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Many questions have surfaced in recent years regarding sustainable and ESG investing. Here, investors and financial intermediaries will find materials that describe the various approaches to sustainable investing and their implementation. While sustainable investing approaches vary and they have thus far defied universally accepted definitions, many practitioners agree that they fall into the following broad categories: Values-based investing, investing via exclusions, impact investing, thematic investments and ESG integration. In conjunction with each of these approaches, investors may also adopt various issuer engagement procedures and proxy voting practices. That said, sustainable investing approaches will continue to evolve.

In addition to periodic updates regarding sustainable investing and how this form of investing is evolving, investors and financial intermediaries interested in implementing a sustainable investing approach will also find source materials that cover basic investing themes as well as asset allocation tactics.

The Bottom Line:  Investors seeking to hire a financial advisor should interview multiple advisors before deciding and prepare a set of core questions in advance. Investors interested in engaging a financial advisor (FA) are guided to interview prospective candidates By some accounts, 35% of Americans worked with a financial advisor as of 2022 while 57% said that they didn't have a financial representative. The share of Americans approaching a financial advisor decreased slightly compared to the previous year. Investors interested in engaging a financial advisor are advised to interview prospective candidates. In the process, it’s important to ask questions that will help you understand their expertise, approach, and whether they’re a good fit for your financial goals. Ten core questions or actions to form the basis for an interview in advance of hiring a financial advisor Here are ten core questions or actions that can be taken to form the basis for an interview when considering the hiring of a financial advisor. 1. Background, qualifications, and credentials of the financial advisor. Ask prospective FA’s regarding their backgrounds and qualifications, including licenses, tests, and credentials, such as Certified Financial Planner (CFP), or Chartered Financial Analyst (CFA), Certified Personal Finance Counselor (CPFC) or Certificate in ESG Investing, to mention just a few. The latter certification or related credentials are relevant for clients interested in pursuing a sustainable investing approach. In addition, investors should also prepare for this question by conducting a current search for any recent updates regarding the individual FA or their affiliated firm. One way to do this is via Artificial Intelligence (AI), by harnessing, for example, an AI tool like Microsoft Copilot (an arm of OpenAI’s Chat GPT) or Google Duet, to get any latest available updates covering the individual financial advisor and or the advisor’s affiliated firm. Posing the following question or variations on this question should generate a recent update: What is the latest news regarding [the name of the individual and/or firm] financial advisor services? 2. Regulatory checkup. It is important to know if the financial advisor has had any regulatory issues in the past, such as complaints from clients or disciplinary actions. It is possible to view an individual financial advisor’s details through the Securities and Exchange Commission’s (SEC’s) Investment Adviser Search Tool that can be accessed at: IAPD - Investment Adviser Public Disclosure - Homepage (sec.gov). This tool is free to use. It will show a list of the advisor’s registrations and licenses, industry exams that they have successfully passed, details on their past employment, customer disputes and any regulatory or disciplinary events. 3. Is the financial advisor classified as a fiduciary. A “fiduciary” is a person or firm committed to acting in the best interest of their clients and putting their clients’ best interests before their own. They are required to avoid conflicts of interest and to provide all relevant facts to their clients. 4. Firm affiliation and resources. Is the financial advisor an independent operator or is he/she affiliated with a financial firm? Regardless, what resources are at their disposal? If a member of a full-service financial services firm, how does the firm rank in the J.D. Power U.S. Full-Service Investor Satisfaction Study ? 5. How is the financial advisor compensated? Some advisors are fee-only, which means they charge a flat rate for their services, or a fee based on assets under advisement. Fees could also vary based on the nature of the services provided. Still others may earn commissions on the products they sell , but this approach exposes investors to potential conflicts of interest. If you are unsure how your advisor is being compensated, simply ask them how they make money. If their answers are hesitant or opaque, that may be a red flag. 6. What services are being offered? Some advisors offer comprehensive financial planning, while others specialize in areas like retirement or investment management. 7. What is the financial advisor’s investment philosophy? Understanding how an advisor approaches investing and his/her philosophy around important topics will serve to align a financial advisor’s investment philosophy with the client’s desires and expectations. Considerations such as active management versus passive or index management, use of mutual funds, emphasis on fees/expenses, ETFs and/or individual securities, portfolio construction, monitoring and portfolio rebalancing are some of the considerations that should be explored during the interview process . At the same time, inquire about the financial advisor’s approaches to determining (a) your financial goals and objectives, (b) your risk tolerances and investment time horizon, and (c) sustainable investing preferences. In the end, investor should understand how these determinations are expected to be implemented in the form of a financial plan. 8. Performance track record. How will the financial advisor measure the performance results of their client portfolios and over what time period? What has been the financial advisor’s performance track record across various investing strategies, and in particular the recommended investment approach? 9. Can the financial advisor provide references? Speaking with current clients can give you a sense of an advisor’s strengths and weaknesses. 10. Monitoring and reporting. Regular check-ins can help ensure you’re on track to meet your financial goals. How often does the financial advisor meet with clients? In addition, what type of periodic monitoring reports are provided and at what frequency. With regard to a sustainable investing strategy, in part or in whole, what type of outcomes or impact reports are provided? Keep in mind It’s important to feel comfortable with your financial advisor. A financial advisor should be someone you can trust and communicate with effectively. Don’t hesitate to interview multiple advisors before deciding, and take the opportunity to expand on the questions presented here or modify these to reflect your individual circumstances and preferences. Regardless, responses should be compared and evaluated to arrive at the best possible candidate. 1. J.D. Power’s study is 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. Preference should be given to financial advisors affiliated with firms that rank above the industry average. Refer to recently published article for a list of highly rated firms at: https://sustainableinvest.com/chart-of-the-week-march-25-2024/ 2.  Alternative compensation arrangements fall into the following categories: -Commission-based. Commission-based advisors make money when you buy a product like life insurance or mutual funds from them. As a result of this model, these advisors have a financial incentive to steer you toward products that net them the most money—even if that product is not necessarily the right choice for you. -Fee-only. Fee-only advisors charge hourly fees, annual fees or assets under management (AUM) fees, and they do not earn commissions of any kind. Advisors who are fiduciaries are required to be fee-only. The National Association of Personal Financial Advisors, or NAPFA, says the fee-only compensation structure is the “most transparent and objective method” for an advisor to use. -Fee-based. Fee-based advisors not only charge an AUM or hourly rate to provide their advice and answer questions, but they also get paid commissions. This makes them a hybrid version of a fee-only and a commission-based financial advisor. Like commission-based advisors, fee-based advisors are not fiduciaries. In addition to being paid by their clients, they also receive commissions from certain products that they recommend.

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The Bottom Line: Six qualifying funds available for investors seeking a sustainable large-cap blended index mutual fund or ETF investment option to serve as an anchor position in a sustainable investment portfolio. Large-cap blended index fund:  An anchor position in a sustainable investment portfolio Investors seeking a sustainable large-cap blended index mutual fund or ETF investment option that could potentially serve as an anchor position in a sustainable investment portfolio can start with a review and analysis of the 32 mutual funds and ETFs, for a total of 42 funds/share classes, classified by Morningstar as based on data compiled as of year-end 2023.  After qualifying this category of sustainable funds based on screening criteria that considers five factors, the eligible universe is reduced to six retail and institutional funds that pursue one of two approaches to sustainable investing.  While actively managed funds remains an option for interested investors, the preference for passively managed large cap funds over actively managed investment vehicles is rooted in research into the performance of passive versus actively managed funds revealing that actively managed large-cap funds rarely beat securities market indices. Or that when they do, their outperformance is not persistent. Applying screening criteria consisting of five factors reduces to six the number of qualifying funds The number of qualifying funds is reduced from 32 funds to six funds, including both retail and institutional funds, after the following screens are applied:  (1) Management company-The fund should be offered and managed by an established firm with a reputation for quality—to ensure effective fund operations and instill trust and confidence in the organization.  (2) Years in operation-The fund should be in operation for at least five years and managed pursuant to the same investment strategy—to provide a sufficiently long but not too long view against which to evaluate the fund’s operation, strategy, and performance.  (3) Total return performance-the fund should have generated a total return equal to or greater than the S&P 500 Index for the five-year interval—to evaluate tracking relative to market based financial outcomes over an interval based on a relatively consistent approach and methodology.  (4) Expense ratio.  The fund should be offered at an expense ratio below the average for the category—since 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, and (5) Fund size-the fund’s total net assets should range above $30 million—so that it may be managed more efficiently and to provide some protection against the fund’s closure. Screened Sustainable Large-Cap Blended Index Mutual Fund or ETFs:  Total Returns to 12/31/2023 Notes of explanation: Screened from a universe of 32 sustainable large-cap blended index funds, as defined by Morningstar.  * Refers to institutional funds with high minimum initial investments.  Sources:  Morningstar Direct, Sustainable Research and Analysis LLC. The six retail and institutional funds pursue two approaches to sustainable investing The remaining six funds either pursue a passively managed values-based approach that incorporates exclusions, ESG integration, including positive and negative screening, engagement and proxy voting as is the case with the Calvert US Large Cap Core Responsible Index Fund or a more narrow ESG screening and exclusionary approach applicable to the five other funds. As these five funds track different indices that are compiled based on varying methodologies, variations apply, and the specific factors used in the process of screening and excluding companies will vary.  Further details regarding such factors may be found in the Funds Glossary. Screened Sustainable Large-Cap Blended Index Mutual Fund or ETFs and Their Sustainable Investing Approach/Strategy   Fund Name   R   I   Sustainable Investing Approach/Strategy Calvert US Large Cap Core Responsible Index I √ Values-based, Exclusions, ESG integration, including positive and negative screening, engagement and proxy voting. Calvert US Large Cap Core Responsible Index R6 √ Values-based, Exclusions, ESG integration, including positive and negative screening, engagement and proxy voting. iShares MSCI USA ESG Select ETF √ ESG screening and exclusions. iShares MSCI KLD 400 Social ETF √ ESG screening and exclusions. JNL/Morningstar US Sustainable Index I √ ESG screening and exclusions. Vanguard ESG US Stock ETF √ ESG screening and exclusions. Vanguard FTSE Social Index I √ ESG screening and exclusions. Notes of Explanation:  R-Retail fund; I=Institutional fund, with minimum investments > $100,000.  For further sustainable investing approach/strategy, refer to the Funds Glossary.  Source:  Fund prospectuses, Sustainable Research and Analysis LLC Passive versus active funds: Research shows that actively managed large-cap funds rarely beat securities market indices while outperformance is not persistent For sustainable investors as well as conventional investors, a reason to consider a passive fund versus an active fund is rooted in research showing that actively managed large-cap funds rarely beat securities market indices, a compelling argument can be made for choosing to invest in a low-cost large cap sustainable passively managed mutual fund or ETF.  According to S&P/Dow Jones Indices, only 39% of large-cap funds outperformed the S&P 500 Index over the one-year period ended June 30, 2023, and the percentage of large-cap funds outperforming over the three, five and 10-year intervals declined to 14%.  Moreover, outperformance is not persistent. Universe of Large-Cap Blended Sustainable Passively Managed Mutual Funds and ETFs:  TR Performance to YE 2023   Fund Name   AUM ($ Millions)   ER (%) 1-YR Return (%) 3-YR Return (%) 5-YR Return (%) AXS Change Finance ESG ETF 132.1 0.49 23.69 5.91 14.34 Calvert US Large Cap Core Responsible Index A 725.9 0.49 26.93 7.52 15.67 Calvert US Large Cap Core Responsible Index C 70.7 1.24 26 6.72 14.81 Calvert US Large Cap Core Responsible Index I 2529.8 0.24 27.26 7.79 15.97 Calvert US Large Cap Core Responsible Index R6 1496.2 0.19 27.31 7.85 16.03 Calvert US Large-Cap Core Responsible ETF 250.9 0.15 Calvert US Large-Cap Diversity, Equity and Inclusion ETF 30.6 0.14 Fidelity U.S. Sustainability Index 2966 0.11 29.04 10.62 16.14 FlexShares ESG & Climate US Large Cap Credit Index 41.9 0.09 25.51 FlexShares STOXX US ESG Select ETF 188.6 0.32 27.83 9.62 15.85 Global X Conscious Companies ETF 604.6 0.43 21.98 8.09 13.97 Goldman Sachs ActBt® P-A US Lg Cp Eq ETF 7.9 0.2 24.5 Impact Shares NAACP Minority Empowerment ETF 41.6 0.75 27.97 9.37 19.23 Impact Shares YWCA Women’s Empowerment ETF 49.1 0.75 27.97 9.37 19.23 IQ Candriam U.S. Large Cap Equity ETF 379.6 0.09 32.39 10.44 iShares Climate Conscious & Transition MSCI USA ETF 1808.9 0.08 iShares ESG Aware MSCI USA ETF 13377.3 0.15 25.72 8.34 15.54 iShares ESG MSCI USA Leaders ETF 1120.8 0.1 29.07 10.63 iShares ESG MSCI USA Min Vol Factor ETF 8.8 0.18 12.1 iShares MSCI KLD 400 Social ETF 4086.2 0.25 28.45 9.73 15.94 iShares MSCI USA ESG Select ETF 5342.8 0.25 23.87 8.3 15.91 iShares® ESG Screened S&P 500 ETF 182 0.08 29.8 9.64 JNL/Morningstar U.S. Sust Idx A 300.9 0.71 25.91 9.58 15.7 JNL/Morningstar U.S. Sust Idx I 14.4 0.36 26.42 9.99 16.13 JPMorgan Carbon Transition US Eq ETF 4.8 0.15 27.47 10.35 Nuveen ESG Large-Cap ETF 25.3 0.21 22.29 7.15 SPDR® MSCI USA Gender Diversity ETF 218.6 0.2 22.34 3.34 10 SPDR® S&P 500® ESG ETF 1110.1 0.1 27.84 11.44 TCW Transform 500 ETF 646.7 0.05 27.42 VanEck Morningstar ESG Moat ETF 5.7 0.49 18.28 Vanguard ESG US Stock ETF 7446.4 0.09 30.76 7.89 16.06 Vanguard FTSE Social Index Admiral 8531.2 0.14 31.79 8.45 Vanguard FTSE Social Index I 8005.2 0.12 31.78 8.47 15.97 V-Shares US Leadership Diversity ETF 1.3 0.29 27.93 Xtrackers MSCI USA Clmt Actn Eq ETF 1866.7 0.07 Xtrackers MSCI USA ESG Leaders Eq ETF 983.2 0.1 29 10.63 Xtrackers Net Zero Pwy Par Alg US Eq ETF 166.6 0.1 27.86 Xtrackers S&P 500 ESG ETF 975.2 0.1 27.84 11.46 Total/Average 65,744.6 0.26 26.59 8.81 15.52 Notes of Explanation:  Universe of large-cap index funds are defined by Morningstar.  Data as of December 31, 2023.  ER=Expense Ratio.  Sources:  Morningstar Direct and Sustainable Research and Analysis LLC.

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The Bottom Line:  A number of the largest ten sustainable investment funds can each serve as a sustainable investment portfolio’s anchor equity or bond position.Largest sustainable mutual funds and ETFs as of November 30, 2023, with trailing 12-month performance resultsNotes of Explanation:  Total net assets combine all share classes.  For mutual funds, trailing 12-month returns apply to the largest share class.  Sources:  Morningstar Direct, Sustainable Research and Analysis LLC.Largest sustainable mutual funds and ETFs going into 2024 can serve in anchor positionsThe largest sustainable mutual funds and ETFs going into 2024, based on total net assets as of November 30, 2023, include a diverse group of funds that, with one exception, can each serve as a sustainable investment portfolio’s anchor equity position or, in one other case, a fixed income investment option.    The top 10 funds manage $102.9 billion in assets, accounting for some 31% of the $326.9 billion in sustainable fund assets at the end of November 2023.  They are managed by seven different firms and include domestic equity, one international fund and one fixed income fund.  These funds also consist of index funds and actively managed funds as well as funds that pursue varying fundamental investing and sustainable investing approaches. Most funds have integrated a sustainable investing approach since their inception, while one fund adopted its ESG investing strategy in the last four or so years.       Largest funds are here to stayGiven their history and size, these funds are here to stay. They range from the smallest, the $5.9 billion actively managed TIAA-CREF Social Choice Equity Fund, to the largest, the $26.8 billion actively managed Parnassus Core Equity Fund.  These funds posted an average gain of 12.8% over the trailing twelve months.  The best performer is the Brown Advisory Sustainable Growth I Fund, up almost 24.9% versus a gain of 13.8% posted by the S&P 500 Index.  At the other end of the range is the only bond fund.  Bond funds experienced a difficult year, but the TIAA-CREF Core Impact Bond Fund managed to produce a 1.6% gain versus an increase of 1.2% recorded by the Bloomberg US Aggregate Bond Index.Expense ratios varyAn important consideration in evaluating a fund is the fund’s expense ratio.  These vary considerably across the largest ten funds, ranging from a low of 0.09% applicable to the passively managed Vanguard ESG US Stock ETF to a high of 1.8% covering Pioneer Fund C.  Expense ratios applicable to index funds are, on average, much lower.Sustainable investing approaches of the largest sustainable mutual funds and ETFs Fund NameExpense Ratio (%)Sustainable Investing Approach/StrategyParnassus Core EquityInstitutional and Investor share classesInstl.-0.61Investor-0.82ESG integration.  Screening/exclusions.  Environmental, social and governance factors are considered in making investment decisions.  The fund applies a fossil-fuel free investment strategy.iShares ESG Aware MSCI USA ETF*0.15ESG integration.  Screening/exclusions.Emphasis on companies with higher ESG ratings, per MSCI.  Exclusions apply to various companies, sectors, and activities.   Vanguard FTSE Social Index Fund*Admiral and Investor sharesAdmiral-0.14Investor-0.12Screening/exclusions.Companies are screened for certain environmental, social, and corporate governance criteria by the index provider (FTSE Russell) and excluded based on certain activities or business segments.  Brown Advisory Sustainable Growth FundInstitutional and Investor sharesInstl.-0.64Investor-0.79ESG integration.  Strategic engagement with companiesThe advisor seeks companies that effectively implement what it calls Sustainable Business Advantages, defined as companies that use internal sustainability strategies to improve their financial position.  iShares ESG Aware MSCI EAFE ETF#0.20ESG integration.  Screening/exclusions.Emphasis on companies with higher ESG ratings, per MSCI.  Exclusions apply to various companies, sectors, and activities.  Pioneer FundA, C, K, R and Y share classes^A-1.0C-1.8K-0.61R-1.5Y-0.61ESG integration.  Screening/exclusions.Environmental, social and/or corporate governance are considered in selecting securities to buy and sell. Exclusions are based on certain business activities.Vanguard ESG US Stock ETF*0.09Screening/exclusions.Companies are screened for certain environmental, social, and corporate governance (ESG) criteria by the index provider (FTSE Russell) and excluded based on certain activities or business segments.  Calvert Equity FundA-0.91Instl.-0.65C-1.65R6-0.59Sustainable investing.  ESG integration. Screening/exclusions.  Active engagement with issuers.Pursuant to its Calvert Principles for Sustainable Investing, the advisor seeks to invest in issuers that provide positive leadership in the areas of their operations and overall activities that are material to improving societal outcomes, including those that affect future generation; and seek to balance the needs of financial and nonfinancial stakeholders and demonstrate a commitment to the global commons, as well as the rights of individuals and communities.  TIAA-CREF Core Impact Bond Fund Adv.-0.43Instl.-0.37Prem.-0.55Retail-0.63Ret.-0.62ESG integration.  Screening/exclusions.  Social and environmental outcomes oriented.ESG criteria are used to evaluate corporate issuers, sovereign issuers and asset-backed securities, favoring issuers or securities that exhibit ESG leadership.  Through the fund’s impact framework, the fund also provides direct exposure to issuers or projects that have the potential to have social or environmental benefits.  Exclusions are based on the involvement of companies in certain business activities.    TIAA-CREF Social Choice Equity FundAdv.-0.27Instl.-0.18Prem.-0.37Retail-0.46Ret.-0.43ESG integration.  Screening/exclusionsESG criteria is considered and the advisor favors companies with leadership in ESG performance relative to peers.  Exclusions are based on certain business activities.  Notes of Explanation:  Sustainable investment approaches are extracted from each fund’s prospectus and are summarized in the table.  For complete fund prospectus disclosures, refer to the fund in the SRI Funds Directory.  ^Fund adopted its sustainable investing approach as of May 2019.  * Refers to an index fund.  #Fund is not considered an anchor equity position in a sustainable portfolio.  Sources:  Morningstar Direct, Sustainable Research and Analysis LLC.

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The bottom line:  July’s sustainable fixed income fund performance results were largely aligned with year-to-date 2023 returns in that riskier assets continued their strong performance. Average performance of sustainable fixed income mutual funds and ETFs, by categories:  July 2023 and Y-T-D to July 2023 Notes of Explanation:  Number of funds/share classes includes ETFs.  Sources:  Morningstar Direct and Sustainable Research and Analysis Leading performance results in July and Y-T-D largely aligned with the riskier assets July’s sustainable fixed income fund performance results were largely aligned with year-to-date 2023 returns in that riskier assets continued their strong performance while funds with stronger credit profiles and better liquidity recorded lower but positive average returns. Lower-than-expected inflation figures from the US raised optimism that the US economy could avoid a more serious downturn. The narrative of a soft landing gained traction. Both the US Federal Reserve (Fed) and the European Central Bank (ECB) raised rates by 0.25% in line with expectations, but pledged data dependency in terms of forward guidance. Against this backdrop, the Bloomberg US Aggregate Bond Index posted a decline of 0.07%, the Bloomberg Global Aggregate Bond Index added 0.69% while corporate high yield bonds gained 1.38% per the Bloomberg high yield index. Leading sustainable funds investing in riskier assets, five categories posting average returns in excess of 1% in July, included funds investing in emerging-markets local currency bonds, emerging markets bonds, high yield bonds, nontraditional bonds and bank loans. The same funds, but not in that order, also led on a year-to-date basis. At the other end of the range were sustainable intermediate government funds, intermediate core bond funds and intermediate core-plus bond funds.  Average returns were negative 0.17%, negative 0.03% and 0.10%, respectively. Some sustainable fixed income categories offer limited investment company options While the sustainable fixed income segment now includes 332 mutual funds/share classes and 40 ETFs with a combined total of almost $55 billion in assets under management, some of the segments consist of limited offerings and, even more so, offerings with limited long-term track records for now. This introduces challenges for sustainable investors seeking exposures to some of the sustainable fixed income segments that include limited offerings and even when this is not the case, limited track records due to recent fund re-brandings. For example, the best performing sustainable fixed income fund category in July and year-to-date, the emerging markets local currency bond fund category, consists of only a single fund, the Templeton Sustainable Emerging Markets Bond Fund.  The fund was launched in 2013 as the Templeton Emerging Markets Fund but adopted an ESG integration approach as of December 15, 2021.  Therefore, the fund’s intermediate and long-term performance is not reflective of its current strategy.

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The Bottom Line: ESG investing has morphed from ESG integration to encapsulate socially responsible investing considerations.  Lack of standards has led to widespread misunderstanding and confusion. Introduction ESG investing is a term that morphed over the last several years from ESG integration, a particular form of sustainable investing strategy, to encapsulate various approaches making up sustainable investing.  An overarching designation, sustainable investing refers to at least five, some argue six, key strategies that range from values-based investing or socially responsible investing (SRI), negative/exclusionary screening, thematic investing, impact investing, ESG integration and issuer engagement.  In the process of evolving, ESG integration, with its core emphasis on properly evaluating investment risks as well as opportunities, has become conflated with socially responsible investing practices.  The morphing of terminology and the lack of standards and definitions has led to confusion in the US around sustainable investing, ESG investing and ESG integration.  The following 10 questions and answers attempt to define these various terms for investors, asset managers, financial intermediaries, politicians and various other stakeholders. Q1.  What does ESG mean? ESG refers to environmental, social and governance factors.  ESG factors are numerous and subject to change.  While there are no universal definitions for these terms, the following are some of the factors that constitute ESG: Environmental:  Climate change, energy, waste, water scarcity, pollution, deforestation and biodiversity. Social:  Human rights, child labor, working conditions, safety, employee relations, gender equality, employee treatment, fair and living wage. Governance:  Bribery and corruption, rule of law, executive pay, board diversity and structure, political lobbying and donations, reporting and disclosure and tax strategy. Q2.  What is ESG investing? ESG investing is a term that seems to have morphed over the last several years from ESG integration, to encapsulate various approaches making up sustainable investing. Whereas ESG integration defines a particular form of sustainable investing strategy, sustainable investing, and now ESG investing, refers to at least five key strategies that range from values-based investing or socially responsible investing, negative/exclusionary screening, thematic investing, impact investing, ESG integration and issuer engagement. The morphing of terminology and the lack of standards and definitions has led to confusion in the US around sustainable investing, ESG investing and ESG integration. Q3.  What is ESG integration? ESG integration is an investing approach that considers relevant and material ESG factors in investment analysis and decision-making using a consistent and systematic approach and methodology.  The consideration of ESG issues in investment analysis is intended to complement and not substitute for traditional fundamental analysis 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. ESG integration is one of at least five, some argue six, key strategies that make up a sustainable investing. Here too, a universally accepted definition for sustainable investing does not exist yet, but practitioners agree that this overarching term refers to values-based investing or socially responsible investing, negative/exclusionary screening, thematic investing, impact investing and ESG integration. In addition, proxy voting and engagement practices may be employed on their own or in combination with one or more of the previously mentioned approaches[1].  Refer to Appendix 1 for definitions. According to data published by Global Sustainable Investment Review 2020, worldwide sustainable assets under management reached about $35 trillion or so at the start of 2020 across varying strategies.  Refer to Appendix 2.  The number may be inflated due to definitional uncertainties and subject to double counting, but what is clear is that ESG integration and related strategies, such as negative/exclusionary screening, are by far the largest component of sustainable investing assets worldwide, making up some 90% or more while impact investing, as a strategy, accounts for about 1% of world-wide assets. [1] Proxy voting and engagement practices are usually but not always employed in combination with one or more of the five above mentioned approaches.  For this reason, these practices are not identified as a separate sustainable investing approach. Q4.  What is an example of how ESG integration is implemented? By way of illustration, if a company is believed not to be paying its employees a fair and living wage and this is figured to impact employee morale and productivity, employee turnover, unionization efforts, or the company’s ability to hire new workers, this can bear down on the company’s profitability and, in turn, its valuation.  All other considerations aside, if this factor is viewed as relevant and material to the company’s valuation, it should be taken into consideration when a portfolio analyst or manager evaluates the company relative to its share price, current and projected. Various methods can be employed by fundamental investment analysts to apply ESG factors in company valuations and the analysis of individual instruments and issuers.  These include discounted cash flow models (DCF) or multiple analysis, to mention just two.  None of the methods are without their challenges but adjusting the company’s future cash flows in a DCF model to reflect the potential impacts of the above noted ESG factors on future wages at least forces analysts to focus on relevant and material issues. That said, it should be noted that ESG factors may not be deemed or considered central in the evaluation of a company and ESG considerations have not typically in the past been the main driver of valuation or credit outcomes.  Rather, broader factors may form a more important part of a company’s assessment.  For example, even when environmental risks may have material implications, the impacts on valuations may be mitigated by other considerations. Q5.  Is there a difference between ESG integration and socially responsible investing? ESG integration should not be confused with socially responsible investing, or related approaches, such as socially conscious investing, green investing, ethical investing, faith-based investing or values-based investing which are investment approaches based on a set of beliefs with a view toward achieving positive societal outcomes. Typically, these approaches are implemented via negative/exclusionary screening involving individual companies or sectors fully or partially engaged in gambling, sex related activities, the production of alcohol, tobacco, firearms, fossil fuels or even atomic energy.  In recent years, high greenhouse gas emitting sectors or companies that have not adopted carbon transition plans, may also be screened out.  Such approaches may be combined with proxy voting and/or active engagement involving equity as well as bond issuers. At the same time, ESG integration approaches have been magnified in recent years to encapsulate negative/exclusionary screening, proxy voting and engagement practices that attempt to modify investee behavior.  In that case, the overall investing approach nudges up against socially responsible investing principles and this has been a factor likely contributing to the confusion that exists regarding sustainable investing, ESG investing and ESG integration. Q6.  Does ESG integration produce better performance results? 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 been narrowing. 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. Q7.  Is ESG integration a more costly investing approach? There is no formal evidence to indicate that ESG integration, either through separately managed portfolios, mutual funds or ETFs, costs any more than conventional investing. Expense ratios levied by active and passively managed sustainable diversified US equity funds are competitive, but size matters for index tracking funds and conventional index tracking funds have an advantage in that they are larger than their sustainable counterparts, they have been around longer, and they benefit from scale economies that allows sponsors to charge lower fees.  That said, discerning sustainable investors can find investing options charging even lower fees. Q8.  Is ESG integration aligned with fiduciary responsibilities? Fiduciaries must exercise the care, skill, prudence, and the diligence of a prudent person who is acting in a like capacity and is familiar with such matters. To the extent that E, S and G factors can impact valuations and risk adjusted returns due to risk exposures or investment opportunities, investment fiduciaries would not be carrying out their responsibilities as fiduciaries if they ignored such factors. ESG integration is consistent with the principals of fiduciary responsibility pursuant to which fiduciaries are required to perform their duties solely in the interest of the plan participants and their beneficiaries. Q9.  Is ESG integration new? ESG integration is not a new concept.  Active investment managers, equity and credit analysts engaged in the evaluation and/or selection of individual securities using fundamental analysis have always integrated relevant and material ESG factors to assess exposures to risks and investment opportunities.  This has certainly always been the case regarding governance considerations and relevant and material E and S factors, even as these may not have been singled out as such.  What has changed, however, is the focus on such factors and, in some cases, the shifting risk profiles of certain environmental and, to a lesser extent, social issues. Socially responsible investing is also not a new concept and has been around in the US for at least a full century if not longer.  Its origins in the US can be traced to religious considerations practiced by the Methodist movement in the 18th century. Historically, the Methodist church opposed investments in companies involved with liquor or tobacco products or promoting gambling, which was expressed in the form of positive and negative screening. As for investment products, the first public offering of a screened investment fund is reported to have occurred in 1928 when an ecclesiastical group in Boston established the Pioneer Fund. The simple screening approach has been expanded to include divestiture, social impact analysis well as shareholder activism, practices that were encapsulated under the label of sustainable and responsible investing or SRI. Q10.  What is the relationship between ESG investing and PRI? PRI, or the Principles for Responsible Investment, bills itself as the world’s leading proponent of responsible investment and it likely is given the number of signatories that have adopted the PRI’s six Principles.  In 2021/2022, the number of signatories reached 4,902 with an estimated $121.3 trillion in assets under management.  The PRI has grown consistently since it was launched in 2006. In early 2005, the then UN Secretary-General, Kofi Annan, invited a group of the world’s largest institutional investors to join a process to develop the Principles for Responsible Investment. A 20-person investor group drawn from institutions in 12 countries was supported by a 70-person group of experts from the investment industry, intergovernmental organizations and civil society. The Principles were launched in April 2006 at the New York Stock Exchange and the PRI was created alongside the Principles to help put the framework into practice. Asset owners and investment advisers that sign on to the PRI Principles agree to commit themselves to the six principles listed below which in early years were viewed as aspirational.  In recent years signing on to the PRI Principles has become a signaling mechanism and a basis for qualifying to compete for asset management mandates worldwide, especially asset owner-initiated mandates. This is one factor that has contributed meaningfully to the growth of ESG in recent years. Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes. Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices. Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest. Principle 4: We will promote acceptance and implementation of the Principles within the investment industry. Principle 5: We will work together to enhance our effectiveness in implementing the Principles. Principle 6: We will each report on our activities and progress towards implementing the Principles. Appendix 1.  The overarching sustainable investing strategies/approaches are²: Values-based Investing.  A strategy based on the guiding principle of investments that are based on a set of beliefs that contain a view toward achieving a positive societal outcome.  Typically, this approach is executed via negative screening, divestiture or divestment. Negative/exclusionary Screening.  Involves the exclusions of companies or certain sectors from portfolios based on specific ethical, religious, social or environmental guidelines. Traditional examples of exclusionary strategies cover the avoidance of any investments in companies that are fully or partially engaged in gambling, sex related activities, the production of alcohol, tobacco, firearms, fossil fuels or even atomic energy.  These exclusionary categories have been extended, in recent years, to incorporate serious labor-related actions or penalties, compulsory or child labor, human rights violations and genocide. Impact Investing.  A relatively small but growing slice of the sustainable investing segment, impact investments are investments directed to companies, organizations, and funds with the intention to achieve measurable social and environmental impacts alongside a financial return.  The direct capital in this strategy addresses challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, affordable and accessible basic services, including housing, healthcare, and education. Thematic Investing.  An investment approach with a focus on a particular idea or unifying concept.  Clean energy, clean tech and gender diversity are a few of the leading sustainable investing fund themes.  Investing in green bonds or low carbon emitting stocks, bonds and funds also fall into the thematic investing category. ESG Integration.  Strictly defined, ESG investing, or ESG integration, is an investing approach that considers relevant and material ESG factors in investment analysis and decision-making using a consistent and systematic approach and methodology.  The consideration of ESG issues in investment analysis is intended to complement and not substitute for traditional fundamental analysis that might otherwise ignore or overlook relevant factors.  As is the case with other sustainable investing strategies, ESG integration can be employed in active and passive investing approaches.  Positive/best in class screening (in which investment in sectors, companies or projects selected for positive ESG performance relative to industry peers, and that achieve a rating above a defined threshold) and norms-based screening (which refer to screening of investments against minimum standards of business or issuer practice based on international norms such as the Sustainable Development Goals (SDGs) issued by the UN) are considered varying approaches to ESG integration. Engagement/Proxy Voting.  Leverages the power of stock ownership in publicly listed companies using action-oriented approaches that rely on influencing corporate behavior through direct corporate engagement, filing shareholder proposals and proxy voting. To a more limited extent, bond investors can also participate in engagement activities with issuers. These activities are usually combined with one or more of sustainable investing approaches listed above, but they can also be employed independently. ² Source:  Drawn in part from Promoting the Continued Growth and Development of Sustainable Investing in US Mutual Funds and ETFs:  A Three-pronged Proposal to Address Misunderstanding and Confusion that Have Arisen in the Sector , Michael Cosack and Henry Shilling, May 2020. Appendix 2:  Global Growth of sustainable investing strategies:  2016-2020 Notes of Explanation:  ESG investing or ESG integration for purposes of Q2 includes positive/best in class screening and Normes-based screening approaches as these represent variations in the implementation of ESG investing.  Data source:  Golbal Sustainable Investment Review 2020

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Sustainable investors can establish cost-effective diversified portfolios of funds that pursue an ESG Integration investing approach aligned with their financial profile and risk tolerance (1). Summary Sustainable investors seeking to establish a diversified investment fund portfolio that pursues an ESG Integration investing approach, as defined and  based on the criteria set out below, should consider the SRA Select Listing.  The SRA Select Listing consists of both ETFs and mutual funds, however, ETFs dominate the listing.  Selected funds are monitored and updated on a quarterly basis.  Impact or outcomes data will also be published on a periodic basis.  Investment allocations will vary based on each investor’s goals and objectives, financial profile and risk preferences. Refer to SRA Investment Allocations for further details. SRA Select Listing:  ESG Integration Investment Funds Fund Type/Asset Class/Index Fund Name/Symbol AUM ($M) ER (%) 1-Year (%) 3-Year (%) US Equity iShares MSCI KLD 400 Social ETF (DSI) iShares ESG Aware MSCI USA Small Cap ETF (ESML) 3,968.8 1,353.6 0.25 0.17 30.72 24.42 22.45 16.30 US Bond iShares ESG Aware US Aggregate Bond ETF (EAGG)^ iShares ESG Advanced High Yield Corporate Bond ETF^ (HYXF) iShares TIPS Bond ETF (TIP)* 1,716.3 123 37,794.5 0.1 0.35 0,19 -1.27 2.17 6.41 5.45 6.51 8.31 Global/ International iShares ESG Aware MSCI EAFE ETF (ESGD) 3,491.7 0.20 11.27 10.53 Emerging Markets iShares ESG MSCI EM Leaders ETF (LDEM) 402.1 0.16 4.89 NA Money Market BlackRock Liquid Environmentally Aware Fund (LEAXX)** Vanguard Treasury Money Market Fund Investor (VUSXX)** 1,100.5 34,400 0.45 0.09 -0.01 0.02 NA 0.93 Thematic iShares Global Green Bond ETF (BGRN)# iShares MSCI ACWI Low Carbon Target ETF (CRBN) 256 1,298.6 0.2 0.2 -1.29 19.18 5.12 16.66 Index S&P 500 Index MSCI USA Small Cap Index MSCI EAFE Index MSCI ACWI Index MSCI Emerging Markets Index Bloomberg U.S. Treasury Bill (1-3 M) Bloomberg U.S. Inflation Protected Securities Index Bloomberg U.S. Aggregate Bond Index Bloomberg Global High Yield Index ICE BofAML Green Bond Hedged US Index 27.92 23.30 10.77 19.27 2.70 0.04 6.83 -1.15 1.6 -1.04 20.38 14.15 9.83 15.96 9.27 3.00 8.52 5.52 5.84 4.17 Notes of Explanation:  AUM=Assets under management as of November 30, 2021.  ER.  Expense ratio.  Performance results to November 30, 2021.  ^ Impact report not available. # Effective March 1, 2022, the fund's name and tracking index will change from the Bloomberg MSCI Global Green Bond Select (USD Hedged) Index to the Bloomberg MSCI USD Green Bond Select Index. The fund's name will be iShares USD Green Bond EFT. Data sources:  Morningstar Direct and Sustainable Research and Analysis. Criteria for selection: Funds are evaluated and selected based on the following criteria.  Reliance on an ESG Integration strategy or thematic investment approach with an ESG orientation and independent reporting/disclosure practices are priority requirements for consideration.  Some exceptions may apply. ESG Integration².  Fund is either actively or passively managed (i.e., index fund).  ESG Integration is an investment strategy by which environmental, social and governance factors and risks are systematically analyzed and, when these are deemed relevant and material to an entity’s performance, they will influence decisions on whether to buy or hold the relevant security and to what extent. Conversely, such considerations may lead to the liquidation of a security from the portfolio.  ESG Integration is further subdivided into four categories based on the nature of and scope of ESG integration.  Only funds that pursue a strategy consisting of ESG Integration, ESG Integration-Mixed and ESG Screening will meet the ESG Integration criteria for the SRA Select Listing.  In addition, thematic funds with an ESG orientation are also considered. Reporting/disclosure.  Fund should publish sustainable research reports, impact or outcomes reports or related information in another format on a periodic basis.  Some exception may apply to optimize the other criteria.        Low expense ratios.  The average expense ratio levied by sustainable ETFs as of November 30, 2021, is 43 bps while ETFs in the first quartile charge 20 bps.  The SRA Select Listing seeks to include funds that charge ≤ 20 basis points to the extent possible, but exceptions may apply.   The average expense ratio charged by sustainable mutual funds is a higher 91 bps.  The SRA Select Listing seeks to include mutual funds that charge ≤ 59 basis points to the extent possible, but some exceptions may apply.    Operating history.  Fund in operation for at least 3 years and managed by established management firm.  Some exceptions may apply. Minimum fund net assets under management.  ≥$50 million in net assets. Performance track record. Performance ≥ the relevant conventional index over the trailing 1-year and 3-years.  Some exceptions may apply. *Fund invests in U.S. Treasury obligations only.  The US Government is generally scores highly based on ESG risks and opportunities. **A note regarding money market fund options.  The BlackRock LEAF Fund is a prime money market fund that invests in securities issued or guaranteed by entities that meet the fund’s ESG criteria as well as more rigorous environmental criteria.  In addition, at least 5% of the net revenue from BlackRock’s management fee from the fund will be used to purchase and retire carbon credits.  Moreover, BlackRock has committed to making an annual contribution to the World Wildlife Fund, an environmental non-profit organization focused on environmental protection.  In the last year, BlackRock announced that it contributed in the amount of $185,000.  At 45 bps, the fund’s expense ratio exceeds the level pursuant to the selection criteria outlined above.  As an alternative, investors may choose a lower priced money market fund option that is invested in US government and/or US Treasury securities.  Such lower cost options are available through some of the leading brokerage platforms, such as Fidelity, Vanguard or Schwab, to name just a few.  For example, an SRA Select Listing portfolio can be established by opening a Vanguard commission free brokerage account.  In that case, investors can choose to invest in the lower cost Vanguard Treasury Money Market Fund Investor shares (VUSXX) with a minimum investment of $3,000.  The fund invests in U.S. Treasury securities and repurchase agreements, however, the fund does not publish sustainable research reports. ¹ Sustainable Research and Analysis (SR) Select Listing should not be construed to offer investment advice. ² ESG Integration Definitions ESG Integration-The investment adviser assesses a company’s environmental, social and governance profile by conducting ESG research and leveraging engagement when appropriate through dialogue with company management teams as part of its fundamental due diligence process. The adviser views ESG characteristics as material to fundamentals and seeks to understand their impact on companies in which the fund may invest. Proactive proxy voting may also be employed. ESG Integration-Mixed-The broadest form of ESG Integration. In addition to employing an ESG Integration approach as described above, the fund may also incorporate values-based screening as well as broader-based exclusions. Thematic elements may also apply. The investment adviser may also engage in active dialogues with company management teams to further inform investment decision-making and to foster best corporate governance practices using its fundamental and ESG analysis. Proactive proxy voting may also be employed. ESG Screening-The fund employs a rules-based approach by which securities are mechanistically excluded based on various criteria such as severe controversies, values-based considerations, alignment with United Nations Global Compact principles in areas such as human rights, labor, the environment and anti-corruption, or the failure to achieve a minimum ESG score as determined by an ESG rating or scoring provider. ESG Integration – Consideration-As part of the research process, portfolio management may consider financially material environmental, social and governance factors. Such factors, alongside other relevant factors, may be considered in the fund’s securities selection process. Thematic- An investment approach with a focus on a particular idea or unifying concept linked to ESG. Clean energy, clean tech and gender diversity are a few of the leading sustainable investing fund themes. Investing in green bonds or low carbon emitting stocks, bonds and funds also fall into the thematic investing category.

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Model portfolios: Strong U.S equity market in November boost sustainable model portfolios to rise above their conventional benchmarks and achieve new highs The Aggressive Sustainable Portfolio (95% stocks/5% bonds), the Moderate Sustainable Portfolio (60% stocks/40% bonds) and the Conservative Sustainable Portfolio (20% stocks/80% bonds) outperformed their conventional indices by a range from 8 basis points (bps) to a high of 40 bps. The three model portfolios also registered above benchmark returns for the trialing three month period while delivering mixed results year-to-date and over the latest twelve months. Still, the portfolios remain well ahead since their inception as of October 2012, beating their indices by cumulative margins ranging from a high of 21.76% to 8.84%. Refer to Table 1 and Chart 1. In an outcome similar to the one observed in October, the three model portfolios benefited from the outperformance delivered by the Vanguard FTSE Social Index Fund Investor Shares relative to the S&P 500 Index. The fund posted a total return of 4.1% relative to a 3.6% gain achieved by the S&P 500, surpassing the conventional benchmark for the second consecutive month. As well, the fund eclipses the index over the previous twelve-months. Also benefiting the model portfolios in November, but to a lesser degree, was the outperformance of the Domini Impact International Equity Fund Investor Shares which gained 1.26% versus the 1.13% gain registered by the MSCI EAFE (Net) Index. Fixed income funds, on the other hand, have lost momentum over the last three months, giving up -0.28%, as long-term interest rates, based on 10-year Treasuries, reversed course starting in early September and rose 31 bps since September 4th to November 30, 2019. In the process, the TIAA-CREF Social Choice Bond Fund Retail Shares has given up -0.39% since the end of August and -0.07% in November. This, in turn, detracted from the performance results achieved by each of the three model portfolios. U.S. stock indices posted a series of record highs during November U.S. stock indices posted a series of record highs during November and closed the next to last month of the year with their strongest monthly gains since June. These milestones also pushed the model portfolios to record highs in November. The Dow Jones Industrial Average, S&P 500 and the Nasdaq Composite each experienced a steady march upward and rose more than 3% for the month as investors reacted favorably to positive US economic news ahead of the Thanksgiving holiday while continuing to shrug off geopolitical and domestic political uncertainties, including US-China trade, Brexit, unrest in Hong-Kong and impeachment proceedings in the US. The S&P 500 Index gained 3.63%, the Dow Jones Industrial Average closed even higher at 4.11% while the NASDAQ Composite added 4.64%. Small stocks performed well, expanding by 4.12% per the Russell 2000 Index, and continuing to outpace the S&P 500 for the third month in a row. Small cap growth stocks recorded even stronger gains, returning 5.89%, however, this relationship did not hold for large cap stocks. Across sectors, Healthcare, Information Technology and Financials led with returns of 8.24%, 6.39% and 5.14%, respectively, while Utilities, Real Estate and Energy were the only sectors to post negative results, giving up -2.05%, -1.96% and -0.70%, in that order. Stocks in the US eclipsed their counterparts overseas. The MSCI ACWI ex US index gained 2.44% while emerging markets backtracked with regional variations. Latin America dropped -4.13% while Asian emerging markets added 0.53%, boosted by China which was up 1.78%. US rates rose across the yield curve in November. Three-month Treasuries ticked up 5 basis points, 2-year Treasuries added 9 basis points to end November at 1.61% while 10-year treasuries also gained 9 basis points to end at 1.78%. Intermediate investment-grade bonds, on the other hand, closed the month -0.05% lower on a total return basis while US Treasuries lost -0.3%.

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Model portfolios: Reversing course in August, the performance of each of the three sustainable portfolios were eclipsed by conventional benchmarks A volatile August driven by trade tensions between the US and China, geopolitical uncertainties and signs of an economic slowdown in the US and overseas produced opposite results for equities and fixed income securities but still left the three sustainable model portfolios trailing behind their conventional benchmarks. US and foreign equities as measured by the S&P 500 Index and MSCI EAFE (NR) Index were down -1.58% and -2.60% while intermediate investment-grade bonds shut out the lights with a return of 2.60%. In turn, market results affected the performance of the underlying funds that comprise the sustainable portfolios, namely the Vanguard FTSE Social Index Fund Investor shares, -2.0%, the Domini International Equity Investor shares, -3.36%, and the TIAA-CREF Social Choice Bond Fund Retail shares, 2.47%. Each of the funds also lagged behind their conventional indices. Refer to Table 1. Against this backdrop, the Conservative Sustainable Portfolio (20% stocks/80% bonds), Moderate Sustainable Portfolio (60% stocks/40% bonds) and Aggressive Sustainable Portfolio (95% stocks/5% bonds) posted index lagging returns of 1.41%, -0.52% and -2.11%, respectively. As well, the three portfolios trailed behind their conventional indices over the preceding 3-month, year-to-date and 12-month intervals. While the Vanguard FTSE Social Index Fund Investor shares has beaten the S&P 500 over the last year, its strong returns have been offset by the relative results recorded by both Domini and TIAA-CREF. Refer to Chart 1. Still, the three sustainable portfolios continue to outperform their conventional benchmarks since inception as of October 2012 by wide margins. Refer to Chart 2. Stock market registers -1.58% decline in volatile month while bonds blew the lights out and sustainable indices, for the most part, outperformed conventional benchmarks A volatile August ended the last week of the month as it began but with opposite outcomes, driven by trade tensions between the US and China, geopolitical uncertainties and signs of an economic slowdown in the US and overseas. By month-end, the broad market as measured by the S&P 500 closed down -1.58% while the Dow Jones Industrial Average gave up -1.32% and the Nasdaq Composite dropped -2.46%. Refer to Chart 1. Small company stocks ended even lower, giving up -4.94% as measured by the Russell 2000 Index. Growth stocks outperformed value stocks while large caps eclipsed their small cap counterparts. Foreign markets also ended lower while at the same time, bonds generally, and long-dated bonds in particular, blew out the lights in August. Long dated Treasury and US government indices gained over 10% and the intermediate-term Bloomberg Barclays US Aggregate Bond Index added 2.59%. For the most part, sustainable equity, foreign, emerging market stock, bonds as well as fund indices outperformed conventional indices. For additional details, refer to article entitled SUSTAIN Indices Post Competitive Returns: August 2019 Update.

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Model portfolios: All three sustainable portfolios outpaced their conventional benchmarks in July by 1 bps to 17 bps As markets across the globe took a breather in July, the three sustainable model portfolios posted positive total returns that exceeded the performance of their corresponding conventional benchmarks by a range extending from 1 basis point (bps) to 17 bps. The Conservative Sustainable Portfolio (20% stocks/80% bonds), Moderate Sustainable Portfolio (60% stocks/40% bonds) and Aggressive Sustainable Portfolio (95% stocks/5% bonds) recorded gains of 0.51%, 0.67% and 0.73%, respectively. Refer to Table 1. While still outperforming their conventional benchmarks by wide margins since inception as of October 2012, performance over intervals ranging from three-months to 12-months are mixed. The Conservative Sustainable Portfolio maintains the best relative record over the three time periods under consideration, leading its conventional index over two of the three time intervals, including year-to-date and over the trailing 12-months. On the other hand, the Moderate Sustainable Portfolio lagged over the latest three-months, year-to-date and trailing 12-months. Refer to Chart 1. Driving the performance of the model portfolios in July are the above benchmark returns recorded by two of the three underlying funds. These include the equity-oriented Vanguard FTSE Social Index Fund Investor shares and bond-oriented TIAA-CREF Social Choice Bond Fund Retail shares that beat their benchmarks by a wide 65 bps and 20 bps, respectively. On the other hand, the Domini International Equity Investor shares, down -3.25% in July, underperformed the conventional MSCI EAFE Index by 1.98%. Exposure levels to Domini range from 15% to 5%, commensurate with each sustainable portfolio’s risk profile. Markets take a breather in July: the S&P 500 Index ended the month up 1.4%, bonds gained 0.22% and foreign stocks were down -1.21% Compared to gains posted in June that ranged from 2.36% to 6.52%, the total returns recorded by the three model portfolios in July were dialed down as stocks in the US and bonds took a breather while foreign stocks landed in negative territory. The S&P 500 Index ended the month of July up 1.4%. The Dow Jones Industrial Average and Nasdaq Composite each recorded gains of 1.12% and 2.15%, respectively. For both the S&P and Nasdaq indices, these were the smallest positive returns so-far this year, excluding the negative results of -6.4% and -7.79% recorded in May, even after stocks reached a new all-time high on July 26 just ahead of the Federal Reserve Bank’s decision on the last day of July to lower the target range for the federal funds rate to 2 to 2-1/4 percent. The rate cut was the first in 11 years, set against a backdrop of a strong labor market and moderate economic activity but prompted by the Federal Reserve Open Market Committee’s view that “sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain.” In addition to concerns regarding the slowing economy led, for now, by a decline in business investment, exports and growth abroad, investor uncertainty focused on other economic and percolating geopolitical risks, including the continuing US/China trade tensions, slower growth in Europe and China, Boris Johnson’s appointment as Britain’s new prime minister and the possibility that the UK would leave the European Union without a BREXIT deal, and Iran strains. At the same time, US corporates looked set to deliver low single-digit earnings growth for the second quarter. Approximately three-quarters of companies that had reported earnings through the end of July, or about 60% of S&P 500 companies, have beaten analyst earnings estimates so far, although this was largely driven by share buybacks and, in part, reflects a lower hurdle after analysts had grown more pessimistic. Returns for the month across sectors and asset classes ranged from a high of 5.11% to a low of -5.83% for the narrowest range of returns so far this year. Small-company stocks were up just 0.58% and while this segment has been losing momentum over the last three months it is still up 17.66% year-to-date while large caps are up 20.24%. Also in July, growth stocks outperformed value stocks. In the fixed income markets, 10-year Treasury yields ended the month at 2.02%, 2 basis points (bps) higher relative to the prior month-end. 90-day Treasury yields remained inverted for the entire month, ending July 6 bps lower than the 10-year. The Bloomberg Barclays US Aggregate Index was up 0.22%. Long-dated and lower-rated securities posted better returns relative to short-dated and highly rated bonds. Outside the US, stocks didn’t perform as well. The MSCI ACWI ex USA NR Index was down -1.21%, dragged down by the performance of emerging market stocks. MSCI EAFE recorded a decline of -1.27% while China was lower -0.54%.

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Model portfolios: All three sustainable portfolios post strong performance results but two of three lag their conventional benchmarks in June with returns ranging from 2.36% to 6.52% The June performance results posted by the three sustainable model portfolios benefited from the gains achieved by global markets across all major asset classes. Results ranged from 2.36% to 6.52%, however, only the Aggressive Sustainable Portfolio (95% stocks/5% bonds) managed to exceed the total return of its corresponding conventional index for the month. The Portfolio, which benefited from the slight excess performance achieved by the Vanguard FTSE Social Index Fund-Investor Shares relative to the S&P 500, recorded a gain of 6.52% versus 6.50% for the Aggressive Sustainable Index, or a differential of 2 basis points (bps). The Moderate Sustainable Portfolio (60% stocks/40% bonds) and Conservative Sustainable Portfolio (20% stocks/80% bonds) recorded total returns of 4.62% and 2.36%, respectively and trailed their corresponding conventional indices by 1 bps and 4 bps. Refer to Table 1. Each of the three underlying sustainable funds that comprise the model portfolios produced strong results in June. That said, the Vanguard FTSE Social Index Investor Shares was the only fund to eclipse its benchmark, exceeding the S&P 500 by 2 bps. TIAA-CREF Social Choice Bond Fund and Domini Impact International Equity Investor Shares lagged by 8 bps and 54 bps, respectively. While the absolute performance results in the short-term posted by each of the three sustainable model portfolios have been strong, relative results for the trailing 3-month, year-to-date and twelve month intervals have largely lagged their designated conventional benchmarks. That, however, is not the case with regard to results since the inception of these portfolios as of October 2012 during which interval they continue to maintain a strong lead over their designated benchmarks. These cumulative leads are 8.49% for the Conservative Portfolio, 14.24% for the Moderate Portfolio and 20% for the Aggressive Sustainable Portfolio. Refer to Chart 1. Global markets across all major asset classes posted gains in June The sustainable model portfolios posted strong gains against a backdrop of global market gains across all major asset classes in June. Notwithstanding trade concerns and fears of an economic slowdown, stocks and bonds in the US and overseas recovered from May’s declines to produce strong returns in June, ranging from a low of -0.27% posted by the MSCI India (NR) Index to highs of 12% or so for energy and biotechnology stocks (some commodities aside) and lift second quarter and year-to-date results. The S&P 500 Index, which gained 7.05% in June versus a decline of -6.35% the month prior, also advanced the three-month total return results to 4.30% and the year-to-date increase to 18.54% thanks, in part, to a perceived shift in the Federal Reserve Banks’ 's appetite for interest-rate cuts. In early June Federal Reserve Chairman Jerome Powell addressed the fears of how the continuing trade squabble with China could hurt the economy, saying the central bank was closely monitoring the escalation in tensions and indicating it could respond by cutting rates if the economic outlook deteriorated. Investors reacted positively to the news, extending a rally that propelled the S&P 500 to record highs. The Dow Jones Industrial Average gained 7.31% while the tech heavy Nasdaq Composite added 7.51% and shares of smaller companies, based on the Russell 2000 Index, posted results more or less in line with large caps with an increase of 7.07%. Mounting fears of an economic slowdown served to push bond yields down globally and bond prices higher, contributing to the 1.26% June uptick in the Bloomberg Barclays US Aggregate Index. The yield on the 10-year U.S. Treasury closed the quarter at 2%, nearly a half-percentage-point drop from the end of March, a downward roll that took many investors by surprise. Outside the US, share prices also rose. The MSCI All Country World Index, ex US (NR) gained 6.02% in June and stands 13.60% higher since the start of the year. In Europe, stocks responded to hints of further monetary easing made by Mario Draghi, the European Central Bank President, who also called for a common Eurozone budget as an additional economic shock absorber. In China, notwithstanding trade tensions and signs that China's economy may be slowing, the MSCI China (NR) Index was up 8.03%.

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ESG Model portfolios:  Each of the three portfolios lagged behind their conventional benchmarks in May with returns ranging from -0.06% to -5.80% During a challenging and volatile month when the three model portfolios along with their corresponding conventional indices posted negative returns, two of the three model portfolios trailed their comparative benchmarks driven by the below benchmark performance of the underlying funds.  The Aggressive Sustainable Portfolio (95% stocks/5% bonds), Moderate Sustainable Portfolio (60% stocks/40% bonds) and Conservative Sustainable Portfolio (20% stocks/80% bonds) recorded total returns of -5.80%, -3.27% and -0.06%, respectively.  Refer to Table 1. The Vanguard FTSE Social Index Investor Shares and Domini Impact International Equity-Investor both produced negative returns of -6.37%, -5.51% and fell short of their conventional indices.  In the case of Vanguard, the differential was a mere 2 basis points (bps) while the Domini fund lagged by 71 bps.  TIAA-CREF Social Choice Bond-Retail, on the other hand, recorded a positive total return for the month with a gain of 1.67% but missed matching its Bloomberg Barclays US Aggregate Index by 11 basis points. The underperformance of the three model portfolios extends to the trailing 3-month, year-to-date and twelve-month intervals, however, they continue to maintain their lead over their designated benchmarks for the longer since inception interval that commenced in October 2012.  Refer to Chart 1. Major US stock indexes closed the month of May down in excess of 6%, recording their worst monthly performance since December 2018 The negative performance of the three model portfolios occurred during a month when the major US stock indexes closed down in excess of 6%, their first calendar month decline for the year and the worst monthly performance since December 2018.  This was being attributed to shifting investor sentiment motivate by concerns that the decade-long US economic growth cycle may be coming to an end as companies curtail spending and higher tariffs around the world are expected to hurt sales and corporate earnings.  The drop on Friday, the last trading day in May, came after President Trump, in a move that unnerved investors, announced plans via Twitter to impose tariffs on Mexico in a bid to compel the nation’s third largest trading partner to crack down on migrants attempting to enter the US.  The S&P 500 gave up 6.35% in May, to close at a level of 2752.06--roughly in line with the benchmark’s value on March 8th.  Following that date, the index reached a peak on April 30, and thereafter the S&P 500 recorded 14 daily declines (64%) during 22 trading days through the end of May.  The Dow Jones Industrial Average posted a similar result in May, giving up -6.32% while the technology heavy NASDAQ Composite declined -7.79%.  This was roughly in line with the performance of small company stocks that gave back -7.78%.  In general, growth stocks across the market cap continuum delivered better results than value-oriented stocks.

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Model portfolios:  Each of the three portfolios lagged behind their conventional benchmarks in April with returns of 0.82%, 2.32% and 3.53%; but longer-term results continue to outperform The three model portfolios trailed their comparative benchmarks in April even as two of the three underlying funds outperformed their designated benchmark while the third lagged and detracted from the overall performance of the portfolios. Vanguard FTSE Social Index Investor Shares and TIAA-CREF Social Choice Bond-Retail, both exceeded the total return results achieved by their corresponding conventional indexes by 25 basis points (bps) and a tiny 0.36 bps, respectively.  On the other hand, Domini Impact International Equity-Investor trailed its MSCI EAFE (Net) benchmark by 90 basis points. The Aggressive Sustainable Portfolio (95% stocks/5% bonds), Moderate Sustainable Portfolio (60% stocks/40% bonds) and Conservative Sustainable Portfolio (20% stocks/80% bonds) posted total returns of 1.69%, 1.78% and 1.88%, respectively.  Refer to Table 1. While all three model portfolios beat their designated benchmarks in March, this was not the case in January and February of this year when only two of the three portfolios outperformed. Similar outcomes were achieved over the previous three months and year-to-date intervals, but the absolute returns posted by the model portfolios have been impressive.  On a year-to-date basis, for example, the portfolios are up from 5.77% to 16.29%, depending on their assumed risk profiles.  Further, the model portfolios continue to maintain their lead over their designated benchmarks for the longer trailing 12-month and since inception intervals.  Refer to Chart 1. Performance Summary Chart: Cumulative Total Returns October 2012 –April 30, 2019 Chart 1: Notes of Explanation: As of January 1, 2018, the aggressive, moderate and conservative sustainable portfolios were reconstituted and are comprised of three mutual funds, including the Vanguard FTSE Social Index-Investor Shares, Domini Impact International Equity-Investor and TIAA-CREF Social Choice Bond-Retail Shares. The US equity/international developed markets equity and fixed income weightings of these funds in each of the portfolios vary and are as follows: Aggressive (70% US equities, 25% international developed markets equities and 5% US bonds), Moderate (45% US Equities, 15% international developed markets equities and 40% US bonds) and Conservative (15% US equities, 5% international developed markets equities and 80% US bonds). Performance results are back casted to October 2012, the commencement date of the TIAA-CREF Social Choice Bond Fund. Portfolios have not been rebalanced. Model portfolio results reflecting the strong performance of major US stock market indexes Model portfolio results are reflecting the performance of major US stock market indexes that recorded their best four-month start to a year since at least 1999, the latest milestone fueled by a more accommodative Federal Reserve Bank and upbeat economic prospects that reversed a sharp downturn in December of last year. The S&P 500 posted a gain of 4.05% in April, the fourth consecutive monthly increase this year that pushed year-to-date results to 21.29% and 24.07% over the previous 12-months.  The Dow Jones Industrial Average, up 14% since the start of the year, also registered its best four-month start since 1999.  The Nasdaq Composite’s 22% advance is its best start since 1991. Large cap value stocks outperformed growth stocks by 14 basis points (bps), but the relationship is a short-lived one as large cap growth stocks exceed the performance of value stocks at least for the cumulative ten-year interval through April. At the same time, small cap stocks trailed large caps.  Outside the US, stocks posted positive but slightly weaker results.  Europe, as measured by the MSCI EAFE Index was up 3.58% while the broader MSCI ACWI, ex US was up 2.64% and Latin America gained 1.05%.  Investment-grade intermediate bonds recorded a very slight gain of 0.03%, much below last month’s 1.92% increase, as 10-year US Treasuries ended the month with a yield of 2.51%, up 10 bps from 2.41% at the end of March.

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Model portfolios: Each of the three portfolios beat their conventional benchmarks in March with returns of 1.69%, 1.78% and 1.88% The three model portfolios beat their comparative benchmarks in March, benefiting from the performance of Domini Impact International Equity-Investor and TIAA-CREF Social Choice Bond-Retail which exceeded the performance results achieved by their corresponding conventional indexes by 30 basis point (bps) and 2 bps, respectively. The last time all three portfolios outperformed their benchmarks was in October of 2018. The Aggressive Sustainable Portfolio (95% stocks/5% bonds), Moderate Sustainable Portfolio (60% stocks/40% bonds) and Conservative Sustainable Portfolio (20% stocks/80% bonds) posted total returns of 1.69%, 1.78% and 1.88%, respectively. Refer to Table 1. The excess benchmark performance results achieved by the three portfolios extended to the first quarter, with the three portfolios recording gains of 12.34%, 8.90% and 4.91% and surpassing the performance of their benchmarks by 14 bps, 8 bps and 1 bp, respectively. Advancing as they did in March, the three model portfolios expanded for the third consecutive month their lead relative to their underlying benchmarks for the interval since inception as of October 2012, which now stands at 19.7%, 14.1% and 7.8%. Refer to Chart 1. U.S. stocks, as measured by the S&P 500 Index, ended March up 1.94% while investment-grade intermediate bonds, based on the Bloomberg Barclays US Aggregate Index end the month up 1.92% or just 4 basis points shy of equities; excepting of Latin America, markets outside the US ended the month in the black but did not perform as well as the US market The results achieved by each of the three model portfolios were powered by the performance of U.S. and foreign stocks as well as bonds. As measured by the S&P 500 Index, the broad market in the US ended the month of March up 1.94%. The Nasdaq Composite posted an even better 2.17% while the Dow Jones Industrial Average eked out a small 0.17% gain. At the same time, large cap sustainable equity funds, as measured by the Sustainable Large Cap Equity Fund Index, posted an increase of 2.0%, eclipsing the S&P 500 by 0.06%. The US markets responded to a shift in the posture of the Federal Reserve Bank and other central banks to hold interest rates as well as to growing confidence that the US and China would reach an agreement on trade. This, given a backdrop of slowing consumer spending and income growth reflected in the downward revisions to gross-domestic product growth to 2.2% for the fourth quarter of 2018 and 2.9% for the full year. While still a bright spot globally, US economic concerns were reflected in the behavior of bond yields. The 10-year Treasury note, which started the month at 2.73% and dropped by 32 basis points to end at 2.41%, inverted relative to the 3-month-Treasury bills that closed March at 2.40%. This, combined with the strong 3.32% return achieved by AAA corporate bonds lifted the Bloomberg Barclays US Aggregate Bond Index (BB Index). The index ended the month with a gain of 1.92%, the best monthly result since January 2015 and just 4 basis points (bps) shy of the S&P 500. The BB Index surpassed the 1.85% increase registered by the Sustainable Bond Fund Index. After logging strong results of 5.20% in February and 11.25% in January of this year, the momentum of small cap stocks was halted. Based on the performance of the Russell 2000 index, small cap stocks gave up -2.09% while growth stocks outperformed value stocks. With the exception of Latin America, markets outside the US ended the month in the black but did not perform as well as the US market. The MSCI ACWI NR index posted a gain of 1.26% while MSCI EAFE ended higher, recording an increase of 0.63%. MSCI China gained 2.44% while Latin America was down 2.53%. Best performing sustainable fund up 8.49% in March while the worst performing fund gave up -6.44% The universe of 1,915 mutual funds and their share classes, ETFs and ETNs posted an average total return of 0.99% in March. When dimensioned along fixed income funds versus all other funds, the outcome was unusual in that the average 1.0% performance of fixed income funds, including taxable and municipal funds, eclipsed the total 0.98% total return results achieved by equity funds as well as other related funds. The best performing fund in March was the Eventide Healthcare and Life Sciences Fund A, up 8.49%. This is a diversified mutual fund representing the adviser’s “best ideas” for long-term capital appreciation in the healthcare and life sciences sectors (greater than or equal to 80%). The fund concentrates its investments in the drug-related industries (greater than or equal to 25%) and employs a values-based negative screening sustainable investing approach. The adviser, Eventide Asset Management, LLC, analyzes each potential investment’s ability to operate with integrity and create value for customers, employees, and other stakeholders. While few companies may reach these ideals in every area of their business, these principles articulate the adviser’s ideal characteristics of good corporate behavior. (Refer to the Sustainable Investment Glossary for further details). Invesco Solar ETF, an index fund managed by Invesco Capital Management LLC, was the worst performing fund in March, giving up 6.44%. This solar industry thematic fund invests in companies that derive a significant amount of their revenues from solar power equipment producers including ancillary or enabling products such as tracking systems, inverters, or batteries; suppliers of raw materials, components or services to solar producers or developers; companies that produce solar equipment fabrication systems; companies involved in solar power system installation, development, integration, maintenance, or finance; or companies that sell electricity derived from solar power. Refer to Table 2. Sustainable funds pierce through half trillion for the first time and reach new high of $627 billion, benefiting from a large number of fund re-brandings and capital appreciation in March For the sixth consecutive month, sustainable funds, including mutual funds, ETFs and ETNs, registered another monthly all-time high of $627.5 billion in assets under management as of March 29, 2019. Funds added a net of $137.2 billion in assets for the month versus net additions of $45.3 billion and $49.8 billion, respectively, in January and February of the first quarter. Refer to Chart 2. Of this sum, $131.4 billion is due to re-branded or repurposed funds, an estimated $4.9 billion is attributable to market movement while an estimated $0.9 billion is due to net new cash flows. 1Q Observation: sustainable assets expanded from $390.4 billion, adding $237.1 during the first quarter, or an increase of 61%. Since the start of the year, sustainable assets expanded from $390.4 billion, adding $237.1 during the first quarter, or an increase of 61%. As is the case in March, the net increase is largely attributable to fund re-brandings which added a whopping $183.2 billion in net new assets, or 79% of the total increase while market movement and net cash flows added an estimated $47.4 billion and $1.6 billion, respectively. In the aggregate, mutual funds/share classes, ETFs and ETNs jumped from 1,163 funds to 1,923 funds at the end of March, or an increase of 65.3% due to the large number of fund re-brandings. Mutual funds and their corresponding assets under management jumped dramatically, adding $234 billion, or a 61% increase, to end the quarter with $614.6 billion. This also served to lift the proportion of mutual funds to ETFs from 97.6% at the end of February to 97.9% at the end of March. The assets were distributed across 1,833 mutual funds/share classes and 90 ETFs/ETNs offered by 131 separate firms. That said, just 45 mutual funds and share classes accounted for 50.3% of total sustainable mutual fund assets. For more detailed information, refer to article entitled Monthly Sustainable Mutual Funds Cash Flows: March 2019.

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Summary The performance of model portfolios, which posted positive total returns in November ranging from 0.78% to 1.51%, fell behind their designated conventional indexes as two of three underlying funds underperformed. Bond and equity markets continued on their volatile path into November, but ended on positive notes.  The S&P 500 posted a gain of 2.04% while Bloomberg Barclays US Aggregate Index added 0.60%. Against this backdrop, the universe of 1,105 sustainable funds/share classes, exchange traded funds (ETFs)and exchange traded notes (ETNs), registered an average gain of 2.02%. Also, the SUSTAIN Large Cap Equity Fund Index recorded a gain of 3.21% and outperformed the S&P500 by 1.17%.  The SUSTAIN Bond Fund Indicator, up 0.426%,lagged behind the Bloomberg Barclays US Aggregate Index that posted a gain of 0.60%.  For more details, refer to article entitled Monthly Performance Summary: November 2018.  Sustainable funds closed November with $312.5 billion in net assets, up $8.7 billion relative to the prior month, benefiting from market appreciation and repurposed/reclassified funds.  The segment expanded by three the number of fund firms offering sustainable funds to 121 groups, and eight new funds as well as 20 share classes with $330.8 million in assets were added.     Performance of model portfolios fell behind their designated conventional indexes as two of three underlying funds underperform  Recovering somewhat from last month’s sharp losses, the Aggressive Sustainable Portfolio (95% stocks/5% bonds), Moderate Sustainable Portfolio (60% stocks/40% bonds) and the Conservative Sustainable Portfolio (20%/80%) produced positive total returns in November that ranged from 0.78% to a high of 1.51%.  The results correspond to the model portfolios’ risk profiles and also the performance of their underlying mutual funds.  Still, the three model portfolios posted returns that came in behind their designated conventional securities benchmarks as two of the three underlying funds did the same.  Only the total return of the Domini Impact International Equity-Investor Shares eclipsed its MSCI EAFE (NR)Index that it outperformed by 0.13% or 13 basis points (bps).  On the other hand, the Vanguard FTSE Social Index-Investor Shares and TIAA-CREF Social Choice Bond-Retail Shares missed their conventional benchmarks by 15 bps and 18 bps, respectively. Refer to Table 1.  The three model portfolios continue to post since inception results that exceed their conventional indexes by 18.7%, 13.7%and 7.8%,  respectively, however, the differential narrowed slightly.  For  Sustainable Portfolio the differential relative to a conventional index narrowed by 0.4% and it expanded to 1.4% for the Aggressive Sustainable Portfolio.  Refer to Chart 1.   Sustainable funds register average gain of 2.02% and performance ranged from a high of 26.38%to a low of -5.78% Sustainable mutual funds,exchange-traded funds and exchange-traded notes posted an average gain of 2.02%while the median gain stood at 1.89%.  This is based on a universe consisting of 1,105 sustainable funds[1] that registered performance results for the entire month of November.  Of these, 970 funds posted ≥0.00% results while 135 funds, or 12.2%,  recorded negative outcomes.  This compares to last month when only 26 funds, or 2.4% of funds, recorded positive results.       In a dramatic about face, the iPath Global Carbon ETN posted a gain of 26.28% and,in the process, erased last month’s loss of -23.81%.  This highly volatile $10.4 million exchange-traded note provides exposure to the global price of carbon by referencing the price of carbon emissions credits from the world’s major emissions related mechanisms. It led other clean or alternative energy funds that may have experienced price run ups linked to heightened concerns over climate change and global warming in light of recently issued reports that the world continues to emit historic levels of carbon dioxide and other greenhouse gas emissions, the recent publication of several authoritative reports updating previous assessments of the impacts resulting from global warming and the intensity as well as speed with which these are accelerating and the convening in Poland of COP 24, or the 24th Conference of the Parties to the United Nations Framework Convention on Climate Change. At the other end of the range, the $10.9 million Organics ETF gave up 5.78%.  The fund seeks exposure to companies globally that can capitalize on our increasing desire for naturally-derived food and personal care items, including companies which service, produce, distribute, market or sell organic food, beverage,cosmetics, supplements, or packaging.  Managed by Janus Capital Management, the fund was launched in January 2016 and is down -19.66%since the start of the year.   Refer to Table 2.     Sustainable funds close November with $312.5 billion in assets under management, adding $8.7 billion due to market movement and repurposed/reclassified funds.  The net assets of the universe of sustainable funds registered a month-over-month increase to offset some of last month’s decline. The 1,130 sustainable funds ended the month of November with$312.5 billion in net assets under management versus an adjusted $303.8 billion at the end of October.  Refer to Chart2.  The month-over-month increase is attributable to market movement, estimated to account for $6.6 billion, or an increase of 2.2%, and almost 76% of the net increase for the month.  Another $1.7 billion, or 19.5% of the increase, is attributable to repurposed funds, including reclassified funds,involving Wells Fargo and Bridgeway. Finally, only an estimated $482.3 million,or 0.16% relative to October and 5.5% of the November increase, is attributable to net new money.     Mutual fund assets stood at $302.9 billion as of the end of November while ETFs and ETNs closed the month at $9.6 billion.  The relative proportion of the two segments remain largely unchanged at 96.9% and 3.1%, respectively.  Assets sourced to institutional only mutual funds/share classes, 423 in total, versus all other funds, ended the month at$106.4 billion or 36.6% of sustainable funds.    At the end of November, the universe of explicitly designated mutual funds and ETFs/ETNs were sourced to an adjusted 121[2]fund groups or firms, up three fund groups since the previous month.  The three new firms include Wells Fargo,Bridgeway and Federated Investors.  Wells Fargo’s Large Cap Core Equity Fund, consisting of 6 share classes, total net assets in the amount of $1,075.3 million, was reclassified.  The fund generally avoids investments in issuers that are deemed to have significant alcohol,gaming or tobacco business.  Bridgeway repurposed 1 fund with$595 million in that it adopted language in its prospectus to exclude any tobacco companies. Eight new mutual funds and 20 share classes were launched during the month of November along with 3 ETFs, with combined assets of $330.8 million Eight new mutual funds and 20 share classes were launched during the month of November along with 3 ETFs, with combined assets of $330.8 million. Highlights include: Three new green bond funds were launched, thereby doubling the number of green bond funds.  Green bond mutual funds and/or exchange traded funds were introduced by Allianz Global Investors, BlackRock and Teachers Advisors.  This brings to six the number of green bond funds available to investors, including four mutual funds offering 12 share classes across a range of targeted investors and corresponding expense ratios as well as two ETFs. In addition to a green bond fund, TIAA also launched the Short-Duration Impact Bond Fund. This fund brings to market another important shorter-term option for investors and complements the very successful Social Choice Bond Fund by offering to investors the raw ingredients necessary to build a complete investment program around actively managed sustainable fixed income funds.  DFA introduced a $201.2 million DFA Global Sustainability Fixed Income Portfolio.  Managed by Dimensional Fund Advisors LP and DFA Australia Limited which serves as the sub-advisor, the fund discloses that its intends to take into account the impact that companies may have on the environment and other sustainability considerations when making investment decisions.  For further details, click on the Investment Research/TheBasics/Sustainable Investment Glossary.  Federated launched the Federated Hermes SDG Engagement Equity Fund.  The fund,which has not been funded as of November 30, 2018, will seek to invest in companies that contribute to positive societal impact aligned to the United Nations Sustainable Development Goals (the UN Sustainable Development Goals.  In addition to fundamental financial indicator criteria, the fund’s adviser may consider engagement criteria such as assessment of company management competence, integrity, and vision, as well as exposure to one or multiple UN Sustainable Development Goals.  Federated has wasted no time to launch a sustainable investing product managed by Hermes, its recently acquired firm. Hermes is now majority owned by Federated Investors since its 60%acquisition from the BT Pension Scheme closed in the third quarter. [1] 1,105 funds reported performance results for the full month of September 2018, including five share classes offered by the Franklin Select US Equity Fund with $103.8 million in assets that are excluded from the October analysis as their most recent prospectus does not reflect the adoption of a sustainable strategy or approach.   [2] BlackRock and iShares, Hartford funds and ETFs and TIAA and Nuveen are each combined into a single fund group; Franklin funds are excluded.      

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Summary The Sustainable Investor Profile Evaluator (SUSTAIN Evaluator) is a Microsoft Excel-based application that relies on an easy to use questionnaire approach by which answers are analyzed methodically and systematically to arrive at a profile of an investor’s sustainable investing goals and objectives. The analysis and resulting profile, in turn, allows financial intermediaries to reflect translate an investor’s individual sustainable preferences into a tailor-made investment program through the selection of an appropriate and corresponding mix of investment products that fit into a broader recommended asset allocation strategy.  The Microsoft Excel-based application does so by combining a proprietary questionnaire and a statistical Analytic Hierarchy Process (AHP) methodology to automatically evaluate and synthesize an investor’s questionnaire results, eliminate inconsistencies, and generate a rank ordering of each respondent’s sustainable investing preferences.  The end result is a series of charts and graphs to assist investors and their financial intermediaries to understand, modify and finalize each individual investor’s sustainable investing preferences. The SUSTAIN Evaluator, which can be found by clicking on the Questionnaire & Research tab, is available at no cost to financial intermediaries as well as interested investors who have registered at for the Sustainableinvest Premium option. Rising Demand Sustainable investing has been gaining footing among individual, high net worth as well as a wide range of mainstream institutional investors.  These range from public pension funds, endowments, and foundations, to mention just a few, as well as traditional investment management firms.  Historically, much of the focus of sustainable investing has been on equity-oriented strategies.  As more investors seek to apply a sustainable approach to a percentage of their portfolios or to their entire portfolio of securities, attention has begun to shift to other asset classes, including fixed income and real estate.  This approach in one form or another has also found its way into alternative investments, such as hedge funds and private equity portfolios. The Forum for Sustainable and Responsible Investment (USSIF) released its 2018 Biennial Foundation’s “Report On US Sustainable, Responsible and Impact Investing Trends.” The Report, based on data collected and analyzed through the beginning of 2018, disclosed that assets linked to sustainable, responsible and impact investing (SRI) strategies have reached $12.0 trillion, up 38% percent from $8.7 trillion in 2016. According to USSIF, this represents one in four dollars out of the $46.6 trillion in total assets under professional management in the United States. The report notes that “asset management firms and institutional investors are addressing a diverse set of environmental, social and governance concerns across a broader span of assets than in 2016. Many of these money managers and institutions, concerned about racial and gender discrimination, gun violence and the federal government’s rollbacks of environmental protections, are using portfolio selection and shareowner engagement to address these important issues.” Much of this growth, per the report, is driven by asset managers, who now consider environmental, social or corporate governance (ESG) criteria across $11.6 trillion in assets, up 44% from $8.1 trillion in 2016. The top three issues for asset managers and their institutional investor clients are climate change/carbon, tobacco and conflict risk. While it is challenging to fully comprehend the absolute numbers, especially when juxtaposed against mutual funds and ETFs that are classified as sustainable investments which stand at only $312.6 billion as of September 30, 2018 and account for a small 1.5% fraction of combined long-term mutual fund and ETF assets, the overall increase reported by USSIF is consistent with the growing attention directed at SRI investing linked to a range of strategies and practices encapsulated in SRI, from values/faith-based and social investment strategies, exclusionary practices, ESG integration, impact/thematic investing, to shareholder engagement and proxy voting. Regardless of the top line numbers, however, perhaps as much as 50% of the assets, by some estimates, are sourced to SRI strategies are likely linked to exclusionary practices, such as tobacco, weapons, and alcohol, to mention just a few. Sustainable Investing Sustainable investing is not new. Its origins in the US can be traced to religious considerations practiced by the Methodist movement in the 18th century. Historically, the Methodist church opposed investments in companies involved with liquor or tobacco products or promoting gambling, which was expressed in the form of positive and negative screening. As for investment products, the first public offering of a screened investment fund is reported to have occurred in 1928 when an ecclesiastical group in Boston established the Pioneer Fund. The simple screening approach has been expanded to include divestiture, social impact analysis well as shareholder activism, practices that were encapsulated under the label of sustainable and responsible investing or SRI. More recently, this term has begun to fade somewhat from contemporary usage—being supplanted by the idea, referred to as ESG integration, that the performance of companies on sustainability issues such as social, environmental and governance factors, is linked to the financial performance of these same companies. This had also translated into the belief that investing in sustainable companies permits investors to attain long-term competitive financial returns while at the same time achieving a positive societal impact. Sustainable investing is the idea that investing in sustainable companies permits investors to achieve long-term competitive financial returns while at the same time attaining a positive societal impact. Achieving a positive societal impact can be broadly encapsulated into goals that are focused on ending poverty, protect the planet and ensure that all people enjoy peace and prosperity. These can also be disaggregated to include the following 16 remediation goals that are in line with the United Nations Sustainable Development Goals that include: (1) poverty, (2) hunger, (3) good health and well-being, (4) education, (5) gender equality, (6) cleaner water and sanitation, (7) affordable and clean energy, (8) decent work and economic growth, (9) industry, innovation and infrastructure, (10) inequalities, (11) sustainable cities and communities, (12) consumption and production, (13) climate, (14) life below water, (15) life on land, (16) peace, justice and strong institutions. Sustainable investing permits investors to focus on the above goals via investment strategies that can be executed individually or in a combination of one or more strategies. These strategies extend from a values-based approach that largely relies on excluding certain objectionable industries and/or companies from portfolios, to thematic investing, including green bond investing, to environmental, social and governance integration (ESG integration) to shareholder/bondholder engagement and proxy voting. The desired strategies can be executed via mutual funds, exchange-traded funds (ETFs), managed funds and individual securities, or some combination of these. Plethora of Options For investors, the alternative approaches to sustainable investing has become very challenging. Not only is the terminology around sustainable investing evolving, but investors are faced with a plethora of strategy options and investment vehicles from which to choose.  On top of that, people’s values are as unique as their fingerprints as these tend to vary from one person to the next.  For example, one person may be most concerned about environmental issues while another may be entirely focused on gender diversity.  Even for one individual or organization, it may be quite difficult to identify specific areas of focus and to prioritize across varying objectives. The Sustainable Investor Profile Evaluator (SUSTAIN Evaluator) The SUSTAIN Evaluator facilitates the process of developing an individualized sustainable investing profile for investors who wish to invest in a way that is intended to achieve a positive societal outcome while at the same time realizing market-based rates of return—either across an entire portfolio or for a segment of a larger portfolio. The SUSTAIN Evaluator is intended for use as a companion to and in conjunction with an investor’s financial risk assessment.  The combination of the two assessments can be used to craft a portfolio or a segment of one that is aligned with an investor’s financial as well as sustainability goals and objectives.  The questionnaire which may be modified over time, currently consists of multiple choice questions and possible answers that reflect potential preferences for one or more of several possible sustainable investing strategies.  In addition to an introduction, the SUSTAIN Evaluator consists of six sections, as follows:  Section I seeks to identify an investors’ overall sustainable investing preferences.  Section II focuses on social factors.  Section III focuses on environmental factors, Section IV focuses on broad societal factors, Section V focuses on governance factors.  Finally, Section VI, which is automatically calculated, displays the investor’s sustainable investing profile. Refer to Chart 1 below for an illustration of a single investor's environmental preferences, based on responses to Section III of the application. Registered users to the www.sustainableinvest.com website can download the SUSTAIN Evaluator as many times as they wish by clicking on the Questionnaire & Research tab at Sustainableinvest Premium.  Any feedback and suggestions to improve this application are welcome.   Analytic Hierarchy Process (AHP) The SUSTAIN Evaluator combines a proprietary sustainable Investing questionnaire with a statistical methodology used to reach decisions when multiple options are available and these have to be sorted out—known as the Analytic Hierarchy Process (AHP). Introduced by Thomas Saaty (1980), the Analytic Hierarchy Process (AHP) is a statistical tool for dealing with complex decision making and is designed to aid the decision maker to set priorities and make the best decision. By reducing complex decisions to a series of pairwise comparisons, and then synthesizing the results, the AHP helps to capture both subjective and objective aspects of a decision. In addition, the AHP incorporates a useful technique for checking the consistency of the decision maker’s evaluations, thus reducing the bias in the decision making process. The AHP considers a set of evaluation criteria and a set of alternative options among which the best decision is to be made. It is important to note that, since some of the criteria could be contrasting, it is not true in general that the best option is the one which optimizes each single criterion, rather the one which achieves the most suitable trade-off among the different criteria. The AHP generates a weight for each evaluation criterion according to the decision maker’s pairwise comparisons of the criteria. The higher the weight, the more important the corresponding criterion. Next, for a fixed criterion, the AHP assigns a score to each option according to the decision maker’s pairwise comparisons of the options based on that criterion. The higher the score, the better the performance of the option with respect to the considered criterion. Finally, the AHP combines the criteria weights and the options scores, thus determining a global score for each option, and a consequent ranking. The global score for a given option is a weighted sum of the scores it obtained with respect to all the criteria.

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October Summary The three sustainable model portfolios ended the month of October lower, with results corresponding to their risk profiles and also the performance of their underlying mutual funds. In each instance, model portfolios outperformed their designated benchmarks.  This was within the context of an abrupt shift in sentiment and momentum that moved the S&P 500 Index down -6.84% in October to register not only its third loss so far this year but also the biggest monthly decline since September 2011. During the same interval, the Sustainable (SUSTAIN) Large Cap Equity Fund Index posted a drop of -7.0%.  This is the steepest drop since calculation of the SUSTAIN Index commenced as of December 31, 2016.  The broad bond market also ended lower, but registered a limited -0.79% decline that was slightly beaten by sustainable fixed income funds. Sustainable funds in general registered an average loss of -6.4% and performance of mutual funds and ETFs/ETNs ranged from a high of 0.35% to a low of -23.8%.  While the severe market reversal took its toll on sustainable fund assets under management that ended the month with $302.4 billion versus $321.9 billion at the end of September, some of the decline due to market movement was offset by the largest estimated monthly net cash inflow into sustainable funds so far this year--an estimated $3.45 billion in net new money. Investors pivoted from positive to negative on the sustainability of the nine-year old bull market Investors pivoted from positive to negative on the sustainability of the nine-year old bull market, focusing instead on a range of new as well as continuing concerns, from geopolitical risks, such as recent events in Saudi Arabia, Italy, Turkey, and even Germany, to local political anxieties in the US and uncertainties heading into the November 6th mid-term elections, to economic considerations, including the unresolved trade dispute with China, the slowing Chinese economy, inflation as well as interest rate jitters.  Perhaps most importantly, however, the reversal may be reflecting tempered investor expectations with regard to corporate earnings.  For the third quarter through the end of October, with about 74% of the companies in the S&P 500 reporting actual financial results combined with estimated results for companies that had yet to report, the year-over-year earnings growth rate for the third quarter, according to FactSet Research, stood at 24.9% which is above the estimate of 19.3% at the end of the quarter.  At this level, the growth rate for the third quarter will be the second highest earnings growth rate since third quarter 2010. But looking ahead, a slightly slower earnings growth rate of 21% is projected for the fourth quarter 2018 and a more moderate 9% growth rate in calendar year 2019. After peeking on September 20, 2018, the S&P 500 reversed course and came within 12 basis points (bps) on October 29th of moving into correction territory.  Positive returns recorded on both October 30 and October 31, during which index gained 2.7%, averted this outcome.  All but two S&P sectors scored positive results. These include the defensive Utilities and Consumer Staples sectors that were up 3.09% and 3.01%, respectively.  The eight remaining sectors suffered declines ranging from -0.37% recorded by the Real Estate sector, -11.86% posted by the Energy sector and -12.75% sustained by the Consumer Discretionary sector. While the S&P 500 gave up 6.84%, the Dow Jones Industrial Index dropped -5.1% in its biggest monthly percentage fall since January 2016. The technology heavy Nasdaq was the worst-performing major benchmark, dropping -9.2% in October for the biggest fall since November 2008. The performance of technology stocks also dragged down large cap growth oriented indexes that posted steeper declines relative to value oriented benchmarks. The S&P 500 Growth Index, for example, was down -8.08% while its value counterpart was down -5.33%, for a difference of 275 basis points. Stocks outside the US were also trading at some of the lowest valuations in more than 2-years.  Latin America was the exception in October, recording an outlier gain of 3.46%, according to the MSCI Emerging Markets Latin America Index versus other geographic regions.  Optimism over presidential elections in Brazil, an International Monetary Fund funding facility for recession-hit Argentina, and a new trade deal between Mexico, the United States and Canada seemed to carve out the region from concerns about global growth and trade that punished other emerging markets.  The MSCI Emerging Markets Asia Index registered a decline of -10.92% while MSCI China was down -11.47%.  Refer to Chart 1. Fixed income investors were not spared as bonds didn’t offer any ballast during the turmoil Fixed income investors were not spared as bonds didn’t offer any ballast during the turmoil. Intermediate-term investment grade bonds, as measure by the Bloomberg Barclays US Aggregate Index posted a decline of -0.79% on the back of rising rates, as 10-Year Treasury yields moved up by 10 basis points from 3.05% to 3.15% at October 31st.  On the other hand, 90-day Treasury Bills posted a gain of 0.19%. For the third month in a row, the SUSTAIN Large Cap Equity Fund Index lagged behind the S&P 500 by a slight margin of 17 basis points after posting its -7.0% decline For the third month in a row, the SUSTAIN Large Cap Equity Fund Index lagged behind the S&P 500 by a slight margin of 17 basis points after posting its -7.0% decline. Only four of the ten funds that comprise the index outperformed the conventional S&P 500. Since its inception as of December 31, 2016, the SUSTAIN Large Cap Equity Fund Index trails the S&P 500 by 4.89%. Refer to Abrupt Shift in Sentiment Also Impacts Sustainable Equity Funds in October. The Sustainable (SUSTAIN) Bond Fund Indicator outperformed the conventional index by 9 basis points to end the month Against a backdrop of concerns about US inflation and interest rates, 10-Year Treasury yields moved up by 10 basis points from 3.05% to 3.15% at October 31st and the Bloomberg Barclays US Aggregate Index posted a decline of -0.79%. This was the benchmark’s sixth monthly drop so far this year and the third worst, bringing the year-to-date performance to a negative -2.38%.  The Sustainable (SUSTAIN) Bond Fund Indicator moved lower as well, but outperformed the conventional index by 9 basis points to end the month 0.70% lower while also continuing to exceed the Bloomberg Barclays US Aggregate Index by increasing margins on a year-to-date and trailing twelve-month basis with its returns of -1.19% and -1.72%, respectively. Model portfolios reflect the severity of October’s downturn, posting results ranging from -2.73% to -6.65% that correspond to their risk profiles The Aggressive Sustainable Portfolio (95% stocks/5% bonds), Moderate Sustainable Portfolio (60% stocks/40% bonds) and the Conservative Sustainable Portfolio (20%/80%) produced total returns in September that range from a -2.73% to -6.65%. Portfolio results correspond to their risk profiles and also the performance of their underlying mutual funds that in the case of both the TIAA-CREF Social Choice Bond Retail and Vanguard FTSE Social Index Investor outperformed their designated conventional securities benchmark. In turn, the model portfolios outperformed its designated benchmark as the three underlying funds fell behind in September. Refer to Table 1. For the year-to-date interval, the model portfolios outperform their respective benchmarks but this is not the case for the trailing twelve months. That said, the absolute and relative results since inception as of October 2012 remain strong and while the relative performance differentials dipped in August they remained unchanged in October. Refer to Chart 2. Sustainable funds register average loss of -6.4% and performance ranged from a high of 0.35% to a low of -23.8% Sustainable mutual funds, exchange-traded funds (ETFs) and exchange-traded notes (ETNs) posted an average loss of -6.4% while the median loss was even lower at -7.4%. This is based on a universe consisting of 1,100 sustainable funds[1] that registered performance results for the entire month of October.  The average return recorded by sustainable funds for the month not only registered the lowest outcome so far this year, but also the fewest number of funds, 26 in total or 2.4%, achieved results ≥0.00%.  The next lowest average return was recorded in February when sustainable funds gave up -3.38%. With its return of 0.35%, the best performing fund in October turns out to be a money market mutual fund managed by DWS (formerly Deutsche Asset Management) that was repurposed in September. Last month, DWS reconfigured the firm’s existing $358.7 million DWS Variable NAV Money Market Fund consisting of two share classes by formally amending the fund’s prospectus to describe its use of ESG criteria, combined with exclusionary screens, as part of a company’s security selection process.  This is the second only sustainable money market fund in operation today, the first one being the GuideStone Money Market Fund, a values-based offering by Guidestone Funds. Refer to Table 2. At the other end of the range is the -23.81% return delivered by the iPath Global Carbon ETN, a $8.2 million exchange-traded note that provides exposure to the global price of carbon by referencing the price of carbon emissions credits from the world’s major emissions related mechanisms. This highly volatile ETN also recorded a loss of -6.3% last month and has been erasing its outstanding 12-month results.  That said, the index is still up an eye popping 138.51% over the trailing 12-months. The recently launched $6.4 million Amplify Advanced Battery Metals and Materials ETF posted another steep decline, dropping -16.76% this month following a -9.67% decline last month on the back of weak metals and mining prices and increased volatility. Sustainable funds close October at $302.4 billion, giving up $19.5 billion due largely to market declines For only the second time so far this year, the net assets of the universe of sustainable funds registered a month-over-month decline. The 1,100 sustainable funds ended the month of October with $302.4 billion in assets under management versus $321.9 billion at the end of September. The month-over-month decline in the amount of $19.5 billion is attributable to market depreciation that was estimated to account for an even larger $23.1 billion.  While the severe market reversal took its toll, some of the decline due to market movement was offset by the largest estimated monthly net cash inflow into sustainable funds so far this year--an estimated $3.45 billion in net new money.  At the same time, repurposed funds contributed an additional $122.8 million.  Refer to Chart 3. Mutual fund assets stood at $293.6 billion as of the end of October while ETFs and ETNs closed the month at $8.9 billion, registering declines of $19.1 billion (6.1%) and $413.0 million (4.5%), respectively, relative to last month. The relative proportion of the two segments remain unchanged at about 97% and 3%, respectively. Assets sourced to institutional only mutual funds/share classes, 416 in total, versus all other funds, declined by $6.9 billion, or 6.3%, to $103.4 billion. The investor group accounts for 34.2% of the segment’s assets, versus $110.3 billion at the end of September. At the end of October, the universe of explicitly designated mutual funds and ETFs/ETNs were sourced to 123[2] fund groups or firms, up three fund groups since the previous month.  The three new firms include Community Capital Management (Quaker Funds)[3]  that repurposed two mutual funds with four share classes for a total of $81.4 million, Zevenberger that also repurposed two mutual funds and shifted $41.4 million as well as KBI Global Investors (North America) Ltd. The firm launched a new fund in October, the KBI Global Investors Aquarius Fund. In addition to the KBI fund, six new funds/share classes were launched, including three ETFs. Most notable was the iShares ESG US Aggregate Bond ETF which now offers sustainable investors through the iShares platform a core investment-grade intermediate term fund option for purposes of constructing a diversified investment portfolio. The fund was launched with $55 million in net assets and is priced at a very attractive 0.1%. [1] 1,105 funds reported performance results for the full month of September 2018, including five share classes offered by the Franklin Select US Equity Fund with $103.8 million in assets that are excluded from the October analysis as their most recent prospectus does not reflect the adoption of a sustainable strategy or approach. [2] BlackRock and iShares are combined into a single fund group while Franklin is excluded. [3] Quaker Funds has been added as a new fund group, even as the two repurposed funds are managed by Community Capital Management Inc. already manages the CRA Qualified Investment Fund.

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An article by Vito J. Racanelli entitled “A Setback for ESG in California” that appeared in last week's November 5, 2018 edition of Barron’s on the subject of the California Public Employees’ Retirement System (CalPERS) election last month that resulted in the ouster of board president Priya Mathur, a 15-year veteran and a strong champion of the public pension fund’s focus on ESG investing and her replacement, Jason Perez, a critic of this focus, perpetuates an increasingly common misunderstanding by conflating ESG integration for the purpose of properly evaluating investment risks with social or ethical investing practices.  Even as the elements of what constitute E, S and G are still being debated, the idea of ESG integration, in line with the CFA Institute’s definition, is to take into consideration, in a systematic and consistent manner, any relevant and material environmental, social and governance risks or opportunities. The consideration of ESG issues in investment analysis is intended to complement and not substitute for traditional fundamental analysis that might otherwise ignore or overlook such risks or opportunities. On the other hand, ethical or social investing relies primarily on screening out or excluding companies from investment portfolios for a variety of reasons, including ethical, religious, social as well as other strongly held beliefs, such as environmental concerns or involvement on the part of companies in specific business activities. These may include companies involved in the production or manufacturing of tobacco, firearms, alcohol, or even fossil fuel companies, to mention a few. The misunderstanding is not surprising as ESG has a definition problem. As reported recently in a joint CFA and PRI publication entitled “ESG Integration in the Americas: Markets, Practices and Data,” a coherent understanding is lacking among asset owners, asset managers, issuers and retail investors of what is meant by ESG…” Further, even when ESG is integrated into the equity and fixed income investing process, challenges remain. Two important ones involve time horizon and materiality. Many ESG issues, particularly environmental issues, are long-term in nature and analysis or investment decisions are often undertaken with a shorter time frame. In the case of long-term bonds or similar financial instruments, confidence in outcomes associated with long-term scenarios diminishes and so there is a tendency to discount the results so that near-term outcomes play a more dominant role in the analysis. Another issue is the lack of a generally accepted definition for materiality which needs to be expressed in terms of its linkage to cash flows and risk. In the same research article, it is noted that investment practitioners may not be able to quantify the precise impact of ESG, but there was agreement that ESG integration can give a more complete understanding of an investment. Indeed, in equity and fixed income investments, risk management was cited as the most important driver of ESG integration in US capital markets while lack of data and a limited understanding of ESG issues and ESG integration were cited as the greatest barriers to ESG integration in US capital markets. Refer to Table 1 and Table 2. Table 1:  Drivers of ESG Integration in US Capital Markets Source: ESG Integration in the Americas: Markets, Practices and Data, 2018 CFA Institute Table 2:  Barriers to ESG Integration in US Capital Markets Source: ESG Integration in the Americas: Markets, Practices and Data, 2018 CFA Institute In the case of the California Public Employees’ Retirement System (CalPERS) with its long-term pension liabilities, ignoring environmental risks due to climate change that are projected to have greater impacts sooner, for example, could potentially further serve to exacerbate the retirement fund’s already underfunded status.

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Summary The effectiveness of divestment strategies aside, index fund investors who may wish to avoid investments in the stocks and bonds of weapons manufacturers and retailers in light of recent mass shootings in Florida, may be challenged to do so. Alternative investment vehicles are not readily available. In the absence of arms-free indexes, alternative near-term strategies for index fund investors could include encouraging index fund managers to engage with firearm manufacturers and retailers and/or to contribute a percentage of an investor’s capital appreciation and dividends derived from index fund investments to organizations of their choice engaged in advancing more restrictive gun legislation. If their concerns extend to retailers, engaging with these retail establishments or even boycotting their stores may represent yet another or a complementary option. One of the Deadliest Mass Shootings in Parkland Florida Prompts Calls for Divestment Public attention on firearm manufacturers, retailers and even financial institutions has once again been galvanized following the most recent and one of the deadliest mass shooting in the United States when on February 14, 2018 17 people were killed at a high school campus in Parkland, Florida by a former student armed with an AR-15 semi-automatic style weapon. This was the deadliest school shooting since 2012 when 26 people were killed at the Sandy Hook Elementary School in Connecticut, also involving a semi-automatic rifle. The attack at the Parkland Marjory Stoneman Douglas High School was the sixth school shooting incident this year that has either wounded or killed students. So far this year through March 24 there have been 17 school shootings where someone was hurt or killed or an average of 1.4 shootings a week[1]. Last year, an attack on a concert in Las Vegas left 58 dead, the worst mass shooting in the U.S., and this again raised questions about civilian gun ownership, and in particular, the types of weapons and their public accessibility; and also thoughts about introducing tougher controls aimed at limiting the manufacture, sale and possession of some types of semi-automatic firearms. Such weapons are often referred to as assault weapons and include the AR-15 assault style rifle. The latest shooting also renewed calls for institutional investors to sever their ties to the firearms industry and prompted both retail, high net worth and institutional investors to ponder whether they should take action to avoid investing in the stocks and, to a lesser degree, bonds of firearms manufacturers and possibly even firearms retailers as well as financial institutions doing business with firearm manufacturers and retailers. While the effectiveness of divestment, whether focused on genocide, fossil-fuel companies, gender diversity or firearms, and its economic implications for investors continues to be debated, such a path is most challenging in particular for investors and managers of index funds that allocate assets to U.S. and foreign stocks and bonds. This is the case regarding divestment from the firearms industry which largely and directly impacts mid-cap and small-cap indexes and perhaps less so foreign indexes (world ex-US) which have exposure to four arms manufacturers. Also by extension, these holdings spread to indexes that encapsulate mid-cap and small-cap stocks such as total stock market indexes, growth/value configurations and other variations based on the same fundamental indexes. But if divestment is also extended to include firearms retailers, of which there could be at least three, this course of action also impacts large-cap stock and corporate bond indexes. In the absence of arms-free indexes, alternative near-term strategies for index fund investors, through mutual funds and exchange traded funds (ETFs), could include encouraging index fund managers to engage with firearm manufacturers and retailers and/or to contribute a percentage of an investor’s capital appreciation, dividends and interest derived from index fund investments to organizations of their choice engaged in advancing more restrictive gun legislation. If their concerns extend to retailers, engaging with these retail establishments or even boycotting their stores may represent yet another or a complementary option. Divestment Has Attracted the Attention of Public Funds Some high profile institutional investors and in particular public pension funds were early on proponents of divestment from the firearms industry following the Sandy Hook shooting. The earliest of these included the California State Teachers’ Retirement System (CalSTRS) and California Public Employees’ Retirement System (CalPERS) that in 2013 announced plans to divest from companies that manufacture firearms classified as illegal for sale or possession in California. These actions were followed by other state and city governments, including New York State, Chicago, New York City, and Philadelphia, to mention just a few. Moreover, some calls for divestment have been extended to include the disposition of shares of retailers, such as Walmart, Inc. (WMT), Kroger Co. (KR), Dick’s Sporting Goods Inc. (DKS), and Sears, through which civilian firearms are sold. Further, some student organizations have advocated for divestiture on the part of university endowments and foundations. Following the latest shooting, additional announcements regarding divestiture have been made. One of the latest is the New Jersey's Treasury Department’s announcement last week that the public pension fund had sold off its last investment in a manufacturer of automatic and semi-automatic weapons for civilian use. No stranger to divestiture initiatives, the New Jersey Division of Investment has been winding down investments in gun makers for some time. Also recently, the Legislature of the Commonwealth of Massachusetts was taking up a bill that would require the state’s public pension fund to divest from companies that manufacture guns and ammunition to include “all publicly-traded securities from any ammunition, firearm and firearm accessory manufacturing companies that derive 15% or more of their revenues from the sale or manufacture of ammunition, firearms or firearm accessories for civilian purposes.” Of note is the fact that divestment actions, and this extends to exclusionary practices as well, can vary based on how manufacturers, firearms and holdings are defined. Variations can arise based on how manufacturers are qualified with regard to weapon types and ammunition, a percentage of revenues derived from the relevant firearms, related activities and the target market, i.e. civilian versus military. As well, divestitures can be implemented across direct holdings while investments in manufacturers of weapons and ammunition held in index funds may be challenging to avoid and might, therefore, continue to be held.  In the end, the effectiveness of divestment strategies continues to be debated. The U.S. Arms Industry An average of 3.4 million rifles, shotguns, revolvers and pistols are manufactured in the U.S. every single year. According to research conducted by the Pew Research Center, 42% of households had at least one gun in their possession and three-in-ten American adults say they currently own a gun, while another 11% say they don’t personally own a gun but live with someone who does. Arms and small arms, in particular, represent a huge business. Based on statistics covering authorized trade of small arms and light weapons, the industry generates revenues estimated to be $11.0 billion. More than 1,000 companies from nearly 100 countries produce small arms and light weapons. Many of these firms are privately held and some, outside the U.S. are state-owned. Privately held firms in the U.S. and overseas include Remington Outdoor Brands, the manufacturer of AR-15 style assault weapon used in the Sandy Hook attack that filed for bankruptcy on April 1, 2018, Marlin, Mossberg, and Smith & Wesson, to mention just a few. In the U.S. alone, by some accounts, there may be as many as 465 manufacturers of weapons and ammunition and almost 51,000 retail gun dealers. Publicly Listed U.S. Firms that Manufacture Firearms, Weapons and Ammunition Publicly listed U.S. firms that manufacture firearms, weapons and ammunition are few in number. Within this segment, research turns up nine publicly listed companies that trade on the NYSE, NASDAQ or on the OTC market. Of these, only four companies, either because of the nature of their lines of business or market capitalization, are likely to be found within the holdings of U.S. oriented stock market indexes and corresponding index mutual funds and ETFs. These firms are American Outdoor Brands, Olin Corp., Sturm, Ruger and Vista Outdoor. Of these, Olin’s weapons segment generates 11% of sales, still higher than the commonly used 5% threshold for determining eligibility across a large number of sustainable funds. Refer to Table 1. Table 1: Manufacturers of Firearms, Weapons and Ammunition in the U.S. (Listed by Market Capitalization) Because of their respective sizes based on market capitalization, the four companies listed above are found in indexes that seek to replicate the performance of mid-cap and small-cap indexes and, by extension, indexes that encapsulate these segments into boarder parts of the capital markets, growth/value derivations as well as other variations such as equal weighting constructs. The most popular of the mid-cap and small-cap indexes are the S&P SmallCap 600 Index and S&P MidCap Index, Russell 2000 Index and the Russell Midcap Index. The most popular extension indexes would include the Total Market Index, Russell 3000, S&P 1500 Index and the series of corresponding growth and value indexes. An analysis limited to the stock holdings of the most fundamental mid-cap and small-cap indexes (i.e. S&P and Russell) reveals that investors in corresponding index mutual funds and ETFs are exposed to the stocks of the four weapons companies noted above. Exposures range from an average of 0.18% held in mid-cap indexes to 0.385% held in small-cap indexes. This is illustrated in Table 2. To the extent that investors at the same time invest in the popular extension indexes and their variations, their aggregate exposures to these firms would expand. As noted above, firearms are sold through almost 51,000 licensed gun stores, sporting goods outlets and pawnshops. But if the universe of excluded investments is expanded beyond firearms manufacturers to include publicly listed U.S. firearms retailers, the largest of which include Walmart, Inc., Kroger (selling firearms through its Fred Meyer branded store), and Dick’s Sporting Goods, Inc., the universe of index investors includes large-cap indexes, such as the S&P 500 and Russell 1000 as well as small-cap indexes and, by extension, indexes that encapsulate these segments into boarder segments of the capital markets, growth/value configurations and other variations. Moreover, these firms, in particular, Walmart and Kroger, are also held as investments in various investment-grade corporate bond indexes, ranging from the broadest Bloomberg Barclays U.S. Aggregate Bond Index to narrower-based indexes constrained by sector as well as maturity. An analysis limited to the stock holdings of the most fundamental large-cap mid-cap and small-cap indexes reveals that investors in corresponding index mutual funds and ETFs are exposed to the stocks of the three retailers above. Exposures range from an average of 0.02% held in small-cap indexes to 1.20% held in large cap-indexes while none are held in mid-cap indexes. This is illustrated in Table 3. To the extent that investors at the same time invest in the popular extension indexes, their aggregate exposures to these firms would expand.   It should be noted that Dick's Sporting Goods announced that it will stop selling semi-automatic rifles like the type used in the mass shooting at the Marjorie Stoneman Douglas High School while Walmart, which stopped selling modern sporting rifles in 2015, announced that it was raising the age restriction for purchase of firearms and ammunition to 21 years of age. Kroger, which sells its firearms thorough its Fred Meyer chain, also said that it would raise the minimum age to buy firearms and ammunition to 21 years. Kroger sells firearms at 43 locations in Idaho, Oregon, Washington and Alaska. Kroger stopped selling assault-style rifles at its Fred Meyer stores in Oregon, Washington and Idaho several years ago, and will stop accepting special orders of those kinds of weapons in Alaska, according to a Kroger spokesperson.  Along a similar vein but representing a new level of corporate activism on this issue, Citigroup introduced last week a new set of rules on March 22, 2018 to restrict gun sales by Citi’s clients to customers who have not passed a background check or who are younger than the age of 21.  It will also bar the sale of bump-stocks and high-capacity magazines. Finally, combining index fund exposures to firearms manufacturers along with firearm retailers shows that investors in large-cap, medium-cap and small-cap index funds would be exposed to this sector in a range from a low of 0.02% to a high of 1.20% of portfolio assets.  Here to the aggregate levels of exposure increase based on additional investments in the popular extension indexes and variations to these. Options for Consideration by Index Fund Investors U.S. focused index fund investors who invest directly or through 401k plans in the most widely held index options are restricted in their arms-free options across the spectrum of large-cap, mid-cap, small-cap and corporate bond index mutual funds and ETFs. Just within the universe consisting of the largest 20 index funds, a segment with some $2.1 trillion in assets under management, 17 of the funds should be expected to have varying levels of exposure to the manufacturers of weapons and the three retailers enumerated above. By way of scale, this is equivalent to 11% of the assets under management[2] attributable to the entire long-term mutual fund and ETF industry.  A process of screening the universe of sustainable index mutual funds and ETFs, the ones most likely to exclude weapons manufacturers as well as retailers, based on a set of criteria that includes years of operation, size, performance track record and low expense ratios, produces only three mutual fund and ETF alternative investment options equivalent to the S&P 500 index fund, but none, at this point, to small and mid-cap index funds.  These include: (1) Vanguard FTSE Social Index Fund, (2) iShares MSCI KLD Social ETF, and (3) iShares USA Select ESG ETF.  As for fixed income alternatives derived from the Bloomberg Barclays U.S. Aggregate Bond Index, only the following two ETFs are available:  (1) iShares ESG 1-5 Year USD Corporate Bond ETF and (2) iShares ESG USD Corporate Bond ETF.  At That said, it should be noted that these two ETFs are small, with less than $50 million each as of March 31, 2018.  In the near future, some managers may also be able to offer newly developed index fund options that completely screen out firearms manufacturers and retailers. While high net worth investors may qualify based on assets under management for the establishment of index tracking separate accounts that can be structured to eliminate arms manufacturers and related parties, this may not be an option for many individual investors in or outside 401k plans. In the absence of arms-free indexes, alternative near-term strategies for index fund investors could include encouraging index fund managers to engage with firearm manufacturers and retailers in line with announced plans on the part of BlackRock (manager of iShares) as well as active manager Capital Group to do so.  Also, investors can opt to contribute a percentage of an investor’s capital appreciation, dividends and interest derived from index fund investments to organizations of their choice engaged in advancing more restrictive gun legislation. If their concerns extend to retailers, engaging with these retail establishments or even boycotting their stores may represent yet another or a complementary option. [1] Source:  CNN [2] Based on assets as of 12/31/2017 and February 2018; excluding money market funds.

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Summary Divestment from fossil fuels and low carbon investing strategies have gained attention and a certain degree of traction among endowments and foundations, sovereign funds, public pension funds and some individual investors. Just in the last two months, both the City of New York’s public pension funds and the New York State Common Retirement Fund (CRF) announced divestment plans even as the largest public pension fund in the US, CalPERS, has decided against doing so. CRF also made known the expansion of its low carbon index investing program first declared at the end of 2015. Divestment is intended to help achieve a reduction in greenhouse gas emissions in line with the Paris Climate Agreement 2°C target by the end of the century.  But studies suggest that fossil fuel divesting can also have negative financial consequences.  That said, investors interested in fossil fuel divestment and/or low carbon investing can consider a number of options for implementing such strategies either though investments in stocks and bonds directly or through mutual funds as well as exchange-traded funds (ETFs) and exchange-traded notes (ETNs).  These options are discussed in this article. NYS and NYC Pension Funds Announce Fossil Fuel Divestiture Strategies Last month on January 10, 2018 New York City Mayor Bill de Blasio, Comptroller Scott M. Stringer and the other trustees of the City of New York’s $180 billion pension funds announced plans to pursue a goal of divesting the City’s funds from fossil fuel reserve owners within five years. This followed by just a few short weeks a similar announcement made in December by New York State Governor Andrew M. Cuomo who, as part of a broader commitment to tackle climate change by pledging to reduce statewide greenhouse gas emissions 40% by 2030 and achieve the internationally-recognized target of reducing emissions 80% by 2050, unveiled a plan for divesting the $201.3 billion New York State Common Retirement Fund from significant fossil fuel investment. These announcements do not mean that the New York State and New York City pension funds are immediately embarking on a process of divesting from fossil fuel holdings in their portfolios. Rather, in both instances, the announcements by two of the largest public pension funds in the US, in contrast to the position staked out by CalPERS, also one of nation’s largest public pension fund, serve to send a strong message to fossil fuel companies, investors, pension fund trustees, the general public as well as others that the funds are committed to a low carbon and clean energy future. At the same time, the state and city are putting into motion the action steps required to reach a final decision on their plans. In the case of the New York State Common Retirement Fund Governor Cuomo and New York State Comptroller Thomas P. DiNapoli will work together to create an advisory committee of financial, economic, scientific, business and workforce representatives as a resource for the Common Retirement Fund to develop a de-carbonization roadmap to invest in opportunities to combat climate change and support the clean tech economy while assessing financial risks and protecting the fund. Also, Governor Cuomo called on the CRF to dedicate a meaningful portion of the fund's portfolio to “investments that directly promote clean energy—which makes economic and environmental sense.”  In fact, under the direction of the State Comptroller, who acts as sole trustee of CRF, the fund had already embarked on this strategy by allocating $2.0 billion to a low carbon equity index fund created shortly after the conclusion of the Paris Climate Agreement at the end of 2015. Also under the direction of Comptroller Napoli, it was announced last week that the CRF’s allocation to the low emissions equity index fund will be increased by $2 billion, bringing the total allocation to $4 billion; and it was the same New York State Comptroller who last year spearheaded a proxy proposal for consideration at the May 31, 2017 meeting of Exxon Mobil shareholders requesting that starting in 2018, ExxonMobil publish an annual assessment on the company oil and gas reserves and resources under a scenario in which reduction in demand results from carbon restrictions and related rules or commitments adopted by governments consistent with the Paris Agreement’s globally agreed upon 2°C warming target. For the first time, investors with 62.3% of shares voted in favor of the resolution. In the case of NYC, the process of implementing this announcement is expected to take some time and may not actually even be implemented. This is because the City’s 5 pension funds are financially independent of the others and each has its own board of trustees and each fund will have to approve the final action after further analysis of the risk and return impacts of such actions on the portfolios along with an enabling fiduciary focused legal opinion. There is no Universally Accepted Definition of Fossil Fuel Free Investing The public statements notwithstanding, the scope of the divestments is not entirely clear. For example, fossil fuels are not completely defined, it’s not well defined how this might impact index fund investments that have exposure to fossil fuel companies and the impact on bonds and other asset classes beyond equities was not addressed. Fossil fuel free investing has gained some currency among investors, especially endowments, foundations and some public pension funds, however, there is no universally accepted definition of fossil fuel free and there can be varying levels of disengagement from fossil fuels. In a more rigorous application of this approach, fossil fuel free investing means the complete elimination of coal, oil and gas companies from a portfolio. This would include investments in any company with proven carbon reserves, investments in any company that explores for, extracts, processes, refines or transmits coal, oil, and gas and it also extends to investments in any utilities that burn fossil fuels to produce electricity. Divestment Movement: Pros and Cons There is now an overwhelming consensus among scientists that fossil fuel emissions cause global warming. Observations, theoretical studies and model simulations indicate an overall warming since the mid-20th century and it is at least 95% certain that human activities have caused more than half of the temperature increase since the 1950s. This warming is responsible for climate change effects worldwide, reflected in severe weather, floods, droughts, and wildfires, to mention just a few, the consequences of which are further compounded by population increases and concentrations of people and property in coastal areas. 196 nations agreed in Paris at the end of 2015 to work together to keep the global temperature this century from rising well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5°C. While various methodologies, scenarios and assumptions can significantly impact outcomes, one estimate provided by the environmental organization 350.org, based on scientist estimates, is that the upper limit of carbon dioxide that the world population can put into the atmosphere and still reasonably expect to stay below the 2°C level is 565 Gigatons. At the same time, the number of proven fossil fuel reserves, which arguably is baked into fossil fuel company valuations, stands at 2,795 Gigatons, or almost 5X the amount that is theoretically allowable within the 2°C limit[1]. This forms the core of the fossil fuel divestment movement spearheaded by 350.org, co-founded by Bill McKibben and a group of university friends in the U.S. The 350.org movement, which opposes new coal, oil and gas projects and favors building 100% clean energy solutions, advocates for divestment as a tactic for keeping fossil fuel reserves in the ground. The organization advances a moral, social and financial argument in favor of this course of action by pressuring institutional investors as well as the fossil fuel companies themselves. The divestment approach has financial ramifications in that keeping current known reserves in the ground will transform these reserves into “stranded assets” and affect fossil fuel company financial valuations. Advocates also posit that there has been no significant difference in returns for fossil fuel free investments. The arguments against divestment cover the range extending from accusing advocates of misrepresenting the impact that divestment would have on climate change, the mounting evidence of the ineffectiveness of the strategy on fossil fuel companies due to the fact that selling off their shares only results in the transfer of ownership of their shares to some other party who cares much less about the issue than the original seller does, to the financial costs that would be incurred by embracing divestment on the part of investors, such as endowments, foundations, public pension funds as well as the risks to their portfolios due to restricted portfolio optimization. According to one recent study, based on a 50-year sample period, an optimal equity portfolio including fossil fuel stocks outperforms a portfolio of equal risk that is divested of energy stocks by an average of 0.5% per year, or 23% reduction in the value of a divested portfolio over a 50-year period. This leads to the argument that retaining ownership in the stocks avoids the financial consequences while preserving the investor’s ability to engage with the fossil fuel companies to secure improved risk disclosures and get companies to act responsibly by becoming part of the transition to a low-carbon economy. Even as it had divested from thermal-coal companies in response to a state legislative mandate, this was in effect the determination reached in 2017 by the California Public Employees’ Retirement System (CalPERS), concluding that the exercise of its fiduciary obligations “preclude CalPERS from sacrificing investment performance for the purpose of achieving goals that do not directly relate to CalPERS operations or benefits. Divesting appears to almost invariably harm investment performance, such as by causing transaction costs (e.g., the cost of selling assets and reinvesting the proceeds) and compromising investment strategies.” Fund Investors Interested in Divestment or Low Carbon Strategies Have Options Investors interested in pursuing a divestment strategy or a low carbon strategy in line with the recent announcements by the New York State Retirement Fund, for example, can do so whether they invest in individual securities or funds. That said, it’s much easier to identify and, if desirable, avoid direct investments in either coal companies, oil and gas firms or fossil-fired utilities, or possibly companies operating in all three sectors, when investing directly in individual stocks or bonds in contrast to doing so through mutual funds, exchange-traded funds or exchange-traded notes. A variation on this when it comes to fixed income is investing in specific project finance or green bond transactions brought to market by firms that might not otherwise meet a sustainable investing threshold except that in these instances the proceeds are explicitly allocated to finance environmentally beneficial projects. Retail and institutional investors who wish to implement either a fossil fuel free or low carbon strategy through their mutual fund and ETF/ETN investments, applicable to a segment of or across their entire portfolio, can do so by pursuing at least one or more of the four fund-oriented investing strategies discussed below. Another option is to invest in alternative energy funds, however, this approach is not covered in this article. For information on alternative energy funds, investors should refer to a recently published article on www.sustainableinvesting.com entitled Tariffs on Solar Cells and Modules Not Expected to Impact Shift to Renewable Energy.  Investing in Sustainable Funds Investors may wish to consider investing in the expanding universe of sustainable mutual funds and ETFs/ETNs that take into consideration a company’s sustainability strategies in general and environmental considerations in particular. While almost all of the approximately 785 self-identified diversified sustainable investment funds and share classes as of January 31, 2018 consider environmental issues and should be expected to qualify and restrict to some extent exposure to these sectors, this does not necessarily mean that investments in fossil fuel and related companies is avoided entirely.  There could be any number of reasons for this.  For example, a fund may consider environmental, social and governance (ESG) factors to inform investment decisions or qualify/disqualify eligible companies and invest in them based on a best-in-class approach or a worst-in-class approach.  A fund may also invest in companies within these sectors based on their adoption of robust strategies and programs to manage ESG risks and opportunities and/or in firms that may be moving in this direction.  An example of this is Royal Dutch Shell, a company that has been making a bet on lower-carbon with its 2016 purchase of natural gas producer BG Group or purchasing a big stake in American solar producer Silicon Ranch Corp. Or a fund may continue to invest in a company, such as Statoil ASA in the case of Boston Common International Fund in an effort to maintain a dialogue with the issuer and engage to advocate for responsible corporate practices.  According to Boston Common Asset Management, this contributed to the sale of Statoil’s oil sands operations in Canada, according to the manager. Given that sustainable funds can have varying exposures to fossil fuel and related companies, investors should review each fund’s investment objectives and strategies to understand the fund’s approach to sustainable investing and supplement this review by further consulting the fund’s periodic reports and holdings as well as any corollary materials that may be published by the fund.  Investors can also zero in on a fund’s sustainable strategies, including exclusionary practices referred to in the next paragraph, by consulting the Investment Research/Basics/Sustainable Investment Strategies tab of the www.sustainableinvest.com website. Funds Employing Exclusionary Strategies A second approach involves funds within the sustainable universe segment that have adopted exclusionary practices focused on avoiding investing in certain companies, including companies in the fossil fuels sector. For example, the Parnassus Fund and the Parnassus Endeavor Fund avoid investing in companies engaged in the extraction, exploration, production, manufacturing or refining of fossil fuels.  Each fund, however, may still invest in companies that use fossil fuel-based energy to power their operations or for other purposes.  That said, based on recent holdings, these two funds do not have exposure to the coal industry, oil and gas industry or fossil-fuel fired utilities.  Green Century Equity Fund is another example. The fund seeks to replicate the performance of the MSCI KLD 400 Social Index, and also excludes from consideration the stocks of companies that explore for, extract, produce, manufacture or refine coal, oil or gas or produce or transmit electricity derived from fossil fuels or transmit natural gas or have carbon reserves. Based on recent fund holdings information, the fund does not have any exposure to coal companies, oil and gas companies or fossil fuel fired utility companies. Investing in Low Carbon Funds Yet another approach involves considering an even smaller subset of funds that specifically targets low carbon investment strategies. While their geographic areas of concentration may differ, these funds are generally designed to address two dimensions of carbon exposure – carbon emissions and fossil fuel reserves expressed as potential emissions. These funds over-weight companies with low carbon emissions and those with low potential carbon emissions so as to reflect a lower carbon exposure than that of the broad market. Other than funds employing exclusionary practices (for example, such as the Green Century Equity) mutual funds with low carbon principal investment strategies are not currently available, however, there are 6 ETFs as of December 30, 2017, that fall into this category. These are listed in Table 1 along with an indicator of their carbon footprint, an estimate of the greenhouse gas emissions that can be directly or indirectly attributed to the activities of the fund’s underlying equity holdings, derived from YourSRI.com along with comparisons to the carbon footprint attributed to their corresponding non-ESG securities market indexes. Investing in Green Bond Funds A variation on the low carbon theme is investing in green bond funds, or funds that invest entirely or almost entirely in green bonds. These typically include bonds issued by corporations, financial institutions, sovereigns, sub-sovereigns, including municipal entities, or in structured finance transactions, that develop or provide products or services seeking to provide environmental solutions or support various environmental projects intended to contribute toward the transition to a low carbon economy.  These could, for example, include green bonds issued by a fossil-fired utility company, as long as the bond proceeds are allocated specifically to finance an environmental project.  An example is the Southern Power Company which completed the issuance of $1 billion of green bonds in 2015. The proceeds were specifically allocated to finance renewable energy generation projects in the U.S., such as solar and wind power generation facilities, rather than being used for general corporate purposes. Two dedicated green bond funds offered via 5 share classes are currently in operation along with one ETF. Two of these funds were launched in 2017.  These funds along with brief descriptions of their strategy/objectives may also be found in Table 1. Table 1: Exchange-Traded Funds (ETFs) and Mutual Funds Pursuing Low Carbon Strategies and Green Bond Funds:  Objectives/Strategies and Carbon Footprints (Listed in Alphabetical Order) Further, Table 2 provides a summary of the performance results achieved by the group of low carbon funds as well as green bond funds. In addition to total returns posted during the latest 12-month period, also disclosed are the average 3-year and 5-year total returns recorded to December 30, 2017, total net assets as of the same date and expense ratios. While their track record is still somewhat limited, with five of the funds and ETFs having been launched in 2017, the performance track record of the funds in existence throughout 2017 and over the previous 3-years, relative to corresponding non-ESG securities market indexes, has been mixed.  To the extent available, 3-year average total return performance results relative to benchmarks eclipses the returns achieved during the calendar year 2017. As for expense ratios, charges levied by the five ETFs offered by BlackRock (iShares), State Street (SPDR) and Van Eck (Vectors) fall into the lowest tier and are attractively priced while the newest entry, offered by Change Finance with an expense ratio of 70 bps, falls above median and is therefore at the higher end of the range.  At the same time, the expense ratios covering the green bond funds fall beyond the lowest tier for fixed income funds, with the exception of the Calvert Green Bonds I institutional share class.  Finally, 4 of the 12 funds and ETFs are small in that they manage less than $50 million in assets as of December 30, 2017. [1] Source: Carbon Tracker Initiative.  For example, another estimate by Mercator Research Institute on Global Commons and Climate Change based on the latest Assessment Report (AR5) of the IPCC places the upper limit at 720 Gigatons or 3.9X the amount that is theoretically allowable within the 2°C limit. [2] Source: Fossil Fuel Divestment and Public Pension Funds, Professor Daniel R. Fischel, Christopher R. Fiore and Todd D. Kendall, June 2017.

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Synopsis: Equivalent to any other type of bonds except that the proceeds are earmarked toward financing projects with sustainable environmental benefits, green bonds are uniquely suited to meet the objectives of sustainable investors generally and impact oriented investors in particular. This article describes green bonds, how the market has grown and investing options for individual or institutional investors who may wish to invest in these instruments either directly or indirectly.      Introduction Green bonds are equivalent to other fixed income securities, both taxable and tax-exempt, except that these types of bonds raise funds specifically to finance new and existing projects with environmental benefits. Green bonds include securities issued by sovereigns, development or supranational banks, corporations, states, cities and local government entities, such as water, sewer or transportation authorities.  Green bonds are issued in the form of senior unsecured obligations, project finance or revenue bonds, notes as well as securitizations that collateralize projects or assets whose cash flows provide the first source of repayment. In the future, new green bond structures are likely to be introduced.  Also, green bonds, like all other bonds, vary as to credit quality, ranging from investment grade to non-investment grade; and they are issued in varying maturities that can range from short-to-long term as well as different rates of interest or yields.  Regardless of structure, green bonds are generally issued pursuant to a set of voluntary guidelines or a set of best practices in the form of a framework known as the Green Bond Principles (GBP)[1]. The GBP frame work, which emphasizes disclosure and transparency, includes guideposts for the use of proceeds, the issuer’s process for project evaluation, the management of proceeds and reporting both at the time of issue and on a periodic basis thereafter. Still, there are variations around the interpretation and application of these Green Bond Principles that could lead to some uncertainties. The green bond offerings can be informed and the potential uncertainties can be mitigated, but not necessarily eliminated entirely, by relying on external independent reviews for assurances or certifications. Green bond proceeds may be used to finance a variety of project categories aimed at addressing key areas of environmental concern, such as climate change, natural resource depletion, loss of biodiversity and/or pollution control. While not limited to these, the following categories will generally qualify for the investment of green bond proceeds:  renewable energy, energy efficiency, pollution prevention and control, sustainable management of living natural resources, terrestrial and aquatic biodiversity conservation, clean transportation, sustainable water management, climate change adaptation, and eco-efficient products, production technologies and processes. For sustainable investors generally and impact oriented investors in particular, green bonds are uniquely suited to meet their objectives. This is because they are specifically intended to achieve positive environmental and other societal benefits, issuers make commitments to disclose the allocation of proceeds and their expected environmental impacts, either in quantitative and/or qualitative terms in the form of periodic reporting, usually annually, and their yields, as well as pricing, are equivalent to any other bond issued by the same issuer.  Put another way, green bonds, at least in the primary market, trade in line with their non-green counterparts. Green Bonds Growth and Development The issuance of green bonds across the world has been expanding rapidly in recent years, reaching an all-time high of around $93 billion in 2016. This represents a significant 120% or so increase from the approximately $42 billion issued in 2015 and $37 billion of green bonds that were issued in 2014.  Since their introduction in 2007, about $194 billion in green bonds have been issued by hundreds of issuers across the globe.  A total of 311 issuers worldwide, domiciled in 26 different countries in addition to development banks, such as the World Bank, brought green bonds to market in 2016.  Of these, 73 issuers were located in the US.  These include corporate and municipal issuers who came to market with about $14 billion, or 15%, of global green bond issuance. Exhibit 1 Green Bond Issuances: 2007 – 2016                   A key reason for the growth and development of green bonds is their role in mobilizing capital toward climate solutions. The success of the UN Paris climate agreement that was negotiated at the end of 2015 and went into effect in November 2016, which aims to reduce greenhouse gas emissions to net zero levels between 2055 and 2070 so as to achieve a targeted 2°/1.5° Centigrade limit on the warming of the earth’s surface temperatures to avoid catastrophic climate change, will require an unprecedented allocation of capital, measured in trillions of dollars a year.  To this end, green bonds are gaining attention for their potential role in directing attention to climate change and mobilizing capital toward climate solutions.  The need to finance climate solutions in combination with growing investor demand should continue to lift green bond issuance this year and beyond. Acquiring Individual Green Bonds While generally issued to and purchased by institutional investors such as asset management firms, banks and insurance companies, individual or other institutional investors can purchase green bonds at the time of offer, or in the secondary market after they have been issued, directly through investment platforms available at financial firms such as Fidelity, Schwab and TD Ameritrade, to mention just a few. In this case, investors have to conduct their own research and qualify the bonds to suit their investment needs and risk profile, based on an evaluation of the issuer, credit rating, maturity, interest rate or yield, as well as the intended use of proceeds. Other considerations may also apply.  Even more importantly, purchasing a single bond or a few bonds will expose investors to idiosyncratic risk or the risk of being exposed to the performance of a single company or a small group of companies which can only be eliminated from a portfolio by means of adequate diversification by investing in a sufficiently large number of bonds issued by different issuers or by hedging.  This approach may be beyond the scope of some investors.  At the same time, a sufficiently large and diversified portfolio of green bonds is expected to perform in line with the broader fixed income market, as illustrated in the graph below.  Refer to Exhibit 2. Exhibit 2: Performance of Green Bonds vs.  Non-Green Bonds:  2014 - 2016                   For example, in 2016, green bonds returned 2.9% while non-green bonds produced a total return of a slightly higher 3.3%. The small 0.4% differential could be attributable to any number of factors outside of the intrinsic performance of green bonds. While this could reflect some differential in the pricing of green bonds in the secondary market (vs. primary market), a more impactful contributing factor may be the difference in the maturity profiles of the comparative universes of green bond versus non-green bond securities. Investing in Green Bonds Through Mutual Funds and ETFs Rather than purchasing individual bonds, an alternative for investors is to invest in a green bond mutual fund or ETF. While investment options are likely to expand in the future, at present, individual or institutional investors interested in a dedicated green bond fund have access to a limited number of options. Beyond the just launched Mirova Global Green Bond Fund[2] (refer to Mirova New Product Profile), only two funds that are is invested in at least around 10% of net assets in green bonds are currently available in the market.  These include the Calvert Green Bond Fund and the TIAA-CREF Social Choice Bond Fund. Refer to Exhibit 3.  All three funds are actively managed.  The TIAA-CREF Social Choice Bond Fund has the longest track record and offers the best management, performance and price combination, however, this fund is not a dedicated green bond fund and only about 9.5% of the fund’s total assets are currently invested in green bonds. Moving beyond mutual funds, investors now also have access to the newly launched VanEck Vectors Green Bond ETF, a green bond index fund managed by New York-based Van Eck Associates. Listed on March 10, 2017, the fund features the lowest and most attractive expense ratio at 40 bps relative to available mutual funds.  On the other hand, the fund is still very small and not as yet fully diversified.  (Refer to VanEck New Product Profile). Exhibit 3: Green Bond Mutual Funds                     [1] Refer to Green Bond Principles (GBP).  See http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/green-bonds [2] At around the same time, an affiliate of the investment manager’s US arm announced the launch of the Natixis Global Asset Management target date funds that includes the Mirova Global Green Bond Fund option.

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Synopsis: This article explains the nature of shareholder advocacy, another sustainable investment strategy, as well as proxy voting and the more recent extension of this concept to include engagement both in connection with equity ownership as well as investments in fixed income securities and recent trends.    Introduction Shareholder advocacy and issuer engagement, which leverage the power of stock ownership in publicly listed companies, are action oriented approaches that rely on influencing corporate behavior through direct corporate engagement, filing shareholder proposals and proxy voting. These approaches have been employed more extensively in recent years to promote environmental, social and governance (ESG) agendas that may typically extend beyond an organization’s generally adopted guidelines and procedures governing proxy voting.  Indeed, for the second year in a row through the 2016 shareholder meeting season, governance and shareholder rights proposals were the most frequently submitted shareholder proposals, according to Gibson Dunn. (refer to Exhibit 1).  At the same time, shareholder proposals covering environmental and social issues, which received a boost in 2015 in the lead up to and adoption of the United Nations Framework Convention on Climate Change (otherwise referred to as the Paris Climate Agreement) and resultants commitments to reduce greenhouse gas emissions, attracted the second largest number of shareholder proposals in 2015 and again in 2016. Exhibit 1: 2016 Shareholder Proposals by Issue                         Source:  Gibson Dunn Bond owners, on the other hand, have adapted these approaches to focus on securing additional information and communicating by means of a direct dialogue on ESG related issues with management to influence issuer behavior, including companies, sovereigns and municipal entities, or modifying bond indenture terms and conditions. While bond ownership limits the advocacy options available to investors, such actions can extend beyond public companies to include privately held firms that tap the debt markets.  This reach is not an available option for stockowners. It should be noted that shareholder initiatives do not produce direct or near-term financial results but can lead to improved long-term performance aligned with changes to a company’s behavior and improved competitive positioning.  Equity Investors Shareholders holding at least $2,000 worth of stock in a publicly-traded company for at least 1-year prior to a filing deadline can introduce a resolution to company management to be voted on at the next annual shareholder’s meeting. This has become an effective way of influencing company decision making and bring about corporate policy actions. The submission of a resolution creates an opportunity for a formal communication channel between shareholders and management that often results in the withdrawal of the resolution through a negotiated dialogue intended to addresses the concerns raised in the resolution.  If an agreement is not reached, the resolution is placed on the company’s proxy statement and voted on by all shareholders. While the vast majority of shareholder proposals are non-binding, resolutions that attract a positive vote in excess of 10% are difficult for companies to ignore. For example, during the 2016 proxy season, the most common shareholder proposal topic involved shareholder access, or actions by which shareholders sought to nominate their own director candidates to serve on the company’s board of directors. However, political and lobbying, advocacy for the establishment of an independent chair on a company’s Board of Directors and climate change were the next most common shareholder proposal topics.  (refer to Exhibit 2).  In turn, climate change proposals included reporting on climate change, greenhouse gas emissions and climate change action. Exhibit 2: Most Common Shareholder Proposals 2015 - 2016                 Source: Gibson Dunn By purchasing shares of a company, an individual or institution, including a mutual fund becomes a shareholder of that company. For example, the New York Stock Exchange requires that companies listed on its exchange hold an annual meeting. Shareholders are invited to attend the meeting in person — or by proxy — to vote on issues brought before the meeting by the company or by other shareholders. Since attending the meeting is very likely inconvenient, most shareholders send in their proxies indicating how they would like to vote. Examples of issues that might be included in a proxy ballot are election of the Board of Directors, executive compensation packages, and approval of mergers or acquisitions Proxy Voting Proxy voting is the right of shareholders to vote their shares on corporate resolutions and in this way influence a company’s policies, practices and governance. Typical issues that might be included in a proxy ballot are the election of the Board of Directors, selection of audit firms, executive compensation packages, and approval of mergers or acquisitions. The proxy voting guidelines cover a variety of issues, including the size and composition of Boards of Directors, independence of the Boards, executive compensation policies, changes in a company's capitalization such as share issuance and repurchases, mergers and acquisitions, and situations unique to non-U.S. companies. For example, the subject of board diversity, including gender and racial diversity, has been gaining attention in recent years. One large shareholder, State Street Global Advisors, has recently launched an initiative to pressure large companies to improve gender diversity on their boards by voting against the re-election of committee heads who do not prioritize the hiring of female directors. Of companies in the Russell 3000 index, almost 25% have no female board members, while 58% have boards that are less than 15% female, according to Institutional Shareholder Services reports. Fixed Income In the absence of an ownership relationship when investing in fixed income securities (unlike their ownership stake in a company via their shareholdings, bond investors are lenders who do not enjoy ownership rights) bond investors have begun in the last few years to engage with company or issuer management teams in an effort to improve ESG-related business practices.

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Synopsis: This article defines impact investing, the small but growing segment that represents another one of the key sustainable investing strategies, and broadly identifies some of the impact investing options available to investors.  Introduction Still a relatively small but growing slice of the sustainable investing segment, impact investments are moneys directed to companies, organizations, and funds with the intention to achieve measurable social and environmental impacts alongside a financial return. Impact investments can be implemented in both emerging and developed markets and made across asset classes, such as cash equivalents, equities, fixed income, venture capital, and private equity.  In each instance, the objective is to direct capital to address the world’s pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services, including housing, healthcare, and education. Historically, impact investments have targeted a range of returns from below market to market rate, depending on the investors' strategic goals. But increasingly, impact investing strategies are expected to at least achieve risk-adjusted market rates of return. Core Characteristics of Impact Investing Impact investing as a segment of the sustainable investing sector is still small but growing and evolving. The size of the market remains difficult to pin down with precision.  By some estimates as of 2014, about $109 billion was invested directly or indirectly in various impact strategies[1]. The practice of impact investing is further defined by the following core characteristics which, on a combined basis, serve to differentiate this strategy from other sustainable investing approaches: Intentionality. Essential to impact investing is an investor’s intention to have a positive social or environmental impact through investments. Return expectations. Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital. That said, impact investments target financial returns that range from below market (sometimes called concessionary) to at least risk-adjusted market rates of return. Impact measurement. A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field. The approaches of investors to impact measurement will vary, based on their objectives and capacities, and the choice of what to measure and how. These may reflect the complexity associated with measuring impact, and, consequently, investor intentions. In general, components of impact measurement best practices for impact investing include: -Establishing and stating social and environmental objectives to relevant stakeholders. -Setting performance metrics/targets related to these objectives, using standardized metrics where possible, or via qualitative descriptions. -Monitoring and managing the performance of investees against these targets. -Reporting on social and environmental performance to relevant stakeholders. Investing Options Issues of scale, diversification, liquidity and costs present challenges when it comes to making individual direct impact investments and therefore, with some exceptions, investing in managed funds is a more viable strategy for retail as well as a large segment of institutional investors. One exception is direct investment in green bonds, fixed-income securities, both taxable and tax-exempt, that raise funds specifically to finance new and existing projects with environmental sustainable benefits. These may include securities issued by sovereigns, development or supranational banks, corporations, states, cities and local government entities, such as water, sewer or transportation authorities.  Green bonds offer yields and returns equivalent to their non-green bond counterparts. There are currently a limited number of impact oriented mutual funds, including several established and newly launched green bond funds and one passively managed green bond ETF. But otherwise, qualifying investors may choose from several hundred impact investment funds that generally operate offshore.  These funds cover a variety of asset classes and geographic focus, as well as a number of impact investing themes, including access to finance, access to basic services, employment generation, green technology, environmental markets and sustainable consumer products, to mention just a few. Financial Return Expectations Impact investors have diverse financial return expectations. Some intentionally invest for below-market-rate returns, in line with their strategic objectives. Others pursue market-competitive and market-beating returns, as may be required for direct and indirect investments that are subject to fiduciary responsibility standards. According to a survey covering 405 funds (not including green bond funds) that was conducted by the Global Impact Investing Network (GIIN), impact funds listed in GIIN’s Impact Investment Fund Database (ImpactBase) in 2016 predominantly seek risk-adjusted market rate returns. This segment accounted for 79% of the funds while 19% sought below risk-adjusted market rates of return only.  Refer to Exhibit 1. Exhibit 1: Number of Funds by Return Targe   [1] Source:  2014 Global Sustainable Investment Review

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Synopsis:  This article explains the sustainable investing strategy of ESG integration and why it is gaining traction. In addition, it highlights some challenges and offers a framework for setting financial performance expectations.  What is ESG Integration?   ESG integration is the investment strategy by which environmental, social and governance factors and risks are systematically analyzed and, when these are deemed relevant to an entity’s performance, they will influence decisions on whether to buy or hold a security, and to what extent. Conversely, such considerations may lead to the liquidation of a security from the portfolio.  As it stands today, ESG integration, regardless of the fundamental strategy approaches to stock (i.e. value versus growth, large cap versus small cap, etc.) and bond investing, is more frequently practiced in connection with equity investing and less so when it comes to bond investing.  But this is changing. Guided by the view that relevant and material environmental, social and governance factors, along with other financial and non-financial considerations, can have an impact on an entity’s performance over time, including stocks and bonds, more investors are considering these issues in their buy/hold/sell decisions or in deciding on their position weightings within a portfolio. In addition, ESG considerations are aligned with the growing desire on the part of investors to achieve a positive societal impact. Significant Variation Surrounds Definition of ESG While there is general agreement that ESG refers to three pillars consisting of environmental, social and governance factors, there is significant variation regarding the considerations or criteria that should be encapsulated under each of these broad pillars, what should be the individual indictors used to evaluate them or how to account for them in any form of analysis—especially if extended to reflect diverse issuers, varying security types and geography. In large part, this has to do with the fact that ESG integration as an investing concept is relatively new, there are numerous factors to consider and the definitions have been and are continuing to evolve. For example, one investment management firm active in bringing sustainable investment practices to retail and institutional investors through various mutual fund offerings considers the following factors when integrating ESG into decision making: Examples of Environmental, Social and Governance Criteria                 At the same time, another prominent investment management firm integrates ESG factors through a somewhat different prism. For example, with regard to factors related to the environment, it takes into consideration carbon and greenhouse gases, environmental impact and footprint as well as water usage. There is also variation around its social and governance criteria.  With regard to social factors, the same firm focuses on impacts on the communities in which an entity operates, labor policies and practices as well as social “sustainability.”  As for governance, the structure of the board and board committees, as well as the board composition, are taken into consideration. Adding further to the complexity, there is no consensus around the issues that underlie each of these factors and how to weight them in any investment methodology that attempts to assign levels of relative importance to each of these factors. For these reasons it is important to investigate and understand the unique and sometimes nuanced approach to ESG integration taken by each manager and/or product and how this aligns with the investor’s goals and objectives. A variation on the ESG integration strategy is thematic investing, an approach based on expectations of growth in ESG/sustainability-related sectors. For example, this may include investments in agriculture, renewable energy, such as solar energy and wind, and clean water, to mention just a few.  It should be noted, however, that portfolios constructed around thematic investment approaches do not necessarily qualify securities holdings on the basis of each individual company’s fundamental ESG practices, such that greater care may be called for to evaluate the thematic investment portfolio’s composition as well as selection practices.  The recently popular version of thematic investing in the fixed income sphere, that also qualifies as an impact investment, consists of green bonds where the proceeds are used to achieve environmental beneficial purposes. Reasons for Growth of ESG Integration Strategies Still, the reasons this approach in particular has been gaining momentum can be sourced to a number of trends, and in particular two important overarching developments. The first is that studies on financial performance of sustainable investments seem to demonstrate improved financial portfolio and stock performance when ESG factors are analytically applied. One recent study, for example, conducted by Morgan Stanley into the performance of mutual funds, found that sustainable mutual funds had equal or higher median returns and equal or lower median volatility for 64% of the periods examined over the last 7 years compared to their non-ESG counterparts[1].  That said, other studies are less positive about the performance results achieved by strategies that attempt to integrate ESG.  The second important reason has been the rapid rise in interest by institutional and retail investors in sustainable investing—motivated by a desire to achieve a positive societal impact alongside positive financial results. One View Regarding Financial Results Achieved with ESG Integration in Stock and Bond Investing What should investors expect from ESG integration in terms of financial results? This is a complex question that remains difficult to answer with complete confidence as the evidence is still evolving.  A proxy for the financial results that investors should expect from a broad-based stock and bond oriented diversified ESG integration strategy may be derived from an examination of the results delivered by two mutual funds, the Vanguard FTSE Social Index Fund as well as the TIAA-CREF Social Choice Bond Fund. The Vanguard FTSE Social Index Fund is a low-cost index mutual fund that attempts to replicate the total return performance of the FTSE4Good US Select Index by investing substantially all of its assets in the stocks that make up the index[2].  This index is composed primarily of large- and mid-cap stocks that have been screened for certain environmental, social and governance criteria. To this end, environmental considerations include climate change, water use, biodiversity and pollution, and resources. Social considerations include customer responsibility, human rights and community, labor standards and health and safety and governance includes corporate governance, risk management, tax transparency, and anti-corruption. The results achieved by this index fund are compared to the results achieved by a similar broad-based US index that does not take ESG factors into consideration, in this instance the S&P500 index. Since 2002 when the Vanguard FTSE fund was launched through the end of 2016, investors in the fund’s Investors Shares[3] would have earned an annual average rate of return of 7.84% versus 8.25% if they had invested in the S&P 500 index.  Put another way, $1,000 invested in an index fund that integrates ESG into its investments would have grown to $2,264 at the end of 2016 versus $2,598 for an investment in the S&P500.  So while there is a slight negative differential, in this instance, the difference is only $334 or 0.41% lower.  While there are some year-by-year variations in total returns (see Exhibit 1), for this extended time period, ESG investors would have earned a return that is slightly lower but very similar to the broad market. Exhibit 1: Performance of the Vanguard FTSE Social Index Fund versus the S&P 500:  2002-2016                     At this time it is not possible to conduct a comparative analysis for the fixed income sector because an equivalent ESG oriented fixed income index fund, either in the form of a mutual fund or ETF, is not as yet offered in the market. At best, it’s possible to analyze the performance of an actively managed lower cost fixed income portfolio that integrates ESG factors and compare this to the results achieved by a broad-based fixed income benchmark. Chosen for this purpose is the TIAA-CREF Social Choice Bond Fund, an actively managed fund investing in investment grade securities that meet certain environmental, social and governance (ESG) criteria in addition to filtering out companies that don't meet the investment manager’s social guidelines.  This fund’s total return performance was evaluated relative to the Bloomberg Barclays US Aggregate Bond Index.  The results below show that the Social Choice Bond Fund, which was launched in 2012, has outperformed the benchmark in each of the last four full years, generating a cumulative return of 10.7% between the start of 2013 through 31 December 2016 versus 7.2% for the index.  Refer to Exhibit 2.  Put another way, ESG investors would have earned an excess return 3.5% over the 4 year period during which the fund was in operation. Exhibit 2: Performance of the TIAA-CREF Social Choice Bond Fund versus the Bloomberg Barclays US Aggregate Bond Index:  2013-2016                         [1] Source:  Morgan Stanley [2] It should be noted that this analysis focuses on the performance of an index fund only rather than an actively managed equity ESG portfolio. [3] Investor Shares is designed for retail investors with a minimum investment of $3,000.

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Synopsis:  This article explains the concept of exclusionary/divestiture strategies, one of the four principal sustainable investing strategies, the various exclusions that are typically considered by investors as well as the challenges associated with targeting specific exclusions, in particular when investing in managed funds such as mutual funds and ETFs. Introduction Exclusionary strategies (sometimes also referred to as negative screening) involve the exclusions of companies or certain sectors from portfolios based on specific ethical, religious, social or environmental guidelines or preferences. Traditional examples of exclusionary strategies 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 or firearms, or even atomic energy. These exclusionary categories have been extended in recent years to incorporate additional considerations, for example, 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. Closely related is the strategy of divestiture or divestment. Divestiture strategies involve current holdings that are liquidated over time as their eligibility is no longer consistent with the owner’s objectives, such as fossil fuel companies. But divestiture strategies may also involve a much broader universe of securities, when for example, divestiture strategies were applied to apartheid practices in South Africa in the 60s and 70s.  At that time, any company doing business with South Africa was taken off the list of eligible investments. In general, this investment approach, when applied exclusively and viewed through the prism of equity mutual funds, in particular, has in the past produced an uneven-to-poor financial track record or total return results. Size of Exclusionary Segment A sustainable investing approach, reliance on exclusionary practices is today the most pervasive across portfolios managed for the individual as well as institutional investors. By some estimates, negative/exclusionary strategies across the globe are associated with about US$15 trillion in assets under management as of early 2016.  That is up from US$12 trillion, or an increase of 25% relative to 2014[1].  The number is even higher, rising to US$21 trillion, when norms-based screening, or screening of investments against minimum business practices on the basis of international norms, is added in. Approach to Implementing Exclusionary Strategies Vary On the surface, the implementation of exclusionary strategies may seem straight forward. Yet the lack of industry-wide conventions on how to execute such a strategy poses some challenges for investors who must make their own decisions on how best to achieve and meet their specific ethical, religious, social or environmental objectives.  For example, tobacco companies might clearly be subject to exclusion, but should this policy also apply to manufacturers and servicers of vending machines.  Even when a decision is made to avoid investing in companies that are engaged in similar activities, such as tobacco or weapons, there is no consensus or consistency around the thresholds that should be used for the exclusion of these companies.  Firms could be excluded when the designated activities represent the company’s primary or significant source of revenues or these could be excluded if any revenues at all are derived from such activities. Using the prism of mutual funds, the table below (refer to Exhibit 1) illustrates the variations in the application of exclusionary strategies across five fund firms that offer some of the largest sustainable mutual funds. Comment on Financial Track Record/Performance Theoretically, investing in funds or portfolios that limit exposure to certain stocks or eliminates them entirely should require some financial sacrifice. This is because portfolios subject to such restrictions are less able to diversify due to the fact that large segments or entire market segments, such as tobacco or alcohol, are excluded from the investment universe. Also, one or more of these segments of the market may actually experience intervals of outperformance as was recently the case with tobacco company stocks. The same argument holds for portfolios that add social criteria to the traditional risk-return based financial analysis. Moreover, firms with high ethical standards may incur additional costs in the process of doing so, thereby potentially lowering the performance of their common stocks. Consequently, portfolios with higher ethical screens should exhibit lower performance. Indeed, past performance of equity oriented mutual funds that have relied largely or entirely on exclusionary strategies have produced an uneven-to-poor financial track record or total return results. At the same time, there have been empirical studies showing that the performance of funds that employ ethical or social considerations is close to that of their equity fund counterparts that don’t employ such considerations. Fewer studies have extended this analysis to fixed income. This being the case, investors adopting exclusionary strategies should be aware of this still continuing debate and be prepared to potentially accept lower total returns over time. [1] Source:  2016 Global Sustainable Investment Review, Global Sustainable Investment Alliance

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Sustainable investing is the idea that investors can achieve a positive societal impact with their investments. Optimally, this should be accomplished without sacrificing long-term financial returns.  The possibility of achieving these dual objectives is what investors in increasing numbers find attractive.  In recent years, a growing number of individual and institutional investors have been adopting sustainable investing strategies.  Moreover, the same investor groups anticipate that sustainable investing will become even more important over the next few years.  But investors should be aware that the successful implementation of such strategies calls for the application of basic investment principles and due diligence. Sustainable investing can be pursued through a variety of sustainable strategies, but most practitioners agree that these encompass one or more of the following four notable approaches: Screening out or excluding companies from investment portfolios for a variety of reasons, including ethical, religious, as well as other strongly held beliefs, such as environmental concerns or involvement on the part of companies in specific business activities, such as gambling and sex-related activities, the production or manufacturing of alcohol, tobacco or firearms, or atomic energy. In general, this investment approach, when viewed through the prism of mutual funds, has produced an uneven financial track record. Impact investing or investing to achieve a targeted social or environmental objective that is measurable, for example, such as investments in companies that develop or offer products or services seeking to protect the environment or provide environmental solutions intended to reduce greenhouse gas emissions that are widely believed to bring about climate change, or companies that promote workplace diversity, human rights and community relations, advance educational initiatives or attempt to alleviate housing shortages and poverty, to mention just a few. Integrating environmental, social and governance (ESG) considerations as a proactive and integral component of the investment research and portfolio construction processes, including companies with social and environmental objectives that some investors believe can serve to minimize certain vulnerabilities, such as the risk of lawsuits from employees or toxic spills, and look for these attributes as predictors of long-term financial performance, and Shareholder and bondholder advocacy and engagement in an effort to influence corporate behavior. These strategies are not mutually exclusive and investors can engage in one or more of these at the same time. Moreover, it’s not always entirely clear where one strategy begins and another ends, as these can also morph into one another. While the above definitions attempt to broadly define sustainable strategies, there are potentially other investing approaches that aim to achieve a positive societal impact and financial returns that might not lend themselves to easy classification.  For example, investing in or financing microfinance institutions that seek to provide banking services to poor families and micro-entrepreneurs falls into this category. Sustainable investing has been gaining a footing among individual investors as well as a wide range of mainstream institutional investors.  These include public pension funds, endowments, foundations and insurance companies, to mention just a few, as well as traditional investment management firms.  Historically, much of the focus of sustainable investing has been on stock oriented strategies, whether through individual securities or funds.  As more investors seek to apply a sustainable approach to their entire portfolio of securities, attention has begun to shift to other asset classes, including fixed income and real estate.  This approach in one form or another has also found its way into alternatives, such as hedge funds and private equity portfolios. Investors can implement sustainable investing strategies by purchasing individual stocks, bonds, mutual funds, Exchange Traded Funds (ETFs), Unit Investment Trusts (UITs) and even closed-end funds.  But regardless of the approach, the same basic investment principles apply before a purchase decision is made.  That is, investors have to conduct fundamental due diligence and analysis to evaluate the investment to make sure that it fits with their return requirements, risk tolerance, income needs and asset allocation goals.  In addition, the investment’s sustainability profile should be aligned with the investor’s goals and objectives. Typically, due diligence efforts should focus on management characteristics and stability of organization, historical performance or financial track record, expenses as well as any other investment specific relevant  considerations which will likely vary from one investment to the next.

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Research

Research and analysis to keep sustainable investors up to-date on a broad range of topics that include trends and developments in sustainable investing and sustainable finance, regulatory updates, performance results and considerations, investing through index funds and actively managed portfolios, asset allocation updates, expenses, ESG ratings and data, company and product news, green, social and sustainable bonds, green bond funds as well as reporting and disclosure practices, to name just a few.

A continuously updated Funds Directory is also available to investors.  This is intended to become a comprehensive listing of sustainable mutual funds, ETFs and other investment products along with a description of their sustainable investing approaches as set out in fund prospectuses and related regulatory filings.

Getting started

Many questions have surfaced in recent years regarding sustainable and ESG investing.  Here, investors and financial intermediaries will find materials that describe the various approaches to sustainable investing and their implementation.  While sustainable investing approaches vary and they have thus far defied universally accepted definitions, many practitioners agree that they fall into the following broad categories:  Values-based investing, investing via exclusions, impact investing, thematic investments and ESG integration.  In conjunction with each of these approaches, investors may also adopt various issuer engagement procedures and proxy voting practices.  That said, sustainable investing approaches will continue to evolve.

In addition to periodic updates regarding sustainable investing and how this form of investing is evolving, investors and financial intermediaries interested in implementing a sustainable investing approach will also find source materials that cover basic investing themes as well as asset allocation tactics.

Inesting ideas

Thoughts and ideas targeting sustainable investing strategies executed through various registered and non-registered sustainable investment funds and products such as mutual funds, Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs), closed-end funds, Real Estate Investment Trusts (REITs) and Unit Investment Trusts (UITs). Coverage extends to investment management firms as well as fund groups. 

Independent source for sustainable investment management company research, analysis, opinions and sustainable fund disclosure assessments