Brown Advisory 2021 Sustainability Report

Sustainable Investing

“Sustainable investing,” “ESG,” “Mission-aligned investing,” “Impact investing”—all these terms carry nuanced definitions but are often used interchangeably in the industry. At Brown Advisory, our sustainable investing (SI) approach seeks to improve investment performance through foundational fundamental and ESG research and active engagement with companies, other bond issuers and investment managers. Using this approach as a foundation, we are committed to helping clients pursue their long-term financial goals as well as their mission-based or values-based objectives. By adhering to this philosophy, we believe that we can generate positive results for clients and for society.

Since its inception, Brown Advisory has worked with various clients to reflect their interest in sustainable investing in their portfolios. In 2010, we launched our first dedicated SI strategy, U.S. Large-Cap Sustainable Growth. Today, sustainable investing solutions represent a meaningful component of client assets and overall growth for our firm. As of March 31, 2021, Brown Advisory managed more than $28 billion in sustainable mandates (across the following entities: Brown Advisory, LLC, Brown Investment Advisory and Trust Company, Brown Advisory Ltd., and Brown Advisory Trust Company of Delaware LLC), which is slightly more than one-quarter of our entire business. Importantly, while we seek to propel our sustainable investing efforts as a distinct set of solutions, we consider SI to be a long-term firmwide initiative in which every one of our colleagues has a role to play.

On the institutional front, we have built a strong presence in the sustainable fixed income market, offering three strategies currently (Sustainable Core, Tax-Exempt Sustainable and Sustainable Short Duration) with a fourth expected to launch later this year. We have launched several other sustainable equity strategies in recent years and worked with portfolio managers of several existing equity strategies to help integrate ESG considerations further into their valuation process and adopt a sustainable investment philosophy on the premise that it can add resilience to the strategies and help us achieve better returns for clients.

We think our private client business and our endowments and foundations practice have similarly blossomed; we have developed and implemented comprehensive mission-aligned investing solutions for more than 100 endowments and foundations, and we have worked with more than 400 individuals, families and family offices to help translate their values and priorities into long-term sustainable investing plans. Over the past year-plus, we have strengthened our offering to these clients by refining our asset allocation and manager selection process, developing a proprietary analytical system to monitor and report on the sustainable attributes of multiasset portfolios, and further building out our roster of sustainable public and private sustainable managers.

To support this work, we have steadily grown our dedicated SI team, which encompassed more than 20 ESG (environmental, social and governance) research analysts, portfolio managers and other SI research professionals as of March 31, 2021. In the past year, we have bolstered our sustainable equity, fixed income, asset allocation and manager research investment teams with additional hires, and increased support for the overall business by formalizing several leadership roles. Karina Funk provides investment leadership as our Chair of Sustainable Investing, alongside her role as co-portfolio manager of the Large-Cap Sustainable Growth strategy; Amy Hauter serves as Head of Sustainable Fixed Income, overseeing a growing set of strategies and a dedicated ESG fixed income research group; Erika Pagel serves as the CIO of Sustainable Investing, overseeing the asset allocation and manager selection process for managing balanced sustainable portfolios, and finally, Carey Taylor oversees the overall advancement of our firm's SI capabilities as Head of the Sustainable Investing Business. 

Institutional Sustainable Investment Offerings

Throughout 2020 and into 2021, we have continued to expand the solutions offered on our institutional sustainable investment platform and build momentum behind them.

SI Policies and Reports

While each of our sustainable strategies is managed independently and reflects the respective styles of their portfolio managers, our overall approach to ESG research, engagement and impact analysis is governed by a common framework. We discuss our overarching approach to our work, as well as each strategy’s distinctive approach and outcomes, in a series of policies and impact reports.

Institutional Policies:

Institutional Sustainable Investment Policy

Institutional Proxy Voting Policy

Institutional Engagement Policy

2020 Engagement Report

Strategy-Specific Impact Reports:

2020 Large-Cap Sustainable Growth 

2020 Sustainable Core Fixed Income

2020 Tax-Exempt Sustainable Fixed Income

2019 Global Leaders

 

We seek to expand our sustainable fixed income platform with the planned launch of our first global sustainable fixed income strategy in 2021. To do so, we hired an experienced team of global bond managers—Ryan Myerberg, Chris Diaz and Colby Stilson—who are working closely with Amy Hauter and with Lisa Abraham, senior ESG fixed income analyst, to expand our global capabilities. The team is currently preparing for the strategy’s expected launch later this year and specifically focusing on developing an ESG framework for evaluating sovereign bonds from a wide range of countries, which the team plans to deploy alongside the ESG frameworks it already uses to evaluate corporate bonds, municipal bonds and securitized issues.

On the equity strategy front, we have continued to expand the range of our offerings. Our global equity team now seeks to incorporate ESG research and a sustainable investment policy in its work, which includes managing our Global Leaders strategy. We launched our Sustainable Small-Cap Core strategy several years ago, serving a number of institutional investors, and we are also working to broadly integrate ESG criteria into the investment process of Flexible Equity, a core large-cap strategy. Finally, we are in the process of rolling out a new Sustainable Income equity strategy for select clients; the strategy seeks an attractive portfolio yield through a portfolio of compelling equity securities which are embracing sustainable opportunities.

As always, we are focused entirely on delivering solutions to our clients that can help them pursue their goals, and we believe that our growing set of sustainable investment strategies can help clients achieve both their long-term return objectives and their desired outcomes in terms of values alignment.

Sustainable Investment Offerings for Endowments, Foundations, Families and Individuals

We work extensively with educational endowments, charitable foundations and other nonprofits to help them develop plans and strategies to align their investments with their organizational mission. Our clients in the endowments and foundations  space have complex challenges—they often depend on portfolio returns to fund a portion of operations each year, and investment decisions need to balance short-term needs, long-term growth objectives and desires for mission alignment and impact. Many are increasingly focused on how their portfolios and their choice of investment managers advance their principles—historically, climate and environment have been top priorities, and more recently clients have begun to prioritize diversity, equity, inclusion and racial justice.

Sustainable investing is also becoming a priority for more of our family and individual clients each year as well. Rising generations are highly focused on environmental and social impact, and clients across the board are recognizing that sustainable investing has the potential to enhance returns as well as provide a path to express their values and societal priorities. The challenges we have faced globally over the past 18 months has led a number of families with whom we work to reflect on what matters most to them and what role they want to have in shaping the future.

2020-2021 Highlights

We constantly seek to enhance our solutions for balanced-portfolio clients; three notable areas of progress over the past year are the refinement of our asset allocation process; our development of our in-house proprietary reporting system, ARIS Analytics; and the continued expansion of our sustainable manager platform and sustainable manager research methodologies, inclusive of work on private investment offerings and DEI investing.

Asset allocation process: This year, we published our first comprehensive sustainable asset allocation publication, “Moving Forward: 2021 Sustainable Investing Perspectives.” In the report, we offered a formalized discussion of our approach to building balanced sustainable portfolios, our investment views informing our asset allocation and manager selection, and our current stance and recommendations within various public and private asset classes. We encourage you to review the report, in which Erika Pagel and Elizabeth Hiss discuss the sustainable investment risks and opportunities we see in today’s markets, and how we are positioning our clients’ portfolios in response.

Sustainable analysis and reporting system (ARIS Analytics): To help effectively manage and monitor our sustainable portfolios, we need “look-through” data across dozens of managers, so we can identify the ESG and impact characteristics of the many hundreds of individual securities these managers collectively hold. Without a technology-based solution, this work involves an untenable time commitment in terms of manual data collection and collation.

To address this challenge, we developed a proprietary system called ARIS Analytics, and have refined and enhanced this system extensively over the past two years. This system (“ARIS” is an acronym for Alignment, Risk, Impact and Sustainability) can cross-reference Brown Advisory’s primary ESG research and third-party ESG data sources against the holdings data for hundreds of managers in our approved and recommended list. Importantly, ARIS is available to all portfolio managers across the firm, and they can use it to quickly generate analysis for any client's portfolio.

The exhibit below offers some additional detail on ARIS Analytics.


ARIS Analytics: Capabilities and Sample Dashboard

Our proprietary analysis and reporting tool, ARIS Analytics, can provide detailed reporting on any multiasset portfolio’s exposure to factors that clients often seek to avoid, such as tobacco, weapons, fossil fuels, and many others. It can also provide portfolio carbon footprint data using several different metrics.

ARIS Analytics also reveals the extent to which the portfolio’s investments may be creating positive outcomes across 10 different social and environmental themes that are mapped to the U.N.'s Sustainable Development Goals (SDGs).

Controversies Tracked in ARIS:

-Carbon Emissions
-Alcohol
-Tobacco
-Gambling
-Firearms
-Adult Entertainment
-Conventional Weapons
-Controversial Weapons
-Opioid Controversy
-Board Gender Diversity
-U.N. Global Compact Compliance
-Fossil Fuel Exposure

Impact Themes Tracked in ARIS:

-Affordable Housing
-Agricultural/Natural Resource Management
-Clean Energy
-Clean Water & Sanitation
-Diversity, Equality and Inclusion (DEI)
-Economic Mobility & Community Development
-Education
-Efficient Product & Conservation
-Health & Wellness
-Sustainable Technology Innovation
-Multi-Sector Impact

The sample ARIS Analytics dashboard below provides a snapshot of a hypothetical portfolio’s sustainable attributes: Allocation between various types of sustainable investments, carbon footprint relative to a broad-market index, and evolution of its carbon footprint and its exposure to what we deem to be ESG-related controversies over time.

Sample ARIS Analytics dashboard

This analysis is not intended to be a guarantee of future results. It is not representative of an actual portfolio and is provided for informational purposes only. Asset allocations could change depending on risk tolerance,  investment objective and assets available for investment. The relationship team will customize portfolios to meet the guidelines, requirements and risk tolerance of our clients. The information provided in this is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular investment strategy, including whether or not to buy, sell or hold investments in any asset class mentioned. It should not be assumed that investments in such asset classes have been or will be profitable. 



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.