Dear Friends,

Although the news media continue to focus on the upheaval and volatility of the financial markets as the top story, ecological limits to economic growth is the real story of the century. Environmental disasters have been intensifying as economic growth struggles against natural and man-made limits.

A drought of historic proportions in China and the general uptrend in global commodity prices are propelling inflation in many parts of the world. Corn prices surpassed the record set during the 2008 food crisis and prices are expected to stay high through 2012 because a wet spring cut the size of this fall's harvest. A wave of wildfires across Russia ravaged millions of acres of forests and caused worse damage than last year's devastating fires. Flooding in Australia, combined with cyclones in both Queensland and Western Australia, had a significant impact on the second quarter activity. The list goes on. Damage from natural disasters often goes beyond what is readily visible. Toxic waste is strewn about. Liquid fuels and chemicals contaminate groundwater. Wrecked buildings contain hazardous materials and fires generate smoke containing soot and other pollutants. Catastrophic costs to insurance companies have been enormous. To boot, the world is facing critical supply constraints. Demand for natural resources is escalating with no end in sight. The International Energy Agency has reported that proven oil reserves are in decline to the tune of 6% per year. There are serious clean water shortages in China, India, Africa, and even the U.S. Again, the list goes on. If climate change and resource depletion continue unchecked, the implications for the world economy and corporate profits will be serious.

After witnessing the spectacle of our representatives in Washington DC bickering about the national debt and budget deficits, it is hard to imagine them confronting our ecological debt. But failure to acknowledge and deal with ecological limits does not mean they don't exist. In fact, the longer we deny and delay, the more disruption we should expect. This reality tends to be overlooked in times of high financial stress and economic instability, but it is no less of a risk. As environmental disruption escalates, there will naturally be a shift in public opinion which will drive the politics and policies needed to address the environmental challenges ahead. The question remains as to whether we have the ability to act in time before disruption causes severe damage to our financial system and way of life.

The caveat--"Past performance is not indicative of future results"--has never been more relevant than today. At Portfolio 21, we are mitigating ecological risk as we believe it is the single biggest threat to economic growth, corporate profits, and investor portfolios in this century. We do so by investing in companies that are retooling their business models and gaining competitive advantage to address limited natural resources and environmental degradation. Some of these companies will offer the needed solutions to many of our environmental challenges. However, technology may not save the day. We expect difficult times ahead with increased risk and volatility. Our global economy will be forced to accept the reality of resource limitations, and companies that adapt to that reality will likely gain distinct competitive advantage.

Portfolio 21's investment approach considers the riskiness of the global growth economy itself. Even if markets decline as a whole, we believe that certain companies--those that help society adapt to and solve the problems of resource limitations--are strategically positioned for leadership, innovation, and competitive advantage. We believe Portfolio 21's selection criteria identify companies that have a higher probability of adaptation in the context of ecological limits, making them better investments over the long term.

Leslie Christian, Co-founder and Carsten Henningsen, Co-founder

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Past performance does not guarantee future results.

Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security. See complete fund holdings information.

The information above represents the opinions of Portfolio 21 Investments, is subject to change, and any forecasts made cannot be guaranteed.