Dear Shareholders and Friends,

As the global economy continues to grow at a pace more slow and uneven than that hoped for by many investors, the mood of the world’s stock and bond markets remains nervous and cautious. Most investors and the media have become focused on the dramatic stories of the global economy, which tend to involve countries with too much debt. Markets have been driven by perceptions of what central bankers and government policymakers say they will do to “stimulate” global economic growth. Portfolio 21 is mindful of the global economy, but we concentrate on the fundamental and environmental performance of individual companies. And we know that many company’s management teams are focused on moving their businesses forward and are not waiting for the world’s central bankers’ latest policy pronouncements.

Today we are able to find companies that are adjusting to the conditions of slow and uneven growth, finding ways to improve their businesses, and move their environmental practices toward more competitive positions. Consider the Swedish ball bearing producer, SKF. In response to a slowdown in global manufacturing, the company is adjusting throughput to account for slower demand from Asia and Europe. Yet, SKF is pushing its “BeyondZero” initiative even harder as it aims to reduce the environmental impact of company operations and assist customers in improving their environmental performance. Many stocks that interest us have become cheaper than we might have expected, which is exciting in the cases where we have not yet bought, but quite a disappointment in terms of the ones we already own. We have taken advantage of the general decline in the price of economically sensitive stocks to buy more of what we believe to be the very best quality companies.

Over the past twelve months ending June 30, 2012, the period covered by this report, global investors have been struggling through the implications of the seemingly endless unfolding of the debt crisis and slower-than-hoped-for economic growth in China and the United States. Yes, we had some hopeful days of good news, but on balance the negative revelations have outweighed the positives. In terms of investment performance, Portfolio 21 has struggled a bit and we are frankly disappointed in the results, as the fund lagged the global equity markets. We greatly appreciate your patience and loyalty during this period.

As of June 30, 2012, the fund’s assets were $358.7 million. Performance is presented below:

Performance as of 6/30/12

On the important matter of environmental performance, although there is no specifically identified immediate economic reward for excellent environmental practices, none of our holdings were divested for environmental, social, or governance (ESG) reasons. In fact, our holdings continue to set the high bar for other companies worldwide.

Direct engagement with companies is fundamental to Portfolio 21’s commitment in finding companies with superior environmental initiatives. Over the course of the year, our Research Analysts monitor news feeds and company publications, and correspond with company managements. While we track companies’ achievements we also seek clarification when companies fall short.

For instance, in February 2012 the New York Times published an article entitled “In China, Human Costs Built into an iPad.” The article revealed unethical practices were discovered by Apple during audits, yet suppliers were not always forced to make changes. While supply chains are complex, Portfolio 21 expects Apple to ensure corrective actions when violations take place. We were very concerned about the article’s description of Apple appearing to prioritize profit over worker safety. We contacted the company to express these concerns and within a week Apple responded that the Fair Labor Association (FLA) would be conducting special voluntary audits of Apple’s final assembly suppliers, and that the FLA would make their findings and recommendations publicly available.

Although we acknowledge this was a significant error in Apple’s supply chain management, the company responded responsibly and was not divested from the fund. All of our holdings are reviewed on an annual basis to confirm that they continue to meet our investment criteria. Over the last year, we reviewed 92 companies. We found no egregious actions worthy of divestment, but our Research Analysts sought additional communication with eight companies. Topics of engagement included clarification surrounding key performance calculations, revenues earned from military contracts, and new acquisitions.

While the investment returns of the past year are not something that we are pleased with, many of the companies we are invested in have in fact produced impressive financial results. This good corporate performance, combined with the noted decline in stock prices, has given us the opportunity to increase our holdings in companies that we believe are the world’s best in terms of environmental management and future potential financial results.

Portfolio 21’s Investment Team focuses on finding companies that have demonstrated excellence both from a financial perspective as well as from an environmental perspective. Our Research Analysts engage directly with companies in our worldwide research effort, and our work is detailed and specific to each company we examine. That is how we seek to produce good long-term investment results, by concentrating on individual company fundamentals, environmental practices, and stock valuations. Unilever is a good example of a recent fund addition is this regard. The company has realized a return-on-equity over the last twelve months that was significantly higher than its global sector peers and more than double that of the MSCI World Equity Index. Unilever demonstrates an environmental awareness not realized by many large companies. In 2009, Unilever launched its Sustainable Living Plan. The plan contains over 50 targets that will assist the company in halving its environmental impacts by 2020. Unilever has also created an Agriculture Code, to which 100% of its suppliers/farmers must comply by 2020. Standards outlined include agrochemicals, soils, water, biodiversity, energy, and waste. Unilever’s plan also sets goals for the company’s packaging use, energy use, logistics, and waste. 2020 targets include: reduce packaging weight by one-third; reduce carbon dioxide emissions from its logistics network to 2010 levels, and reduce carbon dioxide emissions from energy used at factories to 2008 levels or below. Furthermore, the company pays a nice dividend to shareholders and its five-year average price-toearnings ratio is below sector peers and the MSCI World Equity Index.

We believe that our high standards in these areas give us an advantage; conversely, we are clear in the fact that we have no advantage when it comes to trying to outguess the world’s central bankers or in trying to predict the very next turn in the global economy. We think we have a pretty good idea of what’s going on with the long-term fundamentals and environmental strategies of the companies we are interested in as investments, but when it comes to the shortterm global economy, we are observers developing a view along with the rest of the pack.

Our view is that the global economy is in an extended period of adjustment and the problems associated with the debt load and generous retirement and social service promises accumulated over the prior decades have no solutions. The best the world’s policy makers and central bankers can do is to buy time so that the rest of us can get use to living with these problems and we can all make required adjustments. People, governments, and companies are all adjusting differently, and we are working hard to own the companies best able to adjust. Sadly and ironically, we could probably make the same type of comment about climate change. The decline in the prices of economically sensitive stocks and commodities, accompanied by the rise in demand for so called “safe haven” assets, demonstrates that investors are gearing up for continued economic struggles ahead.

At Portfolio 21, we have tended to have a greater percentage of our portfolio invested in economically sensitive companies than that found in the broad market. Many companies that produce products making a positive difference in energy use, or limiting environmental degradation, are in fact economically sensitive. While that exposure hurt our results in the past year, we are maintaining our general portfolio position as we have confidence in the specific companies and management teams. The change we have made in the portfolio has been to use the price declines of economically sensitive stocks as an opportunity to buy more of what we believe to be the most well positioned companies, while pruning weaker holdings.

We cannot help but to see analogies between the ongoing debt crisis and the state of the global environment. Both problems are massive and come as a result of decades of habitual borrowing against the future. These habits were formed during a long period of economic growth fueled, quite literally, by oil and debt. As long as things were growing fast enough, society seemed willing to ignore the ultimate impacts of the debt load and the myriad environmental crises being created alongside all the growth.

One has to wonder, if we had not taken on all the debt and pushed the pace of industrial development and consumerism, maybe we could have done things in a manner that would not have been quite so harmful to the environment. Will that be the silver lining to today’s debt-laden storm clouds? We’d love to say yes, we think that the world will slow down responsibly and begin to mend the many issues that the debt and oil driven growth binge has created. However, we do not think it makes any sense at all to pin our future on hopes for societal change. We need to make sure that we are invested in the companies that have already recognized these issues and made required changes: the farsighted global leaders, focused on environmental issues as well as financial quality.

Management Discussion of Fund Performance

The last twelve months saw investors flocking to the relative growth and perceived safety of U.S. stocks in the midst of a global slowdown. The fund was underweight U.S. stocks, and overweight European Industrial stocks, which produced a drag on performance. We continue with this general positioning as we find many excellent companies with attractive stock prices outside of the U.S.

Outside of the U.S. market, the globe was awash in big negative numbers with the eurozone leading the way. As expected, the fund’s overweight position in Spain hurt performance. Investors fled from everything Spanish, even stocks like Telefonica, which gets less than 30% of its revenue from its home country. Our feeling is that European companies are being painted with too broad of a brush. As a result, not only have weak companies been sold off, but many large European companies with global reach and strong financials have experienced stock price declines to the point that we believe they will be a source of good returns for the fund in the future.

On the sector side, our belief that conventional energy stocks are in secular decline helped, as the Energy sector underperformed and we had virtually no exposure. Our overweighting of Technology also helped, as companies continued to invest in productivity tools as opposed to new hires.

The biggest performance drag sector-wise was our exposure to large European Industrials. While they suffered from the locations of their headquarters, longerterm these companies are focused on what the world will need: doing more with less. Building efficiency, power efficiency, and transportation efficiency are all themes we see playing out well for the fund as carbon constraints increase.

Individually, the big European Industrials like Siemens, ABB, SKF and Schneider Electric were all down by 30 to 50% for the 12 month period. A couple of U.S. stocks, Johnson Controls and NetApp, failed to meet earnings estimates and were penalized 30-40% as the market assigned them “show me” status.

Novo Nordisk was again a top performer as it continued to stay ahead of the competition in insulin analogues. Samsung and Apple were also winners, fighting to fulfill the seemingly endless desire for high-end smart phones. eBay extended its comeback, thanks in no small part to PayPal, and Ecolab’s acquisition of Nalco continued to please investors.

We have cut the number of names in the fund over the last 12 months. The further concentration is due to increased confidence in the financial and ecological profile of our core holdings. Indeed, we were quite happy with the fundamental performance of our companies over the last year and are quite optimistic that better stock returns will follow. The following table highlights some of the past, present, and future metrics that illustrate the fund’s fundamental and valuation positives.

This is not a forecast of the Fund’s future performance.  Earnings growth for a Fund holding does not guarantee a corresponding increase in the market value of the holding or the Fund.

Again, thank you for your patience and loyalty. Since Portfolio 21 began in 1999, we remain true to our investment philosophy and long-term approach. We believe Portfolio 21’s investment process identifies companies that have a higher probability of adaptation in the context of ecological limits, making them better investments over the long term. As always, we welcome your comments and questions. You can reach us at welcome@portfolio21.com.

Sincerely,

The Portfolio 21 Investment Management Team

John Streur, President	Jim Madden, Chief Investment Officer	Tony Tursich, Senior Portfolio Manager
Beth Williamson, Senior Research Analyst	Emily Lethenstrom, Senior Research Analyst

Portfolio 21 invests in foreign securities, which are subject to the risks of currency fluctuations, political and economic instability and differences in accounting standards. The Fund invests in smaller companies that involve additional risks such as limited liquidity and greater volatility.

The Fund’s environmental policy could cause it to make or avoid investments that could result in the portfolio underperforming similar funds that do not have an environmental policy.

Fund holdings and sector allocations are subject to change and are not recommendations to buy or sell any security.  See complete fund holdings information.

Current and future portfolio holdings are subject to risk.

The MSCIWorld Equity Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. The New York Mercantile Exchange, or NYMEX, is a commodity exchange where natural gas, electricity and other futures and options are traded. NYMEXWTI Crude Oil is a grade of crude oil used as a benchmark in oil pricing. NYMEX Natural Gas futures contract is widely used as a benchmark for natural gas prices. The London Metal Exchange, or LME, is the world’s largest futures and options exchange for metals. LME Copper is a standardized exchange-traded contract, which is used as a benchmark in pricing copper. The Intercontinental Exchange, or ICE, is the principle futures exchange for cotton. ICE Cotton is a futures contract on cotton, which is used as a benchmark for cotton pricing. The MSCIWorld Materials Index is a component of the MSCIWorld Index and represents the material securities defined by MSCI. The MSCIWorld Industrials Index is a free float-adjusted market capitalization weighted index that is designed to measure the industrials sector performance of 23 developed markets around the world. The U.S. Dollar Index measures the value of the dollar against a basket of six major currencies. The Gold Spot price is quoted as U.S. Dollar per Troy Ounce. The Japanese yen is the official currency of Japan. The conventional market quotation is the number of yen per U.S. dollar. It is an independent, free- floating currency. The Barclays Capital U.S. 7-10 Year Treasury Bond Index measures the performance of U.S. Treasury securities that have a remaining maturity of at least seven years and less than 10 years. The Barclays Capital U.S. 20+ Year Treasury Bond Index measures the performance of U.S. Treasury securities that have a remaining maturity of at least 20 years. The S&P 500 Consumer Staples Index is an unmanaged index considered representative of the consumer staples market.

Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced. Must be preceded or accompanied by a current prospectus. Please refer to the prospectus for important information about the Fund including investment objectives, risks, charges, and expenses.

The Price to Earnings (P/E) Ratio reflects the multiple of earnings at which a stock sells.

Earnings per share is calculated by taking the total earnings divided by the number of shares outstanding.

Return on Equity is the amount, expressed as a percentage, earned on a company’s common stock investment for a given period.

EBITDA is earnings before interest, taxes, depreciation and amortization.

The PEG ratio is the forward P/E ratio divided by the projected EPS growth rate.

The Fund is distributed by Quasar Distributors, LLC.