othersMetrics for the material factors

Validation by panel of large Asset Owners+

Wider survey of Asset Owners

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ESG Integration — What’s Next?

• 94% of ESG strategy assets are concentrated inAustralia, Benelux, France, Nordics, North America, and UK

• Institutional Investors in above mentioned markets will continue to drive ESG Strategy Growth

• Japan and Asia Ex-Japan: ESG interest and participation is limited and nascent

• Integration is the next ESG strategy primed for growth in key markets

• Active Ownership is gaining ground as a predominant ESG strategy in some of the largest markets

• ESG Product interest and allocation is limited

• PRI participation has grown rapidly at a CAGR of 64% over past 5.5-years and is expected to grow

• ESG Data is becoming easily accessible by mainstream investors

Sources: EuroSIF European SRI Study 2010. US SIF, 2010: Report on Socially Responsible Investing Trends in the US RIAA “Responsible Investment 2010: Inside RI” Report, November 2010. Investment & Pensions Europe (IPE): “Investors in Asia don’t care about ESG, consultancy says,” 5/27/2011. “Sustainable Investment in China 2009,” BSR, 9/1/2009. SIF Japan, 2009 Review of Socially Responsible Investment in Japan. SIF-Japan, 2007 Review of Socially Responsible Investment in Japan. Responsible Investor: “Black Rock taps Thomson Reuters’ ASSET4 for global ESG data,” 4/11/2011. “Thomson Reuters to push ESG data out to 45,000 buy and sell-side analyst clients,” 12/3/2010. RI: “Bloomberg chief outlines ESG data strategy,” 6/4/2010; http://www.reuters.com/article/2009/12/10/us-bloomberg-idUSTRE5B916D20091210. BSR: “ESG in the Mainstream,”9/2009; http://www.fastcompany.com/magazine/154/making-the-bottom-line-green.html. RI: “<SCI buys RiskMetrics for $1.55bn,” 3/1/2010. PRI: ‘2011 Annual Report of the PRI. Interviews with SSgA managers, Asset Owners, & Consultants

Strategy Size

> 30% of ESG AUMLarge

5% – 30% of Total Region ESG AUMModerate

< 5% of Total Regional ESG AUMSmall

Growth Trajectory

Strategy Growth is Flat to Moderate

Strategy Growth is Increasing Quickly

Note: Quantitative Measures are used when data is available, and Qualitative measures are used when data is limited. Sources vary and table information aggregated from information located in the appendix.

Significance and Growth of Regional ESG Strategies (Based on % of Regional Market’s Total ESG Assets)

AsiaEx-Japan

Japan

Australia

Europe

NorthAmerica

Limited Information

No TrendDetermined

Limited Information

No TrendDetermined

Limited Information

Limited Information

No TrendDetermined

No Trend Determined

Impact InvestingIntegration

ActiveOwnershipScreening

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