The New Normal—Sustainable & Impact Investing

The New Normal -- Investing in a new future with Sustainable and Impact Investments

Bank of America Private Bank Transcript

06/16/20

2:30 pm ET

Slide 1: The New Normal – Investing in a new future with Sustainable and Impact Investments

Jackie VanderBrug: Thank you for joining us to talk about how you can weather volatile markets with confidence. This is Jackie VanderBrug, Head of Sustainable and Impact Investment Strategy in the Chief Investment Office for Merrill and Bank of America Private Bank, and I’m joined by Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.

As we all face unprecedented times, I want you to know that we are here for you. Helping you take stock of your finances and make thoughtful decisions about your investments is our focus today.

We will do four things. First, share our take on the coronavirus, also called COVID-19, and how it’s impacting the markets and potentially your finances; second, take a look back on historical bouts of volatility and market downturns; third, share our Chief Investment Office’s outlook for the economy; and finally, explore investing in a new future with sustainable and impact investments.

Slide 2: Important Information

This material was prepared by the Chief Investment Office (CIO) and is not a publication of BofA Global Research. The views expressed are those of the Chief Investment Office only and are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill or Bank of America to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

Global Wealth & Investment Management (GWIM) is a division of Bank of America Corporation. The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for GWIM clients, is part of the Investment Solutions Group (ISG) of GWIM.

Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.

Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.

Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.

All recommendations must be considered in the context of an individual investor’s goals, time horizon, liquidity needs and risk tolerance. Not all recommendations will be in the best interest of all investors.

Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Investment products:

Are Not FDIC Insured

Are Not Bank Guaranteed

May Lose Value

Bank of America Private Bank is a division of Bank of America, N.A., Member FDIC, and a wholly-owned subsidiary of Bank of America Corporation (“BofA Corp.”). Trust and fiduciary services and other banking products are provided by wholly-owned banking affiliates of BofA Corp., including Bank of America, N.A.

Bank of America, N.A. and U.S. Trust Company of Delaware (collectively the “Bank”) do not serve in a fiduciary capacity with respect to all products or services. Fiduciary standards or fiduciary duties do not apply, for example, when the Bank is offering or providing credit solutions, banking, custody or brokerage products/services or referrals to other affiliates of the Bank.

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Slide 3: We are facing uncertain times

Chris Hyzy: Before we dive in first and foremost, we hope that you and your family are safe and staying healthy as we all face these uncertain times. The coronavirus pandemic has impacted nearly every aspect of our lives and is having a significant impact on people across the country. Beyond the immediate health impact of the virus, we are still seeing stress in our health system, drops in spending in economic activity as people continue to stay at home, or change routines to help stem the spread of the virus, and large increases in unemployment due to some extended shutdowns. People are focused on the health and well-being of their families and loved ones, and keeping everyone safe from harm. They are also taking on new responsibilities as teachers and caregivers on top of their regular day-to-day responsibilities.

The pandemic’s effects on the economy and the markets is compounded by simmering trade tensions and the oil price shock that started just as the virus began to take hold in Europe and America. All these factors are still causing uncertainty that is spilling over into people’s finances. Even those who have relatively secure employment in finances are concerned. This is where we can help. We don’t yet know the ultimate impact of the virus but we are confident that in time, we will continue to get through this. We are sharing our thoughts today to make sure you have the information and advice you need to navigate these challenging times as we chart our way into a new frontier.

Slide 4: Although timing may vary, markets have eventually recovered from downturns

More importantly than volatility returning to normal is the fact that historically, market drops have always been followed by recoveries. The timing and length of recovery has varied but each of the market downturns you see here were followed by a recovery and markets going on to new highs. While market downturns can be painful for a short time, it is important to keep in mind that far more wealth has been created in bull markets than bear markets have taken away.

From a historical perspective dating back all the way to the 1910s, we have seen that after major crises, there tends to be a sustained period of strong economic growth. The most relevant example for us today may be the 1920s that followed the last global pandemic and World War I. In this decade, we saw a market and economy sustained comeback characterized by a period of above average GDP and market returns. For example, through 1920 to 1929, real GDP growth across the US and Europe was 4% per year and stock market returns were about 20% or better per year. A long-term perspective reminds us that periods of crises have been followed by periods of strength.

We will be watching to see, given the health implications of the pandemic that triggered this latest downturn, how the response from the governments, companies, and society will be coordinated and go beyond the financial. In the future, health concerns are going to impact how we think about communities, business operations, infrastructure, schooling, and the use of technology. This level of disruption will likely have a material impact on many aspects of life and create a myriad of opportunities as well as risks.

Slide 5: Despite near-term challenges, we are cautiously optimistic for improving conditions

Despite the speed and the severity of the recession and unemployment levels, there are signs of encouragement. The Federal Reserve has been swift to enact stimulus measures, facilitate liquidity, and provide reassurance to the markets. Congressional legislation and the White House’s efforts to support individuals, small businesses and industries have been expansive and are ongoing. Unemployment claims have started to slowly taper.

Our Chief Investment Office feels that the market will continue to take cues from health data - a significant increase in testing overall, greater availability of medical supplies, as well as promise for treatments, and a potential vaccine. Quarter II will likely be most challenging period of the year in terms of corporate earnings and overall productivity. We are already seeing a turn in the key economic data. Given precedent data from other regions and continued advances in testing and treatment, the reopening of businesses and our economy can continue over the coming months and produce better than expected results in the third quarter. Assuming limited second wave cases or other significant exogenous events, the green shoots of momentum and productivity should appear throughout the third quarter and the fourth quarter in our view.

Slide 6: Discipline is key to weathering current markets

The most powerful tool you have for weathering current market conditions is maintaining discipline. Regardless of market conditions, there are some investing basics that you need to keep in mind. For most of you, investing is a long-term pursuit. You are investing for needs of five, 10, or even 20 years down the road. Long-term goals are best served by taking a long-term approach to investing and staying invested, so don’t abandon the markets during short-term bouts of volatility. On the topic of goals, always remember why you are investing. Performance quarter over quarter does matter but the real

measure of how you are doing is how you are progressing towards your goals. It is through this lens, one that takes into account, not just performance but also risk over the long-term, that we evaluate your progress.

Also, remember the basics. Historically, establishing an asset allocation that is aligned with your goals, diversifying your holdings within your allocation, and rebalancing regularly have been the best ways to achieve superior risk-adjusted returns over the long run.

And finally, you will always want to be on the lookout for opportunities. Even in volatile or declining markets, there are opportunities from strategic rebalancing to tax-loss harvesting to making tactical investments overall.

As you think about how you want to prepare for the new normal, you may also want to consider how sustainable investing can help you position your portfolio through the phases of recovery and on the way towards a new frontier.

Slide 7: Social issues have risen in importance

Jackie VanderBrug: The speed and scope the impact of COVID-19 underscores the interconnected nature of the world we live in. In just a few short months, cases spread around the globe and the public health efforts of slowing or stopping the spread led to the fastest bear market in history and depression-level unemployment. There have also been some surprising nonfinancial impacts such as short-term drops in greenhouse gas emissions in many industrial cities due to reduced traffic and manufacturing. We are all living in the midst of newly visible connections, from the supply chain and need for medical equipment, to the reality that viruses and weather do not respect political borders. In an interconnected world, investors are looking for more data on how firms operate.

As a health crisis, COVID-19 has shone a spotlight on the steps that firms are taking to protect the health and wellness of their employees and, of course, of their customers. How companies treat essential frontline workers is now a topic in the news. As public interest and investor questions grow, companies are increasing transparency about how they handle these issues. This may indicate an inflection point. Instead of social environmental issues playing auxiliary roles, CEOs have begun to clearly articulate the societal purpose their firms play and the principles with which they are making business choices.

Firms with strong culture have developed resiliency, helping them maintain operations and customers in the face of these external challenges. In fact, the nature of the pandemic has magnified the business impact of some sustainable practices, and the benefits are emerging. We are seeing real-time evidence that companies with strong environmental, social and governance, or ESG, profiles have seen stock price resilience in the downturn. We believe that this is an indicator that these high-performing firms are also well-positioned to deliver enhanced value over the long-term.

We also hope that the challenges and solutions that companies are addressing today can help us build a better new normal. They accentuate and accelerate ongoing conversations about stakeholder capitalism and corporate approaches that unite the interest of firms, employees, suppliers, customers, and the community for a more sustainable future.

Slide 8: And companies with sustainable practices have shown resilience in this period of turmoil

Let’s take a moment to look at how companies with strong sustainable practices have fared during the crisis. The easiest way to identify these companies is to look for firms that have incorporated environmental, social and governance or ESG concerns in their business practices, such as looking for ways to reduce waste, support the health and safety of their employee, and ensure strong corporate governance.

When you look at these companies, you can see a few things. First, from the S&P 500 market high in February through mid-March, stocks that are ranked in the top quintile for ESG performance also outperform the market by over 5%. Second, while past performance is no guarantee of future results, research has shown companies that demonstrate leadership on the topics of fair and equal pay, strong benefits, and worker safety during the crisis were found to outperform peers by over 7% in Q1 2020. And finally, the majority of the S&P 500’s book value is now made up of intangible assets: things like brand value and intellectual property. These can quickly erode, so how companies respond to COVID-19 will likely matter.

Actions seen around the world – think free wireless data, donating materials, hazard pay, and support for childcare, and shifting manufacturing to support needed equipment – this good will is emblematic

and companies need to nurture sustainable and healthy communities in order to build and maintain a loyal customer base. Not only are companies with sustainable practices performing well now, they are likely also better positioned for long-term success with a business model that can quickly adapt and respond to changing market conditions and unexpected shocks. Slide 9: Sustainable equity indexes have demonstrated strong risk-adjusted returns from 2015 to 2020 Although past performance is no guarantee of future results, a historical look back over the last five years provides compelling results of the performance of sustainable indices. Here’s a look at indices that represent three regions, comparing the return in volatility of the broad market against those with strong sustainable business practices in the form of ESG behaviors. Across all three markets, ESG indices have shown competitive return and risk characteristics as compared to their parent indices. In addition, MCSI ESG Research has examined whether these companies with high ESG ratings were less exposed to systematic risks. The COVID-19 outbreak, while over a very short term and limited in scope, is the first real-world test since the 2008 global financial crisis and the researchers have found that both over the short-term market volatility and on a five-year basis, ESG leaders (illustrated here) have outperformed their parent indices on a risk-adjusted basis. More importantly, however, in further analyzing the contribution to that active return or outperformance, they have found that the ESG factor, separate and apart from other systematic or stock specific sources of active return, has been a positive contributor. These findings reinforce the point that ESG indices may indeed be more resilient. Slide 10: Flows into sustainable investments have accelerated in the last decade And the market is taking notice. In 2019, over $21 billion was invested in sustainable funds according to Morningstar. That’s a four-fold increase over 2018. In the first quarter of this year, that trend only accelerated even as equity markets turned negative, with more than $10 billion flowing to sustainable funds between January and the end of March 2020. Slide 11: So what does this mean for you?

So what does this mean for you? We encourage all clients to think about how they want to position their investments for the future. Take time to think about your personal goals and the impact you want to create with your investments. Whether you want to live out your belief, help society solve its biggest challenges, or target companies poised for long-term success, you may be able to pursue your goals through sustainable and impact investing. Slide 12: Think about the impact you want to create alongside your goals First and foremost, remember why you’re investing. We are here to help you invest so you can pursue the goals you have for yourself, your family, your businesses, and your legacy. Our objective isn’t simply to see a portfolio grow. It is to help you turn your ambition into action and give you the means to help you achieve your long-term goals and the aspirations you may have for your community, society, and the planet. Having an open discussion about your long-term goals and your impact aspiration can help us put a plan in place that will allow you to progress towards the goals you have set while also creating positive impact in the world at large. Slide 13: Think about the impact you want to make and connecting that to the companies you invest in To help you think about your sustainability preferences, our Chief Investment Office has categorized the common issue that sustainable investors focus on into four pillars: People, Planet, Principles of Governance, and Prosperity. These pillars were designed as a framework so we can evaluate investments using consistent and industry-agnostic increasingly available data. Our goal is to make sustainable investing intuitive and actionable so that our clients can understand where they may want to have greater impact. The pillars provide a way for you to act on your preferences by connecting to investments and strategies that align to each sustainability theme, allowing you to invest in the future you want. For instance, investments that accentuate a lens on people may focus on firms that excel in protecting the safety and human rights of employees, plus also positively influence their suppliers, their customers, and the broader community.

Strategies related to the planet will allow you to direct your investments towards companies that are good stewards of the environment and of our limited natural resources, or are actively working towards finding solutions to environmental problems. Principles of governance presents an overarching frame of how firms represent their aspirations regarding people, planet, and prosperity, and ensures that the risk and opportunities of these dimensions are incorporated into their decision-making fabric. And a prosperity lens highlights creators of good jobs, leaders in innovation that serve the common good and investments in the vitality of communities. We can use this framework to help you focus on the areas you’d most like to influence or we can discuss how a combination of these strategies and themes may help you create an approach that aligns with all your sustainable investing goals. Slide 14: And look for opportunities that could result from the current market environment Using a sustainability lens may help you identify opportunities that could emerge at a faster rate given the current environment we face. For instance, you may want to think about how global healthcare and medical technology may evolve to address the realities of the pandemic and the demand for telemedicine in the future. These technologies have the potential to also help expand access to address the needs of an aging and at-risk population, and greatly increase the quality of care. Companies at the cutting edge of medical innovation are poised to benefit greatly. Or how labor and human capital management may emerge as a differentiating capability, separating those companies that invest in the health, safety, and skills of their workers as vital resources from those who treat them as more disposable assets. The reputational risks may also continue to expand with media coverage while the opportunities created my more agile workforces unfold in this crisis. Perhaps you want to review how supply chain localization or creation of dual supply chains may accelerate. A trend that began with simmering trade disputes is likely to continue to help protect against future disruptions that occurred during the pandemic. Supply chain localization is also influenced by concerns about intellectual property theft and national security, and could create opportunities for reducing transport costs and associated carbon emissions.

Finally, cloud computing may need to expand to more efficiently manage business and personal technology needs to support increases in telecommuting by some workers, and distance learning and education. The expanded use and availability of these technologies can also have the positive knock-on effect of providing broader opportunity for advancement and employment to all parts of society.

These opportunities are part of a larger trend, one that is transforming transparency and accountability. This is a shift to stakeholder capitalism that values employees, customers, shareholders, and communities, and transforms business practices accordingly.

Slide 15: You have choices in how to create a more sustainable future

If incorporating sustainable investments into your portfolio is something you’d like to pursue, you have choices in how to do it. In fact, sustainability can be central to an investor’s long-term approach. For clients of Bank of America’s Private Bank, you can access our best thinking about sustainable investing through our internally managed Chief Investment Office equity separately managed account strategies known as socially innovative investing, or through a multi-asset class total portfolio solution known as our CIO sustainable impact portfolio which combines socially innovative investing with third-party mutual funds and exchange-traded funds. You also have access to a wide range of mutual funds and exchange-traded funds and separately managed account through Bank of America Private Bank so you can invest in strategies that benefit from and contribute toward the impact you would like to create.

If you desire, you can elect to avoid certain exposures through exclusionary screening approaches in a separately managed account. For example, screens allow you to avoid firms that participate, say, in the oil and gas industry or those that produce civilian firearms. The right approach or combination of approaches will depend on your larger goals but we can work together to find the approach that is in your best interest.

Slide 16: So what should you consider doing next?

So what should you consider doing next? First, remember you’re not alone. We are here to help. We can answer questions, offer guidance and insight to help you make sense of the markets. We are here to offer you advice so you can make more informed decisions about your finances and maintain investment discipline. This checklist is a handy reminder of the things we can do together, steps that will

help you maintain confidence in your investment strategy and help you to stay on track towards your long-term goals. Slide 17: It all begins with a conversation It all begins with a conversation. Your advisor is always available to answer your questions, to provide you with our perspective and offer advice, so don’t hesitate to reach out to them. We’ve said it a lot during this presentation but remember to focus on your goals and your investment strategy. Your goals are why you invest and they’re the foundation of everything we do. And if you want to learn more about sustainable investing, schedule a time to discuss what you’ve learned today with your advisor and have an open discussion about how you can invest towards your goals and a more sustainable future. And thank you for taking the time to join us today. Slide 18: Index Definitions Securities indexes assume reinvestment of all distributions and interest payments. Indexes are unmanaged and do not take into account fees or expenses. It is not possible to invest directly in an index. Indexes are all based in dollars. The MSCI World ESG Leaders Index is a capitalization weighted index that provides exposure to companies with high Environmental, Social and Governance (ESG) performance relative to their sector peers. MSCI World ESG Leaders Index is constructed by aggregating the following regional Index MSCI Pacific ESG Leaders Index, MSCI Europe & Middle East ESG Leaders Index, MSCI Canada ESG Leaders Index and MSCI USA ESG Leaders Index. The parent index is MSCI World Index, which consists of large and mid-cap companies in 23 Developed Markets Countries. The Index is designed for investors seeking a broad, diversified sustainability benchmark with relatively low tracking error to the underlying equity market. The index is a member of the MSCI ESG Leaders Index series. Constituent selection is based on data from MSCI ESG Research. The MSCI Emerging Markets (EM) ESG Leaders Index is a capitalization weighted index that provides exposure to companies with high Environmental, Social and Governance (ESG) performance relative to

their sector peers. MSCI EM ESG Leaders Index consists of large- and mid- cap companies across 24 Emerging Markets (EM) countries. The Index is designed for investors seeking a broad, diversified sustainability benchmark with relatively low tracking error to the underlying equity market. The index is a member of the MSCI ESG Leaders Index series. Constituent selection is based on data from MSCI ESG Research.

The MSCI USA ESG Leaders Index is a capitalization weighted index that provides exposure to companies with high Environmental, Social and Governance (ESG) performance relative to their sector peers. MSCI USA ESG Leaders Index consists of large- and mid- cap companies in the U.S. market. The Index is designed for investors seeking a broad, diversified sustainability benchmark with relatively low tracking error to the underlying equity market. The index is a member of the MSCI ESG Leaders Index series. Constituent selection is based on data from MSCI ESG Research.

The MSCI World Index captures large and mid-cap representation across 23 Developed Markets (DM) countries. With 1,640 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Emerging Markets Index captures large- and mid- cap representation across 24 Emerging Markets (EM) countries. With 1,124 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI USA Index is designed to measure the performance of the large- and mid- cap segments of the U.S. market. With 620 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the U.S.

The Russell 1000 Index® tracks the highest-ranking 1,000 stocks in the Russell 3000 Index.

Slide 19: Methodology

JUST Capital “JUST Chart of the Week” - To produce the annual Rankings of America’s Most JUST Companies, the methodology follows a four-step process:

Survey Research: JUST Capital conducts both qualitative focus groups and quantitative surveys with a representative sample of the American public on a regular basis in order to understand what issues represent just corporate behavior, how these issues should be defined, and what their relative importance or weight is.

Company Evaluation: In as fair, unbiased and rigorous way as possible, JUST Capital develops metrics and collects data on how companies in the Russell 1000 Index – the largest, publicly traded U.S. companies – perform across these issues. These data are used in developing each company’s score and rank.

Company Data Review: After JUST Capital collects the data for each of the companies in the Russell 1000 universe, companies are given the opportunity to review their data and submit suggestions for revisions before company scores and ranks are determined.

Rankings: As a final step, JUST Capital develops a ranking model that leverages the survey research and company evaluations to score and finally rank companies from the Russell 1000 Index. JUST Capital generates an overall ranking of companies in the Russell 1000 universe as well as an industry-level ranking so that companies can be compared to their peers.

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