NOTE
1 — Organization and Significant Accounting Policies
Green Century Funds (the “Trust”) is a Massachusetts
business trust which offers two separate series, the Green Century Balanced Fund (the “Balanced Fund”) and the Green Century Equity Fund (the “Equity Fund”), collectively, the “Funds”. The Trust is registered under the
Investment Company Act of 1940, as amended (the “Act”), as an
open-end,
diversified management investment company. The Trust accounts separately for the assets, liabilities and operations of each
series. The Balanced Fund commenced operations on March 18, 1992 and the Equity Fund commenced operations on September 13, 1995.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The following is a summary of the Funds’ significant accounting
policies:
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(A)
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Investment
Valuation:
Equity securities listed on national securities exchanges other than NASDAQ are valued at last sale price. If a last sale price is not available,
securities listed on national exchanges other than NASDAQ are valued at the mean between the closing bid and closing ask prices. NASDAQ National Market
®
and SmallCap
SM
securities are valued at the NASDAQ Official Closing Price (“NOCP”). The NOCP is based on the last traded price if it falls within the concurrent best bid and ask prices and is normalized
pursuant to NASDAQ’s published procedures if it falls outside this range. If a NOCP is not available for any such security, the security is valued at the last sale price, or, if there have been no sales that day, at the mean between the closing
bid and closing ask prices. Unlisted equity securities are valued at last sale price, or when last sale prices are not available, at the last quoted bid price. Debt securities (other than certificates of deposit and short-term obligations maturing
in sixty days or less) are valued on the basis of valuations furnished by a pricing service which takes into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, and other market data, without exclusive reliance on quoted prices or exchange or over-the-counter prices, since such valuations are believed to reflect more accurately the fair value of the securities. Securities, if any, for which there are
no such valuations or quotations available, or for which the market quotation or valuation provided by a pricing service is deemed not reliable, are valued at fair value by management as determined in good faith under guidelines established by the
Trustees. Certificates of deposit are valued at cost plus accrued interest, and short-term obligations maturing in sixty days or less are valued at amortized cost, both of which approximate market value.
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Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels
listed below:
Level 1 — quoted prices for active markets for identical securities. An active market for the security is a
market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value.
Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds,
credit risk, etc.) Quoted prices for identical or similar assets in markets that are not active. Investments valued at amortized cost. Inputs that are derived principally from or corroborated by observable market data. An adjustment to any
observable input that is significant to the fair value may render the measurement a Level 3 measurement.
22
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GREEN CENTURY FUNDS NOTES TO FINANCIAL STATEMENTS
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continued
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Level 3 — significant
unobservable inputs, including the Fund’s own assumptions in determining the fair value of investments.
The inputs or
methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used to value the Balanced Fund’s net assets as of January 31, 2014:
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LEVEL 1
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LEVEL 2
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LEVEL 3
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TOTAL
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COMMON STOCKS
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$73,923,161
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$ —
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$ —
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$73,923,161
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CORPORATE BONDS & NOTES
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—
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15,629,916
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—
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15,629,916
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U.S. GOVERNMENT AGENCIES
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—
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5,244,730
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—
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5,244,730
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CERTIFICATES OF DEPOSIT
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—
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95,000
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—
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95,000
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SHORT-TERM OBLIGATIONS
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—
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9,110,680
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—
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9,110,680
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TOTAL
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$73,923,161
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$30,080,326
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$ —
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$104,003,487
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The following is a summary of the inputs used to value the Equity Fund’s net assets as of
January 31, 2014:
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LEVEL 1
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LEVEL 2
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LEVEL 3
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TOTAL
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COMMON STOCKS
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$74,166,304
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$ —
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$ —
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$74,166,304
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SHORT-TERM OBLIGATIONS
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—
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177,473
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—
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177,473
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TOTAL
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$74,166,304
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$177,473
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$ —
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$74,343,777
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The Funds adopted the Financial Accounting Standards Board (“FASB”) amendments to authoritative
guidance which require the Funds to disclose details of transfers in and out of Level 1 and Level 2 measurements and Level 2 and Level 3 measurements and the reasons for the transfers. For the six months ended January 31, 2014, there were
no transfers in and out of Level 1, Level 2 and Level 3. Neither of the Funds held any Level 3 securities during the six months ended January 31, 2014. It is the Funds’ policy to recognize transfers into and out of all Levels at the end of
the reporting period.
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(B)
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Securities Transactions and Investment Income:
Securities transactions are recorded on a trade date basis. Realized gains and losses from securities transactions are determined using the identified cost basis. Interest income,
including amortization of premiums and accretion of discounts on bonds, is recognized on the accrual basis and dividend income is recorded on ex-dividend date.
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(C)
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Options
Transactions:
The Balanced Fund may utilize options to hedge or protect from adverse movements in the market values of its portfolio securities and to enhance
return. The Equity Fund is authorized to utilize options to hedge against possible increases in the value of securities which are expected to be purchased by the Equity Fund or possible declines in the value of securities which are expected to be
sold by the Equity Fund. The use of options involves risk such as the possibility of illiquid markets or imperfect correlation between the value of the option and the underlying securities. The Funds are also authorized to write put and call
options. Premiums received upon writing put or call options are recorded as an asset with a corresponding liability which is subsequently adjusted to the current market value of the option. Changes between the initial premiums received and the
current market value of the options are recorded as
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23
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GREEN CENTURY FUNDS NOTES TO FINANCIAL STATEMENTS
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continued
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unrealized gains or losses. When an option is closed, expired or exercised, a gain or loss is realized and the liability is eliminated. The Funds continue to bear the risk of adverse movements in
the price of the underlying assets during the period of the option, although any potential loss during the period would be reduced by the amount of the option premium received. As required by the Act, liquid securities are designated as collateral
in an amount equal to the market value of open options contracts. In the six months ended January 31, 2014, neither the Balanced Fund nor the Equity Fund utilized options or wrote put or call options.
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(D)
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Repurchase Agreements:
The Funds enter into repurchase agreements with
selected banks or broker-dealers that are deemed by the Funds’ adviser to be creditworthy pursuant to guidelines established by the Board of Trustees. Each repurchase agreement is recorded at cost, which approximates fair value. The Funds
require that the market value of collateral, represented by securities (primarily U.S. Government securities), be sufficient to cover payments of interest and principal and that the collateral be maintained in a segregated account with a custodian
bank in a manner sufficient to enable the Funds to obtain those securities in the event of a default of the counterparty. In the event of default or bankruptcy by the counterparty to the repurchase agreement, retention of the collateral may be
subject to legal proceedings.
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(E)
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Distributions:
Distributions to shareholders are recorded on the ex-dividend date. The Funds declare and pay dividends of net investment income, if any, semi-annually and distribute net realized capital gains, if any, annually. The amount and character of income
and net realized gains to be distributed are determined in accordance with Federal income tax rules and regulations, which may differ from U.S. GAAP. To the extent that these differences are attributable to permanent book and tax accounting
differences, the components of net assets have been adjusted.
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(F)
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Federal
Taxes:
Each series of the Trust is treated as a separate entity for Federal income tax purposes. Each Fund’s policy is to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies (“RICs”). Accordingly, no provisions for Federal income or excise tax are necessary.
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In July 2006, the FASB issued
Accounting for Uncertainty in Income Taxes
. This interpretation addresses the accounting for uncertainty in income taxes and establishes for all entities, including
pass-through entities such as the Funds, a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction). The Funds recognize tax
benefits only if it is more likely than not that a tax position (including the Funds’ assertion that their income is exempt from tax) will be sustained upon examination. The Funds adopted
Accounting for Uncertainty in Income Taxes
in
fiscal year 2008. The Funds had no material uncertain tax positions and have not recorded a liability for unrecognized tax benefits as of January 31, 2014. Also, the Funds had recognized no interest and penalties related to uncertain tax
benefits through January 31, 2014. At January 31, 2014, the tax years 2010 through 2013 remain open to examination by the Internal Revenue Service.
The Regulated Investment Company Modernization Act of 2010 (“RIC MOD”) was signed into law on December 22, 2010. RIC MOD makes changes to a number of the federal income and excise tax
provisions impacting RICs, including simplification provisions on asset diversification and qualifying income tests, provisions aimed at preserving the character of the distributions made by the RIC and coordination of the income and excise tax
distribution requirements, and provisions for allowing unlimited years carryforward for capital losses.
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(G)
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Redemption Fee:
A 2.00% redemption fee is retained by the
Funds to offset the effect of transaction costs and other expenses associated with short-term investing. The fee is imposed on redemptions or exchanges of
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24
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GREEN CENTURY FUNDS NOTES TO FINANCIAL STATEMENTS
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continued
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shares held 60 days or less from their purchase date. For the six months ended January 31, 2014, the Balanced Fund and Equity Fund received $4,669 and $232, respectively, in redemption fees.
Redemption fees are recorded as an adjustment to paid-in capital.
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(H)
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Indemnification:
The Fund’s organizational documents provide that trustees and officers are indemnified against certain liabilities arising out of the performance of their duties to the Funds. In the normal course of business, the Funds may also enter into
contracts that provide general indemnifications. The Funds’ maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Funds. The risk of material loss from such claims is
considered remote. As of six months ended January 31, 2014, no liability has been accrued.
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NOTE
2 — Transactions With Affiliates
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(A)
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Investment
Adviser:
Green Century Capital Management, Inc. (“Green Century”) is the adviser (“the Adviser”) for the Funds. Green Century is owned by
Paradigm Partners. Green Century oversees the portfolio management of the Funds on a day-to-day basis. The Balanced Fund pays Green Century a fee, accrued daily and paid monthly, at an annual rate equal to 0.65% of the Balanced Fund’s average
daily net assets. The Equity Fund pays Green Century a fee, accrued daily and paid monthly, at an annual rate of 0.25% of the Equity Fund’s average daily net assets up to but not including $100 million, 0.22% of average daily net assets
including $100 million up to but not including $500 million, 0.17% of average daily net assets including $500 million up to but not including $1 billion and 0.12% of average daily net assets equal to or in excess of $1 billion.
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(B)
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Subadvisers:
Trillium Asset Management, LLC (“Trillium”) is the subadviser for the Balanced Fund. Trillium is paid a fee by the Adviser at an annual rate of 0.40% on the first $30 million of average daily net assets and 0.35% on average daily net assets
in excess of $30 million for its services. For the six months ended January 31, 2014, Green Century accrued fees of $174,973 to Trillium. Northern Trust Investments, Inc. (“Northern Trust”) is the subadviser for the Equity Fund.
Northern Trust is paid a fee by the Adviser based on Northern Trust’s fee schedule of the greater of $75,000 or 0.10% of the value of the average daily net assets of the Fund up to but not including $50 million, 0.05% of the average daily net
assets of the Fund from and including $50 million up to but not including $100 million and 0.03% of the average daily net assets of the Fund equal to or in excess of $100 million for its services. For the six months ended January 31, 2014 Green
Century accrued fees of $37,808 to Northern Trust.
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(C)
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Administrator:
Green Century is the administrator (“the Administrator”) of the Green Century Funds. Pursuant to the Administrative Services Agreement, Green Century pays all the expenses of each Fund other than the investment advisory fees; interest;
taxes; brokerage costs and other capital expenses; expenses of non-interested trustees (including counsel fees) and any extraordinary expenses. The Balanced Fund pays Green Century a fee at a rate such that immediately following any payment to the
Administrator, the total operating expenses of the Fund, on an annual basis, do not exceed 1.48% of the Fund’s average daily net assets. The Equity Fund pays Green Century a fee at a rate such that immediately following any payment to the
Administrator, the total operating expenses of the Fund, on an annual basis, do not exceed 1.25% of the Fund’s average daily net assets.
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(D)
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Subadministrator:
Pursuant to
a Subadministrative Services Agreement with the Administrator, UMB Fund Services, Inc. (“UMBFS”) as Subadministrator, is responsible for conducting certain day-to-day administration of the Trust subject to the supervision and direction of
the Administrator. For the six months
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25
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GREEN CENTURY FUNDS NOTES TO FINANCIAL STATEMENTS
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continued
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ended January 31, 2014, Green Century accrued fees of $51,642 and $49,289 to UMBFS related to services performed on behalf of the Balanced Fund and the Equity Fund, respectively.
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(E)
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Index
Agreement:
The Equity Fund invests in the securities of the companies included in the MSCI KLD 400 Social Index (the “Index”). The Index is owned and
maintained by MSCI ESG Research (“MSCI”). For the use of the Index, MSCI is paid by the Adviser an annual license fee of $25,000, plus the greater of $25,000 or at an annual rate of 0.05% on the first $100 million of average daily net
assets, 0.04% on the next $100 million of average daily net assets, and 0.03% on average daily net assets in excess of $200 million. For the six months ended January 31, 2014, Green Century accrued fees of $30,620 to MSCI.
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NOTE 3 — Investment Transactions
The Balanced Fund’s cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $32,789,397 and $22,097,081, respectively, for the six months ended
January 31, 2014. The Equity Fund’s cost of purchases and proceeds from sales of securities, other than short-term securities, aggregated $13,188,800 and $9,888,110, respectively.
NOTE 4 — Federal Income Tax Information
The tax basis of the
components of distributable net earnings (deficit) at July 31, 2013 were as follows:
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BALANCED FUND
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EQUITY FUND
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Undistributed ordinary income
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$
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8,048
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$
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18,174
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Undistributed long-term capital gains
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0
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0
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Tax accumulated earnings
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8,048
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18,174
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Accumulated capital and other losses
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(2,446,323
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)
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(4,419,664
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)
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Unrealized appreciation (depreciation)
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16,608,610
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18,497,677
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Distributable net earnings (deficit)
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$
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14,170,335
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$
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14,096,187
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The Balanced Fund and the Equity Fund had accumulated short term capital loss carryforwards of $2,446,323 and $4,419,664,
respectively, of which $2,446,323 and $3,499,154, respectively, expire in the year 2018 and $0 and $920,510, respectively, expire in the year 2019. To the extent that a Fund realizes future net capital gains, those gains will be offset by any unused
capital loss carryforwards.
Capital loss carryovers are available to offset future realized capital gains and thereby reduce further taxable
gain distributions. During the year ended July 31, 2013, the Balanced and Equity Fund utilized $1,666,588 and $1,777,981, respectively of their capital loss carryovers.
The tax character of distributions paid during the fiscal years ended July 31, 2013 and July 31, 2012 were as follows:
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BALANCED FUND
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EQUITY FUND
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YEAR ENDED
JULY 31, 2013
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YEAR ENDED
JULY 31, 2012
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YEAR ENDED
JULY 31, 2013
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YEAR ENDED
JULY 31, 2012
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Ordinary income
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$
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437,535
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$
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330,794
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$
|
489,952
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$
|
503,447
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Long-term capital gains
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—
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—
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—
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—
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26
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GREEN CENTURY FUNDS NOTES TO FINANCIAL STATEMENTS
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concluded
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NOTE 5 — Capital
Share Transactions
Capital Share transactions for the Balanced Fund and the Equity Fund were as follows:
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BALANCED FUND
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EQUITY FUND
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SIX MONTHS ENDED
JANUARY 31, 2014
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YEAR ENDED
JULY 31, 2013
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SIX MONTHS ENDED
JANUARY 31, 2014
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YEAR ENDED
JULY 31, 2013
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Shares sold
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693,829
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1,000,325
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297,227
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355,575
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Reinvestment of dividends
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5,647
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22,065
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9,186
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21,267
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Shares redeemed
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(170,420
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)
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(281,498
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)
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(188,502
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)
|
|
|
(285,551
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)
|
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529,056
|
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|
|
740,892
|
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|
|
117,911
|
|
|
|
91,291
|
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NOTE 6 — Recent Accounting Pronouncements
In January 2013, the FASB issued ASU No. 2013-01
Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
. This update gives
additional clarification to the FASB ASU No. 2011-11 Disclosures about Offsetting Assets and Liabilities. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial
statements to understand the effect of those arrangements on its financial position. The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance requires
retrospective application for all comparative periods presented. Management has assessed the potential impact, in addition to expanded financial statement disclosure, that may result from adopting ASU No. 2013-01 and determined there are no changes
to the financial statements.
NOTE 7 — Subsequent Events
Subsequent to January 31, 2014 and through the date on which the financial statements were available for issuance, management has evaluated subsequent events and concluded there were no subsequent
events requiring accrual or disclosure.
27
BOARD OF TRUSTEES’ CONSIDERATION OF ADVISORY AND SUBADVISORY
AGREEMENTS
The Board of Trustees of the Green Century Funds
considered and approved the continuance of two advisory and two subadvisory agreements during the six months ended January 31, 2014.
INVESTMENT ADVISORY AGREEMENTS WITH GREEN CENTURY CAPITAL MANAGEMENT, INC.
The Board, including the Independent Trustees, approved the continuance of the Investment Advisory Agreements (the “Advisory Agreements”) between the Trust, on behalf of the Balanced Fund and
the Equity Fund (the “Funds” and each a “Fund”), and Green Century Capital Management (“Green Century” or the “Adviser”), at a meeting on October 4, 2013. The Trustees considered, among other things,
information provided by Green Century regarding the investment performance of each Fund; the expenses of each Fund and the advisory fee paid to Green Century by each Fund; and the profitability to Green Century of its advisory relationship with each
Fund. The Independent Trustees were assisted by independent counsel in considering these materials and the approval and continuance of the Advisory Agreements. The Trustees considered all the information provided to them by Green Century, including
information provided throughout the year. The Trustees also received a memorandum from independent legal counsel advising them of their duties and responsibilities in connection with the review of the Advisory Agreements. In approving the Advisory
Agreements, the Board, including the Independent Trustees did not identify any single factor as determinative. Matters considered in connection with their approval of the Advisory Agreements included the following.
Nature, Quality, and Extent of Services Performed.
The Trustees considered the scope and quality of the services performed for each of the Funds by the Adviser, including the resources dedicated by the Adviser. With respect to the
Equity Fund, these services included monitoring the Equity Fund’s performance and tracking error relative to the MSCI KLD 400 Social Index (the “Index”); implementing the environmental and other policies of the Trust by voting the
Equity Fund’s shareholder proxies; and overall compliance oversight provided by the Adviser. The Trustees also considered the Adviser’s supervision of Northern Trust Investments, Inc. (“Northern Trust”), the subadviser of the
Equity Fund, which performs day-to-day portfolio management for the Fund.
With respect to the Balanced Fund, the services performed included
the oversight and monitoring of the portfolio management and performance of the Balanced Fund; monitoring the implementation of the Balanced Fund’s environmental screens; implementing the environmental and other policies of the Trust by voting
the Balanced Fund’s shareholder proxies; and overall compliance oversight provided by the Adviser. The Trustees also considered the Adviser’s supervision of Trillium Asset Management, LLC (“Trillium”), the subadviser of the
Balanced Fund, which performs the day-to-day portfolio management for the Fund.
In addition, the Trustees considered the administrative
services provided by the Adviser to both Funds under a separate agreement, including the coordination of the activities of the Funds’ other service providers. Based on its review of all of the services provided, the Trustees concluded that the
nature, quality, and extent of services provided by the Adviser supported the continuance of the Advisory Agreements with respect to the Equity Fund and the Balanced Fund.
Investment Performance.
With respect to the Equity
Fund, the Trustees considered that due to the Equity Fund’s passive investment strategy, the principal concern with regard to investment performance was the extent to which the Equity Fund tracked the Index. The Trustees reviewed the
performance of the Equity Fund, exclusive of the expenses of the Fund, as compared to that of the Index for the periods ended July 31, 2013, and noted that the Equity Fund’s performance closely followed that of the Index. In particular,
they observed that 37 basis points of the Equity Fund’s one-year variance from the Index’s performance was attributable to factors other than Fund fees and expenses. After considering all the factors deemed appropriate, the Trustees,
including the Independent Trustees, concluded that the performance of the Equity Fund supported the continuance of the Advisory Agreement with respect to the Equity Fund.
28
With respect to the Balanced Fund, the Trustees reviewed and considered information regarding the investment
performance of the Balanced Fund and comparative data with respect to the performance of other funds designated by Morningstar to have similar investment objectives as well as the Balanced Fund’s performance measured against the Lipper Balanced
Fund Index (“Lipper”), which is a broad-based balanced fund market index, and a custom balanced index (“Custom Index”) comprised of a 60% weighting in the S&P 1500 Index and a 40% weighting in the BofA Merrill Lynch 1-10 Year
US Corporate and Government Index. The Trustees noted that as of the period ended August 31, 2013, the Balanced Fund’s one- and three year average annual returns outperformed the Lipper and its five- and ten- year average annual returns
underperformed the Lipper. The Trustees also noted that as of the period ended August 31, 2013, the Balanced Fund’s one- year average annual returns outperformed the Custom Index and its three-, five- and ten- year average annual returns
had underperformed the Custom Index. The Trustees also considered the performance information they had been provided throughout the year. After weighing all the factors deemed appropriate, including the environmental screens applied to the
Fund’s investment process, the Trustees, including the Independent Trustees, concluded that the performance of the Balanced Fund supported the continuance of the Advisory Agreement with respect to the Balanced Fund.
The Costs of Services Provided and Profitability.
The Trustees considered the costs of the services provided to the Funds and the profitability and fall-out benefits to the Adviser from its arrangements with the Funds.
The Trustees reviewed and considered an analysis of the advisory fees and total expenses ratios of each Fund and comparative data for multiple categories
of mutual funds included in and as defined by Morningstar’s mutual fund database of over 7,000 mutual funds. For the Equity Fund, the Trustees noted that, based on the information provided, the Fund’s advisory fee was lower than the
average advisory fee for socially conscious funds by 35 basis points, lower than the average advisory fee for socially conscious growth and income funds by 5 basis points, lower than that of the average growth and income funds by 23 basis points and
higher than the average of growth and income index funds by 5 basis points. The Trustees also noted that the total expense ratio of the Equity Fund was capped at 1.25%, and that the total expense ratio was higher than that of the average of socially
conscious funds by 7 basis points and higher than that of the average of all growth and income funds by 29 basis points, and higher than that of the average growth and income index funds by 71 basis points. For the Balanced Fund, the Trustees noted
that, based on the information provided, the Fund’s advisory fee was higher than the average advisory fee for socially conscious funds (by 5 basis points), socially conscious balanced Funds (by 11 basis points), all balanced funds (by 20 basis
points) and balanced funds which have under $100 million in assets (by 20 basis points). The Trustees also noted that the total expense ratio of the Balanced Fund was capped at 1.48% and that the total expense ratio was higher than that of the
average of socially conscious funds by 30 basis points, higher than that of the average of socially conscious balanced funds by 48 basis points, higher than that of the average of all balanced funds by 44 basis points, and higher than that of the
average of balanced funds with assets less than $100 million by 36 basis points.
Green Century provided the Trustees with information
relating to the profitability to Green Century of its advisory relationships to the Funds. The Trustees noted that based on information provided by Green Century, the relationship was not profitable. In that regard, the Trustees considered the
subadvisory fees and the other expenses incurred by the Adviser in providing advisory services to the Funds. The Trustees also considered the fee received by Green Century for providing administrative services to the Funds and the expenses incurred
in providing those services. In considering the cost allocation methodology used by Green Century, the Trustees took into consideration that the Adviser does not provide advisory or administrative services to other mutual funds or non-mutual fund
clients. The Trustees also considered Green Century’s non-profit ownership structure, its cost structure and personnel needs, and its investment in shareholder advocacy that aligns with the Funds’ stated intention to promote greater
corporate environmental accountability. After reviewing the information described above, the Independent Trustees concluded that the fees specified in the Advisory Agreements, taking into account the costs of the services provided by the Adviser and
the profitability to the Adviser of its relationships with the Funds, supported the continuance of the Advisory Agreements with respect to the Equity Fund and the Balanced Fund.
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Other Benefits.
With respect to fall-out benefits, the Trustees considered that neither Green Century nor any affiliate of Green Century receives any brokerage fees, soft dollar benefits,
liquidity rebates from electronic communications networks or payments for order flow from the trades executed for either Fund. The Trustees noted that Green Century does potentially benefit from its relationship with the Funds due to the Funds’
reputation as the first family of no-load environmentally responsible mutual funds. The Trustees considered that the association with the Funds supports Green Century’s own stated mission of advocating for corporate environmental
responsibility. Further, pursuant to the Advisory Agreements, Green Century has reserved for itself the rights to the names “Green Century Funds” and any similar names; thus, Green Century may benefit in the future from developing other
funds or investment products with the Green Century brand. The Trustees concluded that the fall-out benefits to be realized by Green Century were appropriate and supported the continuance of the Advisory Agreements with respect to the Equity Fund
and the Balanced Fund.
Economies of Scale.
The Trustees also considered whether economies of scale could be realized by the Adviser as the Funds grew in asset size and the extent to which such economies of scale were
reflected in the level of fees charged. They noted the relatively small size of each Fund and the resultant difficulty of achieving meaningful economies of scale. They considered that if the assets were to increase, the Funds could have the
opportunity to experience economies of scale as fixed costs would become a smaller percentage of the Funds’ assets and some of the Funds’ service providers’ fees, as a percentage of the Funds’ assets, could decrease. The Trustees
noted that the advisory fee structure for the Equity Fund included break-points that would cause the advisory fee to decrease as a percentage of net assets as the Fund increased in size. The Trustees concluded that economies of scale could be
realized as the Funds grew and that if assets increased significantly the Trustees would have opportunities to negotiate decreases in fees with the Adviser.
Based on a review of all factors deemed relevant, the Trustees, including the Independent Trustees, concluded that the Advisory Agreements with respect to the Balanced Fund and the Equity Fund should be
continued for an additional one-year period.
INVESTMENT SUBADVISORY AGREEMENT WITH TRILLIUM ASSET MANAGEMENT LLC RELATING TO THE
BALANCED FUND
At the meeting on October 4, 2013, the Board of Trustees of the Balanced Fund, including a majority of the Independent
Trustees, considered the continuance of the subadvisory agreement between the Trust, on behalf of the Balanced Fund, Green Century, and Trillium (the “Subadvisory Agreement”). In connection with their deliberations at the meeting, and in
separate executive session of the Independent Trustees, the Trustees considered, among other things, information provided by Trillium regarding the investment performance of the Balanced Fund, the subadvisory fees paid to Trillium, and the
profitability to Trillium of its subadvisory relationship to the Balanced Fund. The Independent Trustees were assisted by independent counsel in considering these materials and the continuance of the Subadvisory Agreement. The Trustees considered
all the information provided to them by Trillium, including information provided throughout the year. The Trustees also received a memorandum from independent legal counsel advising them of their duties and responsibilities in connection with the
review of the Subadvisory Agreement. In approving the continuance of the Subadvisory Agreement, the Board, including the Independent Trustees, did not identify any single factor as determinative. Matters considered in connection with their approval
of the Subadvisory Agreement included the following.
Nature, Quality, and
Extent of Services Performed.
The Trustees noted that under the terms of the Subadvisory Agreement, Trillium provided the day-to-day portfolio management of the
Balanced Fund, including determining asset and sector allocation; conducting securities selection and discovery; researching and analyzing environmental policies and practices of companies and implementing the Balanced Fund’s environmental
screening criteria; managing the volatility, risk, and turnover of the portfolio; and investing the portfolio consistent with the Balanced Fund’s investment objective and policies. The Trustees considered the professional expertise, tenure, and
qualifications of the portfolio management team and noted that Trillium was devoted exclusively to environmentally and socially responsible
30
investing and managed over $1 billion in assets. The Trustees also considered Trillium’s compliance record as well as the professional experience and responsiveness of Trillium’s
compliance staff. The Trustees also considered Trillium’s leadership in social and environmental responsibility, including its shareholder advocacy efforts.
Based on its review of all of the services provided and to be provided, the Trustees concluded that the nature, quality, and extent of services provided by Trillium supported the continuance of the
Subadvisory Agreement.
Investment Performance.
The Trustees reviewed and considered information regarding the investment performance of the Balanced Fund and comparative data with respect to the performance of mutual funds with
similar investment objectives as well as other broad-based market indexes. The Trustees noted that as of the period ended August 31, 2013, the Balanced Fund’s one- and three year average annual returns outperformed the Lipper and its five-
and ten- year average annual returns underperformed the Lipper. The Trustees also noted that as of the period ended August 31, 2013, the Balanced Fund’s one- year average annual returns outperformed the Custom Index and its three-, five-
and ten- year average annual returns had underperformed the Custom Index. Trillium became the Balanced Fund’s subadviser on November 28, 2005. After considering all the factors deemed appropriate, the Trustees concluded that the
performance of the Balanced Fund together with Trillium’s investment process, philosophies and experience in environmentally and socially responsible investing, supported the continuance of the Subadvisory Agreement.
Costs of Services Provided and Profitability.
The Trustees considered that the subadvisory fees paid by Green Century to Trillium under the Subadvisory Agreement were 0.40% of the value of the average daily net assets of the
Balanced Fund up to $30 million, and 0.35% of the value of the average daily net assets of the Balanced Fund in excess of $30 million. The Trustees also considered that the subadvisory fees are paid by Green Century, and are not in addition to
the advisory fees paid to Green Century by the Balanced Fund.
In evaluating the profitability of the Subadvisory Agreement to Trillium, the
Trustees noted that based on information provided by Trillium, the relationship was slightly profitable. The Trustees noted that Trillium stated that it would not realize a level of profitability similar to that of its other advisory clients on the
management of the Balanced Fund until assets approach $100 million. The Trustees considered the financial resources Trillium dedicated and the other expenses Trillium incurred in providing subadvisory services to the Balanced Fund, including startup
costs relating to the relationship, and additional personnel, legal, trading analysis and compliance costs required in the context of providing subadvisory services to a mutual fund. In considering the cost allocation methodology used by Trillium,
the Trustees took under consideration that Trillium does not provide advisory or subadvisory services to other mutual fund clients. The Trustees also considered Trillium’s fee structure and noted, based on the information provided, that the
subadvisory fees were lower than the fees Trillium receives from its institutional clients with separate accounts of similar size as the Balanced Fund.
After reviewing the information described above, the Trustees concluded that the fees specified in the Subadvisory Agreement, taking into account the nature and quality of services provided and the costs
of the services provided by Trillium, supported the continuance of the Subadvisory Agreement.
Other Benefits.
The Trustees evaluated potential other benefits Trillium may realize from its relationship
with the Balanced Fund. The Trustees considered the brokerage practices of Trillium, including the soft dollar commissions that were generated with respect to the Balanced Fund’s portfolio transactions. The Trustees considered that Trillium was
not affiliated with a broker/dealer and therefore no benefit would be realized by Trillium through transactions with affiliated brokers. The Trustees also considered the reputational and other advantages Trillium may gain from its relationship with
the Balanced Fund. The Trustees concluded that the benefits received by Trillium were reasonable in the context of the relationship between Trillium and the Balanced Fund, and supported the continuance of the Subadvisory Agreement.
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Economies of Scale.
The Trustees also considered whether economies of scale would be realized by Trillium as the Balanced Fund grew in asset size and the extent to which such economies of scale might
be reflected in the subadvisory fees. They noted the relatively small size of the Balanced Fund and considered that if the assets were to increase, Trillium could have the opportunity to experience economies of scale. They also noted that pursuant
to the Subadvisory Agreement, the subadvisory fees paid to Trillium by Green Century (out of its flat 0.65% advisory fee) include a breakpoint at $30 million, so that fees as a percentage of net assets decrease as assets in the Balanced Fund
increase. The Trustees concluded that economies of scale could be realized as the Fund grew, and that the fee schedule as specified was appropriate, and supported the continuance of the Subadvisory Agreement.
Based on a review of all factors deemed relevant, the Trustees, including the Independent Trustees, concluded that the Subadvisory Agreement should be
continued for an additional one-year period.
INVESTMENT SUBADVISORY AGREEMENT WITH NORTHERN TRUST INVESTMENTS, INC. RELATING TO THE
EQUITY FUND
At the meeting on October 4, 2013, the Board of Trustees, including a majority of the Independent Trustees, considered
the continuance of the subadvisory agreement between the Trust, on behalf of the Equity Fund, Green Century, and Northern Trust (the “Subadvisory Agreement”). In connection with their deliberations at the meeting, and in separate executive
session of the Independent Trustees, the Trustees considered, among other things, information provided by Northern Trust regarding the investment performance of the Equity Fund, including the success with which the Fund tracked the Index, the
subadvisory fees paid to Northern Trust, and the profitability to Northern Trust of its subadvisory relationship to the Equity Fund. The Independent Trustees were assisted by independent counsel in considering these materials and the continuance of
the Subadvisory Agreement. The Trustees considered all the information provided to them by Northern Trust, including information provided throughout the year. The Trustees also received a memorandum from independent legal counsel advising them of
their duties and responsibilities in connection with the review of the Subadvisory Agreement. In approving the continuance of the Subadvisory Agreement, the Board, including the Independent Trustees, did not identify any single factor as
determinative. Matters considered in connection with their approval of the Subadvisory Agreement included the following.
Nature, Quality, and Extent of Services Performed.
The Trustees noted that under the terms of the Subadvisory
Agreement, Northern Trust provided the day-to-day portfolio management of the Equity Fund, making purchases and sales of portfolio securities consistent with the Equity Fund’s investment objective and policies and with changes to the Index. The
Trustees considered the professional expertise, tenure, and qualifications of the portfolio management team as well as the team’s experience in passive management. The Trustees also considered Northern Trust’s handling of daily inflows and
outflows, transaction costs, tracking error, and the portfolio turnover rates for the Equity Fund. The Trustees also considered Northern Trust’s compliance record as well as the professional experience and responsiveness of Northern
Trust’s compliance staff.
Based on its review of all of the services provided and to be provided, the Trustees concluded that the
nature, quality, and extent of services provided by Northern Trust supported the continuance of the Subadvisory Agreement.
Investment Performance.
The Trustees considered that the Equity Fund follows a passive investment strategy
designed to track the Index and therefore the analysis of its investment performance should be based on the extent to which the Equity Fund successfully tracked the Index. The Trustees reviewed the performance of the Equity Fund, exclusive of the
expenses of the Fund, as compared to that of the Index for the periods ended July 31, 2013, and noted that the Equity Fund’s performance closely followed that of the Index. In particular, they observed that 37 basis points of the Equity
Fund’s one-year variance from the Index’s performance was attributable to factors other than Fund fees and expenses. After considering all the factors deemed appropriate, the Trustees concluded that the performance of the Equity Fund
together with Northern Trust’s investment process and experience in passive portfolio management supported the continuance of the Subadvisory Agreement.
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Costs of Services Provided and
Profitability.
The Trustees considered that the subadvisory fees paid by Green Century to Northern Trust under the Subadvisory Agreement were 0.10% of the value of
the average daily net assets of the Equity Fund up to but not including $50 million, 0.05% of the value of the average daily net assets of the Equity Fund from and including $50 million up to but not including $100 million, and 0.03% of the value of
the average daily net assets of the Equity Fund equal to or in excess of $100 million. There is a minimum fee of $75,000 per annum, which based on the Equity Fund’s net assets as of August 31, 2013 translated to an annual fee of
approximately 0.12%. The Trustees also considered that the subadvisory fees are paid by Green Century, and are not in addition to the advisory fees paid to Green Century by the Equity Fund.
The Trustees reviewed and considered an analysis of the subadvisory fees against comparative data for index funds managed by Northern Trust and for similar socially responsible index funds. The Trustees
noted that the Fund paid subadvisory fees comparable to those paid to Northern Trust by other subadvised index funds with under $100 million in assets. In evaluating the profitability of the Subadvisory Agreement to Northern Trust, the Trustees
noted that Northern Trust does not calculate earnings at the subadvisory client level. Nevertheless, Northern Trust noted that it is continuing to grow its assets under management, including a significant amount of assets in the socially responsible
mutual fund market.
After reviewing the information described above, the Trustees concluded that the fees specified in the Subadvisory
Agreement, taking into account the nature and quality of services provided and the costs of the services provided by Northern Trust, supported the continuance of the Subadvisory Agreement.
Other Benefits.
The Trustees evaluated potential
other benefits Northern Trust may realize from its relationship with the Equity Fund. The Trustees considered the brokerage practices of Northern Trust, including that Northern Trust does not trade for the Equity Fund through its affiliated broker.
The Trustees also considered that no soft dollars have been or will be paid in connection with Northern Trust’s management of the Equity Fund. The Trustees further considered the reputational and other advantages Northern Trust may gain from
its relationship with the Equity Fund, including that Northern Trust’s management of the Equity Fund will broaden its exposure to the socially responsible mutual fund market, which may assist in its marketing efforts. The Trustees concluded
that the benefits received by Northern Trust were reasonable in the context of the relationship between Northern Trust and the Equity Fund, and supported the continuance of the Subadvisory Agreement.
Economies of
Scale.
The Trustees also considered whether economies of scale would be realized by Northern Trust as the Equity Fund grew in asset size and the extent to which
such economies of scale might be reflected in the subadvisory fees. They noted the relatively small size of the Equity Fund and considered that if the assets were to increase, Northern Trust could have the opportunity to experience economies of
scale. They also noted that pursuant to the Subadvisory Agreement, the subadvisory fees paid to Northern Trust by Green Century (out of its advisory fee, which is subject to breakpoints) include breakpoints at $50 million and $100 million (subject
to a minimum annual fee of $75,000), so that fees as a percentage of net assets decrease as assets in the Equity Fund increase. The Trustees concluded that economies of scale could be realized as the Fund grew, and that the fee schedule as specified
was appropriate, and supported the continuance of the Subadvisory Agreement.
Based on a review of all factors deemed relevant, the Trustees,
including the Independent Trustees, concluded that the Subadvisory Agreement should be continued for an additional one-year period.
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YOUR NOTES
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YOUR NOTES
Semi-Annual Report
INVESTMENT ADVISER AND ADMINISTRATOR
Green Century Capital Management, Inc.
114 State Street
Boston, MA 02109
1-800-93-GREEN
www.greencentury.com
info@greencentury.com
INVESTMENT SUBADVISER (Balanced Fund)
Trillium Asset Management, LLC
711 Atlantic Avenue
Boston, MA 02111
INVESTMENT SUBADVISER
(Equity Fund)
Northern Trust Investments, Inc.
50 South LaSalle Street
Chicago, IL 60603
SUBADMINISTRATOR and DISTRIBUTOR
UMB Fund Services, Inc. (Subadministrator)
UMB
Distribution Services, LLC (Distributor)
803 West Michigan Street
Milwaukee, WI 53233
CUSTODIAN
State Street Bank and Trust Company
State
Street Financial Center
One Lincoln Street
Boston, MA 02111
TRANSFER AGENT
Huntington Asset Services, Inc.
2960 North
Meridian Street, Suite 300
Indianapolis, IN 46208
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
Two Financial Center
60 South Street
Boston, MA 02111
January 31, 2014
Balanced
Fund