Sustainable Small-Cap Core Strategy: Reporting on the impact of our investment decisions 2023

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A Letter of Introduction From The Portfolio Managers

Over the years, we have maintained the belief that there does not have to be a trade-off between strong performance and investments that seek to address society’s environmental and social challenges. This report for our Sustainable Small- Cap Core Strategy includes a review of our sustainable investment research and integration approach and examines how we use this to identify compelling long-term investments. Additionally, we highlight the positive environmental and social outcomes generated by our portfolio companies and detail our engagement and proxy voting activities throughout the year.

Similar to what we have observed in prior years, 2023 was filled with both unique economic and sustainability hurdles as well as progress. Persistent inflation, rising interest rates, a U.S. banking crisis, and supply chain disruptions have all posed significant obstacles for the economy and small-cap investors. Furthermore, 2023 was Earth’s warmest year on record, with the United States experiencing the highest number of billion-dollar disasters in a calendar year.1 All of these events have investment implications, and as stewards of capital on behalf of our clients, it is imperative for us to continuously assess these risks and opportunities within our investment decisions. Many of the companies held in the Sustainable Small-Cap Core strategy are helping to address some of these challenges through more resource-efficient equipment and operations, accessible healthcare, affordable foods, and financial inclusion, for example. In particular, we have identified several pockets of the small-cap asset class that are in the unique position to benefit from U.S. reshoring, the CHIPS Act, infrastructure improvements, and emerging reporting requirements—areas that we believe will contribute to positive environmental and social outcomes.

The small-cap asset class has long been an area plagued with limited data and transparency, particularly in terms of sustainability-related information, surrounding climate change, natural capital and human capital, for example. While we have observed some marked improvements in reporting over the last seven years of managing this strategy, high quality, reliable data remains limited and in a nascent stage. We thank our research team for its contribution to the Sustainable Small-Cap Core strategy. The team works tirelessly to ensure that our investment decisions are informed by solid data and clear insights about how that data may affect a company’s prospects. Engaging with management teams, customers, suppliers, and other subject matter experts is a critical component of our value-added due diligence process, and provides us with what we believe to be a differentiated perspective on how our investments are able to manage sustainability related risks and opportunities.

Most importantly, we are deeply grateful to our clients, who trust us as stewards of their capital and serve as our partners as we learn, innovate and improve over time. We hope you find this report informative, and we welcome an ongoing conversation with you about our work and continuing evolution as investors.

Sincerely,

^{*Brown Advisory entities included are: Brown Advisory LLC, Brown Investment Advisory & Trust Company, Brown Advisory Ltd., and Brown Advisory Trust Company of Delaware, LLC.}