2021 Sustainability Report

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Sustainable manager platform: As of the end of 2020, our sustainable manager platform included 17 approved and recommended public investment options across U.S., global, developed int'l. and emerging markets equity as well as multiple fixed income asset classes. Fourteen of these 17 managers are open-architecture options. Additions to the platform in 2020 included options for U.S. small cap, developed market equity and emerging market equity asset classes. Our current 2021 priority is to identify and add a compelling U.S. large-cap value option to our platform. Our manager due diligence process is outlined in detail in our “Moving Forward” sustainable asset allocation publication.

Private Market Investments

Unlike managed public-market strategies, sustainable private investments opportunities are often laser-focused on specific impact goals, and thus may be compelling to certain clients more than others.

We have expanded our efforts in this space over the past several years. Today, we believe that we offer our clients a healthy range of options with the potential to deliver attractive returns as well as positive outcomes in society. As just two examples of a wide variety of investments we have evaluated and recommended:

• We have invested in a private real estate fund with a sustainable focus; specifically, the manager targets stable, cash-flow positive investments in green, multifamily housing throughout the U.S. that is 100% affordable, mixed-income, rent-stabilized or rent-controlled. Clients with a focus on both environmental issues and community development have found this opportunity appealing.
• In renewable energy, we have made several private investments that involve the purchase or management of the real renewable asset (e.g., solar projects, wind farms, etc.); lower- and middle-market renewable energy investments can often offer relatively attractive deal valuations, given the lack of subscription interest from larger players.

It is important to call out two distinct categories of private impact investment: “return-first” strategies that seek competitive performance commensurate with their asset-class peers, and “impact-first” strategies that mix philanthropic and financial considerations in a vehicle that may seek different risk/reward objectives when compared to a traditional private investment. Nonprofit endowments and foundations are often interested in these distinctions, as they need to consider various guidelines that govern whether investments can be considered mission-related investments (MRIs) or program-related investments (PRIs).

Our asset allocation model focuses on “return-first” strategies, and we work with interested clients to identify investments in the second, “impact-first” category that may be particularly well aligned with their interests. Impact-focused investments tend to be very specific and customized to each client’s individualized impact goals, and to meet these needs and goals we believe an advisory-focused approach is critical. We typically isolate a pool of assets dedicated to these impact investments, so that they can be evaluated according to different criteria than the client’s core portfolio.

DEI Investing Efforts

To serve our clients effectively and to help advance diversity, equity and inclusion (DEI) in our industry, we view manager selection with both an “ESG quality” as well as a DEI lens. Our work to build out a platform of diverse managers, and to formalize our process for reviewing investment choices through a DEI and racial justice lens, is ongoing. This work includes a new partnership with Lenox Park, a research firm that specializes in DEI related information on thousands of investment managers across the world.

In the meantime, we work with many clients to add manager diversity to their portfolios, through a bespoke process that generally involves a discovery phase in an effort to understand the client’s perspectives on diverse manager representation and set goals that can meet their specific needs. This involves helping each client set criteria for what defines a “diverse manager,” and developing a transition plan to add those managers into their portfolio over time. A recent example resulted in a client aiming to move 10% of portfolio assets to managers with >50% women and/or minority ownership, a goal that was surpassed within 12-18 months.

Further, DEI has been one of four priority issues for our ESG research team in its engagement and proxy voting work over the past several years. In 2020, we engaged with 48 different companies and bond issuers, asking them for a variety of actions including alignment of hiring and compensation with diversity measures, development of responsible arbitration policies, reporting on pay parity, loan forgiveness and other measures to help underrepresented minority (URM) borrowers through the economic hardship of the pandemic, and (in the case of municipal debt issuers) ensuring equitable provision of housing, education, transportation and clean water. We also engaged in targeted proxy voting support of proposals that sought racial equity audits at several different companies.

One of our goals for 2021 is to enhance our ARIS Analytics system with DEI information sets that cover the attributes of underlying investments as well as the ownership/management makeup of investment managers. The aim is to be able to apply this analysis in our portfolio construction process with the same ease and accuracy that we can analyze ESG factors.

Educating our Colleagues on Sustainable Investing: The SISME Program

We have a growing team of dedicated SI professionals that spans ESG equity and fixed income research, asset allocation, manager research and balanced portfolio management, but we are also committed to training and educating our entire colleague base on sustainable investing over the next several years. To that end, we created our SISME program (Sustainable Investing Subject-Matter Expert) in 2018 and developed an expansive curriculum covering the history of the field, core sustainable investing principles, ESG research techniques, frameworks for serving clients and many other topics. The program currently takes students through 35 separate learning modules, covering:

• Institutional solutions: Market overview and history of SI; ESG research tools; Brown Advisory’s institutional strategy offerings; Client case studies; Industry partnerships and collaborative initiatives
• Balanced portfolio solutions: Asset allocation; Manager selection; Recommended sustainable manager roster; Private investments; ARIS Analytics; Client case studies; Sustainable strategic advice
• Brown Advisory through an ESG lens: A series of modules that use our ESG research team’s tools to hold a mirror up to our own firm, examining the sustainable traits of our solutions, our DEI efforts, our charitable giving, community programs, colleague development and wellness, and more

Our current cohort, scheduled to graduate in August of this year, is our fourth class. The accelerating participation in the program has been extraordinary. Our initial 2019 and 2020 cohorts had 29 and 33 students, respectively; in 2021, we are on pace to graduate more than 160 colleagues from the program. All told, more than 30% of our colleagues have graduated from SISME or are scheduled to graduate this year, with representation across every department and group within our firm, and broad participation from our most senior colleagues, our new college graduates in the first year of their careers, and everyone in between. The results so far give us confidence that we can achieve our goal of having every colleague at the firm go through SISME.

Engagement and Proxy Voting

Engagement: We seek to regularly interact, or “engage,” with various stakeholders who have an interest in the equity and fixed income securities we hold, including the companies and other bond issuers themselves. Sometimes our goal in these engagements is to inform our investment thesis, and other times we seek to elicit a specific stakeholder response to an idea, suggestion, or perceived risk.

For the past several years, we have focused our engagement work on four high-priority topics (see table for summary). While prioritizing these issues, we also seek to engage stakeholders on a wide range of other issues. For more information on our engagement work, and the policies that govern our actions, we encourage you to review our 2020 Summary Report on Engagement and our Institutional Engagement Policy.

 

TOPIC	NUMBER OF 2020 ENGAGEMENTS*	REQUESTS WE FREQUENTLY MAKE DURING ENGAGEMENTS
Climate Change	63	Report on and manage physical and transition climate risk Align lobbying and political spending with climate goals Continue participation in the Climate Action 100+ Set science-based targets for reducing GHG emissions
Disclosure/Transparency	63	Improve material ESG disclosures in reporting Provide updates on progress of efforts to improve transparency Support more structured reporting frameworks
Diversity, Equity and Inclusion	48	Ensure accessible housing options, school districts, transportation, and clean water by state and local governments Align hiring and compensation with diversity measures Develop responsible arbitration policies Report on pay parity
AI Ethics/Data Security	18	Encourage the hiring of personnel with AI/data privacy expertise and embed these ethics professionals into product development Improve public and investor transparency with regard to use of AI technology and personal data Issue annual progress reports on AI ethics and data privacy

^{*on behalf of institutional strategies}

Proxy Voting: We consider thoughtful proxy voting as another important responsibility and one that ties closely to our broader engagement efforts. It is an important mechanism for voicing our preferences as owners and stakeholders in the companies we hold in our strategies. Importantly, it is our duty to ensure that our votes are cast in the best interest of the clients who have trusted us to vote on their behalf.

Our proxy voting activity covers the equities held in our institutional equity strategies and funds, and we also handle proxy voting for many of our advisory clients who hold securities outside of any Brown Advisory-managed strategies. For more information on our proxy voting process, we encourage you to review our Proxy Voting Policy, as well as the proxy voting section of the strategy-specific impact reports linked above. Additionally, for a fully transparent record of all our proxy votes dating back several years, please refer to the searchable interactive proxy voting information tool on our website.

Finally, we note that our ESG research colleagues and other investment colleagues engage with a wide variety of organizations in their work. We work with investor coalitions, such as PRI, Ceres, Mission Investors Exchange, CDP, ICCR, Confluence Philanthropy, Climate Action 100+ and others, to share ideas with other practitioners and asset owners, and to collaboratively encourage companies or bond issuers to adopt improved ESG practices. We also participate with groups such as SASB and TCFD to establish and improve our standards for reporting and disclosure. Our SI professionals speak at colleges and universities, to help undergraduate and graduate students better understand sustainable investing, how it can drive returns as well as impact, and how they can pursue a career in the field. And many of those professionals also serve as teachers in our SISME colleague SI education program.