Introduction 2. Background to the Fund 3. Investment Criteria 4. Formulating Guidelines 5. Principles 6. Portfolio Screening 8

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3 Introduction 2 Background to the Fund 3 Investment Criteria 4 Formulating Guidelines 5 Principles 6 Portfolio Screening 8 Investment Management 10 Client Service 12 Appendix 14 Contacts 16 1

4 The Light Green Fund forms part of the pooled pension fund range offered by Prudential M&G. Investing in UK equities, the Light Green Fund is managed according to a specific set of ethical and environmental criteria. It is intended to meet the investment requirements of those pension scheme members who, although concerned about investment returns and appropriate levels of risk, feel that social responsibility should play a significant part in their choice of investments. What distinguishes the Fund from other ethical funds are its light green investment criteria, which strike a balance between ethical concerns and investment efficiency. The Fund is intended to be a pragmatic and effective solution for those pension scheme trustees wishing to reflect the ethical requirements of their members, but who remain fully aware of the need to optimise investment return and risk. 2

5 Socially responsible investment is becoming an increasingly important consideration for pension fund trustees. Much of the interest in socially responsible investment has come from pension scheme members themselves, particularly from those who are concerned that the investments used to fund their pensions are selected with consideration for the global environment and community. From our discussions with pension fund clients and their advisers, it is clear that socially responsible investment is increasingly required as a pension scheme investment option, particularly for defined contribution and AVC arrangements. In recognition of this demand, Prudential M&G s Light Green Fund reflects the key ethical and environmental requirements of scheme members while reducing the investment risk implied by too restrictive a set of investment criteria. 3

6 The investment proposition underlying the Light Green Fund is based on the observation that many ethical funds currently available embody relatively strict investment criteria. These may reflect the historic bases for the funds and/or their ethical guidance by committees or advisory boards. Such criteria often go beyond what many pension scheme members would regard as their own ethics. For example, many scheme members may be adamantly opposed to animal testing in the cosmetics industry, but may support such testing for potentially life-saving drugs. We also believe that scheme members are aware of the potential hypocrisy in, for example, demanding investments which hold no stocks involved in alcohol or gambling, whilst still enjoying the odd drink or punt on the National Lottery. For funds based on relatively strict criteria, the blanket de-selection of market sectors can sometimes compromise investment performance. Also, the volatility of investment returns can be unacceptably high due to the constrained nature of the available investment universe. There is a real need for a fund available to pension schemes which represents an emphatic ethical and environmental standpoint, but which also permits investment in a wider, less constrained, universe of stocks. Prudential M&G recognises this need and the Light Green Fund has therefore been designed to balance portfolio risk with social responsibility. 4

7 We have determined a set of investment criteria meeting the requirements of many scheme members in the light of research, both our own and more widely available analysis, amongst pension scheme members, pensions professionals and investment consultants. In defining these criteria, we have worked extensively with EIRIS Services Ltd (a subsidiary of EIRIS, the Ethical Investment Research Service, an independent charity dedicated to ethical investment research) analysing companies against a specific ethical and environmental yardstick. Together with EIRIS Services Ltd, we have applied the investment criteria to companies listed on the UK stock market to determine which should be included in the Fund s investment universe. The specific criteria for the Light Green Fund augment the appropriate ethical and environmental policies already in place for all our UK equity investments. If a company s policy, or lack of it, is identified as presenting a significant risk to shareholder value, we will either not invest at all in the company or engage with its management in order to effect the appropriate changes. 5

8 First and second round affects The investment criteria target first round offenders through the exclusion of manufacturers, rather than second round distributors of unethical goods. For example, tobacco producers are excluded, but not supermarkets that sell cigarettes. Company screening Companies which do not meet the stated ethical and environmental standards are screened out of the investment universe for the Fund. Accordingly, there is a greater emphasis in the Fund on those companies which pass the screens. We have chosen not to emphasise these companies further, other than on investment grounds. This is because such an approach would require a subjective, non investment, view on how much to emphasis particular criteria. We believe clients do not expect us to exercise such judgement in our role as investment managers. 6

9 Review of investment criteria Our research into the requirements of scheme members has formed the basis for the selection of companies given to EIRIS Services Ltd, rather than reflecting the views of a limited group of people such as in a board of reference. The criteria will be continually reviewed in the light of developing public opinion. For example, a development in recent years has been the exclusion of companies which develop genetically modified crops. Established in 1983, EIRIS has many years experience in providing independent research into corporate ethical performance to investors with ethical concerns. Its team of ten researchers is dedicated to offering authoritative and comprehensive research on a broad range of positive and negative criteria for over 1,000 Company Groups in the UK and Continental Europe. 7

10 Working together with EIRIS Services Ltd, we have aimed to exclude from the Fund s investment universe companies which, according to the information held in the EIRIS computer database, fall into the categories described below. A more detailed description of how these criteria are applied is provided in the appendix. Environment & Pollution Convictions for environmental pollution offences Greenhouse gas emissions Manufacture of ozone depleting chemicals Pesticide production Polyvinyl chloride (PVC) production Tropical hardwood deforestation Water pollution Nuclear power Health and Safety Convictions 8

11 Genetic Engineering Genetically modified crops Genetic engineering of animals Tobacco Production Exploitation of Animals Animal testing for cosmetics Intensive farming of animals Military Weapons manufacture and sale Large Ministry of Defence contracts Pornography Third World Exploitation 9

12 Fund Investment Characteristics Applying the above criteria to companies quoted on the UK stock market, the Light Green Fund can hold stocks representing around 60% by capitalisation of the FTSE All-Share Index. This investment universe of stocks has a tracking error of around 5% compared with the All-Share Index. The Fund itself holds around 60 stocks and has an investment performance objective of returns 1% per annum above its investment universe benchmark. Investment Philosophy Prudential M&G are active managers and believe that the vast resources at our disposal give us an edge when it comes to investing. Our experienced investment professionals seek to invest in quality companies whose fundamental strengths and prospects are undervalued by the market. Our approach is driven by bottom up stock selection using both price and quality to assess value. 10

13 Investment Process Within the framework of the given universe of investments, fund managers are notified by EIRIS of additions to, or removals from, the acceptable list on an ongoing basis. The Fund is then managed adopting the same investment philosophy and process underpinning all our institutional equity funds. This investment process uses both qualitative and quantitative methods to identify attractively valued stocks. It focuses on identifying those companies which have a strong and sustainable franchise that can deliver healthy long term returns. Further research is undertaken to understand how these characteristics are reflected in valuations. Company contact is particularly important and analysts meet each company in their sector on a one-to-one basis at least once a year. The portfolio is created on the basis of this comprehensive research incorporating the views of all our equity specialists. The final stage of the investment process is concerned with monitoring and control of stocks in the portfolio to ensure that the overall strategy is consistent with the Fund s objectives. 11

14 Investment Meetings We believe in developing a partnership with our clients that goes beyond the provision of superior investment performance. Communication is a vital ingredient in achieving this and regular contact between the trustees and our investment professionals is encouraged. A senior member of the firm is appointed as the scheme director responsible for all aspects of the relationship, creating solutions to meet individual clients needs. Reporting At the end of each quarter, we produce an investment report which provides an analysis of the Fund s performance and the investment strategy undertaken by the management team during the quarter. Clients also receive a more general report on the financial markets, putting into context our current strategy. Administration Our experienced and professional client services team provides a direct point of contact for general enquiries. This team looks after the organisation and initial take-on of funds, is responsible for the day-to-day cash management and unit administration and produces regular reports and updates for our clients. They also provide a transaction statement after each investment. We operate a telephone helpline for clients providing information on the Fund, prices and performance. 12

15 Dealing Arrangements The Fund is valued and priced daily. The components of our charges are as follows: The Fund has a continuing investment charge of 0.35% per annum on the value of the Fund. This charge is reflected in the unit price. The bid/offer spread on the Fund reflects only dealing expenses incurred, which are typically around 1.5%. The minimum amount for a standalone investment in this fund is set at 100,000 during the first year of contributions. Should the Light Green Fund be used as part of an overall range of funds offered by Prudential M&G, no minimum investment charges will apply. 13

16 Appendix Investment Criteria for the Fund Working together with EIRIS Services Ltd, we have drawn up an acceptable list of those UK companies which, according to the information held in the EIRIS computer database, meet the investment criteria determined by Prudential M&G. This process aims to exclude the following groups of companies from the Fund s investment universe. Environment & Pollution Environmental pollution offences Companies which have been convicted on the basis of a prosecution by the Environment Agency or the Scottish Environment Protection Agency in the last three years. Greenhouse gases Companies which derive a substantial proportion (more than one third) of their annual turnover from a) fossil fuel industries, b) high energy use sectors of industry, c) manufacturing furnaces or major plant equipment for high energy use sectors of industry, and d) companies which have at least a 5% share of UK high energy use sectors of industry. Ozone depleting chemicals Companies which manufacture or supply high or medium-rated ozone depleting chemicals or products that contain them. Pesticide production Companies which manufacture pesticide products. Polyvinyl chloride (PVC) production Companies which manufacture PVC or phthalates. Tropical hardwood deforestation Companies which extract, import, process or merchant tropical hardwood timber from unsustainable (not independently certified) sources. Water pollution Companies which have regularly (more than 10 times) exceeded their effluent discharge consents during the past year, or which have exceeded a Red List substance limit in the last three year period. Nuclear power Companies which own or operate nuclear power stations or which are members of the British Nuclear Industry Forum. Health and Safety Convictions Companies which have been convicted more than once following a prosecution by the Health and Safety Executive in the last three year period. 14

17 Genetic Engineering Genetically modified crops Companies that carry out the development of genetically modified crops. Genetic engineering of animals Companies which carry out the genetic engineering or cloning of animals for medical purposes or for the use of animal organs and tissues for transplantation into humans. Tobacco Production Companies which derive any turnover from the production of tobacco. Exploitation of Animals Animal testing for cosmetics Companies which provide animal testing services or which manufacture or develop cosmetics, toiletries or cosmetic intermediates that are tested on animals. Intensive farming of animals Companies which a) own or operate pig or poultry farms using intensive methods, b) manufacture or supply intensive farming equipment, c) own or operate fish farms, abattoirs or poultry processing plants, or d) derive more than one third of annual turnover from the sale or processing of meat or slaughterhouse by-products. Military Weapons manufacture and sale Companies which are involved in the production and sale of conventional or nuclear weapons systems, and companies which have been classified as major arms traders by the Campaign Against the Arms Trade. Large Ministry of Defence contracts Companies which, in any of the last three years, had contracts with the Ministry of Defence worth more than 250 million. Pornography Companies which publish, print or wholesale magazines that contain pornographic material or newspapers with photographs of topless women, and companies which distribute films or videos containing sexually explicit or violent material. Third World Exploitation Companies which market tobacco products in the Third World. Companies which, according to International Baby Food Action Network (IBFAN), have been found to be in only partial compliance with, or total or substantial violation of, the International Code of Marketing Breast-Milk Substitutes. Full details of the investment criteria for the Fund and the list of acceptable UK companies meeting the criteria are available on request, as are definitions of all terms used in this brochure. 15

18 For further information about the Light Green Fund please contact: Phil Brooke Chris Challis Alison Hutton Brian Kite Alec Spooner Paul Tremeer David Ridge

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20 Prudential M&G Pooled Funds Laurence Pountney Hill London EC4R 0HH The value of investments can fall as well as rise. Past performance is not necessarily a guide to future performance. Financial futures which are margined require the investor to make a series of payments against the purchase price instead of paying the whole purchase price immediately. Investors should be aware that they may lose more than the initial payment. Financial futures must be traded on a Recognised or Designated Investment Exchange unless the customer has experience in futures transactions. Changes in rates of exchange of currencies may cause the value of the investments to increase or diminish. Prudential M&G is a trading name of M&G Investment Management Limited and Prudential Property Investment Managers Limited, registered in England and Wales under numbers and respectively, with registered offices at Laurence Pountney Hill, London EC4R 0HH. M&G Investment Management Limited is regulated by IMRO and is the investment manager for Prudential Pensions Limited, other than for the Prudential Property Fund which is managed by Prudential Property Investment Managers Limited. Prudential Pensions Limited is regulated by the Personal Investment Authority. Part of Prudential plc