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The Bottom Line:  While prioritization of sustainability shifted, sustainability remains important according to Bain & Company research findings that may be extrapolated to sustainable investing. Notes of explanation: Source: Bain & Company. Surveys based on separate CEO surveys conducted by IBM, Gartner, PwC, KPMG and Bain Analysis. Observations: A just released Bain & Company research report entitled The Visionary CEO’s Guide to Sustainability 2024 that relies on third party research and surveys from IBM, Gartner, PwC and KPMG, combined with Bain & Company research and analysis, reveals that CEOs and consumers still value sustainability. The report shows that the prioritization of sustainability has undergone a sharp decline following a number of years of “near boundless excitement, bold commitments and mobilizations.” The past twelve months, according to Bain, have “brought a hefty dose of reality about sustainability as CEOs juggle an increasing number of sweeping, systemic challenges. Global surveys reveal a sharp decline in CEOs’ prioritization of sustainability relative to other topics. Disruptive technology, growth, inflation, and geopolitical uncertainty have taken the top spots on their agendas.” At the same time, Bain & Company observes that sustainability remains important to executives and consumers. Based on responses from nearly 19,000 consumers surveyed by Bain, roughly 60% are more concerned about climate change than they were two years ago, often due to personal experience of extreme weather. However, consumers have trouble figuring out how to live sustainably and look to brands and retailers, in addition to government, to help them. These findings can be extrapolated to sustainable investing and investors who continue to be attracted to this investment approach but have a difficult time implementing such a strategy in their portfolios. This follows some years up through 2021 during which enthusiasm and bold predictions regarding investment performance results, in particular, gave way to disappointments on the part of investors. In the absence of more realistic expectations, clearly defined sustainability terms, fund classifications and stronger disclosures across fund complexes with sustainability focused funds, it turned out that investors did not necessarily know what they are getting when they bought funds with labels such as “ESG” or “Sustainable” or “Impact,” to name a just a few. Given continuing interest in sustainable investing, investors in the US would benefit from a widely adopted classification framework for funds along with consistent definitions around sustainable investing terms and disclosure practices.

The Bottom Line:  Top 10 performing funds in August were led by real estate funds that could further benefit from lower interest rates and inflation.  Notes of explanation: Funds arrayed in order of August 2024 total return performance results. PPGIM Jennison Beter Future ETF and Impax Global Social Leaders Institutional Fund were launched within the last year and have not as yet established a full-year’s track record.  Sources: Sustainable Research and Analysis LLC., fund prospectus documents and Morningstar Direct.Observations:After a sharp stock sell-off at the beginning of August affecting the S&P 500 index as well as other major stock market indices, markets rebounded in response to positive economic data on inflation and retail sales that helped calm recession fears and a signal by the Federal Reserve that it was ready for interest rate cuts. For the full month, the S&P 500 registered a total return gain of 2.4% and 27.1% over the trailing 12-months, the NASDAQ 100 gained 1.2% and expanded the twelve month gain to 27.3% while the small cap Russell 2000 index, whose momentum may have faltered, dropped 1.5% and recorded a trailing twelve month gain of 18.5%. The best performing large cap sectors included Consumer Staples, Real Estate and Health Care, up 5.8%, 5.6% and 5.0%, respectively, while Real Estate and Health Care also ranked in the top three sectors of the mid-cap and small cap indices. Against this backdrop, focused sustainable mutual funds and ETFs, a combined total of 1,446 funds and share classes with $360.6 billion in assets under management, registered an average increase of 1.8% in August and an average 15.4% over the trailing twelve months. Sustainable international equity funds led with an average gain of 2.4% while US equity funds added an average of 1.9%.The top 10 performing sustainable funds in August, the largest number of which consist of funds investing in real estate, dominated by international real estate, posted an average gain of 6.0% and 15.9% over the trailing twelve months. Results in August ranged from a low of 5.1% to a high of almost 9.0% recorded by the iPath Global Carbon ETN, a small thematic Exchange Traded Note that seeks to provide investors with exposure to the Barclays Global Carbon Index Total Return that measures the performance of the most liquid carbon-related credit plans.The second-best performing investment vehicle in August is the $7.4 million ETFB Green SRI ETF (named after the fund’s sponsor, the Exchange Traded Funds Bureau, Inc.).  This index tracking fund invests largely in green certified US REITs (real-estate investment trusts) and, to a lesser extent, foreign ones, that also meet strict Sharia Principles involving the elimination of REITs earning more than 5% of their income from interest-bearing investments or from certain business activities or tenants engaged in a restricted list of activities via an exclusionary process. The fund's returns, along with the performance of the other REIT focused funds, reflects the recent results achieved by the REIT Sector that has soared again in August, posting an increase of 6.4% according to the MSCI US REIT Index and adding to a year-to-date gain that is now positive for the second consecutive month. Investors continued to anticipate a rate cut coming in September and low inflation data throughout the month, helping boost REIT prices that have been lagging through the second quarter of the year.With one exception, namely the Vert Global Sustainable Real Estate ETF with $412.2 million in assets under management that was reorganized into an ETF structure from a mutual fund at the end of last year, the top performing funds are relatively small, ranging in size from $1.8 million to $16.8 million.

The Bottom Line:  Turnover ratios for focused sustainable funds, recently averaged 70.8%, can vary considerably and helps investors make more informed decisions about their investments. Notes of explanation:  Notes of explanation: Turnover ratios over twelve-month intervals and are expressed in percentage terms as of July 31, 2024. Sources: Morningstar Direct and Sustainable Research and Analysis LLC.Observations:Turnover ratios, which measure how frequently securities are bought and sold, can vary considerablyTurnover ratios represent a measure of how frequently assets within a mutual fund, ETF or investment portfolio are bought and sold over a given period of time. Turnover ratios vary, in some cases by considerable margins, based on fund type or investment vehicle, investment category as well as management strategy and style. The above chart considers average turnover rates applicable to focused sustainable investment fund types and active versus passively managed investment strategies.The average annual turnover for sustainable funds stood at 71%, but can range by fund type and investment strategy from an average of 25.6% to 78.9%The average annual turnover ratio for focused sustainable mutual funds and ETFs, a total of 1,467 funds/share classes, stood at 70.8% as of July 31st. Across these funds, turnover ratios vary considerably from a low of 0.37% (excluding zeros) to a high of 2,372% as of the same date. Turnover ratios also vary considerably across fund types, that is, mutual funds and ETFs.The average turnover ratios for actively managed mutual funds and ETFs are 78.9% and 48.6%, respectively, or a variance of 30.6%. The variation for index tracking ETFs as compared to index tracking mutual funds is a much narrower 7.7%. At the same time, the average turnover ratio for index tracking funds stood at 31.3% while for actively managed funds, including mutual funds and ETFs, the average turnover ratio is over 2X higher with an average of 77%. Average weighted turnover ratios are lower, but the range of the variation between index and active funds is largely unchanged.Understanding the turnover ratio helps investors make more informed decisions about their investments While turnover ratios may not be one of the top considerations when selecting a mutual fund or ETF, investors should pay attention to a fund's turnover ratio along with fund expenses, which are reported in a fund’s annual and semi-annual reports, for several reasons: First, high turnover ratios indicate frequent buying and selling of assets within the fund, which can lead to higher transaction costs on top of management and administrative fees that are separately reported. Trading costs, which are not explicitly reported to investors, are passed on to investors and they serve to reduce overall returns. Second, funds with high turnover ratios may generate short-term capital gains, which are taxed at a higher rate than long-term capital gains. This can result in a higher tax burden for investors. Third, the turnover ratio can provide insight into the fund's investment strategy. For example, a high turnover ratio might suggest an aggressive, market-timing approach, while a low turnover ratio might indicate a buy-and-hold strategy. A high turnover ratio can also point to the use of derivative instruments, such as futures, options or swaps. This factor helps to explain the highest 2,372% turnover ratio recorded by the BlackRock Impact Mortgage Fund. Finally, while not a definitive indicator, the turnover ratio can sometimes correlate with fund performance. Funds with lower turnover ratios often have lower expense ratios, which can positively impact returns.

The Bottom Line:  Sustainable equity investment funds experienced a modest increase in assets Y-T-D due to market, but no run of inflows to bond funds. Notes of explanation:  Notes of explanation: Source: Other includes Money Market, Miscellaneous and Commodities funds categories. Morningstar Direct and Sustainable Research and Analysis LLC. Observations: Focused sustainable assets under management attributable to mutual funds and ETFs experienced modest gains Y-T-D Focused sustainable assets under management attributable to mutual funds and ETFs, 1,467 funds/share classes in total, based on Morningstar classifications, closed the month of July at $353.7 billion in net assets. This represents a modest increase of $13.7 billion in net assets so far this year, for a year-to-date net gain of 5.8%. Since sustainable funds gained an average total return of 7.7% during this interval, it seems that the net increase in assets was due to market appreciation, offset by cash outflows. Much of the gain Y-T-D was experienced by equity funds Much of the gain was experienced by equity funds, a segment that accounts for 82% of focused sustainable assets under management. Equity funds gained $16.6 billion in net assets since the start of the year, or an increase of 6.1%. The increase is likely attributable to market gains. Still, the market share of equity funds remains unchanged so far this year. Assets of sustainable fixed income added a net of just $1.7 billion or 3.6% Assets of fixed income funds, with a share of 14% that also did not change during the year, added just $1.7 billion so far in 2024, or 3.6%. While conventional bond funds have seen a run of inflows on the back of improved steadier fixed income returns, according to Morningstar, this has not been the case for focused sustainable fixed income funds. The Other category, a combination of three categories, experienced a net decline due to money market funds The Other category of sustainable funds, consolidated for presentation purposes, combines Commodity, Money Market and Miscellaneous fund categories, is the only category to have experienced a net decline in assets over the last seven months, shifting downward from $10 billion to $5 billion at the end of July as each one of the underlying categories sustained a Y-T-D drop in assets. That said, the across-the-board decline is almost entirely attributable to the drop in the number of focused sustainable money market funds due to fund closures. Sustainable money market funds tracked by Morningstar have been reduced to just one BlackRock money market fund offering, with assets dropping from $10 billion to $4 billion, as retail and institutional investors have been switched out to other sustainable money market fund options beyond focused money funds. Instead, assets have are being invested in funds/share classes that systematically integrate financially material ESG factors into their investment decisions (along with other relevant factors) with the goal of managing risk and improving long term returns and/or offer dedicated share classes that screen out particular types of sectors or companies or that meet specific sustainable investment goals, such as social goals. Also closed was the Direxion Dollar Global Clean Energy Bull 2X Shares, classified as a Miscellaneous fund, leaving just one fund in the category as of July 31.

The Bottom Line:  Sustainable fund assets expanded modestly with outflows, sustainable bond issuance declined in Q2, selected ESG indices underperformed, and fund launches remained anemic.

The Bottom Line: Transparency, measurement and reporting, as well as proxy voting preferences are index tracking ETF features that are uniquely relevant for sustainable investors. Notes of explanation: Source: State Street Global Advisors ETF Impact Report 2024-2025 The Next Wave of Innovation. Responses were provided to the following questions: Which of the following do you think will have the most significant impact on the ETF industry through 2025? (Please select up to three). Observations: State Street report notes that ETFs have become a cornerstone of global finance State Street Global Advisors’ ETF Impact Report 2024-2025 discloses that global ETF assets under management, according to Morningstar, reached US$11.1 trillion as of December 31, 2023 while the number of ETF offerings globally has risen to 9,149 funds. This represents a cumulative annualized growth rate of 19.8% since 2018. As for the US, ETF assets reached US $8.1 trillion and 3,108 funds at the end of 2023 according to the ICI. By way of contrast, US sustainable ETF assets ended 2023 at US$101.8 billion, or 1.3% of ETF assets, and at the end of July stood at US$106.5 billion. At their core, ETFs offer investors transparency, liquidity and cost efficiency</strongThey cater to the full spectrum of investment strategies, they are adaptable and have been evolving to meet diverse investor needs. ETFs have become “instrumental in democratizing access to investments, enabling retail and institutional investors alike to tailor their portfolios with once-unimaginable precision and flexibility.” For these reasons and more, State Street notes that ETFs have become a cornerstone of global finance. According to an online survey conducted among individual investors, financial advisors and institutional investors in April 2024 by State Street Global Advisors, in partnership with field partners A2Bplanning and Prodege, only 45% of US individual investors currently have ETFs in their investment portfolios. At the same time nearly 70% of US financial advisors recommend ETFs to their clients and 67% of US institutional investors use ETFs in their investment strategies. Yet, ETFs still only account for 11.25% of investable assets globally. So State Street posits that there is still room for significant growth. Growth in the number and use of ESG/Sustainability ETFs is one of the trends that will have a significant impact on the ETF industry through 2025 While not at the top of the list with a 21% response rate to the survey, an ETF trend identified by investors that will have a significant impact on the ETF industry through 2025 is the growth in the number and use of ESG/sustainability ETFs. According to Sustainable Research and Analysis, in addition to the features that otherwise can potentially benefit all other types of investors, index tracking sustainable ETFs, in particular, offer investors at least three benefits that uniquely meet the objectives of sustainable investors. Rules-based index tracking sustainable ETFs offer investors a better opportunity to align portfolio practices with their sustainability preferences The first is the opportunity to invest in a fund that pursues a rules-based sustainable investing approach. This, in turn, offers investors greater transparency into the selection criteria and qualifications of securities based on screening, selection, and exclusionary approaches as well as any optimization techniques governing portfolio construction. As a result, investors gain an edge in their efforts to determine whether portfolio practices align with their sustainability preferences. To be sure, the same level of transparency around sustainable investing practices is available through index tracking mutual funds, however, mutual funds offer fewer sustainable index tracking investing options. At present, only 49 funds/share classes with $40.8 billion in net assets, or 20.2%, of sustainable mutual funds are index tracking funds versus 90.8% of ETF assets. Actively managed funds, in general, provide lower levels of transparency. Further, index tracking ETFs offer a greater variety and diversity of investment categories at 39 different investment categories versus 10 for index tracking mutual funds. Rules based indexing approach translates with greater ease into the creation of metrics to measure outcomes Second, the rules-based approach to investing can be translated with greater ease into the creation of metrics to track and quantify portfolio level outcomes and provide the basis for more informed reporting to investors on these, even as outcomes reporting is still developing and evolving. These are not the only firms, but management companies like BlackRock (iShares) and Nuveen, the largest and second largest providers of sustainable ETFs that on a combined basis account for 56% of the sustainable ETF market by assets, measure various outcomes and they report on these to investors. For example, the Nuveen ESG Dividend ETF aims to represent the performance of a set of securities with high dividend income and quality characteristics selected from the broad universe that make up the MSCI USA Index while maximizing the exposure to positive environmental, social and governance (ESG) factors as well as exhibiting lower carbon exposure than the MSCI USA Index, is positioned to quantify this information. The fund discloses its MSCI Carbon Intensity Score, or level of CO2 emissions per $MM, and comparison to the score achieved by an appropriate index. Pass through voting rights Third, recently some ETFs have begun to offer investors pass through proxy voting rights, giving investors the power to express their sustainable voting preferences with respect to their investments.

The Bottom Line:  The lowest expense ratio index tracking sustainable ETFs largely pursue an ESG screening strategy with exclusions, followed by funds with climate-oriented objectives. Notes of explanation: Sources: Morningstar Direct, fund prospectuses and Sustainable Research and Analysis LLC. Observations: • Passively managed sustainable ETFs with the lowest expense ratios largely consist of equity-oriented funds but also include one fixed income fund. These funds, a total of 17 ETFs, levy expenses that translate into expense ratios ranging from a low of 0.05% attributable to the TCW Transform 500 ETF to 0.1% reported by ten funds. The average expense ratio attributable to these 17 funds, including 10 funds with the same 0.1% expense ratio, is .09%. • More broadly, the universe of passively managed sustainable ETFs is comprised of 155 funds with $96.6 billion in assets under management as of July 31, 2024. These funds maintain an average expense ratio of 0.34%, with a range that extends from 0.05% to 0.93% reported by the levered Direxion Daily Electric and Autonomous Vehicles Bull 2X Shares. The median expense ratio for the broader universe is 0.26% • By way of comparison, actively managed sustainable ETFs carry an average expense ratio of 0.53%. The smaller segment of 85 funds with $9.8 billion in assets under management, reports expense ratios that range from a low of 0.14% (excluding one actively managed ETF with an expense ratio of zero) to a high of 1.0%. • The largest number of passively managed sustainable ETFs with the lowest expense ratios pursue an ESG screening strategy that’s combined with exclusions, followed by funds with a climate-oriented objective. The fund with the lowest expense ratio, the 0.05% TCW Transform 500 ETF, tracks the performance of the Morningstar US Large Cap Select Index which measures the performance of the 500 largest U.S. stocks by market capitalization, as determined by Morningstar, Inc. At the same time, the fund seeks to encourage accountability, change acceleration or transformational change at the public companies within its portfolio specifically through the application of proxy voting guidelines and through dialogue with management of the portfolio companies. • ESG screening involves an emphasis on ESG scores or some other metrics to qualify the eligibility of securities, such as stocks or bonds, and use these as a basis for overweighting, underweighting or, in some cases, optimizing their exposures in a portfolio.

The Bottom Line:  A declining rate environment should continue to favor conventional and sustainable bond funds, including green bond funds, especially with longer weighted maturities.   Notes of explanation: Funds listed in order of portfolio weighted average maturities (WAM), as of June 30, 2024. Carbon Collective Short Duration Green Bond ETF WAM is not available; however, the fund’s prospectus indicates that the portfolio will maintain a duration of less than 5 years. Sources: Morningstar Direct, fund prospectuses and Sustainable Research and Analysis LLC.Observations:Weaker than expected data last week accelerated sell-off in stocks but raises likelihood of rate cutLast Friday’s weaker than projected jobs report and mixed earnings by technology companies accelerated the sell-off in large cap, medium cap and small cap stocks across most sectors.  The combination of a hiring slowdown along with a rising unemployment rate and renewed concerns about an economic slowdown increased the likelihood that the Federal Reserve Bank, which held rates steady last week, are expected to lead to a Fed rate cut in September.Continued rate declines should favor bond fundsFor the week, the S&P 500 gave up 2.06%, the Nasdaq 100 dropped 3.06% and the Russell 2000 recorded a sharp 6.67% decline that erased about two-thirds of the gains generated in July. At the same time, 10-year Treasury yields dropped to 3.80%, a 29-bps fall since the end of July when yields stood at 4.09%. Continued rate declines should favor bonds and bond funds, especially longer dated bonds. Anticipation of lower rates, even before yields started to decline, has already rekindled investor interest in bond funds. According to the Wall Street Journal “U.S.-listed fixed-income exchange-traded funds have taken in nearly $150 billion through late July, a record through this point in a year. When looking at mutual funds and ETFs together, taxable bond funds were responsible for nearly 90% of net U.S. fund inflows in the first half, according to Morningstar."A declining rate environment should continue to favor bond funds with longer average weighted maturities, including green bond fundsA declining rate environment should continue to favor conventional and sustainable bond funds, especially bond funds with longer average weighted maturities. This will also apply to green bond funds, a sustainable thematic segment consisting of nine mutual funds and ETFs//29 share classes with $1.6 billion in net assets that invest in green bonds or bonds whose proceeds are exclusively applied to projects or activities that promote climate or other environmental purposes.Lower interest rates should favor green bond fundsOn a year-to-date and trailing 12-month basis, green bonds funds have already posted average returns of 2.07% and 5.11%, respectively, 2.78% and 3.52% more than the Bloomberg US Aggregate Bond Index that posted 0.95% and 2.63% over the same time intervals. Over the intermediate term, the average performance of this segment has also beaten the broad-based intermediate investment grade benchmark. Further declines in interest rates should favor this segment given the average weighted maturity of the funds that comprise this category of active and passively managed mutual funds and ETFS. The average weighted maturity of the segment is 7.2 years, ranging from the PIMCO Climate Bond Fund low of 5.8 years to a high of 8.06 years reported for the Lord Abbett Climate Focused Bond Fund. That said, both funds are still small at $19.6 million and 20.9 million, respectively. In addition to fund size and alignment of sustainable investing preferences, investors should consider the management company, years in operations, performance track record and expense ratio, just to mention some of the key investment factors.

The Bottom Line:  Sustainable investment funds registered a modest 0.47% average gain in June, following a strong 3.8% May increase, supported by stocks and bonds.The S&P 500 continued to register gains in June, rising 3.6% Fueled by enthusiasm for AI and expected interest-rate cuts before the end of the year in the light of softening economic data, the S&P 500 continued to register gains in June.  After recording a 5% total return in May, the index posted seven new closing highs in June and ended the month up 3.6%, with five of the eleven S&P sectors also registering advances, led by Information Technology, up 9.3%.  At the other end of the range, Utilities trailed and gave up 5.8%.  This was the benchmark’s fifth monthly gain this year, for a year-to-date increase of 15.9% and a trailing twelve-month return of 24.6%.  At the same time, the S&P 500 ESG index, designed to meet S&P’s sustainability criteria while maintaining similar overall industry group weights as the S&P 500, was up 3.4% in June.  While trailing in June, the ESG index is ahead of the S&P 500 with returns of 15.8% year-to-date and 25.1% over the trailing twelve-months.  The performance of the conventional large cap index and ESG version have been driven by a small number of growth-oriented technology companies that now dominate the index, including Microsoft Corp., Amazon.com Inc., Meta Platforms Inc., Apple Inc. Alphabet Inc., Nvidia Corp. and the recovering Tesla Inc.  The so-called Magnificent Seven accounted for 79% of the benchmark’s total return in June while on an equally weighted basis, the index was down 0.45% in June and only up 11.8% over the last twelve months—less than half the S&P 500 return.  The same companies drove the performance of the S&P 500 Growth Index, up 6.98% in June, versus the S&P 500 Value Index that sustained a narrow -0.65% decline.  This dynamic also propelled large cap conventional and sustainable growth funds to achieve top results in June.  At the same time, small companies experienced another challenging month, with the Russell 2000 dropping 0.93%, after dropping around 1% in May and an even lower -1.69% posted by the Russell 2000 Value Index. Market concerns may lead to volatility in the next few months The narrow breadth of the market combined with some stretched valuations has invited concerns, as have uncertainties surrounding the US presidential election, corporate earnings, Federal Reserve policy and the direction of interest rates, inflation and the strength of the economy, as well as geopolitical issues (Gaza, Ukraine, foreign election shifts).  How these uncertainties play out could introduce stock market volatility over the next several months. Bonds posted a slight 0.95% gain On the bonds side, the Bloomberg Aggregate US Bond Index posted a slight 0.95% gain in June and a positive 2.6% increase over the trailing twelve months.  During the month, the FOMC met and as expected, kept interest rates unchanged. The 10-year U.S. Treasury Bond closed at a yield of 4.36%, down from the prior month’s 4.51%.  Strong performance in India lifts emerging marketsOverseas, strong performance in emerging markets, for example in India where stocks have been experiencing an upward trend due to positive macroeconomic factors in 2024, notwithstanding a drop in early June following Modi’s lackluster election results, pushed the MSCI Emerging Markets Index higher by 3.94% in June while the MSCI ACWI, ex USA Index and MSCI EAFE Index gave up 0.10% and -1.61%, respectively. Focused sustainable investment funds posted a combined average return of 0.47% in JuneAgainst this backdrop, focused sustainable mutual funds and ETFs, a total of 1,470 funds/share classes with total net assets in the amount of $347.2 billion, posted a combined average return of 0.47% in June, a 5.4% pick up year-to-date and an average gain of 10.6% over the trailing twelve months. This was a modest average gain, the narrowest non-negative advance so far this year, after recording a strong 3.8% average increase in May. Across 75 investment categories, 46 categories or 61% achieved positive average rates of return in June. Average returns ranged from a high of 6.5% posted by Equity India funds and a low of -16.5% recorded by Trading-Leveraged Equity Funds. Average total return performance results for focused sustainable investment funds by investment category to June 2024  Investment CategoryCategory Net Assets ($US)# Funds/Share Classes1-M   TR%6-MTR%12-M TR%3-YTR%5-YTR%India Equity399.256.513.824.28.811.1Real Estate11.824.13.39.03.2 Large Growth33,602.7694.015.325.26.914.5Diversified Emerging Mkts8,463.5553.36.69.2-6.92.8Large Blend142,123.21782.713.122.37.714.0Derivative Income3.722.08.511.3  Muni National Long276.9101.91.15.1-1.61.0Moderate Allocation8932.6531.97.613.83.17.6Miscellaneous Fixed Income593.821.80.85.3-2.41.9Target-Date 2065+10.8201.611.219.66.5 Target-Date 206061.1211.611.019.56.110.5Target-Date 2050196.5211.610.518.55.49.6Target-Date 2055124.2211.610.819.15.810.1Target-Date 2045244.4211.610.117.95.18.9Target-Date 2040298.9211.59.316.84.78.0Muni National Intermediate1181.9301.50.23.8-1.30.5Moderately Aggressive Allocation879.741.56.111.93.27.8Target-Date 2035304.4211.47.814.64.06.7Muni California Intermediate197.931.30.13.1-0.41.1Target-Date 2030311.8211.35.911.92.95.0Moderately Conservative Allocation277.671.22.97.5-0.53.5Target-Date 2025277211.24.69.91.93.5Target-Date 20207.991.24.18.90.96.0Intermediate Government1216.3101.1-0.91.7-3.3-0.9Aggressive Allocation340.941.17.412.91.98.6Target-Date 20157.191.13.47.90.55.1Intermediate Core-Plus Bond8538.4701.10.14.0-3.00.2Target-Date Retirement204.9201.13.17.91.92.2Target-Date 2000-2010181.02.56.6  High Yield Bond2708.7301.02.39.40.73.1Intermediate Core Bond19341.5511.0-0.33.1-3.0-0.2Global Bond-USD Hedged148480.8-0.34.8-3.0-0.6Health1,465.770.7-4.1-7.9-4.71.9Global Allocation135.840.73.06.60.45.3Corporate Bond2879.1160.70.25.5-2.60.9Global Bond149.6110.60.04.9-1.70.3Short-Term Bond4003.2290.61.85.80.61.5Muni National Short15.610.51.53.7  Ultrashort Bond1121.4140.52.65.82.92.3Money Market-Taxable340.330.52.75.63.22.3Prime Money Market4056.7130.42.65.33.02.0Bank Loan284290.44.09.84.94.4Multisector Bond345.170.42.26.60.9 Nontraditional Bond458.270.43.18.92.33.2Global Large-Stock Growth4,653.5550.39.012.82.39.9Global Large-Stock Blend13,042.3710.16.912.03.19.9Global Real Estate386.27-0.1-2.67.2-6.11.4Long-Short Equity35.33-0.422.540.2  Mid-Cap Growth5,565.524-0.54.19.5-5.18.0Emerging Markets Bond7.53-0.52.66.9-8.7 Large Value9,404.733-0.56.413.34.18.5Foreign Large Growth2,164.018-0.92.85.3-1.55.8Mid-Cap Blend7,203.932-1.04.910.72.38.5Technology146.79-1.3-4.4-9.6-13.37.6Foreign Large Blend27,203.482-1.35.710.51.26.8Mid-Cap Value335.32-1.73.69.41.76.8Emerging-Markets Local-Currency Bond17.25-1.8-2.33.0-2.3-3.5Global Large-Stock Value529.19-2.09.316.47.313.1Small Blend7,999.021-2.20.45.1-1.63.2Foreign Small/Mid Growth348.14-2.5-3.02.6-5.62.7Foreign Large Value143.111-2.77.813.66.38.4Small Value419.81-2.7-0.711.54.4 Industrials906.15-3.0-4.0-7.5-6.17.5Infrastructure1,981.218-4.1-2.3-2.3-2.511.1Utilities61.02-4.4-2.8-5.2-4.3-4.0Global Small/Mid Stock1,839.832-4.4-2.5-2.1-5.87.2China Region54.61-4.4-14.0-27.5-25.23.0Small Growth318.13-4.6-7.6-9.6-12.45.2Natural Resources6,029.823-5.01.52.92.411.3Commodities Focused582.29-5.1-5.3-15.18.325.3Consumer Defensive5.61-5.90.2-7.0  Equity Energy363.312-7.7-3.6-9.61.53.7Miscellaneous Sector5,013.923-8.5-10.1-20.2-13.27.4Commodities Broad Basket2.31-8.9-11.2   Trading--Leveraged Equity7.42-16.5-48.4-64.4  Total/Average347206.91,4700.55.410.61.57.4Notes of Explanation:  Fund investment categories listed in descending order, based on June 2024 average performance of all funds/share classes within the investment category.  The three- and five-year results represent average annual total returns.  Source: Morningstar Direct and Sustainable Research and Analysis LLC. 

The Bottom Line:  A limited number of focused sustainable small-cap blended funds is available to investors in pursuit of exposure to the recent market rotation.  Notes of explanation:  Notes of explanation: Funds arrayed using a ranking scale that runs from A (highest ranking) to D (lowest ranking) based on a screening and evaluation methodology that accounts for management company considerations, years in operations, fund size, performance track record and expense ratio. Funds with less than $35 million in net assets are excluded. Small-cap blended funds consist of non-thematic small cap funds defined by their prospectus. * Indicates index fund. Total return results to June 2024, 3 and 5-year results annualized. Sources: Sustainable Research and Analysis LLC., fund prospectus documents and Morningstar Direct.   Observations:A much-discussed market rotation through the end of last week has been gaining momentum in July Higher chances of an interest rate cut in September by the Federal Reserve Bank due to better-than-expected inflation readings combined with disappointing earnings results posted last week by Tesla and heavy AI spending by Alphabet continued a much-discussed market rotation through the end of last week away from a small number of large cap technology stocks whose performance has been fueled by enthusiasm for AI and toward smaller-cap stocks. Against a backdrop of a scrambled presidential election contest, small companies, which have lagged the broader market, have been gaining momentum in July.Whether the rotation has legs and investors should anticipate continued gains by the Russell 2000 Index remains to be seen Lower interest rates could spur spending and give the economy further support. This, in turn, could benefit smaller companies and their future earnings. The Russell 2000 Index, which was in negative territory during the first six trading days of July, reversed course starting on July 10th. Thereafter, the index registered eight daily gains equal to or exceeding 1%, ending the week of July 25th ahead 8.6% over the month-to-date interval. At the same time, the S&P 500 was flat while the NASDAQ 100 Index recorded a narrow decline of 0.81%. Whether the rotation has legs and investors should anticipate continued gains by the Russell 2000 Index may depend on the unfolding state of the economy, interest rates and technology company earnings.Sustainable investors who wish to invest in the small-cap market have some but still a limited number of focused sustainable fund options that are ranked In the meantime, sustainable investors who wish to invest in the small-cap market, using a blended approach consisting of both value and growth companies, have some but still a limited number of focused sustainable fund options. Featured in an earlier Chart of the Week article published as of June 10, 2024 entitled "Limited supply of worthy sustainable small-cap funds," the performance data covering ten available funds (the Xtrackers S&P SmallCap 600 ESG ETF closed on or about June 5 due to its inability to gain traction) have been updated to the end of June. The performance chart above covers nine funds/15 share classes, with $7.9 billion in net assets, including index tracking and actively managed funds, arrayed in order of a Sustainable Research and Analysis scoring approach that ranks funds using a scale from A (Highest ranking) to D (Lowest ranking).Two index tracking funds qualify as the highest “A” ranked fundsFund rankings, including index tracking and actively managed funds, are based on a screening and evaluation methodology that accounts for management company considerations, years in operations, fund size, performance track record and expense ratio. Based on this approach, the highest ranked funds include the iShares ESG Aware MSCI USA Small Cap ETF (ESML) as well as the Nuveen ESG Small Cap ETF (NUSC). These two funds are both index tracking funds that use screening well as exclusionary approaches, they are two of the largest funds in the category with at least five-year track records and are subject to low expense ratios. That said, while the base indices are the same MSCI USA Small Cap Index and MSCI’s ESG scores are used to qualify eligible securities, screening, exclusionary criteria and methods for weighting portfolio securities based on ESG scores vary somewhat.

The Bottom Line:  Top financial results achieved by sustainable funds in June, as well as more generally, are driven largely due to fundamental investment strategies. Notes of explanation: Chart displays the asset weighted sustainable investing approach/strategy of the top 10 performing funds in June 2024. Assets in US$ billions as of June 30, 2024. Funds include: iPath® Global Carbon ETN 8.95%), Nuveen Winslow Large-Cap Growth ESG I (7.85%), Praxis Growth Index I (7.07%), iShares ESG Aware MSCI USA Growth ETF (6.91%), Invesco ESG NASDAQ 100 ETF (6.82%), Calvert Emerging Markets Fcs Gr I (6.73%), ALPS/Kotak India ESG II (6.59%), Xtrackers Cybersecurity Select Eq ETF (6.28%), American Century Sustainable Growth ETF (6.14%) and Invesco Real Assets ESG ETF (6%). Some funds employ multiple sustainable investing strategies and, in such cases, the funds’ total net assts (including all share classes) are fully accounted for under each of the strategies. The category Other includes Thematic, ESG screening and exclusions and ESG screening approaches. ESG screening covers both positive and negative screening approaches. Sources: Morningstar Direct; Sustainable Research and Analysis LLC. Observations: • The top ten performing focused sustainable funds in June 2024, all equity and commodity-oriented funds, posted average total returns of 6.9% and 23.6% in June and over the trailing 12-months. Returns ranged from a low of 6% recorded by the Invesco Real Assets ESG ETF to a high of 8.95% achieved by the iPath Global Carbon ETN. This compares to returns of 0.47% and 10.6% achieved by all sustainable funds during the same time intervals. • The top ten performing funds in June 2024 pursue various fundamental investment strategies, including active and passive investing approaches as well as the following fundamental strategies: carbon credits investing (classified as commodity investing), large-cap growth, technology, emerging markets equity, country specific India focus, cybersecurity and real assets that invest in companies that are either principally engaged in real estate, infrastructure, natural resources or timber industries, or support such businesses. The dominant strategy, however, emphasized large-cap growth stocks. • Fueled by enthusiasm for AI and expected interest-rate cuts before the end of the year in the light of softening economic data, the S&P 500 continued to register gains in June. After recording a 5% total return in May, the index posted seven new closing highs in June and ended the month up 3.6%, with five of the eleven S&P sectors also registering advances, led by Information Technology, up 9.3%. At the other end of the range, Utilities trailed and gave up 5.8%. This was the benchmark’s fifth monthly gain this year, for a year-to-date increase of 15.9% and a trailing twelve-month return of 24.6%. At the same time, the S&P 500 ESG index, designed to meet S&P’s sustainability criteria while maintaining similar overall industry group weights as the S&P 500, was up 3.4% in June. While trailing in June, the ESG index is ahead of the S&P 500 with returns of 15.8% year-to-date and 25.1% over the trailing twelve-months. The performance of the conventional large cap index and ESG version have been driven by a small number of growth-oriented technology companies that now dominate the index, including Microsoft Corp., Amazon.com Inc., Meta Platforms Inc., Apple Inc. Alphabet Inc., Nvidia Corp. and the recovering Tesla Inc. The so-called Magnificent Seven accounted for 79% of the benchmark’s total return in June while on an equally weighted basis, the index was down 0.45% in June and only up 11.8% over the last twelve months—less than half the S&P 500 return. This occurrence led to the success in June achieved by five of the top performing sustainable funds that focus on large-cap growth stocks. For example, the second-best performer in June, the Nuveen Winslow Large Cap Growth ESG Fund I, had a 44.4% exposure to five of the Magnificent Seven stocks, including Microsoft Corp., Amazon.com Inc., Apple Inc. Alphabet Inc and Nvidia Corp. • While some of the top ten performing sustainable funds in June engage in multiple strategies, eight distinct sustainable investing strategies characterize the ten funds, with five strategies accounting for the largest share of assets under management calculated on an asset weighted basis. In order of their respective weights, these include Exclusions, Engagement, Impact, ESG Integration and Values-based investing approaches. These strategies add up to a combined total of $8.4 billion in assets, or 99% of the asset weighted assets attributable to the top 10 funds. Three additional approaches, classified as Other, include ESG screening and exclusions, ESG screening and thematic investing. • That said, the impact on the performance results in June achieved by any of the top 10 sustainable funds, or for that matter any other sustainable funds based on their sustainable investing approach, is difficult to tease out. The one exception involves thematic funds, or funds that invest with a focus on a particular idea or unifying ESG-related concept. In June, carbon credits experienced a rebound and drove the 8.95% total return results posted by the $5.1 million iPath Global Carbon ETN. The fund, however, has been closed. Barclays Bank PLC, the issuer, announced that it will exercise its issuer call option and redeem the note series in full.

The Bottom Line:  Comparisons between sustainable mutual funds and ETFs have to account for the variations in composition of the two investment company types. Notes of explanation: Chart displays arithmetic average performance of the five best and worst performing sustainable mutual fund and ETF investment categories as of June 2024 and number of funds that make up each category. Sources: Morningstar Direct; Sustainable Research and Analysis LLC.  Observations:• Focused sustainable long-term mutual funds and ETFs, a total of 1,454 funds/share classes, posted a combined average return of 0.47% in June and an average gain of 10.6% over the trailing twelve months.• At the same time, the average performance results of mutual funds and ETFs diverged during these time intervals. Sustainable mutual funds recorded average gains in June and over the trailing twelve months of 0.8% and 11.6%, respectively. Comparable returns for ETFs were -1.2% and 5.4%, respectively. These variations diminish but are not eliminated when the results are recalculated on an asset weighted basis, with particular improvements in average asset weighted returns for ETFs.• For sustainable fund investors considering investments in mutual funds and/or ETFs, these variations likely raise questions about the reasons behind the differences in average returns.• When considering mutual funds versus ETFs, a more granular analysis is called for. That said, at least three overarching factors contributed to the differences in average returns. First, ETFs largely consist of passively managed, index tracking, funds versus mutual funds that are almost entirely actively managed. Second, sustainable mutual funds and ETFs vary as to the number of offerings and assets under management. The universe of sustainable mutual funds is comprised of 1,213 funds/share classes with total long-term net assets in the amount of $239.5 billion as of June 2024. This compares to 241 ETFs with $103.3 billion in total net assets. Third, the profile of the two sustainable investment company types also differ in terms of the number and composition of their fundamental investment categories. Mutual funds offer a more diversified menu of sustainable investment categories, extending to 64 categories, while ETFs provide investors with a more narrowly focused menu consisting of 45 investment categories. Of the 64 mutual fund investment categories, 21 categories, or 33%, registered negative returns that ranged from -0.19% to -6.84%. On the other hand, 21 of the 45 ETF investment categories, or 49%, recorded negative average returns. These ranged from -0.77% to a low of -16.51. This was particularly impactful in June when ETFs investing in small growth stocks, global small/mid cap stocks and leveraged equity portfolios posted one-month returns of -11.42%, -11.49% and -16.51%, respectively. These three categories, out of 45 fund categories, dragged down average returns while sustainable mutual funds had no exposure to these investment categories.

The Bottom Line:  Sustainable fund assets expanded modestly, sustainable bond issuance remains strong, ESG relative performance results were positive, but fund launches were still anemic.

The Bottom Line:  Focused sustainable money market fund assets are disappearing while non-focused sustainable money market funds are expanding along with conventional money fund assets. Notes of explanation:  Focused sustainable money market fund assets include the assets of funds that have been liquidated between 12/21 and 6/24.  Sources:  Morningstar Direct; Sustainable Research and Analysis LLC. Investors have been powering up the assets of money market funds to record levels Investors have been powering up the assets of money market funds to record levels since the Federal Reserve Bank began raising interest rates, reaching $6.15 trillion as of July 2nd around quarter-end and the holiday weekend, according to the Investment Company Institute. The Fed has raised the federal funds rate eleven times from near zero since March 2022 to a range between 5.25% and 5.5% on July 24, 2023, in an effort to cool the economy and bring down the rate of inflation. Short-term rates at these levels are at their highest in two decades and money market fund investors are currently realizing 12-month yields that have reached as high as 5.5% at the end of June. Almost 50% of funds at the end of June are recording 12-month yields equal to or greater than 5%. At the same time, the number and assets of focused sustainable money market mutual funds are disappearing The number of funds and assets under management of focused sustainable money market mutual funds have been shrinking. These are funds classified by Morningstar as sustainable money market funds in large part on the basis that they explicitly describe a fund’s sustainable investing approach or strategy* in the fund’s prospectus within its investment objective and investment policy or Statement of Additional Information (SAI). The segment now consists of just three funds/17 share classes, largely institutional prime funds. However, the segment continues to decline further. DWS has announced the termination and liquidation of the DWS ESG Liquidty Fund on or about August 14, 2024 while BlackRock has disclosed that the BlackRock Liquid Environmentally Aware Fund will liquidate on or about September 5, 2024. Following these liquidations, and assuming no new focused sustainable fund formations, the segment will be reduced to just one fund—the BlackRock Wealth Liquid Environmentally Aware Fund and its five share classes. The fund considers factors such as emissions, energy and water intensity, waste generation, green revenues and environmental disclosure levels in evaluating the environmental performance of an issuer or guarantor. Retail and institutional investors have other sustainable money market fund options While focused sustainable money market funds have now been reduced to just one fund offering, retail and institutional investors have other sustainable money market fund options beyond focused money funds. According to Crane Data, there are currently 14 firms offering 47 funds/share classes that systematically integrate financially material ESG factors into their investment decisions (along with other relevant factors) with the goal of managing risk and improving long term returns and/or offer dedicated share classes that screen out particular types of sectors or companies or that meet specific sustainable investment goals, such as social goals. For example, the Federated Hermes Government Obligations Fund SDG share commits to donating, via Federated Hermes and/or its affiliates, 5% of the quarterly management fee revenue and administrative fee revenue attributable to the SDG class, net of any waivers to a designated organization whose mission is aligned with one or more of the United Nations Sustainable Development Goals (UN SDGs). With a combined total of $99 billion in net assets, up from $87.8 billion at the end of 2021, these funds/share classes are largely offered to institutional investors, but they are also available to retail investors either directly or through financial intermediaries. *Sustainable investing is an umbrella term that encapsulates various strategies or approaches, including values-based investing, ESG screening and exclusions, impact investing, thematic investing, ESG integration, shareholder engagement and proxy voting. These approaches are not mutually exclusive.

The Bottom Line:  The top yielding sustainable investment funds, mutual funds and ETFs, recorded an average 12-month yield of 9.3% at the end of May. Notes of Explanation: Notes of explanation: Funds with multiple share classes are only listed once based on the highest yielding share class as of May 31, 2024. Sources: Morningstar Direct; Sustainable Research and Analysis LLC. Top 10 sustainable investment funds record average 12-month yield of 9.3% Focused sustainable investment funds, both mutual funds and ETFs, a total of 1,491 funds, recorded an average yield of 1.95% at the end of May while the median yield stood at 1.46%. Twelve-month yields ranged from a low of 0% to a high of 18.94%. Concurrently, the same universe of funds posted an average total return of 13.9%, ranging from a low of 4.0% to a high of 49.1%. The top 10 funds based on the yields generated by the highest yielding share classes, recorded a significantly higher average yield of 9.3% (median yield of 8.0%), ranging from a low of 7.01% to a high of 18.94%. The funds in this segment were dominated by bond funds and in particular, high yield and floating rate funds. Other strategies include long-short equity, a covered calls strategy and investments in futures contracts on emission allowances issued by various “cap and trade” regulatory regimes that seek to reduce greenhouse gas emissions over time. All but two of the top 10 funds distribute income monthly. The exceptions involve two funds that distribute income once a year and include the AQR Sustainable Long-Short Equity Carbon Aware Fund and the KraneShares Global Carbon ETF. The highest yielding fund is the $35.1 million AQR Sustainable Long-Short Equity Carbon Aware Fund (whose R6, I and N share classes posted yields of 18.94%, 18.88 and 18.76%, respectively). The fund, which was launched in December 2021 with $10 million and hasn’t gained much traction since then, currently seeks to achieve its investment objective by investing in or having exposure to securities of U.S. and foreign issuers through the construction of a long-short investment portfolio that favors attractive companies as determined by AQR Capital Management, LLC., the fund’s advisor using proprietary quantitative investment indicators and certain Environmental, Social and Governance (ESG”) criteria. The fund integrated certain Environmental, Social, and Governance considerations into its security selection and portfolio construction processes and sought to hedge climate risks. It incorporated multiple metrics of climate exposure, such as carbon emissions and fossil fuel reserves, to hedge against climate-related investment risks. That said, effective on or about August 19, 2024, the fund is changing its name to the AQR Trend Total Return Fund, and, in addition to other investment strategy changes, it will no longer employ a sustainable investment approach. This change, along with various other factors, could have an impact on the fund’s future income distributions. In addition to a review and thorough consideration of a fund’s fundamentals, including the fund’s investing strategy and approach to sustainable investing, income-oriented investors, and in particular investors who rely on monthly distributions of net investment income, should carefully review a prospective fund’s dividend distribution policy and its capacity to support its income distributions in the future under various scenarios.

The Bottom Line:  Institutional share classes with minimum investments of $100,000 or mor account for over 50% of assets attributable to focused sustainable mutual funds.  Notes of Explanation: Size=total net assets by share class as of May 31, 2024. Sources: Morningstar Direct; Sustainable Research and Analysis LLC.  Focused sustainable mutual funds are dominated by institutional investorsFocused sustainable mutual funds are dominated by institutional investors, including both direct investments by asset owners as well as investments via financial intermediaries.Focused sustainable long-term mutual fund assets reached $236.2 billion at the end of May 2024. The segment, which includes 1,231 long-term mutual funds and share classes, accounts for 70% of focused sustainable long-term fund assets that includes ETFs. As of the same date, institutional mutual fund share classes, which are dominated by actively managed funds, stood at $135.5 billion or 57.3% of the total, with equity funds making up the largest share at $103.6 billion, or 76%, followed by fixed income funds with almost $37 billion in assets or 20% of the total. The institutional mutual funds segment is concentrated, with the top ten funds/share classes accounting for 44% of the segment’s net assets.Institutional fund share classes typically require shareholders to invest a minimum of $100,000 directly or shares may be purchased through financial intermediaries who also are subject to the same minimum investment requirement.Investors via institutional share classes benefit from lower expense ratios and higher total returns. The average expense ratio for institutional share classes is 0.70%, ranging from a low of 0.12% to a high of 2.57%. On the other hand, all other share classes, largely retail, are subject to an average expense ratio of 1.04%, or 34 basis points higher. These range from the lowest 0.19% to a high of 2.25%.Retail investors can take advantage of a greater number of lower cost mutual funds options if they are investing through financial intermediaries or by focusing on lower cost sustainable ETFs, in particular passively managed funds. On average, these investment funds are subject to an average expense ratio of 0.41%. These start as low of 0% to 0.5%, with low expense ratios available for passively managed funds in core investment categories, such as large and small-cap blended equity funds and investment-grade intermediate bond funds.

The Bottom Line:  The Municipal National Intermediate funds category, which offers investors a core focused sustainable municipal funds holding option, posts negative results in May.    Notes of Explanation:  For each mutual fund with multiple share classes, only the best performing share class is displayed.  May performance results arrayed in descending order.  Results over 3-year and 5-year intervals are average annual performance results. Data to May 31, 2024. Sources: Morningstar Direct; Sustainable Research and Analysis LLC.  Observations:  May was a strong month for stocks as well as bond market indices, reversing April’s declines. With one exception, each of the 77 investment categories that comprise the focused sustainable investment funds universe, as defined by Morningstar, posted zero to positive average total returns, as high as 12.7% recorded by two leveraged equity funds investing in clean energy and EV technologies.The one exception is the Municipal National Intermediate funds category made up of 11 funds (30 share classes) with $1.2 billion in net assets that registered a negative average return of 0.2%. Beyond the month of May, across the one-, three- and five-year time intervals, Municipal National Intermediate funds posted average returns of 3.1%, -1.7% and 0.3%, respectively. Funds falling into this category offer investors a core municipal holding option that should be qualified, in addition to fundamentals and sustainable investing preferences, based on management firm, years in operation, past performance results, fund size as well as fund expenses.Municipal National Intermediate funds, along with Municipal National Long, Municipal California Intermediate and Municipal National Short, make up the sustainable municipal bond funds segment with a combined total of 19 funds and $1.7 billion in net assets. Unlike the funds that make up the Municipal National Intermediate fund category, these other three categories posted zero to positive returns in May.Tax-exempt yields were mixed in May, with yields in the five-to-ten-year segment of the curve rising as much as 34 bps, while the shortest and longest maturities experienced modest yield declines. The longest maturity segment had a positive return, outperforming both short and intermediate segments. Lower quality bonds, particularly BBB and high yield debt outperformed higher-quality issues in May. Against this backdrop, returns in May for the Municipal National Intermediate funds category ranged from a low of -0.77% to a high of .04%, with only five funds/share classes posting positive results for the month. In general, positive to higher returns were achieved by funds with longer average maturities and exposure to lower rated municipal bonds.For example, the Hartford Sustainable Municipal Bond Fund Class F and I ($1 million minimum investment), charging lower than median expenses for the investment category, were both up 0.4% in May, likely assisted by the fund’s average BBB credit quality and longer average maturity. At almost $87 million in net assets with four share classes, the fund, which is sub-advised by Wellington Management, employs an ESG integration approach and emphasizes bonds of issuers with positive sustainable initiatives. The worst performing fund in May is the $9.8 million passively managed Goldman Sachs Community Municipal Bond ETF. Posting a negative 0.78% total return in May, the fund screens for securities that take into account certain social or environmental factors using negative screens that may include sectors, sources of funds and use of proceeds to select securities of issuers that foster community and investing in essential services (including education, healthcare and clean water) along with positive screens that include pre-refunded securities or those with potentially environmentally or socially beneficial outcomes. While the fund’s 0.15% expense ratio is the lowest in the category, its average A credit quality may have detracted from its performance in the month of May.

The Bottom Line:  Sustainable fund assets expanded due to market, social bond issuance was strong, ESG relative performance results were positive, but fund launches suffered.

The Bottom Line:  A limited number of worthy focused sustainable small-cap blended investment funds is available to various investors once screened against five key characteristics. Notes of Explanation:  Funds arrayed in descending order based on May 2024 total return performance results. Small cap blended funds consist of non-thematic small cap funds defined by their prospectus. * Indicates index fund. Sources: Morningstar Direct; fund prospectus; Sustainable Research and Analysis LLC. Observations:   May was a strong month for stocks as well as bond market indices, reversing April’s declines. All three major stock benchmarks, the S&P 500 Index, Dow Jones Industrial Average and the Nasdaq Composite, reached new all-time highs and recorded, by month-end, gains of 5.0%, 2.6% and 7.0%, respectively. Ten of the eleven S&P 500 sectors ended the month on a positive note. The Tech sector gained 10%, Utilities added 9% while the Energy sector, due to falling oil prices, declined 0.4%. At the same time, all mid- and small-cap sectors recorded positive results. While well short of its high value achieved in November 2021, the small-cap Russell 2000 index managed to post a gain slightly above 5.0% in May that edged out its large-cap counterpart by six basis points. • Against this backdrop, focused sustainable small-cap blended funds, consisting of non-thematic small-cap funds defined by their prospectus, recorded an average gain of 4.1% in May, narrowly trailing the 4.3% average total return achieved by large-cap blended funds. • The narrow miss belies a wider average performance disparity extending some five plus years. Over the previous one-, three- and five-year intervals, the average performance of focused sustainable blended small-cap funds has trailed their large-cap counterparts by 8.4%, 7.1% (annualized) and 6.2% (annualized), respectively. • In addition to being burdened by higher interest rates in recent years, the small-cap sector hasn’t benefited from the performance of mega-tech stocks that have driven the performance of large-cap indices. • Consisting of a total of 10 active and passively managed funds (17 funds/share classes) with total net assets of $8.3 billion, the universe of focused sustainable small-cap blended funds, including mutual funds and ETFs, offers investors a limited number of worthy investment options when subjected to screening based on management company considerations, years in operations, fund size, performance track record and expense ratio.

The Bottom Line:  The drought in sustainable investment fund launches continued through May, during which there were no new listings of mutual funds or ETFs.        Notes of Explanation: Number of mutual fund launches excludes share class introductions. Morningstar Direct; Sustainable Research and Analysis LLC.  Observations:  The drought in focused sustainable investment fund launches continued through the end of May. During the latest month, there were no new listings of sustainable mutual funds or ETFs.So far this year, there have been a total of only four new fund introductions. These consisted entirely of ETFs. By way of comparison, 54 new funds were launched during the same period in 2023, including a combined total of 29 funds listed in May alone. In the following seven months, 14 funds were launched, and the number of monthly listings trended lower in succession.Year-to-date, two new funds were launched by BlackRock/iShares and one each by Nuveen and Tidal Investments (Carbon Collective). Of these, Nuveen’s Sustainable Core ETF and Tidal Investments thematic Carbon Collective Short Duration Green Bond ETF are both actively managed while the iShares Paris-Aligned Climate MSCI World ex USA ETF and iShares Storage and Materials ETF are both passively managed.The scarcity in sustainable fund launches, starting after May of last year may be attributable to the fact that anti-ESG movement in the US had gained momentum in the second quarter of 2023 and fund companies may have opted to lower their profile by curtailing focused fund offerings. At the same time, commitments to ESG integration do not appear to have subsided, based on reporting by the largest fund companies.

The Bottom Line: Small sustainable fund firms may introduce unique or innovative investment opportunities, but investors should exercise caution when considering making investments in them.        Notes of Explanation: Fund firms listed in descending order based on total net assets as of April 30, 2024. Sources: Morningstar Direct; Sustainable Research and Analysis LLC.  Observations:  Management of focused sustainable fund assets under management are highly concentrated, with 90% of net assets in the US controlled by 25 firms. This, out of a total of 154 firms with sustainable fund offerings, either mutual funds or ETFs or both. At the other end of the range, the bottom 25 firms manage just $150.5 million in assets, or less than 1% of assets. These firms and their funds, which most often includes just one fund, range in size from a low of $0.8 million to a high of $12.2 million.Some of the smallest fund firms bring to market unique and innovative products, such as exposure to innovative and sustainable solutions in the food and materials sectors, carbon credits or ocean health-related companies. However, unless the associated small funds in this category are managed by deep pocketed management firms or they succeed in building up their assets under management quickly, they are less likely to survive. For example, between the start of 2023 through April 30, 2024, 12 of the smallest fund firms offered by the bottom 25 funds, or 44%, have been liquidated.The smaller funds, on average, tend to subject investors to higher expense ratios and their portfolios may struggle to achieve effective diversification, liquidity, and trading efficiencies. In the process, tracking results could suffer along with performance outcomes. Also, portfolios may shut down without much advance notice.Investors attracted to new and unique fund offerings that don’t have reasonable substitutes are encouraged to monitor these new funds rather than invest in them at the time of their launch, unless offered by established management firms with sustainable businesses. That said, this is still not a fail-safe approach. In general, it may be prudent to avoid such investments until the funds reach about $30 to $50 million in net assets under management. 

The bottom line:  A newly launched green bond ETF expands segment, giving investors another sustainable bond fund option to consider in their core bond segment.Support endures for green bond mutual funds and ETFsA signal in support of green bond funds was on display last month when a new green bond fund, the Carbon Collective Short Duration Green Bond ETF (CCSB), was launched by Tidal Investments LLC.  Elevating the number of green bond funds to nine, including 29 share classes, this was the first green bond fund to be introduced since the rebranding as of May 3, 2022 of the Franklin Liberty Federal Tax-Free Bond ETF, renamed the Franklin Municipal Green Bond ETF (FLMB).  With the addition of CCSB’s $10 million in net assets, green bond funds reached $1.52 billion at the end of April.  Another important factor that shows continuing support for green bond funds has been the stickiness of institutional investors who dominate this small thematic category of sustainable funds and a growing but smaller retail investor base.  Challenging as the bond markets have been in recent years, the positive relative performance results achieved by green bond funds, as compared to the broad-based Bloomberg US Aggregate Bond Index consisting of investment-grade intermediate government and corporate bonds, indicates that green bond funds can have an additive role in the core bond segment of a sustainable investment portfolio and also conventional portfoliosExpanding to nine green bond funds, the segment offers investors additional investment optionsNow consisting of nine green bond funds, the segment is dominated by five firms with their mutual funds and ETF offerings, each of which is close to or in excess of $100 million in net assets.  These include the Calvert Green Bond Fund (CGBIX) with $734.8 million in net assets, or 48% of the category’s total net assets, followed by iShares USD Green Bond ETF (BGRN), Nuveen Green Bond Fund (TGRNX) with its four share classes, Franklin Municipal Green Bond ETF (FLMB) and the VanEck Green Bond ETF (GRNB), with $346 million, $180.3 million, $110.1 and $91.7 million, respectively (Note:  Ticker symbols for mutual funds apply to largest share class).  Together, these five firms manage almost $1.5 billion or 96% of the category’s total net assets.  While each of the funds invests in green investments, their structures and approaches vary in the way the portfolios are managed.  In addition to the distinction between mutual funds and ETFs, active versus passive management as well as variations in expense ratios, key areas of differentiation revolve around fundamental investment strategies, such as credit quality and duration characteristics, the definition and qualification of green investments and the adoption of broader sustainable investing strategies.  The Carbon Collective Short Duration Green Bond ETF expands upon the current batch of offerings by restricting the duration of individual securities as well as the average duration of the portfolio to less than five years, and by selecting bonds based on their ability in the aggregate “to achieve a weighted average avoided/reduced CO2e  e(or carbon yield) of >400 MT per $1 million invested.”  In addition, the fund will not invest in the bonds of any companies that derive 10% or more of their revenue from the production of fossil fuels, defense, weapons and private prisons.While gradually increasing, assets under management have remained within a stable bandAssets under management attributable to the nine green bond funds reached $1.52 billion at the end of April, up from $1.50 billion at year-end 2023, for a limited increase of $14.3 million.  Assets under management have gradually increased over the last two or so years due to positive cash flows but have remained within a band that, since the end of 2021, has fluctuated between a low of $1.4 billion and $1.5 billion in net assets¹.  This relative stability in the light of challenging bond market conditions is in no small part attributable to the role of more stable long-term sustainability oriented institutional investors who continue to dominate the green bond funds investor base and a growing but small retail investor base. While it’s possible to track institutional holdings in ETFs through 13-F filings, institutional ownership can be more readily identified in mutual funds via their institutional share classes.  As of April 2024, institutional shareholders account for $711 million or 74% of assets under management.Notes of Explanation:  The rebranded Franklin Municipal Green Bond Fund reflected, starting May 3, 2022.  Sources:  Morningstar Direct; Sustainable Research and Analysis LLCPerformance results:  Average performance has exceeded the broad investment grade intermediate benchmarkThe last three calendar years have been particularly challenging for fixed income investors, in large part due to rising interest rates and inflation.  Against this backdrop, the relative performance results achieved by green bond funds versus the Bloomberg US Aggregate Bond Index²--the most widely used benchmark for the bond market in the US--have been positive over varying periods during the past five years. At the same time, green bond funds, on average, have exhibited lower levels of volatility.  For these reasons, it’s reasonable to argue that green bond funds can serve as a complement in the core fixed income component of a diversified portfolio to advance investor preferences for “green investments” without giving up any financial returns.  This could also be the case for conventional portfolios.  In the short-term, including time periods up to and including three years, green bond funds, on average, have outperformed the Bloomberg US Aggregate Bond Index.  In April, the eight funds in operation during the entire month along with their corresponding share classes, where applicable, posted an average return of -1.6% for a 93-basis points advantage over the Bloomberg US Aggregate Bond Index.  Returns in April ranged from a low of -2.32% to a high of -1.14%.  All 28 funds/share classes in operation during the entire month outperformed the benchmark but differences in results are, in part, attributable to variations in expense ratios.  For green bond funds, these range from a low of 0.2% to a high of 1.74%.  With a median expense ratio of 0.6%, paying higher fees should be carefully considered.Green bond funds, on average, also outperformed the conventional benchmark year-to-date, trailing twelve months and three years, with margins of 1.79%, 4.34% and 1.06%, respectively. Green bond funds:  Performance results to April 2024, assets and expense ratios   Mutual Fund/ETF 1-M (TR%) Y-T-D (TR%) 12-M (TR%) 3-YR (TR%) 5-YR (TR%) AUM $ M Expense Ratio (%) Calvert Green Bond A -2.32 -2.67 0.29 -3.34 -0.13 66.6 0.73 Calvert Green Bond I -2.3 -2.59 0.55 -3.09 0.12 620.6 0.48 Calvert Green Bond R6 -2.29 -2.57 0.6 -3.04 0.19 47.6 0.43 Carbon Collective Short Dur Grn Bd ETF           10 0.5 Franklin Municipal Green Bond ETF -1.16 -0.94 2.95 # # 110.1 0.3 iShares USD Green Bond ETF -1.69 -1.79 0.9 -3.01 -0.15 346 0.2 Lord Abbett Climate Focused Bond A -1.28 -1.17 4.14 -1.83   5.4 0.65 Lord Abbett Climate Focused Bond C -1.33 -1.36 3.51 -2.45   0.4 1.26 Lord Abbett Climate Focused Bond F -1.26 -1.1 4.35 -1.63   2.6 0.45 Lord Abbett Climate Focused Bond F3 -1.26 -1.1 4.36 -1.59   0.1 0.43 Lord Abbett Climate Focused Bond I -1.26 -1.1 4.22 -1.63   12 0.45 Lord Abbett Climate Focused Bond R3 -1.3 -1.26 3.84 -2.12   0 0.95 Lord Abbett Climate Focused Bond R4 -1.28 -1.18 4.09 -1.87   0 0.7 Lord Abbett Climate Focused Bond R5 -1.26 -1.1 4.35 -1.63   0 0.45 Lord Abbett Climate Focused Bond R6 -1.14 -1.09 4.37 -1.59   0.5 0.43 Mirova Global Green Bond A -1.77 -2.12 3.21 -4.29 -0.67 5.3 0.93 Mirova Global Green Bond N -1.64 -1.99 3.61 -3.98 -0.37 7.7 0.62 Mirova Global Green Bond Y -1.65 -1.99 3.56 -4.01 -0.39 27 0.68 Nuveen Green Bond A -2.15 -1.92 0.37 -3.01 0.34 7.1 0.8 Nuveen Green Bond I -2.14 -1.75 0.7 -2.79 0.58 35.6 0.6 Nuveen Green Bond Premier -2.14 -1.87 0.53 -2.87 0.49 0.9 0.6 Nuveen Green Bond R6 -2.13 -1.82 0.68 -2.73 0.62 96.5 0.45 Nuveen Green Bond Retirement -2.15 -1.9 0.43 -2.91 0.46 13.2 0.7 PIMCO Climate Bond A -1.68 -1.46 3.09 -2.26   1.4 0.99 PIMCO Climate Bond C -1.74 -1.71 2.32 -3   0.1 1.74 PIMCO Climate Bond I-2 -1.65 -1.37 3.4 -1.97   0.2 0.69 PIMCO Climate Bond I-3 -1.66 -1.38 3.35 -2.02   0.4 0.74 PIMCO Climate Bond Institutional -1.64 -1.33 3.5 -1.87   16 0.59 VanEck Green Bond ETF -1.63 -1.42 1.89 -2.46 0.3 91.7 0.2 Average/Total -1.60 -1.49 2.87 -2.48 0.12 1525 0.65 Bloomberg US Aggregate Bond Index -2.53 -3.28 -1.47 -3.54 -0.16     Notes of Explanation:  # Fund rebranded as of May 3, 2022 and prior performance does not reflect a track record in green bond investing.  Sources:  Morningstar Direct; Sustainable Research and Analysis LLC  ¹ Adjustments have not been made for the rebranded $100 million Franklin Municipal Green Bond Fund. ² More narrowly focused benchmarks may be more appropriate to evaluate individual manager performance.  For example, an index tracking a universe of US and non-US securities will be appropriate for the Calvert Breen Bond Fund while a municipal bond index would be most relevant for the Franklin Municipal Bond Index.

The Bottom Line: With one exception, the composition of the top ten sustainable investment funds by assets under management remains unchanged so far this year.          Notes of Explanation: # Index fund. Total net assets as of April 30, 2024. Sources: Morningstar Direct; Sustainable Research and Analysis LLC. Ten largest sustainable mutual funds and ETFsThe largest ten sustainable mutual funds and ETFs as of April 30th managed $112.4 billion in net assets, or 34% of sustainable fund assets under management that stood at $333.4 billion as of the same date. With one exception, the composition of the top ten funds has remained unchanged since the start of the year. The exception involves the addition of the Putnam Sustainable Leaders Fund to the top ten list. The fund replaced the renamed Nuveen Large Cap Responsible Equity Fund that, effective May 1, 2024 , underwent a name change due to rebranding from the TIAA-CREF Social Choice Equity Fund and a modest investment policy change.The top funds consist of seven mutual funds and three ETFs, including six actively managed investment vehicles as well as four index funds. All but one are equity funds, classified as Large Blend, Large Growth and Foreign Large Blend funds.With one bond fund exception, top sustainable funds are all domestic and foreign equity fundsThe one equity fund exception is the recently renamed Nuveen Core Impact Bond Fund which prior to May 1st was called the TIAA-CREF Core Bond Fund. This Intermediate Core Bond fund is the largest sustainable bond fund, offering five share classes with a combined total of $6.1 billion in net assets.Funds employ a variety of sustainable investing approachesThe funds employ a variety of sustainable investing strategies or approaches, ranging from screening and exclusions that characterizes, for example, the Vanguard FTSE Social Index Fund, to ESG integration, applicable to the Parnassus Core Equity Fund, and to the broadest combination, as is the case with the Nuveen Core Impact Bond Fund with sustainable investing approaches that extend from ESG integration, exclusions and impact, that is, investments that provide direct exposure to issuers and/or individual projects that the adviser, through its proprietary analysis, believes have the potential to have social or environmental benefits. Index funds aside, in some cases management firms may also employ engagement practices with companies and other stakeholders to enhance due diligence and monitor the investment thesis.Top ten funds recorded an average decline of 4.2% but are up an average 20.9% over the trailing 12 monthsIn April and since the start of the year, the largest funds recorded an average decline of 4.2% and a positive 20.9% total return, respectively. Based on the total returns posted by the best or worse performing share class where applicable, returns in April ranged from -5.51% posted by Brown Advisory Sustainable Growth I to -2.43% recorded by the Nuveen Core Impact Bond Fund Institutional Class. Year-to-date, returns range from a low of -0.04% registered by Nuveen Core Impact Bond Fund Institutional Class to a high of 32.04% achieved by Pioneer Fund A. 

The Bottom Line: Sustainable funds posted an average -3.2% in April, while the leading Commodity Funds category added 7.2% and the lagging category dropped 58.9%.       Notes of explanation:Notes of Explanation: Sustainable funds fall into one of 75 fund categories, as determined by Morningstar Direct. Returns are the average returns for each category for April 2024 and trailing 12-months. Sources: Morningstar Direct and Sustainable Research and Analysis LLC. Investor optimism shifted to lower gear in April, but corporate earnings provided some ballastInvestor optimism during the first quarter of the year shifted to lower gear in April as investors came to realize that interest rates are not likely to move lower any time soon and Middle East tensions escalated. Investors, who had expected as many as six interest rate cuts in 2024, have come to realize that rate cuts may not be implemented this year due to a lack of further progress on the inflation front and stronger than expected economic growth, jobs, and higher wages. At the same time, corporate earnings came in above the 1% estimated gain and provided some ballast to the equity market which gained 1.4% after April 19th to end the month on better footing. All three major indices declined in April, with large cap growth stocks outperforming value stocks but the reverse was true for small cap stocks. The S&P 500 Index recorded a 4.08% total return decline, while the Dow Jones Industrial Index and NASDAQ Composite gave up 5.05% and 4.38%, respectively. The Russell 2000 Index, consisting of small companies, dropped even lower, giving up 7.04%. Ten of the eleven large cap index sectors reflected declines in April, with the Real Estate sector posting the lowest return at -8.62% while the Utilities sector was positive at 1.59%.Intermediate investment grade bons gave up 2.53% in April and registered a year-to-date decline of 3.28%.After finally recording a monthly gain of 0.9% in March, bonds sold off as 10-year Treasury’s posted the highest yield so far this year, ending the month at 4.69% versus 4.20% as of March 28, 2024. Against this development, the Bloomberg US Aggregate Bond Index gave up 2.53% and registered a wider year-to-date decline of 3.28%.Bolstered by emerging markets, stocks outside the U.S. dropped by 1.8%.Outside the U.S., the MSCI ACWI ex U.S. registered a decline of 1.8%, benefiting from the stronger performance in emerging markets that recorded an increase of 0.45%.Sustainable funds registered an average decline of 3.2%, with over 93% of funds posting declinesAgainst this backdrop, focused sustainable mutual funds, and ETFs, including money market funds, a total number of 1,523 funds/share classes, 75 fund categories or fund classifications, and $333.4 billion in assets under management at the end of April, as classified by Morningstar, registered an average decline of 3.2%. Focused long-term sustainable funds produced similar one-month results. Returns across taxable bond funds, international equity funds and U.S, equity funds varied, ranging from an average decline of 1.6%, to -3.1% and -4.7%, respectively. Only 97 funds/share classes, or 6.4% of sustainable funds recorded positive results for the month.The ten top performing sustainable fund categories, all posting positive average returns, gained an average return of 1.3% in April while the ten worst performing categories registered an average decline of 7.9%.Commodities Focused funds and Trading-Leveraged Equity fun ds were the best and worst performing sustainable fund categories in AprilCommodities Focused funds, ten funds in total, posted the best average return, up 7.2%. The category, tracking mutual funds, ETFs and ETNs, was led by the highly volatile iPath Global Carbon ETN (GRNTF). This small $4.7 million exchange trade note that tracks the performance of the most liquid carbon-related credit plans in the global marketplace gained 11.88% in April but still failed to overcome its underperformance that on a trailing 12-month basis still left the fund in red by -22.4%. The next best performing fund in the same category is the $14.4 million iShares Transition-Enabling Metals ETF (TMET), up 11.47%. The index fund seeks investments that gives it exposure to metals that are essential to a wide range of clean energy technologies supporting the transition to a low-carbon economy.At the other end of the spectrum, two small ETFs that make up the worst performing Trading-Leveraged Equity funds, the $3.9 million Direxion Daily Electric and Autonomous Vehicles Bull 2X ETF (EVAV) and the $3.3 million Direxion Daily Global Clean Energy Bull 2X Shares ETF (KLNE) , registered declines of 62.9% and 55%, respectively.   

The Bottom Line: Sustainable ETFs listed across the globe in 23 jurisdictions with $US3.9 trillion in assets under management are dominated by 10 management firms.      Notes of explanation: Assets under management denominated in US dollars as of early May 2024. All Other includes Netherlands, Switzerland, Japan, Mexico, Singapore, South Korea, HK, New Zealand, South Africa, India, Brazil, Chile and Indonesia, listed in descending order. Sources: Morningstar Direct; Sustainable Research and Analysis LLC. Global sustainable ETFS stood at $US 3.9 trillion at the start of May 2024Global sustainable fund assets managed through ETFs stood at $US 3.9 trillion at the start of May 2024, based on Morningstar classifications.  4,590 funds are listed across 23 domiciles, including cross border listings in Luxembourg and Ireland.The top 10 domiciles, including Ireland and Luxembourg, account for just about 100% of assets with which, in descending order, are led by Ireland (71%), Luxembourg (23%), U.S. (3%) and France (1%). The top 10 domiciles account for almost $US3.9 trillion in assets under management while the top four domiciles make up $US 3.8 trillion in assets under management.Index tracking and equity funds dominate globallyIndex tracking funds dominate globally, by fund count and assets under management, with 4,022 ETFs and $US3.6 trillion in assets under management. On the other hand, there are 569 actively managed sustainable ETFs with $US320 billion in assets, led by Ireland with $US302.5 billion, followed by the U.S. with 92 funds and $US9.1 billion and Canada with 46 funds and $6.0 billion in assets under managementGlobally, equity oriented sustainable ETFs account for almost $US3.1 trillion in assets and make up 79% of assets under management. Fixed income ETFs and fund vehicles investing in commodities follow, with 21% and a distant 0% share, respectively. But there are significant variations by domicile. For example, South Korea equity ETFs hold 54% of assets while fixed income ETFs make up 39%. In the US, on the other hand, sustainable equity ETFs maintain an 89% share while fixed income falls just short of 10%.BlackRock dominates by assets and the largest fundsWhile about 234 firms worldwide offer sustainable ETF investment products distributed under 186 brand names, the top 10 branded offerings account for $US3.6 trillion or 92% of assets under management. Global leaders include BlackRock that towers over the rest of the field with US$1.5 trillion, followed by Amundi and UBS with $US633.5 billion and $US528.6 billion, respectively. Together, there three firms manage over two-thirds of global sustainable ETFs.BlackRock also rules the listing of the largest managed funds, offering six of the largest ten funds globally. These are all index funds, the largest being the $90.7 billion iShares MSCI USA ESG Enhanced ETF USD. Deutsche Bank, UBS and J.P. Morgan Asset Management also land spots with some of the world’s largest sustainable ETFs which, except for the tenth largest actively managed $US42.5 billion JPM US Research Enhanced Equity ESG ETF USD, are also MSCI index tracking funds.

The Bottom Line: While divestment approaches have an important symbolic meaning and serve as a signaling mechanism, the financial impact on companies is likely limited.     Notes of explanation:  *Indicates no divestment of fossil fuel companies. Source: UB University Business, 2/15/2024, based on a report published by the National Association of College and University Business Officers and Commonfund (NACUBO-Commonfund).; Sustainable Research and Analysis LLC.Background: Pro-Palestinian protesters demand that university endowments divest from companies doing business with IsraelFollowing the October 7, 2023 attack on Israel by Hamas and Palestinian Islamic Jihad terrorists that resulted in the deaths of more than 1,200 men, women and children as well as hostage taking and the subsequent military response in the Gaza Strip, pro-Palestinian protesters have sprung up at colleges and university campuses across the US. One of the common demands made by the protesting groups is that university endowments divest from companies doing business with Israel.Israel is not the first target of divestment campaigns: Apartheid movement and fossil fuel divestmentsIsrael is not the first target of divestment campaigns. During the 1970s and 1980s, there was a significant movement in universities across the United States to divest from companies doing business with the South African Apartheid government. By 1985, a reported 55 universities and colleges had partially or fully divested from companies doing business in South Africa. In more recent years, attention has shifted to fossil fuel divestment. According to one report issued in 2023, over 140 U.S. higher education institutions had announced divestment commitments. Specific details regarding fossil fuel divestment policies vary from one institution to the next, and at some universities divestment initiatives have been combined with the adoption of exclusionary or screening approaches that extend beyond fossil fuels to include, for example, screening against firms that operate private prisons, engage in tobacco manufacturing or companies that do business in the Sudan. A review of the top 10 US endowments, with combined assets of about $305 billion, reveals that seven institutions have divested or are in the process of divesting from their direct fossil fuel holdings. The same top 10 US endowments have rejected calls to divest from Israel.Divestment versus exclusions and screeningDivestment refers to decisions to sell assets from a portfolio or fund based on non-economic judgements, usually for moral, political, or values-based reasons. Exclusionary approaches, on the other hand, involve the elimination of companies or certain sectors or industries as eligible securities from portfolios, before investing in them, based on specific ethical, religious, social or environmental guidelines or preferences. Such an action is taken in advance of constructing a portfolio of securities, except in cases where the strategy is adopted after the portfolio is up and running, for example, in cases where a fund’s strategy is formally modified. Traditional examples of exclusionary strategies or screening, which have been widely adopted by ESG focused mutual funds and ETFs, cover the avoidance of any investments in companies that are fully or partially engaged in gambling and sex related activities, the production or manufacturing of alcohol, tobacco, firearms, weapons and even atomic energy. These exclusionary categories have been extended in recent years to incorporate additional considerations, for example, fossil fuel firms, firms that are the subject of serious labor-related actions or penalties by regulatory agencies or demonstrate a pattern of employing forced, compulsory or child labor, or firms that exhibit a pattern and practice of human rights violations or are directly complicit in human rights violations committed by governments or security forces, including those that are under US or international sanctions for grave human rights abuses, such as genocide and forced labor.While important symbolically, the financial impact on companies is likely limitedWhile divestment approaches have an important symbolic meaning and signaling mechanism that might encourage other universities as well as other large institutions to divest, the financial impact on companies is likely limited. Other pools of capital are ready to step in as equity investors (who may be prepared to invest in improvements) or holders of fixed income securities. Also, debt capital may be sourced from private lenders or privately placed securities that, by some accounts, are becoming serious rivals to mainstream lenders. While debt financing may be secured at a slightly higher cost, research suggests that this may not be the case for equity-based capital raising.

The Bottom Line: Returns from sustainable and conventional bond funds have been disappointing, but investing opportunities are available and improvements may come later this year.     Notes of explanation: Performance of sustainable bond fund categories, 19 in total, listed in order of first quarter 2024 average total returns. Quartile rankings are based on Q1 2024 results. Sources: Morningstar Direct; Sustainable Research and Analysis LLC. Observations:Bonds and bond funds were supposed to produce strong returns in 2024. After dropping about 13% in 2022, the Bloomberg US Aggregate Bond Index gained 5.5% the following year due to robust results in November and December of 2023, when the Bloomberg US Aggregate Bond Index returned 4.5% and 3.8%, respectively. The expectations were for even better results in 2024.So far this year, bonds and bond fund returns have been disappointing, as bond yields moved up in response to increasing concerns regarding the stubbornness of inflation which have dimmed the prospects of Federal Reserve rate cuts later this year. Just last week, Federal Reserve Chairman Jerome Powell indicated that persistent high inflation is likely to defer any rate cuts by the Fed until later this year. Chairman Powell expressed caution regarding recent inflation data, stating that it has not instilled greater confidence in the control of inflationary pressures. 10-year Treasury yields that ended the first quarter up 32 basis points since the start of the year added another 42 basis points to end the latest week at a yield of 4.62%. 2-year Treasury notes ended at 4.97%.With two exceptions, the average returns recorded by 19 sustainable bond fund categories in the first quarter placed them between the lowest to next to lowest quartiles within the universe of 75 sustainable fund categories tracked by Morningstar. Overall, these funds registered an average return of 0.7% in March and an average of 0.6% during the first quarter. Average returns ranged from a high of 2.53% to a low of -1.0%. Of these, six fund categories registered negative average returns in the first quarter.The two exceptions included Emerging Market Bond funds and Bank Loan funds that generated average first quarter returns of 2.5% and 2.3%, respectively. Otherwise, the remaining 17 taxable and municipal sustainable bond fund categories achieved average returns ranging from a low of -1.0% posted by Intermediate Government funds to +1.8% attributable to Nontraditional Bond funds. Individual fund returns within these categories ranged from a high of 2.63% posted by the Ashmore Emerging Markets Corporate Income ESG Institutional Class (expense ratio=0.87%), a fund that integrates and screens environmental, social and governance (ESG) factors and employs exclusions, to a low of -1.37% recorded by BlackRock Impact Mortgage Investment Fund Class C subject to a 2.59% expense ratio. In selecting securities, the fund considers whether the activities supported by the investment are expected to include positive social and/or environmental impact with measurable and clear benefit to undercapitalized or high social opportunity areas and alignment with broadly endorsed public policy goals. Refer to the SRI Funds Directory for additional details regarding the sustainable investment approaches employed by these two funds.While returns from sustainable and convention al bond funds so far this year have been disappointing, “higher for longer” rates means that attractive investing opportunities are likely to be available in the bond market, in any case. Further, returns should improve when the Federal Reserve finally does move forward with rate cuts that are still expected later this year.

The Bottom Line: Natural Resources funds, one of 75 fund categories, posted the fifth best average return in March, but results vary by fund mandate. Notes of explanation: Funds listed in order of total return performance posted in March 2024. For mutual funds with multiple share classes, only the top performing share class is listed. 12-M, 3-Y, and 5-Y are average annual total returns to March 31, 2024. 0 performance indicates that the fund was not in operation during the period. Sources: Morningstar Direct; Sustainable Research and Analysis LLC. Observations: Natural Resources, the thematic sustainable funds category that, according to Morningstar, is comprised of 17 equity-oriented funds/25 funds and share classes with $6.1 billion in assets, blends together funds that pursue investments in low carbon economy natural resource companies as well as the water resources sector. The category posted the fifth best average total return in March, out of 75 investment categories, with its average return of 5.3% versus 3.2% for the S&P 500 Index. Like other thematic investment funds, Natural Resources funds tend to concentrate their investments in a few industries and may be exposed to large positions in a small number of companies.  As a result, they tend to expose investors to higher levels of volatility, or risk, as measured by the standard deviation of monthly returns over the past three years. The results in March were driven by the performance of funds investing in companies operating in natural resource industries that will be required to achieve the transition to a low carbon economy, including even narrower so-called green energy metals and technologies, rather than funds that focus on the water resources sector. In March these funds delivered an average increase of 7.7%, led by the strong performance of the actively managed but rather pricey Victory Global Energy Transition Fund. This is a $316 million fund offering multiple share classes that is subject to an average 1.7% expense ratio across its four share classes (Note: Expense ratios, on average, for the category fall within the upper range for sustainable funds). The Victory Global Energy Transition Fund Class Y (RSNYX) was the second best performing sustainable fund in March, gaining 11.02%. While it registered a decline of 2.93% over the trailing twelve-month period, the fund is up 22.21% and 16.5% achieved during the previous three and five-year time intervals to March 31, respectively. Refer to the SRI Funds Directory for additional details regarding the fund’s investing approach. Also in March, the ten funds focused on investing in the water resources sector registered an average 3.8% on a total return basis. Investments in the water sector have been driven by the continued scarcity of water, water quality concerns and infrastructure issues that are exacerbating global water challenges. On the other hand, companies operating in the natural resources industries that will be required for the energy transition including, for example, companies that provide the raw materials and infrastructure necessary to create energy systems with a net zero greenhouse gas emissions profile. The performance drivers for these two segments can and do vary over time as are fund-related performance results, even as these appear to converge over the intermediate term. For the twelve months, three- and five-year intervals, Natural Resources funds posted average gains of 7.4%, 6.9% and 11.4%, respectively, versus the S&P 500 Index that was up 29.9%, 11.5% and 15.1%, respectively. Over the same three time periods, the average performance of funds investing in the water resources sector diverged from low carbon economy natural resource companies by 28%, -2.2% and 0.9%, respectively. Selecting a Natural Resource fund calls for a deeper dive before investing, with particular emphasis on the fund’s mandate, volatility and expense ratio, along with other factors relevant to fund selection.

The Bottom Line: Funds with the highest volatilities are typically, but not always, thematic concentrated funds that expose investors to near-to-intermediate term volatility or risks.    Notes of explanation: The chart displays the ten funds with the highest standard deviations of monthly returns over a three-year period along with 12-month total returns to March 31, 2024. Volatility=monthly standard deviation over 3-years. Sources: Morningstar Direct; Sustainable Research and Analysis LLC. Observations:The ten sustainable funds with the highest risk profiles based on their standard deviations of monthly returns over a three-year period to March 31, 2024 are all thematic funds, typically non-diversified or concentrated funds, focusing on clean or renewable energy and the price of carbon. The three-year standard deviations, which range from 9.52 to a high of 12.2, reflect the near-to-intermediate term volatilities that investors can be exposed to when investing in thematic concentrated funds.The same ten funds, including one mutual fund and nine ETFs, have experienced significant total return declines during the trailing 12-months and, in some instances, trailing 3-years to March 31st.Posting an average 12-month decline of 35.2%, returns ranged from -18.9% to -41.6%. In the first instance, the small $10.1 million actively managed Firsthand Alternative Energy Fund (ALTEX) (2.0% expense ratio) that is down 18.9% invests in alternative energy and alternative energy technology companies, both within and outside the U.S. Included are companies involved in energy generated through solar, hydrogen, wind, geothermal, hydroelectric, tidal, biofuel, and biomass. At the other end of the range is the $364.5 million index tracking Invesco WinderHill Clean Energy ETF (PBW) (0.66% expense ratio) that invests in US listed stocks engaged in the business of the advancement of cleaner energy and conservation or are important to the development of clean energy. The fund focuses on companies that will substantially benefit from a societal transition toward the use of cleaner energy, zero-CO2 renewables, and conservation. The same funds posted total returns in 2020 of 83.9% and 205.6%, respectively. Refer to the SRI Funds Directory for additional details regarding the approach to sustainable investing taken by the two mentioned funds.As noted in the Chart of the Week dated February 12, 2024 [https://sustainableinvest.com/chart-of-the-week-february-12-2024/], clean energy stocks have faced headwinds and volatility due to high interest rates, supply chain disruptions, project delays, regulatory issues and repricing attributable to shifts in investor sentiments. Conditions did not improve in the first quarter of the year. Funds investing in carbon allowances that are regulated by government organizations have been equally volatile and are not for the faint of heart. The dynamics of carbon pricing are complex, and carbon prices have experienced a significant decline. Prices picked up in March.The global shift to renewable energy remains a positive trend and investors committed to the theme have to brace for ongoing volatility and be prepared for a commitment over an intermediate-to long-term time horizon.

The Bottom Line: At the Crane Bond Fund Symposium last week, five observations and conclusions were offered regarding the current state of sustainable investing in fixed income.  Observations/conclusions offered at Crane Bond Fund SymposiumAt the Crane Bond Fund Symposium last week, five observations/conclusions were offered regarding the current state of sustainable investing in fixed income.  These are, as follows:Sustainable investing/ESG investing may be experiencing a period of introspection, but rumors of its demise are exaggerated: From ESG to Stewardship?Sustainable bond mutual funds within the sustainable funds universe are underrepresented relative to conventional funds, with room for growth.The segment is concentrated.Performance comparisons relative to conventional funds require careful analysis.Challenges for bond fund investors offer opportunities for active management.The entire slide presentation can be viewed below.

The Bottom Line: Only two sustainable fund investing options were launched in March 2024, reflecting a cooling off in sustainable mutual fund and ETF introductions.     Sustainable mutual funds and ETFs launch between January 1, 2023 – March 31, 2024Notes of explanation: New fund launches exclude listings of new mutual fund share classes. Sources: Morningstar Direct; Sustainable Research and Analysis LLC. Observations:Reflecting a cooling off in sustainable fund introductions, only two new sustainable funds were launched in March of this year. Both are ETFs, including the actively managed Nuveen Sustainable Core ETF (NSCR) and the index tracking iShares Energy Storage & Materials ETF (IBAT). At the same time, there were no new mutual fund introductions in March.Through the end of the first quarter, a total of only three sustainable funds have been launched, all three ETFs. There were no new sustainable mutual fund listings so far this year.By way of comparisons, 18 sustainable ETFs were launched in Q1 2023 along with six sustainable mutual funds, for a total of 24 funds (excluding new share classes). The number of sustainable fund launches also trails when compared to the number of conventional funds that started operations in the first quarter of this year.The two new ETFs include a thematic fund as well as an actively managed fund that invests in the equities of companies aligned with three sustainability themes. So far this year, two index funds were launched versus one actively managed portfolio.The iShares Energy Storage & Materials ETF, an $8.1 million fund subject to a 47-basis points (bp) fee that seeks to track the investment results of an index composed of U.S. and non-U.S. companies involved in energy storage solutions aiming to support the transition to a low-carbon economy, including hydrogen, fuel cells and batteries. In addition, excluded from consideration are all companies that are identified as violating or being at risk of violating commonly accepted international norms and standards or other exclusion guidelines or having a severe controversy rating. Refer to the SRI Funds Directory for additional details regarding the fund’s approach to sustainable investing.The $5.5 million Nuveen Sustainable Core ETF offered at a 45-bps fee is an actively managed fund that seeks to pursue its investment objective by investing in equity securities of companies aligned with sustainability themes. Sustainability themes are measurable investment themes that exhibit positive societal impact and also influence macroeconomic trends, competitive dynamics, and the financial performance of companies across industries and sectors. The three sustainability themes are (1) energy transition and innovation, (2) inclusive growth, and (3) strong governance. Refer to the SRI Funds Directory for additional details regarding the fund’s approach to sustainable investing.

The Bottom Line: J.D. Power 2024 investor satisfaction study finds a significant year-over-year increase in investor satisfaction but lower levels of younger investor client loyalty. J.D. Power 2024 U.S. Full-Service Investor Satisfaction StudySM-Overall Customer Satisfaction Index Ranking Notes of explanation: Index ranking is based on a 1,000-point scale. ^Brand is not rank eligible because it does not meet study award criteria. Sources: J.D. Power 2024 U.S. Full-Service Investor Satisfaction StudySM Investment and 2023 U.S. Full Service Investor Satisfaction Study. Observations: The just released J.D. Power U.S. Full-Service Investor Satisfaction StudySM based on responses from 9,951 investors who work directly with a dedicated financial advisor or teams of advisors that were collected between January 2023 and January 2024, shows that there has been a significant 8-poiint year-over-year increase in investor satisfaction. This is up to a score of 735 from a score of 727 the previous year, on a 1,000-point scale, and is “consistent with the long-term trend of investor satisfaction moving in concert with stock market performance and illustrates a potential risk factor for advisors whose perceived value is dependent on market forces.” According to the Study, financial advisors are exposed to the highest flight risk from younger affluent clients. Attrition rates tend to be very low among clients with advisors, especially among Gen X, the demographic cohort born between 1965-1976), as well as older clients. At the same time, more than one-third (36%) of Millennials (born between 1982-1994) with more than $1 million in investable assets say they are likely to change firms in the next year. A potential factor in this lack of loyalty is that 70% of affluent Millennials have a secondary investment firm. This number is significantly lower among older affluent cohorts. The Study finds that technology and digital solutions have become increasingly critical to enabling advisor efficiency and empowering more proactive client engagement. Furthermore, advisors who take the time to help clients understand and engage with digital channels are consistently driving higher levels of investor satisfaction. Advisors who fail to clearly explain digital options are perceived more negatively and get half the number of referrals as their more digitally supportive peers. In addition, the Study reports that the rapid growth of AI puts the spotlight on advisor relationships. As AI-enabled investment advisory solutions rapidly gain traction in the marketplace, advisors need to be clear on what differentiates them. In 2024, 41% of advised clients’ experiences fall into the transactional category on the J.D. Power advice continuum. This group is put at the greatest risk by technology-enabled solutions that can effectively compete on price and efficiency. Delivering truly personalized guidance that addresses a client’s unique goals and challenges, major life changes and investment strategies that transcend returns are keys to insulating the business from future competitive threats.

The Bottom Line: With additional room for growth for sustainable bond funds, investors can expect to benefit in time from additional fund offerings and categories. Conventional and sustainable bond funds versus their respective long-term universe of funds sustainable funds Notes of Explanation: Data covers long-term funds (money market funds are excluded), as of December 2023. Left hand chart is in US$ billions while the right-hand chart is in US$ millions. Sources: Investment Company Institute, Morningstar Direct, Sustainable Research and Analysis LLC. Observations: Conventional fixed income mutual funds and ETFs have accumulated $4.8 trillion in assets under management as of year-end 2023 and account for 24% of all long-term mutual funds and ETF assets under management—a combined total of $19.8 trillion. By way of comparison, sustainable bond mutual funds and ETFs, at $46.9 billion as of the same date, account for a smaller 14% of long-term sustainable fund assets under management. This suggests that there is additional room for growth for sustainable bond funds. For example, by expanding the government funds category and/or introducing various iterations of municipal bond funds along state and credit quality lines, to mention just a few, are not currently available to investors in the sustainable bond funds segment. Sustainable bond funds are concentrated across fund firms, fund categories as well as funds. The top 10 firms of 57 firms that offer sustainable bond funds, manage $38.4 billion and account for 82% of assets. At the same time, the top three sustainable fund categories, including Intermediate Core Bond, Intermediate Core-Plus Bond and Short-Term Bond funds, managed a combined total of $31.2 billion that account for 66% of assets under management. The largest ten sustainable bond funds, consisting of both active and passively managed funds, such as the TIAA-CREF Core Impact Bond Fund at $6.3 billion as well as the second largest iShares ESG U.S. Aggregate Bond ETF at $3.6 billion, manage over 50% of the segment’s assets under management.

The Bottom Line:  Sustainable funds in February benefited from the strong equity markets continuing since January, with 61 sub-categories, or 83%, posting positive average returns. Notes of Explanation: Average performance of sub-sectors covers sustainable mutual funds and ETFs. Sources: Morningstar Direct and Sustainable Research and Analysis LLC. Observations: Sustainable fund assets under management attributable to mutual funds and ETFs, including money market funds, a total of 1,564 funds/share classes based on Morningstar classifications, closed the month of February 2024 with $337.2 billion in assets. These funds recorded an average total return of 2.7% in February, 1.9% year-to-date and 12.3% over the trailing twelve months. For the most part, sustainable funds in February benefited from the strong equity markets since the start to the year, with the S&P 500 Index recording its fourth consecutive monthly gain. Along with other major indices, the S&P 500 registered a new 52-week high in February. On the other hand, the US bond market retreated as concerns that the Federal Reserve may be less inclined to lower interest rates amid economic strength led to rate reduction expectations being adjusted from March to June. Sustainable funds, classified across 10 broad fund categories, fall into 75 sub-categories. Of these 61 sub-categories, or 83%, posted positive average performance results in February. These ranged from a low of 1.1%, on average, recorded by high yield bonds to a high of 15.7% reached by one fund comprising China region funds. The top 10 fund sub-categories are dominated by growth funds, posted an average return of 7.2% in February, pushed up by the performance of five of the  Magnificent 7 members (Amazon, Meta, Microsoft, Tesla and Nvidia), with Nvidia, in particular, gaining 28.6% for the month and representing 20% of the February total return for the S&P 500 and 26% YTD.  The 10 lagging fund categories are led by bond funds, with average returns ranging from a low of -6.5% recorded by Commodities Focused funds to a high of -0.76% posted by the miscellaneous sector. The top performing fund sub-categories as well as the laggards are dominated by the most volatile categories, based on their average 3-year monthly standard deviation of returns.

The Bottom Line:  Passively managed mutual funds and ETFs surpassed actively managed conventional funds in 2023 but sustainable funds are still dominated by active strategies. Notes of explanation: Sources:  Long-term funds exclude sustainable money market funds.  Morningstar Direct, Sustainable Research and Analysis LLC. Observations: According to Morningstar, passively managed funds, or index funds, surpassed actively managed funds for the first time at the end of 2023.  This means that of about $27.7 trillion in long-term mutual fund and ETF assets under management, more than $13.8 trillion in assets are now passively managed¹.  This is not yet the case with sustainable funds. The total assets under management in passive index funds have grown significantly over the past decade, a result of the fact that actively managed funds rarely beat securities market indices, For example, according to S&P/Dow Jones Indices², only 39% of large-cap funds outperformed the S&P 500 Index over the one-year period ended June 30, 2023, and the percentage of large-cap funds outperforming over the three, five and 10-year intervals declined to 14%.  That said, in less efficient markets, active managers can exploit mispriced securities or market anomalies and deliver above index returns.  For instance, small-cap stocks, foreign shares, and high yield bonds have shown better performance for active funds compared to other segments.  According to S&P/Dow Jones Indices³, 55% and 34% of high yield funds outperformed over trailing three and five-year intervals. Consistent underperformance on the part of actively managed funds, along with their higher fees, have pushed retail and institutional investors toward low-cost passive investment strategies. The same, however, can’t be said for sustainable fund assets in mutual funds and ETFs at the end of last year.  Based on data as of December 2023, index mutual fund and ETF assets reached 127.2 billion, or 38.5% of sustainable fund assets.  This percentage has been declining, having stood at 41% at the end of 2021 and 40% at the end of 2022. It may be that some sustainable approaches are best implemented via actively managed funds, such as impact, issuer engagement or proxy voting, however, over time, performance considerations are likely to prevail in sustainable investing too and the balance of active management versus index investing is likely to converge in line with conventional funds. ¹ Source:  ICI.org. ² S&P/Dow Jones Indices SPIVA reports. ³ S&P/Dow Jones Indices SPIVA reports.

The Bottom Line:  The decisions by high profile investment management firms to withdraw from the Climate Action 100+ does not signal a retreat from ESG.Investment management firms and companies don't seem to be retreating from ESG related programs The Wall Street Journal (WSJ) concluded the previous week that the tide may have turned on ESG investing.  This was put forward in an editorial published on February 16, 2024 entitled “An ESG Asset Manager Exodus” citing that BlackRock, J.P. Morgan Asset Management and State Street Global Advisors are withdrawing from the Climate Action 100+.  In the same edition of the WSJ, an article on the inequality characteristic of municipal bonds noted that “on some parts of Wall Street, values-based funds seem to be losing popularity amid rising rates and conservative backlash.”  While there may be varying facts and reasons driving the decisions by these high-profile firms to withdraw as signatories to the Climate 100+ initiative, it doesn’t appear to signal a retreat from their stewardship activities.  These range from considering relevant and material ESG risks and opportunities facing investee companies and their securities offerings to engagements with portfolio companies and proxy voting.  At the same time, companies across the globe are also standing by their ESG related programs.Climate Action 100+ Compact was launched in 2017 and recently shifted to a new phase Climate Action 100+ (CA100+) represents itself as an investor-led initiative launched at the end of 2017 to ensure that the world’s largest corporate greenhouse gas emitters take necessary action on climate change.  The initiative, which is coordinated by five investor networks, including Asia Investor Group on Climate Change (AIGCC), Ceres, Investor Group on Climate Change (IGCC), Institutional Investors Group on Climate Change (IIGCC) and the UN affiliated Principles for Responsible Investment (PRI), aims to coordinate engagement activities and unify messaging of dialogue with more than 160 of the world’s most systemically important carbon emitters.  According to the organization’s website, upwards of 700 investors signed on to the initiative that was established with a core goal of addressing climate-related disclosures.  Today, these include some 89 investment managers and 50 asset owners in the US.  In June 2023, it was announced that the Climate Action 100+ initiative would be entering into a second phase and evolve its core goals from corporate-climate related disclosure to the implementation of climate transition plans—a more intrusive investor engagement model.  In this connection, signatories have been asked to commit and sign on by June 2024 to using client assets to pursue net zero emissions reductions in investee-companies through stewardship management.  In advance of this deadline, several high-profile signatories announced their withdrawal as signatories to the Climate Action 100+ initiative.The list of withdrawing companies includes J.P. Morgan Asset Management, State Street Global Advisors, PIMCO and BlackRock, Inc.  In the case of BlackRock, the firm transferred participation in the initiative to BlackRock International which, according to BlackRock, is the organization that engages with most clients that have adopted net zero targets.Firms in the US reconsider their Climate Action 100+ membership for various reasonsThe reasons for withdrawing as signatories may vary from one firm to the next, however, some common reasons for these actions are likely linked to the pivot taken by Climate Action 100+ from an emphasis on disclosure to one that attempts to enlist asset management firms and financial institutions in the effort to seek changes in investee company strategies. For asset management firms based in the US, the Climate Action 100+ updated mandate likely introduces conflicts with the interpretation of their fiduciary responsibilities as well as contractual obligations, potential exposure to litigation risks, which have been rising in the US, as well as a response to the politicization of ESG.  That said, this action doesn’t appear to signal a retreat from their stewardship activities that range from considering relevant and material ESG risks and opportunities facing investee companies and their securities offerings to engagements with portfolio companies and proxy voting.Here is a case in point.  J.P. Morgan Asset Management presents itself as an active investment manager and a fiduciary. According to the firm per its 2022 Investment Stewardship Report, this means that it has a “deeply held conviction that in-depth research and rigorous analysis – by experts across functions, sectors and regions – are key to delivering long term, risk-adjusted returns for our clients.”  The firm seeks to “deliver stronger financial outcomes, including by focusing on the most financially material environmental, social and governance (ESG) issues that we believe impact the long-term performance of companies in which we invest. Additionally, we advocate for robust corporate governance and sound business practices. We believe that understanding financially material ESG factors plays an important role in delivering long-term value creation for our clients."  Regarding its approach to stewardship, J.P. Morgan Asset Management considers active engagement as an important tool to maximize shareholder returns through industry participation and proxy voting across asset classes. J.P. Morgan’s approach applies to its $2.8 trillion in assets under management (as of December 31, 2022) but may deviate, for example, in cases involving client’s contractual obligations that impose certain investment guidelines or in cases of focused funds that are subject to explicit sustainable investing guidelines.  Based on Morningstar’s classifications, J.P. Morgan offers 16 funds/share classes in the US with $504.7 million in assets.While firms like State Street, BlackRock and PIMCO may differ in their business profiles and approaches to investment management, views regarding their fiduciary responsibilities, integration of ESG and approach to stewardship are similar and do not appear to be undergoing any changes.Companies across the globe are also standing by their ESG-related programsJust as importantly, companies also don’t appear to be retreating from ESG in their business operations.  A survey study recently conducted by Teneo, which offers advisory services to CEOs globally, reports that 92% of CEOs are standing by their company’s ESG-related programs even as 72% of CEOs polled are making one or more changes in how they operate in response to the shifting environments.  This is based on Teneo’s Vision 2024 CEO and Investor Outlook Survey that was conducted by the firm’s in-house data, insights and analytics team between October 12 and November 27, 2023. The survey includes the views of more than 260 global CEOs and institutional investors representing more than $3.4 trillion of company and portfolio value.Notes of Explanation:  Sources:  Teneo Vision 2024 CEO and Investor Outlook Survey, Morningstar Direct and Sustainable Research and Analysis LLC.The survey goes on to state that “…whether they chose to be less vocal about their ESG initiatives externally – or even eliminate the acronym from their communications altogether – a vast majority of CEOs continue to believe that certain ESG issues are critical to their business and to their stakeholders. In fact, only a very small percentage of companies (8%) report ramping down some of their ESG-related programs in response to these political headwinds. Those that do so may avoid some short-term backlash, but still face increased scrutiny from stakeholders and forego benefits to the business in the longer-term.”

The Bottom Line: Mean expense ratios are lower, but average weighted expense ratios of sustainable, actively managed, large-cap funds are higher than conventional fund counterparts.      Notes of Explanation: Universe includes actively managed sustainable and conventional mutual funds and ETFs, based on Morningstar classifications. Basis points =1/100 of 1%. Data as of December 31, 2023. Sources: Morningstar Direct, Sustainable Research and Analysis LLC.Observations:An examination of expenses charges by sustainable actively managed large cap mutual funds and ETFs as of December 2023, in the form of expense ratios or internal fund operating charges paid by investors, shows that average expense ratios ranged from 87 basis points (bps) to 97 basis points. At the same time, average weighted expense ratios, that consider the size of funds, are significantly lower. These range from a low of 59 bps to a high of 80 bps. Sustainable actively managed large- cap funds, including growth funds, value funds and blended funds make up a large 47% of the assets under management linked to sustainable long-term actively managed funds.When compared to conventional actively managed large cap funds, the average expense ratios of sustainable funds are lower, but this relationship does not hold up when compared to average weighted expense ratios. Conventional funds benefit from their larger sizes and offer investors lower expense ratios ranging from 12 bps to 25 bps.This relationship also holds up for funds offered to large and institutional investors, defined as funds requiring minimum investments of $10,000 or more.A fund’s expense ratio is not the only factor to consider when evaluating an investment in a mutual fund or ETF, but it is an important consideration. Other important factors include the management company, historical performance track record and sustainable investing approach or strategy. A fund’s expense ratio directly affects the fund’s total return performance over time, and even a small difference in expense ratios can have a significant effect on net investment outcomes. For example, if two identical rates of return are earned by a fund, say 6%, but one fund charges 15 bps in fees and another charges 75 bps in fees, an investment of $10,000 over 30 years would yield upwards of $8,000 by the fund with the lower expense ratio.However, when combined with knowledge that actively managed large-cap funds rarely beat securities market indices, a compelling argument can be made for choosing to invest in a low-cost large cap sustainable passively managed mutual fund or ETF. According to S&P/Dow Jones Indices, only 39% of large-cap funds outperformed the S&P 500 Index over the one-year period ended June 30, 2023, and the percentage of large-cap funds outperforming over the three, five and 10-year intervals declined to 14%.

The Bottom Line: Of 75 sustainable fund categories covering all fund asset classes, only 30 categories, or 40%, posted average positive results in January 2024.     Notes of Explanation: Left side displays leading sustainable fund categories while right side displays lagging sustainable fund categories. Red dots indicate the fund category’s total size in terms of assets under management as of January 31, 2024. Sources: Morningstar Direct and Sustainable Research and Analysis LLC.Observations:The various asset classes that make up the sustainable mutual fund and ETF segment of short (money market funds) and long-term funds, which extends to 1,578 funds/share classes, according to Morningstar, and reached $335 billion in assets at the end of January, are comprised of 75 long-term fund categories.The universe of sustainable funds and ETFs posted an average decline of 0.77% in January, versus a gain of 1.7% for the S&P 500, a 0.99% decline for the MSCI ACW, ex USA Index, and a decline of 0.27% registered by the Bloomberg US Aggregate Bond Index.Of the 75 fund categories, only 30 categories, or 40%, posted average positive results in the first month of the year. In fact, 53% of sustainable funds turned in negative results in January versus only 1% of funds in December 2023--illustrating that short term results should generally be discounted.The top five performing categories included two of the largest sustainable fund categories, namely Large Growth and Large Blend funds, with a combined total of 253 funds/share classes and $162.1 billion in assets, or 48% of sustainable fund assets. These categories, which recorded average gains of 2.22% and 1.5%, respectively, continued to benefit from their higher exposures to the technology sector. The NASDAQ 100 Index posted a gain of 1.89% in January after achieving a 55.1% increase in 2023.The top five performing categories also tracked some of the smallest fund categories, including Long-Short Equity and Derivative Income, that posted average gains of 5.85% and 2.19%, respectively. Long-Short Equity currently tracks only one fund, the $27.1 million AQR Sustainable Long-Short Equity Aware Fund that invests long and short across global equity markets, integrating certain environmental, social, and governance considerations into its security selection and portfolio construction processes and seeking to hedge climate risks. The Derivative Income category is comprised of two small Global X ESG index tracking funds, fashioned around theoretical S&P 500 and NASDAQ 100 index portfolios with covered call writing. At the other end of the range, average total return declines in excess of 20% were posted by small single fund categories, including Trading-Leveraged Equity and China Region. Comprised of two leveraged Direxion ETFs focused on clean energy and electric and autonomous vehicles as well as KraneShares MSCI China Clean Tech funds, these funds recorded significant declines in January due to continued challenges in the renewable energy sector, lower than expected demand for electric vehicles as well as concerns regarding the economic outlook in China.

The Bottom Line: The worst ten performing funds in January, all thematic ETFs and ETNs focusing on renewable energy, posted an average decline of 22.4%.    Notes of Explanation: Universe of sustainable funds includes mutual funds and ETFs. Funds are listed in descending order of performance based on January 2024 results. Volatility, which is not available for all funds, is calculated based on monthly returns over the previous three years. Not Sources: Morningstar Direct, Sustainable Research and Analysis LLC.Observations:The 10 worst performing sustainable investment funds in January posted an average decline of 22.4%, in dramatic contrast to the S&P 500 that gained 1.68% while sustainable US equity funds added 0.59%. Returns for the month ranged from a low of -42.3% to a high of -18.6%. The same funds recorded an average drop of 45.1% over the previous 12 months while the S&P 500 gained 20.8%.The ten funds are all equity-oriented or commodity focused thematic ETFs and Exchange Traded Notes (ETNs) that can be classified into three renewable energy themes, each of which continued to face challenges that contributed to their poor performance this month, last year and, in some cases, over the previous three years. In fact, 2020 was the last year during which the funds in this group that were in operation that year posted positive results across the board, and strong positive results at that.Six funds pursue renewable energy strategies, including one 2X leveraged fund, and one fund that is China focused. Three funds, including two ETNs, are linked to the dynamics of carbon credit pricing while two funds focus on the electric vehicle market and future mobility themes, including another 2X leveraged fund.Investment opportunities in clean and renewable energy have attracted at least $1.8 trillion in 2023 according to Bloomberg NEF and perhaps as much as $2.8 trillion, but clean energy stocks have faced headwinds and volatility due to high interest rates, supply chain disruptions, project delays, regulatory issues and repricing attributable to shifts in investor sentiments. Still, the global shift to renewable energy remains a positive trend. That said, investors taking positions in thematic clean energy funds, which are also exposed to concentrations risks on the fund level, have to brace for ongoing volatility which over the previous three years has been twice as high as an S&P 500 ESG portfolio, and be prepared for a commitment over an intermediate-term time horizon of at least three years.Funds investing in carbon allowances that are regulated by government organizations have been equally volatile and are not for the faint of heart. The dynamics of carbon pricing are complex, and carbon prices have experienced a significant decline. A contributing factor has been the ongoing scrutiny and reputational issues faced by the voluntary carbon market in 2023.**

The Bottom Line: Sustainable mutual fund and ETF investors interested in ESG integration may have to conduct research that extends beyond their fund’s prospectus language.   Long-term sustainable funds vs. conventional funds and growth of sustainable fund assets in 2023 Notes of Explanation: Notes of explanation: Sustainable funds include long-term mutual funds and ETFs but exclude money market funds. Sources: ICI, Morningstar Direct, Sustainable Research and Analysis LLC. Observations:The net assets attributable to long-term mutual funds and ETFs expanded during 2023, benefiting almost entirely from capital appreciation, to end the year at an estimated $27.7 trillion in net assets. Sustainable funds, as defined by Morningstar, also gained, and ended 2023 at $331.7 billion.On this basis, long-term sustainable mutual funds and ETFs account for just 1.2% of fund assets at the end of 2023. This is almost identical to the ratio at the end of 2022.That said, it seems highly likely that the degree of adoption of one or more sustainable investing strategies by US-based mutual fund and ETF management companies is understated. This is certainly the case with regard to ESG integration, defined as the process by which relevant and material ESG factors are systematically and consistently analyzed as part of investment decisions. The focus is on both risks and investment opportunities that may contribute to long-term financial returns. Sustainable mutual funds and ETFs pursue a range of investing approaches ranging that include values-based investing, ESG screening and exclusions, thematic investing, impact investing and ESG integration. These strategies, which are not mutually exclusive, are oftentimes augmented by proxy voting and company engagement practices.According to some data, the adoption of ESG criteria in US portfolios in 2022 runs as high as 61% of North American investors.US based mutual funds and ETF investors interested in fund management firms that promote investment stewardship and sustainable investing need to look beyond Morningstar’s universe of classified sustainable funds. Some companies, for example, J.P. Morgan Asset Management, considers the management of financially material ESG risks and opportunities an important part of its investment decision-making process across its platform. The firm offers as many as 134 and 436 bond funds and share classes, respectively. Yet only 16 funds/share classes are explicitly identified as sustainable funds. Interested sustainable investors have to engage more directly with their advisors and fund managers to better understand their investment management firm’s current and prospective investment stewardship practices and how ESG may be accounted for in portfolio decisions.

The Bottom Line: Green bond funds, which continue to offer sustainable investors exposure to investments that promote climate change mitigation or adaptation, rebounded in 2023.  Green bond funds end the year with $1.5 billion in assets, experiencing limited outflows Green bond funds, the segment of thematic bond funds consisting of eight funds, five mutual funds/28 share classes and three ETFs, that offer investors exposure to a broad range of environmental projects, activities and investments intended to promote climate change mitigation and adaptation while seeking market-based returns, principally by investing in green bonds, ended the year 2023 with $1.5 billion in net assets. The small fund category gained assets for the third consecutive month, adding $49.5 million in December and $89.8 million, or some 6% over the course of the entire year. At $1.5 billion in assets, the category reached its highest month-end level for the year, but just short by $16.1 million of the month-end high reached in August 2022. Based on a simple calculation, the green bonds category likely sustained about $19 million, or 1%, in cash outflows during the challenging 2023 calendar year. The increase in net assets was largely attributable to two of the three largest funds in the category. These include iShares USD Green Bond ETF that added a net of $43 million during the year and an additional $14.4 million (net) attracted by the TIAA-CREF Green Bond Fund. The third and oldest fund in the category, the Calvert Green Bond Fund, broke just about even on a net basis over the calendar year. The investors in the green bond funds category remain dominated by institutional shareholders. Green bond issuance up for the year as are investments in clean and renewable energy The narrow level of outflows in 2023 occurred in a challenging period for credit markets and this experience is juxtaposed against the increase in green bonds issuance reported for 2023. According to BofA Securities Global Research, $489 billion in green bonds were issued in 2023, for a 12% year-over-year gain. This comes while global spending on clean-energy transition hit record highs, according to BloombergNEF. Total spending in 2023, including investments to install renewable energy, buy electric vehicles, build hydrogen production systems and deploy other technologies, surged to $1.8 trillion, or an increase of 17%. Adding on top of that investments in building out clean-energy supply chains and $900 billion in financing brings the total funding in 2023 to about $2.8 trillion. Still, according to BloombergNEF, the world needs to be investing more than twice as much on clean technology to reach net zero emissions by mid-century. These activities support significant investing opportunities. Green bond funds gained 7.7% in a challenging 2023, beating indices Low interest rates followed by the Federal Reserve’s aggressive policy normalization created a challenging environment for bond investors in 2022 and 2021. A combination of a strong economy and reduced concerns of a looming recession, better-than-expected corporate earnings, lower inflation and an apparent end to the Federal Reserve’s interest rate hikes that were expected to lead to multiple Fed rate cuts in 2024 fueled a rally in the last quarter of 2023. Credit markets rebounded as well gaining 3.8% in December and 5.53% for the full calendar year, according to the Bloomberg US Aggregate Bond Index. Still, 2023’s ear’s gain was not yet sufficient to overcome 2022’s 13% decline. Against this backdrop, taxable and municipal green bond funds finished the year up 7.7%, with much of the gain realized in November and December of the year when the category added 3.6% and 3.4%, respectively. Returns for the year ranged from a low of 6.1% recorded by the TIAA-CREF Green Bond Fund-Retail class to a high of 8.82% delivered by the PIMCO Climate Bond Fund-Institutional class. Green bond funds offer investors an opportunity to gain exposure to investments that promote climate change mitigation or adaptation Regardless of orientation, all 28 green bond funds and share classes outperformed the Bloomberg US Aggregate Bond Index as well as the Bloomberg Global Aggregate Bond Index for the year, including the municipal Franklin Municipal Green Bond ETF that outperformed the Bloomberg Municipal Total Return Index by 1.3%. Largely similar results can be observed over the trailing three-year interval, however, some of the intermediate term results are more nuanced based on the fund’s mandate to invest in non-US dollar denominated securities. This is the case, for example, with the Mirova Global Green Bond Fund. That said, these funds, on the whole, offer investors an opportunity to expand their sustainable credit exposure allocation via investments that are intended to promote climate change mitigation or adaptation projects or activities.Green bond fund mutual funds & ETFs assets under management:  12/22 - 12/23 Notes of Explanation:  Sources: Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC Green bond funds:  Performance results, expense ratios and AUM – December 31, 2023 Notes of Explanation:  Notes of Explanation: Blank cells=NA. 3 & 5-year returns are average annual total returns. @Fund rebranded as of May 3, 2022. ^Effective March 1, 2022, fund shifted to US dollar green bonds. ^^As of September 3, 2019, the fund shifted to US dollar green bonds and tracks the S&P Green Bond U.S. Dollar Select Index. Fund total net assets, performance and expense data source: Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC.

The Bottom Line:  A start-up exchange for the buying and selling of proxy voting rights, Shareholder Vote Exchange, is a two-edged sword for sustainable investors.Corporate engagement and shareholder actions dominate across the various sustainable investing strategies worldwideActive approaches to voting on proxies and shareholder proposals are some of the strategies employed by investors pursuing sustainable investing mandates, either in concert with other strategies, such as ESG integration, or an independent strategy.  As of 2022, corporate engagement and shareholder action, according to Global Sustainable Investment Alliance (GSIA), 2022, is a strategy employed by asset owners and investment managers with $8.0 trillion in assets under management.  This is the single largest sustainable investing strategy, following a significant adjustment by GSIA as to the level of adoption by firms employing ESG integration.The number of environmental and social shareholder proposal submissions have been expanding, but support has declined due to a degradation in their qualityIn recent years, the number of shareholder proposal submissions have been expanding, with the number of submissions increasing about 44% over the last five years, according to a report published by the Harvard Law School Forum on Corporate Governance.  At the same time, the average support for the number of environmental and social shareholder proposals has declined sharply in 2022 and 2023.  Some attribute this to the contentious political debate that has surrounded ESG and the success of the “anti-ESG movement.”  But according to the same report, a close examination suggests that an important contributing factor is the low quality of E&S shareholder proposals submitted in 2022 and 2023 proxy seasons rather than a rejection of ESG.  The quality of recent shareholder proposals has suffered due to their prescriptive nature, non-targeted and repetitive proposals.Limited opportunity available to mutual fund and ETF shareholders to vote their proxies and shareholder proposals Unless investing directly in stocks or via separate account portfolios, shareholders, for the most part, may not have the opportunity to vote their proxies or shareholder proposals as this power is retained by the investment manager.  A new development in recent years may bring about a positive change in this regard.  BlackRock has introduced a capability called "Voting Choice" which allows clients to engage more directly in proxy voting. This initiative, as well as several others like it, has seen significant interest.  According to some accounts, clients representing 25% of the $1.8 trillion in eligible assets enrolled in Voting Choice.  Another example involves the $105.7 million S&P 500 Equal Weighted Index fund managed by ONEFUND LLC that has been in operation since May 1, 2015.   and carries a 25 bps expense ratio net of waivers in effect until July 31, 2021. Since April 2021 when the fund’s prospectus was amended, underlying investors are permitted to express their views on proxy voting, including any environmental, social and governance (ESG) issues.A just launched marketplace that lets investors sell their votes for a small fee represents a two-edged sword for sustainable investorsOn the other hand, a just announced innovation introduces the potential for reversing this positive change.  As reported in the Wall Street Journal on January 23rd, a new marketplace has been launched to let investors sell their votes. Called Shareholder Vote Exchange, this California-based startup allows shareholders of record to sell off their proxy voting rights to interested parties for a small fee.  In turn, the buyer can use the seller’s proxy to vote on agenda items and a company’s annual meeting.  Promoted as return enhancing, sustainable as well as conventional investors could be selling off their rights to an entity that may decide to vote their acquired shares in a manner contrary to the best interests of sustainable shareholders of record.  Of course, voting rights may also be acquired by ESG advocates.  In this sense, this development is a two-edged sword.Shareholder support for E&S proposals, submissions and approvals: 2019 - 2023Notes of explanation:  Sources Harvard Law School Forum on Corporate Governance, A Review of the 2023 Proxy Season:  An E&S Backlash? posted by Lara Aryani, William Kim, Shearman Sterling LLP, December 21, 2023, with additional sourcing to Broadridge and The Conference Board, Shareholder Voting Trends and Proxy Season Review:  Navigating ESG Backlash & Shareholder Proposal Fatigue.  The data shown in the chart on the right hand side covers companies constituent of the Russell 3000 index for the full year, except for 2023 in which the period considered was from January 1 through June 30.

The Bottom Line: Sustainable investors with a greater tolerance for risk with cash can take advantage of higher returns available in short-term and ultrashort funds.   Sustainable short-term, ultrashort and money market funds returns and volatility: 2023 Notes of Explanation: Average 12-month return and volatility applicable to sustainable short-term bond funds adjusted for one fund’s outlier results. Volatility is a measure of the dispersion of a fund’s monthly returns around its average return over the trailing 3-year time interval. Sources: Morningstar Direct, Sustainable Research and Analysis LLC. Observations:Low interest rates followed by the Federal Reserve’s aggressive policy normalization created a challenging environment for bond investors in 2022 and 2021. In 2022 the intermediate investment grade bond segment gave up 13.0% after dropping 1.5% in 2021, according to the Bloomberg US Aggregate Bond Index. An improving environment lifted bond prices in the fourth quarter of 2023, and bonds gained 5.5% for the year while sustainable taxable bond funds climbed 7.1%. Sustainable short-term bond funds and ultra short bond funds also benefited from improving fundamentals and a shift in sentiment, gaining 5.1% and 5.4% in 2023, respectively. Money market funds offer investors one of the best options for achieving safety of principle, yield and liquidity. While more conservative options are available, such as insured bank deposits, money market funds offer flexibility that appeals to a cross section of taxable and tax-efficient investors. Defaults are rare, even in the case of prime money market funds. On the other hand, conservative, moderate and even aggressive investors with the capacity to invest over longer time horizons and have slightly higher risk tolerances, can take advantage in their cash and cash equivalents bucket of the higher risk adjusted returns offered by ultrashort and short-term funds given their credit exposures and longer-durations. In the case of sustainable funds, investors have an opportunity to allocate their investable funds into these categories in line with some or all of their sustainability preferences.The segment of sustainable short-term and ultrashort bond funds consists of mutual funds, ETFs, index tracking funds as well as actively managed funds. The sustainable short-term bond funds category tracks nine funds, a total of 31 share classes, with $3.8 billion in net assets at year-end 2023. The segment, adjusted for an outlier fund, posted an average 5.7% in 2023 with an average monthly volatility of 0.8 (by way of comparison, the average monthly volatility of large cap funds is 5.1). The category’s returns ranged from a low of 4.1% last year to a high of 7.6% recorded by the $2.2 billion Calvert Short Duration Income Fund R6, intended for investors with a minimum investment of $5,000,000. The fund is more volatile than the average short-term fund and is subject to a higher fund expense ratio of 44 bps. The sustainable ultrashort bond funds category is even smaller, tracking just five funds and 14 share classes with $1.4 billion in net assets, that delivered an average return of 5.4% last year with an average monthly volatility of 0.3. Returns ranged from a low of 4.2% to a high of 6.3% achieved by the $988.3 million Calvert Ultra-Short Duration Income Fund I. The fund’s expense ratio is 47 basis points and initial purchases are subject to a $1 million minimum investment.

The Bottom Line: Sustainable actively managed taxable bond funds gained an average of 7% in 2023, while returns by category ranged from 4.4% to 12.3%.  Sustainable actively managed taxable fixed income funds by category: 1-M and 12-M TR% 2023Notes of Explanation: Average total return performance results apply to taxable actively managed sustainable fixed income mutual funds and ETFs for December 2023 and calendar year 2023. Circles reflect each taxable fixed income fund category’s combined assets under management at year-end 2023. Sources: Morningstar Direct, Sustainable Research and Analysis LLC. Observations:Markets continued to rally in December, and both stocks and bonds posted strong gains. Stocks, as measured by the S&P 500, added 4.5% in December and a full year increase of 26.3%, with 65% of the gain being registered during the last two months of the year. The results overcame last year’s 18.1% decline. Credit markets also continued to rebound, gaining 3.8% in December and 5.53% for the full calendar year, according to the Bloomberg US Aggregate Bond Index. Last year’s gain, however, was not yet sufficient to overcome 2022’s 13% decline for bonds. Lower rated and some longer dated bonds, for example corporate bonds, scored double digit returns in 2022.Sustainable taxable and municipal bond funds across all segments, including both active and passively managed funds, a total of 332 funds and share classes with $46.7 billion in net assets under management at year-end, posted an average gain of 2.9% in December and 7.0% over calendar year 2023. Actively managed sustainable taxable bond funds on the other hand, recorded an average gain of 3.2% in December and 7.1% in 2023. The average 12-month results compare to an average gain of 7.6% recorded by taxable actively managed conventional bond funds—a significantly larger more varied universe of actively managed mutual funds and ETFs consisting of 4,539 funds and share classes with $3.1 trillion in assets as of year-end 2023. These factors alone challenge efforts to draw valid performance comparisons between sustainable and conventional funds. Returns by segment comprised of actively managed sustainable taxable bond funds ranged from an average low of 4.4% achieved by intermediate government funds to an average high of 12.3% recorded by bank loan funds. The best performing actively managed sustainable bond fund category consisted of funds investing in bank loans. The small universe comprised of just 2 funds with 9 share classes registered an average gain of 12.3% in 2023. The leading fund and the best performing taxable actively managed fund overall, the Calvert Floating-Rate Advantage Fund I, posted an increase of 13.7%. Sustainable emerging market bond funds investing in local currency bonds, an even smaller category represented by one small fund, the $16.4 million Templeton Emerging Markets Bond Fund offering five share classes, delivered an average gain of 12.1% while the R6 share class with its lowest 89 basis points expense ratio with initial investment minimums of $1 million recorded a gain of 12.5%. Actively managed sustainable taxable high yield bond funds posted an average gain of 11.7% for the year. Comprised of 13 funds/29 share classes with $2.4 billion in net assets, returns for the category ranged from a high of 13.3% registered by the PGIM High Yield Fund R6 to a low of 6.5% delivered by the AXS Sustainable Income Fund I. Bringing in the rear were actively managed emerging market bond funds, comprised of a small $7.3 million Ashmore Emerging Markets Corporate Income ESG Fund with three share classes that recorded an average gain of 2.9%. While the sustainable actively managed taxable bond funds universe is small and still limited as to category types and in several instances offer limited investing options, interested investors can still benefit from opportunities to diversify their taxable fixed income exposure class by expanding beyond the intermediate-core bond position to include, for example, sustainable high yield funds as well as short-term and ultrashort bond funds.

The Bottom Line: Blended portfolios of growth and value stocks across market capitalizations offer investors the benefits of diversification and higher returns with lower risks. Average performance of actively managed sustainable US equity mutual funds and ETFs: 2023 Notes of Explanation: Average returns for calendar year 2023 cover all actively managed sustainable funds within their respective category from small-cap to large-cap equity funds. There are no mid-cap value funds as of YE 2023. Sources: Morningstar Direct and Sustainable Research and Analysis LLC. Observations:The S&P 500 gained 26.3% in 2023, benefiting from a combination of factors ranging from a strong economy, reduced concerns of a looming recession, better-than-expected corporate earnings, lower inflation and an apparent end to the Federal Reserve’s interest rate hikes. This compares to an average gain of 20.9% posted by actively managed sustainable US equity funds, a segment consisting of 303 funds/share classes with $115.2 billion in assets under management as of year-end 2023. That said, the range of returns across size and growth versus value style factors, that is, large cap, mid-cap and small-cap as well as growth and value styles, varied by a significant 21%, ranging from an average 9.0% recorded by small-cap blended funds to an average high of 29.6% delivered by large actively managed sustainable growth funds. Sustainable large-cap growth funds, in particular, profited from their exposures to the technology sector that gained 55.1% in 2023, per the Nasdaq 100 Index. In general, blended portfolios consisting of growth and value stocks across market capitalizations offer investors the benefits of diversification as well as higher returns with lower levels of risk. This is also expected to be the case for actively managed sustainable US equity funds where the relationship is evident across factors over periods of one, three and five years. That said, the expected results are obfuscated due to the limited representation of style-based funds across some categories. For example, there are currently no sustainable mid-cap value funds and there is only one sustainable small cap value fund.

The Bottom Line: Investors in Putnam’s 17 sustainable funds are guided to stay the course but monitor post transaction developments before making any investment changes. Top ten managers of sustainable funds and their assets under management at the start 2024 Notes of Explanation: # of funds refers to funds and share classes. Data as of year-end 2023. Assets of Franklin Resources combine Putnam’s assets under management as of year-end 2023. Calvert Research and Management includes sustainable fund assets managed by Morgan Stanley and TIAA Investments include Nuveen’s sustainable assets under management. Sources: Morningstar Direct and Sustainable Research and Analysis LLC. Franklin Resources announces the completion of its Putnam Investments acquisition Last week, Franklin Resources announced the successful completion on January 1st of its Putnam Investments acquisition from Great-West Lifeco, Inc, a Canadian insurance centered financial holding company that became a long-term shareholder in Franklin Resources, Inc. The January 2, 2024 press release notes that Putnam is a global asset management firm with $142 billion in AUM as of November 30, 2023 (excluding PanAgora which was not a party to the transaction and will remain an indirect, wholly-owned subsidiary of Great-West Lifeco). The transaction, which was announced last year, adds a target date fund range and complementary investment capabilities with scale, including in the areas of stable value, ultra short duration and large cap value. Consistent with Franklin Templeton’s previous acquisitions, the execution plan is designed to minimize disruption to Putnam’s investment teams and client relationships. The addition of Putnam brings Franklin Templeton’s AUM to $1.55 trillion as of November 30, 2023. Putnam’s acquisition catapults Franklin into the 9th ranked sustainable fund management firm Putnam’s acquisition also catapults Franklin, with $629.7 million in sustainable fund assets under management at year-end 2023 into the 9th ranked spot in terms of firms with sustainable assets under management. On a pro-forma basis, the combined firms start the new year managing $9,751.5 million, based on year-end 2023 data, pushing the firm up ahead of Amundi Asset Management US, Inc. and just behind Brown Advisory LLC. On its own, Putnam, which manages $9,121.8 million in assets, ranked 10th out of 161 fund firms with registered sustainable mutual funds and ETFs—a total of $339,999.8 million as of December 31, 2023. In total, the top 10 firms manage $253,664.3 million in assets and account for a sustainable funds market share of 74.6%. Adding Franklin’s $629.7 million lifts the combined firm’s assets and places it above the 10th ranked firm, Amundi Asset Management US with $7,976 million, and just behind Brown Advisory’s $9,814.5 million. Franklin’s combined sustainable fund assets are entirely actively managed, including the 14 ETFs with $1,999.3 million in assets, or 20.5% of the firm’s total that will now include Putnam and Franklin branded investment product offerings in addition to offerings managed by Franklin’s ClearBridge and Martin Currie. The combination extends an emphasis on active management with a focus on “delivering strong investment results.” Changes in the management of the funds are not likely but investors in Putnam funds should continue to monitor the transition over the ensuing months before making any investment shifts As further noted in the company’s announcement, Franklin’s execution plan “is designed to minimize disruption to Putnam’s investment teams and client relationships.” In light of this commitment, investors in any of Putnam’s funds, including the two funds sub-advised by PanAgora Asset Management, Putnam PanAgora ESG Emerging Markets Equity ETF and the Putnam PanAgora ESG International Equity ETF are guided to monitor the transition and evaluate any changes that might occur over the ensuing months before making any decisions to liquidate or affect a change in their positions.

The Bottom Line: Notwithstanding a challenging year, sustainable fixed income mutual funds and ETFs ended the year with $46.7 billion, benefiting from positive cash inflows.     Sustainable mutual funds and ETFs Y-O-Y changes in net assets and number of funds Notes of Explanation: Sources: Morningstar Direct, Sustainable Research and Analysis LLC.Observations:Bolstered by the combination of a strong economy and reduced concerns around a looming recession, better-than-expected corporate earnings, lower inflation and an apparent end to the Federal Reserve’s interest rate hikes that were expected to lead to multiple Fed rate cuts in 2024, stocks, as measured by the S&P 500, rallied 26.3% in 2023. Technology stocks drove the broader market’s returns, catapulting 55.1% higher for the year per the Nasdaq 100 Index, based on optimism surrounding the boom in artificial intelligence technologies as well as Fed rate cuts. At the same time, credit markets rebounded in the fourth quarter, ending 2023 with a gain of 5.5% according to the Bloomberg US Aggregate Bond Index while longer dated and lower rated bonds posted double digit returns.Sustainable mutual funds and ETFs recorded a combined gain of 5.1% in December and 13.5% over calendar year 2023. Sustainable equity funds added an average 16% in 2023, the same increase recorded by Allocation funds, while sustainable fixed income funds gained an average 7.0%.Sustainable mutual funds and ETFs ended 2023 with almost $340 billion in assets.  Sustainable equity funds closed 2023 with $271.0 billion in assets under management, for a net increase of $30.7 billion. Based on a back of the envelope analysis, this gain was insufficient to offset investors redemptions.On the other hand, sustainable fixed income funds ended 2023 with $46.7 billion in assets, or a gain of $4.1 billion. Again, based on a back of the envelope analysis, this gain benefited from an estimated $1.1 billion in new money.Allocation funds experienced the greatest number of net new funds/share classes introduced in 2023, adding 199 funds/share classes and ending the year with 328 funds/share classes.

The Bottom Line:  After rallying recently, sustainable small-cap mutual funds and ETFs may still have upside potential, but the number of investment options is limited.       Selected sustainable small cap funds: Performance results to November 30, 2023, net assets and expense ratios Notes of Explanation: Funds listed in descending order based on 3-year trailing performance results. Selected list of sustainable small-cap funds exclude small sized funds, or funds with assets under management below $25 million, thematic funds, and, with one exception (Brown Advisory Sustainable Small Cap Core Investment funds that were launched in September 30, 2021 and have delivered strong performance results), funds with a track record under three years due to strategy shifts, in particular due to the adoption of sustainable investing or modifications to sustainable investing approaches. Sources: Morningstar Direct, Sustainable Research and Analysis LLC. Observations:Small cap stocks and funds have suffered a 12-month period of substantial underperformance, driven by higher interest rates. That said, a case is being made that small cap stocks could be primed for a significant comeback. Indeed, the stocks of smaller companies have experienced a rally recently. Since reaching a 2023 low on October 27th, the Russell 2000 Index is up 24.3% (price only) through December 22, 2023. Based on their attractive valuations relative to large-cap stocks, small caps still have upside potential.Investors interested in pursuing the small cap investing opportunity via the available universe of sustainable small cap funds segment, however, are restricted to a limited number of investment company choices across the blended, growth and value continuum. The sustainable funds segment, as defined by Morningstar, includes 21 active and passively managed mutual funds as well as ETFs, 41 funds/share classes in total, with $8.3 billion in assets under management as of November 30, 2023. After screening these funds to exclude small sized funds, or funds with assets under management below $25 million, thematic funds, and, with one exception, funds with a track record under three years due to strategy shifts, in particular as a result of the adoption of a sustainable investing approach or modifications to an existing sustainable investing approach, the segment narrows to 11 mutual funds and ETFs. These consist of seven actively managed funds and four passively managed funds.The four passively managed funds feature the lowest expense ratios, ranging from 12 basis points charged by the iShares ESG Screened S&P Small-Cap ETF (XJR) to 43 bps levied by Praxis Small Cap Investor Fund (MMSIX).  Actively managed funds charge higher fees, ranging from DFA US Sustainability Targeted Value Institutional Fund’s (DAABX) 34 bps to a high of 1.94% charged by Calvert’s Small-Cap Fund C (CSCCX).  Further, research measuring the performance of actively managed funds against their index benchmarks worldwide shows that they don’t often outperform. In the case of small cap funds, the same research indicates that a larger percentage of actively managed small cap funds have underperformed over the previous three and five years, but this is less so the case over longer time intervals. As for the latest year through June 30, 2023, only 26.6% of funds underperformed the S&P 600 Small Cap Index. So, the basis for choosing an actively managed fund rather than an index fund is more compelling than it is for a fund investing in large cap stocks that are more widely covered, are more actively traded and tend to be more liquid, for example. Across the board, the selected segment of 11 funds posted average returns of 8.8% in November, 4% year-to-date, -1.6% over the trailing twelve months, and an average annual 5.6% over the trailing 3-years. Actively managed funds, which in some cases benefited from a value bent, outperformed index funds, on average, in November 2023, year-to-date and over the trailing 12-months and three years.Sustainable investing strategies across the selected universe of funds are dominated by funds that employ an ESG integration approach combined with fund screening. These approaches involve an evaluation of financially material environmental, social, and governance (ESG) factors that may affect a company's revenues, expenses, assets, liabilities, and overall risk as part of investment decision making. In addition, funds are also subjected to ESG screening criteria, pursuant to which companies or industries with significant exposure to specific products, services or social and environmental concerns are excluded from the eligible investing universe. That said, implementation strategies vary and some, like the Calvert Small-Cap Fund, also employ a broad-based socially responsible strategy. Before investing, a very careful review of a fund’s sustainable investing approach is recommended.

The Bottom Line:  Across 76 investment categories as defined by Morningstar, sustainable Technology funds delivered the top total return in November 2023—an average of 13.7%.       Top and bottom three investment fund categories by November 2023 average total return results Notes of Explanation: Top and bottom three investment fund categories arrayed based on November 2023 average performance results. Corresponding trailing 12-month returns are also shown. Sources: Morningstar Direct, Sustainable Research and Analysis LLC.Observations:Positive sentiment pushed stock prices higher in the US and overseas in November while bond prices gained as yields declined sharply. Global stocks, as measured by the MSCI ACWI, ex USA Index, recorded their strongest monthly gain since November 2022, registering an increase of 9%. At the same time, US large cap stocks tracked by the S&P 500 added 9.13%, the best monthly result since July 2022 while the Nasdaq 100 Composite Total Return Index rose 10.8%. The Bloomberg US Aggregate Bond Index added 4.53%, pulling into positive territory on a year-to-date basis with a rise of 1.64%. Against this backdrop, sustainable mutual funds and ETFs, a total of 1,588 funds/share classes with $326.9 billion in net assets, posted an average gain of 7.6%. Equity funds added an average of 9.3% while fixed income funds registered an average gain of 4.1%. Across 76 investment categories defined by Morningstar, Technology funds delivered the top average return, followed by Trading-Leveraged Equity funds and Mid-Cap Growth funds, posting average returns of 13.7%, 13.3% and 11.5%, respectively. At the other end of the range, Commodities Focused, China Region and Commodities Broad Basket fund delivered the lowest average returns in November. With average returns ranging from -6.3%, -2.4%, and -0.4%, these were also the only categories to produce negative average returns in November. Comprised of just six thematic funds, nine funds/shares classes in total with $147 million in net assets, the results achieved by the best performing investment category features three funds with performance in November that placed them among the top ten performing funds for the month. These include Eventide Exponential Technologies A (ETAEX 15.34%), Xtrackers Semiconductor Select Equity ETF (CHPS 17.71%) and Xtrackers Cybersecurity Select Equity ETF (PSWD 14.69%). In addition to their thematic classification, each of these three funds also incorporate varying ESG exclusionary practices that serve to refine and reduce their universe of eligible securities. It should be noted that shares of CHPS and PSWD are not currently offered for purchase, according to company filings. There was a wide-ranging difference in the total return results achieved by individual funds in November. The top performing fund in November is the $76.5 million AXS Green Alpha ETF (NXTE). The fund, which was up 18.24%, is classified by Morningstar as a sustainable Global Large Blend Stock fund. That said, this is a thematic fund investing in sustainable companies, defined by Green Alpha Advisors, LLC, the fund’s sub-advisor, as companies that seek to mitigate global sustainability systemic risks. Such risks include, but are not limited to, the climate crisis, natural resource degradation and scarcity, and human disease burdens. The fund benefited from holdings in companies such as Taiwan Semiconductor Manufacturing Company, Applied Materials Inc, Lam Research Corp. there were up between 29% and 59% over the trailing twelve months. At the other end of the range is KraneShares Global Carbon Offset Strategy ETF (KSET) that registered a 23.6% decline in November and -90% over the previous 12 months. Exposure to technology funds in particular and thematic funds more generally have a place in diversified portfolios, but levels of exposure should be qualified by an investor’s financial goals and objectives, their financial profile and risk/reward tolerances.

The Bottom Line:  Lower turnover ratios are recorded by sustainable US equity funds relative to their conventional counterparts and should be factored into investment decisions.      Turnover ratios for US equity mutual funds and ETFs as of November 30, 2013 Notes of Explanation: Turnover ratios calculated for active and passively managed mutual funds and ETFs, which have been combined. Sources: Morningstar Direct, Sustainable Research and Analysis LLC.Observations:An analysis of the latest turnover statistics applicable to sustainable US equity funds versus conventional US equity funds shows that various sustainable mutual funds and ETFs classified as US equity funds, per Morningstar, consistently report lower turnover ratios relative to their conventional counterparts. The average turnover ratio calculated for sustainable US equity funds is 43% versus 79% for conventional funds.This observation takes into consideration mutual funds as well as ETFs and actively managed funds versus passively managed funds. In total, 397 sustainable funds/share classes with $188.6 billion in net assets as of November 30, 2023, and 5,901 conventional US equity funds/share classes with $12.3 trillion in net assets were taken into account, with differentiation across actively and passively managed mutual funds and ETFs. In each instance, the lower turnover ratios reported by sustainable funds range from 9% to 58%. Turnover ratio refers to the trading activity of a mutual fund, calculated by dividing the lesser of purchases or sales for the fund’s fiscal year by the monthly average of the portfolio’s net assets. Excluded are securities that mature within a year. A turnover ratio of 100% is the equivalent of a complete portfolio turnover.A lower turnover ratio is generally desirable. First, it translates into lower transaction costs and therefore higher returns to investors. Second, it can potentially reduce the tax liability of investors as the buying and selling of securities can lead to capital gains, which are subject to taxes. A lower turnover rate can potentially help minimize these taxable events. Third, it may reflect the employment of a value creation strategy that entails longer holding periods for portfolio securities that have the potential to appreciate over time. The latter approach is also aligned with the documented more patient posture associated with a segment of the sustainable investors.The turnover ratio, along with other factors, should be taken on board when deciding which funds to consider for investment.

The Bottom Line:  Fast tracking the energy transition at COP 28 could stimulate the performance of clean and renewable energy funds, overcoming recent poor performance. COP 28 expected to focus on setting more ambitious emissions reduction targets for this decade and beyond The 28th Conference of the Parties to the United Nations Framework Convention on Climate Change, or COP 28, is now in progress, having begun on November 30, 2023 in Dubai, United Arab Emirates (UAE).  Already, a deal has been brokered to form a climate-related fund administered by the UN to pay for loss and damages sustained by developing countries.  Delegates from almost 200 countries have come together once again to coordinate global climate action for the next year and beyond, this time focusing on four areas:  Fast-tracking the energy transition and reducing emissions before 2030, putting nature, people, lives and livelihoods at the heart of climate action, including helping the most vulnerable communities adapt to the changes that are already occurring, delivering on climate finance by delivering on previously made commitments and setting the framework for a new deal on finance, and mobilizing inclusivity.  Against a backdrop of record-breaking wildfires, catastrophic floods, unbearable heat waves, and an updated UN Emissions Gap Report 2023 showing that we are getting closer to breaching the temperature limits specified in the 2015 Paris Climate Agreement, COP 28 is expected to focus, in large  part, on setting more ambitious emissions reduction targets for this decade and beyond 2030 to maintain the possibility of achieving the long-run temperature goal of the Paris Agreement.  COP 28 results are likely to further boost the scale of renewable energy development and advance opportunities for investors to participate in the long-term growth of the renewable energy sector.  Concentrated, thematic or targeted clean and renewable energy funds offer investors one pathway to participate in this long-term growth opportunity, even as such thematic stock-oriented funds are riskier and have suffered performance reversals in recent years.  Sustainable as well as conventional investors who are willing to look beyond more recent results registered by clean energy stocks and thematic clean and renewable energy funds can do so by choosing to invest in one or more active or passively managed mutual funds or ETFs focused on energy transition.  A selection of such active and passively managed equity funds is set forth in Tables 1 and 2./UN Gap Report shows some progress since Paris Climate Agreement but GHG emissions also set new records in 2022  The Emissions Gap Report 2023 from the UN Environmental Programme (UNEP) shows that in addition to an acceleration in the number, speed and scale of broken climate records, global GHG emissions and atmospheric concentrations of carbon dioxide (CO2) also set new records in 2022. Global GHG emissions¹ reached a new record of 57.4 gigatons of CO2 equivalent (GtCO2e).  Refer to Chart 1.  According to the just released report, it was found that there has been progress since the Paris Agreement was signed in 2015. Greenhouse gas emissions in 2030, based on policies in place, were projected to increase by 16% at the time of the agreement’s adoption. Today, the projected increase is 3%. However, predicted 2030 greenhouse gas emissions still must fall by 28% per cent for the Paris Agreement 2°C pathway and 42% for the 1.5°C pathway.As things stand, fully implementing unconditional Nationally Determined Contributions (NDCs) made under the Paris Agreement would put the world on track for limiting temperature rise to 2.9°C above pre-industrial levels this century. Fully implementing conditional NDCs would lower this to 2.5°C.The report calls for all nations to accelerate economy-wide, low-carbon development transformations. Countries with greater capacity and responsibility for emissions will need to take more ambitious action and support developing nations as they pursue low-emissions development growth.The report looks at how stronger implementation can increase the chances of the next round of NDCs, due in 2025, bringing down greenhouse gas emissions in 2035 to levels consistent with 2°C and 1.5°C pathways. It also looks at the potential and risks of Carbon Dioxide Removal methods – such as nature-based solutions and direct air carbon capture and storage.As global temperatures and greenhouse gas emissions break records, the latest Emissions Gap Report finds that current pledges under the Paris Agreement put the world on track for a 2.5-2.9°C temperature rise above pre-industrial levels this century, pointing to the urgent need for increased climate action.  That said, it should be noted that based on other climate models, results differ.  Still, COP 28 results are likely to further boost the scale of renewable energy development and provide opportunities for investors to participate in the long-term growth of the renewable energy sector.Chart 1:  Total net anthropogenic GHG Emissions, 1990-2022Notes of Explanation: GHG emissions include CO2 emissions, methane (CH4) emissions, nitrous oxide (N2O) and fluorinated gases (F-gasses).  Source:  UN Environment Programme (UNEP), Emissions Gap Report 2023Thematic more narrowly focused clean and renewable energy funds offer to intermediate and long-term investors one pathway to participate in the potential growth of the sectorSustainable as well as conventional investors who are willing to shrug off the very poor performance results recorded by narrower thematic mutual funds and ETFs investing in global clean and renewable energy stocks and to focus on the opportunities to participate in the intermediate to long-term growth potential in the sector due to the growing acceptance of climate change, demand for clean energy, declining costs and supportive government policies, can do so by choosing to invest in an expanding number of active or passively managed mutual funds or ETFs.  Tables 1 and 2 feature a selection of 20 active and passively managed thematic, more narrowly focused specialized funds investing in companies involved in the clean energy sector, including companies that provide products and services that enable the evolution of a more sustainable energy sector that may benefit from the long-term secular growth of clean energy demand and the projected build-out of renewable energy generation across various sectors such as utility, industrial, technology, and energy.  An example of a fund in this category is the index tracking $311.4 million ALPS Clean Energy ETF (ACES) that was launched in 2018.  The fund is designed to provide exposure to a diverse set of US and Canadian companies involved in the clean energy sector including renewables and clean technology.  The fund’s most recent top exposures include companies such as Rivian Automotive Inc. A, Tesla Inc., Enphase Energy Inc., Lucid Group, Inc. and First Solar, to mention just a few.This fund, which suffered a 42.3% decline in the previous twelve months, along with other thematic funds pursuing a clean and renewable energy mandate, have suffered due to higher interest rates, inflation, supply-chain issues, inadequate electric transmission infrastructure and competition from China.  According to the S&P Global Clean Energy Index, global clean and renewable energy stocks that were down 30.3% during the 12-months through the end of October and posted an average annual return of -11.44% over the previous 3-years.  Against this backdrop, the selection of the 20 thematic renewable and clean energy actively managed funds as well as index funds in operation for at least 12-months posted an average decline of 20.5% over the trailing one-year interval and a negative 8.9% over the trailing three-years through the end of October.  The range of returns varied, extending from a low of -42.3% over the trailing 12-month interval to a high of -1.9%.  With fewer funds in existence over the last 3-years, the lowest average annual return registered by funds in existence for 3-years was -21.3% while the best return posted an average annual decline of 0.71%.Excluded from this universe are funds that may combine climate considerations along with other ESG factors, including green and social bond funds. Also excluded from these lists are funds that provide broad exposure to companies that are better positioned to benefit from the transition to a low carbon economy and may also integrate ESG considerations into the investment decision making. An example of a fund in this category includes the actively managed BlackRock U.S. Carbon Transition Readiness ETF (LCTU). The fund, which was launched in 2021, is offered at a very attractive 0.14% and now manages almost $1.4 billion in net assets, has invested in companies such as Apple Inc., Microsoft Corp. Amazon.Com Inc. and Nvidia Corp, to mention just a few. Benefiting recently from its exposure to the “Magnificent Seven,” the largest technology companies that have been driving the performance of the S&P 500, the performance of the BlackRock US Carbon Transition Readiness ETF along with other funds pursuing similar strategies stand in stark contrast to the performance results posted by ACES over the past year and during 2022 and 2021. LCTU is up 8.25% over the previous 12 months. Thematic funds generally and the identified funds in particular tend to be riskier, especially when they are concentrated or exposed to leverage.  They will exhibit higher levels of volatility over time—reaching higher highs and lower lows over a market cycle.  In addition to risk considerations, investors should evaluate a fund’s mandate, record of stewardship investment track record, fund size and expense ratio, to mention the key variables.    While caution is advised, beaten down prices of clean energy stocks and related securities may be approaching a buying opportunity for intermediate and long-term investors.  It’s tough to know when they might reach a trough.  That said, the energy transition will continue to move forward and collective efforts to curb climate change to head off frequent and severe weather events by increasing our reliance on renewable energy and making advances in new technologies to reduce greenhouse gas emissions are not likely to diminish.  To the contrary, they are more likely to get a lift from this year’s COP 28 climate conference.Table 1a:  Selection of actively managed thematic clean and renewable energy mutual fundsFund Name1-Year TR (%)3-Year  TR (%)Net Assets ($)Expense Ratio (%)Ecofin Global Energy Transition A-20.47                   24,774 1.15Ecofin Global Energy Transition Instl-20.28          34,572,757 0.9Firsthand Alternative Energy-19.38-8.99         10,009,945 2GMO Climate Change I-22.38-1.31       267,705,490 0.87GMO Climate Change III-22.28-1.18       278,627,786 0.77GMO Climate Change R6-22.30-1.19       150,084,747 0.77Goldman Sachs Clean Energy Income A-23.77-9.19            2,720,149 1.26Goldman Sachs Clean Energy Income C-24.37-9.89               367,505 2.01Goldman Sachs Clean Energy Income Ins-23.49-8.87            5,650,985 0.89Goldman Sachs Clean Energy Income Inv-23.58-8.97            1,958,056 1.01Goldman Sachs Clean Energy Income P-23.48-8.83       107,210,235 0.88Goldman Sachs Clean Energy Income R6-23.48-8.86                  73,844 0.88Guinness Atkinson Alternative Energy-16.94-0.71         24,214,448 1.1Kayne Anderson Renewable Infras I-22.28-6.72         47,860,508 1.0Kayne Anderson Renewable Infras Retail-22.50             2,949,105 1.25Averages-22.07-6.23         62,268,6891.12Notes of Explanation:  Total return performance results to October 31, 2023.  Blank performance indicates that the fund was not in existence over the entire trailing 3-year period.  3-Year TR=Average annual rate of return.  Sources:  Morningstar Direct, Sustainable Research and Analysis LLC.Table 1b:  Selection of passively managed thematic clean and renewable energy mutual fundsFund Name1-Year TR (%)3-Year TR (%)Net Assets ($)Expense Ratio (%)Calvert Global Energy Solutions A-6.10-1.0278,152,7411.24Calvert Global Energy Solutions C-6.83-1.757,321,5011.99Calvert Global Energy Solutions I-5.86-0.7661,665,2190.99Averages -6.26-1.1849,046,4871.41Notes of Explanation:  Total return performance results to October 31, 2023.  Blank performance indicates that the fund was not in existence over the entire trailing 3-year period.  3-Year TR=Average annual rate of return.  Sources:  Morningstar Direct, Sustainable Research and Analysis LLC. Table 2a:  Selection of actively managed thematic clean and renewable energy ETFsFund Name1-Year TR (%)3-Year TR (%)Net Assets ($)Expense Ratio (%)BlackRock Future Climate and Sus Eco ETF-2.16 3,680,8920.7JPMorgan Climate Change Solutions ETF-1.91 18,813,3710.49Neuberger Berman Carbon Transition & Infrs ETF-4.40 23,043,2080.55Virtus Duff & Phelps Clean Energy ETF-26.87 6,285,2200.59Averages-8.84 12,995,6730.58Notes of Explanation:  Total return performance results to October 31, 2023.  Blank performance indicates that the fund was not in existence over the entire trailing 3-year period.  3-Year TR=Average annual rate of return.  Sources:  Morningstar Direct, Sustainable Research and Analysis LLC. Table 2b:  Selection of passively managed thematic clean and renewable energy ETFsFund Name1-Year TR (%)3-Year  TR (%)Net Assets ($)`Expense Ratio (%)ALPS Clean Energy ETF-42.31-21.26311,426,1980.55Fidelity Clean Energy ETF-31.96 25,240,3830.39First Trust NASDAQ® Cln Edge® GrnEngyETF-36.19-14.50941,771,8490.58Global X Renewable Energy Producers ETF-23.14-12.5543,796,6870.66Goldman Sachs Bloomberg Cln Enrgy Eq ETF-11.63 7,585,9110.45Invesco Global Clean Energy ETF-25.66-17.75131,690,5610.75Invesco WilderHill Clean Energy ETF-39.06-29.77411,652,2100.66iShares Global Clean Energy ETF-29.97-12.762,624,795,6960.41VanEck Low Carbon Energy ETF-9.82-8.43140,506,5350.61Averages-27.75-16.72575,385,1190.56Notes of Explanation:  Total return performance results to October 31, 2023.  Blank performance indicates that the fund was not in existence over the entire trailing 3-year period.  3-Year TR=Average annual rate of return.  Sources:  Morningstar Direct, Sustainable Research and Analysis LLC.¹ GHG emissions include CO2 emissions, methane (CH4) emissions, nitrous oxide (N2O) and fluorinated gases (F-gasses).

The Bottom Line:  Top yielding funds posted 12-month trailing yields ranging between 7.5% and 13.3%, but corresponding total rates of return can be much lower. Highest yielding sustainable mutual funds and ETFs: Trailing 12-M yields and total returns to October 31, 2023 Notes of Explanation: Trailing 12-month yields (listed in descending order (but exclude KraneShares Global Carbon ETF) and total returns to October 31, 2023. In the case of multiple share classes, only the top yielding fund/share class is listed. Source: Morningstar Direct, Sustainable Research and Analysis LLC. Observations: The ten highest yielding sustainable mutual funds and ETFs recorded an average trailing 12-month yield of 9.5%. Limiting the compilation to the highest yielding share class in the event of mutual funds with multiple share classes, yields ranged from a low of 7.5% to a high of 13.4%. The ten highest yielding funds are dominated by taxable bond funds (6), followed by international equity funds (2) and one each classified as an allocation fund and sector equity fund.  The two highest yielding funds fall into the dominant fund classifications. The $21.2 million American Beacon TwentyFour Sustainable Short Term Bond C (TFBCX) is a fixed income fund managed by American Beacon Advisors, Inc. along with TwentyFour Asset Management that invests fixed income securities and derivatives with an average maturity of under three years. The fund combines fundamental investment analysis and ESG integration, employing an exclusionary approach and screening based on an ESG scoring model and also emphasizing companies striving to improve industry such as energy production and transportation. The second highest yielding fund is an actively managed ETF investing in foreign equity securities. The $185 million FCF International Quality ETF (TTAI), managed by FCF Advisors LLC, combines reliance on a free cash flow quality model to compile a list of highly ranked securities that are optimized to achieve an overall above average ESG score based on third party inputs.  Trailing twelve-month yields, that are calculated by aggregating the weighted average yields of a fund’s underlying holdings, should be considered an estimate of yield, as it may not always represent income received by all investors. Moreover, trailing twelve-month yields don’t necessarily correlate with the fund’s total rate of return.  The average total return posted by the highest yielding funds over the previous twelve months settled in at 3.7%. Total returns ranged from a low of -25.9% to a high of 14.23%. The correlation between these returns and TTY turns out to be a low 0.47. The divergence between TTY and total return is punctuated by the performance of Kayne Anderson Renewable Infrastructure Fund I. The fund’s TTY was 7.5% as of October 31st while posting a negative 25.9% total rate of return over the previous 12 months.

The Bottom Line:  Average size of newly launched sustainable ETFs has been significantly larger than mutual funds in 2023, offering investors the benefit of scale. Net assets of top 10 newly listed (2023) sustainable mutual funds and ETFs: October 31, 2023 Notes of Explanation: Net assets as of October 31, 2023. Mutual fund assets combine all share classes. Source: Morningstar Direct, Sustainable Research and Analysis LLC. Observations: Sustainable fund assets dropped to $305 billion at the end of October, according to Morningstar. Of this sum, $X is managed in mutual funds while $89.8 billion is sourced to ETFs, or 29.4% of sustainable fund assets under management. Yet, even with a lower number of fund launches in 2023 to-date, versus mutual funds, newly listed ETFs attracted about eight times more assets than mutual funds. In part, this is due to large institutional investors lining up in advance to support a particular themed investment product, such as one focused on the transition to low carbon economy.  33 new sustainable ETFs were launched through the end of October versus 42 new mutual funds, consisting of 153 share classes (excluding new share class additions). Based on assets garnered since inception to the end of October, ETFs accumulated $5.8 billion as compared to $682.7 million for sustainable mutual funds, or a significant differential of $5.1 billion. The largest ten newly launched funds, all with assets more than $100 million, include eight ETFs and only two mutual funds. These are the GMO Resource Transition Fund VI (GMOYX) and the GuideStone Funds Impact Equity Fund Institutional and Investor shares (GMEZX and GMEYX). The median sizes of newly launched sustainable mutual funds and ETFs at the end of October stood in sharp contrast at about $697,000 versus $19 million, respectively. Eight new ETFs drew in $5.4 billion and accounted for 93% of net new assets. Two of these ETFs alone, including the stock index tracking $2.1 billion iShares Climate Conscious & Transition MSCI USA ETF (USCL), managed by BlackRock, and the $2.1 billion Xtrackers MSCI USA Climate Action Equity ETF (USCA), managed by DBX Advisors, accounted for three-quarters of this sum. The two funds, subject to expense ratios of 0.08% and 0.07%, respectively, are almost identical in their construction. They screen stocks from the same underlying index, the MSCI USA Index and they both rely on MSCI qualifying opinions.  One differentiating factor, however, is that USCL extends the eligibility of issuers to include any that have approved science-based targets for emissions reduction or are assessed as having a “credible track record” of reduced emissions.  Larger fund sizes benefit investors in conventional as well as sustainable mutual funds and ETFs. In general, larger funds advantage investors from their economies of scale as they can be managed more efficiently and in a less costly manner and they are less likely to be terminated in the event fund sizes fail to reach break-even, especially when offered by fund management firms that don’t enjoy deep pockets or view the funds as strategic to the organization.

The Bottom Line:  Lineup and assets of the top 10 managers of sustainable funds have experienced some but limited changes since the start of year.    Net assets attributable to the top 10 sustainable mutual fund and ETF managers: December 31, 2022, and October 31, 2023 Notes of Explanation: Net assets as of December 31, 2022 and October 31, 2023. *BlackRock and iShares assets combined. #Owned by Morgan Stanley. **TIAA and Nuveen assets combined. Source: Morningstar Direct, Sustainable Research and Analysis LLC..Observations:Since the start of the year to the end of October, the lineup in the roster consisting of the top 10 managers of sustainable mutual funds and ETFs has experienced some, but limited changes. At the end of October, the top 10 firms managed $213.1 billion in sustainable fund assets under management, out of $305 billion invested in the segment.  This is down from $213.4 billion at year-end 2022.  The firms retain their dominance in the sustainable investing sphere, accounting for a market share of 70% in net assets versus 71% at the end of 2022.    Sustainable mutual funds and ETFs posted an average gain of 0.39% since the start of the year. At the same time, the top 10 sustainable fund firms experienced estimated net withdrawals of $1.5 billion, or 0.70%.  This is calculated assuming the lineup of funds remained the same over the two time periods.    The composition of the top 10 firms experienced two changes. Invesco, which had been the 8th largest sustainable fund firm at the end of 2022 dropped out and was replaced by Putnam Investments with $7.1 billion in assets under management.  Invesco gave up $2.2 billion in net assets, largely attributable to the decline in assets experienced by Invesco Solar ETF which dropped $1.2 billion due to market depreciation.  The fund, along with other sustainable energy funds and their stock holdings suffered from higher interest rates, supply-chain issues, inadequate electric transmission infrastructure and competition from China, posted a significant year-to-date decline of 42.6%.  At the same time, Brown Advisory moved up to take Invesco’s spot with its gain of some $2.0 billion.  Brown Advisory ended October with $8.3 billion in sustainable fund assets under management.Firms gaining the most assets during the ten-month interval were Vanguard, Brown Advisory and Calvert Research & Management, in that order. At the same time, assets under management at BlackRock, including iShares, and Invesco, dropped by $5.4 billion and $2.2 billion, respectively.  

The Bottom Line: Investors in sustainable taxable mutual funds and ETFs exhibited a level of stickiness during a very challenging six-month period for fixed income.Net assets of sustainable taxable and municipal bond funds: May 31, 2013 – October 31, 2013 Notes of Explanation:  Bond funds include mutual funds and ETFs. Source: Morningstar Direct, Sustainable Research and Analysis LLC.Observations:With concerns in October centered on Q3 corporate earnings and projected earnings, interest rates and the state of the economy, stocks fell for the third consecutive month while bonds experienced their sixth consecutive monthly decline. Short-dated government instruments aside, the bond market gave up almost 1.6% in October, based on the Bloomberg US Aggregate Bond Index total return results, as 10-year treasury yields briefly touched 5% mid-month before settling at 4.88% on October 31st. For the trailing 6-month period, bonds posted a decline of 6.13%.• Against this backdrop, the FT reported on Friday that investors, according to data compiled by BlackRock, withdrew a record $9.4 billion from corporate bond exchange-traded funds in October, “shifting to lower-risk government bonds as lending rates hit 16-year highs.” • Unlike conventional funds, sustainable taxable bond funds, including sustainable corporate bond funds, which posted six-month average declines of 3.1% and 4.8%, respectively, exhibited a high level of stickiness during this interval. On the other hand, sustainable municipal bond funds registered withdrawals. The segment, which gave up 4.1% over the trailing six months, recorded a decline in net assets in the amount of $154 million or 9%. • Sustainable corporate bond mutual funds and ETFs actually experienced a pick-up in assets, gaining $98 million or 4%. The gains were registered by both mutual funds and ETFs. • A more stable shareholder base limits the need to sell securities at reduced prices to meet redemptions and preserves the opportunity to benefit from a turnaround in bond prices.

The Bottom Line:  ESG litigation is on the rise worldwide while ESG investment practices in the US have faced fewer lawsuits, but this could change. Quarterly totals for ESG-related lawsuits in the US federal district courts: Q1 2022 - Q1 2023 Notes of Explanation:  Source: Source:  Bloomberg Law docket search of complaints filed in federal district courts:  Q1 2022 – Q1 2023.Observations:According to Bloomberg Law, the scope of US Federal ESG-related lawsuits since the beginning of 2022 isn’t yet huge, with fewer than 150 complaints in the past five quarters.At the same time, according to the Grantham Institute 2021 Global Trends in Climate Change Litigation Policy Report, the number of climate change-related cases alone has more than doubled since the adoption of the Paris Climate Agreement. As of May 2022, there were 2,002 cases of climate change litigation globally.Litigation in the US has largely focused on four emerging categories of ESG risk. These include environmental justice, product advertising, employment and diversity, equality and inclusion, and corporate representations. A fifth category surrounding ESG investment practices has been involved in fewer lawsuits so far, but this could change in the future. For example, investors in sustainable funds may bring claims against investment management companies based on false or misleading statements regarding their funds-specific sustainable investing practices and outcomes.  Or even actions against individual firms in connection with representations made in connection with firm-wide practices, such as Net Zero Investment initiatives.  Also, actions may be brought against financial advisers because of their questionable recommendations to invest in certain sustainable mutual funds and ETFs.On the other hand, the limited number of actions and number of funds involved taken by the SEC against investment management firms to-date, which includes actions against BNY Mellon Investment Adviser, Inc., Goldman Sachs Asset Management, L.P. and Deutsche Bank subsidiary DWS Securities, relating to ESG quality reviews and policies, or procedures involving ESG research performance or failure to adequately implement certain ESG policy provisions, may suggest that the number of future lawsuits in this area may not change much.  

The Bottom Line:  For investors contemplating sustainable high yield funds, firms with strong credit research teams have shown that they can outperform high yield indices.Top 10 performing sustainable high yield mutual funds and ETFs, based on Q3 2023 resultsNotes of Explanation:  Top performing sustainable funds listed based on Q3 2023 results, limited to the best performing share class, based on Morningstar’s classification.  List Data as of September 30, 2023 and performance results represent the arithmetic average.  Sources:  Morningstar Direct and Sustainable Research and Analysis.Observations:Sustainable high yield funds, a segment investing in un-rated or rated below investment grade securities consisting of 11 active and six passively managed mutual funds and ETFs with $2.6 billion in net assets as of September 30, 2023, recorded an average decline of 1.29% in September versus a narrow 0.11% gain over the third quarter.  Year-to-date, 12-month and 3-year average annual results came in at 4.2%, 8.4% and 0.20%, respectively. The top 10 performing funds registered a Q3 average return of 0.60%. The US and global high yield markets got off to a strong start in July, with sustainable high yield funds adding 1.3% on average, as investor expectations for a soft economic landing gained momentum.  But expectations moderated in August and weakened further in September as investors came to realize that rates may remain “higher for longer.” Global interest rates moved sharply higher and, in the US, 10-year Treasury yields rose by 50 basis points in September to end the month at 4.59%.  The average performance of sustainable high yield funds finished August on a still positive note but turned negative in September.  Returns in Q3 ranged from a high of 1.79% recorded by the $73.5 million Osterweis Short Duration Credit Inv Fund, a fund that combines fundamental analysis to construct a portfolio consisting primarily of selected, short duration fixed-income securities issued by companies who prioritize making progress in key areas of sustainable business practices. Relative sustainable practices and exclusions based on specific environmental, social and governance (ESG) risks are both considerations in the adviser’s fundamental and sustainable credit research process.  The fund benefited from its short duration mandate. That said, Osterweis Capital Management, LLC, the fund’s adviser, announced on September 29, 2023 that new purchases are suspended effective as of that date and the fund will be terminated after the close of business on December 15, 2023.  According to the fund’s SEC filing, the decision was made due to the funds inability to obtain a level of assets necessary for it to be viable.At the other end of the range with a 3-month total return of -0.67% was the very small $3.2 million AXS Sustainable Income I Fund.  For investors contemplating intermediate to long-term investments in high yield funds, actively managed investment options should be considered.  Actively managed funds outperformed the six passively managed ETFs and mutual funds in Q3 by 5 basis points, on average, confirming a view that active management in less liquid lower quality bonds can best even low-cost index funds.  While the average results over the last 3 years don’t support this thesis, individual fund firms with strong credit research teams operating at scale have shown that they can outperform high yield indices.

The Bottom Line: Sustainable large cap value funds reflect greater variations in their holdings and broader diversification than their sustainable large cap growth funds counterparts.Top 11 stocks most widely held by sustainable large cap value funds: September 30, 2023 Notes of Explanation: Sustainable funds based on Morningstar’s classification.  Data as of September 30, 2023. Sources: Sustainable Research and Analysis, Morningstar Direct. Observations:Unlike the commonality across a limited number of stock holdings that characterized the performance of sustainable large cap growth funds since the start of the year (refer to :https://sustainableinvest.com/chart-of-the-week-october-9-2023), the top  investments of large cap value funds display a significant dispersion of investments. The segment of sustainable large cap value funds comprised of mutual funds and ETFs is considerably smaller than large cap growth funds, consisting of only nine funds and 19 share classes with almost $5.0 billion in assets. This compares to 23 sustainable large-cap growth funds and 76 funds/share classes and ETFs with $27.1 billion in net assets.Sustainable large cap value funds registered an average 4.2% decline in September when the S&P 500 Index gave up 4.9%. At the same time, average year-to-date and trailing 12-month returns were -1.3% and 10.9%, respectively.  Average trailing twelve-month returns were just about 50% lower than the average performance of sustainable large cap growth funds.Among the nine sustainable large cap value funds, Cisco Systems Inc., which designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry, is the most widely held stock. The stock was up almost 13% since the start of the year through the end of September.  Five funds reported that Cisco was one of their top 10 holdings, accounting for investments ranging from 2.81% to 4.41% of portfolio assets.AIG followed, with holdings reported by three funds while nine funds held two positions common across the funds. On the other hand, the remaining 79 positions making up the roster of the top 10 holdings, were unique to the nine sustainable large cap value funds. Value funds reflect a greater variation in their holdings, they are more broadly diversified and less concentrated than their sustainable large cap growth fund counterparts, with 10% lower volatility profiles based on monthly 3-year standard deviations of returns.         

The Bottom Line: Methodologies used to analyze the outperformance or underperformance of sustainable and conventional mutual funds and ETFs may produce distortions and skew outcomes.  Average 12-month performance of actively managed sustainable and conventional funds-Taxable bond funds and US equity funds across mutual funds and ETFs Notes of Explanation: Sustainable funds based on Morningstar’s classification.  Data as of September 30, 2023, and performance results represent the arithmetic average.  Sources: Sustainable Research and Analysis, Yahoo Finance and Morningstar Direct. Observations:Sustainable funds outperformed their conventional counterparts over the twelve-month period ended September 30, 2023 across just one out of four broad categories consisting of actively managed mutual funds as well as ETFs. The two broad categories that are examined here are restricted to taxable bond funds as well as US equity funds, further dimensioned into ETFs and mutual funds.  In these instances, the average performance of actively managed sustainable US equity ETFs exceeded the average total return results achieved by their conventional counterparts by 3 percent.  Otherwise, conventional funds outperformed.  Average weighted calculations did not change relative results. That said, comparative results regarding the outperformance or underperformance of sustainable mutual funds and ETFs that key off reliance on entire asset classes or broad fund categories such as taxable bond funds or US equity funds, to name just two, may be subject to distortions that will influence the outcomes.   Even before examining structural market factors that may contribute to periods of outperformance or underperformance, how various issues such as how to define sustainable funds, the inclusion or exclusion of actively managed and passively managed funds, combining ETFs and mutual funds into one group, including and excluding open-end funds and closed end funds, can lead to different and skewed results. In addition, reliance on averages, selection of time horizon(s) under consideration, differences in the profile of fund categories, including significant variation in fund sizes and differences in the number of funds in each category, will also impact fund level results.  The latter are especially important because sustainable funds are not as mature as conventional funds and fund categories, number of funds and fund sizes, which tend to me much smaller, can vary significantly and tilt the results.As a result, studies claiming trends of outperformance by sustainable funds compared to conventional funds should be approached cautiously and examined very critically by investors. 

The Bottom Line: Sustainable large cap growth funds exposure to some of the market's top performers so far in 2023 drove their average 14.9% results.     Top 10 stocks held by the best performing sustainable large cap growth funds: September 30, 2023 Notes of Explanation:  Stocks listed based on the number of top performing funds holding the stock as of September 30, 2023.  For example, each of the top 10 sustainable large cap growth funds held Nvidia, Inc.  Percentage gain has been rounded.  Top 10 performing sustainable large cap growth funds include:  Invesco ESG NASDAQ 100 ETF, Xtrackers S&P 500 Growth ESG ETF, ClearBridge Large Cap Growth ESG ETF, BlackRock Sustainable US Growth Equity Fund, Parnassus Growth Equity Fund, American Century Sustainable Growth ETF, Fisher IIG US Large Cap Eq Env & Social Val Fund, ClearBridge All Cap Growth ESG ETF, Nuveen ESG Large-Cap Growth ETF and US Vegan Climate ETF.  Data as of September 30, 2023.  Sources: Sustainable Research and Analysis, Yahoo Finance and Morningstar Direct. Observations:Sustainable large cap growth funds gave up an average of 5.6% in September when the S&P 500 recorded a decline of 4.9%, its worst month this year as concerns regarding economic growth, inflation and higher for longer interest rates overtook market sentiment. Still, outside the long-short equity fund segment consisting of one sustainable fund that registered an average year-to-date gain of 17.3% across its three share classes, sustainable large cap growth funds are the best performing segment year-to-date. Comprised of some 76 mutual funds/share classes and ETFs with $27.1 billion in net assets, the segment registered an average gain of 14.9% since the start of the year. Returns ranged from a low of 9.3% recorded by the Mirova US Sustainable Equity Fund C to a high of 35.2% registered by Invesco ESG NASDAQ 100 ETF. The top 10 funds in the segment posted an even more impressive average gain of 25.7% year-to-date.   Like the limited number of stocks that had been driving the performance of the broad market since the start of the year, for example, stocks like the best performing Nvidia Corp., up 213%, Meta Platforms, Inc Class A, up 149% or Tesla, Inc., up 103%, the best performance results year-to-date posted by sustainable large cap active and passively managed mutual funds and ETFs were recorded by funds with investments concentrated in some of the best performing growth stocks.Nvidia, Inc., benefiting from the artificial intelligence boom, was the most widely held stock, found in each one of the top 10 performing sustainable large cap growth funds, with levels of investment ranging from a low of 4.33% in the Parnassus Growth Equity Fund to a high of 7.19% held in the BlackRock Sustainable US Growth Equity Investment Fund.Nvidia was followed by holdings across eight to nine funds of Microsoft, Apple and Amazon with exposures of fund assets ranging from 2.57% to a high of 14.4%.  

The Bottom Line:  Short-term performance results in the volatile renewable energy sector may be poised for gains due to demand surge in the coming years.Top 10 clean energy funds by assets under management and performance to August 31, 2023Notes of Explanation:  Funds listed in size order.  Top 10 funds by assets under management selected from universe of mutual funds and ETFs that focus on clean energy-related businesses, but excluding from this segment funds that invest in companies that are positioned to benefit, directly or indirectly, from efforts to mitigate the long-term effects of global climate change.  Data as of August 31, 2023.  Sources:  Morningstar Direct and Sustainable Research and Analysis.Observations:Climate Week NYC, an event held between September 17 and September 24, 2023 in partnership with the United Nations General Assembly, brought together business leaders, political change makers, local decision takers and civil society representatives of all ages and backgrounds, from all over the world, to drive climate action. According to the International Energy Agency, the reduction of greenhouse gas emissions to limit the effects of climate change is not happening fast enough but at least one climate model forecast, unveiled during Climate Week on September 20th, predicts that the world will likely achieve the Paris Agreement goal of limiting the increase in the global average temperature to well below 2°C above pre-industrial levels¹.  This is according to the Inevitable Policy Response (IPR) latest forecast based on global climate policies expected to be put in place in major economies between now and 2050.  Investors interested in advancing the climate transition agenda and potentially benefiting from long-term opportunities by investing in clean energy related businesses can do so via an expanding list of mutual funds and ETFs.  These are funds investing in clean energy related businesses that generate their power from renewable sources, renewable energy companies which may include, for example, wind, solar, hydro, hydrogen, bio-fuel or geothermal technology, lithium-ion batteries, electric vehicles and related equipment, waste-to-energy production, smart grid technologies, or building or industrial materials that reduce carbon emissions or energy consumption.  The top 10 equity funds by size that invest in line with this narrowly drawn theme are all index tracking ETFs.  These funds manage a combined total of $8.6 billion in assets, including the largest sustainable ETF—the $3.5 billion iShares Global Clean Energy ETF (ICLN).  This fund, along with the other top funds, experienced declines in assets recently due to a combination of performance related factors as well as investor redemptions.  Performance in the volatile clean energy sector suffered in August, not only in the light of the broader market sell-off but, to an even greater degree, in response to rising interest rates that may remain elevated for longer and the effects of this on technology-oriented stocks.  The top ten funds were down an average of 10.7% in August as compared to the S&P 500 which was down 1.59%.  Trailing twelve-month results were even worse, as the 10-fund cohort gave up an average of 21%.  In the intermediate-term, the funds posted a negative 3-year average annual return of 1.6%, with returns ranging from a low of -31.2% to a high of 21%.  Notwithstanding short-term results, the renewable energy sector is poised to see demand surge in the coming years, driven by government incentives and urgency to combat climate change. A significant tailwind for the US green industry comes from the Inflation Reduction Act which was signed into law in August 2022 and carries about $370 billion in subsidies and credits for clean energy investment.¹The Paris Agreement goes on to state that the parties to the agreement will pursue efforts “to limit the temperature increase to 1.5°C above pre-industrial levels.”

The Bottom Line:  Sustainable index tracking ETF fees range from a low of 0.1% to a 0.75% high, offering investors a range of pricing options.Assets and average expense ratios for top 10 sustainable index tracking ETF investment categories Notes of Explanation:  Assets=total net assets.  Expense ratios are average for the investment category.  Data as of August 31, 2023.  Sources:  Morningstar Direct and Sustainable Research and Analysis.Observations:The universe of index tracking sustainable ETFs at the end of August stood at 160 ETFs with $90.6 billion in net assets.  The average expense or fund fee levied by these funds is 0.35%.  The top 10 sustainable index tracking ETF investment categories, accounting for 104 funds with $83.8 billion in assets under management, or 92% of the segment’s assets, charge an average fee or expense ratio of 0.32%, or 32 basis points.Average expense ratios for the top 10 sustainable index tracking ETFs range from a low of 13 basis points applicable to the two ETFs that make up the intermediate core bond funds investment category to a high of 57 basis points covering the 18 ETFs that comprise the miscellaneous sector consisting of thematic funds.The largest sustainable index tracking segment consists of 31 ETFs in the large blend investment category, with an average expense ratio of 24 basis points.Across the top ten investment categories, expense ratios for individual funds range from a low of 0.1% charged by the SPDR S&P 500 ESG ETF (EFIV) or the iShares ESG US Aggregate Bond ETF (EAGG), to name just two, to a high of 75 basis points levied by the thematic Impact Shares YMCA Women’s Empowerment ETF (WOMN).

The Bottom Line: Eight thematic sustainable investment vehicles investing in futures contracts on carbon credits and voluntary offset credits are listed, but volatilities are high.Performance of thematic sustainable investment funds investing in carbon credits and voluntary offset credits, to August 31, 2023Notes of Explanation:  Eight funds include, iPath Series B Carbon ETN (GRN), iPath Global Carbon ETN (GRNF), Global X Carbon Credits Strategy ETF (NTRL), KraneShares California Carbon Allowances ETF (KCCA), KraneShares Carbon Offset ETF (KSET), #Carbon Strategy ETF (KARB), KraneShares Global Carbon ETF (KRBN) and KraneShares European Allowances ETF (KEUA).  #Actively managed fund.  Performance data source:  Morningstar Direct.  Funds data:  Sustainable Research and Analysis.Observations:Exchange traded funds (ETFs) and exchange traded notes (ETNs) investing in carbon credits, usually via futures in carbon credits across at least four markets, and, in one case, investing in futures contracts on voluntary offset credits, a total of eight investment vehicles with total net assets of $892.1 million, posted an average decline of 1.4% in August. This was still slightly ahead of the S&P 500 Index, down 1.59% in the same month.Returns applicable to these seven passively managed and one actively managed (noted above) thematic sustainable funds ranged from a drop of 67 basis points recorded by the $46.1 million iPath Series B Carbon ETN (GRN), an unsecured index tracking debt obligation of Barclays Bank PLC that provides exposure to the Barclays Global Carbon II TR USD Index, to a decline of 2.7% posted by the passively managed $23 million KraneShares European Carbon Allowance Strategy ETF (KEMA), a fund that tracks the performance of carbon credit futures linked to the value of emissions allowances issued under European Union (EU) Emissions Trading System or cap and trade regime.  On the other hand, three-month average returns were positive, adding 11.2%.  Average year-to-date as well as trailing 12-month returns would also be positive if not for the inclusion of the recently launched $1.2 million KraneShares Global Carbon Offset Strategy ETF (KSET), a fund that tracks the performance of the S&P GSCI Global Voluntary Carbon Liquidity Weighted Index.  The fund invests in futures contracts on voluntary carbon offset credits which represent projects that seek to reduce the impact of greenhouse gas emissions in an effort to curb climate change.  KSET posted disastrous year-to-date and 12-month returns, likely due to the shrinkage experienced in the voluntary carbon markets for the first time in at least seven years, as companies reduced buying and studies found that several forest protection projects did not deliver promised emissions savings. Preserving forests is viewed as crucial to meeting international goals to limit global temperature increases to prevent the most extreme consequences of global warming.  The fund’s results dragged down otherwise positive returns achieved by the remaining six or five funds that invest in carbon credit futures linked to the value of emissions allowances issued under one or more of cap-and-trade regimes, including the European Union (EU) Emissions Trading System, the California Carbon Allowance, the Regional Greenhouse Gas Initiative and the UK Emissions Trading Scheme.  Recently, the allowances trading under the EU’s Emission Trading Scheme reached an all-time high of €101 per metric ton of CO2. But prices, which are determined based on supply and demand of allowances, can be highly volatile.  For example, in March 2022 the outbreak of the Russia-Ukraine war caused prices to crash to less than €60 per metric ton of CO2 due to the expected ban on Russian energy imports in Europe.  In this way, funds investing in carbon allowances can be exposed to significant volatility.  Annualized standard deviations of returns for three funds that have been in operation for three years or more extends from 27 to 37 as compared to 18 for the S&P 500.According to the World Bank, almost a quarter of global greenhouse gas emissions (23%) are now covered by 73 instruments, and this is expected to expand.  An Exchange Traded Scheme places a limit on the amount of greenhouse gas emissions, and it allows emitters with lower emissions to sell their extra emission units or allowances to higher emitters, thereby establishing a market price for emissions. Carbon pricing can be an effective way to incorporate the costs of climate change into economic decision making, thereby incentivizing climate action and enabling a more rapid transition to a low carbon energy future.

The bottom line:  Best performing sustainable funds in August 2023 dominated by short-dated bond funds investing in fixed or floating rate securities and integrating ESG.Sustainable mutual funds and ETFs:  Top 10 performers in August 2023Notes of Explanation:  Performance results limited to best performing share class, to August 31, 2023.  Calvert Ultra-Short Investment Grade ETF commenced operations on 1/30/2023.  Sources:  Morningstar Direct and Sustainable Research and Analysis.Observations:Sustainable mutual funds and ETFs posted an average decline of 2.58% in August, as both stocks and bonds edged lower.  The S&P 500 gave up 1.59% in August and the Bloomberg US Aggregate Bond Index dropped 64 basis points, as investors started to contemplate the potential for higher interest rates over a longer period of time in the light of economic strength fed by consumer and government spending.  Energy was the only positive sector.    Only 131 funds recorded positive returns, or 8.2% of the 1,597 mutual funds/shares classes and ETFs in operation at the end of August with total net assets in the amount of $331.7 billion.    Results range from a high of 1.81% achieved by the $31.8 million AQR Sustainable Long-Short Equity Carbon Aware Fund N to a low of -35.23% recorded by the Direxion Daily Electric and Autonomous Vehicles Bull 2X Shares, a thematic fund that seeks daily investment results of 200% of the performance of the US Electric and Autonomous Vehicles Index.The roster of performance leaders in August, posting an average 0.94 gain, was dominated by short duration fixed income mutual funds investing in fixed or floating rate securities, such as bank loan funds.  The exception was AQR, which seeks to achieve its investment objective by investing in or having exposure to securities of US and foreign issuers through the construction of a long-short investment portfolio that favors attractive companies.  Thes same top performing funds gained an average 4.53% and 5.24% year-to-date and over the trailing 12-months, respectively.  Sustainable investing strategies employed by the top performing funds and their implementation approaches vary, but these range from expansive socially responsible principles to reliance on ESG integration combined with exclusionary screening applied to issuers and/or individual securities.  AQR Sustainable Long-Short Equity Carbon Awareness Fund also specifically targets net zero carbon positioning.  While some of the top performing mutual funds have been in operation for many years, sustainable investing strategies have been adopted more recently and investors should more closely examine intermediate and long-term performance track records as part of their due diligence process.  For example, while the Angel Oak Financials Income Impact Fund Ins shares began operations in 2014, the fund’s name and investment strategies were changed as of September 2022.

The bottom line: Only three explicitly classified sustainable closed-end funds are available to interested investors, including two funds that emphasize positive environmental and social impacts. Performance results posted by sustainable closed-end funds:  Y-T-D to August 31, 2023 and calendar year 2022Notes of Explanation:  *Estimates.  Performance results for closed-end funds based on NAV to August 31, 2023.  Sources:  CEF Connect and Sustainable Research and Analysis. Notes of Explanation:  *Estimates.  Performance results for closed-end funds based on NAV to August 31, 2023.  Sources:  CEF Connect and Sustainable Research and Analysis. Observations: Closed-end fund investors interested in sustainable investing have limited options to choose from, based on explicitly classified sustainable investment companies.  Out of 433 closed-end funds valued at $233 billion, only three funds are explicitly classified by Morningstar as sustainable investment funds.  These relatively new funds, which pursue varying investment objectives, fundamental as well as sustainable investing approaches, were valued at $2.3 billion as of August 31, 2023 and account for just 1% of the value of closed-end funds.  That said, it’s likely that other funds within the universe of closed-end funds employ sustainable investing approaches, such as ESG integration, even while they are not explicitly classified as such. Closed-end funds are a type of investment company that issues a fixed number of shares that trade intraday on stock exchanges at market-determined prices. Investors in a closed-end fund buy or sell shares through a broker, just as they would trade the shares of any publicly traded company.  Some funds employ leverage to boost returns, but this strategy amplifies their volatility. While the three closed-end funds are classified as sustainable funds, because of their differing investment objectives, performance results achieved by the three funds can differ dramatically, as illustrated in the chart above. The largest of the three funds, at $1.8 billion, is the BlackRock ESG Capital Allocation Term Trust (ECAT) that was launched at the end of September 2021.  The fund, which is actively managed by BlackRock Advisors LLC, follows an unconstrained approach with the ability to invest in public and private markets across different asset classes.  The fund can but does not intend to use leverage at this time. The fund seeks to identify untapped growth opportunities tied to the evolution of ESG and it also employs an exclusionary approach to screen out certain issuers. The next largest fund is the $332 million Nuveen Core Plus Impact Fund (NPCT), launched in April 2021.  This actively managed fund, advised by Nuveen Fund Advisors, employs leverage up to approximately 35% of the fund’s managed assets and seeks to achieve total returns through high current income and capital appreciation by investing primarily in fixed income investments while giving special consideration to certain impact and environmental, social and governance (ESG) criteria.  In connection with its impact objectives, NPCT identifies investments that will generate positive, measurable social and environmental impact alongside a competitive financial return.  The fund issues expansive quarterly impact reports that should satisfy impact-oriented investors. The third fund and the oldest is the $200 million Ecofin Sustainable & Social Impact Fund (TEAF).  Also actively managed, by TCA Advisors and Ecofin Advisors Limited,  the fund seeks to provide a high level of total return with an emphasis on current distributions. Leverage ranges between 10%-15% of total assets.  TEAF provides investors access to a combination of public and direct investments in essential assets that are making a positive social, environmental and economic impact on clients and communities.  Some but limited impact reporting is provided. The fund was launched in 2019 but was renamed in June 2021.

The bottom line:  The top 10 managers of sustainable mutual fund net assets at July 2023 handle $163.3 billion, or 69% of the segment’s assets. Top 10 sustainable mutual fund management firms and number of funds/share classes offered:  July 2023 Notes of Explanation:  Firms with common ownership have been consolidated. Sources:  Morningstar Direct and Sustainable Research and Analysis   Observations: Sustainable assets under management sourced to mutual funds and ETFs in the US reached $338.0 billion in assets under management at the end of July 2023. Mutual funds account for $236.5 billion, or 70% of sustainable fund assets at the end of July 2023.  ETFs now control $101.6 billion in net assets. The top 10 managers of mutual fund assets handle $163.3 billion, or 69% of the segment’s assets. The ETF segment, on the other hand, is more concentrated, with the top 10 firms managing $93.2 billion, or 92% of assets under management.    163 separate firms offer mutual funds and/or ETFs. Of these, 122 firms offer mutual funds while 71 firms offer ETFs. Of the top 10 mutual fund managers, five firms also offer ETFs. The exceptions for now are:  Parnassus, Impax Asset Management, Brown Advisory, Amundi US and Eventide. 

The Bottom Line:  Sustainable small cap stock funds, which posted some of the strongest gains in June 2023, call for additional due diligence before investing. Top 10 performing sustainable small cap equity mutual funds and ETFs in June 2023 Fund/Share Class Start Date TNA ($ billions) Expense Ratio (%) 1-M (%) 3-M (%) Y-T-D (%) 12-M (%) HSBC RadiantESG US Smaller Companies I (R) 6/28/2022 23.0 0.9 11.09 8.81 18.37 27.54 Kennedy Capital ESG SMID Cap I 6/28/2019 46.0 0.82 10.39 4.49 7.15 10.89 DFA US Sustainability Targeted Val Instl 7/2/2020 361.0 0.34 9.75 4.28 5.74 13.9 abrdn US Sust Ldrs Smlr Coms InstlSvc (R) 12/1/2020 14.1 1.05 9.47 6.66 7.31 11.55 Dana Epiphany ESG Small Cap Eq Instl 1/1/2020 27.5 0.95 9.34 6.71 13.17 17.13 CCM Small/Mid-Cap Impct Val Fd Instl (R) 1/1/2018 19.9 1.3 9.05 7.41 7.41 9.67 JPMorgan Small Cap Sustainable Ldrs R6 (R) 7/1/2021 55.9 0.65 8.49 3.46 3.4 9.67 iShares ESG Aware MSCI USA Small-Cap ETF^ 4/10/2018 1,444.3 0.17 8.45 4.79 8.72 14.72 iShares® ESG Screened S&P Small-Cap ETF^ 9/22/2020 50.9 0.12 8.26 3.71 6.34 9.84 Praxis Small Cap Index I 5/1/2007 155.3 0.43 8.19 3.52 6.4 9.47 Average 0.67 9.25 5.38 8.40 13.44 Notes of Explanation:  ^ denotes index fund; TNA as of June 30, 2023 for entire fund; Start date refers to the launch of the earliest share class or the effective date upon the implementation of the fund’s sustainable investing approach in cases of fund re-brandings, noted by the letter R; Performance results to June 30, 2023.  Sources:  Morningstar Direct and Sustainable Research and Analysis LLC. Observations: June, and continuing into early July, is an interval that proved to be a favorable for the stock market as equities demonstrated resilience and rallied, defying the Fed’s signal that the Federal funds rate, while left unchanged at 5%-5.25% in June, may go to 5.6% by year-end if the economy and inflation do not slow down more. Major market indices, including the S&P 500, MSCI ACWI ex USA and MSCI Emerging Markets Index recorded June gains of 6.61%, 4.49% and 3.8%, respectively. Against a backdrop of optimism regarding the economy’s health and cheap valuations by historical standards, small cap stocks, which lagged for much of the year-to-date time period, registered a reversal.  Small cap stocks posted some of the strongest gains in June, ranging from 7.94% for the Russell 2000 Value Index, to 8.13% for the Russell 2000 and 8.29% for Russell 2000 Growth Stock Index.  Since the end of June, the Russell 2000 has added another 3.6% on a price basis through July 21st. In turn, small cap sustainable stock funds, which according to Morningstar consists of a universe of 20 mutual funds and ETFs, 43 funds/share classes in total, with $8.2 billion in assets under management that are dominated by small cap funds that pursue a blended investing approach, outperformed the average domestic sustainable stock fund in June.  Sustainable small cap funds registered an average return of 7.88% versus an average 6.23% achieved by all equity funds.  June’s ten best performing sustainable small cap funds delivered an average return of 9.25% while sustainable small cap growth-oriented funds, limited to just four funds, exceeded their level of performance with an average return of 9.34%. The top ten performing sustainable small cap funds in June represent a diverse group of fund offerings.  Included are a mix of mutual funds and ETFs, actively managed funds that pursue varying fundamental investing strategies and alternative sustainable investing approaches (detailed based on prospectus filings for the top ten funds in the Funds Directory under the Resources tab), as well as passively managed funds tracking different indices, with variations in fund sizes as well as expense ratios.  In addition to these key factors, the track records of four funds are limited to less than three years due to either more recent launches or re-brandings that have occurred within the last three years.  This factor raises the bar when it comes to conducting due diligence by investors who may wish to consider any of these funds for investment purposes.  

The Bottom Line:  Large cap growth-oriented sustainable mutual funds as well as ETFs have largely outperformed their value-oriented counterparts over the short to long-term intervals. Average performance of large cap sustainable mutual funds and ETFs to July 31, 2023Notes of Explanation: Performance over 3, 5 and 10-years is annualized.  Sustainable funds based on Morningstar classificaaitons.  Sources:  Morningstar and Sustainable Research and Analysis LLC Observations: Large cap sustainable mutual funds and ETFs were up almost 3.1% in July versus a gain of 3.2% recorded by the S&P 500.  Large cap value-oriented sustainable funds outperformed growth funds, adding an average of 3.4% in July as compared to 2.7%, or a differential of 70 basis points. That said, the outperformance of large cap value-oriented sustainable funds in July does not overcome the wide gap that has developed over the short, intermediate, and long-term relative to the performance of large cap growth-oriented sustainable funds.  So far this year and over the trailing twelve months through July, the average performance of large cap growth-oriented sustainable funds has exceeded their value-oriented counterparts by 15.9% and 3.7%, respectively. Large cap growth-oriented sustainable funds have benefited from a heavy weighting in technology stocks, with leading funds in the category based on their trailing 12-month total return results, such as the Invesco ESG Nasdaq 100 ETF (24.9%), Clearbridge Large Cap Growth ESG ETF (22.9%), Nuveen ESG Large Cap Growth ETF (19.5%), Clearbridge All Cap Growth ESG ETF (18.8%) and Nuveen Winslow Large-Cap Growth ESG Fund R6 (17.6%), reflecting an average 46.3% exposure to the technology sector as of the latest reporting periods.  During the same interval, the Nasdaq 100 Index was one of the best performing benchmarks, up 22.8%. Average annual returns realized by large cap growth-oriented sustainable funds retain their performance advantage over the intermediate and long-term, producing an annualized advantage over five and ten years of 3.81% and 3.1%.  The only exception is the 3-year interval during which large cap value-oriented funds outperformed by 3.2%. Investors have the option of allocating capital to individual growth and value funds, or they can straddle both growth and value oriented large-cap sustainable funds by investing in funds that combine both factors.  Blended funds mitigate the periodic variations in returns between growth and value and these funds have delivered respectable outcomes by exceeding the average performance of growth and value sustainable funds over periods ranging from 12-months to 10 years.  In either case, investors should be aware that the long-term records attributed to some sustainable mutual funds, in particular, may have been achieved, in part, when the funds employed different investment strategies, and these should be examined closely. Examples include the Putnam Sustainable Leaders Fund and the Nuveen Winslow Large-Cap Growth ESG Fund.  

The bottom line:  Actively managed conventional as well as sustainable ETFs have been gaining some traction, but investors should carefully consider their alternative investing options.Performance of top 10 actively managed sustainable ETFs relative to designated market index:  Trailing 12-months to July 31, 2023Notes of Explanation:  *Dimensional US Sustainability Core 1 ETF, Dimensional International Sustainability Core 1 ETF and Putnam ESG Core Bond ETF have not been operating for a full year.  Prior to 7/14/2023, the JPMorgan Sustainable Municipal ETF operated as an open-end mutual fund.  Total return performance based on NAV. Designated market index as disclosed in fund’s prospectus or summary prospectus.  Sources:  Morningstar Direct and Sustainable Research and Analysis.Observations:An article published last week in the Wall Street Journal entitled Index-Tracking ETFs Were All the Rage, Until Now sets forth that “the titans of the ETF industry are facing competition in the battle for new money.”  Firms like BlackRock, Vanguard and State Street that dominate the market for exchange-traded passively managed funds are facing competition from new players like JPMorgan Asset Management and Dimensional Fund Advisors that have entered the market by focusing on actively managed ETFs.  Another source, Bloomberg Intelligence, reported that the segment of actively managed ETFs drew 23% of total ETF inflows this year, despite holding just 4% of the industry’s assets in January.Actively managed ETFs have also gained some traction in the sustainable investing sphere.  While new listings of actively managed sustainable ETFs through the end of July trailed passively managed ETF launches this year by four funds, last year new listings of actively managed ETFs dominated by a ratio of 2.2 to 1 across the universe of 61 ETF new listings in 2022.  That said, the net assets of actively managed sustainable ETFs expanded by $3.2 billion to reach $8.6 billion year-to-date, posting a 60% net gain while passively managed sustainable ETFs netted $3.8 billion, or just 4%, even as sustainable index funds account for 94% of the segment’s assets under management.These developments are somewhat surprising given the accepted view that most actively managed funds, both equity funds and fixed income funds, tend to underperform the market, in part, due to higher expense ratios.  This would also apply to sustainable funds, although funds in this category are still relatively new and their performance track record is limited.  This is either because sustainable ETFs have only recently been launched or their strategies have been rebranded in recent years to reflect that adoption of a sustainable investing approach.According to the latest data compiled by S&P’s Indices Versus Active (SPIVA) report [1] that compares the performances of actively managed funds to their appropriate benchmarks, the vast majority of actively managed funds underperform, with margins of underperformance widening over long periods of 10 years or more. The chances are better for the outperformance in investment-grade intermediate funds but here too, levels of underperformance are high.  Even in a year of declining markets, like 2022, when active management skills can be more valuable, S&P’s data shows that 51% of active managers underperformed in the US large-cap equity sphere and 79% underperformed in the investment-grade intermediate bond fund area.An evaluation of the top 10 sustainable actively managed ETFs as of July 31st shows that only six funds have been in operation for a full 12-months and of these funds, only two funds, or 33%, outperformed their designated benchmarks.  The two outperforming funds were both bond funds.  The top 10 funds manage $4.8 billion in net assets and account for 55% of the actively managed sustainable funds segment.Given the historical performance record of active managers, the limited track record of sustainable fund managers as well as higher expense ratios [2], on average, sustainable investors should carefully consider whether they may be better served by investing in an equivalent or similar index fund offering; and consider actively managed funds in cases where passively managed options are not available and exposure to the particular active investment strategy is highly desirable. [1]S&P Down Jones:  SPIVA U.S. Year-End 2022, S&P Dow Jones Indices.[2] Average expense ratio of actively managed sustainable ETFs is 52 basis points as compared to 35 basis points for their passively managed counterparts, as of July 31, 2023.   

The Bottom Line:  Expressions of interest in sustainable investments may be high, but usage remains low in employer-sponsored defined contribution plans, calling for additional education. MFS US Retirement Survey, 2022:  Interest in more sustainable (ESG) investments in employer-sponsored retirement plansNotes of Explanation:  Percentages represent the sum of respondents that chose somewhat interested, very interested and extremely interested. Sources:  MFS-The Road to Better Outcomes.  Sustainable Research and Analysis LLC. Observations:   Recently referenced, an MFS sponsored survey found that there was strong interest in ESG investments by plan participants in corporate defined contribution plans and an inclination to contribute at higher rates. MFS, the mutual fund management company, retained Dynata, an independent third-party research provider, to conduct a defined contribution (DC) survey to shine a light on the concerns and challenges faced by participants in their savings journeys.  The survey, conducted between March 15 and April 13, 2022, covered 1,001 DC plan participants.  To qualify, DC plan participants had to be ages 18+, employed at least part-time and actively contributing to a 401(k), 403(b), 457, or 401(a). The survey respondents were divided into generational cohorts, as follows:  Millennial ages 23-38, Generation X ages 39-54, and Baby Boomer ages 55-73. The survey results published by MFS identify two ESG related questions.  The first is how interested participants are in seeing more sustainable (ESG) investments offered in their employer-sponsored retirement plan.  The second question addressed the likelihood that plan participants would contribute at a higher rate to their workplace retirement fund if the plan offered or included investment options that consider sustainability issues. According to MFS, the survey results demonstrate strong participant interest across generational cohorts for investments that consider environmental, social and governance (ESG) factors in the workplace retirement plan. The results show that 87% of millennial investors surveyed want to see more investments that consider ESG factors in their retirement plan and as many as 77% and 62% of Generation X and baby boomers.  Most participants indicate that they would contribute at a higher rate if offered investment options that consider ESG issues.  On this basis, MFS suggests that plan sponsors should consider the administration of a survey to gauge employee appetite for investments that embrace ESG factors and also offer educational materials that explore the different approaches to sustainable investing. Other DC surveys have reached similar conclusions in terms of interest by participants in sustainable fund options.  That said, ESG fund options have yet to make significant inroads into the line-up of investment options in corporate defined contribution plans and usage remains low.  This may be due to the confusion and misunderstanding that exists in the marketplace regarding sustainable investing as well as the broad variation in sustainability preferences expressed by individuals.  As such, DC employer sponsors may wish to lead off with an educational effort at the end of which engaged plan participants should be surveyed regarding their sustainable preferences and expected levels of participation.

The Bottom Line:  April 2023 green bond fund performance results favored passively managed funds investing in US dollar denominated securities and featuring low expense ratios. Observations: Green bond funds, the segment of thematic bond funds consisting of five mutual funds/28 share classes and three ETFs that offer investors exposure to environmental projects and investments while seeking market-based returns, principally by investing in green bonds, added $2.4 million, or a month-over-month increase of 0.2%.  Year-to-date, green bond fund assets expanded by $49.9 million, exceeding the gains achieved via capital appreciation.  That said, green bond fund assets under management have still not fully recovered from the month-end peak reached in August 2022 when assets recorded $1,516.0 million.  Refer to Chart 1. Retroactively added to the universe of green bond funds is the $18.8 million Lord Abbett Climate Focused Bond Fund with its nine share classes launched in May 2020.  The fund, which focuses on achieving a total return, invests in the investment and non-investment grade securities of issuers that have or will have, a positive impact on the climate through an issuer’s operations or the products and services provided by the issuer.  The fund does not limit its investments to labelled green bonds and also accounts for ESG factors. The green bond funds segment remains concentrated.  The three largest funds, the Calvert Green Bond Fund, iShares USD Green Bond ETF and the TIAA-CREF Green Bond Fund, make up 83% of the segment’s assets under management.  The net assets invested in the Calvert Green Bond Fund declined by $5.1 million in April while the other two funds added $4.2 million and $0.7 million, respectively. All green bond funds recorded positive rates of return since the start of the year.  With an average gain of 0.58% in April, with all but two share classes subject to the highest expense ratios, outperforming conventional benchmarks.  Results in April ranged from a high of 0.92% registered by the VanEck Green Bond Fund ETF and 0.89% posted by the iShares USD Green Bond ETF.  In addition to restricting themselves to US dollar denominated green bonds, the two ETFs feature the lowest expense ratios at 0.2%.  The poorest taxable fund performer in April, excluding the Franklin Municipal Green Bond ETF that gained 0.14%, was the Lord Abbett Climate Focused Bond Fund C shares that gained 0.42%.  The share class was hampered by its 1.29% expense ratio.  Refer to Table 1. On a year-to-date basis with an average return of 3.32%, 50% of funds/share classes outperformed their conventional benchmarks.  On the other hand, trailing twelve month and three-year average returns are still negative at -1.80% and -2.01%, as the bond market is still recovering from the huge resetting of interest rates in 2022 and performance results that were the worst since the start of the Bloomberg US Aggregate Bond Index series that goes back to 1976. Excluding the municipal Franklin Municipal Green Bond ETF, the taxable segment gained 0.60% and 3.30% year-to-date. The average expense ratio applicable to the green bonds segment is 0.64%, ranging from a low of 0.20% levied by the two ETFs that have been in operation for over three years, to a high of 1.66%. Chart 1:  Green bond fund mutual funds & ETFs assets under management:  12/21 - 4/23Notes of Explanation:  Data adjusted for (1) The closing of the Franklin Municipal Green Blond Fund and its four share classes with total net assets of $9.7 million and the rebranded Franklin Liberty Federal Tax-Free Bond ETF, renamed the Franklin Municipal Green Bond ETF, as of May 3, 2022, and (2) Retroactively adding the Lord Abbett Climate Focused Bond Fund, launched in May 2020.  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC Table 1:  Green bond funds:  Performance results, expense ratios and AUM – April 30, 2022 Fund Name 1-M Return (%) 3-M Return (%) 12-M Return (%) 3-Year Return (%) $AUM Expense Ratio (%) Calvert Green Bond A 0.84 3.49 -1.36 -2.36 69.4 0.73 Calvert Green Bond I 0.86 3.57 -1.11 -2.11 652.9 0.48 Calvert Green Bond R6 0.86 3.58 -1.05 -2.06 40.7 0.43 Franklin Municipal Green Bond ETF@ 0.14 3.65 112.1 0.3 iShares USD Green Bond ETF**/^^ 0.89 3.68 0.29 -2.72 308.7 0.2 Lord Abbett Climate Focused Bond A 0.47 2.89 -2.2 4.9 0.65 Lord Abbett Climate Focused Bond C 0.42 2.69 -2.8 0.4 1.29 Lord Abbett Climate Focused Bond F 0.49 2.96 -2 3.9 0.45 Lord Abbett Climate Focused Bond F3 0.49 2.96 -1.96 0.1 0.44 Lord Abbett Climate Focused Bond I 0.61 3.09 -1.88 9 0.45 Lord Abbett Climate Focused Bond R3 0.45 2.79 -2.49 0 0.95 Lord Abbett Climate Focused Bond R4 0.47 2.88 -2.24 0 0.7 Lord Abbett Climate Focused Bond R5 0.49 2.96 -2 0 0.45 Lord Abbett Climate Focused Bond R6 0.49 2.96 -1.97 0.5 0.44 Mirova Global Green Bond A 0.49 2.88 -5.34 -3.96 5.1 0.91 Mirova Global Green Bond N 0.49 2.86 -5.1 -3.69 6 0.61 Mirova Global Green Bond Y 0.49 2.86 -5.1 -3.72 26.5 0.66 PIMCO Climate Bond A 0.66 3.6 -1.35 -1.07 1 0.91 PIMCO Climate Bond C 0.6 3.35 -2.09 -1.82 0 1.66 PIMCO Climate Bond I-2 0.68 3.7 -1.06 -0.78 0.4 0.61 PIMCO Climate Bond I-3 0.68 3.68 -1.11 -0.83 0.1 0.66 PIMCO Climate Bond Institutional 0.69 3.73 -0.96 -0.68 11.9 0.51 TIAA-CREF Green Bond Advisor 0.44 3.64 -0.88 -1.6 43.9 0.6 TIAA-CREF Green Bond Institutional 0.56 3.79 -0.69 -1.53 77.2 0.45 TIAA-CREF Green Bond Premier 0.54 3.74 -0.85 -1.66 0.9 0.6 TIAA-CREF Green Bond Retail 0.53 3.69 -0.99 -1.84 7.8 0.8 TIAA-CREF Green Bond Retirement 0.54 3.73 -0.86 -1.69 14.4 0.7 VanEck Green Bond ETF**/^^ 0.92 3.47 0.42 -2.09 75.5 0.2 Averages+/Total 0.58 3.32 -1.80 -2.01 1,473.3 0.64 Bloomberg US Aggregate Bond Index 0.61 3.59 -0.43 -3.15 Bloomberg Global Aggregate Bond Index 0.44 3.46 -2.31 -3.91 Bloomberg Municipal Total Return Index -0.23 2.45 2.87 0.70 S&P Green Bond US Dollar Select IX 0.92 3.56 0.29 -1.81 ICE BofAML Green Bond Index Hedged US Index 0.59 3.26 -4.55 -3.99 Notes of Explanation:  Blank cells=NA. 3-year returns are average annual total returns.  +Average returns apply to taxable as well as municipal green bond funds.  If the municipal Franklin Municipal Green Blond ETF is excluded, results are 0.60% in April and 3.30% Y-T-D.  12-M and 3-Year results are not impacted.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent. Unless otherwise noted, fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.   @Fund rebranded as of May 3, 2022.  ^Effective March 1, 2022, fund shifted to US dollar green bonds. ^^As of September 3, 2019, the fund shifted to US dollar green bonds and tracks the S&P Green Bond U.S. Dollar Select Index.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC.

The Bottom Line:  April performance results highlight that mutual funds at this time offer sustainable investors a greater variety of investment options relative to ETFs. April 2023 average total return performance for top 10 performing investment categories stratified by actively managed mutual funds and ETFs Observations: Strong earnings registered by several large companies overcame bank sector concerns and uncertainty regarding interest rates, the looming debt ceiling deadline and economic growth, to push the broad stock market higher in April.  The broad-based US market gained 1.6% in April and 9.2% year-to-date based on the performance of the S&P 500 Index.  Lage cap and large cap value stocks led the pack while mid-cap and small cap stocks did not manage to register results above 0.0%. At the same time, US bonds generated gains of 0.61% and 3.59% year-to-date, according to the Bloomberg US Aggregate Bond Index.  The MSCI ACWI, ex US Index added 1.8% and 8.9% over April and on a year-to-date basis while global bonds registered gains of 0.44% and 3.46%, respectively. Against this backdrop, actively managed mutual funds added .40%, on average, while actively managed ETFs came in at an average -.01% in April.  Sustainable actively managed US equity funds, including both mutual funds and their share classes, as well as actively managed ETFs, posted an average gain of 0.07% while sustainable taxable bond funds added an average of 0.54%.  International equity funds closed the month with an average gain of 0.48%. The average performance of actively managed mutual funds and ETFs on a more granular level, across fund investment categories, ranged from a high of 4.9% recorded by mutual funds focused on the health sector while technology-oriented mutual funds landed on the other side of the range with an average drop of 5.09%. When viewed through the prism of investment fund categories, mutual funds at this time offer sustainable investors a greater variety of investment options relative to ETFs.  This can be observed in the broader breadth of sustainable mutual fund investment categories that make up the top 10 performing categories versus ETFs based on average performance results in April.  For example, six of the top 10 performing mutual fund investment categories with 32 funds/share classes, are not offered at this time in the form of sustainable ETFs.  The April average performance of some of these investment categories contributed to the month’s outperformance of mutual funds relative to ETFs. As for individual top and bottom performing funds, both funds are volatile, equity oriented thematic funds that charge higher than average fund expenses.  Returns ranged from a high of 7.15% recorded by the $1.7 billion Eventide Healthcare & Life Sciences Fund A that invests in stocks of companies in the healthcare and life sciences sectors.  At the other end of the range is the small $13.9 million Firsthand Alternative Energy Fund that invests in alternative energy and alternative energy technology companies, both U.S. and international.  The fund registered a decline of -8.63.

The Bottom Line:  The campaign against ESG considerations by investment managers and investors shows no evidence so far that interest in sustainable investing is diminishing. Sustainable mutual funds and ETFs net assets:  December 2022 – April 30, 2023 Sources: Morningstar Direct and Sustainable Research and Analysis LLC Observations: The continuing campaign against the use of ESG considerations by managers, investors, corporations and financial institutions, with the latest salvo being directed by a group of 17 Republican US state attorneys general against BlackRock, does not appear to be impacting the sentiments of current sustainable investors in US mutual funds and ETFs or their investment managers. This conclusion is supported by fund flows since the start of the year as well as new fund formations. According to Reuters, the Republican state attorneys general asked federal energy regulators to review BlackRock's ownership of utilities, citing the top fund manager's involvement in industry efforts to limit climate change. In their motion on Wednesday of this week the attorneys general asked the four-member body known as FERC to audit whether BlackRock has complied with a 2022 order that gave it permission to own more than 10% of U.S. utility company shares. This, as well as various other Republican led initiatives are detrimental to their own constituents in that they promote a disregard for the consideration of ESG risks and opportunities in financial and investment decisions that are likely in the best interests of stakeholders when such factors mitigate short and long-term financial losses and potentially take advantage of investment opportunities. So far this year, the combined assets of sustainable mutual funds and ETFs expanded by $19.2 billion, for a gain of 7%. Based on a simplified evaluation, the gain in net assets is exceeding the 5.3% average aggregate rate of return achieved by the universe of 1,478 funds/share classes that make up the Morningstar universe of sustainable funds.  Separately, mutual funds recorded a gain of $14.5 million while the assets attributable to sustainable ETFs added a net of $7.7 million in assets. Sustainable mutual funds, which account for 67.7% of sustainable fund assets as of April 30, 2023, experienced successive monthly gains in assets since the start of the year. February was the only exception with funds experiencing a sharp 2.74% decline due to market factors.  Otherwise, sustainable mutual funds reached a four-month high of $213.2 billion. Sustainable ETFs also reached a four-month high at the end of April, ending the four-month interval with $101.6 billion. ETFs, however, experienced two monthly declines in net assets before gaining $7.2 million in April. At the same time, investment management firms have continued to launch new products, but at a slightly reduced pace. So far this year, 26 new mutual funds and ETFs were launched versus 30 during the first four months of 2022, excluding a one-off strategic positioning by Fidelity that added 21 sustainable funds in April 2022.  While this represents a slight lag, it is more likely attributable to the banking scare in March that disrupted the new issue calendar.  During March, there were three mutual fund launches but no new ETF introductions.

The Bottom Line:  Outsized flows into actively managed ETFs disregards evidence that most active investment managers tend to underperform their benchmark most of the time. Total net assets of sustainable active and passive ETFs: December 30, 2022 – April 28, 2023Notes of Explanation:  Sources:  Morningstar Direct and Sustainable Research and Analysis Observations: According to reporting in the Wall Street Journal on May 3, 2023 investors have been directing outsized flows into actively managed exchange-traded funds versus index-tracking ETFs.  While accounting for less than 6% of total assets, active ETFs have attracted about 30% of the total flows to ETFs so far this year.  This is being attributed to a greater interest in active management in the light of turbulent market conditions as well as the “ease with which they allow investors to more easily trade specific strategies.”  While this thinking may seem to be appealing in the short term, the fact is that a majority of active managers tend to underperform their benchmark most of the time. The underperformance rate in both categories and regions tends to increase with longer time horizons. Also, when funds outperform in a certain category, the outperformance doesn’t persist, and it doesn’t increase the odds of outperformance in a future period. The trend so far this year favoring conventional funds can also be observed regarding sustainable ETFs through the end of April.  During the first four months of the year, actively managed sustainable ETFs added $1.8 billion in assets, or a gain of 33%.  This compares to a $2.0 billion decline in the assets of passively managed ETFs, or 0.2% without adjusting for year-to-date market gains and the blockbuster launch in early April of the $2.0 billion Xtrackers MSCI USA Climate Action Equity ETF (USCA).  The new ETF, which focuses on companies that are addressing and adapting to climate change, pulled in more than $2 billion in assets in its first day of trading, with the bulk of that money coming from Finnish pension fund Ilmarinen. Actively managed ETFs reached $7.2 billion in assets at the end of April and account for 7.7% of sustainable ETF assets.  Actively managed sustainable ETFs have also outpaced sustainable passively managed ETF new fund launches throughout 2022 but lagged nine to 11 passively managed fund launches during the first four months of 2023. It should be noted, however, that about two-thirds of the four-month gains recorded by actively managed sustainable ETFs are sourced to six recently launched funds managed by Putnam Investment Management and Dimensional Fund Advisors investing in US equities, international equities, and fixed income securities.  These funds, which were launched between November 2022 and January 2023 and likely sourced the bulk of the new money via internal sources, added $1.2 billion or 67% of the total four-month net gain. These funds include the Putnam ESG Core Bond ETF (PCRB), Dimensional US Sustainability Core 1 ETF (DFSU), Putnam PanAgora ESG International Equity ETF (PPIE), Putnam ESG Ultra Short ETF (PULT), Putnam ESG High Yield ETF (PHYD) and Dimensional International Sustainability Core 1 ETF (DFSI).  Net expense ratios reported by these funds average 36 basis points and range from a low of 18 basis points to a high of 60 basis points.

The Bottom Line:  Moody's latest report shows the varying credit impacts of environmental, social and governance (ESG) considerations applicable to more than 10,400 rated entities.Distribution of Moody’s credit impact scores and issuer profile scores as of March 31, 2023 Notes of Explanation:  Based on ESG scores of 10,467 rated entities, as of 31 March 2023.  IPS scores measure issuer’s exposure to ESG considerations that could be material to credit risk, while CIS gauges the impact those ESG considerations have on an issuer’s credit rating.  Both CIS scores and ESG scores run on a five-point scale:  1 is positive, 2 is neutral-to-low, 3 is moderately negative, 4 is highly negative and 5 is very highly negative.    Source:  Moody’s Investors ServiceObservations: Last week Moody’s Investors services published its observations as of March 31, 2023 of the credit impact of environmental, social and governance (ESG) considerations applicable to more than 10,400 rated entities, including corporates, sovereigns, sub-sovereigns as well as project and infrastructure finance.  These cut across both investment and non-investment grade credits and are based on Moody’s assigned credit impact scores and issuer profile scores.  The distributions by number of entities or assets covered, by sector or credit rating categories are not provided.   According to Moody’s, ESG risks do not have a material impact on the ratings of half of rated entities. As for the rest, ESG considerations have a material credit impact on nearly a quarter of rated entities. The impact is highly negative or very highly negative for 20% of rated entities and positive for 3% – that is, their credit ratings are lower or higher because of ESG considerations. For 27% of rated entities, ESG risks have a limited impact on the current rating, with potential for greater adverse impact over time. The credit impact of ESG risks is most pronounced for corporates, sovereigns and sub-sovereigns, with nearly 50% of corporates and about 30% of sovereigns and sub-sovereigns affected either positively or negatively. On the other hand, ESG considerations, according to Moody’s, do not have a material impact on the ratings of most financial institutions and US public finance entities. Non-investment grade entities have a greater risk exposure to ESG considerations. Governance issues tend to have more influence on credit strength and ratings than environmental and social risks. For fixed income investors, fundamental factors such as interest rates, general market conditions, maturity, structure, call provisions and liquidity, in addition to credit ratings, all contribute to bond valuations and understanding how these factors interact play a role in informing investment decisions. Adding another level of transparency to the impact that material ESG issues can have on issuer credit assessments is informative and valuable.  At the same time, issuer level ESG risk assessments must be disentangled on a case-by-case basis to account for issue level characteristics, such as structure and maturity, as part of the fixed income security evaluation and selection process.

The Bottom Line:  Expense ratio comparisons between conventional and sustainable funds are difficult due to lack of homogeneity but low-cost options for investors are available. Conventional and sustainable mutual funds and ETFs asset-weighted expense ratios Notes of Explanation:  Expense ratios applicable to conventional mutual funds and ETFs are based on ICI reporting as of December 2022 while expense ratios applicable to sustainable funds are as of April 2023.  Investment fund categories may not be identical and index bond mutual funds are excluded as there is only one sustainable fund that falls into this category.  Sources:  Investment Company Institute (ICI) 2022 Trends in the Expenses and Fees of Mutual Funds report, March 2023.  For sustainable funds, net expense ratios as reported in the fund prospectus are sourced to Morningstar Direct. Observations: Last month the Investment Company Institute (ICI) published its 2022 Trends in the Expenses and Fees of Mutual Funds report, disclosing that on average “expense ratios for long-term mutual funds have declined substantially over the past 26 years.  From 1996 to 2022, average equity mutual fund expense ratios dropped by 58 percent and average bond mutual fund expense ratios dropped by 56 percent.”  This is a long-term decline in the average mutual fund expense ratios primarily reflecting a shift toward no-load funds. According to the ICI, investor interest in lower-cost equity mutual funds has helped fuel declines in average expense ratios for both actively managed and index equity mutual funds. In 2022, the average weighted expense ratio of actively managed US equity mutual funds fell to 0.66 percent, down from 1.08 percent in 1996 while the average weighted expense ratio of actively bond funds stood at 0.44%. Given the latest ICI data, it’s instructive to review how the ICI's expense ratios by category compare to sustainable funds as part of a process intended to address concerns that are sometimes surfaced about the cost of owning sustainable mutual funds and ETFs. Based on an imprecise analysis of similarly managed mutual funds and ETFs for selected ICI categories that relies on asset-weighted averages in which share classes are given a greater weighting in proportion to their size so as to give a better idea of what investors are actually paying, asset-weighted average expense ratios applicable to sustainable actively managed US equity and taxable bond mutual funds as well as passively managed US equity funds tend to be higher than conventional funds by between 6 and 16 basis points.  While additional analysis is required but challenged due to the lack of homogeneity across the two fund classifications, an explanation for this may be that sustainable mutual funds are less mature, fund categories are not identical and there is significant variation in the number of funds and assets under management when conventional funds are compared to sustainable funds.  For example, there is a significantly higher number of very large conventional mutual funds with lower expense ratios relative to sustainable funds—which benefits the average weighted expense ratio of conventional funds.  That said, investors can find sustainable fund substitutes in each of the above mentioned categories with equivalent to even lower expense ratios. As for sustainable index US equity and bond funds as well as sustainable actively managed US equity funds, which are also relatively fewer in number and exposure to investment categories, asset-weighted average expense ratios are nevertheless largely aligned with their conventional counterparts or even lower by 13 basis points in the case of sustainable actively managed US equity ETFs.

The Bottom Line:  Sustainable funds recorded an average gain of 5.05% in Q1 2023, while top performing funds gained 7.2% and bottom funds dropped 5.09%. 0:00 / 0:00 Listen to this article Top and bottom performing sustainable mutual funds and ETFs - Q1 2023Observations:Sustainable mutual funds and ETFs, a total of 1,401 funds/share classes with $312.1 billion in assets under management at the end of March 2023, recorded average gains of 1.78% in March and 5.05% in the first quarter (Q1) as well as a decline of 6.56% during the trailing twelve months.  The uptick in the first quarter came after an unsettling 2022 for equities as well as fixed income markets and a surprising show of resilience that overcame stress in the banking system, cryptocurrency meltdowns and uncertainty about what’s ahead for the economy. Sustainable international equity funds led over the quarter, followed by US equity and taxable bond funds, adding an average of 7.06%, 6.0% and 2.64%, respectively.  Only about 5% of funds/share classes posted negative returns in the quarter.  The broad S&P 500 Index gained 7.5% in Q1, the S&P 500 ESG Index added an even higher 8.09% and bond prices, based on the Bloomberg US Aggregate Bond Index, also rose, notching a gain of 2.96%, as investors bet that the Federal Reserve won’t raise rates as high as previously expected due to recent banking failures or near-failures, technology stocks soared 20.77% per the Nasdaq 100 Index while oil and gas prices fell and ended the quarter down 4.94% according to the S&P 1500 Energy Index.  The best performing sustainable mutual funds and ETFs gained 7.25% in Q1, benefiting from an emphasis on large cap growth stocks, exposure to technology stocks and lighter allocations to fossil fuel companies in the energy sector.  That said, their strong average gain was not yet sufficient to offset their average -31.6% total return results in 2022. It should be noted that the top 10 funds, apart from the $131.1 million ClearBridge Large Cap Growth ESG ETF, are small in size.  At an average fund size of $5.8 million, these funds may not be able to replicate the quarter's outsized performance results once they begin to attract assets and grow.      The ten worst performing sustainable mutual funds and ETFs include funds investing in renewable energy sectors such as battery storage, hydrogen, renewable gas, solar PV, offshore and onshore wind and carbon sequestration, to mention just some.  The group gave up 5.1% in Q1.  Returns ranged from a low of -9.94% to a high of -2.44% versus -0.05% recorded by the S&P/TSX Renewable Energy and Clean Technology Index.

The Bottom Line:  After a challenging year in 2022 the relative total returns of sustainable indices in the first quarter of 2023 recorded improved results. 0:00 / 0:00 Listen to this article now Selected MSCI ESG indices relative performance results to 3-31-2023Notes of Explanation:  Positive or negative ESG performance results are for the selected MSCI ESG Leaders indices relative to their underlying conventional benchmarks, except for the BB MSCI ESG Focus Aggregate Bond Index.  Other than calendar year 2022 results, performance is to March 31, 2023.  Sources:  MSCI and Bloomberg.Observations: After a challenging year in 2022 during which sustainable securities market indices tracking stocks as well as bonds trailed their conventional counterparts, the relative total returns of sustainable indices in the first quarter in 2023 recorded improved overall results.    Viewed through the prism of six selected MSCI ESG Leaders indices, including two US and three international equity indices and one US investment-grade intermediate ESG Focus index, all six indices registered returns equal to or greater than their conventional counterparts in the month of March while five of the six indices achieved returns equal to or greater than their conventional counterparts.  In 2022, all but one of the ESG benchmarks underperformed, impeded due to their energy underweighting and technology overweighting in a year when energy, according to the S&P 1500 Energy Total Return Index, was up 63.77% while the technology heavy Nasdaq Composite Index was down 32.54%.  Only the MSCI Small Cap ESG Leaders Index outperformed.  In the first quarter of 2023, ESG indices benefited as the opposite results unfolded.  The technology sector gained 20.77% while energy was down 4.94%.  Indices matching or outperforming their conventional counterparts in the first quarter include the Bloomberg MSCI ESG Focus Aggregate Bond Index, MSCI USA ESG Leaders Index, MSCI ACWI ex USA Leaders Index, MSCI EAFE ESG Leaders Index and MSCI Emerging Markets ESG Leaders Index.  These benchmarks matched or eclipsed their conventional benchmarks by an average of 45 basis points, with a range extending from 0 basis points to 100 basis points.  The MSCI Leaders indices attempt to capture the exposure of high environmental, social and governance scoring companies, based on MSCI ESG scores, relative to their sector peers, while maintaining risk and return characteristics similar to their underlying conventional index.  MSCI scores, which range from CCC to AAA, measure a company’s management of financially relevant ESG risks and opportunities. While outperforming in 2022, the MSCI USA Small Cap ESG Leaders Index lagged behind its conventional counterpart in the first quarter by a narrow margin of four basis points.While they may have narrowed, intermediate to longer-term results delivered by sustainable or ESG indices over the trailing five and 10-year intervals continue to outperform by an average of 24 basis points and 44 basis points, respectively.    The performance results of sustainable or ESG indices relative to conventional benchmarks can lead and lag in the short-term, defined here as up to 3-years.  Yet so far it seems that over the intermediate to long-term investors can still achieve market-based returns or even excess returns via investments in sustainable or ESG indices that aim to track conventional indices.  That said, the construction of ESG indices and the nature of the underlying ESG ratings or scores will have an impact on the outcomes.  

The Bottom Line: The absence of widely accepted definitions and standards in sustainable finance is illustrated in the wide variations of referenced assets under management. 0:00 / 0:00 Listen to this article now Sustainable assets under managementObservations:The absence of widely accepted definitions and standards in the sustainable finance sphere has contributed to confusion, misunderstanding and, more recently, skepticism on the part of investors and other stakeholders. Estimates regarding the size of the sustainable investing market, growth trends and dominant strategies have also been distorted by the absence of standardization in this sphere of investing.  This is illustrated in data compiled and disseminated by four frequently cited authoritative sources:  Principles for Responsible Investment (PRI), US SIF-The Forum for Sustainable and Responsible Investment, The Investment Company Institute (ICI) and Morningstar.  While the base line dates vary, three of the four sources with a focus on the US market report that sustainable assets under management range from a low of $291 billion to an approximate high of $8.4 trillion, or a range of $8.1 trillion.At the low end of the range is Morningstar which reports $291.1 billion in sustainable mutual fund and ETF assets under management as of December 2022.  To qualify for inclusion as a sustainable fund, Morningstar considers the centrality of a fund’s sustainability principles to its investment management process or about how it is applying those principles in practice.Higher by 82%, The Investment Company Institute reports that sustainable fund assets reached $529 billion at the end of 2021.  The latest available data is also compiled based on sustainable assets sourced to mutual funds and ETFs, but the ICI’s ESG criteria screens and stratifies sustainable funds using four defined categories that include a broad ESG focus, environmental focus, religious values, and other focus.  The ICI reports on ESG assets in its annual Mutual Fund Factbook and the 2023 edition has not been published yet.    At the other end of the range is US SIFs estimate of $8.4 trillion in sustainable assets under management at the start of 2022 that relies on surveys and research capturing portfolio data extending beyond mutual funds and ETFs to include, for example, pooled investment funds, separate accounts, etc.  The US SIF, which recently amended its estimate due to changes in its methodology for collecting the data, dropped its estimate from $17.1 trillion at the start of 2020 by $8.7 trillion.  The staggering 51% decline in the estimate by US SIF of assets subject to sustainable investing approaches was recently attributed by one publication to the fact that institutions were “being more careful about how they classify their assets¹.” More likely is that US SIF was not rigorous in its methodology and in the process of inflating the ESG numbers may inadvertently stimulated new investment product introductions on the one hand while also fueling a growing alarm over ESG and contributing to the resultant politicization of the investing approach. This, notwithstanding the outsized role of ESG integration that largely focuses on investment risk and opportunities rather than values-based or impact investing--considerations that should be factored into investment decision making by fiduciaries when these are relevant and material.  Still, it’s clear that sustainable fund offerings and assets under management have expanded and investors have more choices today to consider and align with their sustainability preferences.  That said, investment managers should be more transparent regarding their sustainable investing approaches and investors should conduct due diligence, consult fund offering documents and engage with their advisers or investment managers to understand a fund’s approach to sustainable investing to ensure alignment with their sustainability preferences.¹ Corporate Knights, You Down with ESG, Winter 2023.

The Bottom Line:  Reports issued last week on climate change and related financial, economic, and social risks are required reading for investors and other stakeholders.   0:00 / 0:00 Listen to this article now Carbon dioxide levels over timeNotes of Explanation:  Source: 2023 Economic Report to the President/Lüthi https://doi.org/10.1038/nature06949et al. 2008. Note: Data come from reconstructions from ice cores.Observations:On top of President Biden’s veto of a bill passed by Congress that attempted to overturn a Department of Labor rule regarding consideration of ESG factors in the selection of investment options by retirement plan fiduciaries, including 401(k) plans, two consequential climate change-oriented reports with financial, economic, and social implications were issued last week on Monday that are required reading for all investors and other stakeholders.  The first is a synthesis of six previous reports issued by the Intergovernmental Panel on Climate Change (IPCC), a body of experts convened by the United Nations whose work is endorsed by 195 nations.  The second is the annual 2023 Economic Report to the President, a document that devotes an entire chapter to climate change, along with a companion White Paper entitled “Methodologies and Considerations for Integrating the Physical and Transition Risks of Climate Change into Macroeconomic Forecasting for the President’s Budget.”  The report warns of the resultant economic, financial, and social risks to the U.S. economy that will confront the Federal Government with related fiscal challenges.According to the IPCC synthesis report, human activities, principally through emissions of greenhouse gases, have caused surface temperatures to reach 1.1° Celsius and global average temperatures are estimated to rise to a level in excess of 1.5° Celsius above preindustrial levels sometime around the first half of the 2030s.  Beyond that point, scientists believe that the impacts of climate change in the form of catastrophic heat waves, flooding, drought, crop failures and species extinction will reach a pivotal point that will be hard to reverse.  There is still a 50/50 chance that the worst outcomes can be avoided, provided nations work together immediately to reduce greenhouse gas emissions by roughly 50% by 2030 and then stop adding carbon dioxide to the atmosphere altogether by the early 2050s.The 2023 Economic report to the President warns that a warming planet poses severe economic challenges for the United States with consequences that would require the federal government to reassess its spending priorities.  The report notes that even given ambitious action to rein in emissions that will be required to meet these national commitments, the climate will continue changing for the foreseeable future until global greenhouse gas emissions fall to zero.Considering these reports and their rather dire warnings regarding the potential impacts due to climate change, what are some actions that concerned investors may wish to consider, both negative and positive?First, investors in actively managed mutual funds and ETFs should investigate and understand the approach taken by their managers to factor climate change scenarios into their investment management processes.  For some funds, relevant disclosures may be found in their Summary Prospectus, Prospectus and/or Statement of Additional Information.  Other fund managers may disclose their sustainable investing practices on the firm’s website in the form of research reports or other disclosures.  For investors working with financial advisers, an inquiry along these lines should be directed to their financial adviser.Second, investors in passively managed conventional funds may wish to consider switching to equivalent environmental, social and governance (ESG)-oriented, low cost ESG index funds, that account for relevant and material ESG risks but are also managed using strategies that involve investing in a representative sample of securities that collectively have an investment profile similar to that of an applicable underlying conventional index so as to limit tracking error.  To ensure alignment with their sustainability preferences, investors should be aware of the methodology employed by the fund’s index to screen and monitor index constituents as well as the basis for excluding companies in certain industries, such as the extraction of thermal coal or the generation of electricity from thermal coal, or due to their engagement in controversial activities.      Third, investors may also wish to consider an appropriate allocation, commensurate with their overall risk tolerance and investment time horizon, to one or more investment themes that will benefit from the opportunities of the clean energy transition. These include funds with a focus on the renewable energy sector, companies seeking to achieve net zero emissions, clean water and precious metals used in electric vehicles battery construction, to mention just a few.  Green bond funds also fall into this category.  

The Bottom Line:  Plans announced yesterday by UBS to acquire Credit Suisse should not result in any immediate impact on the management of investment funds. 0:00 / 0:00 Listen to this article now Mutual funds, ETFs and ETNs managed by UBS and Credit Suisse as of February 28, 2023Notes of Explanation:  Sources:  Morningstar Direct and Sustainable Research and Analysis LLCObservations:In a transaction still subject to shareholder approval that is intended to rescue Credit Suisse from a confidence and liquidity spiral and as well as to support financial stability, UBS announced yesterday that it plans to acquire the 167-year-old financial institution for more than US$3 billion along with support from the Swiss National Bank. According to the UBS announcement, the combination is expected to create a business with more than US$5 trillion in total invested assets and sustainable value opportunities. It will further strengthen UBS’s position as the leading Swiss-based global wealth manager with more than US$3.4 trillion in invested assets on a combined basis.Investors in Credit Suisse mutual funds and ETNs, in total 18 funds/20 share classes with US$1.9 billion in assets under management as of February 28, 2023 which would remain segregated in case of bankruptcy, should not expect any immediate consequences. After the transaction closes and management contracts are amended, however, investors should anticipate potential adjustments in the line-up of their funds, management as well as investment strategy changes.  For now, and baring any unanticipated developments, investors should closely monitor events relating to the acquisition transaction and any announced plans by UBS regarding the status of Credit Suisse’s investment product offerings.In the US, UBS maintains the larger asset management franchise. The firm offers 31 mutual funds, ETFs and ETNs, some 51 share classes in total, with US$81 billion in assets under management as of February 28, 2023. In the sustainable investing sphere, Credit Suisse does not offer any explicitly tagged sustainable investment products. Rather, Credit Suisse had been applying a systematic approach to sustainable investing across portfolios, pursuant to which ESG factors are taken into account at various stages throughout the investment process. The firm’s sustainable investing strategies employ ESG criteria when defining the investment universe (e.g. ESG Exclusions), integrating ESG factors directly into the investment process, extending traditional research views to encompass sustainability considerations, and reflecting on ESG factors when selecting and defining exposure to securities. Furthermore, Credit Suisse represents that it supports sustainability initiatives through proxy voting, participation in annual general meetings (AGMs), and engagement with investee companies.On the other hand, UBS manages four sustainable investing funds/nine share classes, with almost US$4 billion in net assets under management. Sustainable investing approaches across its offerings of equity, bond and money market funds range from ESG integration that relies on positive screening with an emphasis on maintaining a higher sustainability profile overall as well as exclusions to the selection of companies with the ability to have a positive impact on human well-being and environmental quality.  These investment approaches are not expected to be impacted and UBS’s relative ranking within the universe of sustainable investment fund managers will not be affected directly. The firm ranks 16th within a universe of 168 fund firms that manage registered sustainable investment products.         

The Bottom Line:  The largest actively managed sustainable equity funds are outperforming their designated securities market indices in 50% or more of three time periods. 0:00 / 0:00 Listen to this article now Observations: By one measure, the largest actively managed sustainable US equity funds are outperforming their designated and appropriate benchmarks at levels that exceed conventional funds, with 50% or more outperformance over 1-year, 3-year and 5-year time intervals. This contrasts with the often-cited research that most active managers across a broad mix of fund categories over short and long-term time intervals fail to outperform their comparison securities market index with underperformance rates increasing over longer time periods.The largest ten actively managed sustainable US equity funds by assets as of January 31, 2023 represent a segment that includes mutual funds employing varying sustainable investing approaches that range from ESG integration, some with minimum thresholds and exclusions, to a responsible investing approach the seeks out companies and other issuers that provide positive leadership in the areas of their business operations and overall activities that are material to improving long-term shareholder value and societal outcomes, including active engagement with companies. The ten funds compare their performance results to securities market indices that include the S&P 500, Russell 3000, Russell 3000 Growth Index, Russell 1000 Growth Index, Russell 1000 Value Index and Russell Mid Cap Index.  After fees performance results were evaluated relative to their designated index over the trailing 1-year, 3-year and 5-year time intervals to January 31st, based on the results achieved by the best performing share class.  For funds with multiple share classes, this typically represents the share class offered at the lowest expense ratio.  The analysis is limited to the three time periods capped by five years to avoid the need for substitutions due to limited track records in some cases. On this basis, over the three-time intervals, the ten funds registered levels of underperformance relative to their benchmarks of 50%, 30% and 30% respectively. These levels are considerably lower than the levels of underperformance recorded by actively managed funds tracked by S&P Indices Versus Active (SPIVA) scorecard reports that measure actively managed funds against their appropriate benchmarks on a semiannual basis. Based on the latest data through June 30, 2022 that combines all multi-cap equity funds and compares their performance against the S&P 1500 Index, levels of underperformance are 65.3% for 1-year, 88.4% for 3-years, and 87.53% for 5-years. The outperformance after expenses of sustainable actively managed US equity funds relative to their comparison benchmark, positive or negative, range from a high of 10.8% registered by the Calvert Equity Fund I (CEYIX) in the trailing 12-months to January 2023 to a low of 22 basis points recorded by Parnassus Core Equity Fund Institutional shares (PRILX) on an average annual basis over the trailing three years.  Expense ratios applicable to the ten funds average 67 basis points and range from a low of 17 basis points applicable to TIAA-CREF Social Choice Equity Fund Institutional shares (TISCX) to a high of 1.06% levied by Pioneer Fund A (PIODX).                           

The Bottom Line:  The trend of launching actively managed ETFs continues into 2023 through January, subject to higher expense ratios and challenging record of underperformance. 0:00 / 0:00 Listen to this article now Mutual funds/share classes and ETFs launched in January 2023 Fund FirmMutual Fund/ETFAUM (M)*Expense Ratio (%)Sustainable Investing Approach (Summary)Calamos Advisors#Calamos Antetokounmpo Global Sustainable Equities ETF 0.95Seeking companies with attractive ESG attributes on top of financial considerations, using a three-pronged ESG process that consists of: 1) exclusionary screens; 2) materiality assessments and 3) environmental and social impact scoring.GuideStone Capital Management#GuideStone Funds Impact Bond InstlGuideStone Funds Impact Bond InvGuideStone Funds Impact Equity InstlGuideStone Funds Impact Equity Inv42.59.361.413.40.50.790.861.21Values-based:  Exclusions based on Christian values focusing on sanctity of life and spreading the gospel; human dignity and advancement; and stewardship of god's creation.  BlackRock/iShares^iShares ESG Aware MSCI USA Growth ETFiShares ESG Aware MSCI USA Value ETF4.1 4.10.18 0.18ESG integration, positive characteristics + exclusions based on certain business practices and involvement in very severe, ongoing business controversies.Putnam Investment Management#Putnam ESG Core Bond ETFPutnam ESG High Yield ETFPutnam ESG Ultra Short ETFPutnam PanAgora ESG Emerging Markets Equity ETFPutnam PanAgora ESG International Equity 0.350.550.250.6 0.49ESG integration using a sector specific approach that will vary when applied to corporate issuers, securitized debt, and sovereign debt.  Notes of Explanation:  New listings exclude the addition of new share classes.  *As reported, otherwise blank.  #Actively managed funds. ^Index funds.  M=Millions.  Data as of January 31, 2023.  Sources:  Morningstar Direct and Sustainable Research and Analysis.Observations: Continuing a trend that was observed throughout 2022 during which new fund launches were dominated by actively managed investment funds versus passively managed or index funds, eight of 10 new fund launches during the first month of 2023 were actively managed mutual funds and ETFs.  In particular, eight new ETFs were listed, six of which are actively managed.  These funds, consisting of 12 funds/share classes, added a combined total of $134.8 million in assets under management. Even as actively managed ETFs are expanding, they still make up only 5.8% of total sustainable ETF assets under management.  Actively managed mutual funds, on the other hand, account for 87.2% of sustainable assets under management.   Listed by four firms, the newly launched funds consist of four actively managed fixed income funds and six equity-oriented funds, of which four are actively managed.  The list includes a first time ETF offering by Calamos Advisors LLC.  The 10 new funds pursue a range of sustainable investing approaches, from values-based to various forms of ESG integration that combine exclusions.  As used here, sustainable investing refers to an overarching term that encapsulates the different strategies and approaches being employed today by investment managers and reflected in investment products such as mutual funds and ETFs.  The overarching sustainable investing strategies/approaches include values-based investing, negative/exclusionary screening, impact investing, thematic investing and ESG integration in its various forms.  In addition, proxy voting and issuer engagement may be employed as an overlay by one or more of the aforementioned approaches.  The average expense ratio for the actively managed funds is 66 basis points, ranging from a low of 25 basis points to a high of 121 basis points.  This is almost four times higher than the 18 basis points each levied by the two iShares listed index funds, the iShares ESG Aware MSCI USA Growth ETF and the iShares ESG Aware MSCI USA Value ETF.While declining markets provide an opportunity for active managers to add value, active managers across a broad mix of fund categories over short and long-term time intervals fail to outperform their comparison securities market index with underperformance rates increasing over longer time periods.

The Bottom Line:  Sustainable investors can choose from an increasing number of sustainable mutual funds/share classes and ETFs that are now offered by 165 firms. 0:00 / 0:00 Listen to this article now Ten largest management firms offering sustainable mutual funds and ETFsNotes of Explanation:  Where applicable, assets of affiliated firms are consolidated.  Assets as of December 31, 2022.  Source:  Morningstar Direct and Sustainable Research and Analysis LLCObservations: Sustainable investors can choose from an increasing number of sustainable mutual funds/share classes and ETFs that are now offered by at least 165 firms with $300.4 billion in assets as of year-end 2022.  These firms offer a combined total of 1,348 sustainable investment mutual funds/share classes and ETFs.  These now include a growing selection of actively managed funds as well as index funds that pursue various forms of sustainable investing approaches ranging from values-based investing to thematic investing, impact investing and ESG integration.     The segment is concentrated, with the ten largest firms accounting for $213.4 billion or 71% of assets under management.  The largest firm offering sustainable investment funds is BlackRock that together with its mutual funds and ETFs manages $61.9 billion in assets across 139 funds/share classes.  Most of these are in the form of passively managed ETFs that make up 89% of the firm’s sustainable fund assets.   On the other hand, the second largest firm, Parnassus with its 10 funds/share classes (5 funds), only offers actively managed investment options.  At the other end of the range, just about 50% of firms manage less than $100 million in sustainable fund assets.  Passively managed sustainable investing options, 197 in total, are available from 42 managers.  This segment makes up $116.4 billion or 39% of assets.  Within the segment of the ten largest sustainable fund firms, expense ratios vary with average weighted expense ratios ranging from the lowest applicable to Dimensional Fund Advisors and Vanguard of 29 bps and 33 bps, respectively, to the highest levied by Amundi US at 1.07% to an average of 93 basis points charged by Calvert Research and management.  In addition to confirming alignment with their sustainability preferences, investors interested in active management, recognizing that few active managers outperform securities market indices, should seek out funds with a sufficiently long management, financial and sustainable investing track record, usually three + years, reasonably sized funds and low expense ratios.  Expense ratios for actively managed funds can be twice as high as their passively managed counterparts, if not higher.  As for index funds, in addition to the factors noted above, follow-on considerations include the potential impacts of securities lending and currency exposures, to the extent applicable.

The Bottom Line:  Legal action against DOL rules governing climate change and other ESG factors could slow near-term adoption but not affect their long-term uptake. 0:00 / 0:00 Listen to this article now Socially responsible funds offered and used, per Vanguard qualified plans 2022 surveyNotes of Explanation:  Includes the offering and use of equity funds that incorporate environmental, social and governance (ESG) factors in defined contribution plans.  Source:  How America Saves 2022, an examination of retirement plan data from nearly 5 million defined contribution (DC) plan participants across Vanguard's recordkeeping business.Observations: Just three business days before they were to take effect on January 30, 2023, 25 Republican state attorneys general along with two energy companies filed a complaint in the U.S. District Court for the Northern District of Texas against the U.S. Department of Labor (DOL) seeking a preliminary injunction and permanent relief from recently adopted rules governing how retirement plan managers can consider climate change and other ESG factors.  The challenge, filed on January 26, 2023, covers a "Prudence and Loyalty in Selecting Plan Investments and Shareholder Rights" 2022 rule issued by the DOL  to clarify previous regulations and to remove certain barriers for plans subject to The Employee Retirement Income Security Act of 1974 (ERISA), in particular defined contribution plans such as 401(k), 403(b) and Employee Stock Ownership Plans, to select ESG investments provided that those selections are otherwise consistent with a prudent and loyal investment decision process; and also when they exercise shareholder rights, including voting on shareholder resolutions and board nominations.  The rule acknowledges that ESG factors may be material to the risk-return analysis of a portfolio and that a fiduciary analysis may often require an evaluation of the economic effects of climate change and other ESG factors. It should also be noted that the January 26 filing followed by nine days the release of a letter forwarded by 21 overlapping Republican state attorneys general to Institutional Shareholder Services (ISS) and Glass, Lewis & Co., two proxy voting advisory firms, in which they seek written assurances that these firms will cease from making proxy voting recommendations based on climate commitments and alignments with diversity, equity and inclusion quotas that may be contrary to the financial interests of investment vehicles and citizens and businesses within their states in violation of federal and state laws. The January 26 complaint alleges that the rule conflicts with the scope of ERISA’s fiduciary duties, is arbitrary and capricious in violation of the Administrative Procedure Act and goes beyond the DOL’s authority to regulate ERISA fiduciaries to consider nonpecuniary factors in administering plan assets. Among other things, the plaintiffs contend that the rule “will not only loosen the statutory and regulatory restraints on fiduciaries to consider ESG factors, it will allow fiduciaries and investment managers to potentially substitute their own ESG policy preferences under the guise [of] making a risk-return determination about an investment or investment course of action.”If granted, a preliminary injunction and related legal actions will likely check any immediate actions that 401(k) plan sponsors might have taken in response to the DOL’s 2022 rule but these are not likely to affect a long-term shift to include sustainable investment options.  This, even as there has only been a modest uptake to-date in sustainable investment fund options in 401(k) plans. Various surveys have found that a high percentage of defined contribution plan participants want their investments to be aligned with their values.  Yet offerings are still limited and while some research points to conflicting results, when sustainable fund options are available, the uptake is limited.  Based on data derived from Vanguard’s 1,700 qualified plans and five million participants as of December 2021, offerings of socially responsible funds, limited to equity funds that take on board environmental, social and governance factors, have been increasing at a modest pace with larger plans, or plans with over 1,000 participants, more likely to include these funds in their investment lineup than small plans.  According to Vanguard’s How America Saves 2022 report, approximately 13% of plans offer socially responsible funds, up from 9% in 2017.  During the same interval, the percentage of participants that use socially responsible funds increased from 3% to 6%.  While usage doubled, the absolute level of participation remains low.  Modest levels of participation may be due to confusion and misunderstanding regarding sustainable investing, and stepped-up employee education is needed.  At the same time, the restrained uptake of investment options by defined contribution plans is likely due to the uncertainties surrounding the DOL’s fiduciary rules, but fiduciary considerations are further handicapped due to: (1) Confusion and misunderstanding that also applies to investors as well as other stakeholders regarding the various types of sustainable investing strategies that have been adopted by mutual funds and ETFs along with their financial and non-financial outcomes, if any, that have arisen due to the absence of clear definitions, lack of investment product clarity and a disclosure gap, (2) Limited availability of sustainable product offerings, in terms of fundamental investment offerings and suitably long investment performance track records, and (3) The challenge of offering sustainable investment options that will satisfy the sustainability preferences of a sufficiently large segment of employees.   As used here, sustainable investing refers to an overarching term that encapsulates the different strategies and approaches being employed today by investment managers and reflected in investment products such as mutual funds and ETFs.  The overarching sustainable investing strategies/approaches include values-based investing, negative/exclusionary screening, impact investing, thematic investing and ESG integration in its various forms.  In addition, proxy voting and issuer engagement may be employed as an overlay by one or more of the aforementioned approaches. Some but not all of these factors, could potentially be clarified in October of this year when the SEC intends to finalize rules to provide additional information regarding the ESG investment practices of investment managers offering investment products.  The proposed rules and form amendments seek to facilitate enhanced disclosure of ESG issues to clients and shareholders and are designed to create a consistent, comparable, and decision-useful regulatory framework for ESG advisory services and investment companies to inform and protect investors while facilitating further innovation in this evolving area of the asset management industry. In addition, the SEC is proposing to amend its fund Names Rule, and, as it relates to the application of the rule to such terms as “ESG” or “Sustainable,” the proposal would extend the Names Rule to encompass fund strategies, including sustainable investing strategies covering 100% of portfolio assets.    

The Bottom Line:  Green bond funds held steady in 2022 and are expected to benefit from moderating conditions and increased sustainable bonds issuance in 2023. December Summary Investors didn’t abandon green bond funds in 2022 even in the light of posting an average decline of 13.5%, excluding the Franklin Municipal Green Bond Fund (FLMB), versus a drop of 13.01% registered by the Bloomberg US Aggregate Bond Index.  Green bond funds, the small segment of thematic bond funds consisting of four mutual funds and three ETFs that offer investors exposure to environmental projects and investments while seeking market-based returns, ended the year 2022 with $1,392.2 million in assets under management.  This was down $11.8 million relative to November and lower by $88.6 million versus December 2021, due to market conditions, when green bond fund assets stood at $1,480.8 million.  Refer to Chart 1. The ranking of the top three green bond funds by assets under management changed during the year.  The Calvert Green Bond Fund and iShares USD Green Bond ETF (BGRN) remain the top two ranked funds, with year-end assets of $732.7 million and $291.1 million, respectively, but the TIAA-CREF Green Bond Fund gained ground and overtook the VanEck Green Bond Fund ETF (GRNB).  The fund’s strong 3-year performance track record attracted institutional assets and led to an overall gain of $80.5 million in 2022, to end the year at $139 million. In calendar year 2022 the bond market went through a huge resetting of interest rates and performance results were the worst since the start of the Bloomberg US Aggregate Bond Index series that goes back to 1976. Against this backdrop, for investors who benchmark their fixed income positions to the same benchmark, the latest one month, one-year and three-year average performance results registered by taxable green bond funds are a disappointment. Excluding the Franklin Municipal Green Bond ETF, green bond funds recorded an average decline of -0.96% (-0.93% when FLMB is included); and for the calendar year and three-year intervals, green bond funds scored an average decline of 13.5% and 2.86%, respectively.  That said, the TIAA-CREF Green Bond Fund posted the best results across its five share classes for the three-year interval, followed by the PIMCO Climate Bond Fund, the Calvert Green Bond Fund R6 (CBGRX) and VanEck Green Bond ETF.  Relative to suitably matched narrowly based green bond indices the results are generally more favorable, as noted in Table 1. According to Refinitiv, global debt capital markets activity totaled $8.3 trillion in 2022, down 19% compared to 2021.  Inflationary concerns, rising interest rates and geopolitical tensions dampened issuance in 2022.  Green and other sustainable bonds were also impacted by the downturn and experienced a similar percentage decline.  Sustainable bond issuance reached $843.5 billion according to the Climate Bond Initiative.  Green bond issuance comprised just over half of labelled bond issuance in 2022 at $487.1 billion.  Sustainability bonds added $166.4 billion, social bonds totaled $130.2 billion, sustainability linked bonds reached $76.3bn and transition bonds contributed $3.5 billion.  According to a just issued Moody’s forecast, sustainable bond issuance, including green bonds, social bonds, sustainability bonds and sustainability-linked bonds, is expected to rise to $950 billion in 2023.  Refer to Chart 2.  That said, Sustainable Research and Analysis is more upbeat.  Developments, such as a more optimistic outlook for global growth (per the IMF just upgraded global economic outlook for 2023), moderating inflation and interest rates, supportive policies and continued strong demand, a catch-up of postponed issuances from last year, increased sovereign issuances, potential relaxation of World Bank and IMF balance sheet practices, as well as the expansion in the “use of proceeds” bonds, are likely to overcome some constraints and push sustainable bond issuance beyond the $1 trillion level in 2023. For example, a new “use of proceeds” bond type, an orange bond, was issued in December of last year. The world’s first orange bond, the Impact Investment Exchange (IIX) Women's Livelihood Bond 5 (WLB5), is named after the orange colorings of the UN’s Sustainable Development Goal 5 for gender equality with a mission to build a gender-empowered financial system. Using a gender-lens investing approach, bond proceeds will fund small businesses that empower approximately 300,000 women and girls in emerging markets across Asia and Africa. The WLB5 made it known that it intends to comply with existing standards including the International Capital Markets Association (ICMA) Sustainability Bond Guidelines and the ASEAN Social Bond Standards.   On another front, just this past week, Brazil announced plans to issue its first-ever green bonds in 2023--giving a lift to potential sovereign issuances this year. Chart 1:  Green bond fund mutual funds & ETFs assets under management – 2022Notes of Explanation:  Data adjusted for the closing of the Franklin Municipal Green Blond Fund and its four share classes with total net assets of $9.7 million and the rebranded Franklin Liberty Federal Tax-Free Bond ETF, renamed the Franklin Municipal Green Bond ETF, as of May 3, 2022.  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC Chart 2:  Annual global sustainable bonds issuance:  2016 – 2023 (forecast)Notes of Explanation:  Sustainable bonds include green bonds, social bonds, sustainability bonds and sustainability-linked bonds.  Sources:  Moody’s Investors and Environmental Finance Data. Table 1:  Green bond funds:  Performance results, expense ratios and AUM - Dec. 31, 2022 Name Symbol 1-Month Return (%) 3-Month Return (%) 12-Month Return (%) 3-Year Average Return (%) 5-Year Average Return (%) Expense Ratio (%) Net Assets ($M) Calvert Green Bond A* CGAFX -1.11 1.31 -13.01 -3 -0.23 0.73 67.1 Calvert Green Bond I* CGBIX -1.09 1.37 -12.78 -2.77 0.05 0.48 627.7 Calvert Green Bond R6* CBGRX -1.08 1.39 -12.72 -2.69 0.43 37.9 Franklin Municipal Green Bond ETF@ FLMB -0.41 4.64 0.3 107.9 iShares USD Green Bond ETF^ BGRN -0.33 2.04 -12.99 -3.33 0.2 291.1 Mirova Global Green Bond A* MGGAX -2.49 1.93 -16.73 -4.57 -0.92 0.94 5.3 Mirova Global Green Bond N* MGGNX -2.47 2.05 -16.42 -4.28 -0.62 0.64 5.2 Mirova Global Green Bond Y* MGGYX -2.36 2.05 -16.45 -4.28 -0.66 0.69 25.8 PIMCO Climate Bond A* PCEBX -0.76 2.42 -12.91 -2.7 0.91 0.8 PIMCO Climate Bond C* PCECX -0.83 2.22 -13.57 -3.44 1.66 0 PIMCO Climate Bond I-2* PCEPX -0.73 2.49 -12.65 -2.42 0.61 0.4 PIMCO Climate Bond I-3* PCEWX -0.73 2.48 -12.69 -2.46 0.66 0.1 PIMCO Climate Bond Institutional* PCEIX -0.72 2.52 -12.56 -2.31 0.51 10.4 TIAA-CREF Green Bond Advisor* TGRKX -0.53 1.53 -13.02 -2.09 0.6 42.7 TIAA-CREF Green Bond Institutional* TGRNX -0.52 1.55 -12.98 -2.07 0.45 74.5 TIAA-CREF Green Bond Premier* TGRLX -0.53 1.51 -13.11 -2.19 0.6 0.9 T TIAA-CREF Green Bond retail* TGROX -0.55 1.47 -13.23 -2.34 0.8 7.2 TIAA-CREF Green Bond Retirement* TGRMX -0.54 1.51 -13.12 -2.2 0.7 13.7 VanEck Green Bond ETF^^ GRNB 0.05 2.66 -11.86 -2.41 -1.21 0.2 73.5 Average/Total+ 0.96 1.92 -13.5 -2.86 -0.48 0.64 1,392.2 Bloomberg US Aggregate Bond Index -0,45 1.87 -13.01 -2.71 0.02 Bloomberg Global Aggregate Bond Index 0.54 4.55 -16.25 -4.48 -1.66 Bloomberg Municipal Total Return Index 0.29 4.1 -8.53 -0.77 1.25 S&P Green Bond US Dollar Select IX -0.03 2.55 -12.14 -6.95 -3.76 ICE BofAML Green Bond Index Hedged US Index -2.46 0.98 -16.74 -4.58 -0.48 Notes of Explanation:  Blank cells=NA. 3 and 5-year returns are average annual total returns.  +Average returns apply to taxable funds only and excludes Franklin Municipal Green Bond ETF.  If Franklin is included, results are 0.93% in December and 2.06% over the trailing 3-months.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  @Fund rebranded as of May 3, 2022.  ^Effective March 1, 2022, fund shifted to US dollar green bonds. ^^As of September 3, 2019, the fund shifted to US dollar green bonds tracks the S&P Green Bond U.S. Dollar Select Index.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC.

The Bottom Line:  On the 30th anniversary of ETFs, sustainable ETFs make up 1.4% of net assets but have the potential for continued rapid growth. 0:00 / 0:00 Listen to this article now Conventional ETFs versus sustainable ETFs:  AUM and number of funds as of 12/31/2022Sources:  Sources:  AUM and number of funds:  Morningstar Direct; sustainable investing strategies source=Sustainable Research and Analysis LLC.Observations:  Last week marked the 30th anniversary of the very first ETF to be listed on a U.S. stock exchange.  The SPDR S&P 500 ETF Trust (SPY) was launched on January 23, 1993, reportedly with an initial seeding of $11.5 million put up by Spear Leeds.  The fund has since become the largest ETF in the world with $356.7 billion in net assets as of December 31, 2022.  This fund alone accounts for 5% of the ETF industry’s assets.  Today, there are 3,148 ETFs listed in the US with $6.5 trillion in net assets, and over $9 trillion worldwide.  Originally limited to equity index funds, the ETF industry has exploded over the last 30 years, in terms of number of funds, asset classes, investment strategies, and assets under management.  The expansion has included the introduction of actively managed funds as well as sustainable ETFs.  Actively managed ETFs have pulled in $349.6 billion in assets under management and account for 5.4% of assets.  A smaller but growing segment consists of sustainable ETFs that, at $93.9 billion, makes up 1.4% of net assets spread across 230 ETFs.   The largest but not the first sustainable ETF is the $19.6 billion iShares ESG Aware MSCI USA ETF (ESGU).  The first listed sustainable ETF still in operation ranked 17th by size at $3.6 billion and is now named the iShares MSCI KLD 400 Social ETF (DSI).  The fund was originally listed by Barclays Global Investors on January 24, 2005 as the iShares KLD Select Social Index Fund.  At that time, it tracked the KLD 400 Social Index (originally launched as the Domini 400 Social Index) which was designed to provide exposure to the common stocks of 400 companies drawn from the S&P 500 and Russell 3000 that were determined to have positive environmental, social and governance characteristics while excluding businesses beyond specified revenue thresholds involved in alcohol, tobacco, firearms, nuclear power, military weapons and gambling.  The index has been modified several times since 2005, with the most significant change occurring following the MSCI acquisition of the RiskMetrics Group in 2010.  The index constituents were thereafter selected from the MSCI USA Index based on MSCI ESG ratings that are defined by risk exposures rather than positive ESG performance attributes.As noted, sustainable ETFs still make up a small number of total ETFs in the US.  That said, they have grown rapidly, expanding from around $23 billion at the start of 2020 to almost $94 billion, or a threefold increase.  The overall profile of the sustainable ETFs segment contrasts with conventional ETFs in a few important ways, including a lower allocation to taxable bond funds and higher allocations to international as well as U.S. equity funds and, in particular, to sector equity funds. These include, for example, funds that focus on solar energy, wind energy, clean water, other renewable energy investments, and carbon reduction.  At the same time, actively managed sustainable funds, which represents a growing segment, now accounts for 5.7% of assets versus 1.4% for conventional funds.In recent years it’s been common for analysts and researchers to compare investment results and fund expenses across conventional and sustainable ETFs on the basis of fund aggregates using traditional investment categories. The variety of sustainable investing strategies and the lack of definitions, the differences in the allocation of assets and higher incidence of active management versus passive investing approaches, however, contribute to the challenges of comparing not only investment performance results but also fund expenses.  In this case, a more granular analytical approach is called not only when it comes to analyzing sustainable ETFs but also sustainable mutual funds.          

The Bottom Line:  Only 13 sustainable funds (42 funds/share classes) posted positive rates of return for calendar 2022, led by energy transition thematic equity funds. 0:00 / 0:00 Listen to this article now Top 10 performing sustainable funds (mutual funds and ETFs) in 2022Sources:  Notes of Explanation:  # Fund repositioned as of July 29, 2022.  In the case of mutual funds with multiple share classes, only the best performing share class and its total return for 2022 is displayed in the graph. Performance data=Morningstar Direct; sustainable investing strategies source=Sustainable Research and Analysis LLC.Observations:Of 1,181 sustainable funds/share classes in operation throughout 2022, only 13 sustainable funds, for a total of 42 funds/share classes, posted positive rates of return.  The list is dominated by mutual funds, but also covers two ETFs, and, by investment category, includes five sustainable money market funds, three thematic energy transition equity funds, three taxable bond funds, one equity fund as well as one nontraditional equity fund.  All but one of the funds are actively managed and two of the 13 funds were rebranded during the year.  A reflection of the difficult and anomalous market conditions in 2022 when both equities and fixed income securities were pummeled and energy was the only positive sector for the year, the average total return registered by the universe of 1,181 sustainable funds was -16.84%.  That said, the 13 funds along with all 42 funds/share classes with positive returns recorded an average gain of 11.3%, with returns ranging from 0.1% to 41.7%.  Excluding the top performing fund because it was repositioned mid-year brings the calendar year 2022 average total return for the positive performing funds down to 6.3%.The range of positive performing fund types by investment category is captured by lining up the top 10 performing funds.  Also illustrated by focusing on these top performing funds is the range and variety of sustainable investing approaches employed by sustainable mutual funds and ETFs.  This is on top of any other qualitative and quantitative investment considerations.The five top performing money market funds benefited from increasingly higher interest rates in 2022 and generated returns extending from 1.23% to 1.76%.  These funds approach sustainable investing in varying ways.  DWS ESG Liquidity Fund employs an ESG integration best-in-class approach.  Morgan Stanley Institutional Liquidity ESG Money Market Fund and UBS Select ESG Prime Fund have both adopted a credit risk oriented ESG integration approach along with certain exclusions; and finally, the BlackRock Wealth Liquidity Environmental Awareness Fund and the BlackRock Liquid Environmentally Aware Fund rely on screening based on environmental criteria along with certain exclusions.     The best performing fund in 2022 along with two other funds that fall into the top 10 category are thematic energy transition equity funds.  Delaware Climate Solutions Fund R6 (EINRX) posted a return of 41.7%, however, the fund was repositioned as of July 29, 2022 from the Delaware Ivy Energy Fund.  The fund now focuses on identifying and investing in companies that seek to reduce, displace, and/or sequester their greenhouse gas emissions (GHG) or those that facilitate the reduction of GHG for others.  Its leading 12-month performance is heavily weighted by the fund's results achieved prior to its rebranding at which time it invested in companies within the energy sector, including, for example, companies engaged in the exploration, discovery, production, distribution or infrastructure of energy and/or alternative energy sources. Two other energy transition thematic equity funds registered positive returns:  The first is the concentrated $409.9 million actively managed Victory Global Energy Transition Fund Y class (RSNYX), up 35.46%, that invests in companies located anywhere in the world engaging in natural resources industries that supply critical input materials for or own infrastructure that will be key to enabling the broader objective of decarbonization.  The second is the $34.6 million First Trust EIP Carbon Impact ETF (ECLN), up 5.23%, investing in companies that have or seek to have a positive carbon impact. The fund benefited from overweighting exposures to natural gas pipeline companies and liquid natural gas terminal companies. The third best performing fund in 2022 is the AQR Sustainable Long-Short Equity Carbon Aware Fund R6 (QNZRX), up 15.62%.  The fund employs a long-short investment strategy that considers the positive and negative ESG characteristics from a financially relevant risk perspective.  Covering both US and foreign securities, the fund also seeks to manage the fund’s exposure to greenhouse gas emissions by targeting a “net-zero” carbon positioning.  The $23.1 million CrossingBridge Responsible Credit Fund (BRDX), a multisector short-duration bond fund that was launched in 2021, was up 1.81%.  The fund employs responsible investing criteria based on ESG standards along with exclusions.  Eligible issuer’s securities or other instruments must meet the fund’s minimum ESG threshold level.For sustainable investors, the variations in and wide-ranging approaches to sustainable investing illustrated by the top 10 performing funds reinforces the need on the part of investors to conduct fund due diligence via their financial advisors or directly on their own by carefully reviewing all available fund information before investing to ensure alignment with their sustainable investing preferences.  

The Bottom Line:  The SEC will finalize rules in 2023 covering corporate climate disclosures, executive compensation proxy voting, sustainable fund classifications and fund naming conventions.SEC sustainable investing and corporate disclosure rulemaking agenda for 2023 0:00 / 0:00 Listen to this article now Sources:  SEC; Sustainable Research and Analysis LLC.Observations:  On January 4, 2023, the Office of Information and Regulatory Affairs, a division with the Office of Management and Budget, released the Fall 2022 Unified Agenda of Regulatory and Deregulatory Actions, which included contributions related to the Securities and Exchange Commission (SEC) and short- and long-term regulatory actions that administrative agencies plan to take.The SEC’s planned rulemaking schedule for 2023 includes the publication of 23 proposed rules and the anticipated adoption of 29 final rules. In terms of final rule making, the SEC intends to finalize four proposed rules directly affecting sustainable investing and climate disclosures that are expected to be issued in April and October of this year.In April, the SEC is scheduled to finalize rules involving enhanced executive compensation proxy voting disclosures on the part of registered investment companies as well as climate disclosures by public companies. Regarding the former, the intention is to make information easier to collect and analyze.  As for climate disclosures, the proposed rule would enhance and standardize the climate-related disclosures provided by public companies, including climate related risks and opportunities.  Under the proposed rule, a registrant would be required to provide disclosures about greenhouse gas (GHG) emissions, including an attestation for Scope 1 and Scope 2 disclosures, certain financial statement disclosures, and qualitative and governance disclosures within a registrant’s registration statements and annual reports (e.g., Form 10-K). Excluding small reporting companies, Scope 3 emissions would also be subject to disclosure rules under certain conditions.In October, the SEC intends to finalize rules to provide additional information regarding the ESG investment practices of investment managers offering investment products. The proposed rules and form amendments seek to facilitate enhanced disclosure of ESG issues to clients and shareholders and are designed to create a consistent, comparable, and decision-useful regulatory framework for ESG advisory services and investment companies to inform and protect investors while facilitating further innovation in this evolving area of the asset management industry. In addition, the SEC is proposing to amend its fund Names Rule, and, as it relates to the application of the rule to such terms as “ESG” or “Sustainable,” the proposal would extend the Names Rule to encompass fund strategies, including sustainable investing strategies covering 100% of portfolio assets.Various concerns relating to the final form of the proposed rules aside, the proposed rules are intended to promote transparency, enhance and standardize climate-related disclosures provided by public companies, as well as clear up confusion and misunderstanding on the part of investors as well as other stakeholders regarding the various types of sustainable investing strategies that have been adopted by mutual funds and ETFs along with their financial and non-financial outcomes, if any. The unprecedented growth in sustainable investing in the US starting in 2019, including a dramatic expansion in the number and variety of sustainable investing products, and proliferation in the number of firms offering such products, has contributed to confusion and misunderstanding on the part of investors as well as other stakeholders regarding the various types of sustainable investing strategies and their outcomes.  This has led to concerns and exposed stakeholders to challenges, in particular, for investment managers, asset owners, regulators, investors as well as financial intermediaries.  The absence of clear definitions, lack of investment product clarity and a disclosure gap have been contributing factors.  With some modifications, the proposed fund categories, definitions, and the enhanced layered disclosure approach proposed by the SEC will address some of these core concerns and create a more consistent, comparable, and decision-useful regulatory framework to inform and protect investors.  As used here, sustainable investing is an umbrella term covering various sustainable investing approaches, including values-based investing that relies on inclusions and exclusions, also referred to as ethical, religious, social or responsible investing, thematic investing, impact investing, ESG integration, proxy voting and stakeholder engagement. 

The Bottom Line:  Launches of sustainable mutual funds and ETFs in 2022 were dominated by actively managed portfolios investing in equities subject to higher expenses. 0:00 / 0:00 Listen to this article now Sustainable mutual funds and ETFs new listings:  2022Notes of Explanation: A total of 53 ETFs were launched in 2022 and 41 mutual funds, representing 102 share classes, with data points for Q4 revised relative to previously published SRA research.  New share classes added to existing funds omitted from the analysis of new fund launches.  Mutual fund and ETF totals are cumulative.  Data revised Data source:  Morningstar Direct.  Research by Sustainable Research and Analysis (SRA).Observations:  Offering investors additional sustainable investing options, a total of 94 sustainable mutual funds (102 share classes) and ETFs were launched in 2022, with 53 sustainable ETF listings outpacing the 41 mutual fund originations that, on a combined basis, accounted for $2.8 billion in assets valued as of December 31, 2022.New launches were dominated by equity-oriented funds that led with 66 funds versus 22 fixed income mutual funds and ETFs.  However, new ETFs consisted of a greater number of equity funds relative to mutual funds.  On the other hand, sustainable fixed income mutual fund offerings outpaced ETFs by a ratio of almost 3 times.  Actively managed funds were dominant versus passively managed or index funds.  That said, the new listings diverged in two important ways.  New mutual funds were entirely actively managed while new ETF listings included a combination of both.  Of these, 37 actively managed ETFs were launched versus 17 index funds, or slightly over twice as many.  Second, as to be expected, there were significant variations in expense ratios as between index funds, with an average expense ratio of 26 basis points, and actively managed funds with an average expense ratio of almost 90 basis points.  Also, actively managed ETFs charged lower fees on average and lower fees were charged by actively managed fixed income mutual funds versus actively managed equity mutual funds.  The former was elevated in large part due to higher priced Fidelity advisor-directed funds.    As noted in a recent research article published by Sustainable Research and Analysis, the new issue momentum favoring actively managed ETFs is unfolding even as most active managers underperform most of the time relative to securities market indices.  According to S&P Indices Versus Active (SPIVA) research that measures the performance of actively managed funds against their relevant S&P index benchmarks, this is the case not only for equity funds but also fixed income and global/international managers.  These conclusions also apply across geographies.  The number of management firms adding more than one fund to an existing portfolio of sustainable mutual funds and ETFs and the number of firms adding a single fund were just about equally divided.  A notable example in the first category is Fidelity Investments with its launch of 22 mutual funds that are largely directed at its advisor client base, including funds dedicated to certain programs affiliated with Strategic Advisers (SAI funds).  In the second category is Vanguard that launched its third actively managed sustainable fund, the Vanguard Global Environmental Opportunities Stock Fund (Admiral shares VEOAX and Investor shares VEOIX).  The fund is managed by Ninety One North America, Inc., a unit of Nine One Plc with combined assets of $38 billion, that invests the fund’s portfolio across the globe in so called “environmental companies” that derive at least 50% of their revenues from various activities deemed to contribute positively to environmental change.

The Bottom Line:  Sustainable actively managed bond mutual funds and ETFs suffered a significant drop in 2022 but 2023 is projected to be much brighter. 0:00 / 0:00 Listen to this article now Performance of selected sustainable actively managed fixed income funds: Y-T-D and 12-MNotes of Explanation: Average Y-T-D and trailing 12-month total returns to November 30, 2022.  Data source:  Morningstar Direct.  Research by Sustainable Research and Analysis LLC.Observations:For fixed income securities, calendar year 2022 performance results are likely to be the worst year since the start of the Bloomberg US Aggregate Bond Index series that goes back to 1976.  The same applies to sustainable fixed income funds that through the end of November posted an average drop of 10.89% year-to-date and 10.71% over the trailing 12-months.  When sustainable index funds are excluded, the corresponding total return results are -10.72% and -10.54%, respectively.  At the same time, the Bloomberg US Aggregate Bond Index posted drops of -12.62% and -12.84% and if anything, the index is likely to end the year even lower.  In calendar year 2022 the bond market went through a huge resetting of interest rates.  After years of negative to zero yields to stimulate economic growth, surging and persistent inflation prompted central banks to raise interest rates.  In the US, the Federal Reserve began a gradual shift to tighter monetary policy with a 25-basis-point rate hike in March 2022 as economic growth recovered. But the Fed shifted to rapid tightening by summer as inflation surged on the back of supply/demand imbalances, a resilient economy, and the spike in oil prices due to the war in Ukraine.  10-year Treasury yields, which stood at 1.52% at the end of 2021 gained 216 basis points to close November at 3.68% while 3-month Treasury yields were at 4.37%.Against this backdrop, higher risk bonds and funds, those holding longer dated lower quality securities, suffered greater declines.  Except for money market funds that recorded average gains of 1.05% over the first eleven months of the year and trailing 12-months, all other fixed income categories registered declines over the same intervals.  Excluding money market funds, average returns year-to-date varied from a high of -2.91% recorded by bank loan funds to an average decline of 26.75% posted by sustainable corporate bond funds.   These funds pursue varying sustainable investing approaches.   The simultaneous declines by equities as well as bonds also had a significant impact on balanced as well as target date fund investors whose exposures to fixed income for near-date retirement funds can be as high as 60%.  That said, 2023 is projected to be much brighter for bonds in part because the yields on investment grade bonds are now much higher.  Still, it's not likely to be smooth sailing due to continued central bank tightening policies, the uncertain path for the economy and ongoing political uncertainties.

The Bottom Line:  US large cap actively managed sustainable mutual funds are likely to underperform their conventional actively managed mutual fund counterparts in calendar 2022. 0:00 / 0:00 US large cap actively managed mutual funds:  Allocation to value, blend and growth style factorsNotes of Explanation: Value, blend and growth styles apply to large cap stocks.  Other may include mid-cap and small-cap stocks as well as other equities or non-equity investments.  Conventional funds include all US large cap actively managed mutual funds (excluding index funds, ETFs and sustainable funds), a total of 3,014 funds/share classes with $3.6 trillion in assets.  US large cap actively managed sustainable mutual funds include 184 funds/share classes, 62 funds in total, with $82.1 billion in assets.  Data source:  Morningstar Direct, as of November 30, 2022.  Research by Sustainable Research and Analysis LLC.Observations:As calendar year 2022 comes to an end, stocks and stock funds are likely to deliver their worst returns since 2008, when the S&P 500 Index dropped -36.55%.    Unlike last year when US large cap actively managed sustainable mutual funds outperformed conventional mutual funds on average (26.1% versus 23.9%), this year the reverse is likely to be true.  Through the end of November, US large cap actively managed sustainable mutual funds posted a negative average return of 15.6% versus a negative 13.3% for their conventional mutual fund counterparts, or a negative variance of 2.3%.  The average performance of conventional US large cap actively managed funds was more closely aligned to the S&P 500 Index that recorded a decline of 13.1% through the end of November.  Not only that, but about 54% of actively managed US large cap equity mutual funds have outperformed the S&P 500 Index on a year-to-date basis.  Declining markets make active management skills all the more valuable, and based on data through the end of November, it looks like actively managed large cap equity funds are on track to achieve their best record of outperformance since 2009. The same can’t be said of US sustainable large cap equity mutual funds whose level of outperformance over the same interval is only at 25%, or 50% lower than conventional funds.  Within this segment, however, 61% of growth oriented sustainable funds are beating the S&P 500 Growth Index.   It’s not clear to what extent, if any, sustainable fund managers’ stock picking across the large cap styles range is impacted in any way by their sustainable investing mandates.  But this factor aside, reasons for divergence in their performance can be associated with a higher concentration in growth-oriented technology stocks in portfolios managed by sustainable funds, a slightly lower concentration in value stocks as well as lower exposures to the Energy sector’s fossil fuel stocks.  Through the end of November, the S&P 500 Value Index and S&P 500 Growth Index posted divergent results, a negative 1.36% and 23.58%, respectively, or a dramatic difference of 22.2%.  At the same time, the Information Technology and Communications Services sectors of the S&P 500 were down 22.4% and 35.3%.  Conventional funds also benefited from their exposures to fossil fuel companies in the Energy Sector that was up 64.2% year-to-date. Over the long-term, returns across conventional and sustainable funds are likely to harmonize, but a blended approach may be best suited for most investors who wish to avoid year-to-year variations due to style-based factors.  

The Bottom Line:  Reversing two consecutive months of declines, thematic green bond funds gained $29.4 million in November 2022 while total return performance lagged benchmarks.November SummaryReversing two months of declines in net assets under management, the segment of thematic green bond funds, consisting of four mutual funds and three ETFs that offer investors exposure to environmental projects and investments while seeking market-based returns, experienced a net gain of $29.4 million in assets.  The seven funds ended the month of November with $1.40 billion in assets under management, versus $1.37 billion the prior month.  Outflows in the amount of $17.7 million were offset by market related gains of $47.1 million, for a net increase of $29.4 million.  Refer to Chart 1.  The top three gains in net assets were attributed to the Calvert Green Bond Fund A, I and R6 Share classes (CGAFX, CGBIX, and CBGRX), iShares USD Green Bond ETF (BGRN) and Franklin Municipal Green Bond ETF (FLMB).  These funds added $12.3 million, $9.3 million, and $5.9 million in net assets, respectively.   The bond market registered a strong month with yields in the US and Europe retreating significantly, leading to a 3.7% rally for the Bloomberg US Aggregate Bond Index and 4.7% for the Global Aggregate Bond index.  Market related gains were realized as green bond funds posted an average 3.58% gain, including an increase of 6.19% recorded by the Franklin Municipal Green Bond ETF that invests in municipal securities whose interest is free from federal income taxes. Excluding BGRN, the average gain registered by green bond funds slid back to 3.44%.  Funds investing in US dollar green bonds trailed conventional and green bond US dollar indices in November while taxable funds investing in US and non-US dollar green bonds failed to outperform the Bloomberg Global Aggregate Bond Index.  At the same time, the Mirova Global Green Bond-Class A (MGGAX), N (MGGNX) and Y (MGGYX) beat the ICE BofAML Green Bond Index Hedged US Index.  Refer to Table 1.    Over the intermediate-term, periods covering the last twelve months and three-years, funds investing in US and non-US denominated green bonds exceeded the performance of the Bloomberg Global Aggregate Bond Index and ICE BofAML Green Bond Index Hedged US Index.  Only the Mirova Global Green Bond Index-Class A (MGGAX), that reports a high 94 basis points expense ratio, failed to meet or exceed the two relevant benchmarks.  Based on data through the end of October 31, 2022, it’s expected that issuance of sustainability-linked debt in calendar year 2022 will lag 2021. This includes green, social and sustainability bonds as well as loans. With another decline in the issuance volumes of sustainable bonds and loans registered in October, total year-to-date issuance, according to Bloomberg New Energy Finance, reached $1.2 trillion or about 16% behind 2021—a level that is projected to apply for the entire 2022 calendar year.  Refer to Chart 2.  By some estimates, green bonds reached almost $360 billion at the end of October and about $400 billion by the end of November.  It should be noted that the decline in the issuance of sustainable bonds largely follows the downward trend of the global fixed income market, against a backdrop of market volatility and rising interest rates due to high and persistent inflation, recession fears and the Ukraine war, to mention just a few.  While there are variations by issuers and bond types, estimates for global bond issuance in 2022 point to a 16% contraction and that is in line with estimates for sustainable bond volumes.  That said, issuance is expected to recover in 2023 with sovereigns taking on an increasing role.Chart 1:  Green bond mutual funds and ETFs and assets under management – December 1, 2021 – November 30, 2022Notes of Explanation:  Franklin Municipal Green Blond Fund and tis four share classes with total net assets of $9.7 million included in the data.  At the same time, the rebranded Franklin Liberty Federal Tax-Free Bond ETF renamed the Franklin Municipal Green Bond ETF is excluded as of April 29, 2022.  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLCChart 2:  Cumulative sustainable debt issuance January 1, 2022 – October 31, 2022Table 1:  Green bond funds:  Performance results, expense ratios and AUM - Nov. 30, 2022  Name Symbol1-Month Return (%)3-Month Return (%)Y-T-D Return (%)12-Month Return (%)3-Year Average Return (%)5-Year Average Return (%)Expense Ratio (%) Net Assets ($M)Calvert Green Bond A*CGAFX2.95-1.32-12.04-12.22-2.750.040.7369.6Calvert Green Bond I*CGBIX2.97-1.19-11.82-11.99-2.50.320.48635.1Calvert Green Bond R6*CBGRX2.97-1.17-11.77-11.93-2.45 0.4338.6Franklin Municipal Green Bond ETF@FLMB6.190.11    0.3106.5iShares USD Green Bond ETF^BGRN3.62-1.56-12.7-13.61-3.39 0.2289.2Mirova Global Green Bond A*MGGAX4.15-0.23-14.61-15.44-3.94-0.50.945.6Mirova Global Green Bond N*MGGNX4.250-14.31-15.15-3.65-0.190.645.3Mirova Global Green Bond Y*MGGYX4.14-0.12-14.43-15.28-3.7-0.250.6928.1PIMCO Climate Bond A*PCEBX3.49-1.01-12.25-12.01  0.910.8PIMCO Climate Bond C*PCECX3.43-1.19-12.85-12.68  1.660PIMCO Climate Bond I-2*PCEPX3.52-0.93-12.01-11.75  0.610.4PIMCO Climate Bond I-3*PCEWX3.51-0.94-12.05-11.79  0.660.1PIMCO Climate Bond Institutional*PCEIX3.53-0.91-11.93-11.66  0.5111.5TIAA-CREF Green Bond Advisor*TGRKX3.15-2.04-12.56-12.69-1.96 0.645.3TIAA-CREF Green Bond Institutional*TGRNX3.16-2.12-12.52-12.65-1.94 0.4572.5TIAA-CREF Green Bond Premier*TGRLX3.15-2.16-12.64-12.78-2.07 0.60.9T TIAA-CREF Green Bond retail*TGROX3.14-2.2-12.75-12.9-2.21 0.87TIAA-CREF Green Bond Retirement*TGRMX3.15-2.17-12.65-12.79-2.07 0.713.7VanEck Green Bond ETF^^GRNB3.6-1.29-11.9-12-2.43-1.180.273.8Average/Total+ 3.44-1.25-12.66-12.85-2.70-0.290.641404.0Bloomberg US Aggregate Bond Index 3.68-2.09-12.62-12.84-2.590.21  Bloomberg Global Aggregate Bond Index 4.71-1.36-16.7-16.82-4.47-1.69  Bloomberg Municipal Total Return Index 4.68-0.18-8.79-8.64-0.771.4  S&P Green Bond US Dollar Select IX 3.65-1.41-12.11-12.1-2.22-0.31  ICE BofAML Green Bond Index Hedged US Index 3.64-0.95-14.63-15.36-3.94-0.02  Notes of Explanation:  Blank cells=NA. 3 and 5-year returns are average annual total returns.  +Average returns apply to taxable funds only and excludes Franklin Municipal Green Bond ETF.  If Franklin is included, results are 3.58% in November and -1.18% over the trailing 3-months.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  @Fund rebranded as of May 3, 2022.  ^Effective March 1, 2022, fund shifted to US dollar green bonds. ^^As of September 3, 2019, the fund shifted to US dollar green bonds tracks the S&P Green Bond U.S. Dollar Select Index.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC.

The Bottom Line:  According to the Economist magazine, dubious green funds are rampant in America but the article is misadvised regarding the sustainable funds market. 0:00 / 0:00 Growth in sustainable mutual funds and ETFs by assets:  Dec 2019 - November 30, 2022Notes of Explanation: Data source:  Morningstar Direct.  Research by Sustainable Research and Analysis. Observations:   The December 3, 2022 edition of the Economist includes an article on green investing entitled “Uncle Sham” that’s accompanied by the tag line “Dubious green funds are rampant in America.”  The article discusses the recent large-scale shifts that have taken place in the classification of European Union (EU) sustainable funds due to the implementation of the EU’s sustainability disclosure regime that went into effect in July.  Many funds, according to the article, have shifted their classification from the highest grade to “light green.”  This has exposed European fund managers to accusations of greenwashing, according to the article.  The same article goes on to report that recent research published in the Review of Finance suggests that American firms are doing worse.  “When it comes to sustainable investing, Wall Street stalwarts appear to run a fully fledged laundromat of exaggerated sales pitches and bogus claims.”  The article is misadvised regarding the sustainable funds market in at least four ways (the reference to sustainable funds encapsulates a wide range of investing approaches from values, impact and thematic to ESG integration). First, the Economist article reaches its conclusion by keying off research just published in the Review of Finance in which the authors examined funds that have signed up to the UN-sponsored Principles for Responsible Investment (PRI), “a scheme that investment managers can sign up to certify that they take account of environmental, social and governance (ESG) principles when making investment decisions.” Examining a fourteen-year period from 2003 to 2017, researchers found no sign that the portfolios of PRI signatories in America had higher ESG scores, across a range of metrics, than non-signatories. Facts:  The PRI was launched in 2006 to set forth an aspirational set of six best practices for responsible investment.  Much of the growth in the number of signatories commenced around 2015, not coincidentally, the year 196 parties adopted the Paris Climate Agreement.  As for funds in the US, the growth in the number and assets of sustainable funds, now at $306.4 billion according to Morningstar, didn’t really begin to take off until the start of 2019.  Many US sustainable funds, either rebranded or operating pursuant to a socially responsible mandate, don’t have a track record that extends to 2017, let alone 2003. Second, the Economist posits that funds managed by PRI signatories should have higher ESG scores. Facts:  PRI signatories commit to a set of six best practices, the first of which is that they “will incorporate ESG factors into investment analysis and decision-making.”  This investing approach, widely referred to as ESG integration, considers relevant and material ESG factors in investment analysis and decision-making using a consistent and systematic methodology.  The consideration of ESG issues in investment analysis is intended to complement and not substitute for traditional fundamental analysis in active management that might otherwise ignore or overlook relevant factors.  As for passive investing, ESG factors are typically considered in the construction of indices via negative/exclusionary screening, best in class and norms-based screening as well as weighting variations, either up or down.  Setting aside the consequential questions of whose ESG scores are used in the analysis and their meaning, which are widely acknowledged to differ from firm-to-firm, ESG raw data and scores, now offered by some 600 firms by some accounts, are used by active managers to inform their views about buying, holding or selling a stock or bond issued by companies or other entities.  This approach does not necessarily translate into an aggregate portfolio with higher ESG scores.  For example, after due consideration of the relevant risks and opportunities, an active manager may decide to buy ExxonMobil (XOM) based on its growth and earnings potential over the intermediate-term or sell Tesla, Inc. (TSLA) due to poor governance and reputational risks. The portfolio’s aggregate ESG score fails to capture these considerations. Third, the Economist states that "American firms seem to be defining their own rules; some simply sign up to the PRI in the sole hope of attracting green-conscious investors with little to show for their claims.” Facts:  Unlike Europe that has adopted a set of rules that, according to the Economist, are “tedious and sometimes misguided,” the SEC is still considering but has not promulgated guidelines for classifying sustainable funds.  Also, the US funds industry has only made limited attempts to address the classification and definitional issues.  In addition to contributing to confusion and misunderstanding, the absence of definitions and guidelines makes it much harder to conduct performance or greenwashing research.  Further, the article implies a relationship between signing on to the PRI principles and green investing, yet none of the six PRI principles are linked directly to positive societal outcomes.  This linkage, however, is consistent with the general tendency to conflate ESG integration with socially responsible investing, ethical investing or green investing. Fourth, according to the Economist, "...sometimes greenery is even used to keep assets under management growing even as managers post sub-par returns." Facts:  There is no reliable evidence yet to indicate that ESG integration produces higher or lower investment returns over the intermediate-to-long-term time horizons. In large part, the lack of reliable evidence has to do with the fact that ESG has a definition problem and a coherent understanding of what is meant by ESG integration is lacking among investing practitioners.  Because of this, but also due to the large number of fund conversions or re-brandings to sustainable investing strategies and the limited track record associated with ESG integration, identifying cohorts of like funds over a sufficiently reasonable time interval to effectively evaluate performance results is challenged.  At the same time, returns based on short time intervals can be skewed by shifting market dynamics to produce positive or negative performance differentials, as was the case in 2021-2022 when overweighting growth-oriented technology companies due to their generally higher ESG scoring and underweighting fossil fuel companies in ESG equity portfolios led to periods of outperformance by some funds pursuing a sustainable investing strategy or approach. Since the start of 2022, however, the performance advantage has narrowed or even reversed.  Touting the potential for outperformance by some US based fund firms has proven to be a marketing misguided strategy.  On the other hand, there is a somewhat stronger body of evidence in support of the view that socially responsible investing, because this form of investing has been around for many more years, produce below market-based rates of return. Even here, the conclusions may be attributable to the limited number of socially responsible funds, their varying approaches to socially responsible investing and the smaller size and less proficient investment management expertise exhibited by the management firms serving as advisers to these funds.

The Bottom Line:  More active versus passively managed sustainable ETFs will be launched in 2022, but costs are higher and they are likely to underperform. 0:00 / 0:00  Number of active vs. passive sustainable ETF launches:  January 1 – November 30, 2022Notes of Explanation: Data source:  Morningstar Direct.  Research by Sustainable Research and Analysis.Observations:This year for the first time, actively managed sustainable ETF launches will outpace new passively managed ETFs, based on data through the end of November 2022. The latest entries into the actively managed sustainable ETF space include three funds managed by Dimensional Fund Advisors LP and one by Thrivent Asset Management.  At the end of November, there were 135 passively managed sustainable ETFs with $94.6 billion in assets and 86 passively managed sustainable ETFs with $5.4 billion in assets, for a combined total of $100 billion.  During the 11 months through the end of November, 45 sustainable ETFs were launched.  Of these, 34 are actively managed while 11 are passively managed, or just about 3:1 active versus passive.  This compares to almost an equal number of passive and actively managed ETF launches in 2021 and almost 2:1 sustainable passive versus active ETFs in 2020.The new issue momentum favoring actively managed ETFs is unfolding even as most active managers underperform most of the time relative to securities market indices.  According to S&P Indices Versus Active (SPIVA) research that measures the performance of actively managed funds against their relevant S&P index benchmarks, this is the case not only for equity funds but also fixed income and global/international managers.  These conclusions also apply across geographies.  Moreover, when good performance does occur, it tends not to persist. Above-average past performance does not predict above-average future performance.The average expense ratio covering this year’s cohort of actively managed sustainable ETFs is 60.2 basis points as compared to 27 basis points for passively managed funds, or 55% lower.  Offsetting higher expenses are three acknowledged benefits that accrue to actively managed ETF investors, namely tax efficiencies, but applicable to taxable funds, lower minimum investment requirements and a greater level of transparency.  In addition to fundamental investment factors, the Dimensional Emerging Markets Sustainability Core 1 ETF (DFSE), Dimensional International Sustainability Core 1 ETF (DFSI) and the Dimensional US Sustainability Core 1 ETF (DFSI) take into account the impact that companies may have on the environment and other sustainability considerations when making investment decisions.  Dimensional may overweight, exclude or underweight companies based on sustainability impact considerations.  The Thrivent Small-Mid Cap ESG ETF (TSME) identifies companies that have sustainable long-term business models for the benefit of all primary stakeholders while driving financial success and risk management and also considering various ESG factors.  The fund reports that it will measure its performance relative to a conventional benchmark as well as an ESG index—a practice adopted by a very small segment of actively managed sustainable funds.    Unless an actively managed strategy is highly desirable but difficult or impossible to replicate, is offered by a fund manager with an established track record, has achieved sufficient scale and diversity of shareholders and is subject to a reasonable expense ratio, preference by investors should be given to sufficiently scaled passively managed sustainable ETFs offered at attractive fees.  

The Bottom Line:  Sustainable and conventional emerging market debt funds are turning in one of the worst years on record, but conditions may be improving. 0:00 / 0:00 Performance (TR) of sustainable emerging market debt funds:  12-M to October 31, 2022Notes of Explanation:  BlackRock rebranded its two funds at the end of 2021.  Templeton Sustainable Emerging Markets Bond Fund rebranded in 2021.  Xtrackers JPMorgan ESG EM Sovereign ETF changed its underlying index effective May 12, 2020 to the JP Morgan ESG EMBI Global Diversified Sovereign Index from the Solactive USD Emerging Markets Bond – Interest Rate Hedged Index. Performance data source:  Morningstar Direct.  Research by Sustainable Research and Analysis.Observations:Sustainable emerging market debt funds are turning in what is widely expected to be one of the worst years on record for emerging markets.  The small universe, consisting of four mutual funds with 14 share classes and one ETF, for a combined total of $86.1 million in net assets, emphasizes investments in higher ESG scoring firms or sovereigns and/or momentum in improving ESG scores as well as exclusions and, in the case of BlackRlock, an additional focus on carbon emissions, posted an average return of -22.78.  Returns ranged from -20.22% to -28.25%, with the lowest returns attributable to higher levels of exposure to Russia and Ukraine, in particular, at the start of the year that were written down.  These results compared to -22.21% posted by the J.P. Morgan Emerging Markets Bond Global Total Return Index and in line with the -21.1% trailing 12-month performance results recorded by conventional emerging market funds, including active and passively managed funds.  Emerging market debt, which suffered five consecutive quarters of negative returns, was impacted by the COVID-19 pandemic, and then fell sharply in the first half of the year. Investors reacted negatively to Russia’s invasion of Ukraine in February 2022 and the resulting impact on energy prices and global supply chains. Also, stubbornly high inflation prompted the Fed and other central banks to raise interest rates aggressively while repeated lockdowns in China have been weighing heavily on its economy.  These factors have affected returns across the entire bond market, with higher-risk categories experiencing the weakest performance.  Emerging markets are also potentially facing higher rates of default. Returns turned up in November.  Also, some firms have begun to raise their outlook for emerging market’s hard currency bonds based on the premise that a slowdown in U.S. rate hikes could provide some breathing space for the embattled asset class.  According to a Reuters report issued two weeks ago, JPMorgan raised its outlook for emerging market hard-currency debt to "marketweight" from "underweight." Also, in its 2023 outlook Morgan Stanley predicted emerging market hard-currency bonds could return more than 14% next year.That said, sustainable emerging market debt funds offer investors a very limited set of investment options.  The number of fund options is small and they are relatively new (while some funds have been in existence for some time, they have been rebranded in the last two years or so through the adoption of a sustainable investing strategy or index change), the average fund size is just $17.2 million as of October 31st and expense ratios for actively managed portfolios, an average of 1.06%, is high (but not any higher than conventional emerging market debt funds).  The only passively managed Xtrackers JPMorgan ESG Emerging Markets Sovereign ETF (ESEB), that charges 35 bps, was launched in 2015.  But the underlying index was swapped out in 2020 and the fund has only managed to attract $16.2 million.  At this time, a conventional actively managed emerging market debt fund may be the way forward for investors interested in dropping an anchor in this challenging environment.    

The Bottom Line:  To ensure alignment with sustainable investing preferences, index fund investors should delve into the methodology used by index providers to construct benchmarks. 0:00 / 0:00 Leading providers of sustainable (ESG) securities market indices used in index fundsObservations:Total US sustainable mutual fund and ETF assets under management as of October 31, 2022 stood at $295.8 billion, based on Morningstar’s definition.  Of this sum, $114.5 billion, or 39% of assets, is managed passively through index mutual funds and ETFs.  That is, funds seeking to replicate the yield and total return performance of securities market indices.  Many but not all index funds license the use of securities market indices designed and maintained by third party index providers, including firms like MSCI, S&P Dow Jones, FTSE (a unit of the London Stock Exchange Group), Bloomberg, ICE and J.P. Morgan, to mention just a few.  While some securities market indices may be customized to suit the needs of the index fund manager, most rely on the expertise of the third-party index providers to construct the rule set for the index as well as the identification, selection and maintenance of securities that comprise the index.  In the case of sustainable or ESG indices, this also involves determining eligibility requirements based on ESG or sustainability criteria as well as the application of exclusions.  These may be based on companies’ involvement in specific business activities, involvement in relevant ESG controversies as well as performance against one or more set of internationally recognized principles, such as the United Nations’ Global Compact.    In effect, the index and, in turn, the index fund, relies on sustainability or ESG opinions attributable to the index provider.  For sustainable index fund investors, this means that their sustainability preferences should be aligned with the ESG opinions, views, and approaches expressed by the third-party index providers.  Some of the largest ESG index providers, according to data as of October 31, 2022, include MSCI, FTSE and S&P Dow Jones.  Together, the indexes created and maintained by these three firms account for 80% of sustainable index fund assets under management.  But ESG is not universally defined and ESG scores, that are at the core of constructing sustainable and ESG indices, can have different meanings ranging from the measurement of investment risks to ESG practices to positive societal impacts.  In the process, ESG scores can vary from one company to the next and ultimately these influence the financial and non-financial results recorded by index funds.  Therefore, it behooves investors to delve into the methodology used by index providers to construct their benchmarks.

The Bottom Line:  The FTX Trading Ltd. debacle, like previous implosions due to governance failures and fraud, should give ESG integration skeptics pause for thought. Summary According to published accounts, the rapid bankruptcy filing of FTX Trading Ltd., an exchange for trading cryptocurrencies founded in 2020 by Sam Bankman-Fried, and more than 100 related entities, including Alameda Research, could involve some one million individual creditors and estimated debts to its customers and investors, direct and indirect, of about $8 billion¹.  There will be additional fallouts, likely involving other crypto entities, such as exchanges, lenders, and tokens, and beyond, especially on the regulatory front, and a final loss tally may not be known for some time.  Governance failure and potentially fraud appear to be at the core of FTX’s collapse and both the Securities Exchange Commission and the Commodity Futures Trading Commission are investigating FTX.  The losses are not only impacting retail but also sophisticated institutional investors.  These include sovereign wealth funds, private equity firms, hedge funds, pension funds, endowments, and family offices, as well as other investment vehicles. Criminal fraud findings complicate the issue, but a high likelihood of exposure to loss could potentially have been red flagged if corporate governance due diligence had been methodically undertaken and the results factored into investment decision making.  While challenging to evaluate, governance issues have played an important role in the evaluation of corporations, financial institutions, public finance organizations and other entities.  The emphasis on governance is not a new development and the link between corporate governance and the performance of companies has been well established.  This has preceded the introduction of ESG integration in investing practices with its principal emphasis on risk mitigation, but in more recent years the importance of governance has been reinforced by the adoption of ESG investing principles that have recently faced headwinds.  The FTX debacle, like previous implosions due to governance failures, should give ESG skeptics pause for thought. High likelihood of exposure to loss could potentially have been red flagged if methodical governance due diligence had been conducted In recent years, corporate governance has attracted more and more attention among professionals, academics and officials involved in the economy. Concern for improving and strengthening mechanisms of corporate governance has grown worldwide.  This has been especially so after high profile governance breakdowns impacted firms like Enron Corporation, WorldCom, Parmalat SpA and others or even more recently governance breakdowns at Bear Stearns Companies Inc., Lehman Brothers Holdings Inc. and others. According to the CFA Institute², corporate governance is the system of internal controls and procedures by which individual companies are managed. It provides a framework that defines the rights, roles, and responsibilities of various groups—including management, the board, controlling shareowners, and minority or noncontrolling shareowners—within an organization. At its core, corporate governance is the arrangement of checks, balances, and incentives a company needs to minimize and manage the conflicting interests between insiders and external shareowners and stakeholders. Its purpose is to prevent one group from expropriating the cash flows and assets of one or more other groups and to provide a structure that ensures the long-term viability of the organization. In general, good corporate governance practices seek to ensure that: -Board members act in the best interests of shareowners.  In recent years, effective corporate governance practices have been extended to the interests of a broader stakeholder group (e.g., labor groups, society at large); over the long-term, the interests of shareowners and stakeholders converge; -The company acts in a lawful and ethical manner in its dealings with all stakeholders and their representatives; -All shareowners have a right to participate in the governance of the company and receive fair treatment from the board and management, and all rights of shareowners and other stakeholders are clearly delineated and communicated; -The board and its committees are structured to act independently from management and other influential groups, and to act in the best interest of the corporation; -Appropriate controls and procedures are in place to cover management’s activities in running the day-to-day operations of the company; and -The company’s governance activities, as well as its operating and financial activities, are consistently reported to shareowners, market participants, and stakeholders in a fair, accurate, timely, reliable, relevant, complete, and verifiable manner. FTX implosion seen as a complete failure of corporate controls and a complete absence of trustworthy financial information At FTX, none of the above good governance practices were in evidence.  John J. Ray III, now acting as the Chief Executive Officer on behalf of FTX debtors, made the following comment in the FTX Trading Limited Chapter 11 filing: “I have over 40 years of legal and restructuring experience. I have been the Chief Restructuring Officer or Chief Executive Officer in several of the largest corporate failures in history. I have supervised situations involving allegations of criminal activity and malfeasance (Enron). I have supervised situations involving novel financial structures (Enron and Residential Capital) and cross-border asset recovery and maximization (Nortel and Overseas Shipholding). Nearly every situation in which I have been involved has been characterized by defects of some sort in internal controls, regulatory compliance, human resources and systems integrity. Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.” FTX, reported to be the industry’s third-largest cryptocurrency exchange and valued recently at $32 billion, filed its petition for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware on November 17, 2022.   Organized in various jurisdictions around the world with headquarters in the Bahamas, FTX faced a severe liquidity crisis that necessitated the bankruptcy filing. Largely unregulated, FTX was organized along a complex array of businesses, including investments and property, that have been grouped into four silos.  These included: (a) FTX US and related entities that operated an exchange for spot trading in digital assets and tokens with about 1 million users.  In addition, through various owned entities, FTX also offered futures, options and swaps contracts on digital assets and other commodities, broker-dealer services, securities clearing, custodial services, video game development and a marketplace for trading non-fungible tokens.  (b) Alameda Research LLC, owned entirely by co-founders Sam Bankman-Fried and Zixiao “Gary” Wang, operated quantitative trading funds specializing in crypto assets employing strategies that included arbitrage, market making, yield farming and trading volatility.  Alameda apparently dipped into FTX’s customer deposits to meet cash needs, thus commingling funds between the two entities that should have been operating at arm-length that could lead to criminal fraud-charges.  (c) Private venture investments management, and (d) Various entities, including FTX.com.  Not available to US investors, FTX.com is a digital asset trading platform and exchange that also holds certain marketplace licenses and registrations in certain non-US jurisdictions. Also offered is an off-exchange portal that enabled users to connect and request quotes for spot digital assets and trade directly. The portal enabled users to lend their digital assets to other users for spot trading and matched users wanting to borrow with those willing to lend.   In addition to ownership by co-founders, only the last two lines of business identified as c and d apparently have third party equity investors.  These would include investment funds, endowments, sovereign wealth funds, families and other entities. A final tally of realized losses, both direct and indirect, may not be known for some time In addition to any losses that will be incurred by individual investors, institutional investors are also impacted and some realized losses have already been disclosed.  These include both direct and indirect investments by sovereign wealth funds, private equity firms, hedge funds, pension funds, endowments, and family offices, as well as other investment vehicles. There may also be additional indirect fallouts involving other crypto entities, such as exchanges, lenders and tokens and a final tally may not be known for some time. The following are just a few examples of the losses or exposures to potential losses that have been disclosed or identified to-date: -The Singapore state-owned Temasek Holdings which has announced that it will write down its entire $275 million investment in FTX. -SoftBank’s Vision Fund planned to write down its almost $100 million investment in FTX. -Sequoia Capital, which reportedly owned FTX and FTX.com in its Global Growth Fund III, announced that nearly $214 million it invested in crypto exchange FTX Trading Ltd. is a total loss³.  Indirect investors through Sequoia’s Global Growth Fund III included the Alaska Permanent Fund Corp. that in 2018 committed $200 million to Sequoia's Global Growth Fund III and the Washington State Investment Board retirement system that approved an allocation of up to $350 million to the same fund⁴. -Ontario Teachers invested a total of $75 million in FTX in October 2021, followed by another $20 million invested in January of 2022. The pension plan housed the FTX investment in its Teachers' Venture Growth platform. -Institutional Venture Partners Fund.  Among investors in Institutional Venture Partners fund with exposure to FTX are Tennessee Consolidated Retirement System; City & County of San Francisco Employees' Retirement System; Maryland State Retirement & Pension System; and Alaska Permanent Fund Corp. -Lightspeed Venture Partners Illinois Municipal Retirement Fund was invested in Lightspeed Venture Partners, which also had exposure to FTX. Conclusion The high likelihood of exposure to losses on the part of sophisticated institutional investors, in particular, could have been red flagged if corporate governance due diligence had been methodically undertaken and the results factored into investment decision making.  Governance is a key focal point of ESG integration and the consistent and systematic accounting of relevant and material governance factors in investment decision making has been an important consideration even before the advent of ESG integration investing.  Incorporating governance has little if anything to do with socially responsible investing and everything to do with risk management considerations and taking advantage of investment opportunities after the completion of thorough investment analysis. ¹ FTX US founded in 2000. Assets and liabilities of FTX and related firms have not been verified and while some firms’ financial statements have been audited but on a more limited basis relative to publicly listed companies, there are substantial concerns regarding these. ² The Corporate Governance of Listed Companies, CFA Institute. ³Source:  Pensions & Investments, Institutions weigh exposure to FTX crypto exchange, November 10, 2022. ⁴ Ibid.

The Bottom Line:  The ETF industry will experience the highest number of sustainable ETF closures, as so far in 2022 nine ETFs have been delisted. 0:00 / 0:00 Sustainable ETFs classified by fund net assets and number of funds in each asset categoryNotes of explanation:  Sustainable ETF assets as of October 31, 2022 dimensioned by assets size, with total net assets in each size category along with the number of funds.  Fund assets and expense ratios source:  Morningstar Direct.  Otherwise, Sustainable Research and Analysis LLC. Observations:The ETF industry this year will experience the largest number of sustainable ETF closures.  So far in 2022, nine ETFs have been delisted, or 4.1% of ETFs as of October 31st.  This compares to two sustainable ETFs in 2021, six ETFs in 2020 and seven ETFs in 2019.   It also compares to just three mutual fund year-to-date closures.The average net assets of the nine funds delisted so far this year stood at $2.6 million, calculated based on the delisted fund’s net assets as of the prior year-end.  These funds ranged in size from a low of $364,583 to a high of $5.8 million in net assets.  In previous years 2021, 2020 and 2019, average net assets prior to liquidation were $9.5 million, $21.9 million and 11.3 million, respectively. Six of the nine funds delisted this year pursued narrowly based thematic mandates or strategies, including for example, waste reduction, climate change, LGBTQ or price momentum.  These include:  Amplify Cleaner Living ETF, Direxion World Without Waste ETF, iClima Climate Change Solutions ETF, Impact Shares MSCI Global Climate Select ETF, LGBTQ100 ESG ETF, and Trend Aggregation ESG ETF.  The other three funds are general equity ETFs or a broad-based bond fund that include AVDR US LargeCap ESG ETF, First Trust TCW ESG Premier Equity ETF and AdvisorShares North Square McKee ESG Core Bond ETF.Depending on the fund’s expense load, between $25 million in assets or $30 million in assets or so are required to operates the fund on a financial break-even basis.  Unless subsidized by the investment management company, funds that are unable to pull in additional assets to take them beyond these beak-even levels are more likely to be liquidated.  At present, the assets of 109 sustainable ETFs or just short of 50% of total ETF assets, fall below the $30 million level.  These funds are more highly exposed to liquidation risk.  That said, the stock and bond market declines since the start of the year are a contributing factor and this development may persuade ETF sponsors to extend the life of these investment vehicles pending the resolution of market uncertainties.   Smaller funds tend to have higher expense ratios, as reflected by the differential between the 27-basis points (bps) average expense ratio for the largest ETFs and the average expense ratio of 46 pbs applicable to funds with assets up to $30 million.  Also, smaller portfolios may not reach asset levels that allows them to be managed optimally, relative performance may lag, seed capital may dominate the investor base and could be pulled out at inopportune times.  This, in turn, may lead to the untimely liquidation of the fund.  In addition to the untimely liquidation risk, shareholders would have to book capital gains or losses upon liquidation.   Unless investors are committed to a particular theme or strategy and are willing to sustain lower rates of return and/or bear the liquidation risk, larger funds and lower expense ratios should continue to guide their investment decisions.

The Bottom Line:  Favorable green bond fund results tend to converge around selected funds that are managed effectively and are offered at low-to-lower expense ratios. October Summary The small segment of thematic green bond funds, consisting of four mutual funds and three ETFs that offer investors exposure to environmental projects and investments while seeking market-based returns, was subjected to net withdrawals for the second consecutive month as assets under management declined by $39.2 million to end October 31, 2022 with $1,374.6 million in net assets.  This left the segment with the lowest level of assets under management since April 2022 when assets dropped to $1,361.4 million.  Refer to Chart 1.  Net outflows are estimated at $10 million. Much of the decline in October is attributable to the Calvert Green Bond Fund I shares (CGBIX) that sustained a net drop of $35.7 million in assets.  The same fund also gave up $77 million in September, almost entirely linked to the institutional oriented Calvert Green Bond I shares. Further reinforcement that the Fed’s tighter interest rate policy remains a priority for as long as inflation persists at unacceptably high levels translated into an extension of the bond market’s historic downward slide through the end of October.  Unlike equities that gained 8.1% in October, according to the S&P 500 Index, intermediate-term investment grade bonds gave up 1.3% per the Bloomberg US Aggregate Bond Index.  The same benchmark is down 15.7% on a year-to-date basis.  Against this backdrop, taxable green bond funds managed to narrow their declines in October, giving up an average 0.51% versus a drop of 4.05% in September, computed on a comparable basis.  Including the municipal Franklin Green Municipal Bond Fund (FLMB), -1.05% in October, shifts the average results slightly lower to -0.53%.  Returns ranged from a low of -1.2% posted by the iShares USD Green Bond ETF (BGRN) to a positive 0.37% recorded by the Mirova Global Green Bond Fund A, N and Y shares (MGGAX, MGGNX, MGGYX).  Average 3-month, year-to-date and trailing 12-month results were -7.32%, -15.63% and -15.64%.  Refer to Table 1. Both short and intermediate-term favorable green bond fund results converge around selected funds that are offered at low-to-lower expense ratios, funds that avoid currency exposure or have exhibited effective management skills, including currency hedging in cases where foreign currency exposure is taken. Fund size may also be a factor. While clear results covering sustainable and green bonds issuance in October are not yet available, based on September’s volume it was established that year-to-date issuance of green bonds reached as high as an estimated $395.8 billion according to Bloomberg.   This represents a drop of 11% drop compared to last year over the same period.  At the same time, global sales of social, sustainability and sustainability-linked debt also declined in September.  It is therefore not surprising that with only three months remaining, both Moody’s Investors and S&P Global Ratings lowered their forecasts for 2022 global issuance of green, social, sustainability and sustainability-linked bonds.  Influencing the results are deteriorating credit conditions and weaker issuance trends for the global bond markets.  Moody’s had projected 2022 bond volumes to hit $1.35 trillion but lowered its full-year forecast for global sustainable bond issuance in October to around $900 billion.  S&P took a similar action, lowering its forecast from $1.5 trillion to $865 billion.  Based on S&P reporting, this would represent a 16% decrease from actual 2021 issuance of $1.0 trillion in 2021. A more upbeat assessment regarding green bonds was offered by a Climate Bond Initiative investor survey conducted on October 28th in London.  According to the survey, investors expect global green bond investment to double and reach $1 trillion for the first time in a single year by the end of 2022.  COP 27 may produce a bump in green bond issuance, but it remains to be seen whether $1+ trillion will be reached this year. A noteworthy transaction-oriented development in October was the Republic of Uruguay issuance of a $1.5 billion 5.75% sustainability-linked bond due 2034.  The bond includes a first-time coupon step-down feature in the event that Uruguay overperforms its pre-defined environmental targets by a certain threshold. The targets contemplated by Uruguay’s bonds include achieving a reduction in aggregate greenhouse gas emissions, expressed in CO2 equivalent per real GDP unit, by 2025 compared to 1990 and maintaining or increasing the native forest area covering Uruguay’s territory by 2025 as compared to 2012.  Closed on October 28, 2022, the offering was the first sustainability-linked bond issued by Uruguay and the second ever by a sovereign.  The first was a $2 billion sustainability-bond issued by Chile in March of this year. Chart 1:  Green bond mutual funds and ETFs and assets under management – November 2021 – October 31, 2022Notes of Explanation:  Franklin Municipal Green Blond Fund and tis four share classes with total net assets of $9.7 million included in the data.  At the same time, the rebranded Franklin Liberty Federal Tax-Free Bond ETF renamed the Franklin Municipal Green Bond ETF is excluded as of April 29, 2022.  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC Table 1:  Green bond funds:  Performance results, expense ratios and AUM-Oct. 31, 2022 Name Symbol 1-Month Return (%) 3-Month Return (%) 12-Month Return (%) 3-Year Average Return (%) 5-Year Average Return (%) Expense Ratio (%) Net Assets ($M) Calvert Green Bond A* CGAFX -0.48 -6.71 -14.7 -3.71 -0.55 0.73 69 Calvert Green Bond I* CGBIX -0.46 -6.58 -14.46 -3.46 -0.27 0.48 624.6 Calvert Green Bond R6* CBGRX -0.46 -6.56 -14.41 -3.41 0.43 37.4 Franklin Municipal Green Bond ETF@ FLMB -1.05 -8.58 0.3 100.6 iShares USD Green Bond ETF^ BGRN -1.2 -7.06 -15.69 -4.6 0.2 279.9 Mirova Global Green Bond A* MGGAX 0.37 -8.39 -18.19 -5.35 -1.29 0.94 5.5 Mirova Global Green Bond N* MGGNX 0.37 -8.35 -17.99 -5.07 -1 0.64 4.9 Mirova Global Green Bond Y* MGGYX 0.37 -8.36 -17.94 -5.11 -1.03 0.69 28.3 PIMCO Climate Bond A* PCEBX -0.28 -7.4 -15.23 0.91 0.8 PIMCO Climate Bond C* PCECX -0.34 -7.59 -15.87 1.66 0 PIMCO Climate Bond I-2* PCEPX -0.26 -7.33 -14.97 0.61 0.5 PIMCO Climate Bond I-3* PCEWX -0.26 -7.35 -15.01 0.66 0.1 PIMCO Climate Bond Institutional* PCEIX -0.25 -7.31 -14.88 0.51 10.8 TIAA-CREF Green Bond Advisor* TGRKX -1.05 -6.99 -15.27 -3.01 0.6 43.4 TIAA-CREF Green Bond Institutional* TGRNX -1.04 -6.97 -15.23 -2.99 0.45 69.7 TIAA-CREF Green Bond Premier* TGRLX -1.06 -7.01 -15.36 -3.11 0.6 0.9 T TIAA-CREF Green Bond retail* TGROX -1.07 -7.04 -15.48 -3.26 0.8 6.8 TIAA-CREF Green Bond Retirement* TGRMX -1.06 -7.01 -15.37 -3.12 0.7 13.3 VanEck Green Bond ETF GRNB -0.95 -6.56 -15.06 -3.65 -1.64 0.2 78.1 Average/Total+ -0.51 -7.25 -15.62 -3.83 -0.96 0.64 1374.6 Bloomberg US Aggregate Bond Index -1.3 -8.23 -15.68 -3.77 -0.54 Bloomberg Global Aggregate Bond Index -0.69 -10.13 -16.45 -2.18 1.83 Bloomberg Municipal Total Return Index -0.83 -6.73 -11.98 -2.18 0.37 S&P Green Bond US Dollar Select IX -1.03 -6.64 -15.28 -3.43 -0.4 ICE BofAML Green Bond Index Hedged US Index -0.11 -8.70 -17.47 -5.11 -0.69 Notes of Explanation:  Blank cells=NA. 3 and 5-year returns are average annual total returns.  +Average returns apply to taxable funds only and excludes Franklin Municipal Green Bond ETF.  If Franklin is included, results are -0.53% in October and -7.32% over the trailing 3-months.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  @Fund rebranded as of May 3, 2022.  ^Effective March 1, 2022, fund shifted to US dollar green bonds.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line:  Recent outperformance of small-cap sustainable index funds versus actively managed sustainable counterparts influenced by their higher levels of exposure to value stocks. 0:00 / 0:00 ETF/Fund NameTracking Index and ESG Integration Approach:  Exclusions and Inclusion Practices Fund Size ($)Expense Ratio (%)iShares ESG Aware MSCI USA Small-Cap ETF MSCI USA Small Cap Extended ESG Focus Index, derived from the MSCI USA Small Cap Index, consisting of companies that meet certain ESG criteria via exclusionary screening based on MSCI determinations.  Inclusion is based achieving a higher allocation of companies with favorable ESG profiles through an optimization process.  1,462.10.17iShares® ESG Screened S&P Small-Cap ETFS&P SmallCap 600 Sustainability Screened Index consisting of companies that meet certain ESG criteria via exclusionary screening, based on determinations made by Trucost, Sustainalytics and SAM ESG Research.  36.10.12Nuveen ESG Small-Cap ETFTIAA ESG USA Small-Cap Index, derived from the MSCI USA Small Cap Index that meet certain ESG criteria via exclusionary screening based on MSCI determination.  Inclusion is based on highest ESG ranked companies.   909.80.3Praxis Small Cap Index A and IS&P SmallCap 600 companies qualified as to companies aligned with Everence Capital Management’s Stewardship Investing core values:   Respecting the dignity and value of all people, building a world at peace and free from violence, demonstrating a concern for justice in a global society, exhibiting responsible management practices, supporting and involving communities, and practicing environmental stewardship. ESG factors may be optimized.  147.11.12/0.43SPDR S&P SmallCap 600 ESG ETFS&P SmallCap 600 Sustainability Screened Index consisting of companies that meet certain ESG criteria via exclusionary screening, based on determinations made by Trucost, Sustainalytics and SAM ESG Research.  Worst ESG scoring companies are also excluded.  2.60.12Xtrackers S&P SmallCap 600 ESG ETFS&P Small Cap 600 ESG Index. Similar to above criteria.10.70.15Fund assets and expense ratios source:  Morningstar Direct.  Otherwise, Sustainable Research and Analysis LLC.Observations:Sustainable small-cap index funds, including five ETFs and one mutual fund, outperformed actively managed sustainable small-cap funds in October and over the trailing twelve-month interval.  Sustainable small-cap index funds posted an average gain of 11.7% in October versus 9.4% registered by their actively managed counterparts and -14.3% year-to-date as compared to -17.9% for actively managed small-cap sustainable funds.  A greater average exposure to small-cap value stocks in index funds versus actively managed funds was an important contributing factor to the performance differential.  Actively managed sustainable index funds had an average 14.8% exposure to value stocks versus 29.3%, on average, held in passively managed funds, almost twice as high.Expense ratio differentials is also a factor.  The average expense ratio for actively managed sustainable small-cap funds is 1.08% versus 0.60 for sustainable small-cap index funds.  That number is significantly reduced to 0.17% when the high-priced Praxis Small Cap Index Fund A and I shares that charge 1.12% and 0.43% are excluded.  Within the universe of sustainable small-cap index funds, performance variations are attributable to fund size, index construction methodologies and the criteria for qualifying and weighting securities based on their sustainability characteristics or ESG exclusionary screens that vary in accordance with the providers of ESG determinations.  Within the small-cap index funds segment, ESG determinations are provided by MSCI, S&P Dow Jones that relies on multiple sources as well as Everence Capital Management, Inc. for Praxis.   Sustainable small cap index funds have attracted $2.6 billion in assets under management as of October 31, 2022, representing 35% of the segment’s total with $7.4 billion in assets as of the same date.

The Bottom Line:  Sustainable municipal bond fund investors have taken notice of potential buying opportunities in municipal bonds and stayed firm even as returns plunged. 0:00 / 0:00 Notes of explanation:  12/31/2021 ETF assets exclude the Franklin Municipal Green Bond Fund that was rebranded and renamed in early May.  Fund assets source:  Morningstar Direct.  Research:  Sustainable Research and Analysis LLC.Observations:Further reinforcement that the Fed’s tighter interest rate policy remains a priority for as long as inflation persists at unacceptably high levels translated into an extension of the bond market’s historic downward slide through the end of October.  Unlike equities that gained 8.1% in October, according to the S&P 500 Index, intermediate-term investment grade bonds gave up 1.3% per the Bloomberg US Aggregate Bond Index.  The same benchmark is down 15.7% on a year-to-date basis.  Municipal bonds weren’t spared.  The Bloomberg Municipal Total Return Index posted declines of 0.83% in October and 12.86% year-to-date.  High yield municipals performed even worse, dropping 2.05% in October and 17.75% year-to-date.That said, the yields on municipal bonds have been increasing in tandem with rising rates, reaching the highest yields in many years.  Yields on municipal bonds are now in the 3% to 5% range, up from 1% to 2% at the start of the year. Investors seem to have taken notice of this buying opportunity.  Even as sustainable municipal bond funds registered total return declines of 0.78% and 13.4% in October and over the first ten months of the year, assets under management have recorded gains.  Sustainable municipal bond funds still represent a small 5.5% segment of the sustainable fixed income universe, consisting of 17 mutual funds and 49 share classes with $2.1 billion in assets plus three actively managed ETFs with $151.9 million in assets under management.  Combined assets started the year at $2.1 billion, gaining some $195.7¹ to September 30th only to give up $124.5 million to end October at $2.2 billion. Since the start of the year, assets expanded by 3.3% while net cash inflows are estimated at $271 million.  The universe of sustainable municipal bond funds is limited at this point in terms of fundamental investing options relative to conventional municipal funds. For example, the segment does not include any index fund offerings, state specific funds are limited to two California tax-exempt funds nor is there any stratification along investment-grade and non-investment grade lines.  At the same time, the segment does offer a variety of actively managed sustainable investing approaches.  For example, there are three actively managed ETFs, one of which is the thematic $100.6 million Franklin Green Municipal Bond Fund that invests in tax-exempt green and sustainable bonds and charges 30 bps.  Other options among the mutual funds managed by 14 different firms pursue a range of sustainable investing strategies from values-based to impact to ESG integration, or some combination of these.  These include, for example, (1) the large $493.9 million AB Impact Municipal Income Fund (ABIMX) available through wrap fee programs that invests in securities with high ESG scores and are also deemed to have an environmental or social impact in underserved or low socio-economic communities and (2) the $417 million Calvert Responsible Municipal Income Fund (three share classes CTTLX, CTTCX and CTTIX) that’s managed pursuant to the Calvert Principles for Responsible Investment.  The Principles provide a framework for the investment adviser’s evaluation of investments considering environmental, social and governance factors. The Principles seek to identify issuers that operate in a manner that is consistent with or promote: environmental sustainability and resource efficiency; equitable societies and respect for human rights; and accountable governance and transparency, among other factors.  Broadly, sustainable municipal bond funds are subject to an average expense ratio of 68 bps versus 78 bps for actively managed conventional mutual funds.¹ This includes $100.6 million Franklin Municipal Green Bond Fund that was rebranded and renamed as of early May 2022 from the Franklin Federal Tax-Free Bond ETF.

The Bottom Line: Sustainable target date funds suffered steep total return declines to September 30, 2022, but more attractive valuations offer upside potential for long-term investors. 0:00 / 0:00 Investment Manager/FundFund Structure Start YearAssets ($M)ExpenseRatios Sustainable Investment StrategyBlackRock Fund Advisors/BlackRock LifePath ESG Index FundLargely affiliated sustainable passively managed ETFs but also some mutual funds in a fund of funds like structure with target dates from 2025 to 2065 as well as a Retirement fund option.202025.1RangeFrom 0.20% to 0.50%, depending on share class.ESG Integration/best in class screening and Exclusions.  Much of the investable universe consists of securities managed in the form of index tracking funds that optimize higher ESG ratings, subject to maintaining risk and return characteristics like the underlying index, after factoring in exclusions based on business practices and severe business controversies.  A limited number of funds with limited exposures do not pursue ESG mandates, for example, iShares Developed Real Estate Index Fund.     GuideStone Capital Management, LLC/GuideStone Funds MyDestination Fund Affiliated underlying active and passively managed mutual funds ranging in target dates from 2015-2055 that are advised by external independent investment managers.20064,736.6Range from 0.48% to 0.75%, depending on share class. Values-based/Exclusions.  Funds may not invest in any company that is publicly recognized, as determined by GuideStone Financial Resources of the Southern Baptist Convention, as being in the alcohol, tobacco, gambling, pornography or abortion industries, or any company whose products, services or incompatible activities.  J.P. Morgan Investment Management/JPMorgan SmartRetirement Fund Primarily invest in other J. P. Morgan actively and passively managed mutual funds as well as ETFs.  Target dates range from 2020 to 2065.2021#25,443.6Rangefrom 0.40% to 1.45%, depending on maturity and share class.ESG Integration.  The adviser will assess how ESG risks are considered within an active underlying fund’s/manager’s investment process and how the active underlying fund/manager defines and mitigates material ESG risks. Although these risks are considered, underlying funds and securities of issuers presenting such risks may be purchased and retained by the fund.Natixis Advisors, L.P. (a unit of Natixis, a French-based firm)/Natixis Sustainable Future FundAffiliated underlying actively managed mutual funds ranging in target dates from 2015-2065 that are advised by affiliated investment managers (examples include Loomis Sayles and Harris Assoc.).201789.5Range from 0.50% to 0.55%, depending on share class.  ESG Integration, Exclusions and Thematic Investing.   Implementation of ESG strategies may vary across underlying funds.  Certain ESG strategies may also seek to exclude specific types of investments.  Range of underlying funds also includes thematic funds, such as funds investing in green bonds or carbon neutrality.  Notes of Explanation:  #Existing funds rebranded, having posted on December 23, 2021 prospectus amendments to onboard the consideration of certain environmental, social and governance (ESG) factors in the investment process.  For sustainable investing definitions, refer to Q&A:  What is ESG investing and ESG integration @ https://sustainableinvest.com/qa-what-is-esg-investing-and-esg-integration/.  Sources:  Fund prospectus and related materials.  Assets as of September 30, 2022, sourced to Morningstar Direct.  Other sources:  Sustainable Research and Analysis.Observations:In tandem, equities and bonds suffered steep total return declines during the first nine and trailing 12-months of the year to September 30th, and this has upended target date funds in the short-run.  Both conventional and sustainable target-date funds were impacted.  Target date funds are managed to an internal asset allocation glide path pursuant to which a fund’s targeted mix of equity and fixed income allocations becomes more conservative over time as the target retirement date nears.  This is achieved by shifting the mix of equity and fixed income investments on a regular basis, based on modeling to achieve optimal portfolio mixes and risk adjusted rates of return.  Asset class exposures vary from one investment firm to another.  For example, the Natixis Sustainable Future 2025 Fund, the next closest retirement date fund in the Natixis line-up, is intended for investors expecting to retire or to begin withdrawing assets around the year 2025.  57.34% of the fund’s assets are allocated to equities, both domestic and international, 40.69% to fixed income and 1.97% to cash¹. The elevated fixed income component is in theory intended to achieve stability in the portfolio.  This compares to the longest dated Natixis Sustainable Future 2065 Fund that is 92.33% allocated to equities, only 5.60% to fixed income and 2.07% to cash.  Bonds or bond funds fulfill various roles in target date portfolios, including capital preservation, diversification via the benefit of low or negative correlation to stocks that smooth out returns and protect investors against market swings, inflation protection using inflation protected bonds, and income generation.  This hasn’t turned out this way so far in 2022 or over the trailing twelve months during which equities and bonds became more correlated.  Stocks, as measured by the S&P 500, registered declines of -23.87% and -15.47% since the start of the year to September 30th and for the trailing 12-months while investment grade intermediate bonds, based on the Bloomberg US Aggregate Bond Index, gave up 14.6% during the same periods.  These results translated into significant declines for conventional and sustainable target date funds.  For sustainable target date funds in particular, results range from a low of -16.59% to a high of -26.38% for the longest maturity date in 2065.          The unusual outcome over the last twelve months should not lead investors to abandon target date funds, especially now that valuations are more attractive and offer upside potential going forward.  Still, fund managers may now be exploring further opportunities for achieving diversification, for example, by modeling the potential impacts of adding liquid alternatives, such as managed futures, merger-arbitrage, long/short and global macro strategies.Target date funds are ideal investment vehicles for overlaying sustainable investing strategies consistent with fiduciary responsibilities, given their long-term investment time horizon.  Still, of 2,525 mutual funds/share classes offered by 33 fund firms with total net assets of almost $1.4 trillion, sustainable investors are limited to four sustainable target date fund options (120 mutual funds/share classes in total) with $30.3 billion in assets, or 2.2% of the total (a fifth fund is scheduled to come on stream in the first quarter of 2023²).¹ As of January 31, 2022, the fund’s latest annual report. ² Shareholders were informed through a supplement to the Putnam RetirementReady Funds prospectus dated July 1, 2022 that the fund will be repositioned to invest mainly in Putnam Management-sponsored exchange-traded funds that focus on investments with positive sustainability or environmental, social, and governance (“ESG”) characteristics.  The repositioning will take effect in the first quarter of 2023.

The Bottom Line:  Facing strong headwinds, sustainable fixed income ETFs experienced net inflows on a year-to-date basis to September 30th while equity funds sustained outflows. 0:00 / 0:00 Sustainable fixed income ETFs:  Top 5 ETFs based on assets gains and bottom 5 ETFs by assets declines year-to-date to September 30, 2022Notes of Explanation:  *Index tracking fund.  Sources:  Morningstar Direct, Sustainable Research and Analysis LLCObservations:Assets attributable to sustainable ETFs, a total of 224 funds with $90.6 billion in net assets as of September 30 according to Morningstar, experienced a decline of $23.7 billion since the start of the year, or a 20.7% dip. Equities and bonds suffered steep total return declines during the first nine months of the year.  All ETFs combined dropped 25.4%, equity funds gave up 27.2% while bond funds posted an average decline of 16.2%--a very unusual two-punch consequence attributable to high inflation.  Drops due to market depreciation plus outflows were offset by an estimate $61.4 billion in cash inflows to limit the overall drop to $23.7 billion. That said, sustainable bond ETFs experienced net gains in assets since the start of the year while equity funds asset under management declined.   Equity ETFs account for $90.4 billion in assets invested across 183 equity funds. This segment saw its assets decline by $24.2 billion since the start of the year, experiencing a combination of market depreciation and outflows estimated to be in the amount of $28.1 billion, offset by $3.9 billion in inflows.    At the same time, fixed income funds gained $481.4 million, or 7%, during the same interval.   Consisting of 34 actively as well as passively managed ETFs as of September 30th with $7.3 billion in net assets, fixed income ETFs experienced inflows in the amount of $1.5 billion, offsetting a combination of about $1.1 billion representing market depreciation plus estimated outflows.  The gains were largely observed during the first five months or the year or so.Fixed income funds, which account for almost 16% of the sustainable fixed income ETF segment, realized 60.1% of the net cash flows versus passively managed fixed income funds.   Actively managed fixed income, on average, outperformed passively managed funds in each of the three quarters since the start of the year.  But this performance differential is largely a function of the composition of the two sub-segments with passively managed funds having more exposure to funds with high yield and emerging markets mandates. The top 5 ETFs track either the broad fixed income market with some variations or limit investments to corporate bonds only. Otherwise, the three index tracking funds employ ESG screening and exclusions to isolate eligible securities, however, Inspire Corporate Bond ETF (IBD) is guided by adherence to a biblical theme. As for the top two actively managed funds, in one case, IQ MacKay ESG Core Plus Bond ETF (ESGB) also employs an issuer engagement approach while in the second case, OneAscent Core Plus Bond ETF (OACP), the sub-adviser also seeks to invest a portion of the fund’s assets in impact-oriented securities that have the potential to achieve social or environmental benefits.

The Bottom Line:  Smallest number of funds launched in Q3 2022, but new launches include two sustainable infrastructure funds using different approaches to qualifying companies. 0:00 / 0:00 Quarterly # of mutual funds and ETFs launched between Jan. 1, 2022 – Sept. 30, 2022Notes of Explanation:  New mutual funds data excludes the addition of share classes on top of existing mutual funds.  Sources:  Morningstar Direct, Sustainable Research and Analysis LLCObservations:11 sustainable funds were launched during the third quarter 2022, including two mutual funds and nine ETFs.  This was the smallest number of funds launches so far this year.  The largest number of funds came to market in the first quarter of the year, and the number of new fund introductions has been declining since then.That said, eight new ETFs were listed in September, the largest number of ETFs in a single month so far in 2022.Of note are two sustainable infrastructure funds listed in September:  An ETF advised by J.P. Investment Management Inc. and a mutual fund advised by Principal Global Investors/Principal Real Estate Investors Global.  The funds are positioned to take advantage of the growing demand for sustainable infrastructure and these funds, especially at scale, can serve as intermediaries to mobilize much needed capital for sustainable infrastructure investments, particularly in emerging markets.   The two funds are the JPMorgan Sustainable Infrastructure ETF (BLLD) that came to market with $9.2 million in net assets and carries an expense ratio of 49 basis points (bps), and the Principal Global Sustainable Listed Infrastructure Institutional Shares (PGSLX) with $9.0 million at the time of launch, is subject to an expense ratio of 88 bps, and is available for purchase without a minimum investment through financial professionals.  Both funds are actively managed, non-diversified funds, that intend to invest in large, medium and small cap US and foreign stocks, including stocks in emerging markets. BLLD focuses on infrastructure companies that facilitate accessibility to public goods and services such as electricity, renewable energy, clean water, digital access, transportation, medical facilities, affordable housing and education.  Before employing a bottom-up investment approach, companies are qualified for consideration after screening them based on an exclusionary framework that includes controversial weapons, conventional weapons or thermal coal.  Thereafter, eligible companies are identified using natural language processing to isolate companies that facilitate sustainable infrastructure through their products and services.  They are, in turn, evaluated using J. P. Morgan Investment Management’s proprietary sustainable investment inclusion process.  PGSLX is focused on companies engaged in the development, operation, and management of infrastructure assets. Infrastructure assets include but are not limited to utilities (electric, gas, water), transportation infrastructure (airports, highways, railways, marine ports), energy infrastructure (renewable energy generation, oil and gas pipeline operators), and communications infrastructure (cell phone tower operators, data centers, other providers of telecommunication services).  Companies are evaluated based on their overall quality, valuation and market perception, including their ESG practices using a proprietary Principal Global Investors/Principal Real Estate Investors ESG-ratings framework. Companies are also assessed against their alignment with the United Nations Sustainable Development Goals (SDGs) with special emphasis on clean water and sanitation, affordable and clean energy, decent work and economic growth, industry innovation, and infrastructure, sustainable cities and infrastructure, and climate action.

The Bottom Line:  Green bond funds sustained their worst monthly decline in net assets while preliminary green bonds issuance data in September show another again. September Summary The segment of green bond funds, consisting of four mutual funds and three ETFs, sustained its worst monthly decline in net assets in September.  Net assets dropped by $102.8 million to reach $1,413.8 million.  Market deprecation in September accounted for an estimated $57.7 million while redemptions hit $45.1 million.  This occurred immediately following the best month-over-month gain in net assets so far this year with an increase $63.2 million in August even on the back of negative performance results.  Refer to Chart 1. Three-quarters of the assets decline in September was attributable to the Calvert Green Bond Fund.  This $769.3 million fund gave up $77 million in net assets, down from $846.3 million the previous month.  The decline was almost entirely linked to the institutional oriented Calvert Green Bond I (CGBIX).  The second largest net decline in assets was experienced by the iShares USD Green Bond ETF (BGRN) that gave up $11.2 million. The reality of higher interest rates and high inflation fueled by high employment and strong demand triggered a fall of 9.21% in the S&P 500 Index (large and mid-cap companies) in September while the Bloomberg US Aggregate Bond Index gave up 3.48%.  During the same interval, green bond funds posted an average decline of 4.08%, or slightly better than the -4.32% recorded by the Bloomberg US Aggregate Bond Index and an even wider 27 bps differential when the Franklin Municipal Bond ETF, a fund that seeks to maximize income exempt from federal income taxes that was down 4.72%, is excluded.  The Calvert Bond Fund with its three share classes posted the best results in September, dropping between 3.58% and 3.68%.  At the other end of the range is the Mirova Global Green Bond Fund that recorded declines ranging from -4.56% to 4.43%, depending on share class.  Refer to Table 1. The Mirova Global Green Bond Fund was also a laggard over the trailing twelve months during which time the small universe of green bond funds registered an average decline of -15.61%.  The average decline was wider than the Bloomberg Aggregate Bond Index, -14.6%, but significantly ahead of the Bloomberg Global Aggregate Bond Index, down 20.43%, and the ICE BofAML Green Bond Index Hedged US Index, -17.78%. Two active funds, the Calvert Green Bond Fund (two of three share classes) and TIAA-CREF Green Bond Fund (two of five share classes), produced average 12-month results that bettered the Bloomberg US Aggregate Bond Index.  Otherwise, green bond funds did not provide a cushion from volatility that permeated the conventional bond market. According to reporting by Bloomberg on a preliminary basis, global sales of green bonds rose for a second straight month in September to the highest level since May, even against a backdrop of heightened volatility in the broader market.  Green bonds issuance in September sourced to companies and governments around the world, according to Bloomberg, reached an estimated $54.05 billion versus $35.5 billion raised in August.  Refer to Chart 2.  Based on September’s volume, year-to-date issuance reached an estimated $395.8 billion for an estimated 11% drop compared to last year over the same period.  At the same time, global sales of social, sustainability and sustainability-linked debt declined in September. Not counted in the above numbers is the noteworthy $500 million 100-year green bond tranche issued by the Saudi Arabia Public Investment Fund (PIF) and guaranteed by GACI First Investment Company which raised a total of $3 billion after the close of the third quarter on October 5, 2022.  The bonds were issued in line with the Green Bond Principles maintained by the International Capital Markets Association, the proceeds will be used to finance, refinance and/or invest in eligible green projects that, according to the Offering Circular, are aligned with the United Nations Sustainable Development Goals and are expected to include renewable energy, energy efficiency, sustainable water management, pollution prevention and control, green buildings and clean transportation.  The bonds also received a second party opinion by DNV Business Assurance Services UK Limited.  While not assured, the bonds are also in line to receive a Climate Bond Initiative certification based on the Climate Bond Standard. This very long dated PIF green bond transaction appears to satisfy the generally accepted criteria for qualifying green bonds.  At the same time, beyond the various other issue and issuer-specific financial risks enumerated in the Offering Circular, the PIF offering is likely to have been problematic for values-based investors.  This is due to the sovereign wealth fund’s indirect exposure to Saudi Arabia, even as the fund itself is quite diversified and many of the sectors where PIF invests have low exposure to environmental and social risks.  Saudi Arabia scores poorly on governance due to the country’s low ranking on factors the include ease of doing business, rule of law, press freedom and political rights which have been suppressed, as shown in very stark terms by the killing of Saudi columnist Jamal Khashoggi back in October 2018.  Also, Saudi Arabia is highly exposed to carbon transition risk due to its economic and fiscal dependence on the hydrocarbon sector, it faces increased challenges surrounding water sustainability that are exacerbated by a rapid population growth in recent years, and its exposure to various social risks, including the country’s high levels of gender inequality.  Admittedly, some of these considerations are being mitigated by the country’s long-term commitment to energy transition, but it was also just a short five days following the issuance of the bonds that Saudi Arabia agreed along with other OPEC+ nations to cut oil production, potentially contributing to pain and instability in Europe this coming winter.  In the end, the combined offering was assigned high investment-grade ratings of A1 by Moody’s Investors and an A rating by Fitch Ratings and the transaction was reported to have received final orders that totaled around $25 billion. Chart 1:  Green bond mutual funds and ETFs and assets under management – September 2021 – September 30, 2022Notes of Explanation:  Franklin Municipal Green Blond Fund and tis four share classes with total net assets of $9.7 million included in the data.  At the same time, the rebranded Franklin Liberty Federal Tax-Free Bond ETF renamed the Franklin Municipal Green Bond ETF is excluded as of April 29, 2022.  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC Chart 2:  Month-over-month issuance of green and sustainable bonds–September 2022Notes of Explanation:  Source:  Bloomberg Table 1:  Green bond funds:  Performance results, expense ratios and AUM-Sept. 30, 2022 Name Symbol 1-Month Return (%) 3-Month Return (%) 12-Month Return (%) 3-Year Average Return (%) 5-Year Average Return (%) Expense Ratio (%) Net Assets ($M) Calvert Green Bond A* CGAFX -3.68 -3.51 -14.68 -3.46 -0.46 0.73 70.9 Calvert Green Bond I* CGBIX -3.59 -3.45 -14.44 -3.21 -0.18 0.48 660.3 Calvert Green Bond R6* CBGRX -3.58 -3.43 -14.39 -3.16 0.43 38.1 Franklin Municipal Green Bond ETF@ FLMB -4.72 -4.53 0.3 99.6 iShares USD Green Bond ETF^ BGRN -3.84 -3.95 -15.05 -4.37 0.2 279.4 Mirova Global Green Bond A* MGGAX -4.56 -4.67 -18.95 -5.58 -1.24 0.94 5.8 Mirova Global Green Bond N* MGGNX -4.43 -4.54 -18.68 -5.3 -0.93 0.64 4.6 Mirova Global Green Bond Y* MGGYX -4.43 -4.55 -18.71 -5.35 -0.99 0.69 27.9 PIMCO Climate Bond A* PCEBX -4.08 -4.09 -15.64 0.91 0.8 PIMCO Climate Bond C* PCECX -4.14 -4.28 -16.28 1.66 0 PIMCO Climate Bond I-2* PCEPX -4.05 -4.02 -15.38 0.61 0.5 PIMCO Climate Bond I-3* PCEWX -4.05 -4.03 -15.42 0.66 0.1 PIMCO Climate Bond Institutional* PCEIX -4.04 -3.99 -15.29 0.51 11 TIAA-CREF Green Bond Advisor* TGRKX -4.03 -3.95 -14.53 -2.55 0.6 44.1 TIAA-CREF Green Bond Institutional* TGRNX -4.12 -3.94 -14.5 -2.53 0.45 70.4 TIAA-CREF Green Bond Premier* TGRLX -4.14 -3.98 -14.63 -2.66 0.6 0.9 T TIAA-CREF Green Bond retail* TGROX -4.15 -4.01 -14.74 -2.8 0.8 6.9 TIAA-CREF Green Bond Retirement* TGRMX -4.14 -3.98 -14.63 -2.66 0.7 13.5 VanEck Green Bond ETF GRNB -3.79 -3.74 -14.98 -3.2 -1.52 0.2 79 Average/Total -4.08 -4.03 -15.61 -3.60 -3.56 0.64 1,413.8 Bloomberg US Aggregate Bond Index -4.32 -4.75 -14.6 -3.26 -0.27 Bloomberg Global Aggregate Bond Index -5.14 -6.94 -20.43 -5.47 -2.32 Bloomberg Municipal Total Return Index -3.84 -3.46 -11.5 -1.85 0.59 S&P Green Bond US Dollar Select IX -3.89 -3.81 -15.06 -2.96 -0.17 ICE BofAML Green Bond Index Hedged US Index -4.32 -4.52 -17.78 -5.22 -0.52 Notes of Explanation:  Blank cells=NA. 3 and 5-year returns are average annual total returns.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  @Fund rebranded as of May 3, 2022.  ^Effective March 1, 2022, fund shifted to US dollar green bonds.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line:  Long-term performance through September continues to support portfolios informed by or indexed to ESG screened international benchmarks, however, their advantage is narrowing. 0:00 / 0:00 Intermediate-to-long-term performance differential:  Selected ESG screened indices vs. conventional indices: Trailing 3, 5 and 10-years to September 30, 2022Notes of Explanation: The six MSCI ESG indices include the MSCI USA ESG Leaders Index consisting of large and mid-cap companies, MSCI USA Small Cap ESG Leaders Index, MSCI ACWI ex USA Leaders Index consisting of large and mid-cap companies in developed and developing countries, MSCI EAFE ESG Leaders Index consisting of large and mid-cap companies in developed markets.  MSCI Leaders indices are constructed to provide exposure to companies with high ESG scores relative to their sector peers.  Intermediate term covers 3 and 5 years.  Long-term=10 years.  Data source:  MSCIObservations:The outperformance of ESG screened indices, a consideration in promoting the alpha generating properties of ESG versus conventional investing in 2021, continued to narrow in September.  This observation is based on the tracking of six selected MSCI ESG Leaders indices and their performance, including two US stock indices, three international and one fixed income index.    The reality of higher interest rates and high inflation fueled by high employment and strong demand triggered a decline of 9.27% in the MSCI USA Index (large and mid-cap companies) in September while the Bloomberg Aggregate US Bond Index gave up 4.32%.  All but one industry sector posted negative results.  Against this backdrop, three of five selected US and international ESG screened equity indices comprised of companies with high ESG scores relative to sector peers and one bond fund index lagged behind their conventional counterparts, for a total of four underperforming indices of six.  This is the third month in a row during which four or more of the same six indices trailed, and the sixth month so far in 2022. The US-oriented benchmarks, the MSCI USA ESG Leaders Index and the MSCI USA Small Cap ESG Leaders Index, exceeded the total return performance of their conventional counterparts in September by 31 basis points (bps) and 92 bps, respectively.  Both indices lagged last month but retain a performance advantage over the 1-year term.  That said, the two indices delivered mixed results in the intermediate 3-year and 5-year time periods while falling behind over the ten- year time horizon to September 30, 2022. The three international indices, including the MSCI ACWI ex USA ESG Leaders Index, the MSCI Emerging Markets ESG Leaders Index and the MSCI EAFE ESG Leaders Index, fell behind their conventional counterparts in September by 65 bps, 97 bps and 53 bps, respectively.  The indices now also trail over the 1-year and 3-year time periods but continue to lead with narrower margins over 5-years and 10-years.As for fixed income, the Bloomberg MSCI ESG Focus Aggregate Bond Index posted the sharpest monthly decline so far this year, giving up -4.34% versus -4.32% for the Bloomberg US Aggregate Bond Index.  It’s also off by 2 bps over the previous twelve-month interval but leads by 5 bps over the trailing 3-years.  The index was launched less than five years ago.While long-term results continue to support ESG screened international benchmarks, the leads posted by the international indices, in particular, relative to conventional benchmarks have been shrinking by a minimum of 50% over the 10-year and 5-year terms since January 2021.

The Bottom Line:  Dow Jones survey reports that recent developments like the pandemic, the Ukraine conflict and the energy crisis are influencing sustainable investing practices. 0:00 / 0:00 Developments impacting the strategic thinking of senior managers around ESG strategiesNotes of Explanation:  Dow Jones collaborated with Coleman Parkes, a B2B market research specialist, to conduct this survey in April - May 2022 using phone to web methodology. They targeted 200 senior leaders in investment management firms with more than $750 billion in assets, in the UK and U.S. All participants had a role in sustainable investments.  The responses above were to the question:  How, if at all, have the following impacted your strategic thinking, especially around ESG strategies.  Source:  Dow Jones.Observations:Released last month in conjunction with the launch of a new sustainability data set covering thousands of publicly traded companies, a survey conducted in April-May 2022 and published in September by Dow Jones, a News Co. affiliate, concluded that ESG investments are “projected to double in the next three years, accounting for 15% of all investments by 2025.”  The survey targeted 200 senior leaders in investment management firms with more than $750 billion in assets in the US and the UK.The numerical conclusions are curious given that as recently as 2020 global sustainable assets reportedly reached $35.3 trillion in assets under management¹ and accounted for 35.9% of total assets under management.  ESG investments along with negative/exclusionary screening practices are dominant and are not likely to double in the next three years. The puzzlement around the data is likely attributable to the lack of consensus around terms and definitions. Still, the survey notes that recent developments such as the pandemic, the Ukraine conflict, the energy crisis and climate change are accelerating the move towards more sustainable investing practices.  At the same time, the absence of timely, relevant and trustworthy information and tools can challenge the growth trajectory. Recent top of mind developments, however, are likely to be playing an informing role rather than shifting long-term and more entrenched drivers of ESG investing in equities and fixed income that include risk management, client demand, regulations, and fiduciary responsibility.  Alpha generation, another investment consideration, has begun to trail off in the last year.  The above noted long-term drivers are also impacted by the often-cited lack of comparable and historical data.¹Source:  Global Sustainable investment Review 2020

The Bottom Line:  Money market funds are benefiting from rising interest rates and offer investors a safe haven from declines in stock and bond prices. Total return performance of leading sustainable money market funds:  1- and 12-monthsNotes of Explanation:  Total return performance arrayed based on trailing 12-month results through August 31, 2022, posted by the top 10 performing money market funds, including their share classes.  Source:  Morningstar Direct. Observations: Sustainable mutual funds and ETFs, a total of 1,345 funds at the end of August according to Morningstar, recorded an average return of -3.37% in August and -15.34% for the trailing twelve months.  Of these, only 42 funds posted positive results over the trailing twelve months.  Within this segment, 20 funds, or almost 50%, were sustainable prime money market funds that were also just about the only sustainable funds to post positive returns in August.  These are very conservatively managed funds that invest in short-term government, corporate and other similar obligations but do not seek to maintain a constant net asset value. The average returns of sustainable money market funds began to tick up in mid-March of this year when the Federal Reserve announced its first-rate hike of this inflation fighting cycle with a 25-basis point interest rate increase.  The central bank took its federal funds rate up to a range of 3%-3.25% on September 21, 2022, the highest it has been since early 2008, following the third consecutive 75 basis point rate hike. Since the first-rate hike, the average total return performance of sustainable money market funds has risen from -0.01 in March to 0.18% in August.  Returns are expected to rise along with higher rates since Fed officials signaled the intention of continuing to hike rates until the federal funds level hits a “terminal rate,” or end point, of 4.6% in 2023.  In the meantime, money market funds offer investors positive returns (unadjusted for inflation) and shelter from volatile market conditions that have impacted stocks as well as bonds due to surging inflation, central bank responses, the continuing war in the Ukraine and concerns that global economies are heading into a slowdown. For the trailing twelve-month interval, returns ranged from a low of 2 bps recorded by the BlackRock Wealth Liquidity Environmentally Aware Investment Fund C to a high of 56 bps achieved by the DWS ESG Liquidity Capital Fund.  This $569.4 million fund managed by DWS Investment Management Americas, Inc., a unit of DWS, evaluates securities based on a variety of ESG considerations and seeks to identify and invest in ESG leaders within industry-and region-specific peer groups.  The fund is largely geared to institutional investors but can be accessed via financial intermediaries.

The Bottom Line:  Even as the majority of US and international equity managers continue to underperform, new launches of actively managed sustainable ETFs tick up. Observations According to the just released S&P Dow Jones Indices SPIVA report¹ that measures the performance of actively managed funds against their relevant S&P index benchmarks, 49% of actively managed large-cap domestic equity fund managers were able to outperform their corresponding benchmarks during the first six months of 2022. Or, put another way, 51% underperformed.  This was a period during which the S&P 500 gave up 19.96% and fixed income, as measured by the Bloomberg US Aggregate Bond Index, was down 13.91%. This represents a significant minority of active managers, and it puts actively managed large-cap US equity funds on track for their best (i.e., lowest) underperformance rate since 2009. Underperformance across US market capitalization ranges was even higher, with 54% of mid-cap and 63% of small-cap funds underperformed the S&P MidCap 400 and the S&P SmallCap 600, respectively. As for international equities, a majority of actively managed funds underperformed in every category.  On the other hand, 93% of Core Plus Bond funds and 59% of actively managed high-yield US funds outperformed the iBoxx $ Liquid Investment Grade Index and iBoxx $ Liquid High Yield Index.  This was not the case, however, for other fixed income categories. There is no reason to believe that sustainable funds would perform any differently, yet interestingly, the latest interval of underperformance by US equity fund managers coincides with a pickup in the launch of actively managed sustainable ETFs.  As of August 31, 2022, there are a total of 74 actively managed ETFs with total net assets in the amount of $4.8 billion.  The segment is dominated by equity funds that account for 74% of funds by number and 71% of assets under management. During the eight month-interval since the start of the year, actively managed sustainable ETFs expanded by 13 ETFs, or 21.3%, while passively managed sustainable ETFs expanded by 10, or an increase of 6.5%. ¹ S&P Indices Versus Active (SPIVA) measures the performance of actively managed funds against their relevant S&P index benchmarks.

The Bottom Line:  Gains in assets over the last four months shows investor confidence in green bonds even as performance has been in the red. August Summary Assets attributable to the segment of green bond funds, four mutual funds and three ETFs, gained $63.2 million in net assets during the month of August to reach a new high of $1,516.6 million.  Refer to Chart 1.  The segment experienced estimated cash inflows of $100.3 million, offset by about $37.1 million due to market depreciation.  This is the best month-over-month gain so far this year, adjusting for the re-branding of the Franklin Municipal Green Bond ETF as of May 3rd and the shift of $101.9 million into the green bond funds segment.  The biggest gain by a fund in August was realized by the TIAA-CREF Green Bond Fund that added $39 million in net assets, with $40.8 million attributable to the fund’s Advisor Shares class (TGRKX). The fund finally eclipsed the $100 million level the previous month and now stands at $139.4 million.  The TIAA-CREF Green Bond Fund, which was launched in November 2018, is the best performing green bond fund over the trailing 3-year time period. Green bond funds posted an average return of -2.85% in August versus -2.83% recorded by the Bloomberg US Aggregate Bond Index and -3.46% and -4.47% registered by the Bloomberg Global Aggregate Bond Index and the ICE BofAML Green Bond Index Hedged US Index, respectively.  The average performance of green bond funds, in part influenced by variations in returns due to a combination of exposures to US dollar and non-US dollar denominated green bonds as well as taxable and municipal bond funds, is lagging the broad-based Bloomberg US Aggregate Bond Index since the start of the year, the trailing 12-month and 3-year intervals. During the month of August returns ranged from a high of -1.94% attributable to both the Van Eck Green Bond ETF (GRNB) and TIAA-CREF Green Bond Fund Institutional Shares (TGRNX) to a low of -4.46% posted by the Mirova Global Green Bond Fund Y (MGGYX).  Relative to the Mirova Global Green Bond Fund, both the leading funds in August had zero to a more modest exposure to non-US dollar denominated green bonds.  Refer to Table 1. According to recent data by Bloomberg New Energy Finance as reported by SEB, issuance of sustainability-themed bonds and loans continue to lag last year’s levels as total transactions at the end of August reached $946 billion or 11% behind comparable year-over-year levels.  The decline in sustainable debt continued to impact the various types of categories, with social bonds and sustainability-linked loans reflecting the largest declines in terms of value.  Refer to Chart 2.  Issuance of sustainability linked bonds and sustainability linked loans has ticked up so far this year relative to last year when sales reached about $100 billion, even as skepticism regarding these structures is rising.  Concerns are focused on how well the bonds advance stated goals in the light of easy to beat greenhouse gas emissions goals and the ability to repurchase the bonds before any penalties kick in for not meeting sustainability targets.  That said, there are reasons to believe the overall sustainable bond market will recover.  As noted in last month’s Green bond funds reverse course in July 2022 article (https://sustainableinvest.com/article-title-green-bond-funds-reverse-course-in-july-2022/), the passage of the Inflation Reduction Act (IRA), that included $369 billion in energy security and climate spending over the next 10 years, is likely to stimulate the issuance of sustainability-themed bonds.  Also, Euro zone governments have raised 15 billion euros ($15 billion) from green bonds issued by Germany, Italy and the Netherlands over the last two weeks, pushing volumes above a year ago.  At the same time, green bond sales in the Asia-Pacific region are likely to rise in 2022 as major economies lay out roadmaps to net-zero emissions and invest in projects to reduce carbon intensity. Demand for sustainable bonds remains strong and as bond markets stabilize, the caution exhibited by borrowers in recent months is likely to recede. Chart 1:  Green bond mutual funds and ETFs and assets under management – September 2021 – August 31, 2022Notes of Explanation:  Franklin Municipal Green Blond Fund and tis four share classes with total net assets of $9.7 million included in the data.  At the same time, the rebranded Franklin Liberty Federal Tax-Free Bond ETF renamed the Franklin Municipal Green Bond ETF is excluded as of April 29, 2022.  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC Chart 2:  Year over year change in issuance-January – August 2022 Table 1:  Green bond funds:  Performance results, expense ratios and AUM-August 31, 2022 Name Symbol 1-Month Return (%) 3-Month Return (%) 12-Month Return (%) 3-Year Average Return (%) 5-Year Average Return (%) Expense Ratio (%) Net Assets ($M) Calvert Green Bond A* CGAFX -2.67 -2.25 -12.09 -2.46 0.19 0.73 73.7 Calvert Green Bond I* CGBIX -2.65 -2.26 -11.92 -2.23 0.46 0.48 732.6 Calvert Green Bond R6* CBGRX -2.64 -2.24 -11.87 -2.18 0.43 40 Franklin Municipal Green Bond ETF FLMB -3.02 -2.3 -12.12 -1.78 1.02 0.3 104.8 iShares USD Green Bond ETF^ BGRN -2.17 -1.91 -12.73 -3.35 0.2 291.3 Mirova Global Green Bond A* MGGAX -4.36 -3.93 -15.72 -4.42 -0.42 0.94 6.3 Mirova Global Green Bond N* MGGNX -4.45 -3.92 -15.56 -4.17 -0.15 0.64 4.9 Mirova Global Green Bond Y* MGGYX -4.46 -3.92 -15.61 -4.21 -0.18 0.69 28.9 PIMCO Climate Bond A* PCEBX -3.2 -2.59 -12.54 0.91 0.8 PIMCO Climate Bond C* PCECX -3.26 -2.77 -13.21 1.66 0 PIMCO Climate Bond I-2* PCEPX -3.17 -2.52 -12.28 0.61 0.5 PIMCO Climate Bond I-3* PCEWX -3.18 -2.53 -12.32 0.66 0.1 PIMCO Climate Bond Institutional* PCEIX -3.16 -2.49 -12.19 0.51 11 TIAA-CREF Green Bond Advisor* TGRKX -2.05 -1.78 -11.6 -1.35 0.6 43.9 TIAA-CREF Green Bond Institutional* TGRNX -1.94 -1.67 -11.48 -1.3 0.45 73.2 TIAA-CREF Green Bond Premier* TGRLX -1.96 -1.71 -11.61 -1.42 0.6 0.9 T TIAA-CREF Green Bond retail* TGROX -1.97 -1.73 -11.73 -1.57 0.8 7.2 TIAA-CREF Green Bond Retirement* TGRMX -1.96 -1.71 -11.62 -1.43 0.7 14.2 VanEck Green Bond ETF GRNB -1.94 -2.08 -12.57 -2.19 -0.92 0.2 82.3 Average/Total -2.85 -2.44 -12.67 -2.43 0.0 Bloomberg US Aggregate Bond Index -2.83 -2.01 -11.52 -2.0 0.52 Bloomberg Global Aggregate Bond Index -3.95 -5.05 -17.61 -4.39 -1.46 Bloomberg Municipal Total Return Index -2.19 -1.25 -8.63 -0.83 1.28 S&P Green Bond US Dollar Select IX -1.85 -2.14 -12.53 -1.82 0.56 ICE BofAML Green Bond Index Hedged US Index -4.47 -3.01 -15.12 -4.05 0.29 Notes of Explanation:  Blank cells=NA. 3 and 5-year returns are average annual total returns.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  ^Effective March 1, 2022, fund shifted to US dollar green bonds.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line:  Divergence in the August 2022 performance of the top and bottom clean energy funds due to foreign holdings reinforces benefits of diversification. Divergence in performance of top and bottom 10 performing ETFs in August 2022 Observations: With two exceptions, the top sustainable ETF performers in August 2022 were focused on clean energy.  Whereas the universe of 231 listed sustainable ETFs posted an average return of -3.1%, the top ten performing ETFs recorded an average gain of 3.6%. Excluding the two non-clean energy focused funds, the average performance of the eight remaining funds is 3.8%. Clean energy funds, led by the top performing $801.8 million ALPS Clean Energy ETF (ACES) that was up 5.9% in August, benefited from the passage of the Inflation Reduction Act (IRA).  The Act is designed to spur investment in electric cars and clean energy in the United States by providing $369 billion in direct funding, loans and loan guarantees aimed at reducing greenhouse gas emissions.  Still, the same funds are down 15.9% over the trailing twelve months. At the other end of the range, the ten worst performing funds in August registered an average decline of 7.3%, stretching from a low of -9.6% to a high of -6.5%.  Included in the mix were seven funds invested in clean energy, water and green buildings. Taken together, these seven funds registered a decline of 7.4%.  The disparity in August’s results is attributable to the fact that these seven funds were almost 2X more exposed to foreign securities in markets that didn’t perform as well as their domestic US counterparts in August and that are less likely to benefit directly from IRA unless investments are made in the US. The divergence in performance illustrates the benefits of diversification, which continues to apply to stocks and bonds longer-term, notwithstanding recent negative returns posted by both asset classes, as well as across geographies.

The Bottom Line:  Renewable and clean energy mutual funds and ETFs, performance leaders in July, should benefit from the just enacted Inflation Reduction Act (IRA). Performance of the top 10 mutual funds and ETFs:  July 2022 and trailing 12-months (12-M)Notes of Explanation:  *Name change from iClima Distributed Smart Energy ETF effective as of August 9, 2022.  ProShares S&P Kensho Cleantech ETF and Virtus Duff & Phelps Clean Energy ETF were not in operation for the full trailing 12-M interval.  Sources:  Morningstar Direct, fund disclosures and Sustainable Research and Analysis LLC. Observations: The universe of active and passively managed sustainable mutual funds and ETFs as defined by Morningstar, a total of 1,343 funds as of July 31, 2022, posted an average return of 6.50%.  Sustainable equity funds gained 8.34% while fixed income funds added 2.33%. Leading in the performance rankings for the month were all renewable thematic energy funds that benefited from concerns over climate change and the anticipated passage of the Inflation Reduction Act (IRA).  IRA, which was signed into law by President Joe Biden on August 16, is a major piece of legislation that does more to cut fossil fuel use and fight climate change than any previous legislation in the US.  The main thrust of the bill is the $369 billion provision toward clean energy assets and technologies over the next decade. The IRA provides tax credits reducing the cost to deploy new wind and solar assets, acquire new electric and hybrid vehicles, and invest in renewables and clean energy technologies, including clean hydrogen production and carbon capture and storage (CCS).  These provisions, according to the Rhodium Group, are likely to reduce carbon emissions 37% to 41% below 2005 levels by 2030. The top ten performing funds in July, posting an average return of 22.8%, were all thematic-oriented renewable energy funds pursuing various strategies from clean and alternative energy generally to more targeted or strategies such as solar and hydrogen power. Top holdings, based on latest reported positions held, include Enphase Energy (ENPH), a Freemont California-based company that develops, manufactures and sells solar micro-inverters, energy generation monitoring software and battery energy storage products, primarily for residential customers. ENPH is followed by First Solar, Inc. (FSLR), a manufacturer of solar panels, and a provider of utility-scale PV power plants  and supporting services that include finance, construction, maintenance and end-of-life panel recycling, Plug Power Inc. (PLUG), an American company engaged in the development of hydrogen fuel cell systems that replace conventional batteries in equipment and vehicles powered by electricity, and Solar Edge Technologies (SEDG), an Israeli company that develops and sells solar inverters for photovoltaic arrays, energy generation monitoring software, battery energy storage products, as well as other related products and services to residential, commercial and industrial customers.  Only two funds hold Tesla (TSLA) Returns ranged from a high of 34.93% posted by the $5.3 million leveraged Direxion Daily Global Clean Energy Bull 2X ETF (KLNE) to 19.08% recorded by the Virtus Duff & Phelps Clean Energy ETF (VCLN), another small fund at $3.7 million. Reflecting the volatility of the segment, these outstanding July results were not enough to offset in their entirety the trailing average -17.3% returns registered by the eight more seasoned funds over the trailing 12-month interval to July 2022. That said, these funds and others in this category should benefit from spending under the Inflation Reduction Act (IRA).

The Bottom Line:  Green bond funds reverse course in July 2022 while green bond volumes are are expected to benefit from the Inflation Reduction Act. July Summary Assets attributable to green bond funds, a segment consisting of four mutual funds and three ETFs, reversed a four-month decline in net assets largely due to capital depreciation.  The seven funds added $30.7 million in net assets during the month of July, benefiting from an average total return gain of 2.98%, to end the month at $1,453.4 million. Refer to Chart 1.  Still, green bond funds sustained estimated cash outflows in the amount of $7.1 million.  However, these were offset by market appreciation.  The largest net gainers were also the two largest funds in the category.  Included is the $810.5 million Calvert Green Bond Fund.  The fund gained $22.1 million, 89% of which was attributable to the institutional share class I (CGBIX) that accounts for 86% of the fund’s assets.  Also, the $ 269.1 million iShares USD Green Bond ETF (BGRN) added $5.1 million.  The fund’s total return performance results have shown improvement since its mandate was updated as of March 1 of this year to limit its exposure to US dollar denominated green bonds.  The only fund to experience a net decline in assets was the recently relaunched $111 million Franklin Municipal Green Bond EFT (FLMB) that gave up $2.6 million (net). After the first two quarters of 2022 recorded the worst US bond market returns since 1980 on the back of significant increases in US interest rates, July delivered a positive beginning for the third quarter and offered investors some relief from year-to-date and trailing 12-month declines. The US bond market returned 2.44%, according to the Bloomberg US Aggregate Bond Index while the global bond market returned 2.13% per the Bloomberg Global Aggregate Bond Index.  At the same time, green bond funds posted an average gain of 2.98% in July, a strong rebound but still not sufficient to wipe away paper losses that stood at -8.97% since the start of the year and -10.29% over the trailing 12-month interval to July 31.  The $38.9 million Mirova Global Green Bond Fund Y (MGGYX) led with a positive 4.55% total return while at the other end of the range, the $82.6 million VanEck Green Bond ETF (GRNB) posted a gain of 2.04%.  Refer to Table 1. Based on preliminary data, $12.3 billion in green bonds were issued in July, compared to $25.6 billion issued during the same month in 2021 and $47 billion that came to market last month.  Refr to Chart 2.  Green bond issuance lagged in Q1 but revived in the second quarter. Still, based on updated data, green bond volumes year-to-date reached $243.0 billion versus last year’s $269.4, a decline of 26.4 million or 10%.  The drop in volumes is not unique to green bonds, as heightened market volatility and rising interest rates during the first quarter extended through the full first half of the year as inflation stress was joined by rising recession risks.  The growing headwinds have all contributed to slowdowns and contractions in the second-quarter bond issuance for every sector relative to the first quarter, which is expected to keep global bond issuance in 2022 well below last year’s levels. Toward the end of July news emerged of negotiations between Senate Majority Leader Chuck Schumer and West Virginia Senator Joe Manchin regarding a new budget reconciliation bill, the Inflation Reduction Act (IRA), that included $369 billion in energy security and climate spending over the next 10 years as well as tax and healthcare provisions.  From that point, the passage of the IRA moved very quickly.  It successfully passed through the Senate on August 7, the House of Representative on August 12 and IRA was signed into law by President Joe Biden on August 16.  The Act is a major piece of legislation that does more to cut fossil fuel use and fight climate change than any previous legislation in the US.  It evidences the U.S.’s commitment to reducing its emission profile and it is likely to stimulate green bond issuance in the US.  The main thrust of the bill is the $369 billion provision toward clean energy assets and technologies over the next decade. The IRA provides tax credits reducing the cost to deploy new wind and solar assets, acquire new electric and hybrid vehicles, and invest in renewables and clean energy technologies, including clean hydrogen production and carbon capture and storage (CCS).  According to the Rhodium Group, these provisions are likely to reduce carbon emissions 37% to 41% below 2005 levels by 2030. Chart 1:  Green bond mutual funds and ETFs and assets under management – August 2021 – July 31, 2022Notes of Explanation:  Franklin Municipal Green Blond Fund and tis four share classes with total net assets of $9.7 million included in the data.  At the same time, the rebranded Franklin Liberty Federal Tax-Free Bond ETF renamed the Franklin Municipal Green Bond ETF is excluded as of April 29, 2022.  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC Chart 2:  Issuance of green bonds:  January 1, 2021 – July 31, 2022Notes of Explanation: Volumes data varies by data source and may be preliminary.  Source:  Climate Bond Initiative (CBI) Table 1:  Green bond funds:  Performance results, AUM and expense ratios-July 31, 2022 Name Symbol 1-Month Return (%) 3-Month Return (%) Y-T-D Return (%) 12-M Return (%) 3-Year Average Return (%) $Assets (millions) Expense Ratio (%) Calvert Green Bond A* CGAFX 2.82 0.26 -8.5 -10.06 -0.84 76 0.73 Calvert Green Bond I* CGBIX 2.76 0.24 -8.43 -9.9 -0.62 715.5 0.48 Calvert Green Bond R6* CBGRX 2.75 0.25 -8.4 -9.85 -0.57 41.1 0.43 Franklin Municipal Green Bond ETF$ FLMB 3.32 108.4 0.3 iShares USD Green Bond ETF^ BGRN 2.11 0.78 -9.34^ -11.17^ -1.93^ 274.2 0.2 Mirova Global Green Bond A* MGGAX 4.44 -1.11 -10.5 -12.29 -2.2 6.5 0.94 Mirova Global Green Bond N* MGGNX 4.54 -0.99 -10.31 -12.04 -1.91 4.8 0.64 Mirova Global Green Bond Y* MGGYX 4.55 -0.99 -10.33 -12 -1.92 29.6 0.69 PIMCO Climate Bond A* PCEBX 3.28 0.12 -8.43 -9.56 0.8 0.91 PIMCO Climate Bond C* PCECX 3.22 -0.06 -8.82 -10.24 0 1.66 PIMCO Climate Bond I-2* PCEPX 3.31 0.2 -8.27 -9.29 0.5 0.61 PIMCO Climate Bond I-3* PCEWX 3.3 0.18 -8.3 -9.33 0.1 0.66 PIMCO Climate Bond Institutional* PCEIX 3.32 0.22 -8.22 -9.2 11.4 0.51 TIAA-CREF Green Bond Advisor TGRKX 2.17 0.21 -8.87 -9.81 0.04 3.1 0.6 TIAA-CREF Green Bond Institutional* TGRNX 2.17 0.22 -8.85 -9.79 0.06 74.5 0.45 TIAA-CREF Green Bond Premier* TGRLX 2.16 0.18 -8.93 -9.92 -0.07 1 0.6 TIAA-CREF Green Bond Retail* TGROX 2.16 0.15 -9 -10.04 -0.22 7.2 0.8 TIAA-CREF Green Bond Retirement* TGRMX 2.16 0.17 -8.93 -9.92 -0.07 14.6 0.7 VanEck Green Bond ETF^ GRNB 2.04 0.21 -8.99 -10.8 -1.24^ 84.1 0.2 Average/Total 2.98 0.01 -8.97 -10.29 -0.88 1,422.7 0.64 Bloomberg US Aggregate Bond Index 2.44 1.49 -8.16 -9.12 -0.63 Bloomberg Global Aggregate Bond Index 2.13 -0.88 -12.08 -14.58 -2.45 Bloomberg Municipal Total Return Index 2.64 2.46 -6.58 -6.93 0.43 S&P Green Bond US Dollar Select IX 1.98 0.1 -9.17 -10.77 -0.58 ICE BofAML Green Bond Index Hedged US Index 4.47 0.15 -9.78 -11.46 -1.84 Notes of Explanation:  Blank cells=NA. 3 and 5-year returns are average annual total returns.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  ^Effective March 1, 2022, BGRN fund shifted to US dollar green bonds while GRNB made a similar shift as of September 1, 2019.  $Effective May 3, 2022, Franklin Templeton rebranded the Franklin Liberty Federal Tax-Free Bond ETF. Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line:  Sustainable actively managed US equity mutual funds and ETFs generated better average performance results in July relative to their conventional fund counterparts. Average performance of actively managed sustainable diversified US equity funds versus conventional funds:  July 2022, Y-T-D and trailing 12-months to July 31, 2022Note of Explanation:  Sustainable US equity funds, both mutual funds/share classes and ETFs, include large-cap, mid-cap and small-cap equity funds.  Data sources:  Morningstar Direct, Sustainable Research and Analysis LLC. Observations: Sustainable actively managed US equity funds, a total of 304 large, mid-cap and small-cap equity mutual funds and ETFs, including mutual fund share classes that were in operation throughout the entire month of Jul 2022, registered an average total return of 9.58%.  This compares to conventional funds, qualified on the same basis, that posted an average gain of 8.95%, or a one-month deficit of 63 basis points. At the same time, conventional US equity funds outperformed their sustainable funds counterparts, based on their average performance results on a year-to-date and trailing 12-month basis.  Conventional funds, a larger universe consisting of 5,917 funds/share classes posted an average return of -14.56% and -10.29% for the year-to-date interval and trailing 12-months while actively managed sustainable equity funds registered average declines of 16.08% and 11.05%. When performance results are evaluated on an average weighted basis, giving more weight to larger funds, the trailing 12-month performance picture changes.  The same cohort of sustainable funds registered an average weighted return of -9.28% versus -10.05% for conventional funds.  As for the year-to-date interval, the results are identical. The 12-month 77 basis points (bps) outperformance attributable to sustainable funds based on their average weighted return is attributable to slightly better results achieved by the largest sustainable equity funds versus the smaller funds in the segment.  The largest sustainable funds, with assets over $100 million, produced an average return of -15.5% versus a decline of 16.8% recorded by funds with assets less than $10 million.  The smallest funds are less efficient, they face challenges trying to implement their strategy at less-than-optimal fund sizes and their expense ratios, on average, are 20 bps higher.

The Bottom Line:  Enhanced disclosures to clients and shareholders by self-described sustainable mutual funds and ETFs of ESG related outcomes and impacts are not commonplace. Average weighted carbon intensity metrics for the largest 10 sustainable ETFsNote of Explanation:  Data sources:  Fund Fact Sheets, MSCI, Sustainable Research and Analysis LLC. Observations: In general, enhanced disclosures of ESG related outcomes and impacts by sustainable funds to clients and shareholders are not commonplace.  On the one hand, sustainable funds in the US are not subject to any ESG-specific regulatory requirements to provide such information, and recently proposed SEC enhanced disclosure practices are still far from being finalized and adopted.  On the other hand, as we see it, funds integrating one or more sustainable factors that represent a significant or main consideration in investment decision making and that have served as a magnet for attracting client assets have a duty and responsibility to step up their disclosures and report on specific and measurable environmental, social and governance outcomes.  Excluded are funds that consider ESG factors alongside other, non-ESG factors in investment decisions¹. Except for BlackRock which has published individual sustainability reports for its universe of sustainable iShares ETFs, most sustainable ETFs (and mutual funds) do not explicitly report to investors on non-financial ESG-oriented outcomes in the form of key performance indicators (KPIs) or otherwise.  This contrasts with fundamental data such as price-to-book ratios, price-to-earnings ratios, or dividend yields, to mention just a few, that regularly appear in various shareholder communications. For investors seeking to understand, measure and manage carbon risk in particular, some funds are now disclosing a portfolio’s weighted average carbon intensity.  A portfolio’s weighted average carbon intensity is derived by calculating the carbon intensity for each portfolio company (comprised of Scope 1 + Scope 2 emissions per $million in sales) and calculating the weighted average by portfolio weight. GHG emissions are expressed in tons of GHG, which can be equated to greenhouse gas emissions released for 1-mile of travel in an automobile that gets 25 miles/gallon.  Weighted average carbon intensity, which is one of two GHG metrics proposed by the SEC in its disclosure proposal for funds that consider GHG emissions, allows for comparisons between funds of different sizes. Often disclosed in a fund’s Fact Sheet, carbon intensity data is now disclosed by seven of the top 10 diversified US-equity ETFs.  These funds, all index managed stock funds, have attracted $47.9 billion in net assets and account for 43% of sustainable ETF assets under management of 232 funds with $110.3 billion.  Average weighted carbon intensity outcomes across the range of the top 10 diversified US-equity ETFs as of May 31, 2022 range from a high of 113.3 reported by the iShares ESG Aware MSCI USA Small-Cap ETF (ESML) to a low of 60.64 registered by the Nuveen ESG Small-Cap ETF (NUSC).  This compares, for example, to a carbon intensity of 134.6 calculated for the MSCI North America Index²,or between 16% and 55% higher across the reporting ETFs.  While the calculation methodologies are the same, because they track two different benchmarks, the two small cap ETFs, the iShares ESG Aware MSCI USA Small Cap ETF (ESML) and Nuveen ESG Small Cap ETF (NUSC) produce widely different results that investors should take on board when making investment decisions qualified by their investment preferences. ¹Such funds should disclose their ESG integration practices but have a lesser duty to disclose outcomes. ²Based on latest reported MSCI data as of October 29, 2021.  Carbon intensity for a small cap index is not available.

The Bottom Line:  Three new ETFs listed in June 2022 seeking to reduce greenhouse gas emissions should be evaluated based on financial and non-financial outcomes. Sustainable ETFs listed in June 2022 that invest in companies seeking to reduce CO2 emissions Fund Name/Symbol ER Assets ($M) Structure Sustainable Investing Approach Nuveen Global Net Zero Transition ETF (NTZG) 0.55% 5.0 Actively managed.  Equities of any market capitalization anywhere in the world, including emerging markets. Fund focuses on the equity securities of companies that will have a positive impact on the carbon economy through their current and/or planned efforts to reduce global greenhouse gas emissions which, in turn, will contribute to the overall transition to a net zero economy. The fund’s adviser will engage with companies to expedite their transition to net zero carbon emissions. V-Shares MSCI World ESG Materiality and Carbon Transition ETF (UDI) 0.39% 2.3 Passively managed/MSCI World ESG Materiality and Carbon Transition Select Index.  Equity securities of companies in the developed markets. The underlying securities are intended to represent the performance of companies which are assessed to be sector leaders based on a set of relevant key issues scores that are aligned with SASB’s Materiality Map.  The index excludes companies involved in controversial weapons, tobacco-related businesses, thermal coal mining, thermal coal power generation and unconventional oil and gas. Also, it excludes companies that fail to comply with the United Nations Global Compact Principles and companies with Low Carbon Transition (LCT) category of Asset Stranding. Xtrackers Net Zero Pathway Paris Aligned US Equity ETF (USNZ) 0.10% 49.6 Passively managed/Solactive ISS ESG United States Net Zero Pathway Enhanced Index.  Large and mid-cap companies. The underlying securities are selected in such a manner that the resulting benchmark portfolio’s GHG emissions are aligned with the long-term global warming target of the Paris Climate Agreement, including only companies operating in accordance with market standards for responsible business conduct (Norms-Based Research) and controversial weapons. Those standards are based on established norms such as the United Nations Global Compact and the exclusion of significant involvement in defined sectors. In addition, certain activities are excluded from the index based on fixed revenue thresholds. Note of Explanation:  ER=Expense ratio.  Data sources:  Fund prospectus, Sustainable Research and Analysis LLC. Observations: Six new sustainable funds with total net assets of $73.1 million were launched in June 2022¹, including one municipal bond fund introduced by Fidelity Investments and five new ETFs. Of the six new sustainable mutual funds and ETFs, three new funds, all ETFs, offer investors additional stock-oriented opportunities to invest in companies that are either leading in the transition to low carbon emissions, are expected to have a positive impact on the carbon economy or are aligned with the long-term global warming target of the Paris Climate Agreement to reduce global warming to well below 2℃ compared to pre-industrial levels. Two ETFs are index tracking funds offered at expense ratios ranging from 10 bps to 39 bps that employ detailed positive and exclusionary screening rules the results of which will only be clarified over time as the indices are newly launched and historical results are calculated via back-testing. While back-tested results show positive intermediate-term spreads, that’s not the case more recently.  Short-term year-to-date total returns relative to tracking indices are lagging in both cases. The third fund, an actively managed ETF offered at an expense ratio of 55 bps, is yet to establish a performance track record. In addition to evaluating climate outcomes by means of disclosures that should be provided by fund firms (and mandated for ESG Impact Funds by recently proposed SEC disclosure requirements, once these are adopted), investors should evaluate fund results relative to the underlying index, in the case of index tracking funds, and also against the performance of an appropriately selected conventional benchmark².  In the meantime, DWS reports in its prospectus that the fund “does not intend to report retrospectively if the portfolio, as selected at each prior rebalance, met the carbon intensity reduction targets.” ¹Excluding new/additional share class additions. ²Conventional benchmarks for each of the index tracking funds are: UDI-MSCI World Index, and USNZ-Solactive GBS Unites States Large and Mid-Cap Index or equivalent.  A conventional index candidate for the actively managed NTZG is the MSCI All Country World Index.

The Bottom Line:  Green bond fund investors tested by sharp 12-month performance declines in a difficult environment as markets priced in higher interest rate increases. June Commentary The assets of dedicated green bond funds, a segment consisting of seven active and passively managed mutual funds as well as ETFs, declined by $50.7 million in June, a month-over-month drop of 3.4%, to end the first six months of the year at $1.4 billion in assets.  Refer to Chart 1.  This was the fourth monthly decline in the six months since the start of the year.  Capital depreciation in June combined with net outflows accounted for the decline, with outflows registering about $17 million.  This was almost entirely attributable to institutional redemptions from the Calvert Green Bond Fund I (CGBIX) in the amount of about $21.2 million while the recently rebranded Franklin Municipal Green Bond ETF (FLMB) added $5.7 million¹. Against a backdrop of declines in government and corporate bond values as markets moved to price in significant further increases in interest rates on top of what has already been announced, green bond funds posted an average drop of 2.49% versus -1.57% recorded by the Bloomberg US Aggregate Bond Index².  Returns ranged from -1.85% registered by the TIAA-CREF Green Bond Fund Institutional Shares (TGRNX) to a low of -3.82% attributable to the Mirova Global Green Bond Fund A (MGGAX) that was likely impacted by the rising value of the US dollar.  Year-to-date and trailing twelve-month results also suffered significant declines, with green bond fund averages dropping 11.60% and 11.96%, respectively.  Refer to Table 1. Green bond issuance in June ticked up to $47 billion but trailed the $56.3 billion recorded in June 2021, according to preliminary data from the Climate Bond Initiative.  Year-to-date, preliminary issuance stood at $218.1 billion versus $243.8 billion during the first six months of the prior year. Refer to Chart 2. At the end of June, the International Capital Markets Association (ICMA) announced new and updated publications and resources to help stakeholders and capital market participants navigate the framework of sustainable finance, including new definitions for green securitization, an updated registry of key performance indicators for sustainability-linked bonds, a new registry containing methodologies for climate transition finance, new metrics for reporting of both green and social projects to assess the impact on the environment and natural resources and the impact on certain social indicators and target populations, respectively, and enable improved disclosures regarding such projects, updated guidelines for external reviews of bonds issued under the Green Bond Principles (GBP), guidance for providers of green, social and sustainability bond index services, and updated mapping to the United Nations’ Sustainable Development Goals, tying the GBP to global ESG goals. ¹Franklin Templeton rebranded the Franklin Liberty Federal Tax-Free ETF as of May 3rd and shifted $101.9 million into the renamed Franklin Municipal Green Bond ETF (FMLB) as well as the green bonds segment. ²Results are the same whether the Franklin Municipal Green Bond ETF is included or excluded. Chart 1:  Green bond mutual funds and ETFs and assets under management:  July 2021 – June 30, 2022Notes of Explanation:  Franklin Municipal Green Bond Fund and its four share classes with total net assets of $9.7 million included in the data as of April 2022.  At the same time, the rebranded Franklin Liberty Federal Tax-Free Bond ETF renamed the Franklin Municipal Green Bond ETF is excluded as of April 29, 2022.  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC Chart 2:  Issuance of green bonds:  January 1, 2021 – June 30, 2022Notes of Explanation: Volumes data varies by data source and may be preliminary.  Source:  Climate Bond Initiative (CBI) Table 1:  Green bond funds:  Performance results, expense ratios and AUM-June 30, 2022 Name Symbol 1-Month Return (%) 3-Month Return (%) 12-Month Return (%) 3-Year Average Return (%) 5-Year Average Return (%) $Assets (millions) Expense Ratio (%) Calvert Green Bond A* CGAFX -2.43 -5.63 -11.57 -1.55 0.39 0.73 74.6 Calvert Green Bond I* CGBIX -2.4 -5.56 -11.33 -1.32 0.68 0.48 695.8 Calvert Green Bond R6* CBGRX -2.4 -5.48 -11.28 -1.25 0.43 40.1 Franklin Municipal Green Bond ETF*** FLMB -2.49 -4.91 -11.75 -0.82 0.3 111 iShares USD Green Bond ETF* BGRN -1.8 -4.86 -11.49 -2.14 0.2 269.1 Mirova Global Green Bond A* MGGAX -3.82 -8.84 -15.22 -3.17 -0.12 0.94 6.3 Mirova Global Green Bond N* MGGNX -3.81 -8.81 -14.98 -2.89 0.15 0.64 4.5 Mirova Global Green Bond Y* MGGYX -3.81 -8.82 -15.03 -2.93 0.12 0.69 28.1 PIMCO Climate Bond A* PCEBX -2.57 -5.95 -11.66 0.94 0.8 PIMCO Climate Bond C* PCECX -2.63 -6.13 -12.33 1.69 0 PIMCO Climate Bond I-2* PCEPX -2.55 -5.88 -11.4 0.64 0.5 PIMCO Climate Bond I-3* PCEWX -2.55 -5.89 -11.44 0.69 0.1 PIMCO Climate Bond Institutional* PCEIX -2.54 -5.85 -11.31 0.54 11 TIAA-CREF Green Bond Advisor* TGRKX -1.86 -5.35 -10.83 -0.49 0.55 3.1 TIAA-CREF Green Bond Institutional* TGRNX -1.85 -5.35 -10.81 -0.47 0.45 72.7 TIAA-CREF Green Bond Premier* TGRLX -1.87 -5.38 -10.93 -0.6 0.6 0.9 TIAA-CREF Green Bond Retail* TGROX -1.88 -5.42 -11.14 -0.75 0.78 7.1 TIAA-CREF Green Bond Retirement* TGRMX -1.87 -5.38 -10.94 -0.6 0.7 14.4 VanEck Green Bond ETF** GRNB -2.14 -5.09 -11.88 -2.08 -0.2 0.2 82.6 Average/Total -2.49 -6.03 -11.96 -1.50 0.17 0.64 1,422.7 Bloomberg US Aggregate Bond Index -1.57 -4.69 -10.29 -0.93 0.88 Bloomberg Global Aggregate Bond Index -3.21 -8.26 -15.25 -3.22 -0.55 Bloomberg Municipal Total Return Index -1.64 -2.94 -8.57 -0.18 1.51 S&P Green Bond US Dollar Select IX -2.23 -5.07 -11.84 -1.06 0.82 ICE BofAML Green Bond Index Hedged US Index -2.81 -7.58 -13.78 -2.78 0.62 Notes of Explanation:  Blank cells=NA. 3 and 5-year returns are average annual total returns.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  ***Performance should be compared to the Bloomberg Municipal Total Return Index.  ^Effective March 1, 2022, fund shifted to US dollar green bonds.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line:  Putnam Investments announces rebranding of its RetirementReady funds effective later this year or early 2023, thereby expanding sustainable target date fund options.Assets of sustainable target date funds:  2019 - June 2022Note of Explanation:  All TDFs exclude Putnam’s RetirementReady funds.  Data sources:  Morningstar Direct and Sustainable Research and Analysis LLC.Observations:Putnam Investments has become the latest firm to offer a sustainable target date mutual fund product, adding yet another option for sustainable investors by expanding to five the identified universe¹ of fund firms offering such products.  This identified universe consists of 36 funds offering 131 share classes with explicit sustainable investing mandates based on prospectus language that manage $34.1 billion in combined net assets as of June 30, 2022 (excluding Putnam).  The segment is dominated by J. P. Morgan’s $34.1 billion in SmartRetirement Fund assets that were rebranded as of December 23, 2021 via prospectus amendments to onboard the consideration of certain environmental, social and governance (ESG) factors in the investment process.  On July 1, 2022 Putnan Investments amended the prospectus applicable to its Putnam RetirementReady funds, a series of 10 funds consisting of 88 share classes, with $1.3 billion in assets under management.  Putnam will be rebranding its RetirementReady funds by changing the name of the funds as well as their investment strategies.  Effective in the fourth quarter of 2022 or the first quarter of 2023, the funds’ names will change to Putnam Sustainable Retirement funds and the funds’ strategies by investing in Putnam Management-sponsored exchange-traded funds that focus on investments with positive sustainability or environmental, social and governance characteristics. The expanded identified universe of sustainable target date funds for retail and institutional investors now consists of funds offered by J.P. Morgan Investment Management, BlackRock, Natixis and GuideStone.  These funds employ varying approaches to sustainable investing.  Under the proposed (yet to be enacted) SEC enhanced disclosure guidelines applicable to certain investment advisers and investment companies about their ESG investment practices, the five target date funds would be classified as follows:-JPMorgan SmartRetirement.  Integration Fund.  Subject to limited additional disclosures, focused on how the fund incorporates ESG factors into its investment selection process.-BlackRock LifePath ESG Index, GuideStone Funds MyDestination, Natixis Sustainable Future and Putnam RetirementReady.  ESG-Focused Fund.  Subject to additional disclosures about how the fund focuses on ESG factors in its investment process.¹Identified universe include funds researched by Sustainable Research and Analysis that have explicitly signified in their prospectus the adoption of sustainable investing practices. All underlying funds must, in turn, employ sustainable investing strategies to qualify.

The Bottom Line:  Expense ratios levied by active and passively managed sustainable diversified US equity funds are competitive, but size matters for index tracking funds. Expense ratio comparisons for active and passively managed diversified US equity ETFs and distribution of expense ratios for sustainable ETFs Expense ratio comparisons                                      Sustainable index funds:  ER distribution Notes of Explanation: Diversified equity funds include large, mid- and small-cap US equity funds as classified by Morningstar.  Comparisons conducted both on an average and average weighted basis.  ER=Expense ratio.  Data source:  Morningstar Direct.  Analysis:  Sustainable Research and Analysis. Observations: Expense ratios levied by active and passively managed sustainable diversified US equity funds, including large cap, mid-cap and small-cap equity ETFs, a total of 90 funds with almost $58 billion in assets under management as of May 31, 2022¹, are in line with equivalent non-sustainable ETFs.  In some cases, these are offered at even lower expense ratios.  At the same time, non-sustainable investors benefit from lower expense ratios charged by the largest non-sustainable passively managed ETFs due to their significant scale advantages while the largest sustainable index tracking funds offer similar advantages. An analysis of expense ratios recorded by sustainable ETFs versus the overall segment, consisting of 730 ETFs with $3.3 trillion in assets as of May 31, 2022, shows that sustainable funds levy lower expense ratios in the case of both actively managed funds and index tracking funds, based on an evaluation of average expense ratios. Average expense ratios for actively managed sustainable ETFs are 0.56% versus 0.62% for the overall segment, or 0.06% lower.  The same analysis based on average weighted expense ratios, that accounts for ETF sizes, yields almost identical results. Average expense ratios for index tracking sustainable ETFs are 0.26% versus 0.34% for the overall segment, or 0.08% lower.  The same analysis based on average weighted expense ratios indicates that sustainable ETFs levy a modestly higher expense ratio of 0.17% versus 0.11% applicable to their non-sustainable counterparts.  This differential, however, is largely due to the low expense ratios charged by very large index funds that benefit from scale economies.  For example, the largest 10 ETFs account for slightly over 50% of the assets in the non-sustainable US equity ETF segment.  These funds levy a low average expense ratio of 0.06%, ranging from 0.03% to 0.19%, and contribute meaningfully to the average weighted expense ratio applicable to the entire segment that would otherwise come in at 0.16%.  They also offer investors more variety in terms of factor-based investment approaches. That said, discerning sustainable investors can find investing options charging even lower fees, starting at 0.1%. ¹This segment represents 39% of listed sustainable ETFs (232) and 52% of sustainable ETF assets ($111.1 billion) as of May 31, 2022.

The Bottom Line:  Sentiment around ESG is taking a negative turn and based on various recent developments and actions, ESG is also becoming more politicized. States that have adopted anti ESG legislation, may be considering them or are leaning in that direction Observations: Sentiment around ESG has taken a negative turn and ESG is becoming more politicized. In some corners, ESG is being equated with a Communist Chinese-style “social credit scoring system,” where people or corporations are punished if they do not meet ESG requirements.  Offered in support of this observation are the following developments and actions: The adoption of legislation by various states seeking to penalize managers or other financial institutions that either exclude investments in or discriminate against companies in the fossil fuels, firearms and ammunition sectors.  As many as 25 states have either banned or are considering a ban on practices involving the inclusion of ESG in investment decisions. 16 states recently sent a letter to President Biden requesting he withdraw the U.S. Securities and Exchange Commission’s (SEC) proposal that would force publicly traded companies to account for and share data on so-called climate change risks and greenhouse gas emissions for themselves and the companies in their supply chains. In their letter, various governors argue that the proposal is unjustified, is outside the SEC’s authority, would harm U.S. business competitiveness, and would reduce returns to investors, including already woefully underfunded public pension funds. The State of Utah’s recently public voiced its objection to any ESG ratings, ESG credit indicators, or any other ESG scoring system that calls out ESG factors separate from, in addition to, or apart from traditional credit ratings.  This was in response to the publication by S&P Global Ratings of ESG credit indicators as part of its credit ratings for states and state subdivisions. The introduction in Congress of the Investor Democracy is Expected (INDEX) Act that aims to deconsolidate the voting power amassed within a small number of the largest advisers of passively managed funds to neutralize their dominance by turning voting power in corporate governance to individual investors.  While motivated by anti-ESG sentiments, this Act, if adopted, could actually accrue to the benefit of individual sustainable investors.

The Bottom Line:  Nine of the top 10 fixed income ESG ETFs would likely be classified as ESG-Focused funds under the SEC’s proposed rule amendments. Top 10 sustainable fixed income ETFs and their expected SEC ESG-related classifications based on currently proposed rule amendments covering ESG funds Integration Fund ESG-Focused Fund Impact Fund None iShares ESG U.S. Aggregate Bond ETF (EAGG) iShares USD Green Bond ETF (BGRN) iShares ESG 1-5 Year USD Corp Bd ETF (SUSB) iShares ESG USD Corporate Bond ETF (SUSC) iShares ESG Advanced Total USD Bd Market ETF (EUSB) Vanguard ESG US Corporate Bond ETF (VCEB) Nuveen ESG US Aggregate Bond ETF (NUBD) Inspire Corporate Bond ESG ETF (IBD)# PIMCO Enhanced Short Maturity Active  ESG ETF (EMNT)* IQ MacKay ESG Core Plus Bond ETF (ESGB) Notes of Explanation:  *Fund is actively managed.  #Name changed from Inspire Corporate Bond Impact ETF effective March 30, 2022.  Top 10 universe based on Morningstar classfications.  Assets as of May 31, 2022.  Sources:  Morningstar Dirrect and Sustainable Research and Analysis. Observations: On May 25, 2022, the Securities and Exchange Commission (SEC) proposed two sets of rule amendments covering BDCs and registered investment companies that employ environmental, social, or governance (ESG) factors as part of their investment strategies.  The first set of proposed amendments would require funds to include additional disclosures in their SEC filings depending on the extent to which ESG factors play a role in their investment decision-making processes. The second set of proposed amendments would, among other things, subject funds that include ESG-related language in their names to additional disclosure requirements. The SEC proposed three new classifications of ESG funds, each of which would be subject to varying disclosure requirements: Integration Fund, ESG-Focused Fund, and Impact Fund. An analysis of the application of the proposed disclosure rule to the ten largest sustainable or ESG-oriented fixed income ETFs, with net assets of $6 billion as of May 31, 2022 and  representing 83% of the $7.3 billion segment, shows that (1) nine of the funds would be classified as ESG-Focused funds, and (2) the tenth fund, iShares USD Green Bond Fund (BGRN), may be classified as an ESG-Impact Fund.  That said, there is some ambiguity that invites further clarification.  On the one hand, the fund refers to ‘green” in its name and qualifies securities based on an issuer’s commitment to ongoing reporting of the environmental impact of the use of proceeds.  On the other hand, the fund itself does not explicitly seek to achieve specific environmental outcomes or impacts.  At minimum, the fund would qualify to be classified as an ESG-Focused fund. The regulation defines the three new classifications, as follows: A) Integration Fund is a fund that considers one or more ESG factors alongside other, non-ESG factors in its investment decisions, but those ESG factors are generally no more significant than other factors in the investment selection process, such that ESG factors may not be determinative in deciding to include or exclude any particular investment in the portfolio, B) ESG-Focused Fund includes any fund that utilizes ESG considerations as the main factor or consideration in selecting an investment strategy or in its engagement strategy with companies in which it invests. Specifically, an ESG-Focused fund will include a fund: a) with a name that indicates the fund takes ESG considerations into account, b) whose advertisements or marketing materials are explicit in using ESG as a "significant or main consideration," c) that tracks an ESG focused index, d) that applies a screen to include or exclude certain stocks based on ESG consideration, or e) that has a policy of voting proxies in a way that would consider or encourage ESG-related goals or considerations. An ESG-Focused Fund would be required to provide an ESG Strategy Overview Table in its prospectus that includes an overview of the fund’s strategy, a description of how the fund incorporates ESG factors in its investment decisions and the fund’s proxy voting record and engagement activities.  ESG strategy, the fund will be required to disclose how it voted on ESG-related proxies in its annual report, and C) Impact Fund is a fund that seek to achieve a specific outcome that is ESG-related. For instance, an Impact Fund may include a fund that invests intending to profit while "financing the construction of affordable housing units" or to "advance the availability of clean water". An Impact Fund will be subject to the same disclosure requirements as ESG Focused Funds, and they must also include information that states in qualitative and quantitative terms: a) the progress made towards the fund's stated impact, b) the time horizon that the fund utilizes to measure its impact, and c) the relationship between the impact the fund is trying to achieve and its financial returns.

The Bottom Line:  The nine sustainable index ETFs launched so far this year indicate lower average expense ratios relative to funds listed prior to 2022. Average expense ratios of exchange traded funds launched prior to 2022 and 2022 Y-T-DNotes of Explanation:  Expense ratios = arithmetic average, covering a total of 232 ETFs.  Source:  Morningstar Direct Observations: Newly launched sustainable ETF index tracking funds in 2022 to-date are subject to lower expense ratios relative to the universe of ETFs listed prior to 2022.  At the same time, newly listed sustainable actively managed ETFs indicate similar expense ratios, on average, relative to their pre-2022 counterparts. A total of 26 sustainable ETFs have been launched in 2022 to June 16, dominated by 17 actively managed ETFs and 9 index tracking funds. The sustainable index tracking funds reflect an average expense ratio of 23 bps or an average of 12 bps lower than the average 35 bps attributable to sustainable index tracking ETFs launched prior to 2022. Five of the nine funds, or 56%, were launched by BlackRock and SSGA whose funds carry the lowest expense ratios ranging from 1 bps (iShares Paris-Aligned Climate MSCI USA ETF (PABU) and SPDR MSCI USA Climate Paris Aligned ETF (NZUS)) to no more than 16 bps.  The other five funds are subject to expense ratios ranging from 18 bps to 45 bps. The newly launched funds offer investors additional attractively priced sustainable investing options, including, for the first time, funds investing in U.S. large- and mid-capitalization stocks compatible with the objectives of the Paris Agreement to limit the increase in the global average temperature to well below 2 degrees Celsius (preferably 1.5 degrees Celsius) above pre-industrial levels.  Reported progress relative to these objectives, if any is to be provided, will be beneficial  for investors.

The Bottom Line:  Green bond funds reversed a slide in net assets, helped by posting the narrowest average monthly total return performance drop this year. May Summary Dedicated green bond funds, which rebounded to seven funds on May 3rd upon the launch of the rebranded Franklin Municipal Green Bond ETF (FMLB)¹ that shifted $101.9 million into the green bonds segment, reached $1,473 million in net assets at the end of May.  Refer to Chart 1.  The segment, which is dominated by institutional investors, gained $112 million, or 8.2%, including the assets attributable to FMLB.  Excluding FMLB, assets increased by $10.1 due to net positive flows attributable almost entirely to $29.6 million gained by iShares USD Green Bond ETF (BGRN). Testing the resolve of green bond fund investors, green bond funds continued to struggle in May but managed to post the narrowest average total return drop so far this year.  The segment of seven funds posted an average decline of 0.28% in May versus a 0.64% gain recorded by the Bloomberg US Aggregate Bond Index and a negative 1.36% registered by the ICE BofAML Green Bond Index Hedged US Index.  There was a performance divide between the three funds that invest in US dollar denominated green debt versus those funds that invest in non-US dollar denominated debt and take on currency exposure.  The three, including Franklin Municipal Green Bond ETF (FMLB), iShares US Green Bond ETF (BGRN) and VanEck Green Bond ETF (GRNB), each registered positive returns in May.  Refer to Table 1.   Consistent with the decline in global bond issuance so far this year, green bond volume year-to-date has fallen behind 2021.  According to data compiled by the Climate Bond Initiative, $149.4 billion in green bonds were issued through May of this year versus $187.5 billion during the equivalent time interval last year.  Refer to Chart 2.  Volume is expected to be bolstered by sovereign green bonds.  Austria sold its first ever green bond in May while France issued its first ever inflation-linked green bond.  According to reports, the Netherlands is expected to reopen its green bond later in June, Greece’s first green bond and a new green bond from Germany are expected in the second half of 2022 and more generally, the European Commission’s plan (“REPowerEU) to cut its reliance on Russian energy and slash imports of Russian oil is expected to stimulate the issuance of green bonds. ¹Franklin Templeton rebranded the Franklin Liberty Federal Tax-Free Bond ETF. Chart 1:  Green bond mutual funds and ETFs and assets under management – June 2021 – May 31, 2022 Notes of Explanation:  Franklin Municipal Green Blond Fund and tis four share classes with total net assets of $9.7 million included in the data.  At the same time, the rebranded Franklin Liberty Federal Tax-Free Bond ETF renamed the Franklin Municipal Green Bond ETF is excluded as of April 29, 2022.  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC Chart 2:  Issuance of green bonds:  January 1, 2021 – May 31, 2022 Notes of Explanation: Volumes data varies by data source and may be preliminary.  Source:  Climate Bond Initiative (CBI) Table 1:  Green bond funds:  Performance results, expense ratios and AUM-May 31, 2022 Name Symbol 1-Month Return (%) 3-Month Return (%) 12-Month Return (%) 3-Year Average Return (%) 5-Year Average Return (%) $Assets (millions) Expense Ratio (%) Calvert Green Bond A CGAFX -0.07 -5.39 -8.94 -0.31 0.9 76.7 0.73 Calvert Green Bond I CGBIX -0.04 -5.32 -8.7 -0.06 1.19 734.6 0.48 Calvert Green Bond R6 CBGRX -0.04 -5.3 -8.65 0.01 41.1 0.43 Franklin Municipal Green Bond ETF FLMB 1.4 -6.17 -9.29 0.14 108 0.3 iShares USD Green Bond ETF BGRN 0.51 -5.78 -9.36 -0.87 274.7 0.2 Mirova Global Green Bond A MGGAX -1.55 -6.57 -11.39 -1.22 0.58 6.6 0.94 Mirova Global Green Bond N MGGNX -1.54 -6.58 -11.17 -0.91 0.88 4.9 0.64 Mirova Global Green Bond Y MGGYX -1.55 -6.51 -11.22 -0.95 0.82 29.6 0.69 PIMCO Climate Bond A PCEBX -0.5 -5.42 -8.99 0.8 0.94 PIMCO Climate Bond C PCECX -0.56 -5.6 -9.68 0 1.69 PIMCO Climate Bond I-2 PCEPX -0.48 -5.34 -8.71 0.5 0.64 PIMCO Climate Bond I-3 PCEWX -0.48 -5.36 -8.76 0.1 0.69 PIMCO Climate Bond Institutional PCEIX -0.47 -5.32 -8.62 11 0.54 TIAA-CREF Green Bond Advisor TGRKX -0.07 -5.93 -8.48 0.57 3.1 0.55 TIAA-CREF Green Bond Institutional TGRNX -0.06 -5.93 -8.46 0.59 74.1 0.45 TIAA-CREF Green Bond Premier TGRLX -0.08 -5.96 -8.59 0.46 1 0.6 TIAA-CREF Green Bond Retail TGROX -0.09 -6 -8.8 0.31 7.3 0.78 TIAA-CREF Green Bond Retirement TGRMX -0.08 -5.96 -8.67 0.45 14.7 0.7 VanEck Green Bond ETF GRNB 0.35 -5.24 -9.37 -0.28 0.31 84.6 0.2 Average/Total -0.28 -5.77 -9.26 -0.15 0.78 1,473.4 0.64 Bloomberg US Aggregate Bond Index 0.64 -5.86 -8.22 0 1.18 Bloomberg Global Aggregate Bond Index 0.27 -8.11 -13.21 -1.44 0.08 Bloomberg Municipal Total Return Index 1.49 -4.52 -6.79 0.5 1.78 S&P Green Bond US Dollar Select IX 0.4 -5.15 -9.16 0.09 1.27 ICE BofAML Green Bond Index Hedged US Index -1.36 -7.27 -10.75 -1.13 1.12 Notes of Explanation:  Blank cells=NA. 3 and 5-year returns are average annual total returns.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  ^Effective March 1, 2022, fund shifted to US dollar green bonds.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line:  Funds focused on investments based on their alignment with the UN’s SDGs are limited and they don’t address SDG contributions over time. Funds focused on alignment with UN Sustainable Development Goals (SDGs) Fund Name/Symbol AUM (M$) Expense Ratio (%) Description Impact Shares Sustainable Development Goals Global Equity ETF (SDGA) 5.3 0.75 An index tracking fund designed to measure the performance of large and mid-capitalization companies globally that (i) display a commitment to the UN’s Sustainable Development Goals, (ii) adhere to the principles of the UN Global Compact, (iii) display a commitment to reducing poverty and supporting economic development globally and (iv) have exposure to countries with low levels of socioeconomic development. iShares MSCI Global Sustainable Development Goals ETF (SDG)* 442.0 0.49 Index tracking fund that invests in companies that derive a majority of their revenue from products and services that address at least one of the world's major social and environmental challenges as identified by the United Nations Sustainable Development Goals. Federated Hermes SDG Engagement High Yield Credit Fund -IS (FHHIX) -R  (FHHRX) 46.6 0.62 0.57 UN SDG goals and targets are used as a framework for identifying, articulating and measuring positive impact opportunities within the companies that the fund chooses for investments.  The fun seeks to invest in companies that are aligned with at least one of the SDG goals and also exhibit willingness to enact the changes suggested by the adviser. Federated Hermes SDG Engagement Equity Fund -A (FHEQX) -IS (FHESK) -R6 (FHERX) 65.6 1.19 0.94 0.89 UN SDG goals and targets are used as a framework for identifying, articulating and measuring positive impact opportunities within the companies that the fund chooses for investments.  These include small- and mid-capitalization companies in both the United States and foreign markets.  In addition to quantitative financial indicators and metrics, qualitative criteria will include assessment of company management competence, integrity, vision, potential and willingness to enact the changes suggested by the adviser during company engagements. Notes of Explanation:  *On December 30, 2021, the name of the Fund changed from the iShares MSCI Global Impact ETF to the iShares MSCI Global Sustainable Development Goals ETF.  Sources:  Descriptions based on fund prospectuses.  AUM and expense ratios:  Morningstar Direct. Observations: The UN Sustainable Development Goals (SDGs) are a collection of 17 global goals set by the UN Development Program that calls for the integration of economic development, social equity, and environmental protection. Adopted in 2015, the SDGs are intended to stimulate action over a period of 15 years to 2030 in areas of critical importance for humanity and the planet, including: poverty eradication, food security, health, education, gender equality, access to water, sanitation, clean energy, decent jobs, key infrastructure, strong institutions, inequality reduction, sustainable urbanization, responsible production and consumption patterns, climate change mitigation and adaptation, and ecosystem conservation. According to the just released Sustainable Development Report 2022 published on June 2, 2022, the world’s progress on the UN’s Sustainable Development Goals (SDGs) has declined slightly for the second year in a row.  The average SDG Index score slightly declined in 2021, partly due to slow or nonexistent recovery in poor and vulnerable countries. Sustainable investors seeking to invest in securities via funds whose investments, in addition to varying fundamental investment factors, are chosen based on their alignment with the SDGs, have limited options.  These consist of just four mutual funds and ETFs, including two actively managed funds, one equity and the other a high yield fixed income fund as well as two, passively managed, equity-oriented funds.  These funds also vary as to their track records, fund sizes and expense ratios. Even at that, the funds focus on alignment of securities with the SDGs rather than the achievement of specific outcomes or contributions over time, and reporting on SDG contributions is not provided by any of the four funds.

The Bottom Line:  The segment of sustainable municipal ETFs expanded in May and turned in positive monthly performance results for the first time in 2022. Sustainable municipal ETFs:  Average total return performance January 1, 2022 – May 31, 2022 Notes of Explanation:  The segment, identified by Sustainable Research and Analysis, consists of five funds:  Franklin Municipal Green Bond ETF (FMLB), JPMorgan Municipal ETF (JMUB), JPMorgan Ultra-Short Municipal Income ETF (JMST), SPDR Nuveen Municipal Bond ESG ETF (MBNE) and VanEck HIP Sustainable Municipal ETF (SMI).  Total returns source:  Morningstar Direct. Observations: After registering four successive monthly total return declines, sustainable municipal ETFs turned positive in May.  The five funds in the segment recorded a positive average return of 1.21% in May, ranging from 0.35% registered by the JPMorgan Ultra-Short Municipal Income ETF (JMST) to 1.46% posted by the VanEck HIP Sustainable Municipal ETF (SMI). Notwithstanding the negative results, the segment’s assets have expanded, reaching $3.6 billion, largely due to positive net flows into JMST. A secondary factor is the expansion of the segment.  In May, the SPDR Nuveen Municipal Bond ESG ETF (MBNE) was launched—one of seven new ETF listings during the month.  Offered at 43 bps (1.6X higher than the next highest expense ratio), this actively managed municipal bond fund is managed by SSGA Funds Management and sub-advised by Nuveen Asset Management.  Another actively managed ETF also joined the mix in May when Franklin Templeton rebranded the Franklin Liberty Federal Tax-Free Bond ETF into the Franklin Municipal Green Bond ETF (FMLB), shifting with it some $101.9 million in net assets.¹ The five ETFs, all actively managed, embody three varying approaches to sustainable investing, ranging from a thematic (FMLB) approach to two varieties of ESG integration, including ESG materially-based risk assessment (JMUB and JMST) and ESG screening combined with thematic alignment (MBNE and SMI). ¹FMLB is excluded from the number of new ETF launches in May.

The Bottom Line:  S&P removed Tesla Inc. from the S&P 500 ESG Index in May but limited transparency regarding the decision contributes to ESG confusion. S&P 500 ESG Index top 10 holdings prior to and following removal of Tesla Inc. (TSLA)Source:  S&P Down Jones reports and various index fund holdings reports. Percentages as of May 2 are approximate. Observations: On April 22, 2022, S&P Dow Jones Indices announced changes in the composition of the S&P 500 ESG Index following the April rebalance that became effective prior to the open of trading on May 2, 2022.  The S&P 500 ESG Index is a broad-based market cap weighted index that measures the performance of securities in the S&P 500 that meet the firm’s sustainability criteria. 36 stocks were added and 35 were removed, including Tesla Inc. (TSLA).  Prior to its removal, the stock accounted for a significant 3% or so of the index weight and represented one of the top ten stocks. While the decision was not accompanied by a clear explanation, according to follow-on reporting by Reuters, the stock was removed because Tesla’s ESG score had fallen behind while the scores of other companies improved. Contributing factors included poor working conditions at the company’s U.S. Freemont factory, claims of racial discrimination and its handling of a U.S. government probe into multiple deaths and injuries linked to its autopilot technology.  At the same time, Exxon Mobil Corp. remains a top 10 holding. Elon Musk responded to the news by rejecting ESG scores as a “scam,” adding that ESG “has been weaponized by phony social justice warriors.”  This, combined with the simultaneous addition of some companies, such as oil and gas producers, the limited transparency in the shift in Tesla’s rating as well as the ratings of other index constituents and the intricacies of reaching an aggregate rating or score, add to the confusion regarding ESG.

The Bottom Line:  The top performing money market funds in April employ varying sustainable investing approaches, a factor contributing to the challenge of their classification. Sustainable investing approaches used by top performing money market funds-April 2022 Fund Name/Share Class TR (%) Sustainable Investing Approach Morgan Stanley Institutional Liquidity ESG Money Market Fund Cs/OK 0.05 ESG Integration.  A minimum ESG scoring approach is used to determine eligibility. Exclusions.  Tobacco, landmines and cluster munitions, firearms, thermal coal or coal fired power generation, fossil fuel companies, based carbon emission thresholds. Engagement.  Engagement with companies on corporate governance and materially important E and S issues. JPMorgan Prime Money Market Fund Empower Shares 0.05 ESG Integration.  Applies to material risk factors and opportunties. Other.  An annual donation of 12.5% of revenue received from the Empower Shares management fees to support community development. State Street ESG Liquid Reserves Fund 0.04 ESG Integration.  Approach relies on a proprietary scoring system that accounts for material ESG issues based on a framework established by the Sustainability Accounting Standards Board (SASB), excluding corporate governance issues, and a separate score related to corporate governance issues. Eligible securities must meet minimum scores while in some cases, such as US government securities or securities for which scores are not available, other factors such as alternative ESG ratings may be used. UBS Select ESG Prime Institutional 0.04 ESG Integration.  Emphasis on better than average ESG ratings. Exclusions.  Exclusions apply to controversial weapons, natural resource extraction activities, thermal and power coal generation and certain controversial behavior and business activities as well as the failure of a portfolio company to meet certain engagement objectives identified by UBS AM. BlackRock Liquid Environmentally Aware Direct Shares 0.04 Environmental.  The fund invests in securities that perform at an above average level as to environmental practices, including but not limited to such factors as emissions, energy and water intensity, waste generation, green revenues and environmental disclosure levels.  US government securities are considered to have met the environmental criteria and the fund may invest in mortgage, asset-backed securities, and various other short-term obligations issued, for example, by states and other entities. Exclusions:  securities issued by or guaranteed that derive more than 5% of their revenue from fossil fuels mining, exploration, or refinement or that derive more than 5% of their revenue from thermal coal or nuclear energy-based power generation. Other. BlackRock or its affiliates will use at least 5% of BlackRock’s net revenue from its management fee from the fund to purchase annually and then retire carbon credits either directly or through a third-party organization. Notes of Explanation:  Selection of top 5 funds and sustainable investing approaches based on explicit disclosures in fund prospectuses or SAIs.  In case of a tie based on April’s performance, the funds with the highest year-to-date results were selected.    Total return source:  Morningstar Direct, otherwise Sustainable Research and Analysis. Observations: The top performing sustainable funds in April 2022 were all sustainable prime money market funds, except for the AQR Sustainable Long-Short Equity Carbon Awareness Fund, N, I and R6 share classes that were up between 2.77% and 2.87%. The five top performing sustainable money funds are all prime funds that generated returns of either 5 bps or 4 pbs. Sustainable investing strategies employed by the top five performing money market funds varied, thus contributing to the difficulty of standardizing their classification.  Sustainable investing approaches range from a focus on environmental performance and reliance on exclusions and the purchase of carbon credits (BlackRock) to an ESG integration approach (that is, the systematic accounting for material ESG risks/opportunities) expanded to incorporate exclusions and engagement practices (Morgan Stanley).

The Bottom Line:  Green bond funds experienced modest outflows during a volatile month and while performance suffered in April, the segment, on average, held up. April Summary Modest outflows during a volatile month for both equities and bonds led to a net decline of $55.3 million in assets to $1.37 billion.  Excluded is the $101.9 million shifted into the segment by the rebranded Franklin Municipal Green Bond ETF that was launched in early May.   The fund represents a better value proposition for municipal investors relative to Franklin’s Green Municipal Bond mutual fund that has now been liquidated. Green bond funds were not spared during April’s volatility, but their performance held up well. Taxable green bond funds (excluding the Franklin Municipal Green Bond Fund and its four share classes that was slated for liquidation in early May) posted an average drop of 3.34% in April that beat the Bloomberg US Aggregate Bond Index by 45 bps. A decline in Q1 sustainable bond issuance has led Moody’s to cut its forecast for sustainable bond issuances during 2022 but demand is expected to remain strong and issuance may surprise on the upside. Modest outflows during a volatile month led to a net decline of $55.3 million in assets to $1.37 billion and a rebranded municipal green bond ETF was launched Dedicated green bond funds, consisting of six taxable funds, including four green bond mutual funds and two green bond ETFs, reached $1.37 billion in assets under management at the end of April.  Refer to Chart 1.  The small segment sustained limited outflows, estimated at $8.1 million on top of an estimated $47.2 million drop due to capital depreciation, for a net decline of $55.3 million or a 3.9% drop.  These numbers exclude the Franklin Municipal Green Bond Fund that was to be liquidated on or about May 6th and the launch of the rebranded Franklin Municipal Green Bond ETF (FMLB) as of May 3, 2022 that shifted $101.9 million into the green bonds segment¹. All funds recorded declines in net assets during the month.  While the Calvert Green Bond Fund gave up a net of $30 million, the R6 (CBGRX) share class offered to institutional investors required to make a $5 million minimum investment, is the only share class that experienced a net gain in April.  The share class added $29.8 million. The Franklin Green Municipal Bond ETF invests in municipal securities whose interest is free from federal income taxes and that qualify under Franklin’s definition of green bonds.  These include bonds whose proceeds are typically used for one or more of the following purposes: renewable energy, energy efficiency, pollution prevention and control, environmentally sustainable management of living natural resources and land use, terrestrial and aquatic biodiversity conservation, clean transportation, sustainable water and wastewater management, climate change adaptation, eco-efficient and/or circular economy adapted products, production technologies and processes or green buildings that meet regional, national or internationally recognized standards or certifications.  External reviewer inputs are not required. With $101.9 million in net assets and offered at an attractive 3 bps (1 bp higher than iShares USD Green Bond ETF and the VanEck Green Bond ETF), the fund benefits from scale at inception and represents a better value proposition for municipal investors relative to Franklin’s Green Municipal Bond mutual fund that has now been liquidated.  At the same time, the fund’s performance track record will have to be established. Chart 1:  Number of green bond mutual funds and ETFs and assets – May 2021 – April 29, 2022 Notes of Explanation:  Franklin Municipal Green Blond Fund and tis four share classes with total net assets of $9.7 million included in the data.  At the same time, the rebranded Franklin Liberty Federal Tax-Free Bond ETF renamed the Franklin Municipal Green Bond ETF is excluded as of April 29, 2022.  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC ¹ Franklin Templeton rebranded the Franklin Liberty Federal Tax-Free Bond ETF. Green bond funds were not spared during April’s volatility but their performance has held up Fixed income came under increasing pressure, with 10-year Treasury yields moving up 57 bps  since March 31st to end the month of April at 2.89%.  Yield have risen 137 bps since the start of the year and expectations for the path of monetary policy have undergone a major shift with the market now pricing in interest rates in the US of over 2% by year-end.  The Bloomberg US Aggregate Bond Index dropped 3.79% in April, the worst month since 1980, and is now down 9.5% year-to-date and -8.51% for the trailing 12-months versus the S&P 500 that eked out a gain of 0.21%.  The Russian invasion of Ukraine, diminished growth expectations, high inflation and rate hikes ahead introduced substantial economic and market uncertainties that continued into May and are likely to extend beyond this month. Green bond funds were not spared, but they have held up well.  Taxable green bond funds (excluding the Franklin Municipal Bond Fund and its four share classes) posted an average drop of 3.34% in April that beat the Bloomberg US Aggregate Bond Index by 45 bps.  Since the start of the year, green bond funds on average gave up -8.98%.  This exceeded by 52 bps the total return results recorded by the conventional Bloomberg US Aggregate Bond Index, down 9.5%.  Refer to Table 1. Returns in April recorded by the six green taxable sustainable mutual funds and ETFs ranged from a high of -2.95% registered by both the PIMCO Climate Bond Fund I-2 and Institutional (PCEIC) share classes to a low of -3.73% posted by the Mirova Global Green Bond Fund Fund A (MGGAX). That said, the average performance of taxable green bond funds trailed behind the Bloomberg US Aggregate Bond Index for intervals of one, three and five years, covering both time frames during which returns were negative (1-year) and positive (3 and 5 years).  During its three full years of operation, the TIAA-CREF Green Bond Fund, including it five share classes, generated returns in excess of the Bloomberg US Aggregate Bond Index as well as other broad and narrow indices. Decline in Q1 sustainable bond issuance led Moody’s to cut its forecast for sustainable bonds during 2022 but demand is expected to remain strong As reported last month, difficult market conditions for both equities and bonds influenced sustainable bond issuances in the first quarter.  According to Reuters, global sustainable bond issuance in the first quarter totaled $231.7 billion, recording a 19% drop over the same period in 2021.  Developing geopolitical and market conditions led Moody’s to cut its forecast for sustainability and sustainability linked bonds to roughly $1.0 trillion this year from a prior $1.35 trillion estimate, or a decline of 25%. That said, demand for sustainable debt instruments is expected to remain strong as investment management firms continue to respond to investor calls for sustainable product offerings, particularly on the institutional side.  Further, investment management firms that have committed to achieving net-zero targets are likely to meet such targets, in part, by seeking out low carbon issuers, bonds sourced to firms that have likewise made commitments to decarbonize, green bonds as well as sustainability-linked bonds with ESG performance goals.  Such a development could potentially overtake green and sustainable bond issuances and offer a surprise to the upside in the aggregate. Table 1:  Green bond funds:  Performance results, expense ratios and AUM-April 29, 2022 Fund Name Symbol April 2022 TR (%) Y-T-D TR (%) 12-Month TR (%) 3-Year Average TR (%) 5-Year Average TR (%) Expense Ratio (%) AUM ($millions) Calvert Green Bond A* CGAFX -3.22 -8.74 -8.72 0.14 1.02 0.73 79.7 Calvert Green Bond I* CGBIX -3.19 -8.65 -8.48 0.39 1.31 0.48 746.4 Calvert Green Bond R6* CBGRX -3.12 -8.63 -8.43 0.47 0.43 41.6 iShares USD Green Bond ETF**^ BGRN -3.61 -10.05 -9.83 -0.65 0.2 245.1 Mirova Global Green Bond A* MGGAX -3.73 -9.5 -10.25 -0.34 0.99 0.94 6.4 Mirova Global Green Bond N* MGGNX -3.72 -9.41 -9.95 -0.06 1.31 0.64 4.9 Mirova Global Green Bond Y* MGGYX -3.72 -9.43 -10 -0.08 1.25 0.69 29.1 PIMCO Climate Bond A* PCEBX -2.98 -8.54 -8.19 0.94 0.8 PIMCO Climate Bond C* PCECK -3.04 -8.77 -8.89 1.69 0 PIMCO Climate Bond I-2* PCEPX -2.95 -8.45 -7.92 0.64 0.5 PIMCO Climate Bond I-3* PCEWX -2.96 -8.46 -7.96 0.69 0.1 PIMCO Climate Bond Institutional* PCEIX -2.95 -8.42 -7.82 0.54 10.9 TIAA-CREF Green Bond Advisor* TGRKX -3.5 -9.06 -7.96 1.03 0.55 3.1 TIAA-CREF Green Bond Institutional* TGRNX -3.5 -9.05 -7.95 1.05 0.45 74.3 TIAA-CREF Green Bond Premier* TGRLX -3.51 -9.09 -8.07 0.92 0.6 1 TIAA-CREF Green Bond Retail* TGROX -3.52 -9.13 -8.2 0.78 0.78 7.4 TIAA-CREF Green Bond Retirement* TGRMX -3.51 -9.09 -8.07 0.91 0.7 14.8 VanEck Green Bond ETF** GRNB -3.35 -9.17 -9.31 -0.26 0.71 0.2 95.3 Average/Total -3.34 -8.98 -8.67 0.33 1.10 1361.4 Bloomberg US Aggregate Bond Index -3.79 -9.5 -8.51 0.38 1.2 Bloomberg Global Aggregate Bond Index -5.48 -11.3 -12.63 -1.09 0.33 Bloomberg Municipal Total Return Index -2.77 -8.82 -7.88 0.46 1.8 S&P Green Bond US Dollar Select IX -3.6 -9.92 -9.49 -0.28 1.52 ICE BofAML Green Bond Index Hedged US Index -3.29 -9.27 -9.13 0.42 1.34 Notes of Explanation:  Blank cells=NA. 3 and 5-year returns are average annual total returns.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  ^Effective March 1, 2022, fund shifted to US dollar green bonds.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line:  Fixed income funds have come under increasing pressure Y-T-D and green bond funds have not been spared, but they have held up. Average performance of taxable green bond mutual funds and ETFs Jan. - April 2022Source:  Performance data:  Morningstar Direct; Sustainable Research and Analysis LLC Observations: Dedicated green bond funds, consisting of six taxable funds, including four green bond mutual funds and two green bond ETFs, reached $1.37 billion in assets under management at the end of April.  The small segment sustained limited outflows in April on top of an estimated $47.2 million drop due to capital depreciation.  These numbers exclude the Franklin Municipal Green Bond Fund that was to be liquidated on or about May 6th and the launch of the rebranded Franklin Municipal Green Bond ETF as of May 3, 2022 that shifted $101.9 million into the green bonds segment. Fixed income funds have come under increasing pressure this year as expectations shifted for the path of monetary policy.  Green bond funds have not been spared, but they have held up well.  Taxable green bond funds (excluding the Franklin Municipal Bond Fund and its four share classes) posted an average drop of 3.34% in April that beat the Bloomberg US Aggregate Bond Index by 45 bps. Green bond funds, on average, gave up -8.98% since the start of the year.  This exceeded the total return results recorded by the conventional Bloomberg US Aggregate Bond Index, down 9.5%, by 52 bps. While additional benchmarks are also relevant for relative performance evaluation purposes, such as narrowly focused green bond indices as well as global bonds in connection with funds that take on non-US dollar exposure, US bond investors will want to know how their green bond funds with investments that seek to achieve positive environmental outcomes are performing relative to an alternative conventional investment product consisting of intermediate investment-grade bonds.

The Bottom Line:  24 sustainable MFs and ETFs were launched in April, expanding to 50 the Y-T-D number of sustainable investment options available to investors. Mutual fund and ETF launches:  January 1, 2022 – April 30, 2022Source:Morningstar Direct Observations: The largest number of new sustainable fund launches so far in 2022 occurred in April when 24 sustainable mutual funds and sustainable ETFs came to market.  This brings to 50 the number of sustainable funds launched during the first four months of the year, excluding new share classes. Mutual funds led the list of new investment company launches, with 30 investment fund offerings, or 60%, followed by 20 ETFs. Continuing to expand its sustainable offerings, Fidelity (FMR) alone launched 16 new funds in April.  These included eight funds directed exclusively to certain clients of FMR or its affiliates, including Strategic Advisers, LLC. (SAI), that are not available for sale to the general public. Equity-oriented sustainable investment funds dominated, with a combined total of 30 funds.  At the same time, a large number of fixed income funds, 18 in total, were launched. 13 fixed income funds were launched in April alone, including four municipal bond funds—three FMR actively managed mutual funds and one SSGA SPDR Nuveen sub-advised actively managed ETF.

The Bottom Line:  Difficult market conditions in the first quarter led to very poor monthly and quarterly performance results and reduced issuance of green bonds. Summary Green bond funds, consisting of active and passively managed green bond mutual funds and green bond ETFs, invest in “green” bonds whose proceeds are used principally for climate mitigation, climate adaptation or other environmentally beneficial projects, such as, but not limited to, the development of clean, sustainable or renewable energy sources, commercial and industrial energy efficiency, or conservation of natural resources. Green bond fund assets across the seven-fund category declined by $12.6 million in March, a drop of 0.9%, to end the first quarter with $1,426.3 million in net assets.  Heightened volatility and uncertainties in the first quarter dragged down the prices of investment-grade intermediate bonds by the widest level in more than 10-years.  Green bond funds were not spared but, with an average return of -2.35%, the small green bond funds segment outperformed.  Q1 results also impacted intermediate-term outcomes.  Finally, difficult market conditions influenced sustainable bond issuance in the first quarter and the volume of green bonds dropped to $110.4 billion. Green bond fund assets decline in March to $1,426.3 million; Franklin Municipal Green Bond Fund to close After managing to eke out a slight gain in net asset of $618,994 the previous month, green bond fund assets declined by $12.6 million in March, a drop of 0.9%, to end the first quarter with $1,426.3 million in net assets.  Over the first quarter of the year, green bonds funds gave up $54.5 million, registering a net decline of 3.7%.  Refer to Chart 1.  There were some but otherwise mostly limited withdrawals and much of the drawdown was attributable to the total return declines registered by all seven green bond funds in March.  One exception was the TIAA-CREF Green Bond Fund that experienced an increase of $28.3 million, almost entirely reflecting a $28.6 million net addition into the institutional share class.  The same fund also recorded a sizable $19.6 million net gain in February, almost entirely into the same TIAA-CREF Green Bond Fund Institutional Share Class (TGRNX), and for the first time since its inception now exceeds a combined total of $100 million in assets. On February 28, 2022, Franklin Advisers announced that the Franklin Municipal Green Bond Fund will be liquidated on or about May 6, 2022, and that effective at the close of market on April 1, 2022, the fund will be closed to all new investors and new investments. Shareholders of the fund will have their shares redeemed in full and the proceeds will be delivered to them.  At $9.6 million by the end of March, the fund, which was launched on October 1, 2019, did not gain much traction.  Following its closure, the number of green bond funds will drop to six. Chart 1:  Green bond mutual funds and ETFs and assets under management – April 2021 – March 31, 2022Notes of Explanation:  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC Green bond funds posted an average decline of 2.35% but beat the broader Bloomberg US Aggregate Bond Index Concerns and uncertainties regarding the implications of the Russian invasion of Ukraine, the potential need for a faster pace of interest rate increases and a shrinking of the Federal Reserve’s balance sheet to combat higher inflation introduced heightened volatility and dragged down the prices of investment-grade intermediate bonds by the widest level in more than 10-years.  Against this backdrop and in line with bond markets more generally, green bond funds posted an average decline of 2.35%, including the worst performing Franklin Municipal Green Bond Fund and its four share classes.  Excluding the Franklin Fund that invests in green bonds exempt from Federal income taxes, the six remaining green bond funds produced a slightly better -2.1% average return in March.  That said, all six taxable funds outpaced the Bloomberg US Aggregate Bond Index that registered a 2.78% decline, with funds maintaining shorter than benchmark maturities posting slightly better results. At the same time, the average performance of green bond funds also eclipsed the Bloomberg Global Aggregate Bond Index and also one of the two more narrowly constructed green bond indices.  Refer to Table 1. Green bond fund returns in March ranged from -1.37% to -2.48%.  The best performer in March was the Mirova Global Green Bond Y (MGGYX) while the worst performance was registered by the TIAA-CREF Green Bond Fund Retail share class (TGROX). Average year-to-date results were also dragged down by the performance of the four Franklin Municipal Green Bond Fund share classes.  Excluding this fund, the average year-to-date performance of the green bond fund segment stood at -5.8% versus -5.93% recorded by the Bloomberg US Aggregate Bond Index.  Returns ranged from a -6.68% registered by the iShares USD Green Bond ETF (BGRN) which as of March 1st launched its updated strategy by shifting to US dollar denominated green bonds, to a high of -5.64% achieved by both the PIMCO Climate Bond Fund Institutional (PCEIX) Calvert Green Bond Fund I (CGBIX). Less of an impact was imposed by the Franklin Municipal Green Bond Fund over the trailing 12-months, during which green bond funds gave up an average -4.96%.  Over the intermediate three and five-year intervals, green bonds posted average returns of 1.62% and 2.02%, respectively. Q1 difficult market conditions impacted the issuance of sustainable bonds that dropped to $231.7 billion, for a 19% decline; green bond issuance also dropped Difficult market conditions for both equities and bonds influenced sustainable bond issuances in the first quarter.  According to Reuters, global sustainable bond issuance in the first quarter totaled $231.7 billion, recording a 19% drop over the same period in 2021.  The slowdown followed record issuance of bonds linked to environmental or social goals in 2021, according to data compiled by Refinitiv.  Refer to Chart 2.  The drop exceeded the broader bond market’s decline in new issues that reached $2.49 trillion or a 5% decline. At the same time, issuance of green bonds dropped to $110.4 billion¹ in the first quarter, a 7% decline from the prior year. Chart 2:  Quarterly issuance of sustainable bonds:  2007 - PresentNotes of Explanation:  In millions of US$.  Source:  Refinitiv Eikon ¹According to Bloomberg, Q1 green bond issuance was even lower at $93.1 billion, down 39% vs. Q1 2021. Table 1:  Green bond funds:  Expense ratios, assets and performance results to March 31, 2022 Fund Name Symbol March 2022 TR (%) 3- Months TR (%) 12-M TR (%) 3-Years TR (%) 5-Years TR (%) Expense Ratio (%) AUM ($ millions) Calvert Green Bond A* CGAFX -2.17 -5.71 -5.47 1.32 1.79 0.73 83.4 Calvert Green Bond I* CGBIX -2.15 -5.64 -5.22 1.55 2.09 0.48 802.5 Calvert Green Bond R6* CBGRX -2.21 -5.69 -5.24 1.61 0.43 11.8 Franklin Municipal Green Bond A** FGBGX -3.38 -6.65 -4.58 0.71 1 Franklin Municipal Green Bond Adv** FGBKX -3.36 -6.6 -4.4 0.46 8.5 Franklin Municipal Green Bond C** FGBHX -3.41 -6.75 -4.87 1.11 0.1 Franklin Municipal Green Bond R6** FGBJX -3.36 -6.51 -4.36 0.44 0 iShares Global Green Bond ETF*^ BGRN -2.75 -6.68 -6.62 0.69 0.2 254.8 Mirova Global Green Bond A* MGGAX -1.43 -6 -7.04 1.03 1.97 0.93 6.5 Mirova Global Green Bond N* MGGNX -1.46 -5.92 -6.74 1.34 2.26 0.63 5.8 Mirova Global Green Bond Y* MGGYX -1.37 -5.93 -6.79 1.3 2.23 0.68 30 PIMCO Climate Bond A* PCEBX -2.02 -5.73 -4.65 0.94 0.9 PIMCO Climate Bond C* PCECX -2.08 -5.9 -5.38 1.69 0 PIMCO Climate Bond I-2* PCEPX -1.99 -5.67 -4.37 0.64 0.6 PIMCO Climate Bond I-3* PCEWX -2 -5.67 -4.42 0.69 0.1 PIMCO Climate Bond Institutional* PCEIX -1.99 -5.64 -4.27 0.54 17 TIAA-CREF Green Bond Advisor* TGRKX -2.46 -5.76 -3.73 2.37 0.55 3.4 TIAA-CREF Green Bond Institutional* TGRNX -2.46 -5.75 -3.71 2.38 0.45 77.2 TIAA-CREF Green Bond Premier* TGRLX -2.47 -5.79 -3.84 2.25 0.6 1 TIAA-CREF Green Bond Retail* TGROX -2.48 -5.82 -4.06 2.11 0.78 7.4 TIAA-CREF Green Bond Retirement* TGRMX -2.47 -5.79 -3.93 2.25 0.7 15.5 VanEck Green Bond ETF** GRNB -2.29 -6.02 -5.39 0.86 1.76 0.2 98.8 Averages/Total -2.35 -5.98 -4.96 1.62 2.02 1,426.3 Bloomberg US Aggregate Bond Index -2.78 -5.93 -4.15 1.69 2.14 Bloomberg Global Aggregate Bond Index -3.05 -6.16 -6.4 -.69 1.7 Bloomberg Municipal Total Return Index -3.24 -6.23 -4.47 1.53 5.25 S&P Green Bond US Dollar Select IX -2.31 -6.17 -5.27 1.62 2.17 ICE BofAML Green Bond Index Hedged US Index -2.49 -6.56 -6.29 1.08 2.42 Notes of Explanation:  Blank cells=NA.  3 and 5-year returns are average annual total returns.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  ^Effective March 1, 2022, fund will shift to US dollar green bonds.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line:  Both conventional and ESG fund investors may be exposed to Russian securities that have declined in value primarily in emerging market funds. The Russian invasion of Ukraine led to suspensions in trading and likely modest portfolio losses in some active and passively managed funds primarily focused on emerging markets The Russian invasion of Ukraine on February 24 produced an unprecedented, coordinated response by the U.S., the European Union, the U.K., Canada, Switzerland, Japan, Australia and Taiwan.  Sanctions were followed up on March 8 with a ban on the import of Russian Oil, liquified natural gas and coal to the United State as well as new investment into Russia’s energy sector.  The UK and EU took other oil and gas related importation measures.  The Russian central bank responded, in part, with a hike to its key interest rate from 9.5% to 20% and to the imposition of capital controls. Russia’s central bank has also temporarily banned sales of local securities by foreigners and banned payments of dividends and interest on bonds to foreigners. Trading was suspended on the Moscow Exchange, prices for Russian stocks and bonds plummeted and liquidity evaporated, leading buyers, according to reports, to view Russian assets as "uninvestable.” As a result, both conventional and ESG investors in active and passively managed mutual funds and ETFs, especially emerging market equity and bond funds, with exposure to Russian stocks and bonds may have experienced some decline in the value of their portfolios. Recent market volatility combined with limited strategy-based exposures to Russia along with other market influences likely obscured these declines in many portfolios.  Still, these developments reinforce the fundamental principles that investors should adopt in their investing approach, namely portfolio diversification, liquidity and patience. Implications for conventional and ESG investors in mutual funds and ETFs To the extent held, exposure to Russian securities in equity and fixed income portfolios fluctuate by portfolio strategy, including active and passively managed funds.  To illustrate, the iShares ESG Aware MSCI Emerging Markets ETF (ESGE) that seeks to replicate the performance of the equity-oriented MSCI Emerging Markets Extended ESG Focus Index held securities of firms like LUKOIL PJSC, Sherbank of Russia, Novatek PJSC or Polymetal International PLC, to mention just a few.  In total, these along with other Russian equity holdings accounted for about 3% to 4% of the index and, in turn, portfolio assets based on the latest annual report as of August 31, 2021 and heading into February 2022.  These securities are now valued at 0 dollars or close to 0 dollars.  On the bond side, ESG funds tracking emerging market indices like the Xtrackers JPMorgan ESG EM Sovereign ETF (ESEB) that tracks the JPMorgan ESG EMBI Global Diversified Total Return USD Index also maintained similar levels of exposure to Russian foreign bonds, even as Russian debt accounted for lower average levels across JPMorgan’s emerging market indices.  According to The Wall Street Journal on March 15, Russian government bonds fell below 10 cents on the dollar the previous week, after trading around 100 cents on the dollar prior to the Ukraine invasion.  The combination of strategy, low exposures, the elevation of market volatility generally and other market influences since the start of the year means that the impact on portfolios was likely muted in many, but not all, cases.  Some actively managed and thematic funds may have been caught in less favorable positions.  The actively managed Ashmore Emerging Market Equity ESG Fund, for example, ended its October 31, 2021 fiscal year with a 10.08% exposure to Russian stocks.  The fund posted declines of 10.2% and 5.0% in February and January, respectively.  The VanEck Green Metals ETF (GMET) tracking the MVIS Global Clean-Tech Index maintained a 5.3% exposure to Russia’s MMC Norilsk Nickel PJSC ADR entering 2022 and the fund dropped 3.6% in January, but quickly bounced back, gaining almost 13% in February as strategic metals prices experienced a boost. Impact on index managed funds:  Leading index providers remove Russian securities from their indices Leading equity index providers S&P Dow Jones, MSCI and FTSE Russell as well as bond index providers Bloomberg and JP Morgan moved quickly to remove Russian stocks and bonds from all relevant benchmarks, including emerging market stock and bond indices, both conventional and ESG indices.  Following consultations with several market participants, MSCI announced that it would remove Russian securities from its indices after markets close on Wednesday, March 9, at a price “that is effectively zero.” Russia’s debt will also be excluded from the JPMorgan Emerging Market Bond Index, the Government Bond Index-Emerging Markets, the Corporate Emerging Markets Bond Index and all the bank’s other benchmarks, effective March 31.  At the same time, indices were rebalanced to reflect the removal of Russian securities. Index tracking mutual funds and ETFs have had to take similar actions to keep their portfolios aligned with their tracking benchmarks or suffer widening tracking errors.  Currently restricted from trading in Russian securities, these may continue to be held in portfolios at 0 or close to 0 values.  Still, portfolios have had to be rebalanced and, in the process, they likely incurred additional trading costs.  At this juncture, it’s not known when, or if, sanctions may be lifted or the funds’ ability to trade in Russian securities will resume (it should be noted that trading in local currency bonds reopened on Monday and it has been reported that the Russian stock market will partially reopen on Thursday of this week). Impact on actively managed portfolios:  More flexibility and in some cases higher levels of exposure to Russian securities Unlike index funds, actively managed portfolios are not constrained in the same way as they are not index bound.  While their performance for relative evaluation purposes may be compared to indices that have removed Russian securities, they have the flexibility to invest higher or lower proportions of their portfolios in Russian securities.  They also have the flexibility to liquidate securities ahead of market closures or to hold such securities while evaluating the long-term impact on valuations as well as the ability to trade those securities.  Indeed, some actively managed funds maintained significantly higher as well as lower Russian exposures relative to benchmarks.  Examples include the Ashmore Emerging Market Equity ESG Fund and Ashmore Emerging Markets Corporate Income ESG Fund with investments in Russia of 10.1% and 6.2%, respectively as the funds’ October 31, 2021 year-end while the BlackRock Sustainable Emerging Markets Bond Fund held a 2.0% position.  That said, any current holdings are likewise carried at 0 or near 0-dollar values. Refer to Table 1 and Table 2 for a sample listing of sustainable active and passively managed equity and bond mutual funds and ETFs likely holding Russian securities.  The sample listings have been compiled based on a review of index tracking funds along with their tracking indices as well as actively managed funds based on their latest reporting periods. In some cases, actively managed funds could have reduced or eliminated their Russian securities exposures prior to February 24, 2022. Published March 23, 2022 Table 1:  Sample listing of sustainable equity and bond ETFs with likely exposures to Russian securities Fund Name Fund Type Tracking index or prospectus designated index $ AUM BNY Mellon Sustainable Glbl Em Mkts ETF (BKES) Actively Managed-Equity MSCI Emerging Markets NR USD 8,827,728 iShares ESG Advanced MSCI EM ETF (EMXF) Index Tracker-Equity MSCI Emerging Markets Choice ESG Screened 5% Issuer Capped Index 28,978,796 iShares ESG Aware MSCI EM ETF (ESGE) Index Tracker- Equity MSCI Emerging Markets Extended ESG Focus Index 6,513,073,329 iShares® ESG MSCI EM Leaders ETF (LDEM) Index Tracker-Equity MSCI EM Extended ESG Leaders 5% Issuer Capped Index 71,431,395 Nuveen ESG Emerging Markets Equity ETF (NUEM) Index Tracker-Equity TIAA ESG Emerging Markets Equity Index 147,737,382 SPDR Bloomberg SASB EM ESG Select ETF (REMG) Index Tracker-Equity Bloomberg SASB Emerging Markets Large & Mid Cap ESG Ex-Controversies Select Index 28,140,652 SPDR® MSCI Emerging Mkts Fossil Ful Free RsrvETF (EEMX) Index Tracker-Equity MSCI Emerging Markets ex Fossil Fuels Index 133,235,452 WisdomTree Emerging Markets ESG ETF (RESE) Actively Managed-Equity MSCI Emerging Markets Extended ESG Focus Index 27,048,054 WisdomTree Emerging Markets ex-State-Owned Entrprs ETF (XSOE) Actively Managed-Equity WisdomTree Emerging Markets ex-State Owned Enterprises 3,438,850,548 Xtrackers EM Carbon Reduction &Climate Improvers ETF (EMCR) Index Tracker-Equity Solactive ISS Emerging Markets Carbon Reduction & Climate Improvers Index NTR 731,133,538 Xtrackers MSCI EMs ESG Leaders Eq ETF (EMSG) Index Tracker-Equity MSCI EAFE ESG Leaders Index 23,335,423 Xtrackers JPMorgan ESG EM Sovereign ETF (ESEB) Index Tracker-Bonds JPMorgan ESG EMBI Global Diversified Total Return USD Index 26,367,251 Notes of Explanation:  In compiling the sample listing of funds, emphasis was placed on emerging market funds.  For actively managed funds, the listed index reflects the fund’s prospectus designated index, where available.  Sources: $AUM data sourced to Morningstar Direct.  Otherwise, fund prospectus, annual and semi-annual reports, compiled by Sustainable Research and Analysis. Table 2:  Sample listing of sustainable equity and bond mutual funds with likely exposures to Russian securities Fund Name Fund Type Tracking index or prospectus designated index $ AUM Aberdeen Emerging Mkts Sust Leaders Instl Svc (GIGSX), A (GIGAX), C (GIGCX), R (GIRRX), and Institutional (GIGIX) Actively Managed-Equity MSCI Emerging Markets Index (NR) USD 158,417,902 Allspring Emerging Markets Equity Inst (EMGNX), R6 (EMGDX), C (EMGCX), Adm (EMGYX), A (EMGAX) Actively Managed-Equity MSCI Emerging Markets Index (NR) USD 5,199,617,255 Ashmore Emerging Markets Equity ESG Ins (ESIGX), A (ESAGX), C (ESCGX) Actively Managed-Equity MSCI Emerging Markets Index (NR) USD 12,167,893.00 BlackRock Sustainable Adg EM Eq Ins (BLZIX), K (BLZKX) and A (BLZAX) Actively Managed-Equity MSCI Emerging Markets Index (NR) USD 10,876,097 Calvert Emerging Markets Equity I (CVMIX), C (CVMCX), A (CVMAX) and R6 (CVMRX) Actively Managed-Equity MSCI Emerging Markets Index (NR) USD 3,476,825,833 Artisan Sustainable Emerging Mkts Inst (APHEX) and Inv (ARTZK) Actively Managed-Equity MSCI Emerging Markets Index (NR) USD 80,963,512 Ashmore Emerging Markets Corporate Income ESG A (ECAEX), C (ECCEDX) and Ins (ECIEX) Actively Managed-Bond NA 80,227,827 BlackRock Sustainable Emerging Markets Bond Ins (BEHIX) and K (BEHKX) Actively Managed-Bond JPMorgan EMBI Global Diversified TR Bond Index 20,468,829 Notes of Explanation:  In compiling the sample listing of funds, emphasis was placed on emerging market funds.  For actively managed funds, the listed index reflects the fund’s prospectus designated index, where available.  NA=Not available.  Sources: $AUM data sourced to Morningstar Direct.  Otherwise, fund prospectus, annual and semi-annual reports, compiled by Sustainable Research and Analysis.

The Bottom Line:  Green bond fund investors experienced disappointing near-term returns, but intermediate-term outcomes continue to flash green, especially if accompanied by positive environmental outcomes. Summary Green bond funds invest in “green” bonds whose proceeds are used principally for climate mitigation, climate adaptation or other environmentally beneficial projects, such as, but not limited to, the development of clean, sustainable or renewable energy sources, commercial and industrial energy efficiency, or conservation of natural resources.  The small universe of seven dedicated green bond funds, including green bond mutual funds and green bond ETFs, eked out a slight gain in net assets during the month of February.  The universe of green bond funds will shortly drop to six funds due to the announced liquidation of the only Federal tax-exempt Franklin Municipal Green Bond Fund.  Against a difficult investment backdrop in February, green bond funds posted an average decline of 1.61%.  But results to-date continue to support the case for lower priced green bond funds over the intermediate-term, especially if accompanied by some evidence of positive environmental outcomes. Green bond funds managed to eke out a slight gain in net assets even as six of seven funds experience net outflows Green bond funds, including green mutual funds and green bond ETFs, managed to eke out a slight gain in net assets, adding $618,994 to end the second month of 2022 with $1,438,863,530.  All but one fund reported a gain in net assets.  This was the TIAA-CREF Green Bond Fund that recorded a sizable $19.6 million net gain.  The fund benefited from a $19.5 million dollar net gain into its TIAA-CREF Green Bond Fund Institutional Share Class (TGRNX).  Refer to Chart 1. Otherwise, the remaining six funds in the segment sustained net outflows ranging from $10,384 attributable to the Franklin Municipal Green Bond Fund to $9.0 million sustained by the Calvert Green Bond Fund. Since the start of the year, the net assets of green bond funds have declined by almost $42 million. On February 28, 2022, Franklin Advisers announced that the Franklin Municipal Green Bond Fund will be liquidated on or about May 6, 2022, and that effective at the close of market on April 1, 2022, the fund will be closed to all new investors and new investments. Shareholders of the fund on the will have their shares redeemed in full and the proceeds will be delivered to them.  At $10.5 million by the end of February, the fund, which was launched on October 1, 2019, did not gain much traction. Chart 1:  Green bond mutual funds and ETFs and assets under management – March 2021 – February 28, 2022 Notes of Explanation:  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC Green bond funds experienced a third consecutive monthly decline, giving up an average of 1.61% in February Equity and bond markets experienced a difficult month in February as concerns surrounding Russia’s invasion of Ukraine and its fallout eclipsed expectations regarding inflation, interest rate hikes and growth outlook.  Against this backdrop, green bond funds posted an average decline of 1.61%, including the Franklin Municipal Green Bond Fund that invests in green bonds exempt from Federal income taxes.  The average result for green bond funds is even lower in February, at -1.83%, if the Franklin Municipal Green Bond Fund and its various share classes are excluded.  This compares to the Bloomberg US Aggregate Bond Index, gave up 1.12% and the Bloomberg Global Aggregate Bond Index that dropped 1.19%.  At the same time, the ICE BofAML Green Bond Hedged US Index sustained a decline of 2.44%.  Refer to Table 1. For green bond fund investors seeking to at least match the results of domestic or global investment grade intermediate bonds, the results were disappointing.  Green bond funds posted total returns that ranged from -0.52% registered by the Franklin Municipal Green Bond A (FGBKX) to -2.81% recorded by the Mirova Global Green Bond Y (MGGYX). Excluding Franklin, the top results by taxable funds were delivered by the TIAA-CREF Green Bond Fund Advisor (TGRKX) and Institutional (TGRNX), each posting a return of -1.34%.  Three-month returns were also generally disappointing. With one exception due to a higher-than-average expense ratio, one-year trailing results to February were more comforting for green bonds investors.  Posting an average return of -3.05%, green bond funds invested in global bonds denominated in US dollars outperformed the Bloomberg Global Aggregate Bond Index.  This also applies over the trailing 3-year and 5-year time horizons for share classes with lower expense ratios.  These results continue to support the case for lower priced green bond funds over the intermediate term, especially if accompanied by some evidence of positive environmental outcomes. Table 1:  Green bond funds:  Expense ratios, assets and performance results to February 28, 2022 Fund Name Symbol February 2022 TR (%) 3- Months TR (%) 12-Months TR (%) 3-Years TR (%) 5-Years TR (%) Expense Ratio (%) AUM ($ millions) Calvert Green Bond A* CGAFX -1.74 -3.81 -4.05 2.63 2.24 0.73 85.1 Calvert Green Bond I* CGBIX -1.72 -3.75 -3.8 2.86 2.54 0.48 827.3 Calvert Green Bond R6* CBGRX -1.71 -3.74 -3.75 2.94 0.43 12.8 Franklin Municipal Green Bond A** FGBGX -0.52 -3.21 -0.55 0.71 1.5 Franklin Municipal Green Bond Adv** FGBKX -0.6 -3.15 -0.38 0.46 8.8 Franklin Municipal Green Bond C** FGBHX -0.65 -3.4 -0.82 1.11 0.2 Franklin Municipal Green Bond R6** FGBJX -0.6 -3.15 -0.34 0.44 0 Mirova Global Green Bond A* MGGAX -2.34 -5.04 -4.27 2.35 0.2 262 Mirova Global Green Bond N* MGGNX -2.81 -5.57 -5.41 2.21 2.1 0.93 6.5 Mirova Global Green Bond Y* MGGYX -2.71 -5.47 -5.11 2.51 2.42 0.63 7.3 PIMCO Climate Bond A* PCEBX -2.81 -5.58 -5.26 2.47 2.35 0.68 31 PIMCO Climate Bond C* PCECX -1.77 -3.53 -3.35 0.94 0.9 PIMCO Climate Bond I-2* PCEPX -1.83 -3.71 -4.08 1.69 0 PIMCO Climate Bond I-3* PCEWX -1.75 -3.46 -3.06 0.64 0.6 PIMCO Climate Bond Institutional* PCEIX -1.75 -3.47 -3.11 0.69 0.1 TIAA-CREF Green Bond Advisor* TGRKX -1.74 -3.44 -2.97 0.54 17.3 TIAA-CREF Green Bond Institutional* TGRNX -1.34 -3.53 -2.41 3.79 0.55 3.5 TIAA-CREF Green Bond Premier* TGRLX -1.34 -3.52 -2.39 3.81 0.45 48.6 TIAA-CREF Green Bond Retail* TGROX -1.35 -3.56 -2.52 3.67 0.6 1 TIAA-CREF Green Bond Retirement* TGRMX -1.37 -3.59 -2.66 3.53 0.78 7.3 iShares Global Green Bond ETF*^ BGRN -1.35 -3.56 -2.52 3.67 0.7 15.8 VanEck Green Bond ETF** GRNB -1.57 -3.93 -4.25 1.95 0.2 101.3 Average/Total -1.61 -3.87 -3.05 2.95 2.33 1,438.9 Bloomberg US Aggregate Bond Index -1.12 -3.49 -2.64 3.3 2.71 Bloomberg Global Aggregate Bond Index -1.19 -3.35 -5.32 2.15 2.36 Bloomberg Municipal Total Return Index -0.36 -2.93 -0.66 3.19 3.24 S&P Green Bond US Dollar Select IX -2.44 -4.99 -4.06 2.67 2.92 ICE BofAML Green Bond Index Hedged US Index -0.36 -2.93 -0.66 3.19 3.24 Notes of Explanation:  Blank cells=NA.  3-year annualized average performance results to January 2022.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  ^Effective March 1, 2022 fund will shift to US dollar green bonds.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line:  Green bond funds, ending January with $1.44 billion, experienced monthly net outflows for the second consecutive month coincident with total return declines. Summary Green bond funds, including green bond mutual funds and green bond ETFs, experienced monthly net outflows for the second consecutive month coincident with total return declines.  Net declines kicked up to $42.6 million or a month-over-month drop of 2.9% to end January with $1,438.2 million (estimated cash outflows=$14.0 million).  Green bond funds fell an average of -2.14% in January and -0.93% for twelve months, but intermediate-term returns hold up.  The results reinforce the advisability of investing for the intermediate-to-longer-term.  Sustainable debt and green bonds issuances reach record levels, to $1.6 trillion according to Bloomberg. Green bond funds experienced monthly net outflows for second consecutive month coincident with total return declines Green bond funds experienced net outflows in January, as net declines kicked up to $42.6 million or a month-over-month decline of 2.9% to end January with $1,438.2 million (estimated cash outflows=$14.0 million).  Net declines have now taken place for the second consecutive month, coincident with total return declines in December and January.  Refer to Chart 1.  Green bond funds net outflows stand in contrast with sustainable fixed income ETFs that managed to register a narrow $24.9 million net gain in January and also sustainable fixed income mutual funds that added $324.8 million in net assets.  Sustainable equity mutual funds and ETFs, on the other hand, declined a net of $12.4 billion and $8.3 billion, respectively. While net withdrawals were recorded by institutional as well as retail investors, institutional investors accounted for at least 80% of the total and may be attributed to a one-off investor decision.  All but one fund experienced withdrawals.  The one exception was the VanEck Green Bond ETF (GRNB) that gained $1.6 million in net assets and ended the month with $103.1 million—even as the fund recorded the worst decline (-2.28%) in January among taxable funds. The largest withdrawals were recorded by Calvert Green Bond Fund I (CGBIX), iShares Global Green Bond ETF (MGGAX) and PIMCO Climate Bond Institutional Shares (TGRNX) in the amounts of $33.7 million, $4.8 million and $2.4 million, respectively. Chart 1:  Green bond mutual funds and ETFs and assets under management – February 2021 – January 31, 2022Notes of Explanation:  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC Green bond funds drop -2.14% in January and -0.93% for twelve months but intermediate-term returns hold up Inflation, concerns about central bank tightening and tensions in eastern Europe roiled markets and led to a sharp increase in volatility during the month of January.  Against this backdrop, US Treasury yields rose 27 bps to end January at 1.79%, bond markets fell in the US and overseas and green bond funds registered an average -2.14% decline. Returns for green bond funds spanned a range from a low of -2.89% posted by the Franklin Municipal Green Bond A (FGBGX) to a high of -1.74% recorded by iShares Global Green Bond ETF (BGRN).  The average return for the segment exceeded by 1 bps the results registered by the Bloomberg US Aggregate Bond Index while trailing the Bloomberg Global Aggregate Bond Index and the ICE BofAML Green Bond Hedged US Index.  When the Franklin municipal green bond funds are excluded from consideration, the group’s average result in January picks up 14 bps to -2.0%.  Municipal bonds based on the Bloomberg Municipal Bond Index, which were down -2.74% in January, experienced a sell-off in anticipation of a Federal Reserve tightening cycle due to worrying inflation numbers. January’s municipal bond funds performance erased the gains achieved for the entire 2021 calendar year.  Refer to Table 1. Excluding the Franklin municipal funds, the laggard in January was the VanEck Green Bond Fund ETF (GRNB) that recorded a -2.28% decline.  In addition to the factors noted above, the fund’s results were pressed by a number of non-investment-grade dollar denominated China-based real estate development company green bonds holdings, for example, CIFI Holdings, Yuzhou Group Holdings and Zhenro Properties, that have been facing financial pressures and have suffered significant price declines. Refer to Chart 2.  The fund maintains an 11.9% position in US dollar denominated China green bonds. Municipals, including the Franklin Municipal Green Bond Fund, calendar year 2021 was a challenging year for bond funds generally as well as green bond bonds that did not avoid the downdraft that led bond indices lower.  Still, their three-year trailing performance record to January 2022 has held up.  Posting an average annual gain of 3.7%, green bond funds beat the Bloomberg US Aggregate Bond Index and the ICE BofAML Green Bond Hedged US Index by 5 bps and the Bloomberg Global Aggregate Bond Index by 137 bps. The TIAA-CREF Green Bond Fund Institutional Shares (TGRNX) along with its four other share classes delivered strong results.  The results over all reinforce the advisability of investing in green bond funds for the intermediate-to-long-term Chart 2:  Prices of selected green bonds issuedSource:  Tradeweb, as reported in the WSJ 1/28/2022 Sustainable debt and green bonds issuances reach record levels, to $1.6 trillion according to Bloomberg With issuance numbers covering 2021 now finalized or nearly finalized, it has been reported that green bonds volume increased on a year-over-year basis by anywhere from 74% to over 100%, depending on data source.  The Climate Bond Initiative, using updated numbers, reported that green bond issuance increased 74% to end the year at $517.4 billion, up from $297 billion. At the same time, Bloomberg reported that green bonds “doubled issuance between 2020 and 2021, with volumes reaching more than $620 billion.” Regardless of the actual number, green bonds issuance increased dramatically as governments, corporations, financial institutions and local government entities across the globe but led by the US, Germany and China, have been stepping up their commitments to finance the energy transition spurred on by the COP 26 UN climate conference. A new record was also set by sustainable debt instruments more broadly, according to Bloomberg.  On a combined basis, issuance of sustainable debt instruments, including green bonds, green loans, social bonds, sustainability bonds as well as sustainability linked loans and bonds, reached about $1.6 trillion in 2021.  Stimulated by the COVID pandemic and rising social and racial justice considerations, it remains to be seen whether sustainable and social bond issuances will track or exceed 2021 levels in 2022. Table 1:  Green bond funds:  Assets, expense ratios and performance through January 31, 2022 Fund Name Symbol AUM ($) Expense Ratio (%) Jan. 2022 TR (%) 2021 TR(%) 3-Year TR (%) Calvert Green Bond A* CGAFX 86,580,331 0.73 -1.90 -1.92 3.32 Calvert Green Bond I* CGBIX 838,967,908 0.48 -1.88 -1.67 3.55 Calvert Green Bond R6* CBGRX 8,601,872 0.43 -1.88 -1.61 3.63 Franklin Municipal Green Bond A** FGBGX 1,515,829 0.46 -2.89 0.99 Franklin Municipal Green Bond Adv** FGBKX 8,795,307 0.46 -2.77 1.12 Franklin Municipal Green Bond C** FGBHX 230,314 0.46 -2.82 0.78 Franklin Municipal Green Bond R6** FGBJX 4,887 0.46 -2.67 1.07 Mirova Global Green Bond A* MGGAX 6,645,331 0.97 -1.87 -3.02 3.32 Mirova Global Green Bond N* MGGNX 7,845,261 0.67 -1.87 -2.73 3.63 Mirova Global Green Bond Y* MGGYX 31,814,254 0.72 -1.87 -2.69 3.55 PIMCO Climate Bond A* PCEBX 817,340 0.94 -2.05 -0.56 PIMCO Climate Bond C* PCECX 22,129 1.69 -2.11 -1.30 PIMCO Climate Bond I-2* PCEPX 583,427 0.64 -2.03 -0.24 PIMCO Climate Bond I-3* PCEWX 81,105 0.69 -2.03 -0.30 PIMCO Climate Bond Institutional* PCEIX 17,630,681 0.54 -2.02 -0.15 TIAA-CREF Green Bond Advisor* TGRKX 3,198,899 0.46 -2.07 -0.62 4.45 TIAA-CREF Green Bond Institutional* TGRNX 29,119,015 0.45 -2.07 -0.60 4.47 TIAA-CREF Green Bond Premier* TGRLX 1,037,652 0.55 -2.08 -0.73 4.34 TIAA-CREF Green Bond Retail* TGROX 7,367,849 0.73 -2.09 -0.97 4.2 TIAA-CREF Green Bond Retirement* TGRMX 15,984,461 0.54 -2.08 -0.72 4.33 iShares Global Green Bond ETF*^ BGRN 268,289,464 0.20 -1.74 -2.54 3.3 VanEck Green Bond ETF** GRNB 103,111,220 0.20 -2.28 -2.00 2.37 Average/Total 1,438,244,536 -2.14 -0.93 3.73 Bloomberg US Aggregate Bond IX -2.15 -2.97 3.67 Bloomberg Global Aggregate Bond IX -2.05 -4.71 2.36 Bloomberg Municipal Total Return IX -2.74 1.52 3.5 S&P Green Bond US Dollar Select IX -2.3 -1.41 3.72 ICE BofAML Green Bond Index Hedged US -1.78 -2.19 3.67 Notes of Explanation:  Blank cells=NA.  3-year annualized average performance results to January 2022.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  ^Effective March 1, 2022 fund will shift to US dollar green bonds.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line:  J. P. Morgan’s sustainable target date SmartRetirement Fund expands to four the number and variety of available target date options for investors. J.P. Morgan is latest manager to move into the sustainable target date funds space J.P. Morgan Investment Management is the latest manager to move into the sustainable target date funds space, having posted on December 23, 2021 prospectus amendments to onboard the consideration of certain environmental, social and governance (ESG) factors in the investment process applicable to the to the JPMorgan SmartRetirement Fund prospectuses.  Like the other offerings in the segment, the JPMorgan SmartRetirement Fund is organized as a “fund of funds” with each target date fund investing in J. P. Morgan mutual funds as well as ETFs.  These underlying funds are actively managed investment vehicles that employ ESG integration strategies.  Having commenced operations in 2008 the portfolio of nine target date funds ranging from 2020 to 2060 target dates, offering eight share classes each, have attracted $34.5 billion in assets under management as of year-end 2021.  This latest sustainable target date fund addition expands to four the number and variety of available target date options that now stand at $40.1 billion in assets under management, including the JPMorgan SmartRetirement Fund assets.   Investors now have a broader range of structures, sustainable strategies, and pricing alternatives to choose from, as described in Table 1. Target date funds, sometimes also referred to as lifecycle funds, are most used for long-term retirement or education savings, including default options in corporate 401(k) plans Target date funds, sometimes also referred to as lifecycle funds, are most used for long-term retirement or education savings where the owner of the account expects to use the proceeds at a known future date. They are designed to satisfy an investor’s investment objective by a particular target date, which is usually included in the name of the fund. For example, the JPMorgan SmartRetirement 2060 Fund is designed for persons who plan to retire in around 38 years.  To fulfill the investor’s investment objective, the fund is typically constructed as a hybrid fund that follows a predetermined reallocation of risk over the lifetime of the investment pursuant to a glide path that charts the fund’s strategic target allocations among a mix of asset and sub-asset classes.  The fund’s strategic target allocations generally become more conservative as the target retirement date approaches. In the case of the JPMorgan SmartRetirement 2060 Fund, the portfolio today is constructed around a strategic asset allocation consisting of a 91% exposure to equities and 9% to fixed income funds or securities.  Included in these categories are various sub-groups of equities and fixed income securities.  In contrast, a fund with a target date of about five years from today is constructed with a 48.50% exposure to equities and 51.50% investment in fixed income securities.  Refer to Table 2 for JPMorgan’s current strategic asset allocation across the various target date funds.  Interestingly, it is being debated today whether allocations to equities at or around retirement dates are too conservative and should be lifted above the 50% or so level for investors who can tolerate higher risk and can afford to do so based on their circumstances.  This is not an inconsequential point, as target date funds have become a dominant investment default option in many corporate 401(k) retirement plans. Investors now have another sustainable investing option to consider As part of its active management investment assessment, J.P. Morgan considers the risks presented by certain environmental, social and governance factors. Specifically, the adviser will assess how ESG risks are considered within an active underlying fund’s/manager’s investment process and how the active underlying fund/manager defines and mitigates material ESG risks. This approach to sustainable investing gives investors another sustainable investing option to consider as it contrasts with the ESG screening and exclusions index tracking approach employed by BlackRock, the values-based strategy employed by GuideStone Capital Management and the more varied combination approach that includes ESG integration, exclusions and thematic investing offered by Natixis Advisors.  That said, investors must also consider each firm’s fundamental investment approach, glide path philosophy, fund expenses and historical performance results, to mention some of the other key evaluation factors that are expected to influence performance outcomes. Fund performance results are largely influenced by a fund’s strategic asset allocation, based on its glide path, and fund expenses.  In 2021, returns across the four target date funds ranged from a low of 7.6% to a high of 10.7% for the more conservatively managed 2025 target date portfolios.  At the other end of the range, funds with 2060 target dates with their 90%+ allocation to equities posted returns ranging from 16.4% to 20%. Table 1:  Sustainable target-date funds and their sustainable investment strategies Investment Manager/Fund Fund Structure Start Year Assets ($M) Expense Ratios Sustainable Investment Strategy BlackRock Fund Advisors/ BlackRock LifePath ESG Index Fund Largely affiliated sustainable passively managed ETFs but also some mutual funds in a fund of funds like structure with target dates from 2025 to 2065 as well as a Retirement fund option. 2020 28.1 Range from 25% to 0.50%, depending on share class. ESG screening and exclusions.  Much of the investable universe consists of securities managed in the form of index tracking funds that optimize higher ESG ratings, subject to maintaining risk and return characteristics like the underlying index, after factoring in exclusions base on business practices and severe business controversies.  A limited number of funds do not pursue ESG mandates, for example, iShares Developed Real Estate Index Fund. GuideStone Capital Management, LLC/ GuideStone Funds MyDestination Fund Affiliated underlying active and passively managed mutual funds ranging in target dates from 2015-2055 that are advised by external independent investment managers. 2006 5,519.0 Range from 0.50% to 0.75%, depending on share class. Values-based/Exclusions.  Funds may not invest in any company that is publicly recognized, as determined by GuideStone Financial Resources of the Southern Baptist Convention, as being in the alcohol, tobacco, gambling, pornography or abortion industries, or any company whose products, services or incompatible activities. J.P. Morgan Investment Management/ JPMorgan SmartRetirement Fund Primarily invest in other J. P. Morgan mutual funds as well as ETFs.  Target dates range from 2020 to 2060. 2021 34,453.5 Range from 0.56% to 0.65%, depending on maturity and share class. ESG Integration.  The adviser will assess how ESG risks are considered within an active underlying fund’s/manager’s investment process and how the active underlying fund/manager defines and mitigates material ESG risks. Although these risks are considered, underlying funds and securities of issuers presenting such risks may be purchased and retained by the fund. Natixis Advisors, L.P. (a unit of Natixis, a French-based firm)/Natixis Sustainable Future Fund Affiliated underlying actively managed mutual funds ranging in target dates from 2015-2060 that are advised by affiliated investment managers (examples include Loomis Sayles and Harris Assoc.). 2017 103.6 Range from 0.55% to 0.60%, depending on share class. ESG Integration, Exclusions and Thematic Investing.   Implementation of ESG strategies may vary across underlying funds.  Certain ESG strategies may also seek to exclude specific types of investments.  Range of underlying funds also includes thematic funds, such as funds investing in green bonds or carbon neutrality. Sources:  Fund prospectus and related materials.  Assets as of December 31, 2021.  Sources:  Morningstar Direct and Sustainable Research and Analysis. Table 2:  J.P. Morgan’s current strategic asset allocation across the various target date funds Notes of Explanation:  Source:  JPMorgan SmartRetirement Fund prospectus, November 1, 2021

The Bottom Line:  An expanding universe of sustainable high yield funds adds to investor options but sustainable strategies can be nuanced and challenging to compare. Expanding universe of sustainable high yield funds adds to investor options Sustainable mutual funds and ETFs across all asset classes ranging from money market funds to equity funds turned in low double digit performance results in 2021, recording an average gain of 11.5%.  Returns varied considerably, however, by asset class and security type. These ranged from -2.76% recorded by diversified emerging market funds to a high of 24.73% achieved by small company stock funds.  Refer to Chart 1.  Corporate bond funds experienced a narrow -0.70% decline on average while government funds came in at an even lower -1.96%.  Fixed income fund results overall were disappointing as investors reacted to concerns about rising inflation and higher yields drove bond prices lower.  Yet even within fixed income some segments managed to deliver positive returns.  The best sustainable fixed income fund performance results in 2021 were recorded by high yield mutual funds and ETFs.  The segment, consisting of at least ten funds investing in below investment-grade securities¹, registered an average gain of 3.6%.  Results ranged from a high of 5.7% to a low of 2.6%.  Posting lower but positive returns in 2021 and strong results during the previous two consecutive calendar years, the sustainable high yield segment, in addition to performance attributes, now offers to sustainable investors a greater variety of fund options that cover management firms, fund types and investing approaches, varying cost options and sustainable investing strategy alternatives—even as these may be puzzling for investors to sort out and differentiate outcomes. Nevertheless (and this is not to downplay their riskier profile), adding a high yield fund to the fixed income segment of a sustainable portfolio can lift the portfolio’s expected return while reducing the standard deviation or risk relative to the expected returns. Chart 1:  Average total returns for selected fund categories-2021 Notes of Explanation:  Fund categories include mutual funds and ETFs.  Source:  Morningstar Direct ¹ With some exception to reflect high yield mandates, based on the Morningstar universe of sustainable funds that otherwise excludes high yield investment vehicles that integrate material ESG factors into investment analysis, for example high yield funds managed by T. Rowe Price, JP Morgan and Lord Abbot, to mention just a few. Actively managed and index tracking high yield fund choices available to investors At least ten sustainable high yield investment funds with almost $2 billion in assets are available to investors.  Refer to Table 1.  These funds are offered by nine investment management firms pursuing a range of sustainable investing strategies.  Four funds are index tracking ETFs that employ mechanical ESG screening approaches, positive in three of the four funds and negative or exclusionary in each instance, and carry the lowest expense ratios. The second best performing high yield sustainable investment vehicle in 2021, the Xtrackers JPMorgan ESG USD High Yield Corporate Bond ETF (ESHY), assigns greater weights to higher ESG scoring issuers while eliminating lower scoring firms and firms engaged in certain activities such as thermal coal tobacco and weapons to mention just a few.  The fund’s expense ratio is the lowest in the group at 2 bps.  That said, the fund’s performance lags its peer group over the trailing three and five-year intervals although it should be noted that the fund changed its underlying index effective as of May 12, 2020. Among the six actively managed funds, the AXS Sustainable Income Fund I Shares (AXSKX)recorded the best 2021 gain of 5.7%.  The fund integrates ESG into investment decision making but also excludes issuers deemed inconsistent with the goals and objectives expressed in the UN Global Compact or Sustainable Development Goals, particularly as it relates to climate change risk.  The fund reorganized on or about October 16, 2020. AXS along with the other five actively managed funds employs a more investigative and analytic approach to sustainable investing.  One fund, the Federated Hermes SDG Engagement High Yield Credit Fund pursues an impact or outcomes-oriented strategy that aligns investee companies with at least one United Nations Sustainable Development Goals (SDGs).  The institutional-only AXSKX fund, that charges 62 bps and is at the lower range for actively managed high yield sustainable funds, was launched in 2019 and posted a 2.58% return in 2021. Sustainable investing strategies can be nuanced, challenging to compare and to differentiate outcomes Regardless of fund types, the sustainable investing strategies pursued by the ten funds can be nuanced, challenging to compare and outcomes are difficult to calibrate unless fund management firms offer some form of transparent reporting.  This is illustrated when comparing the iShares ESG Advanced High Yield Corporate Bond ETF (HYXF) and the Nuveen ESG High Yield Corporate Bond ETF (NUHY).  Both funds track indices created by MSCI and integrate MSCI ESG scores.  The iShares ETF qualifies eligible securities based entirely on negative screens or exclusions that set the bar on ESG scores at the top of the ESG rating average scale.  Nuveen on the other hand, not only excludes a dissimilar set of companies but also sets the bar lower at the mid-level of MSCI’s average ESG rating scale.  Moreover, the index optimizes its holdings to maximize the overall ESG rating.  Currently, the firms do not offer any supplemental outcomes-based reporting. In the end, lower expense ratios are preferred, however, investors have to evaluate the tradeoffs between the realization of their sustainable investing preferences and fund expenses. Table 1:  Sustainable high yield funds, selected total returns, assets and expense ratios(Listed in 12-months total return performance order) Fund Name Symbol 12-Month Return (%) 3-Year Average Return (%) 5-Year Average Return (%) Assets ($M) Expense Ratio AXS Sustainable Income I# AXSKX 5.7 5.67 4.09 51.9 0.99 Xtrackers JPMorgan ESG USD HY Corp Bd ETF& ESHY 5.09 5.69 4.06 24.2 0.2 RBC BlueBay High Yield Bond I RGHYX 4.1 9.75 6.97 296.7 0.58 RBC BlueBay High Yield Bond A RHYAX 3.88 9.5 6.69 3.6 0.83 Calvert High Yield Bond R6 CYBRX 3.71 52.3 0.71 Calvert High Yield Bond I CYBIX 3.64 7.23 4.98 377.7 0.77 iShares ESG Advanced Hi Yield Corp Bd ETF HYXF 3.48 8.05 5.81 144.2 0.35 Calvert High Yield Bond A CYBAX 3.39 6.95 4.68 55.9 1.02 Pax High Yield Bond Institutional PXHIX 3.34 8.47 5.77 558.9 0.72 Pax High Yield Bond A PXHAX 3.09 8.23 5.51 7.2 0.96 Pax High Yield Bond Investor PAXHX 2.94 8.19 5.48 172.5 0.96 Nuveen ESG High Yield Corporate Bd ETF NUHY 2.76 102.1 0.3 Calvert High Yield Bond C CHBCX 2.62 6.16 3.9 4.9 1.77 Federated Hermes SDG Engagement HY Credit IS FHHIX 2.58 50.5 0.62 BlackRock Sustainable High Yield Bd Inv A BSHAX 0.1 0.83 FlexShares ESG & Climate HY Corp Cr^ FEHY 29.7 0.23 BlackRock Sustainable High Yield Bd K BSHKX 49.4 0.53 BlackRock Sustainable High Yield Bd Ins BSIHX 0.1 0.58 Federated Hermes SDG Engagement HY Credit R6 FHHRX 0 0.57 Average/Totals 3.59 7.63 5.27 1981.9 0.71 Bloomberg US Corporate High Yield Index 5.28 8.83 6.3 Bloomberg Global High Yield Index 0.99 6.75 5.21 Notes of Explanation:  ^Fund commenced operations in September 2021.  #Fund reorganization as of October 2020.  &Effective May 12, 2020, the fund changed its underlying index to the JP Morgan ESG DM Corporate High Yield USD Index from the Solactive USD High Yield Corporate Bond.  Universe constructed based on fund mandate.  Data sources:  Morningstar Direct; Sustainable Research and Analysis. Table 2:  Summary of sustainable investing strategies Fund Name/Investment Manager Summary of Sustainable Investing Strategy AXS Sustainable Income Fund AXS Investment LLC/SKY Harbor Capital Management, LLC ESG Integration, including engagement to inform decision making. Exclusions.  Fund excludes issuers inconsistent with the goals and objectives expressed in the UN Global Compact or Sustainable Development Goals, particularly as it relates to climate change risk. Xtrackers JPMorgan ESG USD High Yields Corp Bd ETF DBX Advisors LLC ESG screening.  Fund tracks the J.P. Morgan ESG DM Corporate High Yield USD Index using a representative sampling strategy that relies on positive and negative screening. -Positive screening.  Issuers with the best scores are more heavily weighted. Green bonds categorized as green by the Climate Bond Initiative receive upgraded scores. -Negative screening.  Issuers with the lowest scores are excluded.  Issuers involved in thermal coal, tobacco, weapons, oil sands or UN Global Compact principle violation are excluded from the index regardless of their ESG score. RBC BlueBay High Yield Bond RBC Global Asset Management (U.S.) Inc./BlueBay Asset Management LLP ESG Integration, including engagement to gain insight and /or influence evolving ESG practices and/or improve ESG disclosure. -Exclusions.  Also exclude issuers with high ESG risks and Product-based restrictions exclude issuers and sectors to avoid investments that may contribute to the production or distribution of certain goods associated with significant environmental and societal risks. Conduct-based restrictions exclude issuers who do not adequately address ethical, environmental, and societal risk in their operations:  Non-compliance with the UN Global Compact Principles; Producers of controversial weapons, including, but not limited to, cluster munitions, anti-personnel mines, chemical and biological weapons and depleted uranium; Tobacco producers; and Certain levels of involvement thresholds in thermal coal mining and power generation. Calvert High Yield Bond Calvert Research and Management ESG Integration; Impact/positive outcomes.  Fund seeks to invest in companies and other issuers that provide positive leadership in the areas of their business operations and overall activities that are material to improving long-term shareholder value and societal outcomes. Calvert seeks to invest in companies and other issuers that balance the needs of financial and nonfinancial stakeholders and demonstrate a commitment to the global commons as well as to the rights of individuals and communities. The Calvert Principles for Responsible Investment (Calvert Principles) provide a framework for Calvert’s evaluation of investments and guide Calvert’s stewardship on behalf of clients through active engagement with companies and other issuers. The Calvert Principles seek to identify companies and other issuers that operate in a manner that is consistent with or promote environmental sustainability and resource efficiency, equitable societies and respect for human rights and accountable governance and transparent operations. -Exclusions.  No or limited exposure to the following issuers: -Demonstrate poor management of environmental risks or contribute significantly to local or global environmental problems. -Demonstrate a pattern of employing forced, compulsory or child labor -Exhibit a pattern and practice directly or through the company’s supply chain of human rights violations or are complicit in human rights violations committed by governments or security forces, including those that are under U.S. or international sanction for human rights abuses. -Exhibit a pattern and practice of violating the rights and protections of Indigenous Peoples. -Demonstrate poor governance or engage in harmful or unethical business practices. -Manufacture tobacco products. -Have significant and direct involvement in the manufacture of alcoholic beverages without taking significant steps to reduce the harmful impact of these products. -Have significant and direct involvement in gambling or gaming operations without taking significant steps to reduce the harmful impact of these businesses. -Have significant and direct involvement in the manufacture of civilian handguns and/or automatic weapons marketed to civilians. -Have significant and direct involvement in the manufacture of military weapons that violate international humanitarian law, including cluster bombs, landmines, biochemical weapons, nuclear weapons, blinding laser weapons, or incendiary weapons. -Use animals in product testing without countervailing social benefits such as the development of medical treatments to ease human suffering and disease. iShares ESG Advanced Hi Yield Corp Bond ETF BlacRock Fund Advisors ESG Screening.  Fund tracks the Bloomberg MSCI US High Yield Choice ESG Screened Index using a representative sampling approach the relies on ESG negative screening and exclusions. -Negative screening.  Issuers with an ESG controversy score of less than 3, companies with ESG scores below BB (top of average scale) and companies involved with in adult entertainment, alcohol, gambling, tobacco, genetically modified organisms, controversial weapons, nuclear weapons, civilian firearms, conventional weapons, palm oil, for-profit prisons, predatory lending, and nuclear power based on revenue or percentage of revenue thresholds for certain categories (e.g. $500 million or 50%) and categorical exclusions for others (e.g. nuclear weapons). MSCI ESG Research screens companies with involvement to fossil fuels by excluding the securities of any company in the Bloomberg Class 3 energy sector (i.e., corporate issuers in the energy sector include both independent and integrated exploration and production companies, as well as midstream oil field services, and refining companies) and all companies with an industry tie to fossil fuels such as thermal coal, oil and gas—in particular, reserve ownership, related revenues and power generation. Pax High Yield Bond Fund Impax Asset Management LLC ESG Integration.  The advisor focuses on the risks and opportunities arising from the transition to a more sustainable economy. It is believed that capital markets will be shaped profoundly by global sustainability challenges, from climate change to gender equality, and these trends will drive growth for well-positioned companies and create risks for those unable or unwilling to adapt.  Companies for its investment portfolios are identified through systematic and fundamental analysis which incorporates long-term risks, including environmental, social and governance (ESG) factors. This process is believed to enhance investment decisions and helps us construct investment portfolios made up of better long-term investments. -Exclusions.  Fund seeks to avoid investing in issuers that Impax determines have significant involvement in the manufacture or sale of weapons or firearms, manufacture of tobacco products, or engage in business practices that the adviser determines to be sub-standard from an ESG or sustainability perspective in relation to their industry, sector, asset class or universe peers. Nuveen ESG High Yield Corporate Bd ETF Nuveen Fund Advisors, LLC/Teachers Advisors, LLC ESG Screening.  Fund tracks the Bloomberg MSCI U.S. High Yield Very Liquid ESG Select Index using a representative sampling approach the relies on ESG positive and negative screening and exclusions. -Positive Screening.  Issuers with BBB ESG ratings (mid-level of average ESG rating scale) and above are eligible and an optimization process is used to select ESG leaders to maximize overall index ESG rating. -Negative screening.  Excluded companies are any with significant activities in the following controversial businesses: alcohol production, tobacco production, nuclear power, gambling, and weapons and firearms production. Companies otherwise eligible for inclusion in the underlying index that exceed certain carbon-based ownership and emissions thresholds are excluded from the index. Federated Hermes SDG Engagement High Yield Credit Fund Federated Investment/Hermes Investment Management Limited Impact/Positive outcomes.  Investing in companies that contribute to a positive societal impact by seeking those companies that are in alignment with at least one of the United Nations Sustainable Development Goals (SDGs) or willingness to enact changes suggested during company engagements. -Exclusions.  Excluded are companies that manufacture tobacco and/or controversial weapons. BlackRock Sustainable High Yield Bond Fund BlackRock Advisors LLC ESG integration.  Reflected in the fund management’s securities selection and weighting based on an issuer’s ability to manage the ESG risks to which its business is exposed.  Included in its assessment is the research and development of investment insights related to economic transition, which include target carbon transition readiness and climate opportunities. The fund generally seeks to invest in a portfolio that, in BlackRock’s view (i) has an aggregate ESG assessment that is better than that of the Barclays US High Yield 2% Issuer Capped Index (Benchmark), (ii) has an aggregate carbon emissions assessment that is lower than that of the Benchmark, and (iii) in the aggregate, includes issuers that BlackRock believes are better positioned to capture climate opportunities relative to the issuers in the Benchmark. -Exclusions.  (i) issuers engaged in the production of controversial weapons; (ii) issuers engaged in the production of civilian firearms; (iii) issuers engaged in the production of tobacco-related products; (iv) issuers that derive certain revenue from thermal coal generation or more than five percent of revenue from thermal coal mining, unless the Fund is investing in green bonds of such issuers or the issuers have set certain targets to reduce climate impact; (v) issuers that derive more than five percent of revenue from oil sands extraction, unless the fund is investing in green bonds of such issuers or the issuers have set certain targets to reduce climate impact; (vi) issuers identified by recognized third-party rating agencies as violators of the United Nations Global Compact, which are globally accepted principles covering corporate behavior in the areas of human rights, labor, environment, and anti-corruption; and (vii) issuers receiving an ESG rating of CCC or equivalent by recognized third-party rating agencies. FlexShares ESG & Climate High Yield Corp Core Index Fund Northern Trust Investments, Inc ESG Screening.  Fund tracks the ESG & Climate High Yield U.S. Corporate Core Index using an optimization approach that increases the aggregate proprietary Northern Trust ESG score for the companies relative to the benchmark, reduces the aggregate carbon emissions intensity of the companies in the fund and improves the aggregate carbon risk rating of the companies in the Underlying Index, each relative to the benchmark. -Positive screening.  Companies are ranked using a proprietary ESG Vector Score based on their management of and exposure to material ESG metrics as defined by the Sustainability Accounting Standards Board (“SASB”) Standards and a corporate governance score for each company. NTI calculates and maintains ESG Vector Scores for companies using data from third-party data providers. The SASB Standards identify financially material ESG issues for a company based on its industry classification within the following five dimensions: (i) environmental; (ii) social capital; (iii) human capital; (iv) business model and innovation; and (v) leadership and governance. The preliminary ESG score is then adjusted up or down based on a quantitative assessment of how a company is managing the risks associated with those material ESG issues relative to its peers based on the recommendations of the Task Force on Climate-related Financial Disclosures to evaluate a company through governance, strategy and risk management lenses. The adjusted ESG score generates 80% of the ESG Vector Score. Finally, a distinct corporate governance score is applied to each company with respect to its (i) board and management quality and integrity; (ii) board structure; (iii) ownership and shareholder rights; (iv) remuneration; (v) financial reporting; and (vi) stakeholder governance, which generates 20% of the ESG Vector Score. In addition to applying the ESG Vector Score, the Index Provider uses data from Institutional Shareholder Services ESG Solutions to assess carbon emissions intensity and a carbon risk rating for each company. Carbon emissions intensity measures (i) direct greenhouse gas emissions from sources controlled or owned by the company (e.g., emissions associated with fuel combustion in boilers, furnaces, or vehicles); and (ii) indirect greenhouse gas emissions associated with the purchase of electricity, steam, heat or cooling against the value of the company enterprise wide. The ISS Carbon Risk Rating provides an assessment of a company’s ability to mitigate the risks of transition to a lower carbon economy risk based on its specific baseline carbon risk exposure. -Negative screening/Exclusions.  Excluded companies include those which are involved in (i) verified infringement of established international initiatives and guidelines, including United Nations Global Compact Principles and Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Entities; (ii) the production of tobacco; and (iii) manufacturing of controversial weapons. Excluded companies also include those which derive a certain percentage of revenue (e.g., 5% or more) from (a) manufacturing of civilian firearms; (b) manufacturing of conventional weapons or providing support services through military contracting; (c) thermal coal extraction; (d) coal-fired energy generation; and (e) the retail sale of tobacco and tobacco related products or services. Notes of Explanation:  Data sources:  Fund prospectus based on research conducted by Sustainable Research and Analysis.

The Bottom Line: December redemptions still place green bond funds at new 2021 high of almost $1.5 billion while absolute total return performance results disappoint. SummaryWithdrawals by institutional investors led to a net $9.4 million decline in the assets of green bond funds in December, bringing year-end total net assets to $1,480.8 million.  While fund assets reached a month-end peak in November, December’s almost $1.5 billion was a new all-time year-end high which was also the case for new green bond issuance that reached $448.2 billion.   Green bond funds, on average, outperformed their benchmarks in December and over calendar 2021 but absolute results were disappointing after green bond funds posted average returns between 7% and almost 9% in the previous two years.  Still, 2021 performance results were within the bounds experienced by sustainable fixed income fund investors more generally.  The second largest ranking green bond fund, the iShares Global Green Bond ETF, announced in December that it was restricting its universe of eligible securities to US dollar denominated green bonds.  Investors will now have two distinct product choices:  investing in green bond funds that limit investments to US dollar denominated green bonds and funds that invest in US dollar and non-dollar denominated green bonds.Withdrawals by institutional investors led to a net $9.4 million decline in assets from green bond fund in December, bringing year-end net assets to a close at $1,480.8 millionGreen bond funds experienced net outflows in December as the segment gave up a net of $9.4 million, or 0.6% of assets, to end the year at $1,480.8 million.  This was the first month since March of 2020 when green bond funds experienced a drawdown.  Over the course of the 2021 calendar year interval, green bond funds added $397 million in net assets, a 37% increase from $1,083.8 million at the end of 2020 to end the year at an all time high.  Refer to Chart 1.Chart 1:  Green bond mutual funds and ETFs and assets under management – January 2021 – December 31, 2021Notes of Explanation:  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLCThe Calvert Green Bond Fund sustained the largest withdrawal.  Institutional investors pulled out a net of $26.4 million from the Calvert Green Bond Fund I Shares (GAFX) while an additional $1.2 million was redeemed from the fund’s retail and intermediary-oriented share classes.  On a combined basis fund assets declined by $27.6 million.  The Van Eck Green Bond ETF (GRNB) experienced a decline of $460, 567 while the PIMCO Climate Bond Fund gave up $216.1.On the other hand, the biggest winner in December was the iShares Global Green Bond ETF (BGRN) that gained $17.1 million to end December with $273.1 million.  The second largest ranking green bond fund announced on December 15, 2021 that it was changing the underlying index and fund name.  On or around March 1, 2022, the fund will seek to track a new underlying index, the Bloomberg MSCI USD Green Bond Select Index.  This index will supplant the current Bloomberg MSCI Global Green Bond Select (USD Hedged) Index. The fund name will change to iShares USD Green Bond ETF. The fund’s investment objective will also change as a result of this update.  This action follows by almost two-and-one half years a similar decision made by the Van Eck Green Bond ETF effective as of September 1, 2019 to restrict portfolio investments to US dollar denominated green bonds.The shift to a portfolio of securities limited to US dollar denominated green bonds may be an indication that hedging currencies to protect investors against currency fluctuations might have been more challenging and expensive--reflected perhaps in the fund’s recent underperformance.  Regardless, green bond fund investors now have two distinct product choices:  investing in green bond funds that limit investments to US dollar denominated green bonds and funds that invest in US dollar and non-dollar denominated green bonds.Two recently registered green bond ETFs, both to be managed by Tuttle Capital Management LLC, including the Green Bond ETF and Green Bond Short-Term ETF, have not yet been listed.  Their launch dates have now been deferred several times.Green bond funds outperform benchmarks in December and in 2021 but post disappointing absolute results On a combined basis, the seven green bond funds posted an average -0.16% decline in December, but the results were buoyed by the positive performance of the Franklin Municipal Bond Fund and its four share classes. Excluding Franklin, the only green bond fund seeking to maximize income exempt from federal income taxes, green bond funds registered a slightly greater average -0.23% drop.  This compares to -0.26% and -0.85% recorded by the Bloomberg US Aggregated Bond Index and broader ICE BofAML Green Bond Hedged US Index, respectively.  Refer to Table 1.Leading the pack in December was the PIMCO Climate Bond Fund I-2 Shares (PEGPX) and I-3 Shares (PEGQX), both recording gains of 29 bps.  At the other end of the range, iShares Global Green Bond Fund posted a decline of -1.04%.The 2021 performance results of fixed income funds generally and green bond funds in particular were disappointing.  Green bond funds recorded an average -0.93% total return during calendar year 2021 as investors reacted to concerns about the prospects for inflation.  While beating their benchmarks on average, this year’s outcome stood in stark contrast to the average returns posted by the segment in 2020 as well as 2019 when green bond funds posted average returns of 7.35% and 8.87%, respectively.  Still, 2021 green bond fund performance results were within the bounds experienced by sustainable fixed income fund investors more generally that experienced an average return of -0.98% (excluding high yield bond funds).For the year, the Franklin Municipal Green Bond Fund was the only fund to record a positive return, therefore also lifting the average performance of the segment by 42 bps.  But even when the Franklin Municipal Bond Fund is excluded, the average performance of green bond funds managed to best the Bloomberg US Aggregate Bond Index and the ICE BofAML Green Bond Hedged US Index. Leading in the rankings over the 12-month interval was the PIMCO Climate Bond Fund I-2 Shares that posted a narrow -0.24% decline. In last place was the Mirova Global Green Bond Fund A Shares that registered a -3.02% drop.Green bonds volume trended down in December and Q4 2021 Following the conclusion of the two-week COP 26 Glasgow climate summit deliberations, green bonds issuance trended down.  In December, $14.8 billion in green bonds came to market.  This represented a month-to-month drop of 62% from $39.4 billion in November and ranked as the second lowest monthly issuance volume in 2021. Fourth quarter volume was the lowest of the year, reaching $93.4 billion versus $110.0 billion issued in total during the third quarter and increasingly higher volumes in the first and second quarters.  Refer to Chart 2.Chart 2:  Monthly green bonds issuance:   January 2021– December 31, 2021Notes of Explanation:  Volume reflects latest available and updated data.  Source:  Climate Bond Initiative (CBI)That said, investor interest in green and social bonds continued to grow significantly and more green bonds were issued in 2021 than in any previous year, reaching a new calendar year high of $448.2 billion.  The year’s volume eclipsed last year’s $269.5 billion issuance by $178.7 billion, or an increase of 66.3%, and positions 2022 for an even stronger issuance year.  The two-week COP 26 climate summit deliberations concluded in November with 200 countries agreeing to the Glasgow Climate Pact that sets out a consensus on accelerating climate action.   Also, in early December the EU Taxonomy Regulation became law when its final review period expired. It now sets the criteria for Climate Change Mitigation and Adaptation objectives in more than 60 economic activities, a development that will help mobilize capital for climate action and help meet the EU’s environmental objectives, including an emissions cut of 55% by 2030.  Also, it was announced in early December that European Union legislators are seeking to tighten the region’s planned green bond standards and make it harder for issuers of environmentally friendly debt to overstate their promises to investors. Sellers of European green bonds and sustainability-linked bonds should develop a transition plan indicating how they will adhere to a 1.5°C global warming scenario and reach climate neutrality by 2050.Table 1:  Green bond funds:  Assets, performance through December 31, 2021, and expense ratios Fund Name1-Month Return (%)3-Month Return (%)12-Month Return (%)3-Yesar Return (%)AUM ($M)Expense Ratio (%)Calvert Green Bond A*-0.21-0.62-1.924.2689.60.73Calvert Green Bond I*-0.19-0.56-1.674.52896.20.48Calvert Green Bond R6*-0.19-0.55-1.61 9.70.43Franklin Municipal Green Bond A**0.190.920.99 1.20.71Franklin Municipal Green Bond Adv**0.210.981.12 8.60.46Franklin Municipal Green Bond C**0.050.810.78 0.21.11Franklin Municipal Green Bond R6**0.120.891.07 00.44iShares Global Green Bond ETF*^-1.04-0.39-2.544.32273.10.2Mirova Global Green Bond A*-0.98-0.79-3.024.446.80.93Mirova Global Green Bond N*-0.99-0.7-2.734.758.10.63Mirova Global Green Bond Y*-1-0.71-2.694.7132.10.68PIMCO Climate Bond A*0.27-0.78-0.56 0.80.94PIMCO Climate Bond C*0.2-0.98-1.3 01.69PIMCO Climate Bond I-2*0.29-0.71-0.24 1.20.64PIMCO Climate Bond I-3*0.29-0.72-0.3 0.10.69PIMCO Climate Bond Institutional*0.3-0.68-0.15 200.54TIAA-CREF Green Bond Advisor*-0.15-0.23-0.625.523.50.55TIAA-CREF Green Bond Institutional*-0.15-0.23-0.65.5429.70.45TIAA-CREF Green Bond Premier*-0.16-0.26-0.735.411.10.6TIAA-CREF Green Bond Retail*-0.17-0.29-0.975.267.40.78TIAA-CREF Green Bond Retirement*-0.16-0.26-0.725.416.80.7VanEck Green Bond ETF**-0.11-0.97-23.62101.50.2Average/Total -0.16-0.31-0.934.811,480.80.66Bloomberg US Aggregate Bond IX -0.260.01-1.544.79  Bloomberg Municipal Total Return IX 0.160.721.524.73  S&P Green Bond US Dollar Select Index0.01-0.86-1.564.95  ICE BofAML Green Bond Index Hedged US-0.85-0.29-2.194.73  Notes of Explanation:  Blank cells=NA.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  ^Effective March 1, 2022, fund will shift to US dollar green bonds.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line:  Advocating for improved disclosures and renewable energy sources, considering lesser energy consuming cryptocurrencies and purchasing carbon credits are options for sustainable investors. Summary and options for sustainable cryptocurrency investors In the 13 or so years since the publication of a white paper by Satoshi Nakamoto¹ that launched the cryptocurrency digital wave with the introduction of Bitcoin, the first cryptocurrency, the market capitalization of all cryptocurrency assets has exploded to over $2.23 trillion².  This growth has largely taken place in the last five years, since about July 2017.  The number of cryptocurrencies in the market has also expanded dramatically along with the number of investors.  While new cryptocurrencies are constantly being created and quite a number have reportedly failed, it is estimated that there are currently more than 13,506 in existence³  The market is highly concentrated with the top ten cryptocurrencies representing 80% of the market cap.  Based on a new Pew Research Center survey, the majority of U.S. adults have heard at least a little about cryptocurrencies like Bitcoin or Ethereum, and 16% say they personally have invested in, traded or otherwise used one.  In the meantime, increasing focus on climate change has directed attention on the usage of energy by cryptocurrencies in the mining process and the resultant levels of greenhouse gas emissions.  This, even as calculating the energy use of cryptocurrencies is exceedingly difficult due to the many parameters at play and spotty data.  Bitcoin in particular, due to its dominant market position, high volume of transactions and reliance on a high energy consuming blockchain verification methodology, has been called out for its very high energy usage.  This issue may be less problematic for investors generally, but it is concerning for investors that emphasize sustainable investing as well as investors focused on environmental, social and governance (ESG) investing even as some recent data indicates that energy usage may have moderated somewhat.  Further, while environmental factors top the list of ESG concerns, cryptocurrencies are exposed to various other ESG-related risks and opportunities that should be considered by sustainable investors.  These are noted below, however, this article focuses on environmental considerations and identifies options for consideration by sustainable or ESG investors who may wish to invest in more energy efficient alternatives while keeping in mind the highly speculative nature of cryptocurrency investing.  For sustainable investors, options and considerations include advocating for improved disclosures, transparency and a shift to renewable energy sources, considering lesser energy consuming cryptocurrencies and/or offsetting emissions through the purchase of carbon credits. ¹ Bitcoin:  A Peer-to-Peer Electronic Cash System, 2008. ² Consisting of all crypto assets, including stablecoins and tokens as of 12/11/2021, according to CoinMarketCap, a cryptocurrency price tracking website that was acquired by Binance in April 2020. ³Source:  CoinMarketCap. Cryptocurrencies have expanded dramatically, however, the market is highly concentrated Cryptocurrency is a decentralized digital currency that relies on distributed ledger technology to keep ownership records and transfer ownership from one user to another often with little to no information about the identity of the owner over the internet. Unlike the U.S. Dollar or the Euro, for example, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet in the form of governance protocols. The number of cryptocurrencies in the market has expanded dramatically, however, the market remains highly concentrated.  As noted, the top ten cryptocurrencies represent 80% of the segment’s market cap and the top five cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB) Tether (USDT) and Solana (SOL), account for 72.3% of the market cap as of December 11, 2021.  With a 40% market cap, Bitcoin remains the market leader, having been created as a concept that was outlined in principle by Satoshi Nakamoto in 2008.  Nakamoto described the project as “an electronic payment system based on cryptographic proof instead of trust.” That cryptographic proof comes in the form of transactions that are verified and recorded in a form of technology called a blockchain. Blockchain--an open, distributed ledger that records transactions in code A blockchain is an open, distributed ledger that records transactions in code. In practice, it’s a little like a checkbook that’s distributed across countless computers around the world. Transactions are recorded in “blocks” that are then linked together on a “chain” of previous cryptocurrency transactions.  With a blockchain, everyone who uses a cryptocurrency has their own copy of this ledger to create a unified transaction record. Software logs each new transaction as it happens, and every copy of the blockchain is updated simultaneously with the new information, keeping all records identical and accurate.  To prevent fraud, each transaction is checked using one of two main validation techniques: Proof of Work (PoW) or Proof of Stake (PoS). Of the two validation techniques, PoW requires an intense amount of computer power and electricity Proof of Work (PoW). This validation method, used by a substantial percentage of all cryptocurrencies, including Bitcoin and Ethereum, employs a consensus mechanism that requires computers to solve complex mathematical problems.  Each participating computer, often referred to as a “miner,” races to solve the mathematical problem that helps verify a group of transactions—referred to as a block—then adds them to the blockchain leger. The first computer to do so successfully is rewarded with a small amount of cryptocurrency for its efforts.  This race to solve blockchain problem can require an intense amount of computer power and electricity. According to the Bitcoin Energy Consumption Index, it is estimated that Bitcoin’s annualized electrical energy consumption is 201.32 TWh, comparable to the power consumption of Thailand and slightly below Vietnam.  Its carbon footprint per single transaction is 9