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T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. T. Rowe Price has been independently verified for the twenty four-year period ended June 30, 2020, by KPMG LLP. The verification report is available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report.

TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the U.K. Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S, international, and global strategies but excluding the services of the Private Asset Management group.

A complete list and description of all of the Firm's composites and/or a presentation that adheres to the GIPS® standards are available upon request. Additional information regarding the firm's policies and procedures for calculating and reporting performance results is available upon request

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Leading the Charge in France's Recycling Sector

Environmental, Social and Governance, or ESG, factors have always been a consideration when assessing potential investment opportunities at T. Rowe Price, but they have taken on even greater significance in today’s environment.

Consider the waste generated by your workplace, or even your individual household. Many of us have probably never thought twice about where that waste goes. Only recently have organizations started to focus on recycling efforts, such as separating paper and plastics from food waste. However, the fact remains that much of the waste goes to landfills worldwide.

Paprec, a waste services business, specializes in the collection, sorting, and recycling of nonhazardous waste from private and public customers, primarily in France, as well as Switzerland. It holds the #1 position in the recycling of paper and plastic within France.

Paprec’s market is expected to grow significantly due to a favorable regulatory regime. European Union and French objectives call for 60% of non-hazardous waste to be recycled by 2025, and 2x less waste to be landfilled vs. 2010.

In addition, the French government levies lower taxes on waste that is recycled, as opposed to landfilling or incineration. Clearly, companies are increasingly incentivized to adopt sustainable environmental practices like recycling. Paprec benefits from high customer retention rates, in the mid-90s on average, as customers are increasingly outsourcing their waste management.

Finally, the French government has strict regulatory requirements for companies operating in the waste management sector, including authorizations and licenses that can take months or even years to obtain. So, the barriers to entry in this sector are significant.

With its already-established asset base of equipment, trucks, plants, and landfills, it is our view that Paprec will benefit from increased recycling volumes, even if other players get involved in the space, given its incumbent position and the fact that the “pie” is growing.

Will landfills ever disappear? Though I certainly do not expect it in our lifetimes, companies that are well-positioned to capitalize on a shift away from that segment of waste management should benefit as developed, and eventually emerging, markets have the resources to focus on sustainability.

Within the fixed income market, a category of ESG-oriented bonds has evolved to meet investor demand, and promote corporate responsibility, for sustainable practices. These include Green Bonds, Social Bonds, Sustainability Bonds, and Blue Bonds. The Green Bond market, estimated at ~$169Bn in size, is comprised of fixed income securities where the proceeds are applied to activities that promote environmental sustainability.

In many cases, ESG bonds are classified as “use of proceeds” – meaning that proceeds from the capital raised will be utilized to fund specific “green” projects. In this case, interest and principal can be serviced from cash flows of the issuer, not just the specific project being funded, so the credit risk of the bond reflects the company’s overall credit strength.

Paprec is one of a growing number of companies that has raised capital in the ESG-oriented bond market. Paprec’s most recent financing in 2018 was “use of proceeds”. This was classified as a Green Bond due to the company’s focus on recycling projects, and it received a second party opinion confirming its sustainability credentials.

At T. Rowe Price, we utilize “ESG-integration”, which means that we incorporate environmental, social, and governance factors as components of our investment decision – alongside traditional metrics relating to financials, industry, macroeconomic, and other qualitative factors.

The final piece of the investment consideration puzzle is pricing of the security and the relative value of the new Green Bond versus the broader European high yield market. Thus, ESG is naturally considered as we seek to maximize investment performance for our clients.

Given our “client-first” mentality at T. Rowe Price, investment analysts like me are constantly assessing business models, seeking those that are positioned for the long-term. With our ESG efforts, I am better able to analyze sustainability as part of the mosaic of an investment decision.