MFS Investment Management®

FOR INSTITUTIONAL AND INVESTMENT PROFESSIONAL USE ONLY

Profit vs. Altruism:

NADIA SAVVA, CFA Director, Institutional Sales - Canada

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The views expressed in this presentation are those of the speaker and are subject to change at any time. These views do not necessarily reflect the views of MFS or others in the MFS organization, and should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product.Issued in Canada by MFS Investment Management Canada Limited. No securities commission or similar regulatory authority in Canada has reviewed this communication. Unless otherwise indicated, logos, product and service names are trademarks of MFS and its affiliates and may be registered in certain countries.

A Zero Sum Game?

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The Business Case for ESG Integration: From theory to empirical evidence

A New Model: Becoming an integrated investor

MFS ESG integration

AGENDA

ESG = Environmental,

Social, and Governance

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COMMON PLAN SPONSOR FRAMEWORKS FOR ESG

Investment Approach: No ESG consideration

Constraints: None

Goal: Maximize investment performance

Investment Approach: Dedicated ESG/SRI portfolio

Constraints:Invest within a screened universe (Tobacco, Firearms, Sudan, etc..)

Goal: Satisfy stakeholders while not hurting performance

Investment Approach: ESG integration into theresearch process

Constraints: None, but integrate material ESG factors into the research process

Goal: Maximize long term investment performance

Traditional IntegratedESG Aware

Taking a truly long-term perspective is an ESG strategy

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ACCESSING OUR SUBCONSCIOUS:TWO COMMON MENTAL MODELS

Risk/Return Tradeoff

Standard Deviation (or Risk)

Re

turn

Profit vs. Altruism

Societal Value

Pro

fit

Another model… but is it accurate?One common, and generally accurate, model:

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ACCESSING OUR SUBCONSCIOUS: WHEN THE MODEL IS ACCURATE

…may be true in the short-term, but not in the long-term

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The profit vs. altruism trade off is likely accurate when:• Negative externalities are not actively mitigated

• Actors (management, investors) are focused solely on the short-term

• The beneficiary of a product or service is poor or highly distributed

We believe this model is often NOT accurate, especially in the long-term

Let's explore this belief using:• Business strategy theory

• Data regarding corporate sustainability initiatives

• Investment examples backed by economics, operations management, and systems dynamics research

ACCESSING OUR SUBCONSCIOUS: RE-EVALUATING THE PROFIT VS. ALTRUISM MODEL

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A NEW PROFIT VS. ALTRUISM MODEL

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THE BUSINESS CASE FOR ESG INTEGRATION: CORPORATE SUSTAINABILITY PROGRAMS

Source: MIT Sloan Management Review Research Report: December 2013

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System Dynamics: Capability trap• Short-term management decisions can steal long term capabilities from a firm

• Case study: Global mining company• Faced stakeholders and environmental concerns; Pascua Lama recently shut down• Did short-term focus impede firm's ability to develop good processes?

Economics: Negative externalities• An action that imposes a negative impact on a third party

• Case study: Coal utilities• Historically, coal plants less expensive, but new regulations causing plant shutdowns

THE BUSINESS CASE FOR ESG INTEGRATION: BARRICK GOLD & COAL CASE STUDIES

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THE BUSINESS CASE FOR ESG INTEGRATION: UNRELIABLE SHORT-TERM GAINS

Lack of investment in ESG factors can lead to unreliable short-term gains

Company was aiming for this

outcome…

… but a lack of focus on

stakeholders drove a negative outcome

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Operations Management• Case study: Multi-national retailer

• 4,000 SKUs: Enables more accurate stocking/pricing and purchasing efficiencies• Operational practices enable increased employee pay: reinforces operations strategy, reduces

costs (e.g. employee training, shrink), & improves customer satisfaction• The result: Consistent traffic growth and a cult-like customer; a virtuous cycle

• The Good Jobs Strategy by Zeynep Ton

THE BUSINESS CASE FOR ESG INTEGRATION: COSTCO CASE STUDY

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THE BUSINESS CASE FOR ESG INTEGRATION: LONG-TERM COMPETITIVE ADVANTAGES

Positive externalities and good operations create win-win feedback loops

Investment in ESG practices can create durable, long-term advantages

Many analysts and company managers only consider this

lower line and assume higher wages are impossible

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Step 1: Adopt a formal asset manager questionnaire• Understand the process your managers are using to address ESG factors

• Enable better discussion with stakeholders interested in sustainability

Step 2: Adopt formal policy statements • Consider collaboration and partnership initiatives

Step 3: Develop a dedicated ESG/SRI Committee• Develop policies around voting proxies

A NEW MODEL: BECOMING AN INTEGRATED INVESTOR

All three steps should remain focused on the return enhancing opportunity in addition to satisfying the desires of your stakeholders

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Emphasis on ESG is a reflection of our investment process

• Long-term ownership

• Deep fundamental analysis

• Global collaboration

• Active risk management

MFS' commitment to ESG research demonstrated by:

• The founding of MFS' Responsible Investing Committee

• Our signing of the UN PRI in February 2010

• Investment staff training sessions

• Hiring two ESG research providers (MSCI & Sustainalytics)

• Dedicated ESG Analyst

WHY MFS CONDUCTS ESG RESEARCH

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• Our proxy voting policies are informed by ESG issues in order to help protect and enhance long-term shareholder value

• Our proxy team engages with our portfolio companies on many ESG topics, including executive compensation, board composition, and sustainability reporting

• We publicly disclose a report on our proxy voting and engagement activities annually, which includes details of the proxy team's voting and engagement activity

INTEGRATION IN OWNERSHIP POLICIES & PRACTICES

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SUMMARY

You can achieve both of your goals: risk/return maximization and improved alignment with the interests of your stakeholders

Profit maximization and social value are not mutually exclusive if:• You have a long-term horizon that allows you to capture inter-temporal gains that other

investors commonly miss

• You can actively pick among potential winners and losers

• You understand ESG risks & opportunities and recognize when the concept of shared value may result in increased financial value for a given firm

ESG integration is a journey – develop & adapt formal policy statements

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THANK YOU