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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Bottom Line:  Advocating for improved disclosures and renewable energy sources, considering lesser energy consuming cryptocurrencies and purchasing carbon credits are options for sustainable investors. Summary and options for sustainable cryptocurrency investors In the 13 or so years since the publication of a white paper by Satoshi Nakamoto¹ that launched the cryptocurrency digital wave with the introduction of Bitcoin, the first cryptocurrency, the market capitalization of all cryptocurrency assets has exploded to over $2.23 trillion².  This growth has largely taken place in the last five years, since about July 2017.  The number of cryptocurrencies in the market has also expanded dramatically along with the number of investors.  While new cryptocurrencies are constantly being created and quite a number have reportedly failed, it is estimated that there are currently more than 13,506 in existence³  The market is highly concentrated with the top ten cryptocurrencies representing 80% of the market cap.  Based on a new Pew Research Center survey, the majority of U.S. adults have heard at least a little about cryptocurrencies like Bitcoin or Ethereum, and 16% say they personally have invested in, traded or otherwise used one.  In the meantime, increasing focus on climate change has directed attention on the usage of energy by cryptocurrencies in the mining process and the resultant levels of greenhouse gas emissions.  This, even as calculating the energy use of cryptocurrencies is exceedingly difficult due to the many parameters at play and spotty data.  Bitcoin in particular, due to its dominant market position, high volume of transactions and reliance on a high energy consuming blockchain verification methodology, has been called out for its very high energy usage.  This issue may be less problematic for investors generally, but it is concerning for investors that emphasize sustainable investing as well as investors focused on environmental, social and governance (ESG) investing even as some recent data indicates that energy usage may have moderated somewhat.  Further, while environmental factors top the list of ESG concerns, cryptocurrencies are exposed to various other ESG-related risks and opportunities that should be considered by sustainable investors.  These are noted below, however, this article focuses on environmental considerations and identifies options for consideration by sustainable or ESG investors who may wish to invest in more energy efficient alternatives while keeping in mind the highly speculative nature of cryptocurrency investing.  For sustainable investors, options and considerations include advocating for improved disclosures, transparency and a shift to renewable energy sources, considering lesser energy consuming cryptocurrencies and/or offsetting emissions through the purchase of carbon credits. ¹ Bitcoin:  A Peer-to-Peer Electronic Cash System, 2008. ² Consisting of all crypto assets, including stablecoins and tokens as of 12/11/2021, according to CoinMarketCap, a cryptocurrency price tracking website that was acquired by Binance in April 2020. ³Source:  CoinMarketCap. Cryptocurrencies have expanded dramatically, however, the market is highly concentrated Cryptocurrency is a decentralized digital currency that relies on distributed ledger technology to keep ownership records and transfer ownership from one user to another often with little to no information about the identity of the owner over the internet. Unlike the U.S. Dollar or the Euro, for example, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet in the form of governance protocols. The number of cryptocurrencies in the market has expanded dramatically, however, the market remains highly concentrated.  As noted, the top ten cryptocurrencies represent 80% of the segment’s market cap and the top five cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB) Tether (USDT) and Solana (SOL), account for 72.3% of the market cap as of December 11, 2021.  With a 40% market cap, Bitcoin remains the market leader, having been created as a concept that was outlined in principle by Satoshi Nakamoto in 2008.  Nakamoto described the project as “an electronic payment system based on cryptographic proof instead of trust.” That cryptographic proof comes in the form of transactions that are verified and recorded in a form of technology called a blockchain. Blockchain--an open, distributed ledger that records transactions in code A blockchain is an open, distributed ledger that records transactions in code. In practice, it’s a little like a checkbook that’s distributed across countless computers around the world. Transactions are recorded in “blocks” that are then linked together on a “chain” of previous cryptocurrency transactions.  With a blockchain, everyone who uses a cryptocurrency has their own copy of this ledger to create a unified transaction record. Software logs each new transaction as it happens, and every copy of the blockchain is updated simultaneously with the new information, keeping all records identical and accurate.  To prevent fraud, each transaction is checked using one of two main validation techniques: Proof of Work (PoW) or Proof of Stake (PoS). Of the two validation techniques, PoW requires an intense amount of computer power and electricity Proof of Work (PoW). This validation method, used by a substantial percentage of all cryptocurrencies, including Bitcoin and Ethereum, employs a consensus mechanism that requires computers to solve complex mathematical problems.  Each participating computer, often referred to as a “miner,” races to solve the mathematical problem that helps verify a group of transactions—referred to as a block—then adds them to the blockchain leger. The first computer to do so successfully is rewarded with a small amount of cryptocurrency for its efforts.  This race to solve blockchain problem can require an intense amount of computer power and electricity. According to the Bitcoin Energy Consumption Index, it is estimated that Bitcoin’s annualized electrical energy consumption is 201.32 TWh, comparable to the power consumption of Thailand and slightly below Vietnam.  Its carbon footprint per single transaction is 958.68 Kg of CO2, equivalent to the carbon footprint of 2.1 million Visa transactions.  By way of comparison, Ethereum’s annualized electrical energy consumption is 97.19 TWh, or 11X lower than Bitcoin4.  Its carbon footprint per single transaction is 100.91 Kg of CO2, equivalent to 223,651 Visa transactions.  That said, the numbers should be viewed as rough estimates. Proof of Stake (PoS).  The Proof of Stake method, which was introduced in 2012, reduces the amount of power necessary to check transactions.  With proof of stake, the number of transactions each person can verify is limited by the amount of cryptocurrency they’re willing to “stake,” or temporarily lock up in a communal safe, for the chance to participate in the process. Because proof of stake removes energy-intensive equation solving, it’s much more efficient than proof of work, allowing for faster verification/confirmation times for transactions. If a stake owner (sometimes called a validator) is chosen to validate a new group of transactions, they’ll be rewarded with cryptocurrency, potentially in the amount of aggregate transaction fees from the block of transactions. To discourage fraud, if you are chosen and verify invalid transactions, you forfeit a part of what you staked. New validation techniques are reported to consume far less energy and/or rely on renewable energy sources In addition to cryptocurrencies that rely on PoS, there are also new cryptocurrencies that have been introduced, with an emphasis on limiting the energy-related impact of transactions. Chia and IOTA are examples of this. Chia, which describes itself as green money for a digital world, explains that it is an attempt to improve on Proof of Work-based blockchains with a new consensus algorithm that is referred to a Proof of Space and Time. Instead of consuming massive amounts of electricity and wasteful single-purpose ASIC hardware to validate transactions, Proof of Space leverages the over-provisioned exabytes of disk space that already exist in the world today. The farming process for Chia doesn’t rely on the heavy processing power of mining and thus consumes less energy than other popular currencies.  Similarly, IOTA uses an alternative to blockchain called the ‘Tangle’ which essentially removes the need for miners. Instead, the network is maintained by smaller devices and uses calculations that require less power and thus consume less energy per transaction. Another example is Ripple (XRP), a $39.4 billion cryptocurrency that last December became subject to a Securities and Exchange Commission action for allegedly raising over $1.3 billion through an unregistered, ongoing digital asset securities offering.  The platform doesn’t rely on the Proof of Work validation method but rather it uses a protocol that polls its network to validate account balances and transactions. If the majority agrees on the transaction's integrity, it gets the green light. Environmental impacts can vary significantly across cryptocurrencies, but these are difficult to estimate While some of the energy use and greenhouse gas emissions attributable to cryptocurrencies is sourced to the level of efficiency of the mining devices and the electronic wastes created due to replacements of the high intensity computers used in the mining process, most of the energy expenditure of cryptocurrencies is attributed to the energy intensive mining process by which coins are made available.  The machines performing the work consume huge amounts of energy and the energy used, which is challenging to quantify, has been reported to be primarily linked to fossil fuels. Referencing another data source based on what may be less current approximate energy consumption data for some popular cryptocurrencies compiled by DRG Datacenters, a Houston-based datacenter management company, Bitcoin consumed 707 Kilowatt hour (KWh) of electricity per transaction as compared to 62.6 KWh of electricity per transaction or 11.30 times lower than Bitcoin.  This compares to currencies at the other end of the range that have a far lower impact, such as IOTA, XRO and Chia that consumed from 0.00011 to 0.023 KWh of electricity per transaction.  Refer to Chart 1.  That said, according to the Bitcoin Mining Council (BMC) based on survey data as of Q3 2021, Bitcoin mining electricity mix has increased to 57.7% sustainable as of Q3 2021.  According to BMC, there has been an improvement in Bitcoin mining energy efficiency and sustainability due to advances in semiconductor technology, the exodus earlier this year from China of cryptocurrency miners that had been relying on coal-dominated energy sources and the rapid expansion in North American mining, the worldwide rotation toward sustainable energy and modern mining techniques. Chart 1:  Estimated energy consumption per transaction, in KWh Source:  DRG Datacenters, using approximate figures taken from external sources.  According to DRG, some smaller currencies do not have as much information published around them, so the consumption per transaction was calculated using the data available (e.g. yearly consumption per transaction x and transaction number per day). In the end, the lack of transparency and data make it exceedingly difficult to point to any one currency being ‘greener’ than others. There are many parameters at play, there is no central register with all active machines, their location and exact power consumption.  Most miners are small private firms that do not yet disclose this information.  This degree of difficulty means that many of the much smaller cryptocurrencies naturally have a far lower energy footprint because they involve far fewer daily transactions as compared to Bitcoin and other larger scale PoW validation technique users.  For this reason, the recently announced formation of the Crypto Climate Accord (CCA) is a welcome development for sustainable investors and other stakeholders.  The Accord represents a private sector collaborate effort to decarbonize the crypto and blockchain industry.  According to the organization’s website, more than 200 companies and individuals spanning the crypto and finance, technology and NGO, energy and climate sectors have joined the Crypto Climate Accord as supporters that are involved with helping advise, develop and scale solutions in support of the CCA.  Signatories “make a public commitment to achieve net zero emissions from electricity consumption associated with all their respective crypo-related operations by 2030 and to report progress toward this net zero emissions target using the best industry practices5”.  That said, further details have not yet been made available. 4Ethereum is reportedly moving to the PoS consensus mechanism 5 Refer to Crypto Climate Accord at cryptoclimate.org. Cryptocurrency investors are exposed to additional ESG risks and opportunities While the focus of this research article was limited to environmental impacts, cryptocurrency investors should be aware of potential social and governance risks and opportunities sourced to cryptocurrencies.  These considerations are listed in Table 1 but it should also be noted that the same issues are not limited to direct investing in the currencies.  According to research recently published by MSCI, there are at least 52 public companies covered by MSCI research that have exposure to cryptocurrencies 6 Table 1:  Cryptocurrency ESG risks and opportunities ESG Factor Considerations Governance Evaluation challenges due to the decentralized nature of cryptocurrencies.  Oversight and risk management policies and practices may apply, but its challenging to evaluate at this point.  Reporting and disclosure, which is not standardized, is limited, especially with regard to smaller and privately held firms. Environmental Energy usage and greenhouse gas emissions. Social Cryptocurrencies have been associated with ransomware and fraud. The location of some mining companies, such a Xinjiang Province in China, has been associated with human rights abuses.  Such allegations have been denied by China.  It has also been reported that there is a lack of gender diversity in the cryptocurrency and blockchain space.   At the same time, cryptocurrencies and the underlying blockchain technology can facilitate greater levels of inclusion by the expansion of financial and banking services to the estimated 1.7 billion people who don’t have access to banking services. 6Creeping Crypto:  Cryptocurrency Risk and ESG, MSCI, October 13, 2021 Considerations and options for sustainable investors Investors drawn to cryptocurrency should keep in mind that it is a new, unregulated, highly speculative investment opportunity with limited transparency.  Bitcoin, which traded at $66,971.83 as recently as November 8, 2021 dropped to $46,581.05 as of December 4, 2021, registering a 30.4% decline.   The cryptocurrency has since settled at a price of $48,777.75, recovering some 4.7%.  Still, interested sustainable investors can take into account the following considerations and options: Advocate for the disclosure and tracking of energy use and renewable energy sources in a standardized format directly from the cryptocurrencies and to the extent possible, engage with these entities to encourage emphasis on renewable energy sources. The Bitcoin Mining Council7 was recently formed to standardize energy reporting in an effort to correctly track how much bitcoin utilizes renewable energy sources.  This voluntary organization still has a limited number of members. Consider a shift in part on in whole away from cryptocurrencies that are significant consumers of energy and focus on lower energy consuming alternatives, including cryptocurrencies that rely on Proof of Task verification methods as well as newer lower-to-low energy consuming cryptocurrencies that seek to limit the impact of transactions, such as Chia, XRP or IOTA, to mention just a few. Purchase carbon offsets to counterbalance the CO2 emissions sourced to cryptocurrency investments.  Carbon offset programs let individuals and businesses offset their environmental footprint by paying to reduce greenhouse gas emissions elsewhere.  Projects that help support carbon reduction may include landfill gas capture facilities, renewable energy development in communities, wind farms and reforestation projects, to mention just a few. 7Refer to the Bitcoin Mining Council at  www.bitcoinminingcouncil.com.

The Bottom Line:  Green bond funds added $60.7 million in November while green bond issuance flagged as COP 26 concluded and Y-T-D volume reached record. Summary Green bond funds added $60.7 million in November, recovering from sluggish gains over the last two months, and ending the last month of the year at almost $1.5 billion in net assets. At the same time, volume of green bonds flagged again in November but reached a new 11-month high at $429.8 billion.  November’s performance of funds versus relevant benchmarks was mixed, however, effective active management combined with lower expense ratios and exposure to dollar as well as non-dollar denominated green bonds have offered investors the best green bond fund risk adjusted performance results over the three-year interval. Green bond funds added $60.7 million in November, recovering from sluggish gains over the last two months Green bond funds, consisting of five mutual funds offering 20 share classes in total and two ETFs, came back strongly in November after a sluggish two-month interval to add $60.7 million and end the month with $1,490.2 million in net assets.  The 4.2% month-over-month increase was the best monthly gain since January 2021 when green bond funds added $100 million.  Attention focused on the climate debate and negotiations taking place in Glasgow, Scotland, over a two-week period that ended November 13th might have been a contributing factor.  On a year-to-date basis, green investment funds added $406.4 million, or a 37.5% gain in net assets, up from $1,083.8 million at year-end 2020.   Refer to Chart 1. The Calvert Green Bond Fund I (CGBIX) experienced net institutional inflows in the amount of $34.1 million (of $35.2 million across the fund’s three share classes) and at the same time the iShares World Green Bond ETF (BGRN) accumulated a net of $19.1 million.  The two funds accounted for 87.6% of the month’s net gain.  Also during November, the VanEck Green Bond ETF (GRNB) succeeded in piercing through the $100 million in net assets level with its net addition of $2.5 million. The three funds combined account for $1,353.5 million or 91% of the segment’s total assets. Two recently registered green bond ETFs, both to be managed by Tuttle Capital Management LLC, including the Green Bond ETF and Green Bond Short-Term ETF appear to have again deferred their effective date again, this time pushing off the proposed public offering beyond November 30th. Chart 1:  Green bond mutual funds and ETFs and assets under management - December 2020 – November 30, 2021 Notes of Explanation:  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and analysis LLC November’s performance of funds versus relevant benchmarks was mixed Green bond funds in November produced an average return of 0.31% as compared to a 0.30% gain recorded by the Bloomberg US Aggregate Bond Index, 1.05% increase posted by the ICE BofAML Green Bond Index Hedged US Index, and -0.10% return posted by the S&P Green Bond US Dollar Select Index¹.  The average results for the group were lifted by the Franklin Municipal Green Bond Fund with its four share classes that were up at the higher end of the performance range with total returns between 0.95% and 1.02%.  Excluding the Franklin funds, the average performance of green bond funds dropped to 0.16%.  Considering the investment mandates of the various funds, only three funds outperformed their relevant benchmark.  These are the iShares Global Green Bond ETF, the Franklin Municipal Green Bond Fund and the VanEck Green Bond ETF.   Refer to Table 1. The iShares Global Green Bond ETF was November’s best performing fund, adding 1.12%.  At  $256 million, the fund eclipsed the performance of the broader ICE BofAML Green Bond Index Hedged US Index that reflects the global eligible universe of bonds that the fund may invest in.  At the other end of the range, the PIMCO Climate Bond Fund C (PCECX) recorded a decline of -0.35%. Over the trailing 12-month interval, with and without the impact of the Franklin Municipal Green Bond Fund, the average performance of the segment eclipsed both the the Bloomberg US Aggregate Bond Index and the ICE BofAML Green Bond Index Hedged US Index. Green bond funds in operation for three years or more posted an average return of 5.4% for the three-year interval through the end of November.  Of these funds, the TIAA-CREF Green Bond Fund and its five share classes was the only fund to beat the Bloomberg US Aggregate Bond Index and the ICE BofAML Green Bond Index Hedged US Index.  Effective active management combined with lower expense ratios and exposure to dollar as well as non-dollar denominated green bonds have offered investors the best green bond fund risk adjusted performance results during the trailing three-year interval. ¹The ICE BofAML Green Bond Index Hedged US Dollar Index is more relevant benchmarks for funds also investing in non-US dollar denominated green bonds while the S&P Green Bond US Dollar Select Index is more relevant to funds restricting their investment universe to US dollar denominated green bonds. Volume of green bonds flagged again in November but reached a new 11-month high Monthly green bond issuance flagged again even as volume in November, which came in at $38.3 billion, exceeded October’s level of $38.2 billion.  This compares to the average monthly volume over 11-months of $39.1 billion.  Year-to-date green bond issuance has already achieved an all-time eleven-month high of $429.8 billion and is expected to translate into a new annual all-time high record at the end of December 2021.  Volumes in 2022 are likely to reach even higher levels.  Refer to Chart 2. Chart 2:  Monthly green bonds issuance:   December 2020– November 30, 2021 In part, this development can be explained by the growing number of first time sovereign green bond issuances, including Italy, Spain, the United Kingdom and the European Union.  Also contributing to the rise this year is the acceleration in issuances by energy generation companies, real estate firms and industrial manufacturers, most notably in the automotive sector. While it may have been surprising that volumes did not tick up during and following the conclusion of the COP 26 climate negotiations in Glasgow, at least three new sovereign issuers announced in November their intent to issue green bonds in 2022.  These include the Kingdom of Denmark, the Philippines as well as the government of Ghana. The two-week COP 26 climate summit deliberations concluded with 200 countries agreeing to the Glasgow Climate Pact that sets out a consensus on accelerating climate action.  Either in the form of negotiations among the participating countries, a series of voluntary side deals or complementary announcements, the summit produced a number of important breakthrough outcomes.  These included:  pledges to “phase down” coal power, a joint US and China declaration to engage in expanded individual and combined efforts to accelerate the transition to a global net zero economy, the adoption of carbon trading rules, pledges on the part of more than 100 countries to reduce methane emissions, a commitment to return next year to Cop 27 with better climate plans along with new rules that will allow for greater scrutiny on emissions reporting, an agreement to properly set up a mechanism for providing financial help to countries struck by catastrophic climate events, a pact on deforestation, as well as a commitment on the part of banks, investors and insurers representing $130 trillion in assets to decarbonize their businesses by mid-century.  In addition, there was a major announcement made by the International Financial Reporting Standards Board (IFRS) to provide the global financial markets with high-quality disclosures on climate and other sustainability issues. Taken together, an IEA analysis shows that fully achieving all net-zero pledges to date along with pledges made by more than 100-countries to reduce methane could limit global warming to 1.8℃; and the Glasgow Climate Pact is expected to stimulate sustainable bond issuances going forward, including green bonds. Table 1: Green bond funds: Assets and performance through November 30, 2021 Fund Name 1-Month Return (%) 3-Month Return (%) Y-T-D Return (%) 12-Month Return (%) 3-Yesar Return (%) AUM ($M) Expense Ratio (%) Calvert Green Bond A* 0.04 -1.18 -1.71 -1.33 4.79 89.6 0.73 Calvert Green Bond I* 0.07 -1.11 -1.48 -1.08 5.04 896.2 0.48 Calvert Green Bond R6* 0.07 -1.1 -1.43 -1.03 9.7 0.43 Franklin Municipal Green Bond A 0.95 -0.25 0.8 1.59 1.2 0.71 Franklin Municipal Green Bond Adv 0.98 -0.19 0.91 1.69 8.7 0.46 Franklin Municipal Green Bond C 1.02 -0.26 0.73 1.51 0.2 1.11 Franklin Municipal Green Bond R6 0.98 -0.19 0.96 1.75 0 0.44 iShares Global Green Bond ETF* 1.12 -0.56 -1.52 -1.29 5.12 256 0.2 Mirova Global Green Bond A* 0.77 -0.56 -2.07 -1.6 5.01 6.8 0.93 Mirova Global Green Bond N* 0.77 -0.49 -1.76 -1.22 5.35 8 0.63 Mirova Global Green Bond Y* 0.87 -0.5 -1.71 -1.27 5.31 31.3 0.68 PIMCO Climate Bond A* -0.29 -1.6 -0.83 -0.22 0.8 0.94 PIMCO Climate Bond C* -0.35 -1.79 -1.49 -0.97 0 1.69 PIMCO Climate Bond I-2* -0.26 -1.53 -0.53 0.08 1.9 0.64 PIMCO Climate Bond I-3* -0.27 -1.54 -0.59 0.03 0.1 0.69 PIMCO Climate Bond Institutional* -0.25 -1.5 -0.45 0.18 19.6 0.54 TIAA-CREF Green Bond Advisor* 0.11 -0.82 -0.47 0.13 6.09 3.2 0.55 TIAA-CREF Green Bond Institutional* 0.11 -0.81 -0.46 0.14 6.12 30 0.45 TIAA-CREF Green Bond Premier* 0.1 -0.85 -0.57 0.02 5.99 1.1 0.6 TIAA-CREF Green Bond Retail* 0.09 -0.88 -0.8 -0.14 5.84 7.6 0.78 TIAA-CREF Green Bond Retirement* 0.1 -0.85 -0.56 0.02 5.98 16.2 0.7 VanEck Green Bond ETF** -0.01 -1.92 -1.89 -1.58 4.13 102 0.2 Average/Total 0.31 -0.93 -0.77 -0.21 1,490.2 0.66 Bloomberg US Aggregate Bond Index 0.30 -0.6 -1.29 -1.15 5.52 Bloomberg Municipal Total Return Index 0.85 -0.17 1.35 1.97 5.09 S&P Green Bond US Dollar Select Index -0.10 -0.03 -1.58 -1.13 4.66 ICE BofAML Green Bond Index Hedged US 1.05 -0.66 -1.36 -1.04 4.17 Notes of Explanation:  Blank cells=NA.  *Fund invests in foreign currency bonds and performance should also be compared to a more narrowly based relevant index such as the ICE BofAML Green Blond Index Hedged US or equivalent.  ** Fund invests in US dollar denominated green bonds only and performance should also be compared to a more narrowly based relevant index such as the S&P Green Bond US Dollar Select Index or equivalent.  Fund total net assets and performance data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line:  Sustainable investors considering infrastructure funds on the back of the $1.2 trillion Infrastructure Investments and Jobs Act (BIF) should proceed with caution. Summary Sustainable investors considering investing in infrastructure funds on the back of the $1.2 trillion Infrastructure Investments and Jobs Act (BIF)signed into law by President Biden on November 15th, now have for consideration a short list of four infrastructure funds.  That said, the four funds are relatively new, having been launched in the last two years.  Considering their limited operating history, short performance track records and higher than average expense ratios, investors may wish to limit their initial exposures to these funds.  On the other hand, they may wish to consider exercising patience and instead of making an investment decision at this time, resolve to monitor these funds over a period of six-to-twelve months. The $1.2 trillion Infrastructure Investments and Jobs Act (BIF) signed into law on November 15th includes $550 billion in new spending for a broad range of physical infrastructure On November 15th, President Biden signed into law the $1.2 trillion Infrastructure Investments and Jobs Act (BIF) infrastructure plan.  The law includes $550 billion in new spending for a broad range of physical infrastructure on top of a five-year reauthorization of expiring traditional surface-transportation infrastructure programs for highways, rail and transit. The BIF covers fiscal years 2022-2026. Much of the funding will flow to or through state governments. The goal is to harness existing state government programs and offices to help properly and expeditiously allocate the designated funds to address infrastructure needs. The Department of Transportation (DOT) will be the primary federal department responsible for the infrastructure effort and the DOT secretary will retain wide discretion to allocate a significant portion of the funds — approximately $120 billion. In addition to DOT, other federal agencies will also deliver programs and funds within their jurisdiction. For example, the Department of Energy will manage modernizing and strengthening of the electric grid. The Department of Commerce will supervise the expenditure of tens of billions of dollars to deploy rural broadband. The Environmental Protection Agency is tasked with a major investment in clean drinking water programs to be implemented by the states, tribes and territories.  In addition to $284 billion allocated to transportation, including road and bridge improvement and replacement, public transit and passenger and freight rail, to mention just a few, water system upgrades (including lead pipe replacement) have been allocated $55 billion, broadband deployment to connect the unconnected has been allocated $65 billion, electric grid modernization and power generation innovation is allocated $73 billion, environmental remediation of hazardous sites and abandoned mines, $21 billion, western water storage, conveyance, repairs and upgrades: $8.3 billion, and resiliency, including coastal and flood mitigation, cybersecurity, drought and weatherization, $46 billion Sustainable investors considering some level of exposure to infrastructure investments have a short list of mutual funds from which to choose, but the funds have a limited operating history For sustainable investors considering some level of exposure to infrastructure investments, there is now a short list of mutual funds that, on the basis of their principal investment strategies, specifically target investments in infrastructure-related companies.  These are still early days and the list per Morningstar is currently limited to four actively managed mutual funds comprised of 14 share classes that were launched within the last two years.  In addition to investing in infrastructure-related companies that, for example, include renewable energy technology plants and systems that establish the funds’ sustainability credentials, the funds also qualify portfolio securities based on sustainability criteria.  The criteria are either set out explicitly in each fund’s prospectus or Statement of Additional Information, or both, or via other forms of disclosure such as the manager’s website. Each of the sustainable funds invests in equity securities, but these are not limited to securities of companies listed for trading in the US.  In fact, three funds disclose foreign holdings that range from 49% to 65% of portfolio holdings¹. These funds, in turn, hedge foreign currency risks. The four funds, managed by BlackRock, Goldman Sachs, Kayne Anderson and TCA Advisors, range in size from $10.3 million reported by the recently launched BlackRock Infrastructure Sustainable Opportunities Fund to $468.6 million attributable to the Goldman Sachs Clean Energy Income Fund that sourced 94% of the fund’s assets to various internal Goldman wealth management platforms.  Each of the funds pursues an ESG Integration approach, but strategies vary.  Of the four funds, BlackRock offers the most expansive and explicit form of ESG Integration by also combining exclusions and alignment with the US Sustainable Development Goals (SDGs).  Refer to Table 1 as well as Table 2. Given their short existence the funds have limited operating histories and performance track records.  Over the last twelve months, returns ranged from a low of 19.2% to a high of 33.6%.  This compares to a gain of 27.12% posted by the S&P Global Infrastructure (USD) Hedged Index.  Refer to Chart 1.  In part, performance results are hamstrung by the funds’ higher than average expense ratios for actively managed mutual funds.  These range from 0.88% to 2.01% and average 1.15%, or 0.225% higher relative to a universe of 966 sustainable funds/share classes as of October 31st. The implementation of the Infrastructure Investments and Jobs Act and its unprecedented additional spending above the current infrastructure baseline and its ambitious timetable are expected to generate significant economic benefits and investment opportunities.  It will likely stimulate additional infrastructure-specific fund offerings, including lower cost options in the form of passively managed funds and potentially actively managed funds offered with lower expense ratios.  Considering their limited operating history, short performance track records and higher than average expense ratios, investors may wish to limit their initial exposures to these funds.  On the other hand, they may wish to  consider exercising patience and instead of making an investment decision at this time, resolve to monitor these funds over a period of six-to-twelve months. ¹- The BlackRock Infrastructure Sustainable Opportunities Fund, launched in 2021 has not reported holdings as of October 31st. Chart 1:  Performance of sustainable infrastructure funds-12 months ended October 31, 2021 Notes of Explanation:  Blanks indicate that fund has not been in existence for time period covered.  Sources:  Morningstar Direct, S&P Global Table 1:  Sustainable infrastructure funds and their sustainable investing approaches Fund Name/Advisor/Sub-Advisor Investment Focus AUM ($) Expense Ratio (%) Sustainable Investing Strategy BlackRock Infrastructure Sustainable Opportunities Fund (3-share classes:  BINFX, BINAX, BINKX) BlackRock Advisors, LLC/ BlackRock International Limited and BlackRock (Singapore) Limited Fund invests in the equity securities of infrastructure-related companies or derivatives with similar economic characteristics. 10.3 0.95-1.25 ESG Integration-Mixed (exclusions and alignment with at least one UN Sustainable Development Goals (SDGs). Refer to expanded description. Ecofin Global Renewables Infrastructure Fund (two share classes:  ECOAX, ECOIX) TCA Advisors/Ecofin Advisors Limited Fund focuses its investment activities in equity securities of companies who are developers, owners and operators, in full or in part, of renewable electricity technology plants and systems, and related infrastructure investments. 312.3^ 1.00-1.25 ESG Integration (with a preference for positive and improving ESG trends). Refer to expanded description. Goldman Sachs Clean Energy Income Fund (six share classes: GCEBX, GCEGX, GCEDX, GCEJX, GCEPX, GCEHX) Goldman Sachs Asset Management LP Fund invests in U.S. and non-U.S. equity securities issued by clean energy companies. 468.6 0.88-2.01 ESG Integration Kayne Anderson Renewable Infrastructure Fund (2 share classes: KARIX, KARRX) Kayne Anderson Capital Advisors, L.P. Fund fuses exclusively on renewable infrastructure and invests only in the companies that own, operate, and develop renewable power assets that generate predictable long-term cash flows from their base business. 97.4 1.01-1.26 ESG Integration Notes of Explanation:  ^Predecessor fund with majority of institutional assets merged into newly launched fund as of August 7, 2020.  While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass:  values-based investing, negative screening (exclusions), thematic and impact investing and ESG integration.  ESG Integration is further divided into ESG Integration, ESG Integration-Mixed and ESG Integration-Consideration.  Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive.  Sources:  Morningstar Direct, Sustainable Research and Analysis, as of October 31, 2021. Table 2:  Sustainable infrastructure funds and their sustainable investing approaches in detail BlackRock Infrastructure Sustainable Opportunities Fund:  ESG Integration-Mixed To determine the Fund’s investable universe, Fund management will first seek to screen out certain issuers based on environmental, social and governance (“ESG”) criteria determined by BlackRock. Such screening criteria principally includes: (i) issuers engaged in the production of controversial weapons; (ii) issuers engaged in the production of civilian firearms; (iii) issuers deriving revenue from direct involvement in the production of nuclear weapons or nuclear weapon components or delivery platforms, or the provision of auxiliary services related to nuclear weapons; (iv) issuers engaged in the production of tobacco-related products; (v) issuers that derive certain revenue from thermal coal generation, unless such issuers either (a) have made certain commitments to reduce climate impact or (b) derive revenue from alternative energy sources, and issuers that derive more than five percent of revenue from thermal coal mining; (vi) issuers that derive more than five percent of revenue from oil sands extraction, unless the Fund is investing in green bonds of such issuers; and (vii) issuers identified by recognized third-party rating agencies as violators of the United Nations Global Compact, which are globally accepted principles covering corporate behavior in the areas of human rights, labor, environment, and anti-corruption. The Fund’s screening criteria is measured at the time of investment and is dependent upon information and data that may be incomplete, inaccurate or unavailable. This screening criteria is subject to change over time at BlackRock’s discretion. BlackRock next looks to the targets and indicators for each SDG and identifies those goals that are supported by sustainable infrastructure. With respect to its equity investments, BlackRock intends to invest only in companies that align with and advance at least one of the SDGs. BlackRock intends to focus on SDGs related to (i) good health and well-being, (ii) clean water and sanitation, (iii) affordable and clean energy, (iv) industry, innovation and infrastructure, (v) sustainable cities and communities, and (vi) climate action. BlackRock may not consider all SDGs when making investment decisions and there may be limitations with respect to the availability of investments that address certain SDGs. The Fund may gain indirect exposure (through, including but not limited to, derivatives and investments in other investment companies) to issuers with exposures that are inconsistent with the screening and SDG alignment criteria used by BlackRock as described above. Moreover, there is no guarantee that all equity securities held by the Fund will align with the SDGs at all times. The assessment of the level of alignment in each activity may be based on percentage of earnings, a defined total earnings threshold, or any connection to a restricted activity regardless of the amount of earnings received. Where disclosure for segment level earnings are unavailable, Fund management will use revenue as the primary metric. The companies are then assessed by BlackRock based on their ability to manage risks and opportunities including those associated with the infrastructure theme and their ESG risk and opportunity credentials, such as their leadership and governance framework, ability to strategically manage longer-term issues surrounding ESG and the potential impact this may have on a company’s financials. Ecofin Global Renewables Infrastructure Fund-ESG Integration The Sub-Adviser incorporates environmental, social and governance risk factors into its security selection and portfolio construction.  ESG risk considerations include, but are not limited to, the Sub-Adviser evaluating specific environmental factors of a company’s policy towards carbon and potentially other emissions. From a social perspective, the Sub-Adviser analyzes potential portfolio companies’ metrics such as, but not limited to, the percent of women employed by the company, the existence of an equal opportunity policy, whether the company is a signatory to the UN Global Compact and also seeks to measure and create a positive improvement regarding abatement of other harmful emissions including PM2.5 which disproportionately affects some impoverished communities. In terms of governance, the Sub-Adviser incorporates an analysis of the company’s board composition such as the percent of independent directors and may also assess protection of minority interests. The Sub-Adviser analyzes these factors with a preference for positive and improving trends when considering individual stocks for purchase in the portfolio. Goldman Sachs Clean Energy Income Fund-ESG Integration Considers environmental, social, and governance factors as part of the fundamental research and stock selection process. Kayne Anderson Renewable Infrastructure Fund-ESG Integration The advisor believes the integration of material environmental, social and governance risks and opportunities is an important consideration in the selection of both public and private market investment opportunities. The advisor is committed to selecting partners to build sustainable companies, deliver value to our clients and contribute to sustainable development globally. Infrastructure companies, specifically renewable infrastructure entities, are well positioned to contribute to the SDGs. The advisor has witnessed an uptick in the number of companies that have made explicit and public commitments to advance the SDGs. Notes of Explanation:  Sources:  Fund’s prospectus, Statement of Additional Information, or both, or via other forms of disclosure, such as the manager’s website.

The Bottom Line: Sustainable investing practices of new fund launches are increasingly broader and more varied while outcomes are likely more difficult to tease out. 24 sustainable funds, including mutual funds and ETFs launched in September 24 new sustainable investment funds, mutual funds and ETFs, including one ETN, were launched in September¹, adding $718.4 million in total net assets based on values as of September 30th, and expanding the number, investment type and sustainable investing approaches available to investors. Included are sixteen new ETFs, the largest number of ETF launches so far this year. At the same time, sustainable investing practices are increasingly broader and more varied, expanding beyond the integration of environmental, social and governance (ESG) practices, with some funds appending climate-oriented objectives and aligning themselves with the UN Sustainable Development Goals (SDGs). Refer to Table 1 and Table 2. In the process, potential outcomes are likely becoming more difficult for investors to tease out, especially in the absence of stepped-up manager disclosure and transparency initiatives. Adding to that is the lack of a track record and, in some cases, higher expense ratios and the small size of the newly launched funds that may not ultimately achieve sufficient scale. Considering these factors, investors are guided to exercise patience and monitor these funds for now before investing even as first time distinctive sustainable investment options are introduced. At least four new distinctive sustainable investing options launched in September Highlighted below are four new distinctive sustainable investing options launched in September, either in the form of an ETF or mutual fund: Van Eck Associates Corp. launched the first passively managed sustainable municipal bond ETF². The passively managed fund relies on a four-fold qualification approach that ranks issuers, who must support at least one qualified opportunity zone within their region, based on their backing or advancement of sustainable development as well as the promotion of positive social and environmental outcomes. Quadratic Capital Management LLC is sub-advising the first sustainable ETF designed to hedge against inflation. Investing largely in U.S. Treasury securities, the fund makes the case that it represents an ESG “impact” investment based on the fact that Quadratic is a registered Small/Minority Business Enterprise and a majority woman-owned firm and, thus, an investment in the fund advances certain ESG governance principles (such as increasing the representation of women in senior management and board positions in the U.S.). Even though the fund invests in Treasuries only and employs options strategies, Quadratic makes the unlikely claim that it adheres to ESG principles as reflected in the framework published by the Sustainability Accounting Standards Board (SASB) by excluding investments in issuers that are involved in and/or that derive significant revenue from, certain practices, industries or product lines. UBS launched the ETRAC ETN that offers investors an opportunity to leverage their exposure to the performance of the MSCI USA ESG Focused Index that pursues an ESG integration approach combined with certain exclusions. Offering 2X leverage, the ETN exposes investors to the creditworthiness of UBS AG. Metropolitan West Asset Management, LLC launched the first mutual fund that invests in debt securities issued by securitized vehicles and similar instruments that the investment adviser believes satisfy one or more of its positive-screening environmental, social and governance (ESG) criteria to support sustainable initiatives. A securitized vehicle typically issues debt securities backed by assets it owns such as commercial or residential mortgage loans, as well as other types of loans and assets. 16 ETFs and one ETN were launched in September 2021 16 ETFs and one ETN were launched in September, bringing to 174 the number that are classified as sustainable investment options. Even excluding the one ETN, the number of new launches in September exceeded the next highest number of new ETF launches recorded in July by a margin of 2:7 to 1. The new funds include nine actively managed funds, or 53%, versus eight actively managed ETFs. Also, five fixed income funds were launched in September, including the first of its kind passively managed sustainable municipal ETF. As noted above, the sustainable investing practices employed by the new funds are increasingly broader and more varied. Excluding the UBS organized ETRACS 2X leveraged ETF that’s offered at 95 bps, the average expense ratio of the 16 ETFs is 41.6 bps, which drops to an average of 32.4 bps for passively managed funds and 48.7 bps for actively managed ones. In both instances, the average expense ratio is lower than that for equivalent seasoned ETFs. The new funds added a total of $452.4 million in assets to the universe of sustainable ETFs, or an average of $26.6 million per fund. The average fund size, however, was lifted by the higher-than-average starting fund sizes launched by Janus Capital, Northern Trust and Harford Funds Management. Seven new mutual funds were launched in September 2021, all actively managed funds Seven actively managed mutual funds were also launched in September, excluding any new share classes. These funds added a total of $25.8 million in net assets, valued as of September 30th, with five funds reporting zero assets as of the same date. Offering multiple share classes that in some instances apply sales charges, sustainable mutual fund expense ratios average 93 bps and range from 49 bps to 151 bps. This is in line with the 93 bps average actively managed sustainable mutual fund expense ratio applicable to existing funds, but in excess of the average expense ratio charged by actively managed sustainable ETFs. Unlike the newly launched ETFs in September, their sustainable investing practices not as broad and varied as their ETF counterparts. Table 1: Listing of ETFs and ETNs launched in September 2021 and their sustainable investing approaches Fund Name Manage--ment Type TNA (M$) ER (bps) Sustainable Investing Approach^ ETRACS 2x Leveraged MSCI USA ESG Focus TR Index ETN due September 15, 2061 UBS AG Passively managed 23.4 95 ESG integration combined with certain exclusions that apply, such as tobacco, controversial weapons, fossil fuel extraction and thermal coal companies. FlexShares® ESG & Climate High Yield Corporate Core Index  Fund Northern Trust Investments, Inc Passively managed 49.9 23 ESG and climate-related considerations determined on the basis of (1) financially material ESG issues, (2) how a company is managing its ESG risks relative to peers, (3) corporate governance considerations and (4) an assessment of a company’s ability to mitigate the risk of transition to a lower carbon economy.  In addition, certain companies are excluded from consideration, for example tobacco and weapons, to mention just a few. FlexShares® ESG & Climate US Large Cap Core Index Fund Passively managed 2.5 9 Same as above. FlexShares® ESG & Climate Developed Markets ex-US Core Index Fund Passively managed 5 12 Same as above. FlexShares® ESG & Climate Investment Grade Corporate Core Index Fund Actively managed 49.2 12 Same as above. Global X Solar ETF Global X Management Company LLC. Passively managed 2.3 50 Thematic investing combined with an exclusionary approach pursuant to which any existing or potential constituent is excluded if it does not meet the labor, human rights, environmental, and anti-corruption standards as defined by the United Nations Global Compact Principles. Global X Wind Energy ETF Global X Management Company LLC. Passively managed 2.5 50 Same as above. Hartford Sustainable Income ETF Hartford Funds Management Company, LLC./Wellington Management. Actively managed 12.4 54 Seeks to invest in companies that demonstrate a commitment to sustainable practices. These issuers include: (1) issuers that can have a positive social and/or environmental impact; (2) issuers that are leaders or demonstrating improvement in environmental, social and/or governance characteristics, and/or (3) issuers that the manager engages with on ESG characteristics in order to improve ESG disclosure and best practices. A corporate issuer’s carbon exposure is also evaluated. Janus Henderson Sustainable & Impact Core Bond ETF Janus Capital Management LLC Activelymanaged 49.6 39 Same as above. Janus Henderson Net Zero Transition Resources ETF Activelymanaged 47.7 60 Same as above. Janus Henderson International Sustainable Equity ETF Activelymanaged 46.7 60 Same as above. Janus Henderson U.S. Sustainable Equity ETF Activelymanaged 47.8 55 Same as above. Nuveen ESG Dividend ETF Nuveen Fund Advisors, LLC/Teachers Advisors, LLC Passively managed 4.9 25 ESG integration combined with certain exclusions, including alcohol production, tobacco production, nuclear power, gambling, and weapons and firearm production. Also excluded are companies that exceed certain carbon-based ownership and emissions thresholds. ProShares S&P Kensho Cleantech ETF ProShare Advisors Passively managed 4.1 58 Thematic investing. VanEck HIP Sustainable Muni ETF Van Eck Associates Corp. Actively managed 12.4 24 Four-fold qualification approach that ranking issuers that support or advance sustainable development as well as promote positive social and environmental outcomes based on their alignment with the United Nations Sustainable Development Goals 9, 11 and 12, ESG considerations and response to climate threat and resilience.  Issuers must support at least one qualified opportunity zone within their region. Notes of Explanation: ^ This is an abbreviated description of the fund’s sustainable investing approach. For additional information, refer to the fund’s prospectus. Investment manager name is only listed once. ER=Expense ratio. TNA Source: Morningstar Direct, otherwise, fund documents and information compiled by Sustainable Research and Analysis. Table 2: Listing of mutual funds launched in September 2021 and their sustainable investing approaches Fund Name Management Type TNA (M$) ER (bps) Sustainable Investing Approach^ BlackRock Infrastructure Sustainable Opportunities Fund BlackRock Advisors, LLC and BlackRock International Limited Actively managed 0.0 95-125 Investible universe determined on the basis of exclusionary criteria including but not limited to tobacco, controversial weapons, environmental and social considerations to mention just a few, alignment with at least one of several identified UN SDGs and capacity to manage ESG risks and opportunities. Boston Common ESG Impact Emerging Markets Fund Boston Common Asset Management LLC Actively managed 0.8 99 ESG integration combined with a broad range of exclusionary criteria and active engagement with select portfolio companies through a variety of channels. Brown Advisory Sustainable Small-Cap Core Brown Advisory LLC Actively managed 0.0 94-109 ESG integration while also leveraging engagement with companies when appropriate with company management teams as of the firm’s due diligence process.  Fund expects to have minimal exposure to companies exposed to controversial business activities. Hartford Schroders Diversified Emerging Markets Fund Hartford Funds Management Company LLC/Schroder Investment Management North America Inc.  and Schroder Investment Management North America Limited Actively managed 0.0 89 ESG integration, including companies that demonstrate sound or improving sustainability practices based on the firm’s engagement initiatives.  The fund also employs an exclusionary list based on certain industries and product lines. Mainstay ESG Multi-Asset Allocation Fund New York life Investment Management LLC Actively managed 0.0 78-138 Fund invests in underlying ETFs that primarily invest in companies or issuers that either exhibit positive ESG characteristics and/or meet certain ESG criteria.  A broad range of ESG investment strategies may be employed, varying by asset class and by strategy. This may include, but is not limited to: (i) approaches that employ exclusionary screens based on certain sustainability or values-related criteria; (ii) approaches that select investments based on their ESG characteristics; or (iii) approaches that integrate the analysis of ESG factors to assess the risk-reward profile of securities. MetWest ESG Securitized Fund Metropolitan West Asset Management LLC Actively managed 0.0 49-70 Seeking to satisfy one or more of its positive-screening environmental, social and governance criteria to support sustainable initiatives as applied to the underlying security collateral and issuer program.  Up to 20% of assets may not be screened for ESG considerations. PGIM ESG Total Return Fund PGIM Investments LLC/PGIM Fixed Income and PGIM Limited Actively managed 25 49-151 In addition to requiring the issuer to meet a minimum threshold score based on ESG factors considered by the manager, the fund employs and exclusionary approach, avoiding companies that  (i) have exposure to controversial weapons and those with revenue above a certain threshold (as determined by the subadviser) from conventional weapons, tobacco, thermal coal generation and extraction, oil sands extraction, artic oil and gas exploration and gambling activities; (ii) issuers that have carbon emissions activities above a certain emission intensity as determined by the subadviser; and (iii) issuers that are non-compliant with UN Global Compact principles. The principles of the UN Global Compact represent a set of values that the UN believes responsible businesses should incorporate into their operations in order to meet fundamental responsibilities in the areas of human rights, labor, environment and anti-corruption. Notes of Explanation: ^ This is an abbreviated description of the fund’s sustainable investing approach. For additional information, refer to the fund’s prospectus. Investment manager name is only listed once. ER=Expense ratio listed as the range for the multiple share classes offered by the fund. TNA Source: Morningstar Direct, otherwise, fund documents and information compiled by Sustainable Research and Analysis. ¹ Based on Morningstar’s classification framework. ² Based on Morningstar’s classification framework for sustainable funds, the VanEck HIP Sustainable Muni ETF is the first of its kind municipal ETF. Based on research conducted by Sustainable Research and Analysis, JPMorgan offers two actively managed sustainable municipal ETFs. These funds consider certain environmental, social and governance factors that could have a material negative or positive impact on the risk profiles of certain securities in which the fund may invest.

Bottom Line: Investors gained five thematic funds with a key focus on the environment and decarbonization, but other more seasoned lower cost options are available. Summary and observations Seven new sustainable investment funds¹, including five actively managed ETFs and two mutual funds were launched in August and at least 29 new sustainable ETFs as well as mutual funds were registered with the SEC during the same month. Investors gained five thematic funds with a key focus on the environment and decarbonization. The other two newly launched funds employ an ESG integration approach to investing that emphasizes minimum ESG thresholds. Refer to Table 1. The new funds are small in size, averaging $3.7 million in net assets and ranging from $0 to $10.2 million for the Hartford Schroders ESG US Equity ETF that likely includes at this stage some of the sponsor’s seed money. Further, the funds, with one exception, are offered to investors at higher than mean level expense ratios². The one exception is the Hartford Schroders ESG US Equity ETF that charges 39 bps. Given that other more seasoned lower cost options are available, for now, investors are directed to consider alternative currently available investment opportunities. Sustainable funds added $14.3 billion in net assets On a combined basis, sustainable funds, a total of 1,067 mutual funds and ETFs according to Morningstar, added $14.3 billion in net assets during the month, to end August with $348.4 billion in assets. Of the sum added in August, $8.2 billion is sourced to mutual funds that ended the month with $236.3 billion. The remainder, or $6.1 billion, is attributable to sustainable ETFs that closed the month at $112.1 billion, or 32.2% of the total. Almost two-thirds of the net assets gain by ETFs in August was achieved by five funds that gained $3.8 billion. The top five mutual funds accounted for a combined net assets gain in the amount of $2.9 billion, or 35% of the net increase achieved by mutual funds. At the same time, the largest five withdrawals from mutual funds reached $120.3 million. Refer to Table 2. On the other hand, the uptake in ETF assets was more concentrated as almost two-thirds of the gain in August was achieved by five ETFs that attracted a net total of $3.8 billion. The five largest drawdowns deducted $549.8 million. Refer to Table 3. Sustainable mutual funds and ETFs across all asset classes posted an average total return gain of 1.9% Sustainable mutual funds and ETFs across all asset classes, a universe of 1,069 funds, gained an average 1.9% with results ranging from a high of 22.52% recorded by the newly launched $10.2 million Viridi Clean Energy Crypto-Mining and Semiconductor ETF to a low of -4.24% posted by Krane UBS China A Shares Fund I. Mutual funds posted an average gain of 1.93% while ETFs scored a slightly higher average gain of 2.22%. 29 registrations filed with the SEC in August As noted above, more funds are slated for launch in the coming months, based on SEC registrations during the month of August alone. Of 29 registrations, 15 involved new ETF launches, including funds to be offered by BlackRock, Federated Hermes, Invesco, and JP Morgan and State Street Global, to mention just a few. In addition, 14 new sustainable mutual funds were also registered with the SEC, to be launched by firms such as BlackRock, Columbia, Eaton Vance, Goldman Sachs and RBC. Table 1: Newly launched sustainable investment funds and their sustainable investing approaches Fund Name/Manager Mutual fund/ETF AUM($ MM) Expense Ratio (bps) Sustainable Investing Apporach BlackRock Future Climate and Sustainable Economy ETFBFA ETF-Active 5.1 70 Thematic fund, focusing on low carbon economy.  Fund combines ESG integration, exclusions and engagement practices. Hartford Schroders ESG US Equity ETFHartford Funds Management Company, LLC sub-advised by Schroder Investment Management North America and Schroder Investment Management North America Limited ETF-Active 10.2 39 ESG integration anchored by minimum ESG thresholds, combined with exclusions. Nuveen Winslow Large-Cap Growth ESG ETFNuveen Fund Advisors, LLC, sub advised by Winslow Capital Management, LLC ETF-Active^ 5.2 64 ESG integration with ESG scores that must meet minimum ESG standards combined with engagement in some cases as well as exclusions. Ninety One Global Environment INinety One North America, Inc. MF-Active 0 90 Thematic with a focus on companies that contribute to positively to environmental change. Regnan Global Equity Impact JOHCM (USA) Inc. (the “Adviser”). MF-Active 2 89 Thematic with a focus on companies that have the potential to contribute to the world’s major social and environmental challenges. Spear Alpha ETFSpear Advisors LLC ETF-Active 2.1 75 Thematic with a focus on companies poised to benefit from breakthrough innovation in industrial technologies, including a focus on companies with an environmental focus and decarbonization.  ESG is factored into decision making. Virtus Duff & Phelps Clean Energy ETFVirtus ETF Advisers LLC, sub-advised by Duff & Phelps Investment Management Co. ETF-Active 1.3 59 Thematic with a focus on clean energy. Notes of Explanation: ^ ETF will publish on their website each day a proxy portfolio rather than the actual portfolio. Sources: Morningstar Direct for AUM and expense ratios; Sustainable Research and Analysis for sustainable investing practices. Table 2: EFT and Mutual Funds: August 2021 top five funds experiencing greatest net additions ETF Name AUM ($) Net Additions Mutual Fund Name AUM ($) Net Additions iShares ESG Aware MSCI USA ETF 22,884,931,085 2,183,429,719 Parnassus Core Equity 31,013,702,773 1,253,758,014 Xtrackers EM CarbReduc & ClimtImprvs ETF 496,269,344 486,356,854 Vanguard FTSE Social Index 15,202,986,173 727,621,524 iShares MSCI USA ESG Select ETF 3,966,684,051 415,810,328 Brown Advisory Sustainable Growth 6,533,818,476 455,261,168 Vanguard ESG US Stock ETF 5,248,813,500 359,336,217 DFA US Sustainability Core 1 5,412,846,745 230,214,190 iShares ESG Aware MSCI EAFE ETF 6,662,682,037 350,103,758 Parnassus Endeavor 5,252,344,844 206,791,142 Totals 3,795,036,876 2,873,646,038 Notes of Explanation: Mutual fund AUM combines all share classes as is the case for fund additions and withdrawals. Source: Morningstar Direct Table 3: EFT and Mutual Funds: August 2021 top five fund with the greatest net withdrawals AUM ($) Net Withdrawals Mutual Fund Name AUM ($) Net Withdrawals ALPS Clean Energy ETF 941,051,611 (20,657,766) Appleseed Investor 108,508,808 (6,426,258) Invesco Wilder Hill Clean Energy ETF 1,878,440,759 (36,876,104) JPMorgan Small Cap Sustainable Ldrs 333,761,503 (7,671,475) Invesco Solar ETF 3,211,858,112 (138,650,094) Eventide Limited-Term Bond 176,012,691 (12,859,681) iShares ESG Aware MSCI EM ETF 7,107,035,970 (149,616,375) AMG GW&K ESG Bond 893,019,337 (29,906,850) WisdomTree Emerging Mkts ex-State-Owned Enterprises ETF 4,573,289,602 (203,969,499) UBS International Sustainable Equity 373,255,557 (63,389,531) Totals 549,769,838 120,253,795 Notes of Explanation: Mutual fund AUM combines all share classes as is the case for fund additions and withdrawals. Source: Morningstar Direct¹ New sustainable mutual funds and ETFs based sourced to Morningstar Direct, based on Morningstar’s definitions, with new share class launches excluded. Fund registrations sourced to EDGAR filings as compiled by Sustainable Research and Analysis based on the following sustainable investing definition: While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic investing, impact investing and ESG integration, in turn, classified into ESG Integration, ESG Integration-Consideration and ESG Integration-Mixed, referring to a core strategy consisting of ESG integration, but exclusions, impact or thematic approaches may also be employed. Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive. ² Expense ratio data analyzed separately for sustainable ETFs and mutual funds in existence at the end of August, a total of 1,069 funds. Active and passively managed funds have been combined for purposes of this analysis.

The Bottom Line: DWS is under investigation by various regulatory bodies regarding its ESG investing practices but investors in various ESG funds should exercise restraint. DWS Group is under investigation by the Securities and Exchange Commission (SEC), federal prosecutors and BaFin regarding its ESG investing practices but investors in various ESG funds should exercise restraint Based on reporting in the Wall Street Journal on August 25th, Deutsche Bank AG’s asset-management arm, DWS Group, is under investigation by the Securities and Exchange Commission (SEC) and federal prosecutors over representations the firm made regarding the use of sustainable investing criteria to manage its assets. The probes, now expanded to include the Federal Financial Supervisory Authority (BaFin) of Germany that supervises banks and financial services providers, are in response to claims made by a discharged former head of sustainability at DWS that the firm misrepresented its ESG credentials to clients. The regulatory bodies will not comment on their investigations at this time. In response, however, DWS Group issued a statement that while it does not comment on questions relating to litigation or regulatory matters, the asset manager stands by its annual report disclosures regarding its ESG activities, it firmly rejects the allegations being made by the former employee and it also reiterates DWS’s long tradition of sustainable and responsible investing going back well over 20 years. This isn’t the first time that Deutsche Bank has been the subject of scrutiny by various regulatory bodies. Since the financial crisis alone, the bank has been involved in a series of investigations, probes and settlements resulting in substantial payments of penalties and fines. With about 25% of assets under management sourced to various investment product offerings in the Americas and at least $36 billion in various sustainable mutual funds and ETFs¹, a question that DWS fund investors are likely to be asking is what actions, if any, should be taken at this time, particularly if they are invested in ESG investment products. While their product risk exposures vary by product type, regardless of their investments, our view is that investors should exercise restraint, monitor further developments and wait for more definitive information either prior to or at the conclusion of the investigations. In the meantime, they should refrain for expanding their investments in these product offerings until the investigations have been completed. Ranked among the top 30 firms, publicly listed DWS Group is one of the world’s leading asset managers DWS Group is a publicly listed asset manager trading on the Frankfurt Stock Exchange that is still largely owned by Deutsche Bank (79.49%). In addition, Nippon Life Insurance Corp. owns 5.0% and the rest, or 15.51%, is in the form of public float. DWS is one of the world’s leading asset management firms, ranking in the top 30 firms as of 2020. It employs about 3,500 employees worldwide and oversees $962.5 billion of assets under management (as of March 31, 2021) of which 44% is sourced to retail investors and 56% to institutional investors. About 25% of the firm’s assets are domiciled in the Americas, including conventional and sustainable mutual funds and ETFs². Deutsche Bank has been involved in a series of controversies that have led to expensive settlements and the payment of hefty fines since the financial crisis of 2007-2009 alone The regulatory probe is not a first for Deutsche Bank. The bank has been involved in a series of controversies that have led to expensive settlements and the payment of hefty fines since the financial crisis of 2007-2009 alone. While not a complete list, these include cases involving misleading information about the risks associated with auction rate securities, fraudulent tax-shelters, LIBOR manipulation, foreign-exchange and money laundering violations, and poor risk management practices. It should be noted that none of these activities involved the asset management arm of the bank and investors may also take some comfort in the knowledge that at least one ESG rating firm, namely MSCI, maintains an ESG rating of single A on Deutsche Bank. According to MSCI, this third from the top rating reflects a company with a mixed or unexceptional track record of managing the most significant ESG risks and opportunities relative to industry peers--58 companies in the investment banking & brokerage industry. In the end, investors may have varying views on how to factor the past reputation of Deutsche Bank into their decisions either as to investing in or avoiding investment products offered by its investment management arm. In the US, DWS offers a variety of sustainable equity, fixed income and money market mutual funds as well as ETFs that fall into sustainable investing categories stratified into three levels of ESG qualification and analysis In the US, DWS offers a variety of sustainable equity, fixed income and money market mutual funds and ETFs that fall into sustainable investing categories stratified into three levels of ESG qualification and analysis, as detailed in Table 1. Each category potentially exposes investors to varying levels of product risk. Index-tracking funds DWS, through its subsidiary DBX Advisors LLC, offers ten Xtackers sustainable equity and fixed income index tracking ETFs with $5.3 billion in assets as of August 31st. Investors in index tracking funds should be the least concerned about possible deviations from the fund’s sustainable investing undertakings. This is due to the fact that index tracking funds are bound by the sustainable investing qualification criteria adopted by the index provider, typically an independent party, that in the case of DWS Xtrackers index funds include indices created and maintained by independent parties ISS, J.P. Morgan, MSCI and S&P Global. Refer to Table 1 for an illustration of the stock selection criteria imposed by the Xtrackers MSCI USA ESG Leaders Equity ETF. Actively managed funds that explicitly integrate ESG Investors in these funds are slightly more exposed to possible deviations from the fund’s sustainable investing undertakings but less so than the third category of funds described below. Three equity-oriented mutual funds and four money market funds, consisting of 26 share classes, with $1.7 billion in net assets as of August month-end, have each explicitly adopted ESG integration criteria in investment decision making. Each fund’s sustainable investment criteria is set forth in the fund’s prospectus. While variations in the implementation of their ESG integration approach are possible, these funds are less likely to deviate from the application of their ESG integration criteria in investment decision making as they would risk violating their obligations under the terms of each fund’s prospectus. Refer to Table 1 for an illustration of the stock selection criteria imposed by the DWS ESG International Core Equity Fund. Actively managed funds that may integrate ESG DWS offers at least 26 mutual funds with $29.3 billion in net assets that fall into this category. Investors in this category of funds may be the most vulnerable to misrepresentations regarding ESG efforts due to the vague nature of the commitment to integrate ESG. Refer to Table 1 for an illustration of the ESG integration language adopted by the DWS Capital Growth Fund. What actions, if any, should be taken at this time by DWS mutual fund and ETF investors? At this point in the investigations, regardless of the fund category, our view is that investors should exercise restraint, monitor further developments and wait for more definitive information either prior to or at the conclusion of the investigations. In the meantime, they should refrain for expanding their investments in these product offerings until the investigations have been completed. Table 1: Illustration of mutual funds and ETF sustainable investing categories stratified into three levels of ESG qualification and analysis Sustainability Investing Practices Examples of funds that fall into the described category Index tracking funds that are bound by the qualification criteria adopted by the index provider.  Different index providers will apply different qualification criteria.  For example, the MSCI USA ESG Leaders Equity ETF uses MSCI ESG Ratings, MSCI ESG Controversies and MSCI Business Involvement Screening Research to determine index components.  These vary across index providers and ESG rating firms, and the following example applies to the Xtrackers MSCI USA ESG Leaders Equity ETF. - MSCI ESG Ratings, which indicates how well companies manage their ESG risks and opportunities using a even point scale, ranging from ‘AAA’ to ‘CCC.’ Existing constituents Existing constituents are required to have an MSCI ESG rating of BB or above to remain in the index, and companies that are currently not constituents of the Underlying Index (index constituents in the corresponding conventional index from which index ESG index members are selected) are also required to have an MSCI ESG rating of BB or above to be considered eligible for addition. - MSCI ESG Controversies provides assessments of controversies concerning the negative ESG impact of company operations, products and services. A controversy case is defined as an instance or ongoing situation in which company operations and/or products allegedly have a negative environmental, social, and/or governance impact. A case is typically a single event such as a spill, accident, regulatory action, or a set of closely linked events or allegations such as health and safety fines at the same facility, multiple allegations of anti-competitive behavior related to the same product line, multiple community protests at the same company location, or multiple individual lawsuits alleging the same type of discrimination. MSCI ESG Controversies score companies on a scale of 0 to 10, with 0 being the most severe controversy. Existing constituents of the Underlying Index are required to have an MSCI ESG Controversies Score of 1 or above to remain in the index, while companies that are currently not constituents of the Underlying Index are required to have an MSCI ESG Controversies Score of 3 or above to be considered eligible for addition. -MSCI ESG Business Involvement Screening Research aims to enable institutional investors to manage ESG standards and restrictions reliably and efficiently. Companies that are involved in specific business activities which have high potential for negative social and/or environmental impact, such as alcohol, gambling, tobacco, nuclear power, fossil fuel extraction, thermal coal power, conventional weapons, nuclear weapons, controversial weapons and civilian firearms, are ineligible for inclusion. Xtrackers MSCI USA ESG Leaders Equity ETF Xtrackers S&P 500 ESG ETF Xtrackers JPMorgan ESG USD HY Corp Bd ETF Actively managed funds that have explicitly adopted an ESG integration approach in combination with various exclusions. Prior to considering financial information, the security selection process evaluates an issuer based on Environmental, Social and Corporate Governance (ESG) criteria. An issuer’s performance across certain ESG criteria is summarized in a proprietary ESG rating which is calculated by DWS International GmbH, an affiliate of the investment manager, on the basis of data obtained from various ESG data providers. Primarily issuers with an ESG rating above a minimum threshold determined by the DWS are considered for investment by the fund. The proprietary ESG rating for each issuer is derived from multiple factors, including: -Level of involvement in controversial sectors and weapons; -Adherence to corporate governance principles (including, but not limited to: composition, effectiveness and independence of the board of directors; remuneration; and relations with shareholders, including shareholder voting rights); -ESG performance relative to a peer group of issuers; and-Efforts to meet the United Nations’ Sustainable Development Goals. DWS ESG International Core Equity Fund DWS ESG Global Bond Fund DWS MMPS - DWS Money Market Fund Actively managed funds that may but are not obliged to integrate ESG factors into decision making. Portfolio management may consider information about Environmental, Social and Governance (ESG) issues in its fundamental research process and when making investment decisions. DWS Capital Growth DWS Core Equity DWS Small Cap Growth Notes of Explanation: Source: Fund prospectuses; Sustainable Research and Analysis LLC¹ These include active and passively managed funds that explicitly integrate ESG as well as mutual funds that may integrate ESG.² Refer to footnote 1.

The Bottom Line: New sustainable ETFs are thematic, equity-oriented, actively and passively managed, each emphasizing direct or indirect environmental considerations, subject to higher expense ratios. Summary Five new thematic actively and passively managed equity-oriented ETFs were launched in July 2021, each one emphasizing direct or indirect environmental considerations, either entirely or partially across their portfolios. As in June, there were no sustainable fixed income ETF launches in July. While offering some distinctive investing strategies, the funds lack a track record and, in some cases, charge higher or high expenses, with expense ratios ranging from 65 bps (iClima ETFs) and up to 109 bps (Direxion). The addition of five new equity-oriented ETFs brings the total number of sustainable ETFs to 153, according to Morningstar¹. These now consist of 136 equity-oriented funds covering a wide range of investment objectives and sustainable investing approaches, with $100.9 billion in net assets and 17 fixed income-oriented ETFs with about $5.1 billion in assets. While still a small segment, fixed income ETFs have been gaining traction. Sustainable fixed income ETFs only adding about $260 million in net assts during the latest month, but these investment vehicles have recorded a gain of $1.9 billion in net assets year-to-date, or a 60% uptick Sustainable fixed income ETFs posted an average total return of 0.87% in July versus an average return of 0.16% achieved by equity-oriented funds. Observations and investor considerations Five thematic equity ETFs were listed in July, adding a total of $50.6 million in net assets. While their investment strategies vary, they all focus on the climate and the renewable energy theme that is expected to continue to lead the sustainable finance agenda, reinforced most recently by the just released Intergovernmental Panel on Climate Change (IPCC) report warning that steep greenhouse gas emissions reductions efforts are urgently needed by countries and governments if we are to limit warming to 1.5° Celsius in line with the most ambitious goals under the 2015 Paris Climate Agreement. The fundamental investment objectives of the newly launched funds range from miscellaneous equity to large cap equity to leveraged equity. Each of these ETFs pursues a thematic sustainable investing approach with a focus on climate and renewable energy. In addition, some of the funds also incorporate an exclusionary approach along with environmental, social and governance (ESG) screening. Refer to Table 1. While a total of $50.6 million in net assets were added by these new funds, one fund—Goldman Sachs Future Planet Equity ETF added $33.4 million and accounted for 66% of the total. The funds charge higher expense ratios, ranging from 65 (iClima ETFs) bps to 109 bps (Direxion) and because they are new, performance track records have not as yet been established for evaluation purposes. Investors interested in climate and renewable energy themes can choose from other available funds that are more seasoned and offered at lower expense ratios. The addition of five new equity-oriented ETFs brings the total number of ETFs to 153, according to Morningstar², with total net assets in the amount of $10.9 billion. Including new funds, equity-oriented ETFs added $2.6 billion in assets month-over-month. Still, fixed income ETFs have been gaining traction and while only adding about $260 million in net asstes during the latest month, fixed income ETFs have recorded an increase of $1.9 billion in net assets year-to-date, for a 60% gain. Fixed income ETFs posted an average total return of 0.87% in July versus an average return of 0.16% recorded by equity-oriented funds. Refer to Chart 1. Chart 1: Sustainable fixed income ETFs growth in assets: December 2018 – July 30, 2021 Table 1: Listing of ETFs launched in July 2021 and their sustainable investing strategies Fund Name Investment Adviser/Sub-adviser TNA ($M) Expense Ratio (bps) Sustainable Investing Strategy/Approach Direxion Daily Global Clean Energy Bull 2X Shares (KLNE) Rafferty Asset Management LLC 4.9 109 Thematic investing fund.  A leveraged trading vehicle that seeks to achieve 2X the performance of the S&P Global Clean Energy Index.  The index tracks the performance of companies from developed markets whose economic fortunes are tied to the global clean energy business. Goldman Sachs Future Planet Equity ETF# Goldman Sachs  Asset Management 33.4 75 Thematic investing fund. The fund intends to invest in companies that Goldman Sachs believes are aligned with the key themes associated with seeking to address environmental problems, which include, but are not limited to, clean energy, resource efficiency, sustainable consumption, the circular economy and water sustainability.  Goldman may determine that an issuer is aligned with one or more of the key themes, even when the issuer’s profile reflects negative, or a mixture of positive and negative, environmental, social and governance characteristics. Goldman Sachs employs a fundamental investment process that may integrate ESG factors with traditional fundamental factors. No one factor or consideration is determinative in the stock selection process. iClima Distributed Renewable Energy Transition Leaders ETF (SHFT) Toroso Investments, LLC 1.0 65 Thematic investing fund.  Seeks to track the performance of the Solactive GBS Global Markets All Cap USD Index TR that consists of large-, mid-, and small-capitalization segment in developed and emerging markets providing products and services that enable the practice of distributed energy generation which is decentralizing electrical supply services in favor of small, consumer specific sources of power at or near where it will be used (e.g., solar PV rooftop, microturbines, wind turbines, solar cells, etc.) in the following segments:  Distributed power sources, distributed energy storage, vehicle-to-grid and electric vehicle charging, virtual power plants, microgrid and smart grids, and software and systems for distributed energy sources.  The fund also employs exclusionary criteria and applies additional ESG screening.  Refer to Notes of Explanation. iClima Global Decarbonization Transition Leaders ETF (CLMA) Toroso Investments, LLC 2.1 65 Thematic investing fund.  Starting with the same Solactive GBS Global Markets All Cap USD Index TR universe of stocks, companies are selected based on metrics that quantify a company’s contribution to avoidance of carbon dioxide equivalents by offering climate change mitigation solutions (through products and/or services) that enable a function to be performed with lower carbon emissions. Companies in the index generate revenues in line with the most relevant existing climate change mitigation solutions that enable significant CO2 equivalents reductions through CO2 equivalents avoidance, improving energy efficiency and/or contributing to carbon sequestration (i.e., capturing and storing carbon dioxide). Companies from the following segments are selected:  green energy, green transportation, water and waste improvements, enabling solutions, and sustainable products.  The fund also employs exclusionary criteria and applies additional ESG screening.  Refer to Notes of Explanation. Viridi Cleaner Energy Crypto-Mining & Semiconductor ETF#(RIGZ) Investment Adviser:  Empowered Funds, LLC Investment Sub-Adviser: New Gen Minting, LLC dba Viridi Funds 3.8 90 The fund invests in (1) “clean energy” crypto mining industries, and (2) semiconductor industries.  In this connection, the fund will not itself invest directly in cryptocurrencies but rather the fund invests in equity securities of companies that are market participants creating cryptocurrency themselves, or, so called miners. Using a proprietary methodology, the fund’s investments in miners will be evaluated and ranked by New Gen Minting on the basis of each miner’s energy profile with regard to certain clean energy criteria intended to reduce the negative environmental impacts of mining and promote environmental sustainability. In addition, the fund invests in the equity securities of companies in the semiconductor industries, focusing on those that develop or manufacture computer chips used in crypto-mining industries. Semiconductor companies will not be subject to the clean energy screening applicable to the mining companies. Notes of Explanation: # actively managed ETF. Sources: TNA and expense ratios: Morningstar Direct, Sustainable investing strategies: Fund prospectus and Sustainable Research and Analysis LLC. For further information regarding fund sustainable investing strategies, refer to fund prospectuses. Additional information regarding the sustainable investing approaches adopted by both iClima Distributed Renewable Energy Transition Leaders ETF and iClima Global Decarbonization Transition Leaders ETF/per their prospectus: Index components that generate revenue from certain activities are negatively screened and excluded from the list of companies eligible for inclusion in the index. Examples of such activities include: Oil exploration and production, companies in the microgrid and smart grids or software and systems segments with revenues from non-conventional weapons producers (e.g., nuclear weapons or systems, chemical or biological weapons, landmine, cluster bombs, or depleted uranium weapons). Concessions may be made to companies in the microgrid and smart grids or software and systems segment with revenues of less than 10% to conventional armament producers, energy producers that receive over 20% of their revenue from nuclear energy, power generators that are predominantly renewable energy players that receive 50% or more of their revenues from natural gas or more than 1% of their revenues from coal-fired power plants, and automotive makers that receive over 40% of their revenue from sales of automobiles with internal combustion engines. Companies are then subject to a final screening for inclusion in the index based on several additional indicators that provide additional evidence of relevant sustainability and environmental, social and governance aspects of their operations, namely climate and other environmental-related aspects, as well as social and employee aspects, including respect for human rights, anti-bribery and anti-corruption. These additional indicators are used to identify companies with practices that are in line with higher sustainability objectives and companies that are lagging in specific parameters. Additional exclusionary indicators are then applied, and companies determined to engage in activities involving forced and compulsory labor and/or child labor (as defined by the United Nations Global Compact, a corporate sustainability initiative) are excluded from the list of companies eligible for inclusion in the index.¹ In its classification of sustainable funds, Morningstar excludes ETFs and mutual funds managed by firms like JPMorgan, MFS, Eaton Vance and T. Rowe Price, to name some, that integrate ESG. These funds are also excluded from this analysis.² Refer to footnote 1.

The Bottom Line: Green bond fund assets bounced back in July, adding $40.9 million in net assets as funds posted an average gain of 0.98%. Summary Gains in green bond fund assets bounced back to average 2021 levels, adding $40.9 million in net assets, or a month-over-month increase of 3% to end the month of July 2021 at $1,365.6 million. The year-to-date increase in net assets realized by the seven funds operating in this segment, including five mutual funds and two ETFs, for a total of 22 funds/share classes, stood at $281.8 million. Against a backdrop of declining US 10-year Treasury yields, the Bloomberg Barclays US Aggregate Bond Index added 1.12% while green bond funds posted an average gain of 0.98% or a 14 basis points (bps) negative differential. Over the trailing twelve months, however, green bonds recorded an average gain of 2.07% and trounce the conventional Bloomberg Barclays US Aggregate Bond Index by 214 basis points. Advances in fund net assets in July were not matched by green bonds issuance. $22.5 billion in green bonds came to market in July, bringing revised year-to-date totals to $251.5 billion or 211% higher relative to the same time interval last year. But month-over-month volume declined by 58%. Green bond funds net assets added $40.9 million to end July at almost $1.4 billion  The seven green bond funds that make up the thematic segment gained $40.9 million in assets to close the month of July at $1,365.6 million, or an increase of 3%. The July uptick stood in contrast to the previous month’s zero increase in net assets. Refer to Chart 1. Year-to-date gains in assets by the seven funds operating in this segment, including five mutual funds and two ETFs, for a total of 22 funds/share classes, stood at $281.8 million. About 93% of the July gain was attributable to just two funds. The Calvert Green Bond Fund alone added $31.6 million, including $27.4 million attracted to its institutional class I shares. The second fund, the iShares Global Green Bond Fund (BGRN), added $6.5 million to close the month at $219.7 million. BGRN is now the 6th largest fixed income ETF, accounting for 4.3% of fixed income ETF assets as of July 31st. Chart 1: Green bond funds and assets under management-August 2020 – July 31, 2021 Notes of Explanation: Fund total net assets data source: Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC July performance results Green bond funds posted an average gain of 0.98% in July, behind the 1.12% total return recorded by the Bloomberg Barclays US Aggregate Bond Index and 1.73% delivered by the ICE BofAML Green Bond Index Hedged US. Excluding the Franklin Municipal Green Bond Fund, a fund that invests in municipal green bonds that posted lower returns in July, the average performance of the six remaining investment companies was a slightly higher 1.01%. Refer to Table 1. The $219.7 million iShares Global Green Bond ETF was the best performer in July, posting a 1.74% gain and exceeding by 62 bps the next best performing Calvert Green Bond Fund I with its 1.12% return. Not in operation long enough to report a 3-year return history, iShares Global Green Bond ETF is up 1.12% over the trailing twelve months. It ranks second from the bottom across all 22 funds/share classes over the previous 12-month interval but managed to outperform the only other green bond ETF, the VanEck Vectors Green Bond Fund. Unlike BGRN, however, the fund restricts its green bond investments to US denominated instruments. Still, offered at an attractive expense ratio of 20 bps, reinforced by the fund’s management, size and global mandate, BGRN remains a strong candidate for consideration in a sustainable portfolio. While green bond funds were challenged in July to outperform, their track record over the trailing 12-months is much stronger. Green bond funds recorded an average gain of 2.07%, boosted by the performance achieved by the Franklin Municipal Green Bond Fund. Regardless, green bond funds beat both the Bloomberg Barclays US Aggregate Bond Index ICE BofAML Green Bond Index Hedged US. The three green bond funds that have been in operation for a full three-year period recorded an average gain of 5.27%. Funds with a non-US denominated only mandate outperformed the Bloomberg Barclays US Aggregate Bond Index but not the ICE BofAML Green Bond Index Hedged US. Green bonds volume drops in July but year-to-date issuance is strong $22.5 billion in green bonds were issued in July, bringing revised year-to-date totals to $251.5 billion or 211% higher relative to the same time interval last year. At the same time, month-over-month volume declined by 58%. Refer to Chart 2. Based on the year-to-date trajectory alone, green bonds volume should exceed last year’s $269.5 million issuance by a significant margin. That said, green bonds will likely get a strong boost from the just released United Nations Intergovernmental Panel on Climate Change report. According to the report which sounds the alarm about the possibility of irreversible changes to the climate, the earth’s surface warming is projected to reach 1.5C or 1.6C in the next two decades, based on updated data, due to human influence that is driving extreme weather events and leaves an increasingly narrow pathway to stabilizing temperatures at 1.5C above pre-industrial levels by the end of the century according the most ambitious goal of the Paris Climate Agreement. Still, the level of capital needed to address the transition to stabilizing temperatures are not likely to be secured through the issuance of green bonds alone. Chart 2: Green bonds issuance worldwide-August 2020 – July 31, 2021 Source: Climate Bond Initiative (CBI) Table 1: Green bond funds: Assets and performance results through July 31, 2021 Fund Name AUM ($M) 1-Month Return (%) 3-Month Return (%) 12-Month Return (%) 3-Year Average Return (%) 5-Year Average Return (%) Calvert Green Bond A 89 1.1 1.76 1.16 5.39 3.15 Calvert Green Bond I 824.3 1.12 1.82 1.36 5.65 3.46 Calvert Green Bond R6 9 1.12 1.83 1.41 Franklin Municipal Green Bond A 1 0.83 1.61 2.45 Franklin Municipal Green Bond Adv 7.6 0.85 1.63 2.56 Franklin Municipal Green Bond C 0.3 0.81 1.59 2.42 Franklin Municipal Green Bond R6 0 0.87 1.66 2.51 iShares Global Green Bond ETF 219.7 1.74 2.3 1.12 Mirova Global Green Bond A 6.9 0.95 1.2 1.63 5.39 Mirova Global Green Bond N 8.8 1.05 1.36 2 5.7 Mirova Global Green Bond Y 27.8 0.95 1.25 1.86 5.66 PIMCO Climate Bond A 0.7 0.88 1.63 2.96 PIMCO Climate Bond C 0.1 0.81 1.44 2.17 PIMCO Climate Bond I-2 2 0.9 1.71 3.27 PIMCO Climate Bond I-3 0.1 0.9 1.7 3.21 PIMCO Climate Bond Institutional 17.1 0.91 1.73 3.36 TIAA-CREF Green Bond Advisor 2.2 1.02 2.26 1.95 TIAA-CREF Green Bond Institutional 29.5 1.02 2.27 1.96 TIAA-CREF Green Bond Premier 1.1 1.01 2.23 1.86 TIAA-CREF Green Bond Retail 6.9 0.9 2.2 1.68 TIAA-CREF Green Bond Retirement 15.1 1.01 2.23 1.86 VanEck Vectors Green Bond ETF 96.4 0.81 1.88 0.71 3.84 Total/Averages 1,365.6 21.56 39.29 45.47 31.63 6.61 Bloomberg Barclays US Aggregate Bond 0.98 1.79 2.07 5.27 3.31 Bloomberg Barclays Municipal Bond Index 1.12 2.16 -0.7 5.73 3.13 ICE BofAML Green Bond Index Hedged US 1.73 2.38 1.6 5.87 3.93 Notes of Explanation: Blank cells=NA. Fund total net assets and performance data source: Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line: The funds lack an established track record, are generally offered at higher expense ratios and their sustainable investing strategies¹ are not unique. Investor considerations Newly launched in June 2021, the six new EFTs are still small in size, they lack an established track record and, with the exception of two ETFs, their expense ratios exceed the lowest quartile. When combined with the fact that these funds don’t offer sufficiently unique or differentiated fundamental or sustainable investing strategies relative to currently available offerings, investors, at this time, would be better guided to seek out more attractive alternatives from the existing universe of sustainable ETFs or mutual funds. Observations Six new sustainable ETFs were launched in the month of June 2021, the largest number of sustainable ETF launches in one month so far this year. 14 ETFs in total were launched in Q2 and eight were introduced in Q1. Five of these are actively managed ETFs while five of the six funds are equity-oriented; in total, the six funds came to market with $32.8 million in net assets. Of the five actively managed funds three ETFs are non-transparent, that is, they publish a daily "tracking basket" of securities held rather than their entire portfolio of securities holdings. (Designated by the # symbol in Table 1). The six ETFs levy an average expense ratio of 59 bps, ranging 39 bps to 99 bps; the first quartile cut-off is at 39 bps, representing the upward limit of the lowest fee ETFs across the six new offerings in June. This is higher than the first quartile cut-off of 20 bps across the entire universe of sustainable ETFs—146 funds in total. Sustainable investing strategies offered by these funds have adopted ESG integration or thematic investing approaches. The latter don’t qualify securities on the basis of an ESG evaluation. The sustainable investing approaches are described in Table 1. Table 1: Listing of ETFs launched in June 2021 and their sustainable investing strategies Fund Name Investment Adviser/Sub-adviser TNA ($M) Expense Ratio (bps) Sustainable Investing Strategy/Approach American Century Sustainable Growth ETF# (actively managed) American Century Investment Management, Inc. 5.2 39 ESG integration.  Quantitative analysis of ESG factors to arrive at sector specific ESG scores.  Holdings include securities that fall within the top three quartiles relative to the Russell 1000 Growth Index. Amplify Cleaner Living ETF Amplify Investments LLC, investment adviser Penserra Capital Management LLC, subadvisor 1.3 59 Thematic.  An index fund that seeks to replicate the performance of the Tematica BITA Cleaner Living Index, an index designed to measure the market performance of a basket of publicly listed companies that are identified as creating products or providing services that have the potential for a positive impact on the human body and/or the environment.  Securities not subject to ESG evaluations. Asian Growth Cubs ETF (actively managed) Exchange Traded Concepts, LLC,  investment adviser and Kingsway Capital Partners Limited, subadvisor 2.3 99 ESG Integration, including the exclusion from the portfolio of certain industries and sub-industries relating to defense, fossil fuels, gambling, mining, and tobacco due to ESG considerations. Fidelity® Sustainability U.S. Equity ETF# (actively managed) FMR 2 59 ESG Integration.  Process relies on FMR’s proprietary ESG ratings process to evaluate the current state of a company’s sustainability practices using a data-driven framework that includes both proprietary and third party data, and also provide a qualitative forward looking assessment of a company’s sustainability outlook. Fidelity® Women's Leadership ETF# (actively managed) FMR 2 59 Thematic, but securities are not subject to ESG evaluations. IQ Mackay ESG Core Plus Bond ETF (actively managed) IndexIQ Advisors LLC, investment advisor and MacKay Shields LLC, subadvisor 20 39 ESG Integration.  A systematic ESG evaluation approach that scores companies on the basis of three tiers relative to other issuers within the peer group:  Outperforming, average and underperforming.  Only issuers that fall into the top two tier + companies with improving ESG trends.  Also, the fund excludes certain issuers and it also explicitly practices issuer engagements, described below. Notes of Explanation: # non-transparent ETFs. Sources: TNA and expense ratios: Morningstar Direct, Sustainable investing strategies: Fund prospectus and Sustainable Research and Analysis IQ Mackay ESG Core Plus Bond ETF (Cont.).  The fund will also not invest in securities of corporate issuers that derive greater than 5% of their revenue from the production, distribution, and services of coal, manufacturing of military equipment, alcoholic beverages, and tobacco products, operation of gambling casinos, and the production or trade of pornographic materials. The fund will also not invest in the securities of corporate issuers determined to not meet human rights, labor standards, environmental, and anti-corruption screening criteria. The subadvisor is also involved in engagement activities focused on understanding an issuer’s sustainability goals and business practices as well as other industry participants engaged in ESG and sustainability initiatives. Engagement is intended to better align mutual interests while impacting change. ¹ Note of Explanation: While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic investing, impact investing and ESG integration, in turn, classified into ESG Integration, ESG Integration-Consideration and ESG Integration-Mixed, referring to a core strategy consisting of ESG integration, but exclusions, impact or thematic approaches may also be employed. Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive. As defined for purposes of this article, thematic investing refers to an approach that align a fund’s investments with a predetermined ESG investment theme according to established criteria. For example, the Fidelity Women's Leadership ETF normally invests in equity securities of companies that prioritize and advance women’s leadership and development. Such companies include those that, at the time of initial purchase, (i) include a woman as a member of the senior management team, (ii) are governed by a board for which women represent at least one third of all directors, or (iii) in the FMR’s opinion, have adopted policies designed to attract, retain and promote women. At the same time, broader ESG factors are not explicitly taken into consideration in stock selection.

The Bottom Line: Net assets of green bond funds were flat in June, but registered an average gain of 50 bps, falling behind market indices.Summary Green bond funds were flat in terms of assets under management on a net basis in June, just falling short of offsetting an average 50 bps increase in total return performance. Green bond funds ended the month as they had begun, with a combined total of $1,324.7 billion in net assets. This compared to a gain of $35.9 million in May and a year-to-date increase of $240.9 million. With its 50 increase in August, the seven green bonds funds came in behind the performance of the investment-grade intermediate Bloomberg Barclays US Aggregate Bond Index and the ICE BofAML Green Bond Index Hedged US by 11 and 20 bps, respectively. Unlike green bond funds that remained flat in June, green bonds issuance volume gained traction, posting $40.82 billion in new bonds and closing the first six months of the year at 75% of last year’s entire green bond issuance. Net Assets Commentary Green bond funds, unchanged at seven funds in total comprised of 22 funds and share classes, ended June at $1,324.7 and remained flat relative to May on a net asset value basis. The segment experienced modest cash outflows, estimated at $6.9 million. This was the lowest month-over-month change in net assets since the segment gave up $39.9 million in March 2020. The Calvert Green Bond Fund gave up a net of $11.7 million, attributable to net withdrawals by institutional investors in the amount of $13.6. VanEck Vectors Green Bond ETF gained a net of $7.3 million, bringing the fund’s total to $95.8 million; iShares Global Green Bond ETF added a net of $1.2 million. Chart 1: Green bond funds and assets under management-July 31, 2020 – June 30, 2021 Notes of Explanation: Fund total net assets data source: Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLCPerformance Commentary Green bond funds posted an average gain of 50 bps in June, lagging behind an increase of 61 bps registered by the ICE BofAML Green Bond Index Hedged US, 70 bps recorded by the Bloomberg Barclays US Aggregate Bond Index. That said, the average results achieved by the green bond funds over the trailing twelve months eclipsed both conventional benchmarks while the three year average performance results, applicable to just three funds, including the oldest and largest Calvert Green Bond Fund, are mixed. In June, performance results ranged from a low of 0.30% scored by the Franklin Municipal Green Bond Fund and each of its three share classes to a high of 0.73% delivered by the TIAA-CREF Green Bond Fund Advisor and Institutional shares. The fund, which has been in operation since November 2018 and has now reached $53.8 million in net assets, offers a satisfying combination of performance results, albeit over a still shorter time interval, green bond management credentials and disclosure of outcomes. At the same time, the expense ratio for retail investors is above the 65 bps median for the seven funds segment. The only fund to invest entirely in green municipal securities, the Franklin Municipal Green Bond Fund bested the Bloomberg Barclays Municipal Bond Index that was up 27 bps in June. Green bonds volume After reaching three-month peak in March of this year during which $49.6 billion in green bonds were issued, volumes ticked lower in April. Since then, issuance gained traction, rising to $31.9 billion in May and $40.8 billion in June. In the second quarter, volume reached $96.7 billion, slightly lower that the first quarter’s $104.9 billion. But cumulatively in the first six months, green bonds reached $201.6 million, or 75% of last year’s entire green bond issuance. In part, higher volumes are due to stepped up issuances in China. According to China Daily, in the first five months of this year, 150 green bonds worth 192.5 billion yuan ($29.8 billion) were issued in China's bond market, up by 56.25% and 82.72% year-over-year. Chart 2: Green bonds issuance worldwide-July 2020 – June 30, 2021 Source: Climate Bond Initiative (CBI) Table 1: Green bond funds: Assets and performance results through June 30, 2021 Fund NameTNA ($)Expense Ratio (%)1-Month Return12-Month Return3-Year Average5-Year AverageCalvert Green Bond A850.730.472.1253.1Calvert Green Bond I796.90.480.492.385.283.43Calvert Green Bond R68.80.430.52.43Franklin Municipal Green Bond A10.710.38Franklin Municipal Green Bond Adv6.60.460.383.71Franklin Municipal Green Bond C0.31.110.38Franklin Municipal Green Bond R600.460.3iShares Global Green Bond ETF213.20.20.570.86Mirova Global Green Bond A6.70.980.532.675.05Mirova Global Green Bond N9.70.680.53.045.37Mirova Global Green Bond Y26.20.730.4935.32PIMCO Climate Bond A0.70.90.383.43PIMCO Climate Bond C0.11.650.322.66PIMCO Climate Bond I-21.90.60.413.74PIMCO Climate Bond I-30.10.650.43.69PIMCO Climate Bond Institutional17.90.50.413.84TIAA-CREF Green Bond Advisor1.80.550.733.01TIAA-CREF Green Bond Institutional29.10.450.733.02TIAA-CREF Green Bond Premier1.10.60.722.92TIAA-CREF Green Bond Retail6.90.80.712.83TIAA-CREF Green Bond Retirement14.90.70.632.92VanEck Vectors Green Bond ETF95.80.20.651.713.64Total/Averages1324.70.660.502.844.94ICE BofAML Green Bond Index Hedged US 0.611.385.323.77Bloomberg Barclays US Aggregate Bond Index0.7-0.333.343.03Bloomberg Barclays Municipal Bond Index0.214.175.113.25Notes of Explanation: Blank cells=NA. 3-Yr performance data is average annual. Fund total net assets and performance data source: Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC

The Bottom Line: Six thematic funds focusing on gender equality are in operation, offering investors three ETFs and three mutual funds managed by five firms.Investing caseLast week world leaders, including political leaders, executives and other stakeholders, gathered in Paris to attend the Generation Equality Forum convened by U.N. Women—an organization formed by the UN in 2010 to work for the elimination of discrimination against women and girls, empowerment of women, and achievement of equality between women and men as partners and beneficiaries of development, human rights, humanitarian action and peace and security. Together, this group, which has not gathered together since the 1995 Beijing World Conference on Women, unveiled a total commitment of $40 billion to advance gender equality. This is reportedly the largest dollar amount ever dedicated to the issue. The funding will go toward instituting hundreds of new gender-focused policy proposals on issues including gender-based violence, which spiked globally during the coronavirus pandemic, economic empowerment and access to reproductive health services. The $40 billion was pledged by various stakeholders, including a $2.1 billion commitment by the Bill and Melinda Gates Foundation to be spent over the next five years on health and family planning programs, economic empowerment projects and other initiatives. This largest-ever single commitment was among other pledges that came from foundations, including the Ford Foundation and the George Soros-funded Open Society Foundation and PayPal that each pledged more than $100 million. Not everyone is in a position to make such pledges, however, investors with a preference for advancing gender equality can take another tact, by allocating a percentage of their portfolio assets in mutual funds or ETFs that invest in securities of issuers that demonstrate a commitment to advancing and empowering women through gender diversity on their boards, in management and through other policies and programs. In a similar fashion, these investment vehicles represent an option for sustainable investors wishing to align their investments with the UN Sustainable Development Goals (SDGs) and in particular SDG Number 5 that seeks to achieve gender equality and empower all women and girls. At least six thematic funds, with total net assets of $1.3 billion as of May 31, 2021 are available for consideration by investors. Refer to Table 1. These funds include three ETFs and three mutual funds managed by Fidelity Management and Research Company, Glenmede Investment Management, Impact Shares Corp., Impax Asset Management and State Street Global Advisors. Three of these are passively managed while three of the six invest in US as well as non-U.S. securities. While individual strategies vary, the funds tend to concentrate in similar sectors, the largest of which are technology, financial services and consumer services or healthcare. The top pick SPDR SSGA Gender Diversity ETF, for example, allocates 53% of portfolio assets to the following three sectors: 21.7% to financial services companies, 17.9% to technology companies and 13.3% to companies in the health care sector. Top securities holdings include PayPal Holdings, Inc., Texas Instruments, Inc., Visa, Inc., The Walt Disney Company and Johnson and Johnson, Inc. Performance results over the twelve months ended May 2021 were generally strong, averaging 44.5% versus 40.3% recorded by the S&P 500 and 41.85% achieved by the MSCI ACWI Index (Net), with only one fund (two share classes) lagging their broad designated benchmarks. Refer to Table 2 and Chart 1. At the same time, intermediate to-long-term performance results, while limited as only three of six funds that have been in operation for 3 years or more, lack distinction as they fall just short of their benchmarks.Summary analysis Five investment management firms managing six funds are available to investors, including three ETFs and three mutual funds offered in the form of one-to-multiple share classes; three of these are passively managed. The latest edition to this small universe of funds includes the Fidelity Women’s Leadership ETF¹ that was launched on June 17th of this year. Three of the six funds focus on the stocks of US listed companies while the other three funds cast a broader net that extends to foreign firms. These include Pax Ellevate Global Women’s Leadership Fund, the oldest of the six funds in operation since October 1993, Fidelity Advisor Women’s Leadership Fund and the recently launched Fidelity Women’s Leadership ETF. As of May 31, 2021, exposure to non-US companies stood at 31.7% and 11.7%, respectively². Fund expense ratios are high for some of the fund offerings, which can detract from performance results. Expense ratios range from a low of 0.2% to a high of 2%, with the median expense ratio landing at 0.85%. The performance track record of the five funds in the segment is limited, with only two funds in operation beyond a full 12-month period. Four of the five funds posted strong near-term results, beating their respective benchmark, either the S&P 500 or the MSCI ACWI Index (net) over the 12-month period to May 2021. Pax Ellevate Global Women’s Leadership funds was the exception, trailing the MSCI ACWI Index (net) not only over the last year but also over the trailing 3 and 5-year intervals. Top picks SPDR SSGA Gender Diversity ETF (SHE), managed by State Street Global Advisors, is the second largest fund in the small category. It seeks to replicate the performance of the SSGA Gender Diversity Index that consists of US large capitalization companies that are “gender diverse.” These are defined as companies that exhibit gender diversity in their senior leadership positions. The fund levies the lowest expense ratio at 2 bps and has recorded total return results exceeding the S&P 500 over the trailing twelve months but not over the preceding three year time period. Glenmede Women’s Leadership Fund (GWILX), managed by Glenmede Investment Management LP, has been in operation since December 2015. The fund is considerably smaller than SHE and passes on a higher 85 bps expense ratio. That said, it posted strong performance results in the twelve months ended May 2021, up 50.03%; and with a 15.1% total return, the fund has delivered the best 5-year average annual return (even as it missed over the 3-year mark) based on its value-oriented approach that emphasizes reasonable prices, good fundamentals and rising earnings expectations. The approach has been accompanied by higher volatility and turnover ratio. Table 1: Listing of equity thematic gender equality focused funds and their sustainable investing approach Fund Name  MF/ETF Active/Passive Geographic Mandate Explicit Sustainable Investing Approach Fidelity Advisor Women’s Leadership A  (FWOAX) MF Active G Thematic Fidelity Advisor Women’s Leadership C  (FWOCK) MF Active G Thematic Fidelity Advisor Women’s Leadership I(FWMNX) MF Active G Thematic Fidelity Advisor Women’s Leadership M (FWOEX) MF Active G Thematic Fidelity Advisor Women’s Leadership Z  (FWOZX) MF Active G Thematic Fidelity Women’s Leadership  ETF (FDWM) ETF Active G Thematic Glenmede Women in Leadership US Equity Fund (GWILX)* MF Active US Thematic Impact Shares YWCA Women’s Empowerment ETF (WOMN) ETF Passive US Thematic, and exclusions of companies involved in weapons, gambling and tobacco, that do not meet certain ethical standards and companies that have experienced legal controversies. Pax Ellevate Global Woman’s Leadership Institutional  (PXWIX) MF Passive G Thematic, and exclusion of companies that fail to meet certain ESG thresholds including tobacco products and fossil fuel companies.  Fund is fossil fuel free. Pax Ellevate Global Woman’s   Leadership Inv  (PXWEX) MF Passive G Same as above. SPDR SSGA Gender Diversity ETF  (SHE)* ETF Passive US Thematic Notes of Explanation: G-Global, *Top pick. Source: Sustainable Research and Analysis.Table 2: Listing of equity thematic gender equality funds, expenses, AUM and performance records Fund Name  MF/ETF Expense Ratio (%) Assets ($millions) 12-Month Return (%) 3-YR Return   (%) 5-YR Return (%) 10-YR Return (%) Fidelity Advisor® Women's Leadership A MF 1.25 3 44.33 Fidelity Advisor® Women's Leadership C MF 2 1 43.28 Fidelity Advisor® Women's Leadership I MF 1 4.5 44.66 Fidelity Advisor® Women's Leadership M MF 1.5 1 43.95 Fidelity Advisor® Women's Leadership Z MF 0.85 9.7 44.78 Fidelity® Women's Leadership ETF# ETF 0.59 NA Glenmede Women in Leadership US Eq* MF 0.85 30 50.03 14.67 15.1 Impact Shares YWCA Women's Empwrmt ETF ETF 0.75 25.6 57.85 Pax Ellevate Glbl Women’s Ldrsp Inst MF 0.53 745.9 37.06 13.98 13.8 9.77 Pax Ellevate Glbl Women’s Ldrsp Inv MF 0.78 148.9 36.71 13.7 13.51 9.5 SPDR® SSGA Gender Diversity ETF* ETF 0.2 234.3 42.68 16 Total/Average 1,305.5 44.54 14.18 14.14 9.64 S&P 500 Index  40.32 17.16 14.38 14.38 MSCI ACWI Index (Net) 41.85 13.86 14.18 9.58 Notes of Explanation: *Top pick. #Launched June 17, 2021. Sources: Morningstar Direct, Sustainable Research and Analysis.Chart 1: Performance track record of thematic gender equality funds to May 31, 2021 Notes of Explanation: *Top pick. @fund invests in non-US securities and benchmark is MSCI ACWI Index (net). Sources: Morningstar Direct, Sustainable Research and Analysis.¹ The fund is an actively managed ETF that operates pursuant to an exemptive order from the Securities and Exchange Commission (Order) and is not required to publicly disclose its complete portfolio holdings each business day. Instead, the fund publishes each business day on its website a "Tracking Basket," which is designed to closely track the daily performance of the fund but is not the fund's actual portfolio. ² Percentage of assets in foreign securities applies only to Pax Ellevate Global Women’s Leadership Fund and Fidelity Advisor Women’s Leadership Fund.

The Bottom Line: Sustainable investors who wish to focus on water-related investments have a number of mutual fund and ETF thematic pure plays to consider.Investing caseIt’s been widely reported in recent weeks that nearly three-fourths of the American West is grappling with the most severe drought in the recorded history of the U.S. Drought Monitor. Conditions this spring are much worse than a year ago and hot and arid conditions will exacerbate the threat of wildfires and water supply shortages this summer. Parts of California, Nevada and Washington State experienced sweltering triple-digit temperatures over the past week and states released excessive-heat warnings and heat advisories in some areas.  At the same time, factors such the reopening of industrial and commercial activities following the successful development and distribution of COVID vaccines and fiscal as well as monetary stimulus that are leading to broader economic strength and recoveries around the world all contribute to a favorable outlook for the water sector-one of a number of sectors qualifying as a thematic approach to sustainable investing¹.Investing in water-related stocks, including, for example, companies whose main business is in the water-related resource  sector, such as water treatment, engineering, filtration, environmental controls, water related equipment, water and wastewater services and water utilities, to mention just a few, offers investors an opportunity to diversify their portfolios, gain exposure to a theme with favorable prospects and at the same time integrate a sustainable investing strategy into a broader portfolio that aims to emphasize sustainable investing through long-term value creation.  While returns can be attractive over short-to-intermediate time frames, as illustrated by the average trailing 12-month returns of 45.7% for the segment of water-related mutual funds and ETFs versus 40.3% for the S&P 500 Index, investors should also be prepared for bouts of volatility.  In 2018, some funds gave up as much as -14.21% while the S&P 500 posted a drop of -4.4%.   Investors who wish to focus on water-related investments have a number of mutual fund and ETF pure plays to consider.  These are thematic funds that qualify as sustainable investments based on their sector orientation.  At the same time, some of the funds also engage in ESG Integration approaches as detailed in Table 1. Table 2 lists the same funds along with their expense ratios, size and performance track records for intervals ending as of May 31, 2021 while Chart 1 displays average annual rates of return for intermediate-term time intervals.    Summary analysis Ten equity water-related mutual funds and ETFs are in operation, including five ETFs. The segment is dominated by passively managed funds (index funds), but three actively managed mutual funds are also available. Eight of ten funds invest in stocks of US companies as well as foreign firms; two ETFs invest in companies listed in the US, including American Depositary Receipts (ADRs) that provide some foreign exposure. Five funds and ETFs pursue an explicit sustainable investing strategy.  That said, the approaches vary and investors should consider funds that align with their sustainability preferences. The ETFs in the segment have posted the some of the best performance track records over time periods extending to five years, reaching 18.5% and 19.7% in two instances; these funds also levy the lowest expense ratios. In fact, the funds with the best intermediate term track records are offered to investors at the lowest fees—displaying expense ratios that fall within the lowest quartile up to 57 bps. These also correspond to the largest ETFs in terms of assets under management. The largest funds with the lowest expense ratios correlate highly with the best total return results. Top picks  First Trust Water ETF (FLOWX), one of the largest in the segment at $996.3 million in assets with a 54 bps expense ratio that was up an average annual 19.74%, 20.8% and 50.4% for the 5-, 3- and one-year periods ended May 31, 2021.  Invesco Water Resources ETF (PHO), the largest fund in the segment at $1,661.4 million in assets, the fund charges 60 bps and returned 18.5%, 19.0% and 45.8% for the 5-, 3- and one-year intervals ended May 31, 2021. Ecofin Global Water ESG ETF (ECOAX) is considerably smaller than the first two picks and it hasn’t been around as long (its current tracking index was adopted as of June 15, 2018). The fund is subject to the lowest expense ratio at 40 and unlike the other two picks, the fund employs and explicit ESG integration approach. Table 1: Listing of equity thematic water-related funds and their sustainable investing approach Fund Name MF/ETF Active/Passive Geographic Mandate Explicit Sustainable Investing Approach Calvert Global Water C MF P G ESG Integration Mixed Virtus AllianzGI Water Class C MF A G ESG Integration-Mixed (1) Calvert Global Water A MF P G ESG Integration Mixed Virtus AllianzGI Water Class A MF A G ESG Integration-Mixed (1) KBI Global Investors Aquarius Instl MF A G ESG Integration Fidelity® Water Sustainability MF A G None Calvert Global Water I MF P G ESG Integration-Mixed Virtus AllianzGI Water Class P MF A G ESG Integration-Mixed (1) Virtus AllianzGI Water Inst Class MF A G ESG Integration-Mixed (1) Invesco Global Water ETF ETF P G None Invesco Water Resources ETF* ETF P US Listed None Invesco S&P Global Water ETF ETF P G None First Trust Water ETF ETF P US Listed None Global X Clean Water ETF* ETF P G Thematic (2) Ecofin Global Water ESG* ETF P G ESG Integration Notes of Explanation: P-Passive investment fund, A-Active investment fund, G-Global, (1) ESG Integration combines alignment with United Nations Sustainable Development Goals, (2) Seeks alignment with United Nations Sustainable Development Goals, *Top pic. Source: Sustainable Research and Analysis.Table 2: Listing of equity thematic water-related funds, expenses, AUM and performance records Fund Name  MF/ETF Expense Ratio (%) Assets ($millions) 1-Month Return (%) 12-M Return   (%) 3-YR Return (%) 5-YR Return (%) Calvert Global Water C MF 1.99 42.6 1.43 45.71 12.94 11.41 Virtus AllianzGI Water Class C MF 1.97 70 2 40.68 15.94 11.95 Calvert Global Water A MF 1.24 239.5 1.49 46.82 13.78 12.25 Virtus AllianzGI Water Class A MF 1.22 270.7 2.08 41.72 16.81 12.79 KBI Global Investors Aquarius Instl MF 1.1 175.5 2.59 52.8 Fidelity® Water Sustainability MF 1 55.5 1.71 40.2 Calvert Global Water I MF 0.99 266.9 1.52 47.17 14.09 12.59 Virtus AllianzGI Water Class P MF 0.94 318.7 2.12 42.22 17.14 13.1 Virtus AllianzGI Water Inst Class MF 0.93 293.7 2.12 42.19 17.15 13.11 Invesco Global Water ETF ETF 0.75 281 3.15 39.19 17.2 14.18 Invesco Water Resources ETF* ETF 0.6 1661.4 1.71 45.11 20.92 18.51 Invesco S&P Global Water ETF ETF 0.57 944.3 2.92 46.25 18.21 14.6 First Trust Water ETF ETF 0.54 996.3 1.28 50.41 20.79 19.74 Global X Clean Water ETF* ETF 0.5 3.2 2.58 Ecofin Global Water ESG* ETF 0.4 42.6 2.58 47.8 17.95 Total/Average 0.98 5,661.9 2.09 44.88 16.91 14.02 Notes of Explanation: *Top pick. Source: Morningstar Direct.Chart 1: Average annual rates of return for 1-year, 3-year and 5-year time intervals to May 31, 2021 Notes of Explanation: *Top pick. Source: Morningstar Direct.¹ While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic investing, impact investing and ESG integration, in turn classified into ESG Integration, ESG Integration-Consideration and ESG Integration-Mixed, referring to a core strategy consisting of ESG integration, but exclusions, impact or thematic approaches may also be employed. Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive.

The Bottom Line: Green bond funds added $35.9 million in assets to $1,324.7 million in May 2021 while recording an average return gain of 0.29%. Summary Green bond funds added $35.9 million in assets during the month of May 2021, ending the month at $1,324.7 billion.  This represents a gain of 3% relative to last month’s $22.5 million increase or 2%.  The seven funds that comprise the green bonds segment recorded an average total return gain of 0.29% in May, lagging the broad intermediate investment-grade market but beating the ICE BofAML Green Bond Index Hedged US by 26 bps.  For the trailing twelve months, the segment has registered an average gain of 3.93% versus -0.4% for the Bloomberg Barclays US Aggregate Bond Index and 2.16% for the narrower green bond benchmark. Net Assets Comment The $35.9 million gain in May propelled the green bond funds segment to another new month-end high of $1,324.7 million. This represents the 14th consecutive monthly gain in net assets.  Refer to Chart 1. May’s net gain was almost entirely attributable to net new cash realized by the Calvert Bond Fund ($32.1 million), almost entirely via its institutional share class I, as well as the VanEck Vectors Green Bond ETF that added a net of $4.3 million. Chart 1:  Green bond funds and assets under management-June 30, 2020 – May 31, 2021 Notes of Explanation:  Fund total net assets data source:  Morningstar Direct; fund filings. Research and analysis by Sustainable Research and Analysis LLC Performance Comment Four funds and 14 share classes outperformed the Bloomberg Barclays US Aggregate Bond Index. These funds included the Franklin Municipal Green Bond Fund R6 that also eclipsed the performance of the Bloomberg Barclays Municipal Total Return Bond Index.  Refer to Table 1. TIAA-CREF Green Bond Retirement Fund posted the best May return at 0.58% while the four other share classes came in right behind. The fund’s trailing three year results lags behind the conventional intermediate investment-grade benchmark. IShares Global Green Bond ETF and each of the three share classes that comprise the Mirova Green Bond Fund generated negative returns in May. Expense Ratio Comment The VanEck Vectors Green Bond ETF and iShares Global Green Bond ETF are the lowest cost providers, each charging 2c0 bps. But so far the PIMCO Climate Bond Fund, which imposes an expense ratio ranging between 0.5% and a high 0.9% for class A shares, has outperformed over the trailing 12-months.  

The Bottom Line: Sustainable fixed income ETFs outpaced March’s net assets gains but growth slowed. Also, there were no new April launches or SEC filings.

The Bottom Line: A new ETF registration in April by Alpha Architect seeks to combine two hot themes, cyber and ESG, in a concentrated portfolio. Two hot themes combined in new ETF fund filing: Cyber and ESG In addition to four newly launched thematic sustainable ETFs that together added about $1.9 billion in assets during the month of April through May 4th, ten new sustainable ETF SEC filings were also recorded during this interval. Refer to Tables 1a and 1b. One of these, in particular, caught our attention because the product attempts to combine two hot themes into a single actively managed ETF offering, namely crypto and environmental social and governance (ESG) integration. A launch date has not yet been established. Based on an SEC filing dated April 14, 2021, Alpha Architect ETF Trust registered its intention to launch the Viridi ESG Crypto Mining ETF. According to the registration statement, the ETF seeks to generate capital appreciation by investing in U.S. and non-US equity securities of companies actively involved in the entire spectrum of cryptocurrency mining, from producers of computer chips, to manufacturers of computer equipment, to directly investing in market participants creating cryptocurrency themselves. The fund intends to invest in approximately 15-30 companies and considers itself to be non-diversified. The fund will not itself invest directly in cryptocurrencies. All fund investments will be screened on the basis of certain environmental, social and corporate governance impact criteria, and selected cryptocurrency industry companies will emphasize companies that maintain robust and sustainable ESG policies. To this end, the fund’s portfolio managers will employ an integration policy, which includes an evaluation of companies based on their current and anticipated ESG policies. The fund’s strategy will rely on an internal evaluation and ranking strategy for determining a company’s ESG policies. Given the high energy usage of the crypto mining industry, a primary ESG focus will be reducing negative environmental impacts of mining and promoting environmental sustainability. For example, a potential company’s policy to prioritize renewable energy sources for business operations or allocation of funds towards purchasing carbon offsets would be viewed positively. Also taken into account are changes in a company’s ESG strategy and/or changes in a company’s ESG disclosures. More specific details regarding the nature of ESG policies and how such policies are scored, for one, are not provided in the registration statement. The fund will be managed by Empowered Funds, LLC, a Broomall, PA based firm with 11 employees and 1 client with $1.02 billion in assets1. Empowered is 100% owned by Alpha Architect LLC which is, in turn, 100% owned by Empirical Finance, LLC. The fund is to be sub-advised by New Gen Minting, an Issaquah, WA-based firm. The fund is to be sub-advised by New Gen Minting, an Issaquah, WA-based firm about which limited information is available. Table 1a: New ETF launches ETF Name Assets ($MM) BlackRock US Carbon Transition Readiness ETF 1,342.3 BlackRock World ex US Carbon Transition Readiness ETF 591.2 Global X Clean Water ETF 3.1 Invesco MSCI Green Building ETF 5.0 Table 1b: New ETF registrations ETF Name Schwab® Ariel ESG ETF Goldman Sachs Future Consumer Equity ETF Goldman Sachs Future Health Care Equity ETF CG Hydrogen Age ETF Viridi ESG Crypto Mining ETF BlackRock Future Climate and Sustainable Economy ETF VanEck Vectors Low Carbon Energy ETF Nuveen ESG Dividend ETF VanEck Future of Food ETF Virtus Duff & Phelps Clean Energy ETF Notes of Explanation: New ETF launches listed in alphabetical order; New ETF registrations listed in order of registration date. (1) Source: ADV dated February 15, 2021. Note of Explanation: While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic investing, impact investing and ESG integration Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive. Prepared by: Sustainable Research and Analysis LLC.

The Bottom Line:  Assets of green bond funds end March 2021 at another high of $1.3 billion; green bonds bounced back to $163.1 in Q1. Assets of green bond funds gain $47.8 million to end March 2021 at another high of $1.3 billion Assets of green bond funds in the US reached $1,266.3 million at the end of March 2021, adding $47.8 million in net assets or a month-over-month increase of 4%.  Year-to-date, the seven green bond funds offering 22 share classes were up $182.5 billion, from $1,083.8 at the end of 2020.  Refer to Chart 1. The top 3 green bond funds include the oldest and largest Calvert Green Bond Fund, for a total of $1.1 billion, or 91% of the segment’s total net assets. The same three funds accounted for 96% of the month-over-month net assets increase with the addition by the Calvert Green Bond Fund of $28.2 million, $13.0 million by iShares Global Green Bond ETF and $4.5 million by the VanEck Vectors Green Bond ETF. Fund assets continue to be dominated by institutional investors. Green bond funds, on average, outperformed the Bloomberg Barclays US Aggregate Bond Index but lagged the ICE BofAML Green Bond Index US Hedged    Whereas short-term interest rates declined by one basis point in March, 10-year Treasury yields moved from 1.44% at the end of February to 1.74% at the end of March.  For the quarter, 10-year Treasury yields surged by 81 bps from 0.93% as reopening economies and robust fiscal stimulus fueled growth expectations and inflation concerns.   Refer to Table 1. Against this backdrop, green bond funds, on average, outperformed the Bloomberg Barclays US Aggregate Bond Index but lagged the ICE BofAML Green Bond Index US Hedged ICE BofAML).  Green bond funds posted an average return of -40 basis points (bps), including the results of the better than average Franklin Municipal Green Bond Fund. Excluding Franklin’s four share classes, green bond funds dropped 64 bps.  At the same time, the ICE BofAML posted a decline of -16 bps and exceeded the average performance of green bond funds in March.  That said, green bond funds, on average, outperformed both indices for the first quarter and trailing 12-month period. The average performance of the three funds in operation for the trailing three year interval beat the conventional Bloomberg Barclays US Aggregate Bond Index, but failed to outperform the narrower-based green bond ICE BofAML index. The Franklin Municipal Green Bond Fund led in March with a total return of 0.7%. The fund invests predominantly in municipal green bonds issued by municipalities that intend to use bond proceeds for projects and programs that promote environmental sustainability. Municipal obligations were up 62 bps in March, based on the Bloomberg Barclays Municipal Total Return Bond Index. Excluding Franklin, the leading green fund was Mirova Global Green Bond Fund. Each of the fund’s three share classes also posted positive results ranging from 3 bps to 27 bps. The TIAA-CREF Green Bond Fund Advisor and Premier shares brought up the rear in March, recording declines of -1.13%, each. Sustainable debt market, including green bonds, added $378.2 billion in first quarter The sustainable debt market, including green bonds, social bonds, sustainability bonds, and sustainability linked bonds, experienced a strong first quarter in 2021 as volumes reached $378.2 billion.  Green bonds and loans, combined, accounted for $163.1 billion or 43% of the total.  This compares to $269.5 billion issued during the entire 2020 calendar year.  After a temporary reversal due to the Covid-19 crisis in 2020, green bond issuance rebounded in the first quarter with sovereign issuers making up a large part of the new issuance. Most green bonds are issued by investment grade issuers or carry investment grade ratings at the time of issue.  In recent years, however, there has been an uptick in non-investment grade green bond issuance.  In the first quarter, an estimated 3.2% of green bonds by deal value carried non-investment grade ratings.  This is up from 1.2% in 2019 and 2.5% in 2020.  Refer to Chart 2. Some of the non-investment grade issuers in Q1 2021 include:  Vía Célere, a developer specializing in the development, investment and management of homes in Spain, Public Power Company (PPC), a Greece-based power company funding its energy transition, Faurecia, a global automobile supplier and Luxembourg-based ArdaghGroup S.A., a leading global supplier of sustainable beverage cans that issued a green bond through Ardagh Metal Packaging S.A. and its wholly-owned subsidiaries. While green bonds have been issued since 2007, the first non-investment grade green bond was issued in 2014 by Abengoa S.A., a Spain-based renewable energy company that was rated B-.  The company filed for bankruptcy in 2016.  The next high yield green bond was not issued until 2017. In addition to Abengoa’s default, reasons cited for the muted issuance of high yield green bonds include the difficulty in obtaining information from some high yield issuers regarding their climate risks and climate mitigation activities, incremental costs of issuing green bonds to cover tracking and additional reporting as well as the increment cost of securing on a voluntary basis an independent second party opinion. That said, the reasons for the uptick in recent years and the likelihood that non-investment grade issuance, including green and sustainable bonds, is likely to gain traction are, as follows: The imposition of European Union climate disclosure requirements and the possibility that this may also be required in the US via SEC actions. Growth in assets under management sourced to sustainable investing strategies. Strong demand for ESG oriented bonds generally and green bonds as well as social bonds in particular. Appetite for higher yielding securities in a low rate environment and the opportunity to diversify ESG portfolio assets across corporate issuers.

The Bottom Line: JPMorgan Chase launched four new Empower money market fund share classes for the purpose of supporting minority-owned and diverse led financial institutions.

The Bottom Line:  Green bond funds recorded another gain in assets under management to reach $1.2 billion on the back of negative returns in February. Green bond fund assets post gains even as total return performance in February drops an average -1.30% Green bond funds, including mutual funds and ETFs, recorded another gain in assets under management in February to reach $1.2 billion.  Adding $34.6 million in net assets, green bond funds experienced a narrower gain in assets of 3% on the back of negative total returns in February.  Green bond funds gave up an average -1.47% or -1.30% if the municipal bond-oriented Franklin Municipal Green Bond Fund is excluded from the computation.  Intermediate investment-grade bonds got slammed in February, dropping -1.44%, as measured by the Bloomberg Barclays US Aggregate Bond Index.  Green bonds, based on the ICE BofAML Green Bond Index (Hedged USD), posted an even lower -1.86% total return.  According to preliminary data, about $87.6 billion in sustainable bonds, including green bonds, were issued in February worldwide, bringing the year-to-date totals to $172 billion.  February was also marked by notable issuances of sustainable bonds in the US by Goldman Sachs and JP Morgan Chase & Co. as well as announcements of soon to be issued green sovereign bonds by the UK and Spain. Green bond funds added $34.6 million and reached $1.2 billion at the end of February For the eleventh consecutive month, green bond funds, including five mutual funds and two ETFs, gained assets to reach $1.2 billion at the end of February 2021. Refer to Chart 1. Adding $34.6 million in net assets, green bond funds experienced a narrow 3% gain, relative to last month’s $100 million increase or a 9% gain.  All but one of the seven funds registered flat to positive net flows.  The exception was the $188.5 million iShares Global Green Bond Fund that suffered a net withdrawal of $3.5 million.  This was the ETF’s first month-over-month drawdown since it was launched in October 2018 (the fund has since recovered to reach $201.9 million by March 9).  The Calvert Green Bond Fund led yet again, adding a net of $30.6 million that was largely attributable to institutional investors.  VanEck Vectors Green Bond ETF followed with a net gain of $5.8 million. On a combined basis, institutional shareholders continue to dominate the segment.  Institutional investors, participating through institutional share classes and/or share classes that require a minimum investment of $1.0 million, account for a minimum of $811.7 million or 66.6% of green bond fund assets under management. Green bond funds gave up an average -1.47% in February but 12-month return at 2.15% The anticipation of strong economic growth on the back of stepped up vaccination efforts along with unprecedented fiscal and monetary stimulus fueled concerns about higher inflation that, in turn, led to rising yields.  The 10-year Treasury gained 33 bps to end February at 1.44%--a level not observed since February of 2020.  Against this backdrop, Green bond funds gave up an average -1.47% or -1.30% if the municipal bond-oriented Franklin Municipal Green Bond Fund is excluded from the computation[1]. At the same time, intermediate investment-grade bonds dropped -1.44%, as measured by the Bloomberg Barclays US Aggregate Bond Index.  The benchmark experienced the worst monthly decline since November 2016.  Green bonds, based on the ICE BofAML Green Bond Index (Hedged USD), posted an even lower -1.86% return in February. Refer to Table 1. Individual green bond fund returns ranged from a high of -0.85% achieved by the PIMCO Climate Bond I-2 and Institutional share classes to a low of -1.85% registered by the globally- oriented iShares Global Green Bond ETF.  The performance of municipal bonds, which ended the month behind corporates and government securities, pushed the Franklin Municipal Green Bond Fund C even lower to -2.28% versus a decline of -1.59% posted by the Bloomberg Barclays Municipal Total Return Bond Index. The performance of green bond funds over the trailing three-months remains negative but exceeds benchmark performance both with and without the inclusion of the Franklin Municipal Green Bond Fund.  The segment posted an average decline of -1.30% or -1.05% over the 3-month interval to February 28th and outperformed both the Bloomberg Barclays US Aggregate Bond Index and the ICE BofAML Green Bond Index (Hedged USD) with their returns of -2.02% and -20.1%, respectively. Green bond funds turned in positive results over the trailing twelve months, with average total returns for the segment ranging from 2.15% to 2.24% and exceeding benchmark results in each case.  For the three year interval, a limited number of three funds were continuously available. Sustainable and green bond issuance reached a preliminary $87.6 billion Based on preliminary data, about $87.6 billion in sustainable bonds, including green bonds, were issued in February worldwide.  Sustainable bonds volume exceeded January’s $84.4 billion, including an uptick in green bonds that reached an estimated $32.5 billion as compared to $31.5 billion in January 2021 and $19.7 billion in February 2020 for a two-month total of $37.2 billion. Two notable transactions in the US in February illustrates the expanding dimension of sustainable bonds. The first transaction, which settled on February 12th, was an $800 million sustainability bond issued by Goldman Sachs to accelerate climate transition and advance inclusive growth across nine core thematic areas that represent Goldman’s sustainable finance commitment: clean energy, sustainable transport, sustainable food and agriculture, waste and materials, ecosystem services, accessible and innovative healthcare, accessible and affordable education, financial inclusion, and communities. The second was a $1 billion February 16th inaugural social bond issuance by JPMorgan Chase & Co. According to its announcement, JPMorgan may allocate an amount equal to the net proceeds of this issuance to activities that promote economic development by financing small businesses in low- and moderate-income geographies, affordable housing and projects that promote access to education and health care in low-and moderate-income geographies. JP Morgan expects the proceeds of this social bond issuance to be allocated to fund affordable housing projects. Also in February, a number of sovereigns announced plans to issued green bonds.  The UK Debt Management Office, the agency responsible for issuing UK sovereign debt, said it would sell at least £15bn (about $US17.94 billion) of green bonds this calendar year. The Debt Management Office said it would issue two inaugural “green gilts” in 2021, with the first to be issued in the summer.  Also, the UK Treasury announced that it would launch its first sovereign green savings bonds, offering retail investors the chance to buy green debt through National Savings & Investments, the government-backed savings scheme. The Spanish Treasury also announced plans to issue green bonds in the second half of 2021; and in a transaction that hit the market in early March, the Italian government made a splash by issuing a green bond and raising some €8.5bn (about $US10.2 billion) to be used to fund environmental projects. [1] The Franklin Municipal Bond Fund invests in municipal securities whose interest is free from regular federal income taxes whereas the other six green bonds funds in the peer group invest in taxable securities.

The Bottom Line: William Blair is latest firm to re-brand existing funds by adopting ESG strategies, however, the disclosure may be confusing to fund investors.

The Bottom Line: Sustainable ETF launches in February continued the slow start to the year but 11 registration statements have been filed for new ETFs.

The Bottom Line: Goldman Sachs makes news with two sustainable initiatives, the launch of robo-advisor Marcus Invest and issuance of an $800 million sustainability bond. Goldman Sachs makes news with sustainable initiatives Within the previous ten days or so, Goldman Sachs Group, Inc. made the news with two noteworthy sustainable initiatives, the launch of a digital investment management platform that includes an impact investing option and the issuance of an $800 million sustainability bond intended to accelerate climate transition and advance inclusive economic growth across nine core impact themes that underpin Goldman Sachs’ sustainable finance commitment with a target to deploy $750 billion across climate transition and inclusive growth by 2030. This research notes focuses on the Goldman digital investing platform. Goldman’s Marcus digital investing platform includes an impact option with limited impact Goldman is the latest firm to offer a robo-advisor investing platform. The firm this week introduced a digital investing platform under the Marcus brand that was launched in 2016 as part of the financial services firm’s effort to diversify revenue and funding sources by offering savings accounts and personal loans to retail customers. The Marcus Invest Account is available to investors with a minimum investment of $1000. The Marcus Invest platform, also requiring a minimum investment of $1,000, is easy to use and navigate. It assembles diversified portfolios for individual investment and retirement accounts that are created using low cost stock and bond index ETFs selected on the basis of an investor’s risk tolerance, investment time horizon and three strategy preferences. Once profiled, investors can choose from one of three portfolio strategies. These include Goldman Sachs Core, Goldman Sachs Impact and Goldman Sachs Smart Beta. The Goldman Sachs Impact portfolio is designed for “people who want to support sustainable business practices and avoid environmental and social harm while tracking market benchmarks.” It is also noted that coal, tobacco and firearms are excluded. Portfolio allocations will vary based on individual investors’ risk tolerance and investment time horizon but regardless of allocation, the portfolios are constructed by relying on a preselected number of stock and bond ETFs, some that actually consist of conventional funds that don’t employ a sustainable investing approach. In total, the platform relies on 10 ETFs, including ETFs offered by BlackRock, State Street Global Advisors and Vanguard. Four of the ten preselected ETF investment options pursue a sustainable investing approach while six do not. Refer to Table 1. Portfolio allocations will vary based on risk tolerance and investment time horizon, however, conservative investors with stock and bond allocations of 60/40, for example, can end up with portfolios that are dominated by ETFs that don’t qualify as sustainable investment vehicles. Moreover, the Marcus Invest site notes that ETF expenses range from 0.11% to 0.19% when in fact the expense ratios levied by these 10 funds range from a low of 7 bps to a high of 40 bps and the average arithmetic expense ratio is 0.183%. Overall average market weighted ETF expenses will vary depending on each investor’s risk tolerance and investment time horizon. In addition to ETF expenses borne by investors, Goldman’s Marcus charges a portfolio fee of 0.35%.Table 1: ETFs offered on Goldman’s Marcus Invest platform-impact portfolio strategy ETF FundExpense Ratio (%)Sustainable Investing ApproachiShares ESG Aware MSCI USA ETF (ESGU)0.15ESG Integration-MixediShares ESG Aware MSCI EAFE ETF (ESGD)0.20ESG Integration-MixediShares ESG Aware MSCI USA Small-Cap ETF (ESML)0.17ESG Integration-MixediShares ESG Aware MSCI Emerging Markets ETF (ESGE)0.25ESG Integration-MixedVanguard Real Estate Index Fund ETF (VNQ)0.12Not explicitly adoptedVanguard Global ex- US Real Estate Index Fund  ETF (VNQI)0.12Not explicitly adoptediShares 1-3 Year Treasury Bond ETF (SHY)0.15Not explicitly adoptedSPDR Short Term Muni Bond ETF (SHM)0.20Not explicitly adoptediShares National Muni Bond ETF (MUB)0.07Not explicitly adoptedSPDR Barclays High Yield ETF (JNK)0.40Not explicitly adoptedCashNACash investment option not specified Average*0.183Notes of Explanation: *Excluding cash. Source: Goldman Sachs; Sustainable Research and Analysis LLC.Finally, while the website notes that the portfolio avoids sectors like coal, tobacco and firearms, a review of the SPDR Barclays High Yield ETF, a non-sustainable fund, indicates that there may be at least one tobacco company holding as of February 18, 2021. This is a positions in Vector Group LTD, a Delaware corporation that operates as a holding company and is engaged principally in two business segments, including the manufacture and sale of cigarettes in the United States through the Liggett Group LLC, and Vector Tobacco Inc., two subsidiary companies that contributed 58.6% of the holding company’s 2019 revenues.Note of Explanation: While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic investing, impact investing and ESG integration, in turn classified into ESG Integration, ESG Integration-Consideration and ESG Integration-Mixed, referring to a core strategy consisting of ESG integration, but exclusions, impact or thematic approaches may also be employed. Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive.

The Bottom Line: Actively managed sustainable ETFs continue to expand in number and assets, reaching 54 funds with $68.6 billion in net assets under management. Actively managed sustainable ETFs continue to expand in number and assets Three new SEC filings in January added to an expanding number of actively managed sustainable ETFs available to investors that, after accounting for a recalibration of actively managed ETFs by relying on the latest SEC filings, reached a total of 54 funds with $68.6 billion in assets under management as of January 31, 2021[1].  On the basis of this recalibration, actively managed ETFs added $12.7 billion in net assets under management in January, almost entirely due net cash inflows recorded by 10 investment funds that integrate ESG into investment decisions pursuant to a qualified or unqualified approach.  Refer to Table 1.  The same funds are some of the largest ETFs in the segment. Three new sustainable actively managed ETF filings in January New actively managed sustainable ETF SEC filings in January were recorded by BlackRock and Goldman Sachs.  Once launched, these will expand the number of actively managed sustainable ETFs to 57.  These run the gamut in their sustainable investing approach, ranging from values-based funds largely employing exclusionary approaches to ESG integration in its various forms.  That said, ESG integration is the dominant investment approach. BlackRock is planning to introduce two thematic ETFs, the BlackRock U.S. Carbon Transition Readiness ETF and the BlackRock World ex U.S. Carbon Transition Readiness ETF.  The funds will invest in large- and mid-capitalization equity securities that may be better positioned to benefit from the transition to a low-carbon economy by overweighting stocks that BlackRock Fund Advisors believes are best positioned to benefit from the transition to a low-carbon economy and to underweighting issuers that it believes are poorly positioned to so benefit. Also according to new filings in January, Goldman Sachs plans launch the Goldman Sachs Future Tech Leaders ETF that will pursue an ESG Integration-Consideration approach.  The fund intends to invest in technology companies operating in the information technology or communication services sectors, or in the internet and direct marketing retail or healthcare technology industries.  The fund notes in its registration statement that ESG factors as part of the fundamental research and stock selection process may be considered. Actively managed sustainable ETFs record strong gains in assets in January The sustainable actively managed ETF segment was recalibrated to reflect the adoption of ESG integration approaches by an expanded group of ETFs. As a result, 17 ETFs were added to the total tracked at the end of 2020 to reflect the latest SEC filings, including, for example, four additional ETFs managed by ARK Investment Management, four ETFs managed by BlackRock Funds and three by J. P. Morgan Investment Management.  In each case, these funds have adopted an ESG integration approach to their investing process. While 20 firms offer actively managed sustainable ETFs, the segment is dominated by ARK and J.P. Morgan.  Together, these two firms manage 15 ETFs and, with combined assets of $65.4 billion, account for 95.3% of the segment’s assets.  Further, 98% of the $12.7 billion gain in assets achieved in January, or $12.5 billion, is attributable to the top 10 ETFs that also includes funds managed by Dimensional Fund Advisors and Hartford Funds Management.  Refer to Chart 1. Notes of Explanation. ESG integration is classified into three categories, defined as follows: ESG Integration-Consideration-The fund may integrate ESG. ESG Integration-The fund will integrate ESG and may also engage with stakeholders. ESG Integration-Mixed -Core strategy consists of ESG integration, but exclusions, impact or thematic approaches may also be employed. Source: 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. [1]Recalibration based on detailed reviews of SEC filings, including fund prospectus and Statements of Additional Information.

The Bottom Line:  Green bond fund assets continued to expand in January, reaching almost $1.2 billion while interest in green and sustainable bonds remains high. Green bond fund assets continue to expand in January while investor interest in green bonds remains high Green bond funds, including mutual funds and ETFs that for the first time in December surpassed the $100 billion total net assets mark, added another $100.1 million in January to end the first month of the year at $1,183.8 million.  None of the taxable green bond funds posted positive results in January, but the -0.13% average performance of the seven green bond funds and 22 funds/share classes beat the -0.72% recorded by the broad-based Bloomberg Barclays  US Aggregate Bond Index and the -0.45% decline generated by the MSCI Global Green Bond Select (US Hedged) Index.  The Franklin’s Municipal Green Bond Fund, a fund investing in municipal green bonds that promote environmental sustainability, was the exception, adding 0.39% in January.  Also in January, a total of $31.5 billion in green bonds were issued worldwide.  This was below December’s level of $50.3 billion but significantly ahead of last January’s $17.5 billion level.  At the same time, sustainable debt, other than green bonds, reached about $52.8 billion and may be contributing to a green bonds squeezing out effect. Green bond funds added $100.1 million in assets in January  In January, green bond funds added $100.1 million in assets and registered a month-over-month 9% increase.  Refer to Chart 1. January was the strongest month for new money coming into green bond funds since the launch of the first green bond fund by Calvert Research and Management (a unit of Eaton Vance) at the end of 2013.  This followed the second strongest month in December when green bond funds added a net of $87.9 million.  Once again, three of the seven funds dominated the field, led by the Calvert Green Bond Fund that recorded a net gain of $49.3 million.  The other two, both ETFs, include the iShares Global Green Bond ETF and VanEck Vectors Green Bond ETF that added $35.5 million and $12.3 million respectively.  The iShares Global Green Bond, launched in November 2018, is acquiring momentum with its strong 23% monthly increase. Green bond funds gave up -0.13% in January and beat the broad-based Bloomberg benchmark by 59 bps and the MSCI Green Bond Index by 32 bps The early January Democratic victory in the two Georgia Senate races made it more likely that the new Biden Administration’s proposed $1.9 trillion “American Rescue Plan,” even if it’s rolled back somewhat, is expected to have a dramatic impact on economic growth when combined with a successful vaccination campaign.  Against this backdrop, long interest rates, as measured by the 10-year US Treasury Bond, moved up 17 basis points in January, ending at 1.11% from 0.93% at the end of December. At the same time, the Bloomberg Barclays US Aggregate Bond Index dropped -0.72% in January while the MSCI Global Green Bond Select (US Hedged) Index sustained a -0.45% decline.  Green bond funds, on average, gave up -0.13%, but beat the broad-based investment-grade intermediate Bloomberg benchmark by 59 bps and the MSCI Global Green Bond Index by 32 bps.  Even with the exclusion of the only green bond fund to stay in the black in January, the Franklin Municipal Bond Fund that posted a positive 39 bps versus 64 bps delivered by the Bloomberg Barclays Municipal Bond Index, the average performance of the 18 remaining funds/share classes still bested the broad-based investment-grade benchmark and green bonds yardstick.  See Table 1. The smallish PIMCO Climate Bond Fund Institutional shares and I-2, both led the taxable fund segment of funds with a narrow negative -0.09%.  At the other end of the range, Mirova Global Green Bond Fund A and N Shares each lagged with -56 bps and is the only fund to fall short of matching the MSCI Global Green Bond (US Hedged) Index. The average performance of the funds over the trailing three-months and twelve months exceeded the two benchmarks by wide margins. A total of $31.5 billion in green bonds were issued worldwide in January  A total of $31.5 billion in green bonds were issued worldwide in January.  This was below December’s level of $50.3 billion but significantly ahead of last January’s $17.5 billion.  In the U.S. there were two corporate green bond issuers, both from the energy sector.  These included a $1.0 billion green bond issued by SK Battery America, Inc., the US subsidiary of South Korea’s SK Innovation Co, a refinery-to-battery company, that will use the proceeds to expand its electric vehicle battery manufacturing capacity in the US, and $400 million issued by Southern Power Company.  Duke Realty Corp issued a $450 million, 1.75% 10-year green bond and there were several smaller municipal issuers that also came to market in the US. Sustainable debt issued in January reached $84.4 billion While investor interest in green bonds remained high and issuance in 2020, which reached $269.5 billion[1], exceeded by 4.6% the level achieved in 2019, green bonds were overtaken in January by other sustainable debt categories.  These included social bonds, sustainability bonds, sustainability linked bonds and sustainability-linked loans that together issued $52.8 billion[2].  Refer to Chart 2. The rapid growth of these sustainable debt categories could be suppressing green bond issuances, but it remains to be seen what the ultimate impact of this may be, especially in light of continued strong European Union backing for green bonds and a renewed focus on the environment in the US.   [1] Based on latest update.  There is some variation in 2020 green bond issuance by source, with volume for the year ranging from about $269.5 billion to $305.3 billion. [2][2] Sustainability linked loans are issued in the private market and the volume data applicable to this category, sourced to Bloomberg, may not be final.

The Bottom Line:  WisdomTree Investments strives to become a leader in the ESG space, having rebranded a total of six existing ETFs since March 2020. WisdomTree strives to become a leader in the ESG space During the Q4 2020 earnings call held by executives of Wisdom Investments Inc. (WETF) on January 29, 2021, senior executives indicated that the company plans to be a leader in the ESG space and that it is “already ranked third in the US by ESG assets behind iShares and Invesco.” On the same day, WisdomTree Investment Management filed updated prospectuses for three existing ETF index tracking funds that formally reflected the adoption of a sustainable investing approach (refer to explanation below) in the form of excluding certain companies from portfolio investments. In doing so, WisdomTree expanded to six the number of funds in the US it manages pursuant to a sustainable investing mandate and a combined total of $2.3 billion. On a pro-forma basis, this shifts WisdomTree Investment Management to eighth place among 42 firms that offer sustainable ETFs and ETNs in the US. WisdomTree Investments, Inc. is a publicly listed investment management company headquartered in New York that, through its subsidiaries in the U.S. and Europe, offers ETFs and Exchange Traded Products (ETPs) covering equity, commodity, fixed income, leveraged and inverse, currency and alternative strategies. As of December 31, 2020, WisdomTree managed approximately $69.2 billion in assets globally, including $26.0 billion, or 39%, in commodity and currency product offerings. In March of last year, WisdomTree repurposed three existing ETFs by formally amending each fund’s prospectus to reflect the adoption of an ESG integration approach to investing, emphasizing stocks with positive ESG characteristics while also excluding companies involved in certain products and controversies. At the time, the total net assets of the three funds stood at $144.8 million based on net assets as of March 31, 2020. The three funds ended the year with $140.1 million in assets. On the same day that WisdomTree Investments held its Q4 2020 earnings call, it also filed updated short form prospectuses covering three additional ETFs that will, effective January 29th, engage in certain exclusionary approaches. These three ETFs include WisdomTree China ex-State-Owned Enterprise Fund, WisdomTree Emerging Markets ex-State-Owned Enterprise Fund and WisdomTree India ex-State Owned Enterprise Fund, each of which had previously excluded state-owned enterprises that consist of companies with 20% government ownership. Together, these ETFs closed 2020 with $2,122.6 million in assets. The funds will also now exclude companies based “on environmental, social and governance (ESG) criteria.” As set out in each fund’s updated prospectus, the ESG criteria seeks to exclude from the eligible investment universe companies that (i) violate, or are at risk of violating, certain commonly accepted international norms and standards, such as United Nations and the Global Standards Screening guidelines; (ii) are significantly involved in controversial weapons, such as biological, chemical, cluster, nuclear or white phosphorous weapons or in anti-personnel mines; (iii) are significantly involved in the tobacco industry; (iv) are significantly involved in thermal coal activity, such as coal mining and exploration and coal-based power generation; or (v) do not meet such other ESG criteria as detailed in the Index methodology. Other ESG criteria do not appear to be further detailed in the Index methodologies. On a pro-forma basis, with a combined total of $2.3 billion in ETFs managed pursuant to their respective mandates, WisdomTree would rank 8th among the 42 organizations offering sustainable ETFs and ETNs at year-end 2020 with a combined total of $93.1 billion in assets Refer to Table 1 for a listing of the top 10 firms. Table 1: Top 10 ETF/ETN providers with total net assets and percent of total ETF/ETN assets as of 12-2020 Firm NameSustainable ETF/ETN Assets Under Management $Percent (%) of Total ETF/ETN AssetsiShares40,988,451,52744.0J.P. Morgan17,502,634,09918.9Invesco8,952,406,63218.9Vanguard4,649,265,25018.9Xtrackers3,467,465,51518.9First Trust3,230,190,19918.9Nuveen2,481,159,53518.9Ark Financial1,960,464,89118.9State Street1,802,918,81118.9Hartford Investments1,202,549,39018.9Cumulative Total86,237505,84992.6 Notes of Explanation: Assets under management as of 12-31-2020. Assts source-Morningstar; funds classificaitons and related research-Sustainble Research and Analysis LLCNote of Explanation: While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic investing, impact investing and ESG integration. Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive.

The Bottom Line:  Green bond funds reach $1.0 billion for first time while green bonds pass the cumulative $1.0 trillion level; outlook positive for 2021. Green bond funds added $87.9 million in assets and exceed $1.0 billion for the first time US green bond mutual funds and ETFs, a total of seven funds and 22 funds/share classes, pushed through the $1.0 billion level to end calendar year 2020 above that level for the first time.  Adding $87.9 million in net assets in December, the narrow segment, including two ETFs, ended the year with $1,083.8 million in assets.  The seven funds, which gained a combined total of $532.6 million during 2020, each experienced positive cash flows in December.  The funds posted an average monthly gain of 0.56%, which dropped to 0.52% when the performance of the Franklin Municipal Green Bond Fund is excluded.  In either case, the aggregate results exceeded the 14 basis points posted by the Bloomberg Barclays US Aggregate Bond Index as well as the 31 bps registered by the ICE BofAML Green Bond Index Hedged USD. Over the entire calendar year 2020 green bond funds delivered an average return of 7.35%.  The achievement by the seven green bond funds occurred at the same time that cumulative green bond issuance since their launch in 2007 surpassed $1.0 trillion.  Even as green bond issuance slowed earlier and later in the year, 2020 green bond volume closed at a new high of about $266.3 billion and cumulative green bonds reached $1,051 billion as of December 2020.  Various developments unfolding this year point to accelerating momentum that would lead to higher levels of issuance in 2021, likely exceeding about $310 billion. Green bond assets expanded in December and full calendar year 2020, gaining momentum in Q4 Investors, largely institutional investors, added a net of $87.9 million in December as green bond funds ended 2020 at $1.08 billion, reaching above $1 billion for the first time.  For the year, even with the announced liquidation in August 2020 of the Allianz Green Bond Fund for strategic reasons, green bond funds and ETFs in the US gained $493.2 million, or a year-over-year increase of 83.5%.  On average, green bond funds added $38.2 million per month in 2020 but momentum accelerated in the fourth quarter when the average monthly net inflows were boosted to $76 million.  This culminated with a net increase of $87.9 million in December, the largest monthly net inflow of the year. The net inflows in December, as in other months, were not evenly distributed.  Three funds, including the Calvert Green Bond Fund, (the oldest and largest of the seven funds, launched in late 2013), iShares Global Green Bond ETF and VanEck Vectors Green Bond ETF, in that order, attracted $82.8 million or 94.2% of the net positive cash flows for the month.  For the 12-month interval, the seven green bond funds added $93.2 million, or an 84% increase, after accounting for the liquidation of the Allianz Green Bond Fund.  The same three funds that led in December also garnered 99% of the segment’s gain in 2020, adding $486.6 million during the twelve-month period.  Refer to Chart 1. Institutional shareholders continue to dominate the investor-based in green bond funds, as $735.1 million, or 67.8% of the assets are sourced to institutional share classes.  Of this sum, $672.4 is attributable to the Calvert Green Bond Fund’s institutional share class.  This level of institutional sourcing, which declined by 6.4% relative to the level at year-end 2019, is likely higher due to the unaccounted presence of institutional clients in ETFs and investments in mutual funds via non-institutionally oriented share classes. Green bond funds deliver positive relative performance in December but mixed 12-month results Green bond funds delivered positive relative performance results in December, averaging 0.56% and 0.52% excluding the municipal Franklin Municipal Bond Fund.  Each of the seven funds and corresponding 22 share classes exceeded the performance of the Bloomberg Barclays US Aggregate Bond Index, up 0.14%, and all but one fund beat out the ICE BofAML Green Bond Index.  Refer to Table 1. The best performing non-municipal green bond fund in December, at 0.67%, was the TIAA-CREF Green Bond Fund Retail shares.  Bringing up the rear was the iShares Global Green Bond ETF.  The fund’s 0.23% total return lagged the intermediate investment-grade benchmark as well as the ICE BofAML Green Bond Index.  The Franklin Municipal Green Bond Fund was up 0.78% across its four share classes, managing to outperform the two benchmarks along with the Bloomberg Barclays Municipal Bond Index. For the calendar-year period, performance results are mixed.  Green bond funds recorded an average gain of 7.35%, or an even higher 7.41% when the Franklin Municipal Green Bond Fund is excluded.  This compares to 7.51% generated by the Bloomberg Barclays US Aggregate Bond Index and 6.68% recorded by the ICE BofAML Green Bond Index.  Three funds and their share classes, nine in total or 50% of non-municipal funds, beat the broad benchmark.  Returns ranged from a low of 5.54% posted by the PIMCO Climate Bond Fund C to a high of 8.59% attributable to the TIAA-CREF Green Bond Fund Institutional shares.  At the same time, more favorable results were recoded relative to the ICE BofAML Green Bond Index as 13 of 18 funds and their corresponding share classes, or 72.2%, outperformed. The Franklin Municipal Green Bond Fund Adv shares posted a gain of 6.26% in 2020, beating out the Bloomberg Barclays Municipal Bond Index by 1.05%. Green bonds added around $266.3 to $305.3 billion in 2020 while cumulative issuance exceeded $1.0 trillion While there is some variation in 2020 green bond issuance by source, with volume for the year ranging from about $266.3 billion to $305.3 billion[1], there is no denying that green bonds achieved an important milestone in 2020 as cumulative issuance reached and exceeded $1.0 trillion even assuming the lower issuance level.  This is the first time that cumulative issuance surpassed $1 trillion to reach $1,051 million since the launch of the first green bond in 2007.  That said, 2020 issuance volume at the $266.3 level according to the Climate Bond Initiative was only $8.6 million in excess of the prior year’s volume of $257.7 billion, or a gain of 3.3%.  This was the lowest year-over-year gain since 2011 when green bond volumes dropped 70% from $4 million in 2010 to $1.2 million.  Refer to Chart 2.  To some extent, the shortfall in green bond issuances can be attributed to the expansion in the issuance of social bonds and sustainability bonds that benefited from COVID-19 linked developments in 2020.  For example, social bonds added $129.7 billion in 2020, or an increase of 720.3% over 2019[2]. That said, momentum is likely to pick up in 2021 and exceed $310 billion which would otherwise be achieved based on the average annual 5-year growth rate, based on the as the following developments are expected to stimulate new issuances, particularly in Europe and the US that together account for about two-thirds of 2020 green bond issuances: Increasing evidence of climate change and shifting sentiment. Appetite for sustainable investments is high, as asset owners such as asset managers, pension funds and life insurance companies advocate for environmental and social investments in response to client mandates, regulatory initiatives and risk considerations.  Individual investors are also stepping up their demands for sustainable investment products, including green bond funds and sustainable funds more generally. The publication of the final version of the EU’s Green Bond Standard, part of the European Union’s plan for financing sustainable growth that calls for the creation of standards and labels for green financial products. Once adopted, this should likely stimulate new green bond issuance. The EU bloc’s planned green bond issuance debut from Q2 onwards and first-time issuance from several national governments. According to estimates, the EU’s upcoming green bond issuance is expected to be around €225 billon (or around $272 billion), which is equivalent to a third of its COVID-19 recovery package. As announced in September of last year, the European Central Bank will accept bonds with coupon structures linked to sustainability criteria, such as green bonds, as collateral for Eurosystem operations starting January 1, 2021. Potential eligibility has also been extended for asset purchases in the ECB’s monetary policy facilities, including the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP). The new Biden administration in the US is bringing about a rapid and dramatic change in the level of focus directed at climate change and global leadership. The US is expected to rejoin the Paris Climate Agreement on January 20th and overturn the vast majority of the 100 or so climate-related orders that the Trump Administration reversed. Also, Biden has consistently underscored the importance of climate to his economic plans and an infrastructure package is expected to contain climate-friendly proposals. [1] Climate Bond Initiative at $266.3 billion while Bloomberg NEF is at $305.3 billion. [2] Source:  Bloomberg NEF.

The Bottom Line: The announced closing of the $7.9 Sage ESG Intermediate Credit ETF in December illustrates challenges faced by ESG funds to gain traction.

The Bottom Line: The soon to close fourth quarter 2020 will set new records for sustainable ETF launches with at least 18 new sustainable ETFs.

The Bottom Line: US green bond funds are on the cusp of reaching and exceeding $1.0 billion in assets under management for the first time. November Summary Seven or so years after the launch of the first green bond fund, funds in the US that primarily invest in environmentally beneficial securities are on the cusp of reaching and exceeding $1.0 billion in assets under management for the first time.  With the addition of November’s $65.5 million in net new money, the seven funds in operation, 22 funds/share classes in total including two ETFs, ended the eleventh month of the year with $995.9 million, an increase of 7%.  This was the second best gain this year, next only to October’s $74.5 million increase, propelled by gains achieved by the largest three funds in the category.  On a combined basis, these funds delivered $61.7 million or 94.1% of the total gain for the month.  The same three funds, the Calvert Green Bond Fund, iShares Global Green Bond ETF and VanEck Vector Green Bond ETF also generated the lowest comparative returns for the 30-day period.  During the same month when assets ticked up, the volume of green bond issuance, based on preliminary data, dropped to $16.8 billion from $27 billion in October.  Year-to-date issuance, which has been held in check due to an expanding number of sustainable bond issuances due to COVID-19, reached $214.8 billion. Fund flows:  Green bond mutual funds and ETFs added $65.5 million in net assets All but one fund, the Mirova Global Green Bond Fund, experienced cash inflows.  Market factors contributed an estimated $11.09 million while cash inflows added an estimated $54.4 million.  On a net basis, green bond funds gained $65.5 million in assets, with at least 52% of that sum sourced to institutional investors, to end November at $995.9 million.  Refer to Chart 1. The largest and oldest green bond fund, the Calvert Green Bond Fund, added $41.4 million, almost entirely attributable to the fund’s institutional share class while the iShares Global Green Bond ETF saw $11.5 million in net inflows.  This BlackRock managed ETF was launched in November 2018 and has been expanding steadily since that time. The fund, according to 13D filings, benefited from new investments by UBS, Bank of America and Jane Street Group.  The third fund, the VanEck Vectors Green Bond ETF, gained $8.7 million. Fund Performance:  Green bond funds recorded an average gain of 1.56% in November  Across the board, green bond funds recorded an average gain of 1.56% in November.  This compares to 0.98% registered by the Bloomberg Barclays US Aggregate Bond Index and 1.51% achieved by the Bloomberg Barclays Municipal Bond Index, a broad-based municipal bond index that serves as the more appropriate primary benchmark for the Franklin Municipal Green Bond Fund. Even if the Franklin Municipal Green Bond Fund is omitted from the average, the remaining group of six green bond funds is still up 1.46%.  By way of further comparison to a narrower-based index, the ICE BofAML Green Bond Index (Hedged) was up 74 basis points. All but one fund beat the broad-based intermediate investment-grade Bloomberg Barclays US Aggregate Bond Index as well as the narrower ICE BofAML Green Bond Index.  The one exception is the iShares Global Green Bond ETF that was up 58 bps.  The fund also trails on a 12-month basis with its last place return of 5.73%.  At the other end of the range, the Franklin Municipal Green Bond Fund, including its four share classes, was up 1.97% in November, beating the Bloomberg Barclays Municipal Bond Index by 46 bps.  Refer to Table 1. A smaller number of funds in operation for a full twelve-month interval to the end of November  were up an average of 6.86%, as compared to 7.28% and 5.83% for the Bloomberg Barclays US Aggregate Bond Index as well as the narrower ICE BofAML Green Bond Index.  The leading fund over the trailing twelve-months is the TIAA-CREF Green Bond Fund Institutional shares, up 7.79% Green bonds issuance volume declined in November to $16.8 billion Based on preliminary data, green bond issuance volume declined in November to $16.8 billion as compared to $27 billion in the previous month.  A cumulative total of $214.8, also preliminary, has been issued on a year-to-date basis.  Refer to Chart 2. Of total global bond issuance, $1.1 billion was issued by US entities, or 6% of global issuance.  Thirteen issuers accounted for the new issue volume, dominated by 12 municipal issuers. The three largest issuers, including the New York MTA, Arroyo Energy Investors and the Sunnyvale Financing Authority, raised $950.1 million and made up 88% of the volume.  The MTA issued the bonds to refund certain outstanding revenue transportation bonds while Arroyo Energy Investors, an independent investment managed focused on power and energy infrastructure assets in the U.S., Mexico and Chile, was refinancing loans on two of its renewable energy assets.  These include a solar plant and a wind farm providing green electricity to the Minera Los Pelambres copper mine located in Chile, one of the largest in the world.  The Sunnyvale Financing Authority in California issued its $131.2 million green bond to finance the first phase of the City of Sunnyvale Civic Center modernization project along with other improvements that were designated as green. New green investment/security types introduced in November -The first reportedly green interest rate swap transaction in the Asia-Pacific region was arranged by the Crédit Agricole Corporate and Investment Bank. The inaugural green interest rate swap worth HK$590 million (US$64.5 million) was structured for logistics property group Goodman Interlink.  The transaction is subject to a preferential fixed interest rate paid by the borrower that is linked to the underlying facility’s green credentials based on the satisfaction of two requirements.  The facility is required to maintain a silver certificate from the US Leadership in Energy and Environmental Design (LEED) and a gold certificate of the Building Environmental Assessment Method (BEAM) from the BEAM Society, an organization specializing in green certification for Hong Kong buildings.  The borrower’s fixed rate steps up to a non-preferential rate if the green condition fails. -The Citi Treasury and Trade Solutions group within Citibank launched a fixed-term green deposit product that allows clients to invest their short-term liquidity in environment-friendly projects. According to the bank’s announcement, investments in the green deposit solution will be used to finance or refinance a portfolio of green projects that meet the environmental finance eligibility criteria defined in the Citi Green Bond Framework. The framework is aligned with the recommendations of the International Capital Market Association (ICMA) Green Bond Principles 2018and is aimed at helping advance the United Nations’ Sustainable Development Goals.

The Bottom Line:  Sustainable municipal ETFs, a small investment category, reached over $1.0 billion in October having expanded by $262.9 million over the trailing three-months. A small category, sustainable municipal ETFs reach over $1.0 billion in October Overall, 141 sustainable ETFs with $70.0 billion in assets were on offer in the US at the end of October 2020, including one new fund that was launched during the month. Of these, 30 funds with $20 billion in assets are classified as fixed income, both index funds and actively managed investment vehicles. The overall category expanded by $7.3 billion or an increase of 11.6% across the three month interval to the end of October. A net of $5.4 billion, or 74.5%, was added during the month October alone. Equity-oriented funds added $5.1 billion, or 11.7%, while fixed income ETFs expanded by $2.1 billion or 11.4%. Sustainable fixed income ETFs passed the $20 billion level in October, reaching $21 billion. Refer to Chart 1. Comprised of both sustainable taxable and municipal ETFs, sustainable fixed income ETFs now account for 30% of sustainable ETF assets in the US. At only $1.0 billion, sustainable municipal ETFs make up a small 5% percentage of total sustainable fixed income ETF assets. That said, municipal sustainable ETFs expanded by $262.9 million, or an increase of 34% over the trailing three-months. The investment category consists of only four funds, all actively managed by Eaton Vance, Hartford Funds (Wellington Mgt.) and J.P. Morgan. J. P. Morgan Investment Management dominates the category with its $836 million JPMorgan Ultra-Short Municipal ETF. This ESG integrator accounts for 81% of the segment’s assets and was responsible for $252 million of the increase experienced over the last three months. As part of its security selection strategy, J. P. Morgan also evaluates whether environmental, social and governance factors could have material negative or positive impact on the cash flows or risk profiles of securities universe in which the fund may invest. The firm also manages the much smaller JPMorgan Municipal ETF. Refer to Table 1.Table 1: Sustainable municipal ETFs and their sustainable investing strategies (10/31/2020) Fund Name$ AUMSustainable Investing StrategyJPMorgan Ultra-Short Municipal Inc ETF835,819,258ESG Integration Hartford Municipal Opportunities ETF120,816,641ESG Integration JPMorgan Municipal ETF62,341,547ESG Integration Eaton Vance TABS 5to15Yr Ldrd MuniBd NS7,471,825ESG-Consideration Total1,026,449,271Sources: $AUM Morningstar Direct; Sustainable Research and Analysis LLC (SRA) Notes of explanation: Sustainable investing Definitions/per SRA: ESG Integration-The fund will integrate ESG and may also engage with stakeholders, ESG Integration-Consideration-The fund may integrate ESG. ESG Integration-Mixed-Core strategy consists of ESG integration, but exclusions, impact or thematic approaches may also be employed. Sustainable investing strategy source: Fund prospectus and related documents as compiled by Sustainable Research and Analysis LLC Chart 1: Sustainable fixed income ETFs (10/31/2020) Sources: Morningstar Direct; Sustainable Research and Analysis LLC Note of Explanation: While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic and impact investing and ESG integration. Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive.

The Bottom Line:  Dimensional Fund Advisors intends to convert six actively managed sustainable equity mutual funds with $26.1 billion into corresponding ETFs in early 2021. Dimensional Fund Advisors intends to convert six sustainable mutual funds into ETFs in early 2021 Dimensional Fund Advisors (DFA) announced the launch of two Equity ETFs on November 18, 2020. The two core equity ETFs, the Dimensional US Core Equity Market ETF (DFAU) and the Dimensional International Core Equity Market ETF (DFAI), offered at 12 and 18 basis points, respectively, are now listed for trading on the NYSE Arca. To complement these two actively managed funds, Dimensional also plans to launch an Emerging Core Equity Market ETF in early December. DFA’s first ETF listings, these offerings will be expanded in early 2021 with the launch of six actively managed sustainable (refer to definitions below). ETFs that will benefit from the conversion of assets from six corresponding mutual funds. Based on data as of October 31, 2020, these funds will add $26.1 billion in assets to the current universe of 141 sustainable ETFs with $70.0 billion, including 35 actively managed sustainable ETFs with $20.0 billion in assets or 29% of assets sourced to ETFs. The conversion of the six funds into ETFs will also result in expense ratio reductions ranging from 17% to 56% in the case of the Tax-Managed US Equity Portfolio. Approved by their boards as of February 28, 2020, the existing mutual funds and the new corresponding ETFs are listed below. Refer to Table 1.Table 1: Existing DFA mutual funds and the new corresponding ETFs Existing Mutual Fund AUM($) Current Expense Ratio (bps) New ETF New ETF Expense Ratio (bps) Tax-Managed US Equity Portfolio 4,312.1 18 Dimensional US Equity ETF 8 Tax-Managed US Small Cap Portfolio 2,646.2 40 Dimensional US Small Cap ETF 30 Tax-Managed US Targeted Value Portfolio 3,750.4 20 Dimensional US Target Value ETF 30 TA US Core Equity 2 Portfolio 9,639.0 20 Dimensional US Equity 2 ETF 16 Tax-Managed International Value Portfolio 2,474.7 45 Dimensional International Value ETF 30 Tax World ex US Core Equity Portfolio 3,263.3 30 Dimensional World ex US Core Equity 2 ETF 25 Total 26,085.7 Source: Dimensional Fund Advisors, AUM ($) Morningstar DirectAccording to their prospectus, DFA, in addition to any other criteria used for assessing value, profitability, or investment characteristics, may also adjust the representation in the portfolio of an eligible company, or exclude a company, that is believed to be negatively impacted by environmental, social or governance factors (including accounting practices and shareholder rights) to a greater degree relative to other issuers. These are not the only funds advised by DFA pursuant to sustainable investment practices dominated by an ESG Integration approach that combines ESG integration as well as exclusions. As of September 30, 2020, DFA managed 58 funds, including the six scheduled for conversion, with $286.9 billion in net assets. Representing 10% of sustainable mutual fund and ETF assets under management ($2.8 trillion), DFA ranks 4th among 184 firms offering formally designated sustainable investment products. Note of Explanation: While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic and impact investing and ESG integration. Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive.

The Bottom Line: Green bond funds reach $930.4 billion in assets at October month-end and are back on track to reach $1 billion in 2020. October green bond funds: summary Green bond funds recorded strong gains in assets, adding a net of $74.5 million to end October at $930.4 million. This represents the best dollar gain so far this year and a 9% month-over month increase. The October gain positions the sub-category of seven funds/22 funds and share classes to within striking distance of $1.0 billion in assets under management for the first time. This is occurring during a month when green bond issuance across the globe reached $23.1 billion, a drop relative to the $35.7 billion issued in September, but also within striking record of reaching cumulative green bond issuances of $1 trillion since the introduction of green bonds in 2007. Except for the Franklin Municipal Green Bond Fund and its four share classes, the remaining six funds and corresponding share classes outperformed the broad intermediate investment-grade Bloomberg Barclays US Aggregate Bond Index by margins ranging from 1 bps to a high of 103 bps. At the same time, none of the green bond funds outperformed the ICE BofA Green Bond Index (Hedged) which posted a one-month 0.62% gain. Also in October, social bonds received a boost when the European Union issued its first social bond, a two-part €17 billion ($20.2 billion) bond under the EU SURE instrument to help protect jobs and keep people in work. Strong positive estimated cash flows added $74.5 million in net assets, the best gain this year Green bond funds recorded strong gains in assets, adding a net of $74.5 million to end October at $930.4 million. Market depreciation depleted $0.24 million while positive cash flows added an estimated $74.7 million. The gains in October position the group of seven funds/22 funds and share classes to within striking distance of $1.0 billion in assets under management for the first time even as one fund, the AllianzGI Green Bond Fund with its $29.9 million or so in net assets, was liquidated in September. Refer to Chart 1. Two funds contributed $71.7 million or 96% of the month’s net inflows. The largest of these was recorded by the Calvert Green Bond Fund, the largest and oldest green bond fund at $654.9 million. The fund saw a net increase in the amount of $44.4 million. This was almost entirely attributable to net new money of $43.3 million directed into the fund’s institutional share class with its $250,000 minimum investment requirement. The second fund, the iShares Global Green Bond ETF, realized a $28.7 million expansion in assets under management that elevated the fund’s assets to $133.5 million. The fund was launched in November 2018. Performance results in October: Average performance trails green bonds index but beats the conventional benchmark Across the board, green bond funds recorded an average decline of -0.12% in October versus -0.45% registered by the Bloomberg Barclays US Aggregate Bond Index and 0.62% posted by the ICE BofA Green Bond Index (Hedged). These results include the performance of the Franklin Municipal Green Bond Fund. When the municipal bond fund’s results are excluded, the average return achieved by the six taxable green bond funds improves, rising to -0.03% and at the same time increasing or narrowing the variation relative to the two benchmarks. Refer to Table 1. Returns in October ranged from a high of 0.58% posted by the iShares Global Green Bond ETF, the fourth best performing fund over the trailing twelve months. At the other end of the taxable range is the TIAA-CREF Green Bond Fund Retail shares that recorded a -0.44% decline. That said, the 12-month return stands at 5.54%, lagging behind the Bloomberg Barclays US Aggregate Bond Index but ahead of the more narrowly-based ICE BofA Green Bond Index (Hedged). The Franklin Municipal Green Bond Fund which declined -0.56% in October, lagged behind the Bloomberg Barclays Municipal Bond Fund Index by 26 bps. Over the trailing 12-months, taxable green bond funds posted an average return of 5.27%, falling short of the 6.19% generated by the Bloomberg Barclays US Aggregate Bond Index but, at the same time, exceeding the 4.92% registered by the ICE BofA Green Bond Index (Hedged). The TIAA-CREF Green Bond Fund Institutional shares led with a return of 5.83% while Mirova Global Green Bond A brought up the rear with its return of 4.59%. The Franklin Municipal Green Bond A posted a trailing 12-month 3.63% return. Green bonds issuance reached $23.1 billion and $977.6 billion cumulative since 2007 Green bond issuance across the globe reached $23.1 billion in October, a drop relative to the $35.7 billion issued in September. This brings the year-to-date green bonds volume to $192.9 billion and cumulative issuance since inception to $977.6 billion that is now within $22.4 billion striking distance of reaching cumulative green bond issuances of $1 trillion. This level is expected to be achieved in November or early December 2020. Refer to Chart 2. Last month, $1.1 billion in green bonds, or 4.8% of global volume, were issued in the United States. This level was also lower than last month’s US issuances that accounted for $4.7 billion, or 6.8% of September’s total world-wide volume. The allocation in the US between taxable and municipal bonds was 70%/30%, with three taxable issuers accounting for $766.5 million of October’s volume. At the same time, six municipal issuers launched $332.9 million in green bonds. These ranged from the $2 million Lakeside Municipal Utility District #3 (in Texas) insured tax refunding bonds that originally financed wastewater and drainage facilities to the $128.6 million Mountain House Financing Authority (California) to repay developers of the Mountain House Community Services District for the cost of improvements to the water system, wastewater system and storm drain system and other expenses. Other developments: European Union boosts social bonds with a first time €17 billion ($20.2 billion) bond issuance Social bonds received a boost in October when the European Union issued its first social bond, a two-part €17 billion ($20.2 billion) bond under the EU SURE instrument to help protect jobs and keep people in work. The issue consisted of two bonds, one at €10 billion due in October 2030 and €7 billion due for repayment in 2040. It was reported that investor interest was strong and that it was as much as 13-14X oversubscribed. Issuance of social bonds which are similar to green bonds but refer to the use of proceeds for new and existing projects that address or mitigate a specific social justice issue such as employment, education, housing and healthcare, has risen fourfold so far this year from the 2019 level to $71.9 billion according to S&P Global Ratings. Stimulated by the COVID-19 pandemic, S&P also projects that social bond issuance could approach $100 billion this year. Refer to Chart 3.

The Bottom Line:  Sustainable funds related events or developments in October 2020 numbered 33, including two M&A transactions involving Eaton Vance and Truvalue Labs, Inc. October 2020 Events Summary During October 2020 we identified 33 sustainable fund related events or developments.  These include the following: 18 events involved the launch of new US and non US-based mutual funds or ETFs. 15 non US-based mutual fund and ETFs 3 US-based mutual fund and ETFs 5 senior management organization changes 3 new analytical tool or research or indices 2 merger, acquisition, divestitures or JVs 2 portfolio management team changes 3 other events, including a new security type, new robo investing application/platform and a competitive strategic move or repositioning. Events highlight Two M&A transactions were announced in October. The first on October 6 involved Morgan Stanley (NYSE: MS) and Eaton Vance Corp. (NYSE: EV) who announced that they have entered into a definitive agreement under which Morgan Stanley will acquire Eaton Vance.  Eaton Vance conducts its investment management and advisory business through wholly-and majority-owned investment affiliates that include: Eaton Vance Management, Parametric Portfolio Associates LLC, Calvert Research and Management and Atlanta Capital Management Company, LLC.  On a combined basis, these two firms will add $98.2 billion in sustainable mutual fund and ETF assets to Morgan Stanley’s $51.9 billion across 201 funds/share classes that are managed pursuant to an ESG Integration approach.  These numbers do not incorporate Parametric’s $25.0 billion direct-indexing separate account business managed pursuant to client-specified responsible investment guidelines. The second transaction which was announced on October 20 involved publicly listed FactSet (NYSE:FDS) (NASDAQ:FDS).  The firm announcement that it has entered into a definitive agreement to acquire Truvalue Labs, Inc., an AI-driven environmental, social, and governance (ESG) data provider. Terms of the transaction, which is expected to close later this year, were not disclosed. Refer to Table 1.  

The Bottom Line: Five of the top 10 robo-advisor platforms per Barron’s recent rankings offering sustainable investing options but offerings vary by range and scope.Robo-advisor platforms offering sustainable investing options vary by range and scope Robo-advisors, the digital platforms that provide automated algorithm-driven financial planning services with little to no human supervision, have experienced a surge in recent years as they have come to be viewed as an appealing alternative to conventional investing. According to one estimate, Robo-advisor assets under management are expected to reach $1.06 trillion by the end of this year. At the same time, the number of investors using rob-advisors grew significantly while the number of platforms has also expanded. Ease of use, cheaper fees and lower savings entry points are just some of the reasons investors have gravitated to these platforms that offer an automated goals and risk-based approach to client portfolio construction using algorithms to establish target asset allocations. These aim to achieve optimum expected returns by investing client assets in mutual funds, ETFs and individual securities. Some but not all platforms also feature socially responsible investment options. Based on research conducted by Sustainable Research and Analysis that was focused on the 10 top ranked robo-advisors featured in the July 31 edition of Barron’s covering a total of 40 robo services, five of the ten top robo-advisors were found to offer a sustainable investing option. The sustainable investing offerings available on these five platforms, however, are limited as to their range and scope. On the one hand, the five platforms offer one or more low-cost diversified equity-oriented mutual funds and ETFs. On the other hand, sustainable investment options are limited beyond equities. For example, fixed income allocations are achieved by reliance on conventional fixed income funds while other sustainable asset classes or themes are not offered at all. Also, sustainability profiling or a values-based assessment equivalent to the automated goals and risk-based appraisal conducted to assess financial risk-based goals, are not available on any of the platforms. The option to construct a tailored sustainable portfolio comprised of individual stock/bond selections is also not offered and impact reporting or outcomes-based reporting are not mentioned. Using a simple scale to rank order a robo-advisor’s sustainable investing offerings from 1 (Low), to 2 (Medium), to 3 (High), none of the five platforms achieves a score of 3. Rather, a score of 2 is attributed to four firms, including TD Ameritrade, Betterment, Ellevest and Wealthsimple while E*Trade receives a score of 1. Refer to Table 1.Table 1: Top 10 ranked robo-advisors per Barron's/with data by Backend Benchmarking Platform (in rank order) Socially Responsible Investing Options Ranking SigFig Not offered at this time None offered TD Ameritrade* Exposure to sustainable investing is provided in the form of five Socially Aware portfolios constructed around conservative, moderate, moderate growth, growth and aggressive strategies via a combination of exchange-traded equity-oriented funds that employ an ESG integration approach combined with exclusions. At the same time, fixed income allocations are executed using conventional funds and ETFs. 2 Fidelity Go Not offered at this time None offered Vanguard Not offered at this time None offere E*Trade** Investors are offered an option to select a socially responsible ETF for inclusion in their portfolio that's recommended on the basis of a goals-based investment approach stratified along five risk/reward categories. 1 Betterment*** Sustainable investing target asset allocation strategies rely on mutual funds and ETFs based on risk tolerance, time horizon and client investment goals. These investment products are selected on the basis of low cost, global diversifications and liquidity and are currently limited to iShares MSCI ETFs investing passively in large cap US stocks, emerging market stocks and developed market stocks. Indices are constructed by relying on MSCI ESG scoring to qualify stocks on top of various exclusions. Otherwise, portfolios are combined with conventional ETFs, including fixed income. 2 Ellevest Using a risk minimization goal-based investment approach that emphasizes low cost, portfolios are constructed with mutual funds and ETFs selected in collaboration with Morningstar to achieve the desired asset class exposures. An impact-oriented portfolio seeking to advance women on boards, senior leadership teams and other related policies and practices has been available since the end of 2019. 2 Wells Fargo No dedicated socially responsible investment options at this time. None offered Wealthsimple Based on the client's investment goals and risk acceptance level, a recommended portfolio is constructed using passively managed diversified ETFs. Three portfolio categories are available, based on risk-return profiles ranging from conservative to balanced and to growth-oriented. Complementing the conventional portfolios are three investment options that seek to achieve a responsible investing mandate. The portfolios are constructed using sustainable equity ETFs and a combination of one sustainable fixed income ETF as well as conventional ETFs. 2 SoFi Wealth Not offered at this time. None offered Notes of explanation: Rank ordering range runs from 1 (Low), 2 (Medium), 3 (High). The highest rank would be assigned to a firm that conducts sustainability profiling, offers both sustainable equity and bond mutual fund and ETF options as well as the option to invest in a portfolio consisting of individual securities that confers voting rights to investors. Outcomes reporting would also be a positive. *TD Ameritrade was acquired by The Charles Schwab Corporation in a transaction that closed in early October. **E*TRADE was acquired by Morgan Stanley, also in early October. ***On October 22, 2029 Betterment announced that it launched two new ESG portfolios and has teamed up with Morningstar, the Rockefeller Foundation and NAACP to expand the platform's existing Broad Impact Portfolio.Notes of Explanation: While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic and impact investing and ESG integration. Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive.

The Bottom Line:  Sustainable real estate funds still not fully recovered from severe declines during Q1 of 2020, but category expanded, led by ESG Integration. Sustainable real estate funds have still not fully recovered from the severe declines experienced during the first quarter of the year, but category, led by ESG Integration, has expanded Sustainable real estate funds have still not fully recovered from the severe declines experienced during the first quarter of the year as the spread of COVID-19 led to widespread economic and social shutdowns. On a year-to-date basis, the segment lags all other investment categories with an average return of -15.72%. Recent increases in seven-day infection rates across the US and Europe to levels exceeding the highs reached in August of this year, as we move into the winter season, are likely to extend the period of recovery. Still, during the course of the year, the number of real estate funds adopting sustainable investing strategies via re-brandings, on top of existing funds, increased by a net of 10 funds to 21 funds (84 funds/share classes) and $19.4 billion in assets under management at the end of September. These funds are managed by twelve firms that have largely adopted ESG Integration approaches to investment management. In fact, ESG Integration is employed by seven managers with 88.5% of the real estate fund assets under management, followed by 9.6% of assets that are pursuing an ESG Integration-Consideration approach. The sustainable real estate funds objective category expanded rapidly during the course of 2020 due largely to re-brandings The subset of sustainable real estate funds started the year with 11 funds, 40 fund/share classes and $3.5 billion in assets under management. Due largely to re-brandings, the sustainable real estate funds objective category expanded rapidly during the course of 2020, rising to 23 funds, 90 funds/share classes, at the end of the second quarter and settling down at 21 funds, 84 funds/share classes, by the end of September 2020. The drop is attributable to the liquidation during the third quarter of two funds consisting of six share classes managed by Morgan Stanley and Transamerica with combined assets of $19.0 million. Still, assets under management expanded by 8X. Fund firms like Cohen & Steers and Goldman Sachs, in particular, led the re-brandings parade by explicitly amending fund prospectus language to reflect their adoption of ESG integration in investment decisions. Refer to Chart 1. Performance results: Hard hit in the first quarter, sustainable real estate funds posted a year-to-date average decline of -15.72% During the first quarter, the universe of 44 funds/share classes gave up an average of -28.66%, with results ranging from a low of -37.76% to a high of -20.02%. Real estate securities partly recovered in the second quarter, with markets responding positively to massive and unprecedented fiscal and monetary relief and stimulus policies and as economies began to slowly reopen. The listed real estate market was also supported by mostly intact earnings and dividends, and encouraging rent collection data outside of retail and hotel landlords and certain office companies. The universe of sustainable funds benefited, gaining an average of 10.87% in the second quarter and 2.94% in the third quarter. That left the expanded universe of sustainable real estate funds with an average year-to-date decline of -15.72% and a trailing twelve-month drag of -15.72%. These returns are net of expenses, which rank at the higher end of the range across all sustainable investment company categories, including ETFs and index funds. The average expense ratio applicable to sustainable real estate funds is 1.24% as of September 2020, ranking this objective category as the fourth most expensive out of 39 categories. Real estate funds expense ratios range from a low of 0.5% levied by the $58.8 million Vert Global Sustainable Real Estate Fund to 2.12% charged by the $1.4 million Goldman Sachs International Real Estate Securities Fund C (fund AUM=$117.7 million). ESG Integration approach dominates the segment, followed by ESG Integration-Consideration The twelve firms offering real estate funds at the end of Q3 2020 have largely adopted ESG Integration approaches to investment management. ESG Integration is employed by seven managers with 88.5% of the real estate fund assets under management, followed by 9.6% of assets that are subject to an ESG Integration-Consideration approach.  Refer to Table 1 and definitions below.  Two firms, including the legacy GuideStone Funds Global Real Estate Securities Fund, in operation since 2006, employ a values-based approach that relies entirely on exclusions. Only one fund, the Vert Asset Management Global Sustainable Real Estate Fund publishes an impact report that describes the fund’s ESG scores relative to the REIT universe, excluded companies, portfolio alignment with UN SDGs, engagement initiatives, proxy voting record as well as CO2 emissions reduction. While this is positive, the presentation of data covering ESG scores and CO2 emissions lack clarifying details and limit an investor’s ability to make comparisons across funds. ESG Integration definitions:  ESG Integration-The fund will integrate ESG and may also engage with stakeholders, ESG Integration-Consideration-The fund may integrate ESG.  ESG Integration-Mixed-Core strategy consists of ESG integration, but exclusions, impact or thematic approaches may also be employed.

The Bottom Line: GAMCO Investors is set to launch its first actively managed sustainable ETF, Love Our Planet & People (LOPP), Gabelli’s second ESG fund.

The Bottom Line:  Green bond funds in the US experienced positive cash flows in September and added $13.1 million to end September at $855.9 million. September green bond funds: summary Green bond funds in the US experienced positive cash flows in September and added a net of $13.1 million to end September at $875.9 million. This resulted in a net gain of only 2% relative to August due to the liquidation of the $29.9 million green bond fund managed by AllianzGI.  Even with the inclusion of Franklin’s municipal green bond fund and corresponding share classes, green bond fund/share class returns in September produced an average gain of 0.11%.  This exceeded the -0.05% total return posted by the Bloomberg Barclays US Aggregate Bond Index but lagged by 64 bps the ICE BofAML Green Bond Index (Hedged) which only two funds outperformed.  These developments unfolded against a backdrop of strong green bonds issuances in September.  Issuance of green bonds during the last month of Q3, which also experienced robust volumes of social bonds, sustainability bonds and sustainability-linked bonds, reached $32.5 billion, the highest monthly level so far this year and more than twice the $14.4 billion level reached in August. While affecting sustainable bonds more broadly, September also featured a European Central Bank (ECB) announcement that certain sustainable bonds will be accepted as collateral for Eurosystem credit operations and also for the Eurosystem outright purchases for monetary policy purposes, starting in 2021.  This policy is likely stimulate sustainable green and social bond issuances. Green bond funds experience positive cash flows in September and closed Q3 at $855.9 million in assets Cash flows into sustainable fixed income funds were positive in September even as most fixed income indices posted declines, excepting treasuries across the board that returned 0.14% while longer-dated Treasuries were higher.  Green bond funds, now down to seven funds and 22 funds/share classes, also experienced positive cash flows estimated at $42.9 million.  However, net gains were limited to $13.1 million to end September at $855.9 million as a consequence of the liquidation and dissolution of the AllianzGI Green Bond Fund with about $29.9 million in net assets.  This resulted in a net gain of only 2% relative to August and below the roughly 4-5% monthly increase in net assets needed to reach $1.0 billion in green bond fund assets by year-end.  Refer to Chart 1.  The principal beneficiaries of the net inflows were three of the four largest funds that make up the green bond funds universe.  These include the Calvert Bond Fund, iShares Global Green Bond ETF and VanEck Vectors Green Bond ETF, in that order, that expanded by $28.2 million, $6.3 million and $5.8 million, respectively. In the third quarter, green bond funds added a net of $76.5 million, versus $95.8 and $58.3 million in the second and first quarters, in that order. Green bond funds/share classes in September produced an average gain of 0.11% Even with the inclusion of Franklin’s municipal green bond fund and corresponding share classes, green bond fund/share class returns in September produced an average gain of 0.11%.  This exceeded the -0.05% total return posted by the Bloomberg Barclays US Aggregate Bond Index but lagged by 64 bps the ICE BofAML Green Bond Index (Hedged).  The same funds scored an average return of 1.69% in the third quarter, beating the conventional investment-grade intermediate benchmark by 107 bps but falling behind the ICE green bond index by 8 bps.  A more limited group of funds in operation for the full 12-month period to September 30, five funds and 13 share classes in total, recorded an average gain of 5.46% and outperformed the green bond benchmark but not the conventional Bloomberg Barclays US Aggregate Bond Index.  Funds with three year returns are even more limited in number as only three funds were in operation during the entire period and only two without a change in investment policy[1].  The two funds, consisting of five share classes, registered an average return of 5.01%, falling short of both benchmarks.  Refer to Table 1. Individual fund returns in September ranged from a high of 0.83% posted by iShares Global Green Bond ETF to a low of -0.19% recorded by TIAA CREF Green Bond Fund-Retail shares to an even lower -0.36% delivered by the each of the share classes that make up the Franklin Municipal Bond Fund. Another green bond index beating fund in September was the Mirova Global Green Bond Fund and its three share classes, including the Mirova Global Green Bond Fund N that led in the 3Q with a 2.41% return.  A small number of funds combined with their short period of operation (4 of the seven funds were launched within the last two years) limits the ability to reach meaningful conclusions regarding the performance of green bond funds at this time. That said, (1) Even though the seven funds invest in green bonds, strategies vary and this affects performance outcomes.  For example, performance results vary in line with whether a fund invests in dollar denominated bonds only or in combination of dollar and non-dollar bonds along with hedging strategies, or across taxable and municipal bonds, to mention two important strategy distinctions, and (2) there should be a negative correlation between higher performing funds and lower expense ratios but that can’t be confirmed based only on the results recorded in September. Issuance of green bonds in September reached $32.5 billion Issuance of green bonds in September, which also experienced robust volumes of social bonds, sustainability bonds and sustainability-linked bonds, reached $32.5 billion, the highest monthly level so far this year and more than twice the $14.4 billion level reached in August. This also capped the best quarterly volume this year, reaching $68.7 billion versus $54.9 billion in Q2 and an even lower $42.3 billion in Q1.  Refer to Chart 2.  Issuance in September was bolstered by an innovative first-time 10-year 0% coupon Federal green bond issued by Germany in the amount of €6.5 billion ($7.8 billion) with a proviso that the bond can be swapped for an otherwise identical conventional bond that was also issued at the same time.  The green bond was reported to have been almost 6X oversubscribed.  The German government reported that it intends to issue a second Green Federal security in the fourth quarter of 2020.  Other issuers in September included first time issuer Volkswagen that came to market with two bonds at €2.0 billion (about $2.4 billion) with terms of 8 and 12 years to finance modular electric drive matrix (MEB) and the new BEV models as well as US-based Verizon that issued a $1.0 billion green bond. US issuers accounted for $4.7 billion, or 6.8% of September’s total world-wide volume.  Comprised of both corporate and municipal issuers, Verizon Communications was the largest green bond issuer in the US, coming to market with its second green bond offering intended to primarily finance long-term renewable energy purchase agreements which support the construction of solar and wind facilities to bring new renewable energy to the grids powering Verizon’s networks. Augmented by Verizon, corporate issuers led with $2.9 billion in green bonds or 62% of US issuers while municipal entities, ten in total, came to market with $1.7 billion or 35.7% of the US total. Municipal debt issuances were led by the Metropolitan Transportation Authority, NY, which came to market with $900 million Transportation Revenue Green Bonds rated by Moody's Investors Service a notch lower at A3 after the MTA’s downgrade from A2. That said, the headlines were captured by the San Francisco Public Utilities Commission (SFPUC), an issuer of multiple green bonds going back to 2016 that launched a $150.9 million offering to be marketed internationally as taxable bonds and listed on the London Stock Exchange’s International Securities Market (ISM). New Developments ECB accepts certain sustainability bonds as collateral for Eurosystem credit operations On September 22 the European Central Bank (ECB) announced its decision to accept as collateral for Eurosystem credit operations and also for the Eurosystem outright purchases for monetary policy purposes bonds with coupon structures linked to certain sustainability performance targets. To be eligible, sustainable bonds must comply with all other eligibility criteria. According to the ECB, the coupons must be linked to a performance target referring to one or more of the environmental objectives set out in the EU Taxonomy Regulation and/or to one or more of the United Nations Sustainable Development Goals relating to climate change or environmental degradation. This further broadens the universe of Eurosystem-eligible marketable assets and signals the Eurosystem’s support for innovation in the area of sustainable finance. EU rules define an economic activity as environmentally sustainable if it makes a “substantial contribution” to one of its six objective, which relate to climate change mitigation, protection of water, transition to a circular economy, pollution prevention and protection of biodiversity. Non-marketable assets with comparable coupon structures are already eligible. The decision aligns the treatment of marketable and non-marketable collateral assets with such coupon structures. BIS Quarterly Review September 2020 research article advocates for company green ratings A research paper published in the BIS Quarterly Review, September 2020, makes that case that current labels for green bonds do not necessarily signal that issuers have a lower or decreasing carbon intensity, measured as emissions relative to revenue.  Instead, rating firms on the basis of their carbon emissions, rather than any individual green or other bonds, could provide a useful signal to investors and encourage companies to increase their carbon efficiency.  The paper goes on to propose that such ratings could complement existing labelling systems and can be designed to provide extra incentives for large carbon emitters to help combat climate change. This argument has merit.  It should be noted, however, that green bond proceeds according to the ICMA best practices guidelines can be used for purposes that extend beyond GHG reduction.  It's true that the impact on GHG emissions have likely been limited, but even more importantly has been the impact of green bonds on sustainable finance and their role in focusing attention on and driving home the importance of taking action to address climate risk. Credit Roundtable ESG Survey results The Credit Roundtable, an education, outreach and advocacy group focused on preserving bondholder protections, published the results of a survey conducted between August and September of this year on environmental, social and governance with a view toward better understanding how member firms view ESG factors in the investment process.  Responses from institutional fixed income managers overseeing more than $4 trillion of assets with regard to green bonds, in particular, indicate that (1) the lack of standard definitions deters investments in green bonds (67.39%) and (2) 34% expect to see green/sustainable bonds pricing through the secondary curve on a consistent basis within 12 months (12.8%) to within several years (21.3%), 38.3% were unsure while 27.7% responded that they don’t expect this outcome. 64% of respondents to the survey reported that they do not specifically target green or sustainable bonds. [1] Since September 1, 2019 VanEck Green Bond ETF green bonds limited to US dollar denominated.

The Bottom Line:  32 events were recorded in September, including 25 new sustainable mutual fund types or ETFs, with 19 non-US-based funds and 6 US.September 2020 Events Summary32 events were recorded in September 2020.25 new sustainable mutual fund types or ETFs dominate the events listing, with 19 non-US based funds and six new US-based strategies.Three events cover changes in portfolio management processes.Two events apply to new analytical tools, or research tools or indices.One event each included a change in portfolio research inputs or capabilities and one involved a new training service offering.Highlight:As reported on September 18th, BlackRock CEO Larry Fink said at the annual Morningstar Investment Conference in Chicago that by the end of this year, 100% of its portfolios will integrate ESG metrics, up from 70% at the end of April, “We are committed by the end of 2020 to have all our portfolios integrated to ESG,” Fink said at the conference, “Climate risk is investment risk.”  The asset manager will provide data and analytics that highlights the value of issues like climate change.Refer to Table 1.  

The Bottom Line:  Newest Vanguard sustainable ETF launch, the Vanguard ESG US Corporate Bond ETF, is focused on fixed income and relies entirely on exclusions.

The Bottom Line:  Green bond funds posted a negative -0.38% average total return in August but added $35.6 million to end August at $842.8 million. August green bond funds summary Against a backdrop of rising long-term Treasury yields throughout August, green bond funds, including mutual funds and ETFs, posted a negative -0.38% average total rate of return and beat out the -0.81% recorded by the Bloomberg Barclays US Aggregate Bond Index and -0.49% registered by a narrower-based green bond index.  At the same time, the eight corporate and municipal green bond funds ended August at $842.8 million, benefiting from positive cash inflows that added $35.6 million in net assets. Refer to Chart 1. Up from $807.2 million last month, the funds continue on track to equal or exceed $1 billion on or prior to year-end even in the light of the announced liquidation and dissolution of the $29.9 million Allianz Green Bond Fund. Green bond issuance reached $13.2 billion in August[1], down from $20 billion the prior month.  That said, there is a strong pipeline of green bond issuance going into September 2020, including several sovereign issuers. Green bond funds experienced positive inflows in the amount of $38.6 million Green bond funds attracted an estimated $38.6 million in positive flows that were largely directed to three green bond funds.  The Calvert Green Bond Fund added a net of $25.7 million in assets sourced almost entirely to institutional investors.  The iShares Global Green Bond ETF and the VanEck Vectors Green Bond ETF added $4.9 million and $2.5 million, respectively. The eight funds are inching closer to reaching $1.0 billion in net assets, however, the announced liquidation and dissolution of the AllianzGI Green Bond Fund on or about September 28, 2020 will drain $29.9 from the segment. The fund, likely seeded by Allianz Global Investors, has not been able to gain traction and the move seems linked to a strategic partnership between Allianz and Virtus Investment Partners, Inc. intended to enhance the business opportunities of both firms in the US retail market. Green bond fund investors continue to be dominated by institutional investors who account for a minimum of $604.9 million in assets or almost 72% of the segment’s combined assets under management[2]. August performance:  Five funds outperformed both indices while three trailed    The eight green bond funds and the corresponding 25 funds/share classes posted an average total return of -0.38% in August, beating the Bloomberg Barclays US Aggregate Bond Index by 43 basis points and the ICE BofAML Green Bond Index Hedged by 11 basis points.  August returns ranged from a low of -0.83% attributed to the Franklin Municipal Green Bond A[3] to a high of -0.11% recorded by PIMCO Climate Bond I-2.  Five funds outperformed both indices while three trailed, including the recently launched Franklin Municipal Green Bond Fund.  Refer to Table 1. Viewing results over the trailing twelve months, the segment registered an average total return of 4.1% as compared to the 2.29% achieved by the ICE BofAML Green Bond Index Hedged and 6.5% posted by the conventional intermediate investment grade Bloomberg Barclays US Aggregate Bond Index.  11 out of 16 funds/share classes outperformed the narrower green bond index but the broader bond index beat all green bond funds/share classes.  Refer to Table 1. Green bonds volume in August reached $13.2 billion 52 issuers launched green bond transactions that reached a total of $13.2 billion in August, including 15 issuers in the US that accounted for almost $4.0 billion of monthly volume, or 30%.  Refer to Chart 2.  These are largely but not entirely sourced to municipal issuers, led by Los Angeles County MTA that issued about $1.35 billion in tax-free revenue debt to refinance loans covering improvements and extensions to its rail system. In order of size of issuances, the LA  County MTA transaction was followed by San Francisco BART and Tucson Electric Power. Other developed market issuers included entities in Germany and Hong Kong, offering $2.4 billion and $1.3 billion, respectively.  Development banks lead in terms of volume, with Germany’s Kfw issuing $2.0 billion while China Development Bank added $2.6 billion. Year-to-date through the end of August, green bond volume stood at $124.8 billion. [1] Source:  Climate Bond Initiative (CBI), comprised of CBI aligned green bonds that allocate at least 95% of proceeds to green projects. [2] Excludes institutional investors in ETFs. [3] Franklin Municipal Green Bond Fund compares its performance to the Bloomberg Barclays Municipal Bond Index.  The index registered -0.47% in August.

The Bottom Line: The launch of BlackRock’s LifePath ESG Index Funds expands sustainable target date funds segment and may stimulate further growth beyond $4.3 billion. Launch of BlackRock LifePath ESG Index Funds expands sustainable target date funds segment and may stimulate further growth With the launch on August 18th of the BlackRock LifePath ESG Index Funds, a series of ten target date funds consisting of affiliated passively managed mutual funds and ETFs ranging in target dates from 2025 to 2065, the firm’s investment management arm expanded the small universe of sustainable target date registered mutual funds. Now enlarged to three firms offering a total of 25 funds with 50 share classes and $4,301 million in assets under management, BlackRock is the first company to base its offering almost entirely on low-cost passively managed funds designed for retirement plans as well as individual investors seeking to achieve specific intermediate to long-term investment goals via diversified sustainable investment options. This development may stimulate further growth in the segment that has otherwise experienced limited advancement in terms of investment firm offerings and assets under management that have gained just $1.5 billion in the last three years. Beyond distinctive methodologies for establishing glide paths that serve as a basis for shifting equity and fixed-income allocations or riskier to less risky positions over time, BlackRock’s new offering distinguishes itself in three key ways. First, it relies almost exclusively on passively managed ETFs and mutual funds. These include various iShares MSCI ESG ETFs, several non-ESG ETFs as well as the BlackRock Treasury Cash Fund. Second, the fees charged in the form of expense ratios applicable to individual and institutional investors are the lowest of the three target date funds currently on offer. Refer to Table 1. Third is BlackRock’s approach to sustainable investing. For a majority of the fund’s assets (exceptions, for example, apply to the conventional iShares Developed Real Estate Index Fund), the sustainable investing strategy combines exclusions with the integration of environmental, social and governance (ESG) factors into stock selection, based on ESG opinions provided by third-party MSCI. In particular, excluded securities are companies involved in the business of tobacco, companies involved with controversial weapons, producers and retailers of civilian firearms, companies involved in certain fossil fuels-related activity such as the production of thermal coal, thermal coal-based power generation and extraction of oil sands based on revenue or percentage of revenue thresholds for certain categories. Also excluded are companies that are involved in very severe business controversies, as determined by MSCI. Otherwise, the investable universe consists of companies with higher ESG ratings within each industry segment, subject to maintaining risk and return characteristics similar to each relevant underlying index. Refer to Table 1. Table 1: Sustainable target-date portfolios and their sustainable investment strategies Investment Manager Portfolios Start Year Assets ($MM) Expense Ratios  Sustainable Investment Strategy Guidestone Capital Management, LLC (a unit of Guidestone Financial Resources) Affiliated underlying active and passively managed GuideStone mutual funds ranging in target dates from 2015-2055 that are advised by external independent investment managers. 2006 4,219.3 Range from 0.50% to 0.75% Values-based/Exclusions.  Funds may not invest in any company that is publicly recognized, as determined by Guidestone Financial Resources of the Southern Baptist Convention, as being in the alcohol, tobacco, gambling, pornography or abortion industries, or any company whose products, services or incompatible activities. Natixis Advisors, L.P. (a unit of Natixis, a French-based firm) Affiliated underlying actively managed mutual funds ranging in target dates from 2015-2060 that are advised by affiliated investment managers (examples include Loomis Sayles and Harris Assoc.) 2017 61.7 Range from 0.55% to 0.60% ESG Integration, Exclusions and Thematic Investing.   Implementation of ESG strategies may vary across underlying funds.  Certain ESG strategies may also seek to exclude specific types of investments.  Range of underlying funds also includes thematic funds, such as funds investing in green bonds or carbon neutrality. BlackRock Fund Advisors (a unit of BlackRock, Inc.) Affiliated passively managed mutual funds and ETFs ranging in target dates from 2025 to 2065 as well as a Retirement fund option. 2020 20.0 Rangefrom 0.20% to 0.50% ESG Integration, Exclusions.  The majority of the investable universe consists of companies with higher ESG ratings, subject to maintaining risk and return characteristics similar to the underlying index. For each industry that makes up a sustainable index fund, MSCI identifies key ESG issues that can lead to unexpected costs for companies in the medium to long term.  See above for exclusions. Sources: Fund prospectus and related materials/Sustainable Research and Analysis LLC. Assets as of August 31, 2020 sourced to Morningstar.Note of Explanation: While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic and impact investing and ESG integration. Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive.

The Bottom Line: Twenty-five August 2020 reported events include first time ESG scores released from two notable firms, Bloomberg and ISS covering companies and funds. August 2020 events summary Twenty-five events have been identified for August 2020. o 12 new ESG fund offerings dominate the events listing, with 11 non-US based funds versus one new US-based strategy. o Four events cover changes in portfolio management processes. o Four new analytical tools, or research tools or indices were introduced in August. o There were two portfolio management team changes. o The remaining three events included the introduction of a new security type and one green bond fund closing. Two events have been brought forward from July that had not previously been reported. One of these involves the announced reduction of a sustainable ETFs expense ratio.  Observation: Four firms launched new analytical tools or research tools or indices, including first time ESG scores released from two notable firms, Bloomberg and ISS. Bloomberg announced that it is launching a proprietary ESG scoring service while ISS launched a new ratings platform to assess the ESG performance of investment funds. A third firm, Apex Group, announced the launch of the first ESG ratings and advisory platform for private companies and private market investors. These firms are adding ESG scoring and ratings products in an increasingly crowded field that, based on an estimate attributed to finance-consulting firm Opimas earlier this year, may reach $1 billion by 2021. Refer to Table 1.

The Bottom Line:  Green bond funds and ETFs reached $807.2 million as of July 31, likely to reach $1 billion in assets by year-end 2020. Green bond funds reach $807.2 million at the end of July, likely to reach $1 billion by year-end Green bond mutual funds and ETFs surpassed $800 million in assets for the first time at the end of July, reaching $807.2 million with the benefit of a month-over-month 8% July gain of $65.2 million attributable to new money along with market movement. Refer to Chart 1.  July’s green bond funds increase represents the second best monthly gain since the first green bond fund was launched by Calvert Investment Management in October 2013. It comes on the heels of recent green bond issuances that synchronize with the uptick observed in July when $20 billion in labelled green bonds were issued following increasing volumes over the previous three months. Barring a market reversal, both green bond fund assets and green bond issuances are expected to achieve further gains this year, with green bond funds likely to reach $1 billion on or before year-end while green bond issuance dynamics could take 2020 volumes beyond last year’s $257.5 billion level. Eight green bond funds dominated by Calvert and, to a lesser extent, BlackRock iShares Green bond funds, including six mutual funds and two ETFs currently in operation in the US invest in green bonds that are issued to raise capital for investment in new and existing projects with environmental benefits. In a vast majority of cases, green bonds are backed by the issuer’s full balance sheet (rather than the projects financed).  As of July 31, 2020, eight firms in the US offer the eight funds, some with multiple share classes subject to varying expense ratios, that range in size from the most recently launched $5.1 million Franklin Municipal Green Bond Fund to the $556.6 million Calvert Green Bond Fund.  Two firms, however, including Calvert Research and Management, a unit of Eaton Vance, and BlackRock, account for 80.1% of the segment’s assets.  Also, a minimum of 72% of assets is sourced to institutional investors. The small green bond funds universe is comprise of passive and actively managed funds that pursue varying fundamental investment approaches and strategies. Beyond investing in corporate, government and related bonds versus municipal bonds in the case of Franklin’s municipal fund, additional areas of differentiation include green bonds qualification criteria (for example, labelled green bonds or not), investments in non-US dollar denominated bonds which applies to six of eight funds and, in turn, the deployment of currency hedging strategies. Additional factors also impacting investment outcomes include engagement in securities lending activities and liquidity management. 71% of corporate, government and related green bond funds/share classes posted above benchmark results in July 71% of corporate, government and related green bond funds/share classes posted above benchmark results in July, generating an average total return of 1.85% versus the ICE BofAML Green Bond Index-Hedged USD[1], up 1.51%.  Fund returns ranged from a low of 1.29% achieved by the PIMCO Climate Bond Fund C to a high of 2.14% recorded by Calvert Green Bond I.  Only two funds with corresponding share classes underperformed.  By way of a comparison to a non-green broad-based bond index (intermediate investment-grade), the same funds outperformed and underperformed the conventional Bloomberg Barclays US Aggregate Bond Index that posted a 1.49% total return. The results over the trailing 12-months are similar for the 16 funds/share classes in existence for the entire time period.  These funds registered an average return of 6.79%. 11 funds/share classes of 16, or 69%, eclipsed the performance of the ICE BofAML Green Bond Index-Hedged USD, up 5.12%.  Returns ranged from a low of 4.81% posted by the Allianz Green Bond Fund A to a high of 8.91% achieved by the TIAA-CREF Green Bond Fund Institutional Shares.  When compared to the conventional Bloomberg Barclays US Aggregate Bond Index that was up a strong 10.2%, however, none of the funds managed to outperform.  Refer to Table 1.  Reasons to believe green bonds issuance in 2020 could equal or exceed 2019 level After a downturn in March that dropped new issuance to $5.0 billion when labelled green bonds were suppressed by social bond offerings, volumes picked up momentum again in April, May and June.  Just last month, volume reached a year-to-date monthly high of $20 billion and so far in August a number of issuers have launched labelled green bonds, including China Development Bank, the City of Seattle and Reykjavik Energy, to mention some.  The week before last, Visa Inc. came to market with an inaugural seven-year green bond offering totaling $500 million.  The green bond, believed to be the first issued by a digital payments network, is intended to raise proceeds to finance projects that meet eligible categories, including green buildings, renewable energy, sustainable water and wastewater management and projects that support sustainable living behaviors. While estimates for 2020 green bond volumes had been scaled back (for example, Moody’s Investors in May revised its original 2020 forecast of $300 billion to $175 billion to $225 billion of green bond volume in 2020) there are at least two emerging reasons to believe green bond volumes could equal and even exceed the 2019 level.  First, as postulated by S&P Global, the EU recovery plan could act as lightning rod for the green bond market.  EU leaders on July 21 agreed to a groundbreaking US$858 billion (€750) fiscal stimulus package to address the impact of the coronavirus. Programs to fight climate change are a centerpiece of the plan, amounting to roughly US$500 billion and signaling a strong commitment overall to EU green stimulus as part of the post pandemic recovery roadmap.  This is sparking hope among green bond specialists that the plan will stimulate the green bond market.  Second, it has been reported that Christine Lagarde, president of the European Central Bank (ECB), has promised that green objectives will be at the heart of the ECB’s €2.8 trillion asset purchasing program. In an interview with the Financial Times, president Lagarde pledged to “explore every avenue available to combat climate change,” saying she will look at “greener” changes to all of the Bank’s operations to reach this objective. Such an action on the part of the ECB will also bolster demand for green bonds and could, in turn, stimulate further issuances. [1] ICE BoAML Green Bond Index-Hedged USD used for relative performance evaluation purposes even as this benchmark may not actually be the benchmark of record for each one of the green bond funds. Franklin Municipal Green Bond Adv excluded from comparisons.  

The Bottom Line: American Century introduces two actively managed non-transparent sustainable investment ETFs, adding to the now 34 actively managed sustainable funds with $17.1 billion.

The Bottom Line:  21 events reported in July, including the launch of two long/short funds.  Direxion's long-short fund is beating the S&P 500 since inception.  July 2020 Event Summary 21 events are reported in July along with 3 events that are carried forward from June. 13 events or 62% are related to new funds or strategies, including US and non-US-based launches. 7 track new non-US based funds or strategies. 6 track US-based funds or strategies. Five events involve the introduction of a new analytical tool or research tool or indices. The three remaining events, one each, include a management change, M&A and a strategic positioning move on the part of Federated Hermes. Observation Included in new non-US product introductions are two funds that will employ sustainable long-short strategies.  While not likely the only long-short strategies in existence today, these two introductions add to one that was launched in the US as of February 11, 2020.  The passively managed fund, Direxion MSCI USA ESG Leaders vs. Laggards ETF (ESNG), that reached $12.8 million as of June 30, seeks to capture excess returns by emphasizing the thesis that high and positively trending environmental, social and governance (ESG) ratings are correlated with superior accounting and financial results over time.  And unlike the 91 passive and 24 actively managed sustainable investment ETFs on offer today, this fund amplifies the bet via leverage using a 150/50 structure, or a ratio of 3:1, to emphasize highly rated ESG companies with positive rating movement while simultaneously selling short poorly rated companies.  Since its launch, the fund is up 5.2% to July 31 while the S&P 500 has registered a -2.6% return over the same time interval. Refer to Table 1 for details.    

The bottom line: Sustainable investment money market options for institutional investors continue to expand, with US money market funds taking a wide lead by assets.

The Bottom Line:  Eight of the ten largest large cap growth and blended funds invest in Facebook, boycotted now for failing to police hate speech. [/ihc-

The Bottom Line:  33 material events were identified in June 2020, dominated by new fund launches, including seven ETFs in the US, and personnel changes. Events Summary 33 material events were identified in June 2020, dominated by new fund launches and personnel changes, as follows: 20 events involved the launch of new funds or the adoption of sustainable investing strategies in the US and overseas. 15 events were sourced to new fund launches or strategies outside the US. 5 events were sourced to new US fund launches or strategies, including seven new ETFs or more than doubling the previous number of ETF launches year-to-date. Five firms made sustainable portfolio management team changes. Four events are linked to the introduction of new analytical tools, research tools or indices. The remaining four events included two public engagements, one litigation and one noting the formation of a new management firm.

The Bottom Line: BlackRock iShares launches 7 ETFs pursuing sustainable investing strategies, more than doubling the number of sustainable ETF launches year-to-date by six firms.

The Bottom Line:  The sustainable funds segment is highly concentrated with 20 of 179 firms managing 91.5% of assets.  Expansion in number of firms expected.

The Bottom Line: Five new firms introduced first time sustainable mutual funds and ETFs in May that encapsulate ESG integration strategies but their approaches vary.

The Bottom Line: Direct indexing is an option for qualifying passive investors seeking to customize portfolios to more precisely meet their sustainability values and preferences. An introduction to direct indexing The dislocations in the equity and fixed income markets during the February-March 2020 coronavirus-related market rout brings to mind another potential advantage offered by direct indexing that qualifying sustainable long-term investors, particularly taxable investors, may wish to consider as an alternative or supplement to sustainable passive investing[1] through ETFs or mutual funds. Direct indexing, which refers to the investing approach of owning shares directly by creating a dedicated portfolio of securities to track the performance of an index, avoids the risk of exposing the portfolio to forced selling.  That is, investors are insulated from any panic selling on the part of other shareholders in a pooled investment vehicle, such as an ETF or a mutual fund that, in turn, forces managers to sell securities at disadvantageous times and prices as was reported to be the case in some instances during the pandemic induced market panic.  Importantly for sustainable index-oriented investors, the direct indexing approach catalyzes the ability to integrate an investor’s financial goals and objectives and their distinctive set of personal sustainable values and preferences.  In addition, direct indexing allows investors to take advantage of unique tax benefits and the option to directly exercise their proxy voting rights if they choose to do so.  That said, there are some drawbacks that should also be considered.  Not only do investors have to be comfortable with the idea of owning securities directly, but this option is currently limited to equity investing and the cost, provided the minimum portfolio size is met, is higher than investing in an index tracking ETF or mutual fund.  These considerations are explored below. Direct indexing is an alternative to passively managed ETFs and mutual funds Direct indexing represents an alternative to pooled investment vehicles like ETFs and mutual funds while also complementing these as well as investments in actively managed funds.  Direct indexing allows investors to establish an individual separately managed account customized to meet the unique needs of each client based on their sustainability values or preferences. Once these have been identified along with the desired market segment exposure, such as a large cap stock segment via the S&P 500, large and medium sized stock segment through the Russell 1000 or foreign stocks via the MSCI EAFE Index, to mention just a few, a subset of securities is created, qualified by the client’s values.  This is achieved by using a mathematical optimization program designed to deliver index like results with limited tracking error. Indeed, the key is being able to reach the optimal balance between the investor’s values and tracking error, or correlation between the portfolio and its underlying index.  The individual securities are held directly by the investor in a separately managed account. Recent technological innovations have made it possible to automate much of the direct indexing workload and, in the process, to deliver the product to a broader base of investors, with smaller account minimums and lower fees.  However, this is not an option for all investors as it’s only practical for investors that meet the minimum portfolio level requirements.  Also, this approach is largely, if not entirely, limited to equity portfolios since direct indexing has not as yet been extended to fixed income. Owning a stock portfolio directly insulates investors from market volatility and investor panics As news regarding the spread of the coronavirus and its potential impact began to sink in, markets started to plunge, volatility spiked and investors sought safety in US Treasury securities and liquidity options such as money market funds.  For example, on March 11th the Dow Jones Industrial Average dropped 1,400 points, or 5.6%, as the World Health Organization declared the fast-spreading coronavirus a global pandemic.  Investors raised cash and de-risked while redemptions from mutual funds and ETFs spiked.  In the process, portfolio managers had to sell stocks and bonds to liquefy portfolios and meet investor redemptions.  In fixed income, some bond ETFs were highlighting signs of liquidity stress in broader markets, with cash prices trading at persistent and deep discounts to the value of the underlying assets.  Some money market funds froze and had to be bailed out. Whereas mutual fund and ETF investors are, in any case, exposed to the risks of price declines, they also have to bear the consequences of portfolio selling in a stressful market that results in wider bid-asked spreads and the realization of gains or losses allocated to all shareholders.  In a mutual fund, these are normally distributed at year-end to all investors.  This is also the case for ETFs, however, these are structured to operate as more tax-efficient investment vehicles by limiting the realization of gains or losses via the share creation/redemption process that mitigates the consequences of selling and buying securities directly.  A dedicated direct indexing portfolio doesn’t protect a client from price declines, but it does mitigate against having to incur losses by selling securities to meet redemptions. Direct indexing permits customization to suit an investor’s sustainability values and preferences In the case of index tracking sustainable mutual funds or ETFs, an underlying conventional index such as the S&P 500 is modified pursuant to a set of guidelines or sustainable principles formulated by the index provider using a proprietary set of rules, including, as applicable, reliance on environmental, social and governance (ESG) scores to qualify securities.  For example, sustainable indexes might be limited or qualified as to companies with the highest or best ESG scores in each industry or sector, companies deemed to be low carbon emitters, or firms engaged in renewable energy, to mention just a few.  At the same time, such indexes may avoid certain companies based on their line of business, as defined by the index provider, such as tobacco companies, alcohol producers or utilities operating nuclear power plants.  In any case, the guidelines and any restrictions are defined by the index provider.  Direct indexing, on the other hand, enables each individual client to formalize their own sustainable investing principles and values and create an index portfolio that more precisely meets their sustainability preferences.  Financial considerations aside, clients can emphasize particular themes, exclude individual securities or companies, sectors or industries ranging from weapons to oil and gas exploration companies, or emphasize investing in companies that are aligned with broad societal goals to address poverty, hunger, education or climate, to mention just a few. Yet another approach may be to invest in companies with high ESG scores or companies whose scores are on the rise.  The possibilities are many and are only constrained by the trade-off between an investor’s values and the portfolio’s tracking error. Tax minimization benefits include tax loss harvesting and tax management Direct indexing offers a number of tax advantages, including enabling tax‑loss harvesting.  For taxable investors, one of the key benefits to direct indexing is the ability to maximize after tax-returns by taking advantage of tax efficient trading methodologies such as tax-loss harvesting.  Tax loss harvesting refers to selling a security that has lost value in order to offset capital gains on the investor’s tax return.  This can take effect regardless of the overall market movement, either flat or up.  Another tax minimization strategy accrues to investors in that they have the ability to set parameters around the amount of capital gains they will incur per year.  This allows the capital gains to be spread out across a period of time, rather than realized all at once. Direct indexing investors may exercise voting rights and initiate shareholder actions Because investors directly own the underlying securities in their portfolio, they are entitled to vote on matters of corporate policy, including decisions on the makeup of the board of directors, issuing securities, selection of public accounting firms, executive compensation, initiating corporate actions and making substantial changes in the corporation's operations, in proportion to the number of shares they own.  Sustainable investors in particular will have the opportunity to vote on various ESG issues that have increasingly found their way into corporate proxy statements. Or investors can take advantage of another avenue to become change agents by becoming sponsors, co-sponsors or endorsers of specific shareholder resolutions.  These options are not available to investors in mutual funds or ETFs. According to a recent report published by Harvard University, between 2015 and 2019, 1,033 shareholder-initiated ESG resolutions were voted on at U.S. company annual General Membership Meetings, an average of 207 per year.  Investors can exercise their votes on these as well as additional ballot items.  Alternatively, this responsibility may be delegated to the chosen service provider. In addition to voting proxies, direct shareholders can become sponsors, co-sponsors, or endorsers of specific shareholder resolutions to drive further change at companies. Leading direct indexing providers:  Parametric Portfolio Associates and Aperio Group There is now a growing list of firms, large and small, that offer a direct indexing service.  These range from Charles Schwab to a 2015 start-up, Ethic, Inc., now indirectly owned by Fidelity Management (FMR).   That said, the two largest and oldest firms operating in this space with an emphasis on sustainable investing are Parametric Portfolio Associates and Aperio Group. Parametric Portfolio Associates is a Seattle, Washington-based company that was founded in 1987 and now operates as a wholly-owned indirect subsidiary of Eaton Vance Corp. (EVC), a publicly held asset management company.  Parametric lists a combined total of 512 employees and $266 billion in assets under management as of May 1, 2020.  Its stated fees for direct indexing services typically range between 0.15% and 0.35% of assets under management.  Other service fees may apply. Aperio Group is a Sausalito, California-based firm that was founded in 1999.  It operated as an independent company until the purchase of a majority of its outstanding equity by a private equity group in a transaction that closed in October 2018.  Aperio’s combined staff consists of 100 employees and the firm is reported to manage $34.5 billion as of March 13, 2020. Aperio focuses on the higher end of the ultra-net worth space and customizes portfolios for each client.   Its fees for direct indexing services start at 0.35% and are subject to various considerations that should be discussed with the company. Conclusion Direct indexing is an option available to all qualified passive investors, but for sustainable investors in particular, this investing option empowers them to integrate a set of uniquely personal sustainable values and preferences on top of meeting financial goals and objectives into the portfolio construction process.  In addition, direct indexing allows investors to insulate their portfolios from the risks due to forced selling, take advantage of unique tax benefits and offers the option to directly exercise their proxy voting rights if they choose to do so.  That said, there are some drawbacks that should also be considered.  Not only do investors have to be comfortable with the idea of owning securities directly, but this option is currently limited to equity investing and the cost, provided the minimum portfolio size is met, is higher relative to investing in an index tracking ETF or mutual fund.   [1]  While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass:  values-based investing, negative screening (exclusions), thematic and impact investing and ESG integration.  Each of these may also employ shareholder/bondholder engagement and proxy voting strategies.  These are not mutually exclusive. 

The Bottom Line: Of 23 material events identified in May 2020, eight events or 35% involved the introduction of new funds followed by personnel changes. 23 material events were identified in May 2020 including: Eight events involved newly launched US- and non-US based funds or strategies events. Five of these newly introduced funds were non-US based in markets as diverse as Russia & China. Three were new US-based ESG funds or strategies. Seven events involved sustainable management/Portfolio management personnel changes. Two events involved changes in portfolio management process. Two events captured the announcement of new analytical tools or research tools or indices. One event involved a senior management change. One event each pertaining to a fund closing as well as a merger, acquisition, divestiture or JV. One fund made a change to their operational support platform. One item captures a fund closing that occurred as of April 29 but not previously reported. Refer to Table 1 for details.

The Bottom Line:   The coronavirus pandemic did not spare green bonds and impacted the green bonds segment of the market in at least three ways. Introduction:  Green bond market also impacted by coronavirus pandemic    The coronavirus pandemic didn’t spare green bonds and it impacted the green bonds segment of the market in at least three ways.  First, issuance of green bonds in March tumbled to $2.8 billion or the lowest monthly issuance volume since December 2015[1].  Second, some combination of volatility in bond yields, a steep decline in risk assets and a tightening of market liquidity that led to the significant widening of corporate spreads as well as the effect of foreign currency hedging strategies in some funds, had a negative impact on the performance of green bond mutual funds and ETFs in March and for the entire first quarter 2020.  Third, on the plus side, green bond funds benefited from net positive cash flows during the quarter that lifted total net assets to a new high of $648.9 million. The small segment, which is still dominated by institutional investors, consists of eight firms offering eight green bond mutual funds or ETFs as of March 30, 2020. Green bonds issuance in March reached lowest level since December 2015 Primary green bond activity slowed dramatically in March following the market rout that began on or about February 20th  and continuing until governments initiated unprecedented global monetary easing and fiscal actions.  According to Climate Bond Initiative (CBI), overall March 2020 green bond issuance dropped to $2.8 billion, or a decrease of 83% relative to March 2019 and down from $15.6 billion in February.  A similar amount was issued in January 2020.  According to CBI, this is the lowest monthly issuance volume since December 2015 as issuers from sovereigns to corporates shifted attention to address the COVID-19 outbreak.  At the same time, issuance of social bonds according to HSBC more than doubled in March to $4.3 billion due to several large pandemic-related bonds from development banks.  This development led HSBC to ratchet up its estimate for the issuance of social bonds while at the same time to lower its estimate for green bond issuance in 2020 to $225 billion - $275 billion.  Prior to the March downturn, Moody’s Investors had projected that $300 billion in green bonds would be issued this year.  The rating agency has not adjusted its projection to-date. While attention across the globe has for now shifted to addressing the immediate coronavirus pandemic and its various consequences, the intermediate-to-long term outlook for green bond issuance is expected to remain strong if not stronger as governments and other issuers consider how to embed environmental priorities into their post-COVID-19 recovery plans. Green bond fund performance lags in March, first quarter and trailing 12-months     A single index for relative performance evaluation purposes does not capture the diverse nature of the eight green bond funds (22 funds/share classes) in operation throughout the entire first quarter 2020. This is due to four key structural differences among funds.  Six funds are actively managed while the two ETFs on offer are index tracking.  Some funds invest only in dollar denominated green bonds while others invest in US dollar as well as non-dollar denominated green bonds and hedge the currency risk exposure of non-US dollar denominated bonds.  A third difference lies in the way each of the fund management firms defines green bonds. Fourth, one of   the eight funds, the Franklin Municipal Green Bond Fund, invests only in municipal bonds. By all accounts, March was a most challenging month and even as investors shrugged off the potential impact of COVID-19 until the last week of February when markets derailed, the quarterly results were severely impacted.  Green bond funds posted an average total return of -6.12% in March and an average -2.96% over the first quarter and lagged corresponding indices.  Based on performance results compared to their most relevant corresponding taxable green bond benchmark, only one fund beat its benchmark in March as returns ranged from -3.45% to -7.57%.  When compared to the performance of non-green bond indices, their results were even worse.  The same conclusion holds when performance results are evaluated over the course of the entire first quarter. A reduced number of funds/share classes in existence throughout 2019 recorded an average 2.61% gain over the 12-month period ended in March.  The average return lagged both narrowly-based green bond specific indices and the two broader-based conventional benchmarks. With the exception of the iShares Global Green Bond ETF that beat the Bloomberg Barclays Global Aggregate Bond Index by 44 bps but failed to beat the ICE BofAML Green Bond Index Hedged USD, all other funds underperformed both their corresponding narrow or broader conventional indices.  The Franklin Municipal Green Bond Fund has been excluded from consideration at this point.  Refer to Chart 1 and Table 1.       Net new money:  Green bond investors added an estimated $75.8 million in the first quarter The pandemic dislocations didn’t deter green bond investors who added an estimated $75.8 million in the first quarter, including $10.3 million contributed by two new funds launched by PIMCO and Franklin that likely seeded much of the initial capital.  The increase, which was offset in part by market depreciation estimated at $17.5 million, seems like it may have been sourced to flows through financial intermediaries, such as Northern Trust, TD Ameritrade and Charles Schwab, to mention just three of 6 firms, that together account for 71.6% of the assets held by iShares Global Green Bond ETF that ended the quarter with $71.3 million.  Also, institutional investors added an estimated $27.8 million to the Calvert Green Bond Fund I that accounts for 85% of the large fund’s total net assets and 58% of the segment’s total net assets. Reporting and disclosure:  At least five firms offer some version of an impact report In the absence of green bond premiums, investors are less likely to be attracted to green bond funds strictly for outperformance reasons.  Rather, they seek to achieve positive environmental outcomes or impacts while also realizing active management or index tracking equivalent returns.  Environmental impact reports are the way outcomes can be communicated to fund investors. To this end, at least five investment managers publish impact reports or impact type reports, based on a review of company website disclosures.  These are Allianz, iShares/BlackRock, PIMCO, Nuveen (TIAA-CREF) and VanEck.  Each firm discloses a variety of metrics, but Nuveen provides the most extensive set of outcomes.  Four of these firms calculate and report on at least two of the same intended metrics even though calculation methodologies vary. These include renewable energy generated on an annual basis and CO2 avoided in metric tons. Impact metrics and reporting are still evolving and there are challenges to be resolved on the road toward standardizing these to make them comparable so that investors can actually compare and contrast results.  Still, the current reporting on the part of the firms that do so represents a good initial effort.   [1] Source:  Climate Bond Initiative.

The Bottom Line: Article on building sustainable investment products published in connection with webinar conducted on April 14, 2020 by Steve Schoepke and Henry Shilling. Introduction and summary As interest in sustainable investing continues to rise, judging by the growth in fund firms, sustainable fund investment products and assets under management that as of March 31, 2020 exceeds $2 trillion, investment managers are examining ways to enter the market with mutual fund and/or ETF product offerings. There are a number of methods for building sustainable investment products, management expertise, research capabilities, and a corporate image and reputation, but each comes with pros and cons. We outline five of the more common methods and their implementation trade-offs, and offer some recent examples that are further described in Appendix 1. The demand for sustainable investment fund management product and expertise is projected to expand further (currently only 179 of 851 firms or 21% offer sustainable fund products). In the process an increase is anticipated in the number of management companies exploring ways to build out their sustainable capabilities. The increased interest is likely to emerge from both companies with no established sustainable investment capabilities as well as those already in the business. As more managers explore ways to strengthen their sustainable investment management capabilities, most will rely upon the methods or some combination of those outlined in this article, including a “one-off” start up, sub-advisor managed investment product, affinity relationship, mergers and acquisitions and re-branding of existing products. The method by which individual managers choose to establish their sustainable management qualifications is expected to be highly individualized, reflecting the unique nature of each organization. As such, there is no way to predict which methods will predominate for individual management companies. For those investing in a manager’s sustainable investment products, however, the method used to establish their capabilities can be expected to increasingly be a point of selection and oversight focus. Given this, investment managers utilizing any one of the methods described below, should consider the longer-term due diligence implications. “One-Off” Start Up This method of developing a fund company’s sustainable investment expertise, management capabilities and fund products is not only relatively costly, but in some respects the most risky. Essentially it involves a company with no prior experience or track record with sustainable investment management or funds, starting from scratch to build their capabilities. Pros: • The development of customized and possibly unique sustainable investment processes that more closely reflect existing in-house investment management strengths. • The implementation of a closer and cleaner fit with the management company’s overall corporate “culture.” • Greater flexibility to design and implement more specialized sustainability products. Cons: • Longer and more uncertain lead-times and associated costs. • Lack of a performance track record as well as a record of proven sustainable investment experience. • “New comer” image and experience issues, combined with lack of presence, especially among established sustainable fund competition. Recent examples: • Zeo Sustainable Credit Fund • Raub Brock Dividend Growth Institutional Fund Sub-Advisor Managed Product In this method, a fund management company, typically but not always acting as the advisor, selects and hires another manager to serve as an advisor or sub-advisor to a fund. The fund firm contracts with the advisor or sub-advisor to manage the fund’s portfolio according to a selected benchmark and investment policy guidelines. In this case, the mandate would be to provide specific sustainable investment expertise. Conversely, a firm may enter the market by offering its services as a sub-advisor. Pros: • An experienced and proven management team and process that can be quickly operationalized. • Minimal development costs and less need for in-house sustainable investment expertise. • Heightened flexibility when adding or closing selected sustainable investment products, especially in response to quickly changing market demands. Cons: • Higher overall fund expense ratios, in many cases, due to added advisor or sub-advisor management fees. • Less ability to fine-tune the investment management approach than if the fund is internally managed. This can, however, vary by relationship. • Added difficulties when a sub-advisor must be changed for any reason. A comparable replacement may not be available. Recent examples: • Vanguard: Vanguard Global ESG Select • TrueMark ESG Active Opportunities ETF Affinity Relationship This is similar to entering the market through a sub-advisory relationship in terms of some of the pros and cons but rather than retaining a sub-adviser, the management firm secures high profile branding rights to an organization name or theme that is, in turn, transformed into an index- tracking or actively managed product offering. Pros: • Out of the gate name recognition, trust factor and halo effects associated with the adopted brand name or theme. • Identifiable base of potential investors and possibly marketing support from branding organization. Cons: • Product success or failure linked to the reputation of branding partner. • Contract terms and conditions, including licensing fees, may be subject to renegotiation. • Longer and more uncertain lead-time, lack of performance track record and expertise. Recent example: • Impact Shares NAACP Minority Empowerment ETF Re-branding Existing Funds Using this method, an investment management company typically converts the investment process policies for one or more of their existing funds to meet sustainable investment guidelines or restrictions by formally amending the mutual fund or ETF’s prospectus accordingly. Most often to-date such policy changes involved the adoption of an ESG integration approach. Pros: • Low or no development costs especially related to re-defining a fund’s investment approach. • Retention of investment performance track record. • Quickly attaining product scale, an established shareholder base and market presence with limited barriers to entry. • Minimal disruptions for the fund’s current shareholders and distribution network. This approach avoids negative tax implications for shareholders and “ease” of transition for distributors. Cons: • Limited flexibility when building a unique sustainable market identity and presence. • Fewer investment process possibilities, especially in the short-term. • Difficulties when reconciling pre- and post-rebranding performance records. • Accusations of “green-washing.”   Recent examples: • J.P. Morgan Asset Management • MFS Investment Management Mergers and Acquisitions This method is not uncommon in the fund industry. However, at the current stage of the sustainable investment segment’s maturity, it is used to acquire specialized management capabilities and reputational capital. As might be expected, the acquiring firms are often larger fund management companies. Pros: • Lower development costs and lead-time to establish sustainable investment capabilities. • Quickly establishing a proven performance track record, while simultaneously ‘leveling’ the competitive landscape. • A more precise and tested staffing of the sustainable investment management team, and less trial-time before activating.   Cons: • High acquisition cost(s) and added uncertainty as to whether a deal will go forward, leading to potential reputational exposure. • Heightened level of risk when matching corporate cultures of fund management companies – the possibility that the buyer or seller’s management teams will remain intact is a concern. • High public visibility when negotiating and implementing the deal, possibly exposing more company details to the competitions than may be desired. Recent examples: • Trillium Asset Management and Perpetual Limited • Federated Investors and Hermes Asset Management

The Bottom Line:  Twenty events of note were identified for the month of March 2020, including 12, or 60%, involving newly introduced sustainable fund products. Events Summary Twenty events of note were identified for the month of March 2020*.  These are as follows: The majority of these events, 12 in total, involved newly introduced sustainable fund products. It doesn’t appear, based on activity since the start of the year, that the extreme turbulence in financial markets due to the coronavirus has had much impact through the first quarter on fund formation announcements. 10 of these were for new non-US based funds. Two events applied to US-base funds. The remaining events are classified, as follows: 2 events are linked to changes in sustainable management/portfolio management personnel. 1 fund closing. 1 change in portfolio management policies. 1 change in fund name. 1 change in investment manager/sub-adviser. 1 merger, acquisition, divestiture or JV. 1 event due to a change in fund operational support platform. *One event, actually carried forward from February, involves a change to a 3rd-party’s operational platform to capture sustainable process data. Refer to Table 1 for details.    

The Bottom Line:  22 fund related events were identified in February 2020, of which 10, or 45%, involved launches of new sustainable funds or strategies.

The Bottom Line:  Senior executives at leading publicly listed asset management firms acknowledge the growing role and strategic importance of sustainable investing in their business. What asset management companies are saying about sustainable (and ESG) investing?  Based on publicly listed asset management company 3Q 4Q 2019 earnings calls comments and Q&A.  Coverage of excerpted comments related to sustainable investing made during the latest earnings conference calls.  Remarks are extracted from full earnings call transcripts and have not otherwise been edited or modified in any way.    Q3/Q4 2019 earnings call references to sustainable and ESG investing in January to early February 2020 include:  Affiliated Managers Group, BlackRock, Federated Hermes, Invesco and Legg Mason.

The Bottom Line:  New Direxion sustainable ETF with added twist adds to significant 13-month growth in sustainable ETFs that reaches $38.3 billion in net assets. Sustainable ETFs reach 115 funds with $33.7 billion in assets at year-end 2019 and $38.3 billion at the end of January 2020 but represent a small 2.1% of sustainable mutual fund and ETF assets combined  The launch in early February of the passively managed Direxion MSCI USA ESG Leaders vs. Laggards ETF (ESNG) adds a new twist to the current crop of sustainable[1] passive and actively managed exchange-traded funds (ETFs) that seek to replicate the performance results of a broad-based underlying sustainable index, pursue a thematic investment thesis, or employ an active management approach based on financial fundamentals as well as sustainability considerations.  The ESNG fund attempts to capture excess returns by emphasizing the thesis that high and positively trending environmental, social and governance (ESG) ratings are correlated with superior accounting and financial results over time.  And unlike the 91 passive and 24 actively managed sustainable investment ETFs on offer today, this fund amplifies the bet via leverage using a 150/50 structure, or a ratio of 3:1, to emphasize highly rated ESG companies with positive rating movement while simultaneously selling short poorly rated companies.  The fund, which relies on ESG ratings assigned by a single opinion provider, is the latest in a list of 17 sustainable ETF offerings that have come to market in the last 13-months through the end of January 2020.  These have elevated the total number of ETFs to 115 funds (excluding ESNG) with $33.7 billion in assets at year-end 2019 and $38.3 billion at the end of January 2020.  Refer to Chart 1.  Even as it’s off a small base, this represents an increase of $28.5 billion, or 292%, that is attributable to a combination of net new money, including significant investments made by a large European pension fund insurance investor, market appreciation as well as fund re-brandings.  Still, at only about 2.1%, ETFs represent a much smaller component of the combined sustainable mutual funds and ETFs industry segment relative to traditional funds, however, this may be a transitionary state due to the rapid shift in sustainable assets due to re-brandings. Direxion ETF invests in stocks of companies that are highly rated with positive trending ESG scores while shorting poor ESG rated firms  As set out in the fund’s prospectus, the Direxion ETF seeks to provide long exposure to companies with high ESG trend ratings as well as short exposure to companies with poor ESG ratings or subject to extreme controversies or violations of international norms.  ESG company ratings and analysis are provided by MSCI, Inc. and the long and short exposures track the composition of the MSCI USA ESG Universal Top –Bottom 150/50 Return Spread Index.  The combined index exposure is 150% weighted in favor of highly rated companies with positive trending ESG scores versus a short 50% weight position for the laggards.  The index, which normalizes and maintains sector weights consistent with the MSCI USA Index, is reviewed, reconstituted, and rebalanced on a quarterly basis.  It remains to be seen what the turnover is likely to be and the extent to which the long-term thesis behind sustainably managed companies may conflict with quarterly rebalancing operations based on shifting ESG scores. High ESG trend ratings reflect a company’s ESG score based on an evaluation of 37 different key ESG related issues combined with an adjustment to account for score changes from one period to the next.  For example, using a scale that ranges from downgrade, to neutral to upgrade, a company’s ESG score from one period to the next is reviewed and an upgrade score is assigned to the company in the event that the score has moved up at least on level.  The score is then multiplied by the raw ESG score to arrive at the ESG trend score.  On the other hand, the raw ESG score is used in connection with poor ESG scoring companies, however, the universe of poor ESG scoring firms also extends to companies that are found to be in violation of international norms (for example, facing very severe controversies related to human rights, labor rights, or the environment) and/or involved in controversial weapons (landmines, cluster munitions, depleted uranium, and biological and chemical weapons).  Long positions will exclude companies assessed by MSCI to be in violation of international norms but such companies can be shorted. The fund will invest in a basket of securities that reflects the long and short positions but may also utilize derivatives such as swaps or futures contracts to replicate the indexes.  On the other hand, the fund’s short position will consist entirely of derivatives.  As collateral for any derivative positions, the fund may hold money market funds or short-term debt securities.  That said, the basis for qualifying counterparties on the basis of their ESG profiles is not discussed in the prospectus. By way of illustration, the fund’s assets as of February 14, 2020 stood at $13.5 million, of which $12.3 million is invested in 99 long individual company positions while another $6.7 million is invested in the form of a long swap contract to supplement the fund’s position in highly trending ESG scoring companies, for a combined long position of $19.0 million.  Conversely, the fund shorted poor scoring ESG companies via a swap contract in the amount of $6.1 million.  In addition, a cash position in the form of about a $529,000 investment in the Bank of New York Cash Reserve Fund serves as collateral for the swap positions. ETFs and ETF assets expanded in 2019, benefiting from net new money, fund re-brandings and market appreciation, in that order, including the addition of 17 new funds and $4.4 billion in AUM through January 2020 Starting at a low base, ESG ETF offerings and assets under management experienced significant growth in 2019 through January 2020.  Assets expanded from $9.8 billion at December 31, 2018 to end year-end 2019 at $33.7 billion and $38.3 billion by January 31, 2020.  The number of funds expanded by 29% while assets under management added $28.5 billion, or an increase of 292%. That said, $9.4 billion of the growth was attributable to fund re-brandings while the rest, or $19.1 billion is attributable to market appreciation, and net new money, including new fund formations.  Just focusing on 2019 results, a back of the envelope calculation indicates that market appreciation, given 2019’s extraordinary stock and bond market gains, accounted for about 30% of the growth while 70% or so was attributable to net new money.  This includes 17 newly launched funds during the course of the year which had risen to register $4.4 billion in assets by the end of January.  In this regard, it should be noted that two recent successful launches were jump-started by a single large ESG supportive asset owner.  These included the launch of iShares ESG MSCI USA Leaders ETF (SUSL) with $1860.4 million in assets as of January 31 that received an investment of $1.3 billion by Ilmarinen Mutual Pension Insurance Company.  In a similar vein, the successful $1.7 billion Xtrackers MSCI USA ESG Leaders Equity Fund, managed by DBX Advisors, a unit of DWS, also benefited from a $1.4 billion investment by the same insurance company. And just this month, it was also reported that BlackRock’s latest ESG ETF offering, the MSCI EM Leaders ETF, was also bolstered by an equally sizable investment made by lmarinen. Notwithstanding the strong growth registered in 2019 and the first month of January 2020, sustainable ETFs still represent a small 2.1% fraction of the total sustainable mutual funds and ETFs segment relative to the 8X higher 17.1% ratio of ETFs to the conventional mutual funds and ETFs segment combined.  This, however, may be a transitory state attributable to the rapid shift in sustainable assets due to re-brandings that occurred starting at the start of 2018. 17 new ETFs in 2019 and 8 ETF liquidations As noted above, 17 sustainable ETFs were launched in 2019 and through the first month of 2020.  10 of these ETFs adopted an ESG integration approach to sustainable investing, either exclusively or in combination with exclusions or company engagements.  These were followed by four values-based investing funds, two thematic funds and one fund employing negative screening (exclusions).  Refer to Table 1.  There were also 8 ETF closures during the same time interval, consisting of small funds that didn’t manage to lift their assets above $25 million for the largest of the seven funds and marginally, or not at all, operating at break-even.  Six of these were thematic funds. The newly launched Direxion ETF adds yet another fund to the ESG integration roster and it will be instructive to track its performance over time given the fund’s heavy reliance on ESG ratings, amplified positions via leverage and quarterly rebalancing.   [1]  While the definition continues to evolve, sustainable investing refers to a range of overarching investing approaches or strategies that encompass values-based investing, negative screening (exclusions), thematic and impact investing, environmental, social and governance (ESG) integration, company engagement and proxy voting.  These are not mutually exclusive.

The Bottom Line:  In this, the first of two research papers, Michael Cosack and Henry Shilling examine the most recent growth trends in sustainable investing.     Download

Events Summary 25 events were identified in January 2020#: Ten events involved new funds or the adoption of sustainable investing strategies in the US and overseas. Seven new fund launches were recorded for non-US based products. Three were for U.S.-based funds, including one private fund. Seven events signaled portfolio management process changes. Four events covered the introduced of analytical tools, research tools or indices. Two events were linked to personnel changes or additions. One event involved an M&A transaction. One event involved a change in investment adviser or sub-adviser. Refer to Table 1 for provides details. Table 1:  January 2020 Events in Ascending Calendar Date Order

Events Summary Twenty-four management company-specific sustainable fund events were identified in December 2019 including: 19 events involved the launch of new funds or strategies in the U.S. or overseas 12 new US-based products, including two new ETF launches 7 non-US based products. One fund was exposed to a public perception or reputational issue. Three events involved portfolio management team changes. One fund company merged two of its funds. November 2019 events not previously covered are included in the Table below but not covered in the Events Summary. See Table 1 for details.

Growth of green bonds and green bond funds expected to reach new records:  Green bonds volume expected to reach $250 billion in 2019 while green bond funds exceed $500 million We are about to close calendar year 2019 with record green bond issuance that is expected for the first time to reach $250 billion worldwide, including an estimated $65 billion issued by various US corporations, financial institutions, state and local governments as well as in the form of ABS securities. At the same time, retail and institutional assets managed by US-based green bond mutual funds and ETFs that, in turn, invest in securities intended to finance projects with a positive environmental impact, are also expected to achieve another year-end record.  Assets have already exceeded previous highs and in November reached $552.3 million.  Also in 2019, the number of dedicated green bond fund has reached a new high with the latest launch of the Franklin Municipal Green Bond Fund by Franklin Templeton that brings the total number of available mutual funds and ETFs in the US to seven, up one this year, and a total of 20 funds/share classes.  That said, green bond fund offerings differ from one another and as the number continues to expand and their track record seasons, the distinctions between them become more relevant for consideration by investors.  This article examines four key qualities that portrays the differences between these funds, including investment strategies, fund expenses, performance results as well as disclosure of outcomes. Growth of green bonds and green bond funds that now total seven funds/20 funds/share classes Green bonds are bonds and related financial instruments that are no different than conventional bonds, except that their proceeds are earmarked and invested in various projects seeking to generate climate or other environmental benefits, such as renewable energy projects, various projects that seek to reduce greenhouse gas emissions, land conservation, and sustainable waste management projects to mention just a few. So far this year through mid-December green bond issuance has already surpasses last year’s level to reach a new high of $231.2 billion.  This represents a volume increase of $60.1 billion relative to last year’s $171.1 billion, for a gain of 35.1%.  Green bond volume is expected to reach $250 billion by year-end, a new record that will add $78.9 billion if that level is achieved. Since their introduction in 2007 and continuing through mid-December, a combined total of about $758 billion in green bonds has been issued. Unless there is a dramatic shift between now and year-end, a record in assets under management is also expected to be set by dedicated green bond funds in the US.  These have reached seven in number, consisting of five mutual funds and two ETFs, with total net assets in the amount of $552.3 billion through November 29, 2019.  This represents an expansion in assets by $264.5 million or 92% since the start of the year.  In addition, new fund/share class launches in 2019 included the new to market Franklin Municipal Green Bond Fund with its four share classes as well as a new share class R6 added to the existing Calvert Green Bond Fund. Refer to Chart 1. Assets invested in these funds are largely sourced to institutional rather than retail investors[1].  At the end of November, green bond assets under management sourced to institutional investors represented $416 million or 75.3% of green bond assets.  This is up from $187.8 million at the end of 2018 at which time institutional investors accounted for 65.4% of green bond assets. Green bond fund strategies vary across three strategy types Seven green bond fund investment options are available to both retail and institutional investors.  These include five actively managed mutual funds and two index tracking ETFs that can be further stratified into three broad categories:  (1) Funds investing in green bonds across the globe, denominated in US and non-US currencies, issued by investment grade and some non-investment grade corporates, financial institutions, sovereigns, sub-sovereigns, supranational institutions, development banks, and various other types of issuers, including ABS securities.  In each instance, non-US dollar risk may be hedged.  For performance evaluation purposes, the ICE BofAML Green Bond Index-hedged USD Index is a useful benchmark, (2) Funds investing either entirely in US dollar denominated green bonds or exposures to non-US dollar green bonds are limited.  These include the same US and non-US issuer types listed previously, however, the exposure to bonds denominated in non-US dollars may be more limited or avoided altogether, in which case the fund is not exposed to currency risk.  For performance evaluation purposes, these funds are compared to the Bloomberg Barclays MSCI US Green Bond Index or an equivalent benchmark[2], and (3) Funds investing in US green bonds largely issued by municipal issuers, offering tax-exempt income. As of the date of this writing, only the Franklin Municipal Green Bond Fund, launched at the end of November, falls into this category.   Refer to Table 1. Within the constraints imposed on investors due to green bond issuance volumes, issuer types, sector, domicile, currency, credit ratings, and maturities, each fund manager has formulated its own proprietary green bond evaluation framework and investment selection criteria, including index tracking ETFs that default to the selection criteria imposed by the index provider.  Above and beyond green bond selection criteria, three funds also superimpose additional sustainable investing considerations, such as environmental, social and governance (ESG) factors or more limited social filters.  These are described in greater detail in Appendix 1. Moreover, actively managed funds position their portfolio on the basis of geopolitical, economic and fundamental considerations.  That said, there is a surprising degree of diversity in the securities holdings across the six funds.  A total of 265 distinct issuers were held in the six portfolios as of September 30, 2019 and only three issuers are common to all funds, including Apple, Asian Development Bank and Bank of America.  The levels of overlapping securities range from a low of 5.3% to a high of 61%.  Refer to Chart 2. Expense ratios fall within a wide range that extends from a low of 20 bps to a high of 1.11%  Beyond four funds/share classes that are subject to upfront sales charges of 3.75% or 4.25% and possibly a deferred sales charge, expense ratios for both institutional funds and retail-oriented funds fall within a wide range that extends from a low of 20 bps to a high of 1.11%. Across the seven green bond funds, the two green bond ETFs are subject to the lowest expense ratios.  At 20 bps, the ETF expense ratios are the lowest by wide margins even as compared to fees applicable to institutional-oriented green bond funds/share classes and significantly more so as compared to retail-oriented green bond fund offerings. When compared to the entire universe of fixed income ETFs, the expense ratios levied by these funds are below the average of 0.32% charged by the universe of fixed income ETFs but are 5 bps above the 1st quartile cut-off at 0.15% used in this research article as the lowest fee segment. Institutional funds, defined here as funds that require minimum investments in amounts greater than $10,000, range from 45 bps to 71 bps.  Directly sold and indirectly sold retail-oriented funds are subject to expense ratios ranging from 73 bps to 1.11%, however, four of the five funds that fall into this category also levy front-end sales charges of 3.75% or 4.25% and may also impose a deferred sales charge. Lowest cost options for retail investors, those who invest directly rather than doing so via financial advisors or retirement plans, are limited to three lowest cost options, including the two ETFs at 20 bps each and the retail oriented share class offered by TIAA-CREF Green Bond Fund offered at 80 bps as it does not impose a sales charge.  While the 80bps is positioned below the average for fixed income mutual funds, it ranks above the first quartile and is considered, for purposes of this research article, a moderate fee. Total return performance results: Track record is limited but funds lag their designated benchmarks  The performance track record of green bond funds is limited.  Of the seventeen funds/share classes available today only one fund, the Calvert Green Bond Fund, has achieved a three and five year track record.  Launched in 2013, the fund has trailed its designated ICE BofAML Green Bond Index-hedged USD benchmark over the previous one-year, three-year and five-year time intervals. Excluding the impact of upfront sales charges, the fund lagged the benchmark over the last three and five-year intervals by an annualized average of 1.24% and 0.70%, respectively. 15 funds/share classes have established a performance track record covering a full trailing twelve-month cycle as of November 29, 2019.  These funds generated an average return of 10.48% over the twelve month period, underperforming both the ICE BofAML Green Bond Index-hedged USD and the Bloomberg Barclays MSCI US Green Bond Index.  This is also the case if one outlier result, explained below, is excluded.  Still, results over the past year are clustered, with one exception, around the average and none of the funds, deviated from the average by more than 1%. Further observations regarding the latest twelve-month performance results (Refer to Chart 3) are, as follows: None of the 15 funds/share classes in operation for the trailing 12-months beat their designated benchmark. Even as this is not their designated benchmark, for an additional comparison relevant to US intermediate investment-grade bond investors, six funds outperformed the Bloomberg Barclays US Aggregate Index. The best performing fund/share classes are the AllianzGL Green Bond Fund Institutional and P shares, posting returns of 11.42% and 11.38%. The funds/share classes lagged the performance of the ICE BofAML Green Bond Index-hedged USD by 44 bps and 48 bps. The next best performing fund is the iShares Global Green Bond ETF. The fund posted a return of 11.32%, trailing the index by 54 bps. The remaining funds/share classes investing in US and non-US dollar denominated bonds registered results within 73 bps and 1.80% of their relevant index. At the same time, funds investing exclusively or largely in US dollar denominated bonds registered results within 0.99% and 4.69% of the relevant benchmark. The VanEck Vectors Green Bond ETF was a performance outlier, falling short of its index by 4.69%. The fund registered the lowest return of 6.96% due primarily to negative currency returns.  Since then, the fund has modified its investing approach by limiting green bond securities to US dollar denominated issues so as to eliminate the fund’s exposure to currency risk. Reporting and Disclosure:  Three funds produce useful impact reports Thematic investors who invest for impact as well as financial results are likely to seek to understand the environmental outcomes achieved by their green bond fund investments, preferably in the form of measurable outcomes. Of the six funds in operation for at least a year, three funds produce useful impact reports that attempt to capture and disclose environmental outcomes.  These include, for example, CO2 emissions avoided, air pollution reduced, energy saved, renewable energy capacity and generation, and water saved and treated, to mention just a few.  The three funds that produce such reports annually, include: Calvert Green Bond Fund, iShares Global Green Bond ETF and TIAA-CREF Green Bond Fund. [1] Defined here as funds with minimum direct investments ≥$10,000. [2] VanEck Vectors Green Bond ETF seeks to replicate the performance of the S&P Green Bond U.S. Dollar Index.

Introduction: Continued, But Uneven Growth Sustainable investment funds(1) have been available to US retail and institutional investors for a number of years. Earlier versions principally relied upon exclusionary screening processes. This is changing as fund managers are placing more emphasis on sophisticated and multi-layered ESG-integration approaches. Overall, the number and types of sustainable funds on the US market, their AUM, and the range of investment management companies offering these products have grown. U.S. investor awareness of sustainable funds and investments has also grown. A level of comfort can be taken from these developments. The strength of fund investor and industry interests in sustainable investing is encouraging, but the unevenness of some of these developments should not be ignored. They have brought with them new opportunities, but also unprecedented challenges for the fund industry. In this paper we identify a number of these challenges, especially those that may be new to the industry. Further, we explore the developments and the factors that may affect the future of the sustainable fund marketplace. Demand & Supply Considerations Investor Demand Awareness of sustainable investment funds and strategies among institutional investors, including plan sponsors, is well established. We believe that one of the main impedances are fiduciary-related and the possibility of heightened regulatory restrictions. Not only do questions persist as to whether financial and non-financial considerations can be identified as part of a fund’s mandate, but more fundamentally, managers and investors alike are asking what actually constitutes sustainability and ESG-factors? The lack of standardization contributes to investor’s uncertainty as to what they are actually investing toward. This “invites” greenwashing by some companies – a potential credibility issue for the industry overall. For retail investors, awareness, interests and general acceptance varies by demographics. For example, millennials and female investors are keenly interested in sustainable investing. Older investors who may be more financially established, while interested, are generally less so than millennials. Moreover, a general lack of pro-activeness on the part of financial intermediaries toward introducing sustainable funds to their clients is a hurdle towards making in-roads among retail investors. This is especially true for some financial intermediaries is with long established “client-bases” of older investors. Sustainable Fund Product Supply As noted, the range of sustainable fund products in the U.S. has steadily expanded, as has the number of asset managers entering the market. There is though, a concentration of offerings from larger domestic managers. This applies to both actively and passively managed sustainable offerings. However, more specialized sustainable approaches such as “stand-alone” impact and thematic managed funds are often favored by smaller shops. Differences in domestically offered sustainable funds have grown more refined as well. This diversification has expanded to reflect: a broader range of asset classes and investment styles; pricing; and portfolio management approaches. There has been an upsurge in fund rebranding or repurposing as a means for some companies, to quickly enter the sustainable fund marketplace. Often this involves managers applying an ESG integration approach to industries, sectors or companies. This may be employed exclusively or in combination with one or more sustainable strategies, such as negative screening and/or engagement. More Than a Fad or a Market Niche? The question many have asked is whether sustainable funds are just an investment fad, market niche product, or something more? Several factors suggest that it is likely more, including the: 1) number of new sustainable fund product launches, especially those investing in diverse asset classes, 2) continued growth in assets for these funds, and 3) broadening range of management company entrants and participants in the sustainable fund space. The true test, however, will be the staying-power of sustainable funds over the longer-term. If they exhibit the ability to weather varying market cycles, it would be safe to at least, classify them as an established investment fund specialty. A sub-group of sustainable funds that has a long-term track record are values-based products. These funds, which we believe will retain their sector-like status in the marketplace, have their origins in values-based religious affiliations, moral, socially responsible as well as ethical leanings. Recently more “non-traditionally” targeted values-based objectives such healthy living, dietary trends, animal rights, sustainable cities, and those meeting UN Sustainable Development Goals have become a notable addition to the sector. These sustainable sector-like fund products are expected to grow in number and diversity. We believe, however, that sustainable funds overall will eventually be defined first and foremost by their investment processes, much as portfolios now carry investment style mandates. The distinguishing feature among sustainable funds is expected to be their level of sustainability factor coverage and related refinements in their investment management approaches. These will define the determinants of a manager’s investment selections; the range of ESG factors and their weightings. Measurements of the risks associated with ESG factors are expected to become central and ubiquitous to the investment processes used by most if not all sustainable funds. As a result, the segmentation of the marketplace for such funds is expected to increasingly become a function of how comprehensive and sensitive a manager’s process is to evolving sustainability factors and their implications. Factors Defining the Future Sustainable Fund Market "Landscape" As the market for sustainable funds evolves to be defined more by variations in manager's investment processes and coverage, what are some of the distinguishing characteristics that may come to define this landscape? We think that there are four highly interrelated possibilities. These include the following: Specialized Investment Processes and Data Used to Integrate Sustainability Considerations Fund managers utilizing sustainability and ESG-integration processes have been known to distinguish themselves by sometimes applying more detailed analytical steps and techniques. These may employ investment screens that incorporate company sustainability quality scores and ratings. Third-party ratings services have been instrumental in providing these data. Increasingly fund managers are building their own sustainability measures and ratings using in-house data and research capabilities. Proprietary sustainability scoring is sometimes driven by the analytical needs of individual funds with specialized investments and asset class mandates, and their unique data requirements. Recently, we have seen that such in-house capabilities are being established to support sustainable management initiatives across all of a manager company’s strategies as well as, in support of broader corporate-wide sustainability business mission(s). This formalizes a firm's and all of its fund management processes with respect to sustainability considerations, whether they be financial or non-financial. It also establishes a basis for advancing a comprehensive market differentiation strategy. Coverage of Sustainability Factors The range and depth of sustainability factors analyzed by a manager’s integration process is another way to distinguish themselves in the marketplace. From an analytical standpoint, the taxonomy of sustainability factors is highly diverse. As important is the “within group” variations and dynamics of these factors. In other words, what may be a highly charged sustainability concern today, may not be so tomorrow. For fund managers, the question becomes not only what factors and related weights should be used to segment the marketplace, but how to adjust this segmentation given their continually changing importance? At another level, variations among sustainable fund management processes provide opportunities, but also complications when differentiating the marketplace. A segment especially affected by this are managers utilizing sustainable-integration approaches that adapt elements of impact engagement and proxy voting practices. In these cases, the question of sustainability-factor coverage and weighting comes into play. Sustainable “Self-Regulatory” Standards & Market Identity When a manager employs different sustainability-factor coverage and weightings, they are implicitly establishing self-regulatory standards. In doing so, they are distinguishing their sustainability approach from other managers. For better or worse, a manager’s self-regulatory standards whether explicitly stated or implicated to their sustainability-factor coverage, exposes them to possible critical comparisons with competitors and broader industry practices – if industry sustainability standards are in place, it’s “safe”, but not necessarily ideal to be more stringent. This exposure can work both ways, but it can be controlled by doing one-better than one’s peers. Unfortunately, as noted, sustainability factors and their weights are dynamic. This means that being continuously aware of changing sustainability considerations will be an advantage with respect to making both portfolio management process adjustments and positioning fund products in the marketplace. Fund Manager’s Sensitivity to Political and Sustainable “Justice” Considerations Sustainable asset management, even when strictly adhering to financial performance and risk considerations, brings with it some “not so neat” realities. Political questions and those related to environmental/social justice are among these. At some point as the market for sustainable funds develops further, the political, and environmental and social justice stance of individual fund managers can be expected to become a point of discussion, and possibly a means of market segmentation. Identifying sustainable fund managers and their parent companies by their political and justice-related positions should be anticipated. Consequently, the public’s perceived positioning of a fund company with respect to such issues may not be consistent with a fund manager’s design or intent. And as noted, it may have nothing to do with a fund manager’s record in meeting its fiduciary responsibilities. This means that fund managers in this space, either now or in the future, might consider their overall positioning with respect to the political and justice-related consequences of their investment decisions. Will they want to go so far as to define their market position given such issues? Probably not yet, but eventually sustainable fund managers may have little choice in the matter.   [1] While the definition of sustainable investing continues to evolve, today it refers to a range of five overarching investment approaches or strategies; values-based, negative screen or exclusionary, thematic and impact, ESG integration, and shareholder/bondholder engagement and proxy voting.  

Events Summary Twenty-three US and non-US sustainable fund-related events were identified in November 2019 including: • 14 of these events involved the launch of new funds or strategies in the US and overseas --These included 7 U.S.-based and 7 non-U.S.-based products. --Three involved money market funds, including one Euro money market fund • Three events involved portfolio management team changes. • Three events involved changes to portfolio policies, guidelines or inputs. • One event involved an analytical process error and a potential for negative “public perception or reputational issue.” • One event was sourced to a new analytical tool, research or indices. • One event was sourced to a new analytical tool, research or indices. • One event was associated with a competitive/strategic move or repositioning. See Table 1 for details.

Introduction and Summary A review and analysis of the holdings representing investments by the largest actively managed sustainable [1]intermediate investment-grade bond funds as of September 30, 2019, all members of the Sustainable (SUSTAIN) Bond Fund Index, reflects significant variation in the composition of their portfolios across funds and relative to their conventional benchmark, the Bloomberg Barclays US Aggregate Index (BB).  When viewed through the prism of their top 25 holdings, these funds display greater portfolio concentrations, yet a broader distribution of holdings across sectors, as well as limited investments in corporate securities versus Treasuries and agency securities. An exception to this includes two funds that avoid holdings in US Treasuries on the basis of their values-based approach to sustainable investing.  Also, corporate securities, which are limited to an average of 3.1% of assets across the top holdings, are dominated by industries that tend to have more limited exposures to material sustainability issues that are likely to affect the financial condition or operating performance of such companies, namely financial institutions and consumer product companies[2].  Since the start of the year, the ten funds that comprise the SUSTAIN Bond Fund Index gained 9.23% versus an increase of 8.85% recorded by the Bloomberg Barclays US Aggregate Index, or a differential of 38 basis points. These findings are reviewed and summarized in this research article. The Universe of funds:  10 funds with $10.3 billion in net assets The universe of 10 funds comprise the Sustainable (SUSTAIN) Bond Fund Index, a benchmark that tracks the total return performance of the largest actively managed investment-grade intermediate term bond mutual funds that employ a sustainable investing strategy beyond absolute reliance on exclusionary practices for religious, ethical, social or other reasons.  While methodologies vary, to qualify for inclusion in the benchmark, funds in excess of $50 million in net assets must actively apply environmental, social and governance (ESG) criteria to their investment processes and decision making. In tandem with their ESG integration strategy, funds may also employ exclusionary strategies, impact oriented investment approaches as well as issuer-oriented advocacy.  The combined assets associated with the ten funds stood at $10.3 billion as of September 30, 2019.  As of that date, the funds accounted for 4.9% of the sustainable taxable fixed income segment which expanded dramatically since the start of 2019 when the index was last reconstituted and the segment’s assets stood at $24.9 billion in total assets under management. Refer to Appendix 1 for a listing funds and their sustainable investing approaches. Wide variations in exposures to US Treasury securities, securitized debt instruments and corporate bond holdings A broad comparison of portfolio allocation strategies across the 10 funds versus their conventional benchmark, the Bloomberg Barclays Aggregate US Index, shows wide variations in exposures to US Treasury securities, securitized debt instruments and corporate bond holdings.  Refer to Chart 1. The greatest variance is observed within the US Treasury holdings and securitized debt segments that make up 18.02% and 32.02% of the Bloomberg Barclays US Aggregate Index, respectively, as the end of September, but range from an average 0.0% to 53.9% of fund holdings.  Two funds, the Domini Impact Bond Fund and Praxis Impact Bond avoid investments in US Treasury securities altogether.  In the case Praxis Impact Bond Fund, Treasury bills, notes and bonds are avoided in alignment with the Praxis stewardship investing principles.  In the case of Domini, the fund avoids bonds and notes issued by the U.S. Treasury largely because of those securities' role in funding weapons procurement and development for the military, although investments in government agency securities are eligible and securitized debt, including mortgage-backed pass through securities, accounted for 53.9% of portfolio assets.  At the other end of the range, Parnassus Fixed Income Fund maintained a 50% exposure to US Treasury securities. While not as wide, variations can also be observed in corporate bonds which average 32.3% relative to 25.4% for the benchmark but range from a low 19.9% exposure in the Aberdeen Total Return Bond Fund to a high of 47.89% invested in corporates by the TIAA-CREF Social Choice Bond Fund. A more limited view of top 25 holdings across funds reveals a higher average level concentration of 33.4% versus 15.6% for the index Limiting the review to the top 25 positions in each of the ten portfolios relative to the Bloomberg Barclays US Aggregate Index reveals that the funds, on average, maintain concentration levels that are twice as high as the benchmark while sector choices vary.  The average level of fund concentration stands at 33.4% versus 15.6% for the index. Refer to Chart 2. It should be noted that this calculation excludes the PIMCO Total Return ESG Fund as the share of its top 25 holdings is an outlier at nearly 71.5% (the  fund reported that about 20.4% of its net assets were in short sales, all MBS Pass-Through securities,  and 9.7% in reverse repurchase agreements).  The only fund with a concentration level in line with the benchmark is the TIAA-CREF Social Choice Bond Fund whose top 25 holdings account for 14.6% of the fund’s net assets.  Even as that is the case, the fund’s allocations by sector varies given its underweighting in MBS securities and overweighting in corporate bonds at 3.26% versus 0.0% for the benchmark, consisting of financial institutions, industrials (including ABS) and utilities.  Three other funds maintained an overweight position in industrials within the top portfolio holdings segment, including Calvert Bond at 7.06%, Aberdeen Total Return Bond at 3.72% and Parnassus Fixed Income at 6.70%. Sector distribution of the funds’ top 25 holdings is broader compared to the index At the same time, the top 25 positions held by each of the ten portfolios relative to the Bloomberg Barclays US Aggregate Index are more broadly distributed across sectors and there is greater variation in holdings between funds. Excluding Domini Impact Bond Fund and Praxis Impact Bond Fund, the average exposure of the remaining eight funds to treasury bills, notes and bonds is 14.7%.  This compares to 7.74% for the Treasury securities allocation across the top 25 securities holdings that comprise the Bloomberg Barclays index. Further, within their top 25 securities, allocations to US Treasuries varies significantly, from the Touchstone Impact Bond Fund’s 3.01% to 26.63% held by the Parnassus Fixed Income Fund.  Another significant variation can also be observed in the holdings of MBS securities which account for an average of 14.2% across the ten funds but limited to 7.81% by the conventional index, for a 6.4% differential.  Here too, investment variations across funds range from 0.0% by the Parnassus Fixed Income Fund to a gross allocation of 55.65% by the PIMCO Total Return ESG Fund.  Refer to Chart 3. Treasuries and MBS securities comprise the sectors to which the 25 securities that make up the index are largely allocated.  The funds, on the other hand, maintained holdings, on average, in every one of the index’s sectors, ranging, in descending order, from agency securities (4.08%), to utilities (2.05%) to financial institutions (1.40%) to mention just those with average investments over 1%. Refer to Chart 4. Average corporate exposure across the top 25 holdings is limited to 3.1% of assets Corporate securities, within the top 25 holdings, including industrials (which also factors in ABS), financial institutions and utilities, average just 3.1% of portfolio assets and broadly consist of industrials, financial institutions and utilities.  Average corporate investments range from a low of 0.0% reported by the Praxis Impact Bond Fund to a maximum of 11.2% held by Calvert Bond Fund.  Also, the single most heavily weighted position across the ten funds makes up a maximum of 1.4% of fund net assets. Across their top holdings, the ten funds have investments in a combined total of 32 companies, including five asset backed securities. On the basis of their weightings within the portfolios, these companies are dominated by industries that tend to have more limited exposures to material sustainability issues that are likely to affect the financial condition or operating performance of such companies, namely financial institutions and consumer product companies.  A list of the corporate bonds included in the top 25 holdings of the ten mutual funds can be found in Appendix 2. Sustainable (SUSTAIN) Bond Fund Index gained 9.23% vs. 8.84% for the Bloomberg Barclays US Aggregate Index through October 31, 2019 While other relevant factors contribute to or may detract from portfolio performance, such as duration and credit quality, portfolio sector variations also effect total return results.  Since the start of the year, the ten funds that comprise the SUSTAIN Bond Fund Index gained 9.23% versus an increase of 8.85% recorded by the Bloomberg Barclays US Aggregate Index, or a differential of 38 bps.  Refer to Sustainable Indices Matched or Trailed Returns for the Month of October 2019. [1] While the definition of sustainable investing continues to evolve, today it refers to a range of five overarching investing approaches or strategies that encompass:  values-based investing, negative screening (exclusions), thematic and impact investing, ESG integration and shareholder/bondholder engagement and proxy voting.  These are not mutually exclusive. [2] Based on SASB Materiality mapping.

Municipal bond funds that have adopted sustainable investing strategies grew significantly since the start of 2019 The volume of fund re-brandings during 2019 and, in particular, in the month of October, has brought about a transformation in the profile of assets attributable to sustainable funds(1), including mutual funds and ETFs.  This has been especially notable in terms of money market funds and bond funds, including municipal bond funds. In fact, sustainable fund assets invested in the municipal sector reached $39.7 billion at the end of October, up from just $711.8 million at the end of 2018, for a 56X increase in just a short ten month interval.  See Charts 1 and 2. 15 firms now offer a combined total of 51 funds consisting of both mutual funds and ETFs that cover varying segments of the municipal market. These funds now comprise 2.8% of the $1.4 trillion in sustainable assets at the end of October.  Also, while these funds have adopted a variety of sustainable investing strategies, the approach that dominates is ESG integration pursuant to which relevant and material environmental, social and governance factors are factored into investment decision making. That said, four firms equivocate on their approach to ESG integration. It’s likely entirely coincidental, but this uptick correlates with the recognition that US local governments are exposed to more frequent and severe extreme climate events such as heatwaves, droughts and wildfires which vary widely by state. Even though these are not necessarily showing up in muni bond pricing as yet, climate risks, in particular, are more often now cited in documents that accompany the issuance of municipal bonds. According to an article in the November 11th issue of Bloomberg Businessweek, investment banks have begun to quietly sound alarm bells about climate change and their worries are showing up in documents that accompany the municipal bonds they underwrite even as such disclosures are still insufficient. Municipal funds: 15 firms, 51 funds and $39.7 billion in assets under management Municipal funds that pursue a sustainable investing approach are now offered by 15 firms, with two of these firms in particular contributing to the expansion of the municipal bond sphere by re-branding existing funds. In October, MFS re-branded 16 municipal bond funds offered via 70 share classes with combined assets of $11.3 billion. In June of this year alone, J.P. Morgan re-branded 4 municipal bond funds with $8.9 billion in total net assets. Together, these firms offer 51 separate funds/179 share classes, including five ETFs, that range from broad-based investment-grade funds across varying maturities to state specific funds as well as high yield funds linked to a variety of tax profiles. Over 50% of the municipal fund assets are concentrated in three categories of short, intermediate and long-term municipal funds that have sourced $27.7 billion in net assets and account for 69.9% of the total. A fourth category consists of high yield municipal funds with $7.5 billion in net assets and account for almost 19% of the segment’s total assets. Refer to Chart 3. Sustainable investing strategies: ESG integration dominates while four firms also focus on impact The most dominant strategy across five categories of sustainable investing approaches is the integration of ESG factors into investment decision making. Forty-eight funds have adopted this approach either exclusively or in combination with other sustainable strategies. Of these, forty-four funds employ an ESG integration approach exclusively. A potentially worrisome development is that within this segment four firms offering 23 funds have formally declared, by means of prospectus language, that they may reflect ESG considerations in their investment evaluations. This type of equivocation may be perceived as “green washing.” Also within this segment, four funds employ ESG integration along with one or more additional strategies. These funds focus on the achievement of impact, but in the case of the Calvert Responsible Municipal Income Fund, negative screening (exclusions) and company engagement also form part of the fund's approach to sustainable investing. While levels of detail vary, two of these funds provide annual impact reports. These include the Columbia US Social Bond Fund and the Neuberger Berman Municipal Impact Fund. Finally, two funds pursue a green thematic approach, including a newly launched municipal green bond fund now offered by Franklin Templeton, while only a single fund relies entirely on exclusions. Refer to Table 1. (1) While the definition of sustainable investing continues to evolve, today it refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic and impact investing, ESG integration and shareholder/bondholder engagement and proxy voting. These are not mutually exclusive.

Introduction/Summary A review and analysis of the top 10 stocks held by the largest actively managed sustainable investment foreign mutual funds based on holdings as of September 30, 2019, all members of the Sustainable (SUSTAIN) Foreign Equity Fund Index and benchmarked against the MSCI ACWI ex USA Index consisting of stocks issued by large or mid cap companies domiciled in 26 emerging and 22 developed markets excluding the US, reveals that the ten funds are more concentrated with respect to their top 10 holdings. The funds also reflect varying sector preferences and exposure to a wider universe of stocks relative to the conventional benchmark. The most commonly held company is Unilever NV (or Unilever PLC). In addition, these funds invest in but maintain below top 10 index level exposure to three companies, namely HSBC Holdings PLC, Taiwan Semiconductor Manufacturing Co Ltd and Tencent Holdings Ltd. That said, three funds, whether for fundamental and/or ESG considerations, have excluded the three companies from their portfolios altogether. These findings are reviewed in this research article. 10 funds with about $14 billion in AUM The ten funds, members of the SUSTAIN Foreign Equity Fund Index, all employ a sustainable investing strategy beyond absolute reliance on exclusionary practices for religious, ethical or social reasons. On a combined basis, the funds managed $14.5 billion in assets as of September 30, 2019 . The funds invested over 88% of their assets in equity securities of non-US companies. These range from the highest, 97.71%, invested by the DFA International Sustainability Core 1 Fund to the lowest, or 88.26%, managed by the UBS International Sustainable Equity Fund. Seven of the ten funds are foreign large blend funds according to Morningstar’s classification, two funds fall within the foreign large value category and one is classified as foreign large growth fund. Refer to Appendix 1. Sustainable fund portfolios are more concentrated in the top 10 holdings as compared to the MSCI ACWI ex USA Index The top 10 holdings of the ten funds account for an average of 23.56% of each fund’s net assets versus 9.98% for the conventional MSCI ACWI ex USA Index. Varying from the Index, portfolio concentration runs as high as 44.76% for the UBS International Sustainable Equity. At 7.5%, the DFA International Sustainability Fund allocates the smallest percentage of its assets to its top 10 stocks as compared to the MSCI ACWI ex USA Index. Refer to Chart 1. Sustainable funds reflect varying sector preferences relative to the MSCI ACWI ex USA Index Viewed through the lens of each fund’s top ten holdings as well as the top 10 holdings of the MSCI ACWI ex USA Index, the top 10 fund holdings are allocated across four to seven of the 11 sectors that make up the Index whereas the holdings of the Index are spread across six sectors. The dominant fund sectors include Healthcare (all 10 funds invest in healthcare companies), Financial Services, Consumer Defensive and Industrials, with the last three being represented in the top 10 holdings of eight funds. For comparison purposes, the top 10 stocks that make up the MSCI ACWI ex USA Index belong primarily to companies in Technology, Healthcare and the Consumer Cyclical sectors. In terms of sector concentration, the Morgan Stanley Institutional International Equity Fund is the most concentrated in the top 10 stocks, with four sectors accounting for 33.24% of assets, including the Consumer Defensive sector that represents 17.25% of the fund’s net assets. Another fund with a relatively high sector concentration is the UBS International Sustainable Equity Fund whose ten largest investments are allocated to five sectors, with Financial Services representing the largest share of 17.85% of its net assets. Relative to the Index, none of the funds’ top ten investments were allocated to the following sectors: Utilities, Industrials, Communications Services, Real Estate and Basic Materials. On the other hand, the funds’ maintained the highest average overweight positions in Financial Services, 4.74%, Communications Services, 4.36%, and Industrials, 3.42%. While to a lesser extent, the average exposure to the Energy sector which was maintained by only four of the ten funds, also exceeded the Index weighting at 2.59% versus 0.63% for the Index, or a 1.96% differential. Refer to Chart 2. It should be noted that some funds, such as Domini Domini Impact International Equity Fund , exclude as a matter of policy companies included in the Integrated Oil & Gas or Oil & Gas Exploration & Production Industries sub-sectors. Wide range of top 10 stock holdings: 73 stocks issued by 65 companies 73 stocks issued by 65 separate companies are represented across the top 10 holdings of the 10 funds under consideration. This number consolidates various forms of ownership, including for example ADRs (Novartis AG ADR, Roche Holding AG ADR, Unilever NV ADR), dividend right certificates (Roche Holding AG Dividend Right Cert.), Class B shares (Novo Nordisk A/S B, Royal Dutch Shell PLC B) and preferred stock (Henkel AG & Co KGaA Participating Preferred). Across all ten funds, not a single stock is commonly held by all ten funds. The most commonly held company is Unilever NV (or Unilever PLC) which in its various forms, including for example ADRs, is found among the top 10 holdings of seven funds. The exposure to Unilever NV or Unilever PLC ranges between 0.61% held by DFA International Sustainability Fund and 3.47% held by Morgan Stanley Institutional International Equity Fund. However, neither Unilever NV, nor Unilever PLC rank in the top 10 of the MSCI ACWI ex USA Index. The next most widely held stocks are Roche Holding AG and Novartis AG with a portfolio share ranging between 1.51% and 3.92% and 0.64% and 2.60%, respectively. MSCI ACWI ex USA Index exposures to both companies are below 1%. Refer to Appendix 2. Three top 10 MSCI ACWI ex USA Index stocks are held in smaller proportions by sustainable funds Three stocks, including HSBC Holdings PLC, Taiwan Semiconductor Manufacturing Co Ltd, and Tencent Holdings Ltd that are ranked in the top 10 of the MSCI ACWI ex USA Index are absent from the top 10 holdings of the SUSTAIN constituent funds but are nevertheless held by one or more of the funds in small proportions. That said, three funds have omitted the above companies from their portfolios all together. These include Domini Impact International Equity Fund, TIAA-CREF Social Choice International Equity Fund and UBS International Sustainable Equity Fund. As noted earlier, such omissions may be due to fundamental considerations or ESG factors. Only two of the ten funds, including Morgan Stanley Institutional International Equity Fund and Hartford International Equity Fund, have exposure to Tencent Holdings Ltd, China’s internet services company and owner of the popular messaging platform WeChat. Like Facebook in the US, the company has been exposed to controversy due to its data privacy and security policies.

Events Summary 22 events were identified in October 2019, classified as follows: • 17 events involved the launch of new funds or the adoption of sustainable investing strategies in the US and overseas. --Seven US fund firms and a combined total of 10 Canadian, European and Asian fund firms were affected. • Three firms reflected changes in the portfolio management line-up. • One fund firm made the news due to elevated reputational concerns that’s siphoning assets from the firm. • One fund firm announced a change in its product line. Refer to Table 1 for details.

Introduction A review and analysis of the top 10 stocks held by the largest actively managed sustainable investing funds as of September 30 or August 31, 2019, all members of the Sustainable (SUSTAIN) Large Cap Equity Fund Index, reflects higher levels of concentration, some consistency as well as variations in sectors and holdings relative to the S&P 500 Index.  As well, the analysis show the consistent exclusions of at least three stocks that otherwise make up the top holdings in the conventional benchmark.  These findings are reviewed and summarized in this research article. The universe of funds:  10 funds with $45.8 billion in AUM[1] The review and analysis covers a universe of large cap sustainable equity funds that comprise the ten largest actively managed large cap domestic equity mutual funds.  These funds employ a sustainable investing strategy beyond absolute reliance on exclusionary practices for religious, ethical or social reasons.  While their sustainable investing methodologies vary, to qualify for inclusion in the index, funds in excess of $50 million in net assets must actively apply environmental, social and governance (ESG) criteria to their investment processes and decision making. In tandem with their ESG integration strategy, funds may also employ exclusionary strategies along with impact oriented investment approaches as well as shareholder advocacy. The index includes only the largest single fund or share class managed by an investment management firm and any fund with multiple share classes is only included in the index once, based on the largest share class in terms of net assets. The combined assets associated with the ten funds stood at $45.8 billion as of December 31, 2018 and represent about 16.1% of the entire sustainable US equity sector that is comprised of 446 funds/share classes, including actively managed funds and index funds, with $283.8 billion in assets under management.  Eight of the ten funds are large cap blended funds while the remaining two funds are growth-oriented funds.  See Appendix 1 for a listing of the ten mutual funds. The universe of stocks:  46 different stock holdings/44 companies    The 10 funds hold 46 different stocks that make up their top ten holdings, including Alphabet Class A and C shares and Unilever NV and Unilever NV in the form of ADRs, for a total of 44 companies. Of these, a 39 stocks fall outside the range of the top 10 stocks that make up the S&P 500 Index.  Refer to Appendix 2. Concentration levels of top ten stocks higher than S&P 500 The top 10 sustainable investing funds are more concentrated in the top 10 stocks, on average, versus the S&P 500 Index.  The average concentration of the top 10 stocks, which make up 21.5% of the S&P 500 Index, account for an average of 32.9% of the 10 sustainable equity funds, or 11.5% higher.  Concentration levels range from 19.6% to a high of 43.1%.  See Chart 1. Sector exposures are also higher, but outside S&P 500 sectors The top 10 sustainable investing funds with regard to the top 10 stocks also reflect greater variation in sector exposures, on average, versus the S&P 500 Index.  The greatest sector exposure by both the top 10 funds and the S&P 500 is to the technology sector but at the same time the variation is the narrowest at 1.7%.  That said, Parnassus Core Equity Fund maintains an underweight position of 6.1%.  Otherwise, the widest variations, on average, can be observed in sector exposures that are absent in the top 10 holdings of the S&P 500.  These include the Basic Materials sector, Industrials sector as well as three companies that are unclassified as to sector, including Verizon, AT&T and Comcast.  See Chart 2. Top 10 sustainable large cap equity funds all invest in Microsoft but don’t invest in Berkshire Hathaway, Facebook and Johnson and Johnson companies--members of the S&P 500 Only one company, Microsoft Corp. is held by all ten funds. The average exposure to Microsoft is 5.13% versus 4.29% for the S&P 500. Investments range from a low of 3.36% held by Neuberger Berman Sustainable Equity Fund to a high of 6.77% held by Putnam Sustainable Leaders Fund. The next most widely held stock is Alphabet Inc. including both A and Class C shares, followed by Apple Inc. Amazon.com and Visa Inc. Three companies that fall within the S&P 500 top 10 holdings are entirely absent from the portfolios maintained by the top 10 funds. Sustainability factors alone might not have led to the omission of these companies as each of the firms might have been avoided due to ESG factors that, in the view of fund managers, might have had a material impact on the value of the companies and the decisions to sidestep these investments could have been based on a view regarding their value, risk and return potential. Still, each of these companies have some exposure to ESG issues in particular. Johnson & Johnson The company is embroiled in two major controversies.  The first involves accusations and lawsuits alleging that its talc products contain asbestos, which caused many women to develop ovarian cancer.  The other pertains to accusations that the company, along with other firms, responsible for fueling the state’s opioid epidemic. Facebook Concerns about Facebook are not new, as social factors regarding the adequacy of controls, protecting privacy and data security have been known for some time.  This is also the case for the company’s governance structure, since Mark Zuckerberg, the firm’s founder, also acts as Chairman and CEO and given the company’s dual class structure, through his control of the company’s Class B common stock is able to exercise voting rights with respect to a majority of the voting power of the firm’s outstanding stock and therefore has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. Berkshire Hathaway Inc. Berkshire Hathaway has been cited of its average to below average management and governance structure, and poor disclosure on its governance, environment and social policies. Recently, its low score under the United Nations Global Compact (UNGC) rankings excluded the company’s eligibility as a member in the newly launched S&P 500 ESG Index. The UNGC scores companies on the basis of the Ten Principles of the UNGC which are, in turn, derived from the Universal Declaration of Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the United Nations Convention Against Corruption. [1] Includes all share classes, as of December 31, 2018

Sustainable mutual funds and exchange traded funds (ETFs) Total net assets of sustainable mutual funds, ETFs and ETNs stood at $762.7 billion as of June 30, 2019, versus $86.1 billion as of June 30, 2014, or an increase of 785%. Since the start of the year, sustainable fund assets gained $372.2 billion, or an increase of 95.4% (Note:  sustainable fund assets ended August 2019 at $772.7 billion).  Refer to Chart 1. Top 20 sustainable fund firms Top 20 fund firms offer 1,463 sustainable mutual funds/share classes and ETFs with total net assets in the amount of $669.6 billion. This represents 87.8% of the $762.7 billion in sustainable mutual fund, ETF and ETN assets as of June 30, 2019; and about 66% of the total sustainable funds universe consisting of 2,227 funds/share classes and ETFs/ETNs.  Refer to Table 1. Based on the classification of sustainable investing strategies below, the most common individual sustainable strategy involves negative screening or exclusions. $305.4 billion in net assets, or 45.61%, fall into this category. That said, a negative screening or exclusionary approach is also employed in combination with other strategies, such as ESG integration.  Refer to Chart 2. The next most common individual sustainable strategy involves ESG integration. This category has attracted $268 billion in net assets, or 40.02%.  Here too, ESG integration is also combined with other sustainable approaches.  This is also the fastest growing strategy which has been significantly bolstered by the rebranding existing funds.  Refer to Chart 2. The combination of negative screening (exclusions), impact-thematic investing, ESG integration and shareholder engagement in addition to proxy voting, has attracted $42.1 billion in net assets or 6.28% of net assets. This is followed by values-based investing with its $22.2 billion in net assets, or 3.31%.   Refer to Chart 2. Classification of sustainable fund strategies: V=Values-based strategy (i.e. religious, social, ethical), E=Exclusionary strategy, Impact/Theme=Impact and/or thematic strategy, ESG=environmental, social, governance integration, S/P=shareholder/bondholder engagement and proxy voting. Classifications are based on a review of fund prospectus documents.  Classifications are subject to interpretation and are generally identified based on explicit references in each individual fund’s offering documents (prospectus and statement of additional information).  So for example, if the prospectus does not mention that the fund or fund company employs a shareholder engagement approach, such a strategy is not ascribed to the fund.

Alternative Investment Funds: A small category that grew rapidly through re-brandings Alternative sustainable investment funds represent a small category within the sustainable funds universe, comprised of 13 mutual funds (no ETFs), 50 share classes in total offered by 10 firms and managing $9.1 billion in assets of June 2019 largely sourced from institutional investors that make up $8.4 billion or 92% of the category’s assets. The small category, accounting for only 1.2% of the sustainable investment segment’s assets, is also pricier, on average, based on an analysis of expense ratios. The alternatives category has largely evolved through fund re-brandings and the sustainable investing strategies adopted by the various fund offerings is dominated by an ESG integration approach while disclosure practices regarding investment decisions, performance and outcomes, in particular, are limited. This observation, however, is common across sustainable investment funds more generally. The category’s total return performance, qualified on the basis of its sustainable strategies, is short-lived and is therefore too early to evaluate properly. That said, total return results are available for at least 32 funds/share classes out to 5-years given that some of these funds have been in operation as far back as 1989 in the case of Franklin’s Global Currency Fund A shares. Relative to conventional indices such as the S&P 500 and Bloomberg Barclays Aggregate US Index, the performance of these actively managed funds is below benchmark in general. Growth in alternative sustainable funds segment: Currently at $9.1 billion From five funds/17 share classes and $486 million in assets under management at March 2018, the category expanded rapidly starting in the third quarter of the same year and in successive quarters thereafter due largely to fund re-brandings. Net assets expanded 1,768% since the first quarter of 2018, adding an average of $1.7 billion per quarter thereafter but hitting as high as $3.5 billion in a single quarter. Assets increased most dramatically in 4Q 2018 when JPMorgan re-branded the JPMorgan Hedged Equity Fund by formally adopting in its prospectus ESG integration language and shifted $3.5 billion into the category. Having risen to 13 funds at the end of June, the category is expected to decline to 12 funds when the previously announced closing of the Hartford Long/Short Global Equity Fund was scheduled to take effect on or about July 11, 2019. Refer to Chart 1. The Players: JPMorgan is the largest, offering 4 funds, 19 share classes with $5.2 billion As noted, ten firms as of June 2019 offer alternative sustainable funds, with only one firm, JPMorgan, managing both an options-based strategy and a long/short equity strategy, based on Morningstar’s categories. JPMorgan is also the largest in the segment with $5.2 billion in net assets at the end of June 2019. The next largest at $2.6 billion, is BNY Mellon with its Global Real Return Fund sub-advised by Newton Investment Management (North America) Limited. The smallest firm, Hartford, recently announced the closing of its Hartford Long/Short Global Equity Fund that is managed by Wellington Management. This will reduce to nine the number of investment management companies offering funds in this category starting in 3Q of this year. Refer to Table 1. The investment profile: options-based strategies make up 57% of net assets The alternative investment category is comprised of six strategy types including long-short credit, long-short equity, market neutral, multi alternative, multicurrency and options-based strategies. By far the largest category type consists of options-based strategies with $5.2 billion or 57% of the category’s assets while multi alternative strategies account for $3.1 billion or 34% of the segment’s assets. Refer to Table 1. Sustainable Investing Strategies: ESG integration dominates 11 of the 13 funds integrate ESG factors into investment decision making. One of these, CCM Alternative Income Institutional Fund, managed by Community Capital, also incorporates negative screening and impact investing. The remaining two firms include the GuideStone Funds that employ a values-based investing approach using negative screening or exclusions. The second firm, Crossmark Global Investors that manages the Crossmark Steward Covered Call Fund, has adopted an exclusionary approach, although the firm seems to hedge its commitment. According to the Crossmark Steward Covered Call Fund prospectus, the fund “uses its best efforts to avoid investing in companies that are materially involved with mature content, life ethics, alcohol, gambling or tobacco, although it may invest up to 5% of its total assets in certain collective investment vehicles or derivatives that may include prohibited companies.” Refer to Table 2. Reporting and disclosure: Practices vary considerably Reporting and disclosure practices vary considerably across the firms and their individual fund offerings. All ten firms do make explicit but limited references to their sustainable investing approach in fund prospectuses and nine of the 10 firms offer supplemental materials. Almost all of these include an extensive library of materials and regularly updated reports that cover the organization’s sustainable investing approach in general. While not mandated, absent are any individual fund specific explanations that offer insights into investment considerations involving stock purchases, sales and retention decisions, particularly affecting controversial companies, performance attribution implications, if any, and outcomes or impacts that may be linked to the fund’s sustainable investment strategies. Such disclosures would inform investors and assist them to more fully understand the investment management firm’s strategy and linkage between financial results and social and environmental outcomes. Refer to Table 3. At one end of the range, disclosures are limited to the fund prospectus, as is the case with the Pzena’s Long/Short Value Fund which notes that in evaluating an investment for purchase the adviser focuses on the company’s underlying financial condition and business prospects considering estimated earnings, economic conditions, degree of competitive or pricing pressures, the potential impacts of material environmental, social and governance (ESG) factors, and the experience and competence of management, among other factors. The company does not elaborate on its approach in general or in any fund specific literature. On the other hand, nine firms provide supplemental materials and in some cases an extensive library of regularly updated documents and related reports that are typically posted to the firm’s website. These serve to explain the firm’s approach to sustainable investing in general and how the firm addresses particular topics or issues related to environmental, social and governance factors. The same materials may be somewhat limited, as in the case of the GuideStone Funds Group that practices a values-based investing approach through negative screening (exclusions). Or the documentation may be extensive, as is the case for example, with Franklin Templeton Investments, that go on to explains the firm’s philosophy, process, policies and capabilities and offers commentary and insights covering specific topics, such as renewable energy and climate. To be clear, these documents are general in nature and offer limited individual fund specific explanations that offer insights into investment considerations involving stock purchases, sales and retention decisions, particularly affecting controversial companies, performance attribution implications, if any, and outcomes. For example, the documentation leaves unresolved how a specific fund in the alternative sphere may consider ESG risks or opportunities when entering into options trades, or making investments in alternative funds or the basis for selecting one mining company over another, to mention just a few. With regard to security specific references as well as outcomes/impact, one firm, Community Capital Management, publishes an annual impact report that describes the firm’s impact investing approach generally and offers broad-based descriptions of the impacts achieved through the firm’s thematic investing practices across the fund complex. While these, however, are not fund specific disclosures, the Community Capital discloses that it offers investors more specific portfolio and security level tracking and impact reporting using a proprietary technology. Expense Ratios: Alternative funds are pricier with expense ratios ranging from 0.35% to 4.03% As a category within the sustainable investing segment, the cohort of alternative funds is pricier, with expense ratios for this admittedly small category ranging from a low of 0.35% to a high of 4.03%. At 1.55%, the average expense ratio is the highest within seven sustainable investing categories established for purposes of this analysis. When viewed on an asset-weighted basis, the category at 0.81% falls to the fourth-highest expense category, reflecting the influence of the very large institutionally oriented JPMorgan Hedged Equity share classes offered at 60 bps and 35 bps. Refer to Chart 2. Fund Performance: Generally below conventional benchmarks The category’s total return performance, qualified on the basis of sustainable investing strategies, is premature to evaluate due to the recent re-brandings of many funds in the category and, in the case of JPMorgan’s Equity Premium Income and International Hedged Equity funds, their more recent launches in 2018 and 2019. That said, the total returns for the previous 1, 3 and 5-year intervals, evaluated relative to conventional indices such as the S&P 500 and Bloomberg Barclays Aggregate US Index, point to below benchmark results in general. None of the funds/share classes outperformed the S&P 500 over the one-year, three-year and five-year intervals. Relative to the conventional bond index, only 5 funds/share classes, or 12.5%, outperformed during the one year-interval, 28 of 32 funds/share classes, or 87.5% outperformed over the three-year interval and only five of 28 funds/share classes or 17.9% outperformed across the five-year interval. Excluded are the 3 funds with a ten-year track record. Refer to Chart 4.

Events Summary 20 sustainable investing funds related events were identified in July 2019*, classified as follows: • 9 events involved new funds or strategies, including offerings in the US and overseas. • 4 events cover new analytical, research tools or indices. • 3 are related to merger and acquisition (M&A) activities. • 2 events involved fund closings, including one mutual fund and one ETF. • 2 events cover changes to portfolio policies, guidelines or inputs. • *For information purposes, nine events that occurred in June 2019 and not previously reported are listed. These are dominated by new US fund launchings. Refer to Table 1 for details.

EU Green Bond Standard, if implemented, will raise the bar on standards and may increase cost of issuance On June 18, 2019, the Technical Expert Group on Sustainable Finance (TEG) of the European Commission published its Report on EU Green Bond Standard. The report proposes that the Commission create a voluntary, non-legislative EU Green Bond Standard (EU-GBS) to enhance the effectiveness, transparency, comparability and credibility of the green bond market and to encourage market participants to issue and invest in European Union green bonds. The proposal, according to the EU, builds on best market practices and includes four elements that cover alignment with an EU-taxonomy that covers the allocation of bond proceeds, including compliance with minimum social safeguards, publication of a green bond framework, mandatory reporting and mandatory verification by an external reviewer that the EU recommends be formally accredited and supervised. The EU report was issued a few weeks prior to the end of the second quarter 2019 following which it was also disclosed that green bond issuance surpassed the $100 billion mark for 2019. At the same time green bond investment company offerings in the US are approaching $400 million. The EU proposal, if implemented, seems likely to increase the cost of issuance and also raise the bar for European firms as well as any US based firms issuing in Europe. This may further serve to limit green bond issuance globally and impede the achievement of scale required to transition to a low carbon economy. This article summarizes the Report on the EU Green Bond Standard and provides an update on US-based green bond investment company offerings. Report on EU Green Bond Standard This report builds on the interim report that was published on March 6. 2019. More than 100 organizations provided feedback on the interim report and the feedback received was generally positive, according to the EU. It is further noted that a large majority of the respondents supported the creation of a voluntary EU-GBS. The TEG has carefully studied the detailed feedback received from participating stakeholders and has created an improved version of the EU-GBS. This report is now presented in an updated form. The TEG mandate has been extended until the end of this year. In terms of green bonds, during this extension period, the group will inter alia advise the Commission on the proposed link between the EU-GBS and the EU taxonomy , should any changes be needed due to the negotiations or the taxonomy call for feedback. The group will also work further on the design and suggested set-up of the proposed temporary, voluntary registration system of approved verifiers. According to the TEG, it does not plan to organize an additional public call for feedback on the June EU Green Bond Standard report, as it is not proposing substantial changes compared to the interim report. The Commission will now study the report carefully. The next Commission will ultimately be in charge of deciding on how to take this proposal from the TEG forward. Proposal for an EU Green Bond Standard According to the TEG documentation, the EU Green Bond Standard, which builds on best market practices, would comprise four critical elements: 1. Alignment with EU-taxonomy: proceeds from EU Green Bonds should go to finance or refinance projects/activities that (a) contribute substantially to at least one of the six taxonomy Environmental Objectives, (b) do not significantly harm any of the other objectives and (c) comply with the minimum social safeguards. Where (d) technical screening criteria have been developed, financed projects or activities shall meet these criteria, allowing however for specific cases where these may not be directly applicable. 2. Publication of a Green Bond Framework, which confirms the voluntary alignment of green bonds issued with the EU GBS, explains how the issuer’s strategy aligns with the environmental objectives, and provides details on all key aspects of the proposed use-of-proceeds, processes and reporting of the green bonds. 3. Mandatory reporting on use of proceeds (allocation report) and on environmental impact (impact report). 4. Mandatory verification of the Green Bond Framework and final allocation report by an external reviewer. Further, the TEG recommends that external verifiers be subjected to formal accreditation and supervision. The TEG believes that the most suitable European authority to design and operate such an accreditation regime for verifiers would be the European Securities and Markets Authority (ESMA). As this will take time, they recommend to set-up an interim registration process for external verifiers of green bonds, for a transition period of up to three years, in close cooperation with the EC. The TEG is proposing six additional preliminary recommendations suggesting how the EC, EU Member State governments and market participants can support the uptake of the EU GBS through both demand and supply-side measures. The standard would solve several barriers in the current market, including reducing uncertainty on what is green by linking it with taxonomy, standardizing verification and reporting processes, and having an official standard to which incentives could be attached. Green Bonds Issuance Reaches $100 billion at June 2019 The EU report was issued about two weeks prior to the end of the second quarter 2019 following which it was also disclosed that green bond issuance surpassed the $100 billion mark for 2019, according to the Climate Bonds Initiative. This brought total issuance since inception to an estimated $624 billion with roughly one-half that number outstanding at this time. At the same time, green bond investment company offerings in the US are approaching $400 million. This rather small segment grew substantially in 2018 when assets ticked up by $142.5 million and also over the last six months due primarily to sourcing of institutional assets by the Calvert Green Bond Fund as well as new green bond offerings. Refer to Chart 1. Update on US Green Bond Fund Investment Options As previously reported in an article entitled New Green Bond Fund Investment Options Double in Number, investors interested in targeted green bond investing can invest directly in green bonds or broad-based sustainable investment funds, mutual funds as well as ETFs that invest in green bonds along with other securities. Investors in the US can also choose from one of six green bond funds, four bonds mutual funds offering 14 share classes and two ETFs. These are listed in Table 1 below along with their assets, most recent performance and expense ratios. Observations: • Investment mandate: While specific green bond selection criteria vary, each fund generally invests in bonds issued by both domestic and foreign issuers. These may include investment opportunities within and beyond the green bond universe that can also be subject to broader sustainable investing guidelines maintained by the investment management firm. For example, this is the case with the Calvert Green Bond Fund that also qualifies green bonds pursuant to Calvert’s Principles for Responsible Investment covering investment decisions and engagement efforts and also TIAA-CREF’s proprietary impact framework. • Calvert’s Green Bond Fund, now consisting of three share classes, is the largest and oldest fund, launched in 2013. The other five currently available funds have been in operation only since 2017. At $278 million, the Calvert fund accounts for 70% of the combined assets of the six funds as of June 2019. • Institutional investors represent at least $283.4 million, or 71.4% of green bond mutual funds net assets. • Performance results. Except for the Calvert funds, the evaluation time intervals are limited as the funds have only been recently launched. The only funds/share classes with a 3-year track record are the Calvert Green Bond A shares and I shares. Each has consistently trailed the ICE BofAML Green Bond Index (Hedged) across 3-year and in time intervals. At the same time, each has consistently exceeded the performance of the conventional broad-based Bloomberg Barclays Global Aggregate Bond Index. Excepting the VanEck Vectors Green Bond ETF which has lagged, the same observation applies over the trailing 12-months and year-to-date to June 2019 time intervals with respect to the Mirova funds, iShares Global Green Bond ETF and TIAA-CREF Green Bond Fund, including all share classes. • The average expense ratio for green mutual funds and ETFs is 0.58% (0.50% on an asset weighted basis) and 0.25%, respectively. The average expense ratio for green bond mutual funds is lower than the average expense ratio for fixed income sustainable long-term fixed income mutual funds that is 0.88% (average) and 0.67% on an asset weighted basis. • Disclosure practices. As noted in previous research on this topic, unlike the underlying green bond issuers that may offer varying levels of disclosure as to environmental outcomes and impacts, portfolio level disclosures as to outcomes and impact across the six green bond funds is lacking. Based on disclosures made in annual and semi-annual reports, none of the existing green bond funds offer such information for the benefit of investors seeking to understand the impact of their investments. Corollary literature offered by these firms on their websites offer limited supplemental impact disclosures. Literature accompanying the Calvert Green Bond offers an impact scorecard that describes the allocation of portfolio assets but falls short of actually providing impacts data.

Events Summary 17 events were identified in June 2019, classified as follows: 9 events involved new funds, including five new ETFs being launched in the US and Europe. Of 15 non-ETF funds, 9 were launched in the US and Canada, 5 were launched in Europe, and one in Singapore. 4 are linked to changes in investment strategy. 2 events are associated with indices, either changes to existing indices or new launches. 2 are related to organizational changes, including one PM change. Refer to Table 1 for details.

The uptick in the importance of energy and environmental concerns disclosed in the latest National League of Cities (NLC) State of the Cities Report used as jumping off point to highlight expansion in sustainable municipal bond offerings The National League of Cities (NLC) State of the Cities Report issued on May 23, 2019 spotlights the issues most critical to cities and how their mayors are finding solutions, based on content analysis of mayoral speeches delivered in early 2019. The NLC reports that in addition to health and human services that jumped three spots this past year relative to 2018, energy and environment also rose in importance this year, with 41% of mayors discussing the issue compared to only 25% last year. While not necessarily related, we use this finding to explore and highlight the recent expansion in the number of sustainable municipal fixed income mutual funds and ETFs now offered to investors. Over the last twelve months, the number of managers offering sustainable municipal funds increased from 5 firms to 8 firms, the number of mutual funds and ETFs expanded to 16, including 43 share classes, while total net assets jumped from $540 million to $3.4 billion at the end of May 2019. All 16 funds employ an ESG factor integration strategy either exclusively or in combination with one or more other sustainable investing approaches. Still, the number of municipal investing options for retail and institutional investors remain limited. National League of Cities (NLC) State of the Cities Report spotlights economic, social and environmental issues most critical to cities On May 23, the National League of Cities (NLC) released its 2019 State of the Cities Report, a report that analyzes 153 mayors’ state of the city addresses and spotlights the issues most critical to cities, and how their mayors are finding solutions. Now in its sixth year, the report analyzed the content of speeches delivered between January and April 2019 based on parts of the mayors’ speeches that articulate specific plans, goals and impacts related to projects, programs and city departments. Speeches are coded as having significantly covered a major topic if the word count for that topic constitutes at least 10% of the speech. The analysis reveals that the top 10 issues include: Economic development (74%), infrastructure (57%), health and human services (46%), energy and the environment (41%), budget and maintenance (41%), housing (38%), public safety (37%), demographics (32%), education (20%) and government data and technology (11%). Not surprisingly, the priorities of cities, on a combined basis, revolve around various economic, infrastructure and social issues, but in terms of elevated priorities, in addition to health and human services that jumped three spots this past year, energy and environment also rose in importance this year, with 41% of mayors discussing the issue compared to only 25% last year. Mayors, according to the NLC report, introduced concrete plans to for enhancing neighborhood vitality through expanded tree coverage and improved city landscapes. The link to the complete report is here. According to the report, cities are continuing to promote sustainability by planting trees to improve air quality and upgrading waste management systems to reduce waste and decrease contamination among recyclables. Within the context of this discussion, important subtopics include trees and city landscapes (22%), trail (22%), clean energy economy (16%), water reuse and storm water (16%) and flooding (14%). Refer to Chart 1.   Expanded number of sustainable municipal mutual funds and ETFs across varying strategies available to investors While not linked, we use the NCL report to explore and highlight the expansion in the number of sustainable municipal fixed income mutual funds and ETFs now offered to retail as well as institutional investors. As of May 31, 2019, a total of 13 sustainable mutual funds (43 share classes in total offered across varying pricing structures) and three ETFs, for a total of 16 funds, managed by eight firms, are available to investors. This compares to just five sustainable municipal mutual fund offerings managed by five firms, 15 share classes in total, with $540 million in net assets as of June 30, 2018. Refer to Chart 1. Since the start of the year, sustainable municipal bond fund assets gained almost $2.7 billion largely due to fund re-brandings, that is to say existing funds that have formally adopted sustainable investing strategies or approaches to investment management by amending prospectus language. At least 16 share classes and 63% of the assets are available and attributable to institutional investors. The municipal offerings consist of funds with investment objectives that range from current income by investing in ultra-short and short-term municipal securities to capital appreciation by investing in high yield, i.e. non-investment-grade, securities. Further, all 13 funds (43 share classes) and 3 ETFs employ an ESG factor integration strategy either exclusively or in combination with one or more of the following: value-based considerations, negative screening, impact investing and bondholder advocacy. The available underlying funds are listed in Table 1, along with their combined assets under management and sustainable investing strategies. For further details, also refer to the Funds Directory tab for additional details regarding the fund’s sustainable investing strategies. Still, the sustainable municipal investing options are somewhat limited as to fund managers, fund types, as well as pricing alternatives.

Events Summary 15 events were identified in May 2019, classified as follows: 10 involved new funds, including three new ETFs. Of these, five were launched in Europe, four in the US and one in Australia. 2 involved organizational changes or announcements. 2 involved investment strategy announcements. 1 involved the introduction of a new investment tool. Refer to Table 1 for details.

Events Summary 20 events were identified in April 2019, classified as follows: • 6 involved changes to investment strategies • 6 involved new fund or investment vehicle formations • 2 involved index formations or launches • 2 involved organizational changes or announcements • 2 involved mergers and acquisitions • 2 involved new ETF launches Refer to Table 1 for details.

Defining the Watch Status of Sustainable Funds – Some Added Consideration As interest in sustainable funds grows, attention is increasingly focusing on ESG portfolio management approaches, policies and guidelines. Much of this attention is on clarifying the standards and metrics used by managers to evaluate the ESG quality and related risks of fund investments. This is in part, complicated by the dynamic and changing character of ESG factors. Further, the possibility that some ESG factors may have less defined relationships with a fund’s financial (risk-return) mandate, is an impedance to be addressed. For plan sponsors, fiduciaries and trustees, platform ‘gatekeepers’, and other investors, such information is core to evaluating, overseeing, and determining the ‘watch status’ of their sustainable fund selections. It also means that they must take into consideration factors that traditionally haven’t been part of funds’ financial risk-return mandates and fiduciary concerns. This does not mean that these ‘traditional’ areas of fiduciary analyses which include; investment performance, risk and style, and portfolio management consistency are any less important when determining the watch status of sustainable funds. It does, however, suggests that with sustainable funds there may be uniquely defined ESG-related mandates and specialized portfolio oversight concerns that if not met, may be the basis for watch listing, regardless of risk-return results. In the following sections, we identify the watch listing “red-flags” that we believe to be most important when conducting oversight of sustainable investment funds. We’ve identified these flags for different sustainable investment management approaches. Admittedly, each investor or fiduciary may weigh some of these considerations as more important than others, but we feel that those identifies below serve as a representative starting point. Watch Flags for Different Sustainable Management Approaches Negative (“Exclusionary”) Screening · Changes to a manager’s exclusionary standards, weightings, criteria, or screening process. · Adding or (especially) deleting an industry/sector or specific company to a fund’s exclusionary screen. · Inconsistencies in making changes to the management screening process or its application, especially when measuring the degree of adverse ESG impacts. · Including or excluding an industry/sector or company inconsistent with the current or anticipated ESG “values” of the fund’s investors. · Material variations in industry/sector or company concentration and related tracking error, especially during selected market phases. Thematic or Impact · Inconsistencies by the managers when establishing sustainability themes – does the portfolio process focus on themes that are at odds with each other in some way or simply contradictory? · Changes made to the fund’s thematic tracking benchmarks and performance targets. · Failure to consistently abide by and meet established progress benchmarks and/or correct for deviations. ESG-Integration · Changes to the sustainability component of the manager’s process, investment guidelines, analysis protocol, ESG risk factors and weightings. · Changes to the manager’s overall investment process, particularly how and when ESG factors are taken into account, and their importance to the portfolio’s allocations and investment selections. · Changes to company or investment selection ESG quality scoring criteria, data sources, and other inputs -- if applicable, changes by 3rd party providers. Engagement/Proxy Voting · Changes in engagement actions including; the objective of actions, number of actions, and level of portfolio management’s interaction or involvement with a company. · Changes in the portfolio manager’s decision process for instituting an engagement action including; their engagement policies, guidelines, and decision-makers (committee, etc.). · Changes in proxy voting guidelines or responsibilities. Summary: Concerns for All Sustainable Management Approaches There may be other considerations that could lead to the watch listing of a sustainable manager and fund. Moreover, there is likely to be watch list flags listed above that apply across management approaches. As discussed earlier, one such consideration is to define how different ESG-related watch flags and their risk exposures are rated with respect to the ‘traditional’ investment performance factors and mandates. Should they be given a higher weight than traditional risk-return factors; be on an equal footing; or be given a lower level of importance? This could vary depending upon the nature of the flagged ESG concern – some may be of lesser importance to the fund’s investors and generally, toward meeting the portfolio’s overall mandate. For investment managers, their product development and distribution support staff, this places heightened importance on thoroughly understanding their sustainable fund investor client base’s ESG beliefs and values. It especially requires that this understanding be recognized by the fund’s portfolio management and incorporated into their process. In addition, the fund’s disclosures must clearly and thoroughly communicate this process. This ‘message’ must be consistent across the fund organization, and especially among product development and distribution groups.

BlackRock’s head of global stewardship leaves position. Date: Oct. 30, 2017                                                                        Alert:  MODERATE** Briefing Points – i) Zack Oleksik, who lead and help form BlackRock’s Investor’s Global Stewardship group has left the post; ii) Under Mr. Oleksiuk, the group established BlackRock’s corporate governance guidelines and practices for corporate and individual investors; iii) No replacement for Mr. Oleksiuk has been named. Affected Funds – BlackRock Impact Funds Asset Class – IS Equity & US Fixed Income Structure – Open-end Mutual Funds Management Company – BlackRock Advisors, LLC (New York, NY) Alert Level – MODERATE Type of Concern – Corporate Management Team Change Recommended Actions – Inquire about team coverage and new hire status. Date – Oct. 23, 2017 Event – PIMCo appoints new head of ESG portfolio management.

Introduction The growing traction of sustainable investing and sustainable investment funds[i] has brought with it increased attention to how these products are managed.  For fiduciaries, institutions and financial intermediaries as well as, robo-advisors and other platform “gatekeepers,” this has introduced a range of new due diligence questions.  These questions address what should be considered when evaluating and overseeing sustainable investment fund managers.  Not surprising, there is no single answer to these questions.  In this paper, we provide what we believe, are some primary considerations for conducting sustainable manager and fund due diligence.  These are discussed below. Recognizing the Underlying Differences in Managing Sustainable Funds We believe that it is first important to recognize that there are fundamental differences when managing sustainable investment funds. On the surface this may be obvious, but too often the differences between sustainable and non-sustainable fund management are given less attention than warranted.  We think that these differences can be summarized in 3 ways.  First, it is important to understand that when managing sustainable funds there are distinctive sustainability-specific portfolio investment selection criteria and allocation overlay(s).  Sometimes these are straightforward, but they may also be complex depending upon a manager’s proprietary analytics and specialized investment focus.  These may be based on qualitative measures, but may also rely upon qualitative factors, and intangibles, making them more subjective when being interpreted. Second, by their nature sustainable funds will have additional portfolio restrictions and limitations.  Again, some of these may be qualitatively-driven or intangibles.  For example, sustainability-factors are sometimes designed to reflect investor’s “values”, which leave room for interpretation.  These factors may not have clear-cut links to risk-return measures generally used in portfolio analysis and construction. And third, managing sustainable funds can require customized and sometime unique analytical tools, and data.  Supporting these resources may require management team specialists who focus principally on sustainable issues.  This means that financial expertise that traditionally has been the core to making portfolio selection and allocation decisions should not be “confused” with that needed for sustainable fund management. To further complicate matters, sustainable-fund managers use different portfolio management approaches, and as a consequence, the due diligence process needs to be adjusted for such variations.  These are discussed in the following sections.  To supplement this, we include an Appendix where we list specific questions that we feel are critical to conducting due diligence of fund managers using different sustainable investment approaches. Different Questions for Different Sustainable Investment Approaches A fund manager’s sustainability investment approach requires different lines of inquiry when conducting selection and oversight due diligence.  There are many areas of questioning that could and should be pursued depending on managers’ circumstances and their client’s requirements.  Below we identify some essential areas of inquiry for each of the five (for purposes of this paper, values-based investing and negative screening have been combined into a single approach) commonly used sustainable fund investment management approaches. Negative Screening (Exclusionary) Approach In some ways an exclusionary investment approach to sustainable fund management is the most straightforward to apply and oversee.  Defining the industries, sectors, activities, and sustainability-related concerns excluded from a portfolio is an obvious starting point.  It is, however, important to understand what criteria is used to make exclusions, if any, within selected industries and sectors.  These criteria and their weights should be defined for each industry, sector, or other excluded “category”.  Managers using an exclusionary approach are increasingly applying “customized” processes to make selections within industries and sectors.  These processes allow a fund to hold positions in excluded industries and sectors depending upon a company’s exposure to various sustainability factors and controversies.  For instance, companies in an excluded industry may be invested in, depending upon the proportion of their revenues from carbon producing operations – more carbon-linked revenues means a smaller portfolio position, and vice versa. The analytical framework, metrics, and their application should be examined for different market cycles.  This provides a basis for understanding how exclusions affect a fund’s performance and sustainability-risk trade-offs.  It is particularly important to identifying risk-return results that are due to sector concentration in the portfolio, and the manager’s method to control tracking error. Thematic & Impact Investment Approach When conducting due diligence of active managers employing an impact approach to sustainable investing, it is first necessary to identify the sustainability and/or controversy issues or themes being “targeted” for action.  Such action typically involves buying or adding to a company’s position in the fund’s portfolio.  It is important to recognize that sustainability and/or controversy themes or issues are not constant.  They may change overtime given evolving public sentiment toward specific sustainability concerns.  These changes could affect not only the types of issues or themes focused on by a fund’s manager, but their relative importance in the investment process, and ultimately their portfolio weights. The process used to establish sustainability themes should be closely examined.  This involves reviewing how the fund management team identifies pertinent ESG-issues, and then, selects and prioritizes investments and companies that could support a theme.  As part of this process, it is important to determine how a fund manager establishes impact outcomes and related benchmarks used to measure progress toward attaining a theme’s objective. Often this process involves a collaborative effort between fund management and various public and private sustainable investing interest groups. Knowing how such impact actions have “played out” in the past should be questioned, including whether they succeeded as planned.  This is especially important when a portfolio manager intercedes and works directly with an “outside” interest group toward specific sustainability objectives. ESG-Integration Investment Approach The ESG-Integration approach to managing sustainable funds can take different forms and variations among managers.  An initial line of inquiry should be designed to understand how ESG factors are incorporated and weighed in the security selection process.  Portfolio weightings and allocations for ESG positions, if applicable, should be considered with respect to investment style, risk-return potential, and other financial criteria.  As part of this assessment, the question of how ESG factors are weighed against these other portfolio mandates and benchmarks.  Often with bottom up selection approaches, companies are scored on the basis of their sustainability and/or ESG profiles.  Company quality scores are typically designed to measure ESG associated exposures, and integrated with other financial risk measures for purposes of modeling return opportunities and company valuations.  These ESG quality scores may use company data compiled in-house or acquired from a third-party provider.  In either case, added due diligence should be conducted into how these scores are constructed, the underlying data used, and how they compare with those of other out-sourcing services. It is most important when overseeing managers using an ESG integration processes, that are becoming increasingly common, to examine their fund’s risk-return record and its responsiveness during various phases of the market cycle.  Emphases should be made to determine the effects on fund performance when portfolio changes are made as the result of variations in a company’s ESG quality score. Engagement & Proxy Voting Investment Approach Sustainable investment engagement processes utilize direct involvement by fund management with companies that the portfolio invests in.  Fund and company management typically interact in a joint effort to improve the company’s ESG quality.  Underlying these efforts, the goal is ultimately to maintain the company investment as a holding in a fund’s portfolio.  However, engagement actions increasingly involve fund managers using proxy voting actions to achieve specific sustainability-related objectives.  When conducting due diligence of sustainable engagement portfolio managers, a first step is to identify specific companies and portfolio investments targeted for engagement, and why this is the case.  It is also important to explore what determines the level and nature of the portfolio manager’s involvement with each company?  This question has a practical aspect in that engagement initiatives involve resource commitments, and the fund manager must make choices as to which portfolio holdings offer the greatest potential for gains give management’s involvement. The due diligence considerations for different sustainable fund investment approaches may overlap.  Further, within these approaches varying levels of due diligence analysis may be applied. In the next section, we examine an area of due diligence that is applicable to each approach in equal measure – arguably this may be the most important area of oversight. Assessing a Manager’s Corporate-Wide Commitment to Sustainable Practices The internal corporate or business culture in which a sustainable fund manager operates, regardless of their approach, in many ways sets the context for assessing their due diligence results.  A fund manager’s corporate or parent company’s sustainable “culture” provides important due diligence insights.  Simply offering and managing sustainable funds does not necessarily mean that a firm is “dedicated” to sustainability practices.  Also, this cultural feature can change with time, especially as noted, when society’s views of sustainability issues evolve. Areas of inquiry that provide some indication of an organization’s cultural commitment to sustainability include: the range of their sustainable-related products and services, their record of resource commitment to sustainability-related R&D; their planned business and organizational initiatives; and their sustainable investing staffing at different levels within the firm’s hierarchy. A review of the firm’s internal policies and guidelines related to sustainability issues is important, as well.  It is important to evaluate the firm’s track record for sustainability issues, both directly and indirectly related to its primary lines of business.  While some firms have developed their own sustainability guidelines and policies, many rely solely on government issued regulations.  It is worth identifying the policy areas where the firm’s internal guidelines vary from those established by regulation.  How much attention has been paid to “living up to” these guidelines says something about the firm’s sustainable culture. In summary, due diligence of sustainable managers and their funds requires added layers of specialized analysis.  These may require delving into areas and data not typically examined for non-sustainable managers and funds.  Moreover, while financial considerations typically associated with the due diligence process remain, their role should be expected to be augmented and in some cases, subject to analytical sustainability-related trade-offs. Appendix – Important Questions for the Due Diligence of Sustainable Fund Managers Negative Screening (Exclusions) Investment Approach What industries, sectors, and companies are currently excluded from the fund’s portfolio? What are the specific criteria used to designate excluded industries, sectors, and companies? Do these criteria and/or their weighting differ among companies, sectors and companies? Are these criteria the same across asset classes, and if not, how and why do they differ? Can exclusions be partial allowing the fund to hold some company positions in “excluded” industries or sectors? For companies in excluded industries or sectors, what financial metrics are used to determine allowable investment limits for the fund portfolio? Within excluded industries or sectors, how are company allocations for the fund’s portfolio defined? What event or development might change – tighten or lessen – an exclusionary designation? How is the fund’s tracking error controlled, and if required, are there portfolio strategies to offset for sustainability and/or controversies exclusions? Are the impacts of the fund’s sustainability and/or controversy-related exclusionary policies tracked overtime, and if so, what have been the effects on portfolio tracking error, risk-returns, construction, structure, liquidity, and other characteristics? Thematic and Impact Investment Approach How are sustainability-related themes identified for “impact” investing by the fund? What investment parameters or limitations are established when defining a sustainable impact mandate for the fund? Are multiple themes or impact directives allowed for the fund, and if so, how are they prioritized and weighted for investment? Are non-management company “advocacy groups” involved in identifying investment themes or impact areas for the fund? Does fund management have established policies guidelines and restrictions for selecting and overseeing non-management company “advocacy groups”? Once a sustainable investing theme or area of impact is defines as a fund investment, how are projects and transactions evaluated, i.e., benchmarks established, monitoring processes and responsibilities, metrics and comparative base(s) used, etc.? What themes and areas of impact investing are currently being applied to the fund’s investments, and how do their results compare with their benchmark “targets”? For the fund’s current sustainable investing themes and areas of impact investing, what are their performance expectations and track record versus the fund’s benchmark? Have any changes – additions or deletions – to the fund’s themes and impact investments been made and why? Does the management company or its affiliates engage in structural transactions, and how is this managed? ESG-Integration Investment Approach Why is the fund manager using an ESG-integration process – is it only applied for selected of its funds or strategies, or assets classes? How long has the fund manager used its current ESG-integration approach, for the fund and in general? How are ESG-factors defined, e.g. Company ESG associated risk, overall company ESG quality, or some other company “score”? Have the management company changed these ESG-factor definitions for the fund? Where in the manager portfolio investment process for the fund is: are ESG-factors incorporated, egg. Security selection, portfolio construction, etc.? Overall, how are ESG-factors weighed relative to other fund mandates including: financial growth, portfolio sector/industry exposure, investment style, and others? When using company ESG quality “scores”, are these compiled using the fund manager’s internal research – if yes, what ESG-factors, data sources, and weighting process and scoring models are used? Does the fund’s manager use a third-party independent source for company ESG-quality scores for some or all of the fund’s investments – is used for some, why those particular investments and not others? How and why does the fund’s ESG-integration process differ from the manager’s other funds and strategies, whether they be equity, bond, domestic or international/emerging securities? What have been the effects of integrating ESG-factors on the fund’s performance, risk, and other investment mandates, limitations and restrictions? Engagement and Proxy Voting Investment Approach How are specific fund investments identified for engagement action – are there established manager and/or portfolio policies and procedures defining such actions? Does the portfolio manager act alone to initiate engagement actions, or are there “broader” firm-wide committee and policy guidelines employed? What are the primary sustainable investing considerations or factors leading to an engagement decision – are these “fixed” or defined on a case-by-case basis? Are there any over-riding policies or conditions to engagement decisions for the fund – who makes this “ruling”? Once an engagement has been decided upon, what is the process and steps for determining the level and nature of the fund manager’s involvement in a company? How is the level of company involvement determined – does this vary for active versus passive funds? How are the engagement processes measured and monitored by fund management – are there specific target results and time frames set? Are there limits on the number and types of engagement actions for the fund at a given time? What is the fund manager’s voting practices and policies, and who at the management company is responsible for the final voting decision? What is the fund’s proxy voting history and success result? [i] Sustainable investing in an umbrella term that also refers to ethical investing, socially responsible investing and responsible investing.  It also seems that references to the term  sustainable investing is morphing into ESG investing.  Sustainable investing is the idea that investors can achieve a positive societal outcome or impact with their investments. Optimally, this should be accomplished without sacrificing long-term financial returns. While the definition has been changing over time, this concept today encapsulates a range of five overarching investment approaches or strategies. Most practitioners agree that these encompass the following approaches:  (1) Value investing, (2) Negative screening or exclusions, (3) Thematic and/or impact investing, (4) ESG integration, and (5) Shareholder/bond advocacy and proxy voting.

Summary/Introduction In the last four years or so, sustainable bond mutual funds nearly tripled in number and experienced an expansion in assets from $10.3 billion to $27.6 billion, or an increase of 167%.  In addition 14 fixed income sustainable exchange-traded funds (ETFs) with another $1.2 billion in assets are now listed and available[1].  These ETFs have all been introduced in just the last two years. Even with a combined total of almost $30 billion, this compares to $411.4 billion in assets sourced to self-designated sustainable equity funds and ETFs as of January 31, 2019, or only 6.8% of sustainable fund assets. Refer to Chart 1. By way of further contrast to the long-term mutual fund and ETF industry at about $18.1 trillion as of t year-end 2018, long-term fixed income funds, both taxable and municipal, at about $4.7 trillion in net assets, represent 25% of long-term mutual fund assets. Moreover, the growth rate in sustainable fixed income products and assets has lagged behind equity and equity like funds since 2014. Still, the fixed income sustainable fund segment has been changing and evolving. In addition to the growth and expansion in the number, type and fixed income assets under management (AUM) as investors broaden the application of sustainable investing strategies beyond equities, some of the notable recent developments in sustainable fixed income investing, when viewed through the prism of mutual funds and ETFs, include: (1) The growth of the segment due to the entry of mainstream investment managers and the rebranding of existing fixed income funds. This is contributing to growth in the sector which is not as yet being turbocharged by net new money, especially form retail investors, (2) The important role of institutional investors whose assets account for about 76% of the mutual fund assets in the segment, (3) the broadening of offerings to include environmental, social and governance (ESG) qualified investment-grade intermediate term bond portfolio options that, in turn, facilitates asset allocation and diversification, (4) the introduction of additional ESG money market funds and short-term funds, (5) a doubling in the number of green bond funds, and (6) the shifting emphasis from values-based strategies to ESG integration that also imbeds negative screening. It is highly likely that fixed income funds, both taxable and tax exempt, will continue to expand in number as well as assets, potentially at an even greater pace than in the past. At the same time, the unique challenges that arise in the process of integrating ESG in fixed income due to some of the added complexities introduced by fixed income instruments, above and beyond considerations affecting all asset classes, namely data availability or reliability, negative impact on performance and investor education, will also have to be addressed by the various fixed income market participants. Fixed Income Mutual Funds Today: 76 funds with $27.6 billion in AUM There are a total of 76 active and passively managed short-term and long-term taxable and municipal mutual funds, representing 234 share classes and a total of $27.6 billion in assets under management. These funds are offered and/or managed by 41 firms as compared to 29 firms as of December 31, 2017, a period of just 13-months. The average fund family manages $674.5 million in sustainable assets while only eight fund firms can boast of managing $1+ billion in sustainable fixed income assets. 76% of the assets are sourced to institutional investors. Fund firms: 41 fund firms with top ten firms accounting for 82.4% of AUM The largest firms dominate, as the largest 10 fund firms manage $22.8 billion in AUM and account for 82.4% of the fixed income segment’s assets. Adding the next 10 largest ranked fund firms expands the AUM number by an additional $3.4 billion and brings the total to $26.2 billion or 95% of the segment’s assets under management. The ranking of the top 10 and top 20 firms changed in 2018 as mainstream investment management firms rebranded existing fixed income funds by amending their prospectuses and shifted their assets into the sustainable segment. In the process, these firms ascended into the top sustainable fixed income fund ranks. These firms include American Century Investments, Morgan Stanley, Shenkman Investment Management, Aberdeen and DWS (formerly Deutsche Bank). The remaining 21 firms manage about $1.5 in assets, accounting for 5.3% of the segment’s assets under management. Bond fund types: Investment-grade intermediate funds that track the Bloomberg Barclays US Aggregate Index dominate Using a traditional classification approach based on investment mandates, almost $13 billion in assets, or 47%, is invested in intermediate corporate bonds. Short-term bond funds account for another $3.4 billion, or 12.2% and intermediate government bond funds add another $2.5 billion, for a total of $18.8 billion or 68.2%. With the launch by DWS of an institutionally oriented money market fund, and before BlackRock’s newly announced money fund kicks in with some assets, this category now ranks fourth in terms of AUM. Green bond mutual funds, of which there are now four, are captured under the World Funds category. Sustainable strategies of funds: ESG integration combined with negative screening rule the segment Table 1 identifies the sustainable investing strategies employed by the top 20 fund groups in the sustainable fixed income segment. While there may be variations across some funds within a fund group which have been identified in the notes of explanation, the table reflects the most widely applicable sustainable investing strategies applicable within a fund group, based on a review of the underlying funds’ SEC filings. Except for three firms, ESG integration reflects the most commonly used sustainable investing strategy and this approach is typically paired with some level of negative screening or exclusions. With regard to ESG integration, there is no standardized methodology that applies and information inputs can vary. Three ESG integration approaches that are common include reliance on ESG scores generally, selecting from companies and/or securities that have achieved minimum ESG scores, and investing in best in class companies and/or securities based on ESG scores. These strategies may also be paired with an emphasis on firms/securities with ESG scores that are trending up, driven by research suggesting that this approach can lead to outperformance. ETFs and ETNs: 14 Sustainable Fixed Income ETFs with $1.2 billion in AUM 14 sustainable ETFs are currently listed for trading, with $1.2 billion in assets under management as of January 31, 2019.  These are offered by eight firms, one of which repurposed three existing funds effective on March 1[1]. In total, these repurposed funds shifted $766.7 million in assets or 65% of AUM. Rebranded funds aside, five of the current ETF offerings were launched in 2018. The average ETF size stands at about $84 million. All but three funds employ an approach that relies on ESG integration, for a total of 11 funds with about $1.1 billion in assets, or 90%. Typically, this strategy may also be accompanied by negative screening. Refer to Table 2. Two ETFs invest in green bonds, bringing to six the total number of funds that invest in green bonds. Performance of actively managed sustainable fixed income mutual funds A limited number of offerings, a variety of sustainable strategies combined with short operating histories makes the task of evaluating segment performance, rather than individual fund performance, more difficult at this time. In most categories, there are a limited number of funds to evaluate, however, this is not the case for the investment-grade intermediate segment that was transformed in 2018 into the largest grouping within sustainable fixed income due to the expansion in the universe of similarly managed funds, as noted previously. This has made possible the creation of an index to track like funds. That’s the idea behind the creation of the Sustainable (SUSTAIN) Fixed Income Index, a benchmark that tracks the total return performance of ten actively managed sustainable fixed income funds that are pursuing investment-grade intermediate term mandates in line with the Bloomberg Barclays US Aggregate Index while at the same time employing a sustainable investing ESG integration strategy beyond absolute reliance on exclusionary practices for religious, ethical or social reasons. Effective December 31, 2018, the SUSTAIN Fixed Income Index was reconstituted with the expansion of available funds from five to the ten largest qualifying funds. Prior to December 31, 2018, this benchmark was comprised of only five funds and was referred to as the Sustainable (SUSTAIN) Bond Fund Indicator. In 2018, the SUSTAIN Bond Fund Indicator posted a slight total return decline of -0.05% versus a gain of 0.01% for the Bloomberg Barclays US Aggregate Index, for a fractional 0.06% difference. In January 2019, however, the reconstituted SUSTAIN Bond Fund Index posted an increase of 1.2%, exceeding the Bloomberg Barclays US Aggregate Index by 15 basis points as positive contributions to the outperformance of the index were made by six funds that achieved excess index returns. Combining data for the 13-month interval through January 31, 2019, January’s strong results allowed the SUSTAIN Bond Fund Index to record a 13-month return of 1.1% versus 1.07% for the Bloomberg Barclays US Aggregate Index, for a positive 0.04% differential. Refer to Chart 2. Five unique challenges for fixed income investors In addition to the ESG integration challenges faced by all investors, as referenced previously, applying ESG integration to fixed income securities introduces additional complications and unique considerations that have to be addressed by fixed income managers. The key ones are, the following: 1. Company versus security level ESG scoring or rating. Structural variations that range from senior unsecured obligations to project finance and structured transactions, such as ABS or CLOs, that are not necessarily reliant on the company or issuer for repayment, means that a company level ESG score may not be relevant and a transaction specific assessment may be required. 2. Treatment of time horizon in the evaluation of securities. Depending on the risk/opportunity consideration, shorter-dated securities may be subject to lower or greater risks of default or rating transitions. For this reason, the ESG risk profile of an individual transaction may have to be decoupled from that of the issuing company. 3. Evaluating ESG risks of structured securities. Evaluating the ESG risks and opportunities of ABS transactions or CLOs, for example, likely requires an examination of the underlying collateral and possibly the various servicing entities involved in the transaction. 4. Limited disclosures. While data availability and reliability affects all asset classes, it is especially pronounced for municipal entities, private firms, non-investment grade entities, structured securities and emerging market entities. 5. Treatment of derivatives. Extensive reliance on derivatives in fixed income portfolio management and their treatment under an ESG assessment framework means that frameworks for addressing derivative instruments will have to be developed. [1] Three Hartford ETFs managed by Wellington Management adopted ESG integration language via a prospectus supplement dated March 1, 2019.  These three funds, with total net asset of $766.7 million, are nevertheless included in the AUM data as of January 31, 2019 as these had been classified as Responsible Investing funds by Morningstar even prior to the official effective date. [2] Refer to footnote 1.

Sustainable Investing Alerts Coverage: Nordea's new fund, Sustainalytics GES acquisition, Eagle introduces new ESG strategy, Fitch launches ESG Relevance Scores, and Mirova's new international ESG fund. January 10, 2019 DUE DILIGENCE Alert:  LOW COMPETITIVE Alert:  1 Event:  Nordea adds fund to its SICAV STAR equity suite. Briefing Points:  i) Nordea’s new SICAV mutual fund applies an ESG integration approach that employs sustainability quality standards plus “proactive engagement” by the portfolio manager, who “use dialogue and engagement to make a real impact.” The fund focuses on companies with the ability to comply with international standards for environmental, social and corporate governance.  ii) The fund’s PM is John Swahn who currently manages the Nordia 1 – Global Stars Equity fund, an ESG fund using the same “high conviction bottom-up” selection approach;  iii)  Nordea’s STAR suite now has six funds using ESG integration, that “quantify and integrate ESG’ into its valuation model. Affected Fund(s):  Nordea 1 – North American stars Equity fund Asset Classes:  US Equities Management Company:  Nordea Asset Management (New York, NY) DD Concern:  Change to product-line Marketing Considerations:  The firm has solid experience in applying its ESG integration approach, and this is considered a positive from a due diligence standpoint.  Applying the approach to a new asset class mandate should not be a concern.  This experience is also a positive from a marketing standpoint, especially with domestic institutional clients.

Citigroup issues €1 billion three-year fixed-rate green note Last week Citigroup, whose senior debt is rated Baa1/BBB+, became the latest in a string of large US banks operating in the US to issue a green bond. Citigroup is the fourth bank among the top 10 ranked financial institutions to issue a green bond, having been preceded by Bank of America Corp. which was the first to market with a green bond back in 2013. Since then, green bonds have also been brought to market by Morgan Stanley and TD Bank Group. Advancing Citigroup’s $100 Billion Environmental Finance Goal to support sustainable growth as part of Citigroup’s Sustainable Progress Strategy, Citigroup issued a €1 billion three-year fixed-rate note and will use the proceeds to fund renewable energy, sustainable transportation, water quality and conservation, energy efficiency and green building projects. These project categories align with the use of proceeds guideposts established pursuant to the Green Bond Principles that Citi helped craft in 2014. The Green Bond Principles are voluntary guidelines for the development and issuance of green bonds that encourage transparency, disclosure and integrity in the development of the green bond market, including reliance on an external party review. In the case of its offering, Citigroup’s note carried a third party assessment issued by Sustainalytics. Citigroup's offering was reportedly greeted with strong demand, including likely demand from an increasing number of dedicated green bond funds Demand was strong and the note was reported to have been priced competitively compared with other markets. Green bonds, which are no different than conventional bonds except that their proceeds are earmarked for environmentally beneficial purposes, will typically price in line with their non-green bond counterparts given similar seniority, credit rating levels and maturities. Increasing demand for sustainable investing worldwide and in the US is motivating mainstream investment management firms to launch dedicated sustainable investment products generally and green bond investment vehicles in particular. Just in the last two months, the number of green bond funds in the US doubled with the launch of green bond mutual funds or exchange-traded funds (ETFs) by Allianz Global Investors, BlackRock and Teachers Advisors. This brings to six the number of green bond funds available to retail and institutional investors, including a combined total of four mutual funds as well as two ETFs with $286.9 million in total net assets as of year-end 2018. These active and passively managed dedicated green bond funds are dominated by corporate debt that, as of year-end 2018, accounted for between 42.09% and 66.3% of portfolio assets. Also due to issuance patterns and mandates, these portfolios are typically concentrated in investment-grade debt instruments where Citigroup’s notes will fit in. As of December 31, 2018, the three seasoned portfolios managed by Calvert Investments, Mirova, a unit of Natixis Global Asset Management, and Van Eck Associates maintained an average exposure of 68.7% to A1/A or better rated green bonds while an average of 20.83% was invested in Baa1/BBB rated bonds. Given Citigroup’s Baa1/BBB+ ratings, the slight yield pick-up will have been attractive to green bond funds in particular but more generally, sustainable funds more generally as well as conventional bond funds denominated in Euros or with the flexibility to invest in other than base currencies. In 2018 green bond issuance reached a preliminary $167.3 billion and this number is expected to reach higher in 2019 The issuance of green bonds across the world continues to expand since their introduction in 2007. Last year’s issuance reached $167.3 billion, based on preliminary data, and in 2019 green bond volume is expected to exceed that level. Since 2007, an estimated $524.1 billion in green bonds have been issued by hundreds of issuers across the globe, including development banks, such as the World Bank, sovereigns, such as France and Poland, sub-sovereigns and municipalities, which may include taxable and tax exempt instruments, financial institutions and various corporations, and in the form of project finance transactions and securitizations, such as automobiles and residential mortgages. Key reason for the growth and development of green bonds is their role in mobilizing capital toward climate solutions 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° or even lower 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 mobilizing capital toward climate solutions.  Although traditional finance techniques will also have to be mobilized for this effort, the need to finance climate solutions in combination with growing investor demand should continue to lift green bond issuance beyond 2018. Notes of Explanation and data sources:  Total net assets:  STEELE Mutual Fund Systems, Morningstar data; otherwise, fund websites and analysis by Sustainable Research and Analysis LLC.  Green bonds portfolio data represents arithmetic averages.

BlackRock announces new money market fund: BlackRock Liquid Environmentally Aware Fund (LEAF) Adding to a small stable of sustainable money market funds as well as short-term funds, BlackRock announced on January 23, 2019 that it has filed an initial registration statement for the BlackRock Liquid Environmentally Aware Fund (LEAF), a prime type money market fund.  The fund, which intends to offer both a retail and institutional share classes (expense ratios have not yet been disclosed), will invest in companies and counterparties with a better than average performance in environmental practices and, at the same time, avoid certain companies and counterparties.  At the same time, BlackRock is making a commitment to purchase or retire carbon offset credits with a portion of its revenues from the fund and make an annual payment to the World Wildlife Fund (WWF) to help further global conservation efforts. Once it’s up and running, this will be the third money market fund targeted to sustainable investors in particular and it also adds to an expanding list of short-term funds. LEAF will invest in a broad range of money market instruments whose issuer or guarantor has better than average performance in environmental practices. According to the preliminary prospectus filing, BlackRock will use data from independent ESG ratings vendors and may employ the use of its own models. The fund will also prohibit any investments in companies that earn significant revenue from the mining, exploration or refinement of fossil fuels or from thermal coal or nuclear energy-based power generation. The fund also introduces two very unique features. The first is that BlackRock will allocate 5% of the net revenue derived from the fund’s management fee toward the purchase and retirement of carbon offsets either directly or through a third-party organization. Second, the firm disclosed that it has entered into an agreement with World Wildlife Fund (WWF), which it describes as a leading environmental non-profit with recognized expertise and experience in environmental protection, pursuant to which it will make an annual payment to help further the global conservation efforts of WWF. BlackRock LEAF will be the third sustainable money market fund available to investors Once launched, LEAF will be the third sustainable money market fund available to investors.  The announcement follows the rebranding in November 2018 of the $329.3[1] million DWS ESG Liquidity Fund, a variable net asset value money market fund consisting of three share classes.  While both are variable net asset value funds, the sustainable approaches and methodologies vary.  Unlike BlackRock’s LEAF, the DWS ESG Liquidity Fund integrates ESG considerations in making investment decisions.  That is to say, the fund’s investment selections also account for social and governance considerations rather than being limited to environmental practices.  That said, the fund also employs negative screening.  Formerly called the DWS Variable NAV Money Market Fund, the DWS fund, with its high minimum investments, is managed by DWS (formerly Deutsche Asset Management) for the benefit of institutional investors subject to varying minimum investments. Coincidently, the oldest of the third money market funds currently on offer, the GuideStone Money Market Fund, is managed by GuideStone Capital Management, LLC and sub-advised by BlackRock Financial Management.  This is a values-based fund that relies exclusively on negative screening and restricts its investments to US government obligations and repurchase agreements collateralized by same.  The fund, which has been in operation since May 2009, consists of share class targeting individual as well as institutional investors and unlike the two other funds, it maintains a constant net asset value.  Refer to Table 1.  Also, for further details refer to previously published article, ESG Liquidity Fund Targeted to Institutional Investors Offered by DWS. Comparison of DWS, GuideStone and BlackRock LEAF Money Market Funds 3 Short as well as ultra-short duration sustainable mutual funds and ETFs also launched in the last year It is also noteworthy to mention that a number of short as well as ultra-short duration sustainable mutual funds and ETFs were also launched in the last year. These include the Hartford Short Duration ETF, the Calvert Ultra-Short Duration Income NextShares ETF and the TIAA-CREF Short Duration Impact Bond Fund. Each of these funds seek to maintain a weighted average durations of less than three years and, in the case of Calvert’s NextShares, less than one year.   These funds take on greater credit and duration risks relative to money market funds but should, in exchange, post higher returns.  Still, they also expand the roster of existing short duration funds that include:  the Calvert Short-Duration Income Fund, Calvert Ultra-Short Duration Income Fund and the GuideStone Low Duration Bond Fund. What’s driving the new offerings? While the BlackRock fund offers both an investor share class (minimum investment = $1,000) and an institutional share class, the initial and by far the largest audience for LEAF as well its competitor money funds is likely to consist of the various institutional investor segments that have embodied sustainable investing strategies ranging from values-based investing/negative screening, impact and thematic approaches to investing, ESG integration and shareholder engagement/proxy voting, or some combination of these.  This is a growing segment that, in particular, includes foundations, university endowments, family owned offices/wealth management platforms, public defined benefit plans as well as defined contribution 403(b) plans. In addition, other institutional investors identified by US SIF Foundation include insurance companies, labor funds, hospitals and healthcare funds and faith-based institutions.  For all these institutional investors and their asset managers, a sustainable money market fund provides a registered investment vehicle option for investing day-to-day cash in a manner consistent with their overarching investment mandates. Refer also to an article that appeared in Barron's/On Line edition as of February 9, 2019, entitled Earning Income While Being Socially Responsible.  According to US SIF Foundation’s recently published Report on US Sustainable, Responsible and Impact Investments 2018, based on reporting as of the beginning of 2018, assets linked to sustainable, responsible and impact investing (SRI) strategies have reached $12.0 trillion. Much of this growth is driven by asset managers, who now consider ESG factors in their investment decision making.  According to this research, institutional assets subject to ESG criteria reached a total of $5.61 trillion, representing a 19% increase over the corresponding total identified by US SIF in its 2016 research across 477 institutions.  Refer to Chart 1.  While these statistics may be overstated somewhat due to definitional issues and double counting, the overall increase reported by US SIF is consistent with the growing attention to this area and represents a large and growing market segment for sustainable money market funds as well as short duration bond funds. Types of Institutional Investors Incorporating ESG Criteria 2010-2018 [1TNA as of December 31, 2018.

90 new funds with $2.6 billion in assets launched in 2018    In 2018 new sustainable fund launches included some 90 funds, consisting of mutual funds and corresponding share classes as well as exchange traded funds (ETFs) that were valued at $2,588.8 million as of December 31, 2018.  These funds contributed to the growth in the sustainable funds segment that reached $390.4 billion as of the same date, the highest level ever, with the addition of almost $140 billion in 2018.  Refer to Chart 1.  This is up from $250 billion at year-end 2017, or a top line increase of 56%. The net increase is attributable to three factors, including market movement, fund re-brandings and net cash flows.  By far, the largest contributor to the increase is attributable to the rebranding or repurposing of existing funds, which added $155.9 billion, net cash inflows that netted an estimated $11.45 billion in assets while market movement depressed the value of assets by an estimated $27.4 billion. Sustainable mutual funds and ETFS Mutual funds dominated the roster of new fund offerings, accounting for 71 funds and share classes and $1,914.6 million in assets, as compared to 19 ETFs with $674.2 million in assets[1].  Within this universe, equity funds prevailed. 63 mutual funds and ETFs were launched with $1,932.3 million in assets under management investing in US, equities, international equities as well as specific market sectors or themes. The remainder was comprised of bond products, 27 mutual funds and ETFs in total with $656.5 million in net assets.  In all cases, the values are as of December 31, 2018. 2017 still leads in new fund formations and assets over the previous five years This was not the best year for new sustainable fund formations as that designation belongs to 2017 when a total of 112 new mutual funds and their share classes as well as ETFs came to market with a value of $4,060.5 million of December 31, 2017.  This past year came close to but exceeded 2016 when a total of 85 funds were launched with about $2.6 billion in net assets at year-end 2016.  Achieving an absolute level of precision with these numbers is difficult, particularly on the mutual funds side.  One issue has to do with the significant number of re-brandings, the act of shifts existing funds into the segment by amending offering documents to reflect the formal adoption of a sustainable strategy.  Refer to Chart 2. Variety of sustainable approaches adopted by new mutual funds and ETFs, but a majority in 2018 emphasized ESG integration strategies Leading the new sustainable funds landscape in 2018 are investment vehicles that have adopted ESG integration strategies along with funds that combine two or more strategies on top of ESG integration.  New funds that have adopted ESG integration strategies number 16 with $881 million in net assets, or 34% of new funds by net assets at the end of 2018.  ESG integration is often times combined with negative screening or exclusions for companies operating, for example, in the tobacco and alcohol spheres which may, in turn, vary by how these are defined. Such funds add 17 to the total and have sourced $611.7 million by year-end 2018, or 24%.  As is the case more generally, some of the new funds in 2018 that employ ESG integration strategies also extend their approach to encapsulate some combination of impact, thematic considerations, shareholder engagement and proxy voting approaches. A combined total of 26 such funds came to market in 2018, with about $473.0 million in assets under management. A values-based approach combined with exclusions was adopted by seven funds with a combined value of $327 million at the end of 2018.  Also, 19 thematic funds, including nine green bond funds, were launched in 2018.  These stood at $120.8 million as of December 31, 2018.  Refer to Table 1 for a comprehensive list of new funds classified by their sustainable investing strategies. Listing of new funds in 2018 classified by their sustainable investing strategies The availability of at least the four broad-based strategies, and an even larger combination of two or more of these that are further multiplied when these strategies are actually implemented at the security and portfolio level we likely leads to a baffling number of options and contributes to confusion, particularly in the absence of clear explanations around how these strategies are implemented and greater transparency on their portfolio effects, performance results and impact outcomes.  This means that investors have to spend more time understanding the approach each manager is taking and expected outcomes and this could be leading to sustainable investing paralysis. Detailed explanations covering these strategies can be found in the Investment Research/The Basics tab. 127 Management firms now offer sustainable funds versus 107 firms in 2017 At the end of 2018, 127 firms were offering designated sustainable mutual funds and ETFs.  This compares to 107 firms at the end of 2017, or an increase of 20 firms (19% gain).  The largest 20 fund firms account for almost 89% of the assets in the sustainable segment and manage $343.2 billion in assets between them.  That a slight decline from the 90.3% level of concentration at the end of 2017. Refer to Table 2. The profile of the largest firms has shifted in the last year as more of the traditional or mainstream firms established a presence in the sustainable sphere by repurposing existing funds.  Firms like Legg Mason, Aberdeen, Jensen, Pioneer Investments, and Dreyfus moved into the top 20 tier, while firms like Ariel, Amana, and Domini trended lower.  At the same time, firms like JP Morgan and Morgan Stanley moved up in their rankings. An increasing number of mainstream mutual fund firms are launching new sustainable investment products, either newly minted mutual funds and/or ETFs or they are entering the sphere by repurposing or re-branding existing funds.  Some firms that have been active in the sphere before 2018, such as American Funds, American Century and DFA, to mention just a few, launched additional products in 2018.  At the same time, a number of mainstream managers launched new funds or repurposed existing ones.  Firms that fall into this category include, for example, Aberdeen, Federated, Jensen Investments, Goldman Sachs, Putnam, Pioneer and Franklin Templeton. Additional general observations regarding new fund formations in 2018 General observations The number and type of sustainable index funds were expanded so as to permit the creation of broad-based diversified sustainable portfolios, with the introduction of investment options to include small cap, investment-grade intermediate bond, European, Asian and Far East (EAFE), Emerging markets and all countries, outside the US. The expansion in the number and type of thematic funds, including funds linked to affinity groups: NAACP, UN Sustainable Development Goals, Women’s Empowerment, Advanced Batteries, Clean Energy and Clean Power, and just recently announced Vegan Climate ETF. The introduction of sustainable target-date funds by Natixis, adding to the funds that had been available from GuideStone Funds. Equity fund observations Goldman Sachs launched the Goldman Sachs JUST U.S. Large Cap Equity ETF in June of 2018. By the end of the year, the ETF was the most successful new equity fund based on year-end assets under management.  This is a values-based fund with an impact theme that invests in a universe of companies comprising the Russell 1000 Index but are further qualified based on an annual ranking of issuers compiled by the Just Capital Foundation, Inc. Federated launched the Federated Hermes SDG Engagement Equity Fund. The fund, which has not been funded as of November 30, 2018, seeks 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. Vanguard launched its first ESG ETFs that, by the end of the year, had accumulated a combined $166.5 million. The Vanguard ESG US Stock ETF and ESG International Stock ETF track the performance of the FTSE US All Cap Choice Index and FTSE Global All Cap ex US Choice Index. Unlike Vanguard’s successful FTSE Social Index Fund with $4.4 billion in net assets at year-end 2018, the two funds rely largely on excluding certain companies whereas the approach to ESG pursued by the Vanguard FTSE Social Index Fund largely employs an ESG integration strategy while also excluding certain companies. Fixed income fund observations Green bond funds. 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. It also complements short-duration products introduced by Hartford and Calvert. Also competing in the short-duration space, DWS (formerly Deutsche Asset Management) made its sustainable investing debut by repurposing the firm’s existing $358.7 million DWS Variable NAV Money Market Fund consisting of two share classes. This is the second only sustainable money market fund, the first one being the GuideStone Money Market Fund, a values-based offering by Guidestone Funds.  That said, the DWS ESG Liquidity Fund, formerly called the DWS Variable NAV Money Market Fund, is the first money fund to employ ESG criteria, combined with exclusionary screens, as part of a company’s selection process. [1] 3 funds launched by BNP Paribas ($34.3 million) are under review and are excluded from this analysis.

December 28, 2018 DUE DILIGENCE Alert: MODERATE COMPETITIVE Alert: 3 Event: Federated files to offer a global equity ESG mutual fund. Briefing Points: i) Federated new mutual fund will focus on providing long-term capital growth incorporating an assessment of quality and risk “associated with a company’s approach” to ESG issues, ii) The fund will be sub-advised by Hermes Investment Management, Ltd., which is 60% owned by Federated, iii) Hermes will utilize its proprietary quantitative scoring process to weight companies according to their sustainability practices. The fund will not exclude any sectors or industries, but will vary company holdings based on their ESG scores. Affected Fund(s): Federated Hermes Global Equity Fund Asset Classes: US and Non-US Equities Management Company: Federated Global Investment Management Group (Pittsburgh, PA) DD Concern: New untested mandate Marketing Considerations: The firm's integration of its sub-adviser’s established sustainable investment capabilities provides it with a solid foothold in the marketplace. The extent to which these capabilities are integrated into the firm’s global investment process is unclear and deserving of added and continued oversight. December 18, 2018 DUE DILIGENCE Alert: MODERATE COMPETITIVE Alert: 2 Event: FlexShares ESG ETF to change its exchange. Briefing Points: i) Northern Trust’s FlexShares STOXX US ESG Impact Index ETF is changing the public exchange on which its shares are traded from the NYSE and the Nasdaq exchanges to the Cboe Global Markets exchange, ii) The change will take place “on or about” December 28, 2018 and is designed by Northern to “diversify the exchanges on which its ETFs are traded,” iii) A second FlexShares fund, the Morningstar US Market Factor Tilt Index ETF will also make the change, although other FlexShares ETFs will not. Affected Fund(s): FlexShares STOXX US ESG Impact Index ETF Asset Classes: US Equities Management Company: Northern Trust Company, Inc. (Chicago, IL) DD Concern: Cash flow/liquidity management Marketing Considerations: The change is in some ways better suited for accessing international investors and sources of liquidity. It is unclear, though, why the firm only focused on these 2 funds at this time and this invites a discussion with the company and further clarification. December 14, 2018 DUE DILIGENCE Alert: LOW COMPETITIVE Alert: 1 Event: Search for ABN Amro ESG debt manager. Briefing Points: i) ABN Amro is searching for a third-party manager to run its corporate debt pension fund portfolio, ii) The portfolio is a euro-denominated fund investing in “enhanced passive” credits conforming to ESG-aware guidelines, iii) The portfolio is benchmarked against the Bloomberg Barclays MSCI Euro ESG Sustainable Index and is mandated to track within a tracking error of 0.5%. Affected Fund(s): ABN Amro Pension Fund Asset Classes: Global Fixed Income Management Company: ABN Amro Group (Amsterdam) DD Concern: Portfolio management team change Marketing Considerations: None at this time, but calls for review once the search has been concluded. December 13, 2018 DUE DILIGENCE Alert: LOW COMPETITIVE Alert: 2 Event: MAN Group institutes a firm-wide “responsibility” exclusion list. Briefing Points: i) MAN Group has operationalized a global firm-wide list of sectors that all of its portfolio managers will not be allowed to invest in, ii) This exclusionary approach includes tobacco products, “controversial weapons”, and companies deriving “more than 30% of their revenues from producing coal and coal-burning energy,” iii) As part of this initiative, MAN has established an “exclusionary committee” to set ESG standards, guidelines and ensure consistency throughout the firm and its products. Affected Fund(s): All MAN investment strategies and portfolios Asset Classes: All Management Company: MAN Group plc (London, UK) DD Concern: Company or fund product governance/culture Marketing Considerations: While notable, the move into sustainable investing via a negative screenings or exclusionary approach seems quite limited for a global firm of Man’s stature. It may reflect the firm’s view that this is all that is needed at the present time and this very limited approach can be expanded in the future. December 13, 2018 DUE DILIGENCE Alert: LOW COMPETITIVE Alert: 2 Event: NATIXIS affiliate Ossiam, offers ESG ETF using “machine learning” approach. Briefing Points: i) The new portfolio from Ossiam uses a “machine learning algorithm” ro rank and select companies according to their ESG and “financial potential,” ii) ESG factors are core to Assiam’s quantitatively driven “allocation decisions”, which uses AI data assessment of companies ESG characteristics and “future financial performance” relationships, iii) Ossiam’s process employs an exclusionary overlay and their “minimum variation portfolio construction technique”. Affected Fund(s): Ossiam World ESG Machine Learning UCITS ETF Asset Classes: US and Non-US Equities Management Company: Ossiam (Paris, FR) DD Concern: New untested mandate Marketing Considerations: While intriguing from a new innovative product perspective, additional due diligence is needed to determine not only the fund’s workability, but whether it offers much beyond an exclusionary screening process. The use of artificial intelligence, however, makes it worth exploring. DEFINITION -- ALERT RATINGS ___________________________________________________________________________________ Due Diligence (“DD”) Alert: Ranks each identified sustainable fund event or development according to a three-point “call to action” scale that ranges from Low to High, defined as follows: LOW:  A preliminary review and evaluation is recommended, but no on-going monitoring or manager meeting is needed.  Non-US fund offerings will typically be assigned Low Due Diligence Alert levels as these are largely intended for informational purposes and potentially these may have marketing considerations locally. MODERATE:  Near-to-mid-term review and evaluation is recommended along with a manager meeting. HIGH:  Immediate manager contact and meeting are recommended, plus detailed review and evaluation – scheduled on-going more detailed monitoring and follow-up manager meeting(s) are advised. Marketing Considerations:  Ranks the level of required response/urgency for each identified sustainable fund’s product development, sales, promotional or other strategic marketing event or development.  The ranking scale is 1 to 5, where a rank of 1 indicates the lowest level of urgency, requiring little or no competitive response, to a rank of 5 that indicates the highest level of urgency, requiring immediate competitive and/or marketing and sales force response.            

Affected Fund(s):  PGIM QMA Global Core Equity ESG Fund Asset Classes:  US and Non-US Equities Management Company:  PGIM Investments (Newark, NJ) DD Concern: New untested mandate Marketing Considerations:  This investing approach emphasizes a value-based strategy and avoids exclusions of industries and companies.  The integration of securities of companies with varying level of ESG ratings could offer a solid competitive edge.  Even if doesn’t perform as hoped, it at least indicates that the firm is grounded in future sustainable product management techniques. December 10, 2018 DUE DILIGENCE Alert:  MODERATE COMPETITIVE Alert:  2 Event:  RBC strengthens its US responsible investment capabilities. Briefing Points:  i) RBC has promoted two senior staff members to its US based impact and responsible investment group, ii) Ronald Homer is the group’s new Chief Strategist for impact investing – previously he was managing director and institutional portfolio manager, president of RBC GAM capital strategies team, iii) Catherine Banat has also been promoted to director of responsible investing and platform distribution – she was previously a pm with the firm. Affected Fund(s):  All RBC mutual funds and SMAs Asset Classes:  All Management Company:  RBC Global Asset Management (Boston, MA)DD Concern:  Portfolio management team change Marketing Considerations:  The firm’s dedication to sustainable investing is reinforced by the promotion of such senior, long-term staff members.  The possibilities for broader firm wide and product distribution changes is to be expected. December 6, 2018 DUE DILIGENCE Alert:  HIGH COMPETITIVE Alert:  3    Event:  DWS introduces two new ESG ETFs. Briefing Points:  i) DWS has added 2 new ESG ETFs to its xTrackers product line with an emphasis on providing heightened ESG transparency, ii) The ESG Leaders Equity ETF provides exposure to non-UD developed equity markets, while the Emerging Markets ESG Leaders focuses on developing economies, iii) Both ETFs are benchmarked to MSCI indices and hold companies screened by MSCI for their ESG standing. Affected Fund(s):  xTrackers MSCI ACWI ex-USA ESG Leaders Equity ETF,  xTrackers MSCI Emerging Markets ESG Leaders Equity ETF Asset Classes:  Non-US Equities Management Company:  DWS Group GmbH (Germany) DD Concern:  Portfolio management consistency Marketing Considerations:  The new additions are in part, designed to address the ESG transparency concerns and as such, represent a start in that direction.  The reliance on 3rd party ESG rating’s provider is, however, only a partial fix. December 5, 2018 DUE DILIGENCE Alert:  LOW COMPETITIVE Alert:  3 Event:  New off-shore climate fund from UBS offers added tax considerations. Briefing Points:  i) UBS is offering a new Ireland domiciled UCITS off-shore fund that is tax efficient i.e., Tax Transparent Fund (“TTF”), ii) Offered in collaboration with Systematic Investment Management, AG, the fund has a reduced carbon footprint objective – it is passively managed (50-60%) against the MSCI World Index with weightings to reflect companies positions to benefit from renewable energy and associated technology, and iii) The fund will not eliminate carbon-emitting companies, but will underweight them and apply proactive proxy voting to impact their business models. Affected Fund(s):  IBS CCF (IE) Global Climate Aware UCITS Fund Asset Classes: US and Non-US Equities Management Company:  UBS Asset Management (Switzerland) DD Concern:  New untested mandate Marketing Considerations:  While not of direct concern to domestic competitors, the fund’s conscious goal of moving beyond “niche investing activity” should be recognized.  Eventually, their approach is likely to be transferred to the domestic market and offer an answer to concerns about sustainable funds exclusionary methods being too “broad-brushed”. December 5, 2018 DUE DILIGENCE Alert:  MODERATE COMPETITIVE Alert:  2 Event:  Sustainable version of Russell indices in 2019. Briefing Point(s):   i) FTSE Russell announced plans to offer sustainable versions of the Russell 1000, 2000, and 3000 indices, in early 2019, ii) Russell is working with Sustainalytics.  While the new scoring approach is still being established, the firm who will provide ESG risk ratings and the analytical approach for scoring index constituents, iii) The new indices are in response to growing investor interest and sustainable fund offerings – S&P Dow Jones has offered a sustainable version of its S&P 500 Index for several years. Affected Fund(s):  Russell sustainable 1000, 2000, 1nd 3000 indices (to be named) Asset Classes:  US Equities Management Company:  FTSE Dow Jones & Company (New York, NY) DD Concern:  Change in product line Marketing Considerations:  This is welcome addition for active as well as passive ESG managers and investors. December 3, 2018 DUE DILIGENCE Alert:  MODERATE COMPETITIVE Alert:  2 Event:  Tortoise buys London-Based hedge fund manager Ecofin. Briefing Points:  i) Tortoise. LLC (Leawood, KS) has acquired Ecofin Ltd., a privately held hedge fund manager, that focuses on energy infrastructure industries, utility sectors,  and sustainability investments, ii) Ecofin’s possesses global advisory expertise and its customer-base is non-US institutional, HNW, corporate and pension plans, iii)  Tortoise currently has over $20 billion in AUM, largely for domestic clients. Affected Fund(s):  Ecofin Global Utilities & Infrastructure Trust, plc. Asset Classes:  Non-US Equities Management Company:  Ecofin Holdings Limited (London, UK) DD Concern:  Merger/acquisition/divestiture Marketing Considerations:  The acquisition make sense from the standpoint of corporate integration and market expansion, particularly in non-US markets and for hedge funds.  Due diligence related to management approach integration is warranted. December 3, 2018 DUE DILIGENCE Alert:  LOW COMPETITIVE Alert:  3 Event:  New ESG ratings planned for funds on UBS platform. Briefing Points:  i) UBS Global is implementing a ESG rating system for all in-house and third-party funds on its wealth management platform, ii) The ESG scores will be operationalized in 2019 for all long-term fixed income and equity mutual funds, SMAs, and ETFs on UBS’s non-US platform – scores for approximately 150 portfolios on the firm’s US platform’s select list will also be offered, iii) The ESG scored will be generated by UBS’s Global Wealth Management research team. Affected Fund(s):  UBS Global Wealth Management’s Wire House Platform selections Asset Classes:  US and Non-US Equities and Fixed Income Management Company:  UBS Global Wealth Management (New York, NY) DD Concern:  Company or fund product governance/culture Marketing Considerations:  The new internally generated ESG scores help distinguish and reinforce the firm’s commitment to sustainable investing.  At the same time it strengthens the platforms competitive position.  Given material variations in approaches to sustainable investing on the part of funds and ETFs, UBS’s effort should serve to standardize the different sustainable investing approaches and anchor investor expectations. November 29, 2018 DUE DILIGENCE Alert:  LOW COMPETITIVE Alert:  3 Event:  New collective ESG investment fund planned by Decatur Capital. Briefing Points:  i) Decatur Capital Management has selected Hard Benefits & Trust (“HB&T”) to create a new RSG collective investment fund (“CTF”), ii) The new CIF will be 404(a)(5) compliant and be distributed to qualified retirement plans, iii) The new CIF will invest mainly in large-cap companies and “trade on most recordkeeping platforms.” Affected Fund(s):  Decatur Capital US ESG Strategy Asset Classes:  US Equities Management Company: Decatur Capital Management, Inc. (Decatur, GA) DD Concern:  New untested mandate Marketing Considerations:  When available, the new offering will provide an offering to a specialized niche market having potentially substantial growth potential. November 30, 2018 DUE DILIGENCE Alert:  LOW COMPETITIVE Alert:   3 Event:  Bridgeway Capital Management adopts no tobacco company language in prospectus. Briefing Points:  i) The $595.0 million fund, at 15 basis points, seeks to replicate the total return performance of the Bridgeway Ultra-Large 35 Index by investing in blue chip company stocks included in the index that are equally weighted, ii) stocks are selected using a statistically driven approach, iii) Tobacco companies are excluded from the index. Affected Fund(s):  Bridgeway Blue Chip 35 Index Fund Asset Classes:  US Equity Management Company:   Bridgeway Capital Management, Inc. DD Concern:  Change in Risk Profile Marketing Considerations:  The fund excludes any tobacco companies, but tobacco companies is not a defined term and should be clarified. November 27, 2018 DUE DILIGENCE Alert:   LOW COMPETITIVE Alert:  4 Event:  M&G Investments offers new equity impact fund. Briefing Points:  i) M&G Investments’ new fund’s selections will come from the MSCI All Countries World Index of 2500 global stocks of companies operating in “countries where there are social issues,” ii) The fund will be comprised of 30 to 40 stocks meeting M&G’s Positive Impact team’s mission of targeting “companies that are already having impact on society,” iii) The fund’s selections are expected to be weighted by “mid-size and emerging market stocks”. Affected Fund(s):  M&G Impact Equities Strategy Asset Classes:  Global & Emerging Equities Management Company:  M&G Investment Management, Ltd. (London, UK) DD Concern:  Overweight or concentration, shift or tilt or ESG positions Marketing Considerations:  The manager’s focus on companies offering potentially large impacts in countries with “social issues” goes beyond what most sustainable funds now offer.  If successful, this is a positive product advantage and potential selling point both for non-US and US markets. DEFINITION -- ALERT RATINGS _________________________________________________________________Due Diligence (“DD”) Alert: Ranks each identified sustainable fund event or development according to a three-point “call to action” scale that ranges from Low to High, defined as follows: LOW:  A preliminary review and evaluation is recommended, but no on-going monitoring or manager meeting is needed.  Non-US fund offerings will typically be assigned Low Due Diligence Alert levels as these are largely intended for informational purposes and potentially these may have marketing considerations locally. MODERATE:  Near-to-mid-term review and evaluation is recommended along with a manager meeting. HIGH:  Immediate manager contact and meeting are recommended, plus detailed review and evaluation – scheduled on-going more detailed monitoring and follow-up manager meeting(s) are advised. Marketing Considerations:  Ranks the level of required response/urgency for each identified sustainable fund’s product development, sales, promotional or other strategic marketing event or development.  The ranking scale is 1 to 5, where a rank of 1 indicates the lowest level of urgency, requiring little or no competitive response, to a rank of 5 that indicates the highest level of urgency, requiring immediate competitive and/or marketing and sales force response.        

Introduction and Summary Core US equity-oriented sustainable exchange traded funds (ETFs), defined as broad-based US stock funds that provide exposure to socially responsible companies by screening eligible companies for positive environmental social and governance (ESG) characteristics, exhibit material variations in their approach to investments. These involve definitions of socially responsible companies, ESG considerations and resultant decisions regarding eligible companies.  This is not unexpected, but it leads to confusion among investors and other parties regarding the meaning of sustainable investing.  Also, it reinforces the necessity for investors to be aware of the potential for such variations across sustainable funds, to understand the basis for stock or bond selection within their investment portfolios and the varying impacts or outcomes associated with a particular fund’s approach to sustainable investing.  One example of this involves Facebook, Inc. (FB), a firm that’s been exposed to unfavorable developments regarding the  adequacy of its controls, data privacy, and data security (social factors) as well as concerns regarding its corporate governance (governance) structure.  Some of these have been long-standing and have led some sustainable funds to exit the Facebook position.  Other considerations aside, a review of investments held by a universe of eight core US-oriented sustainable ETFs shows that funds that incorporate ESG factors continue to hold positions in Facebook, Inc. Class A Common Stock as of December 20, 2018 or so.  These positions, from which none of the funds have exited, average 1.8% and vary from a low of 0.565% of one fund’s net assets to a maximum position of 3.17%, as compared to a 1.48% Facebook exposure in the S&P 500 Index and 0.0% held by core large cap actively managed sustainable equity funds.  Unlike actively managed funds, sustainable ETFs largely consist of index tracking investment vehicles that rely on varying scoring methodologies to establish levels of exposure to a particular company. The scoring methodology adopted by each index will have a material impact on outcomes while at the same time there is limited disclosure and transparency as to holdings decisions and portfolio impacts. Facebook, Inc. exposed to various social and governance challenges Facebook, Inc. (FB) is a $362.9 billion Nasdaq Stock Market listed social media company with 2.23 billion active monthly users that was again last week featured in a New York Times (NYT) article that cast a negative light on its data privacy and data security practices.  According to the NYT, Facebook had allowed over 150 companies, including firms such as Amazon, Microsoft, Yahoo and other companies, to see names of virtually all Facebook users' friends without consent, and allowed other companies to read Facebook users' private messages.  A Facebook spokesperson, however, stated that none of the partnerships violated users' privacy, or a 2011 agreement with the U.S. Federal Trade Commission (FTC) to require explicit permission from members before sharing their data. This followed the publication of an investigative report published by the same newspaper in November of this year entitled “Delay, Deny and Deflect: How Facebook’s Leaders Fought Through Crisis,” that provided insight into how Facebook has operated through numerous crises over the past few years. The article detailed how Facebook’s top management, Mark Zuckerberg and Sheryl Sandburg, made the company’s growth a priority while ignoring and hiding warning signs over how its data was being exploited to disrupt elections and spread toxic content.  According to the same New York Times report, Facebook also engaged in a lobbying campaign to deflect attention from the company and shift public attention to Facebook’s critics and rival technology firms. Concerns about Facebook are not new, as social factors regarding the adequacy of controls, protecting privacy and data security have been known for some time.  In November 2011, Facebook agreed to settle FTC charges that it had deceived consumers by “telling them they could keep their information on Facebook’s private and then repeatedly allowing it to be shared and made public.”  A new and even higher level of concern was reached in March 2018 when it was revealed that Cambridge Analytica, a voter-profiling firm, had harvested the personal data of millions of Facebook users without their knowledge or permission. Another key issues is the company’s governance structure, since Mark Zuckerberg, the firm’s founder, also acts as Chairman and CEO.  Further, through his control of the company’s Class B common stock, Zuckerberg is able to exercise voting rights with respect to a majority of the voting power of the firm’s outstanding stock and therefore he has the ability to control the outcome of matters submitted to stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of the firm’s assets. Sustainable funds and ESG integration 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. The sustainable investing idea encapsulates various strategies that can be achieved individually or by combining more than one approach.  These strategies extend from a values-based approach, also referred to as socially responsible investing, that largely relies on excluding certain objectionable industries and/or companies from portfolios, to impact and thematic investing, including green bond investing, to environmental, social and governance integration (referred to as ESG integration) to shareholder/bond holder 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.  For further information, refer to the Investment Research/The Basics tab. Sustainable funds that employ an ESG integration approach do so by consistently and systematically accounting for relevant and material environmental, social and governance factors in investment decision making.  Frequently enough, ESG integration is applied to portfolios in concert with exclusionary approaches.  That is, the screening out or the exclusion of investments in companies, based on varying definitions, revenue thresholds as well as other considerations, that are engaged, for example, in the production or manufacturing of alcohol, gambling, tobacco, military weapons, civilian firearms, nuclear power, genetically modified foods or adult entertainment. In addition, companies involved in certain controversies may also be excluded.  Beyond fundamental investment research and analysis or consideration of the investment merits of a particular security, stocks or bonds are selected on the basis of a scoring methodology that evaluates and various ESG factors.  These are subject to wide variations, as can be observed in Table 1.  Also, a company’s weighting within a portfolio will be determined using an optimization technique intended to achieve performance results that correspond to the underlying index. At issue for investors is that scoring methodologies and exclusions both vary and different funds with similar objectives are likely to arrive at different conclusions with regard to a particular stock or bond.  Especially in the absence of effective disclosures, this leads to confusion and leaves investors and others to question what sustainable investing generally and ESG integration in particular really means and what it encompasses. Investments in Facebook, Inc. range from 0.565% to 3.2% The potential for confusion can be illustrated, in part, using the case of Facebook, Inc.  Starting with the entire universe of 87 ETFs valued at $9.6 billion in net assets in operation as of November 30, 2018, the funds were screened to limit the resulting segment of funds to eight ETFs with $2.6 billion in net assets, or27% of all sustainable ETFs representing core US equity-oriented sustainable ETFs. That is, the eight remaining ETFs include funds that employ an ESG integration strategy along with an exclusionary approach.  Excluded from this segment are ETFs that rely entirely on exclusions, thematic ETFs, values-based ETFs, factor oriented ETFs, such as growth and value, revenue, dividends, small cap and mid-cap products that are likely to exclude Facebook for reasons other than ESG considerations. Based on an analysis of the investments held by the eight remaining funds and their index tracking strategies, none of the funds excluded Facebook.  In fact, investments in the social networking company on or about December 20, 2018 varies from 0.565% to 3.2%. This stands in contrast to a complete absence of Facebook investments among the largest actively managed core US equity oriented sustainable mutual funds. A listing of the eight funds in order of their size (total net assets or TNA), their sustainable investing and ESG integration strategies as defined in their offering documents and levels of investment in Facebook, Inc., is provided in Table 1. What does this mean for investment managers and investors? This article is not intended to advocate for or against investments in Facebook, Inc. in index tracking funds.  In fact, the stock, which is down some 40% since its peak in July of this year may be considered attractive by some investment managers on a valuation basis after accounting for Facebook’s social as well as governance risks. That’s a fundamental consideration for active managers that’s not applicable to index funds that rely on decisions made by the underlying index providers.  Rather, the article is intended to illustrate just one source of the material variations that can result from the application of ESG integration-oriented sustainable investing strategies that, in turn, can lead to confusion among investors and other parties regarding the meaning of sustainable investing. Investment managers, whether active or passive, should be encouraged to provide additional information regarding the rationale for holding or liquidating various securities in their portfolio, especially when companies are embroiled in governance, social and environmental controversies. Also, investment advisors should step up their disclosures regarding societal impacts. At the same time, investors seeking to achieve positive societal outcomes with their investment portfolios should become acquainted with the nature of the sustainable strategies employed by their fund and register with their investment adviser a desire for stepped disclosures and impact reporting.  In the absence of same, investors should seek alternative investment options.

November 30, 2018 DUE DILIGENCE Alert: LOW Event: M&G Investments offers new equity impact fund in the UK.Briefing Points: i) M&G Investments’ new fund’s selections will come from the MSCI All Country World Index of 2500 global stocks of companies operating in “countries where there are social issues,” ii) the fund will invest in companies that aim to address social and environmental issues – decided by following the United Nations Sustainable Development Goals (SDGs). These are targets that aim to end poverty, protect the planet and create peace and prosperity, and iii) the fund will be comprised of 30 to 40 stocks meeting M&G’s Positive Impact team’s mission of targeting “companies that are already having impact on society COMPETITIVE Alert: 4 Affected Fund(s): M&G Impact Equities StrategyAsset Classes: Global & Emerging Equities Management Company: M&G Investment Management, Ltd. (London, UK) DD Concern: Overweight or concentration, shift or tilt to ESG positions Marketing Considerations: The manager’s focus on the UN’s SDGs and companies offering potentially large impacts in countries with “social issues” aligns with rising interest in the UK in principles-based investing. A recent survey by finance firm Boring Money found the majority of investors in the UK thought impact investing in healthcare and green energy was important. But the survey also showed that concerns about giving up returns still polarized investors and was not necessarily falling away. If successful, this could also be a potential selling point both for non-US and US markets.

November 13, 2018 DUE DILIGENCE Alert: MODERATE COMPETITIVE Alert: 3 Event: HSBC Introduces Global Sustainable funds in the UK. Briefing Points: i) HSBC Global Asset Management (GAM) introduced two global sustainable funds, a multi-asset conservative portfolio and a multi-asset balanced portfolio. The funds are part of the established HSBC GAM multi-asset series, ii) The conservative portfolio has a 35% equity position, while the balanced fund has a 60% equity position, iii) The two new funds will employ the same approaches and each will invest “across asset classes and regions” and will seek a higher average ESG score and lower portfolio carbon intensity than the market. This is to be achieved by including only asset classes in long term allocations where sustainable characteristics can be measured and will follow one or more of the seven industry recognized sustainable investment methods, as set out by the Global Sustainable Investment Alliance. Affected Fund(s): HSBC Global Sustainable Multi-Asset Conservative Portfolio and HSBC Global Sustainable Multi-Asset Balanced Portfolio Asset Classes: US and Non-US Equities and Fixes Income Management Company: HSBC Global Asset Management (London, UK) DD Concern: New untested mandate Marketing Considerations: Building off the firm’s well-established global multi-asset record is a clear positive. The firm does, however, need to prove its sustainable investment approach and expertise.

October 25, 2018 DUE DILIGENCE Alert: LOW COMPETITIVE Alert: 1 Event: New European ESG fund from Spanish insurer, Mapfre. Briefing Points: i) The Spanish insurance company, Mapfre, has opened a new ESG-responsible fund with an emphasis on capital preservation, ii) The new Luxembourg domiciled fund, which is part of a new line of Mapfre ESG investment products, will invest in stocks and bonds of European companies with strong ESG records, and iii) The fund will mainly be sold to retail investors in Spain and France as well as, international investors. Affected Fund(s): Mapfre Capital Responsibility Fund Asset Classes: Non-US Equities and Fixed Income Management Company: Mapre Asset Management (Spain) DD Concern: New untested mandate Marketing Considerations: There is little near- or mid-term concern for the domestic market.  The interesting aspect is that the new fund reflects yet another entrant into the ESG fund space even as its offering is fairly localized in its targeted market.

Summary DWS launched an institutional money market fund that integrates environmental, social and governance considerations while at the same time employing exclusionary screens. This $329.3 million fluctuating Net Asset Value (NAV) fund contrasts with the stable value GuideStone Money Market Fund that pursues a values/religious-based approach.  Other significant differences extend to eligible security types, minimum investments and expense ratios. DWS, formerly Deutsche Asset Management, made its sustainable investing debut in the US last month by repurposing the firm’s existing $329.3 million DWS Variable NAV Money Market Fund DWS, formerly Deutsche Asset Management, made its sustainable investing debut in the US last month by repurposing the firm’s existing $329.3 million DWS Variable NAV Money Market Fund, an institutional money market fund that integrates environmental, social and governance (ESG) considerations while at the same time employing exclusionary screens[1]. Refer to Chart 1 for ESG definitions.  The DWS ESG Liquidity Fund, which charges an expense ratio of 98 basis points (bps) but is limiting fees to 10 bps pursuant to an 88 bps fee waiver in effect at least until September 30, 2019, has also recalibrated its minimum investment to $10 million effective as of October 15, 2018.  As of September 30, 2018, the fund is generating a 7-day yield of 2.16%[2]. While not the only sustainable money market fund offering available to investors in the US, this fund’s strategy relies on ESG integration rather than emphasizing a values-based approach pursued by the GuideStone Money Market Fund.  The fund is strictly geared to institutional investors, it invests in a broader range of money market instruments and is subject to a fluctuating versus a stable net asset value.  As such, it is expected to generate a higher net yield. The fund’s launch is timely, as short-term interest rates are rising while sustainable investing strategies among institutional investors continues to gain traction. It therefore would not be surprising to see more offerings in this class over time, especially if the fund is successful in accumulating assets under management (AUM).  DWS, like BlackRock, is a highly regarded liquidity manager.  The fund’s capacity to attract ESG sourced AUM will, in part, depend on the effective execution of its ESG strategy.  On this score, time will tell. DWS ESG Liquidity Fund ESG Defitinitions DWS ESG Liquidity Fund invests in a variety of short-term instruments and will maintain strict quality and maturity limits The DWS ESG Liquidity Fund invests in high quality, short-term, US dollar denominated money market instruments, including obligations of US and foreign banks, corporate obligations, US government securities, municipal securities, repurchase agreements and asset-backed securities, paying a fixed, variable or floating interest rate. At the time of purchase, eligible securities will have remaining maturities of 397 days or less, or have certain maturity shortening features (such as interest rate resets and demand features) that have the effect of reducing their maturities to 397 days or less. The fund will maintain a dollar-weighted average maturity of 60 days or less and 120 days or less determined without regard to interest rate resets. In addition to considering financial information, the security selection process also evaluates a company based on ESG criteria According to the fund’s prospectus which became effective September 1, 2018, in addition to considering financial information, the security selection process also evaluates a company based on ESG criteria. With the exception of municipal securities, a company’s performance across certain ESG criteria is summarized in a proprietary ESG rating which is calculated by an affiliate of the DWS on the basis of data obtained from various ESG data providers. Only companies with an ESG rating above a minimum threshold determined by DWS are considered for investment by the fund. The proprietary ESG rating is derived from multiple factors: Level of involvement in controversial sectors and weapons; Adherence to corporate governance principles; ESG performance relative to a peer group of companies; and Efforts to meet the United Nations’ Sustainable Development Goals. ESG ratings for municipal securities are calculated by DWS by applying a combination of positive and negative screens. From the investable universe of municipal securities, positive screens will automatically include green bonds (bonds that intend to finance projects that are expected to produce positive environmental and/or climate benefits) that meet minimum standards and negative screens will exclude municipal securities with exposure to weapons, issues where more than 10% of the business is attributable to nuclear power or more than 25% of the business is derived from coal, and issues related to gambling, lottery, the production or sale of tobacco, and other sectors deemed controversial by DWS. The remainder of the investable universe of municipal securities are then scored on key performance indicators in each of three pillars: environmental, social and corporate governance. Only municipal securities with a cumulative score across all three pillars above a minimum threshold determined by DWS are considered for investment by the fund. Comparison of key fund considerations DWS ESG Liquidity Fund is the second only sustainable money market fund offering available today in the US, however, when compared to the GuideStone Money Market Fund, the fund offerings differ in some significant ways. While not the first to be launched, the $1.1 billion GuideStone Money Market Fund, which is sub-advised by BlackRock, has been available since 2009.  Unlike DWS ESG Liquidity Fund, GuideStone pursues a values/religious-based approach that is intended to align investments with Christian values. GuideStone funds may not invest in any company that is publicly recognized, as determined by GuideStone Financial Resources of the Southern Baptist Convention (GuideStone Financial Resources), as being in the alcohol, tobacco, gambling, pornography or abortion industries, or any company whose products, services or activities are publicly recognized as being incompatible with the moral and ethical posture of GuideStone Financial Resources. There are other differences between the two funds, and these are summarized in Table 1. Comparison of DWS and GuideStone Money Market Fund Characteristics [1] DWS also launched the Xtrackers MSCI EAFE ESG Leaders Equity ETF. [2] Source: Crane Data.

Sept. 27, 2018 DUE DILIGENCE Alert : HIGH COMPETITIVE Alert : 3 Event: Vanguard Charitable to add new ETF-based ESG strategies. Briefing Points:  i) The new strategies or “goals,” scheduled to become effective on October 1, allow charitable assets of investors to be directed into 3 ETF-based ESFG options, ii) Two of the new options correspond to Vanguard’s recently introduced ESG US Stock ETF and its ESG International ETF (see September 20), iii) The third offering, to be named the Vanguard ESG Global Stock ETF, is a blended portfolio with 70% in the Vanguard ESG US Stock ETF and 30% in its ESG International Stock ETF. Affected Fund(s):  Vanguard Charitable ESG US Stock Option, Vanguard Charitable ESG International Stock Option, and Vanguard Charitable ESG Global Stock Option Asset Classes: US and Non-US Equities Management Company:  The Vanguard Group (Valley Forge, PA) DD Concern:  Investor Outreach/Educational Marketing Considerations:  Vanguard has been offering its successful $5.2 billion FTSE Social Index Fund since May 2000 which tracks the FTSE 4Good US Select Index.  The addition of the ESG options to the charitable platform suggests more to come from the firm for Vanguard’s other institutional platforms, most notably its DC and 401k) businesses. Sept. 25, 2018 DUE DILIGENCE Alert: MODERATE COMPETITIVE Alert: 3 Event: TruValue offers platform enhancements for identifying ESG issues in portfolios and investments. Briefing Points: i)  TruValue Lab, a fintech provider to investors and asset managers, has upgraded its research scanning platform for identifying ESG themes and trends within individual securities and funds, ii) The enhancements include expanding its “Thematic search” capabilities and data base for allowing users to pinpoint ESG considerations “by benchmarks, specific portfolios, sectors, industries and material categories,” and iii) TruValue is a provider of analytics for investment managers using artificial intelligence in assessing “real ESG behavior” and its impacts on company value. Affected Fund(s):  TruValue Insight360 platform Asset Classes:  All Management Company:  TruValue Labs (San Francisco, CA) DD Concern:  Portfolio management consistency Marketing Considerations:  The approach offers investors and investment managers additional capabilities and inputs, although a “big data” approach to gathering and organizing ESG data ignores important qualitative considerations with respect to ESG factors.  TrueValue's approach is intended to address some of the often cited issues with ESG ratings, such as lack of standardization, lack of transparency, scoring trade-offs, quality of information inputs, delayed reporting and updating, and internal compliance practices.  That said, there are also concerns about how users will interpret the platform’s output, especially given potentially wide variations in user skill sets and their investment objective and ESG values and “sentiments.” Sept. 20, 2018 DUE DILIGENCE Alert: MODERATE COMPETITIVE Alert: 5 Event: Vanguard launches two ESG ETFs. Briefing Points: i)  Vanguard Group has launched its first US-based ESG ETFs – one is an international equity portfolio and the second is a US equity portfolio, ii) The new ETFs have an emphasis on limiting exposure to fossil fuels and other exclusionary screens complying with the UN standards, and iii) The international equity ETF which has an expense ratio of 15 bps is indexed to the FTSE Global All Cap ex-US Choice Index, and the US equity ETF is pegged to the FTSE US All Cap Choice Index with a fee of 12 bps. Affected Fund(s): Vanguard ESG US Stock ETF (ESGV), Vanguard ESG International Stock ETF (VSGX) Asset Classes:  US and Non-US Equities Management Company: The Vanguard Group (Valley Forge, PA) DD Concern:  Investor outreach/Educational considerations Marketing Considerations:  Since May 2000, Vanguard has been offering its successful $5.2 billion FTSE Social Index Fund that tracks the FTSE 4Good US Select Index and is subject to 12 bps and 20 bps expense ratios applicable to institutional and retail shares. The new offerings reflect an increased commitment on the part of Vanguard to the sustainable investing sphere.  The new offerings may introduce some confusion because the new offerings are cheaper for retail investors, they seek to replicate a different index construct and are broader-based in terms of the range of market caps captured. Sept. 19, 2018 DUE DILIGENCE Alert: HIGH COMPETITIVE Alert: 4 Event: First retail sukuk fund outside the US is opened. Briefing Points:  i) The new fund has a lower initial investment to accommodate a broader “retail” market, specifically in Malaysia, Indonesia, Bahrain, Kuwait and the UAE, ii) The fund which will invest in sukuks, “Sharia compliant” bonds, plans to generate a 5% annual income distribution, a rate that exceeds the “typical fixed deposit rate” for its market, and iii) Its ESG focus will not be based on exclusions, but on a  screen measuring how companies are managed financially and from a sustainability standpoint, using analytics and data provided by Arabesque. Affected Fund(s):  BIMB ESG Sukuk Fund Asset Classes:  Non-US Fixed Income Management Company:  BIMB Investment Management Bhd (Malaysia) DD Concern:  New untested mandate and/or management team Marketing Considerations:  No doubt about it, the fund has a unique market position, however, it remains to be seen how the management firm and the fund deliver on the sustainability profile envisioned by the BIMB ESG Sukuk Fund.  There is clearly a tilt to the offering that opens a significant client-base.   Sept. 19, 2018 DUE DILIGENCE Alert: HIGH COMPETITIVE Alert: 2 Event: Russell to change mutual fund mandate and name to sustainable brand. Briefing Points: i) On January 1, 2019, the mandate for the $533.5 million Russell US Defensive Equity Fund will be changed to a “sustainable investment strategy,” ii) The fund’s name will be changed at the same time to Russell Sustainable Equity Fund, and iii) The fund’s changes come in light of significant asset outflows since its inception in 2009. Affected Fund(s):  Russell Sustainable Equity Fund Asset Classes:  US Equities Management Company:  Russell Investments (Seattle, WA) DD Concern:  New untested mandate and/or management team Marketing Considerations:  The fund’s “restructuring” is seen as overdue.  Whether it makes a difference in terms of performance is questionable.  The fund has lagged the S&P 500 over the previous 3, 5 and 10-year intervals.  Something beyond adding a sustainable overlay may be needed. Sept. 18, 2018 DUE DILIGENCE Alert: HIGH COMPETITIVE Alert: 2 Event: New ESG index strategy from WTW. Briefing Points: i) Willis Towers Watson (“WTW”) has opened a new ESG integration index strategy, ii) WTW, a London-based advisor and insurance broker, is teaming with MSCI who will provide ESG selection factors for companies included in the index, and iii) The strategy will include both developed and emerging equities, and is designed to distribute risk and capitalization levels across a broader range than “traditional indexes.” Affected Fund(s):  Adaptive Capped ESG Universal Index Asset Classes:  US and Non-US Equities Management Company:  Willis Towers Watson (London, UK and New York, NY) DD Concern:  Consistency of investment analytics and research Marketing Considerations:  The new and unique nature of the index is a natural stepping-off point for new product offerings.  Domestically the manager is expected to be mainly an institutional competitor. Sept. 17, 2018 DUE DILIGENCE Alert: MODERATE COMPETITIVE Alert: 3 Event: Axa moves to build further firm-wide ESG integration. Briefing Points: i) Axa Investment Management has moved to further build-out its ESG integration efforts by “embedding specialists into all investment teams” and creating a “central investment team,” ii) Axa hired Yo Takatsuki, a seasoned ESG veteran, from BMO Global as head of ESG research and engagement, to facilitate transparency and clarity for its clients, and iii) Currently about 60% of the firm’s AUM are in ESG-integrated strategies. Affected Fund(s):  All Axa funds and strategies Asset Classes:  All Management Company:  Axa Investment Management Greenwich, CT) DD Concern:  Portfolio management consistency Marketing Considerations:  The firm’s cultural commitment and broad-based integration of ESG continue to expand and these are selling points.  It can be expected to reinforce Axa’s overseas and domestic positions. Sept. 12, 2018 DUE DILIGENCE Alert: HIGH COMPETITIVE Alert: 2 Event: Multi-Asset ESG fund from Richmond Global. Briefing Points: i) The fund uses artificial intelligence to identify “ESG datasets” as the basis for its fundamental analysis process, ii) The fund’s management process evaluates and allocates “investment and trading opportunities across global asset classes” and draws upon a “team of experts in sustainability, global macro investing, data science” as input to its decisions, and iii) The new fund, in operations since its inception in May 2017, has only been available to the firm’s partners. Affected Fund(s):  Compass Fund Founders’ Shares Asset Classes:  All Management Company:  Richmond Global Compass Capital, LP (New York, NY) DD Concern:  New untested mandate and/or management team Marketing Considerations:  The fund has a unique tilt in its application of artificial intelligence, but it lacks a historical record, particularly with more volatile and unpredictable cash flows.  This is even more important given the firm’s idiosyncratic management approach. Sept. 12, 2018 DUE DILIGENCE Alert: HIGH COMPETITIVE Alert: 3 Event: ESG-related portfolio risk ratings from Sustainalytics. Briefing Points: i)  Sustainalytics has released its revamped ESG ratings in the form of risk ratings that are designed to measure “financially material ESG-related risks” in investor’s portfolios, ii) The quantitative ratings provide a “measure of unmanaged ESG risks” for comparing among portfolios and individual securities, and iii) The ratings offer managers a means to further integrate ESG factors into their investment decisions and presumably these risk ratings will also now be integrated into Morningstar’s mutual fund Sustainability Ratings. Affected Fund(s):  Sustainalytics ESG Risk Ratings Asset Classes:  All, but largely equity-oriented funds Management Company:  Sustainalytics (Amsterdam) DD Concern:  Change in fund’s sustainability rating/ESG rating Marketing Considerations:  Morningstar assigns mutual fund Sustainability Ratings by applying the ratings produced by Sustainalytics to mutual fund holdings.  Not only can aggregate ratings change with some frequency, but the new risk ratings offered by Sustainalytics, when applied to funds by Morningstar, may now experience shifts which, in some cases, could be material even as a fund’s strategy remains unchanged. DEFINITION -- ALERT RATINGS ________________________________________________________________________ Due Diligence (“DD”) Alert: Ranks each identified sustainable fund event or development according to a three-point “call to action” scale that ranges from Low to High, defined as follows: LOW:  A preliminary review and evaluation is recommended, but no on-going monitoring or manager meeting is needed. MODERATE:  Near-to-mid-term review and evaluation is recommended along with a manager meeting. HIGH:  Immediate manager contact and meeting are recommended, plus detailed review and evaluation – scheduled on-going more detailed monitoring and follow-up manager meeting(s) are advised. Marketing Considerations: Ranks the level of required response/urgency for each identified sustainable fund’s product development, sales, promotional or other strategic marketing event or development.  The ranking scale is 1 to 5, where a rank of 1 indicates the lowest level of urgency, requiring little or no competitive response, to a rank of 5 that indicates the highest level of urgency, requiring immediate competitive and/or marketing and sales force response.

Sept. 12, 2018 DUE DILIGENCE Alert: MODERATE COMPETITIVE Alert: 2 Event: DWS files for 3 new ESG ETFs and operationalizes one. Briefing Points: i) DWS (formerly Deutsche Asset Management) has launched one of the three ESG international ETFs that it registered  with the SEC earlier in the month, ii) The firm’s first sustainable entry in the US, the newly launched Xtrackers MSCI EAFE ESG Leaders Equity ETF invests in mid- and large-cap stocks of developed countries, ex-US and Canada, and iii) The new ETF is designed to provide investors with “efficient access to international markets” and companies with high ESG ratings as measured by MSCI – the ETF indexed against the MSCI EAFE ESG Leaders Index. Affected Fund(s): Xtrackers MSCI EAFE ESG Leaders Equity ETF (EASG) Asset Classes: Non-US Equities Management Company: DWS Group (New York, NY) DD Concerns: Change in product-line or strategy offering Marketing Considerations: The firm’s new filings and the current launch suggests a commitment to ESG investing, also reinforced by the introduction of the DWS ESG Liquidity Fund (See September 4).  The expansion of its product-line to non-US and Canada is targeting a more sophisticated investor base and reps interested in a one-stop ETF allocation platform.

Summary California Senate passes bill last week requiring California firms to have a minimum of one female director on its board of directors by the end of the 2019 calendar year. Rather than anchoring the bill on the rights of women to achieve gender equality, the bill emphasizes independent studies that have concluded that publicly held companies perform better when women serve on their boards of directors. SB 826 fails to mention any academic studies suggesting contradictory findings or research that the presence of more female board members does not much improve a firm’s performance. While performance results vary, several investment options are available to investors specifically interested in investing in mutual funds and exchange-traded funds or notes (ETFs/ETNs) that focus on companies that promote gender diversity and the advancement of women.   California Senate passes state sponsored bill that requires California firms to have a minimum of one female director on its board by the end of 2019 Last week, the California Senate passed a first of its kind state-sponsored bill in the US, SB 826, that requires publicly held corporations located in California to have a minimum of one female director on its board of directors by the end of the 2019 calendar year. Otherwise, the Secretary of State is authorized to impose fines for violation of the bill, ranging from $100,000 for board member reporting violations and first time compliance violators and $300,000 for second time violations.  In addition, the bill would increase by no later than the close of calendar year 2021 the mandatory female board requirement to 2 female directors if the corporation has 5 directors and to 3 female directors if the corporation has 6 or more directors.  To take effect, SB 826 has to be signed into law by California Governor Jerry Brown. This mandatory bill follows an attempt by the state to encourage companies in California to take these actions by December 31, 2016. Apparently the effort to achieve a voluntary response proved unsuccessful.  According to the text of the bill, 117 companies, or 26%, of California public companies that make up the Russell 3000 Index have no women on their board of directors. 275 companies, or 62%, have at least 1 to 2 women board members while 54 companies or 12% have 3 or more female board members. Refer to Chart 1. Rather than anchoring the bill on the rights of women to achieve gender equality, SB 826 emphasizes studies that publicly-held companies perform better when women serve on boards The bill makes the case that “more women directors serving on boards of directors of publicly held corporations will boost the California economy, improve opportunities for women in the workplace, and protect California taxpayers, shareholders, and retirees, including retired California state employees and teachers whose pensions are managed by CalPERS and CalSTRS. Yet studies predict that it will take 40 or 50 years to achieve gender parity, if something is not done proactively.” The bill itself further makes references to numerous independent studies and cites references to various studies that have concluded that publicly held companies perform better when women serve on their boards of directors. These include a 2017 study by MSCI, a 2014 study published by Credit Suisse, a 2012 University of California, Berkley study, a six-year Credit Suisse global research study conducted between 2006 and 2012 with more than 2,000 companies worldwide. Also, the bill cites other countries that have addressed the lack of gender diversity by mandating quotas on public companies boards, including Germany, Norway, France, Spain, Iceland and the Netherlands. At the same time, SB 826 fails to mention any academic studies suggesting contradictory findings or research that the presence of more female board members does not much improve a firm’s performance On the other hand, the senate bill fails to mention any academic studies suggesting contradictory findings or research that the presence of more female board members does not much improve a firm’s performance. According to an Opinion research report published by Katherine Klein of Wharton School of the University of Pennsylvania, there have been many rigorous, peer-reviewed studies of board gender diversity and these suggest that companies do not perform better when they have women on the board. The research article refers to over 100 studies of firms in 35 countries and five continents concluding that there is no evidence available  to suggest that the addition or presence of women on the board actually causes a change in company performance. “In sum, the research results suggest that there is no business case for-or against-appointing women to corporate boards. Women should be appointed to boards for reasons of gender equality, but not because gender diversity on boards leads to improvements in company performance[1].” Several investment options available to investors specifically interested in investing in mutual funds and exchange-traded funds or notes (ETFs/ETNs) that focus on companies that promote gender diversity and the advancement of women That said, investors specifically interested in investing in mutual funds and exchange-traded funds or notes (ETFs/ETNs) that focus on companies that promote gender diversity and the advancement of women, have several options from which to choose. These options include two ETFs, one ETN and two mutual funds that have to-date attracted $650.1 million. These funds were cited in an earlier article published by sustainableinvest.com in December 2017. Refer to Gender Diversity Thematic Investment Opportunities, December 21, 2017. Since then, a sixth option has been added to the mix with the launch in August of this year of Impact Shares YWCA Women’s Empowerment ETF. The fund, which charges 0.75%, seeks to track the performance of the Morningstar Women’s Empowerment Index that selects companies that have strong women’s empowerment practices but also excludes companies involved in weapons, gambling, or tobacco, or appear on the Norwegian Ethics Council List[2], including, for example, fossil fuel firms, or firms that have experienced an applicable legal controversy. Such exclusions can potentially negatively impact performance results over time. Some of the fund details, such as investment objectives, gender diversity criteria and expense ratios don’t need repeating, however, the table below updates the performance results achieved by these funds through the end of July 2018. Based on updated performance results through the end of July when compared against each fund’s prospectus index, the longest available of the five funds is also the only fund to consistently outperform its benchmark over the four time intervals displayed below is the Pax Ellevate Global Women’s Leadership Fund. The only fund of the five investing in US and foreign stocks of companies in developed markets, both share classes have outperformed their prospectus designated non-ESG benchmark form a low of 0.3% to a high of 1.08%, and the results have been achieved with lower volatility relative to the benchmark. Refer to Table 1. Notes of Explanation: TNA or total net assets as well as performance results as of July 31, 2018. NA Not applicable. *Primary prospectus benchmark, except for SPDR SSgA Gender Diversity Index ETF. The ETF compares itself to the SSgA Gender Diversity Index. For purposes of this analysis, the S&P 500 Index, which aligns with the portfolio, is used to evaluate the fund’s relative performance results. **On June 4, 2014, the Pax World Global Women’s Equality Fund merged into the Pax Ellevate Global Women’s Index Fund. The fund’s performance data for periods prior to June 4, 2014 is attributable to the Pax World Global Women’s Equality Fund. [1] Source: Does Gender Diversity on Boards Really Boost Company Performance, May 18, 2017. [2] Apparently this list is now maintained by Norges Bank. The list of companies that the Council of Ethics for the Norwegian Government Pension Fund Global has recommended excluding from the Pension Fund’s portfolio of investments on the grounds that investment in such companies would be inconsistent with the Pension Fund’s Ethical Guidelines. 

August 30, 2018 DUE DILIGENCE Alert: HIGH COMPETITIVE Alert: 2 Event: New ESG focused fund in Indi for later this year announced for Avendus. Briefing Points: i) Avendus Capital Public Markets Alternative Strategies, which is the alternatives’ asset management division of Avendus Capital, is expected to open a new ESG focused fund in India by late November of this year, ii) The ESG fund, which is the firm’s first, will be a focused portfolio of companies having long-term records of positive ESG practices, and be targeted to institutional investors, and iii) The portfolio manager is Abhay Laijawala, who previously was with Deutsche Securities. He will partner with Institutional Investor Advisory Services (India) that will provide ESG factor ratings to be developed for the fund’s selections. Affected Fund(s): TBD Asset Classes: Equities Management Company: Avendus Capital, Inc. (Mumbai and New York, NY) Marketing Considerations: The new ESGF fund represents “uncharted waters” for the firm and possibly also for any investors not familiar with the management company. Its offering, however, does signal the expanding global interest in ESG investing with the likelihood of growing market acceptance. This launch may be timely in that corporates in India have increased their focus on governance practices.

About a year after closing on the acquisition of Pioneer Investments by Amundi Asset Management, the combined Amundi Pioneer Asset Management entity in the US amended the prospectuses of two of its leading funds as of July 1, 2018 to provide for the expansion of factors used in the selection of investments for the $5 billion Pioneer Fund and $271.5 million Pioneer Classic Fund. The prospectus for each of the two funds was amended to account for the consideration of sustainable business practices, including through environmental, social and/or corporate governance (ESG) policies, practices or outcomes. In addition, the funds are empowered to exclude corporate issuers that do not meet or exceed minimum ESG standards and to exclude companies significantly involved in certain business activities, including but not limited to, the production of alcohol, tobacco products and certain controversial military weapons, and the operation of coal mines and gambling casinos and other gaming businesses. More specific details and thresholds in each case, which would add transparency for the benefit of investors, are not provided. Prospectus amendments or changes to a fund’s investment objectives may be made without shareholder approval to the extent that these are not deemed to be fundamental, however, they may require at least 60 days’ notice prior to the implementation of changes to non-fundamental policies. That said, the ESG changes outlined above do invite questions about the opportunity that fund investors more generally should have to express their approval for these types of modifications when the adoption of ESG factors could potentially impact current and future fund practices, portfolio holdings as well as investment performance results. Also, investors might incur additional expenses in the event that securities have to be sold to comply with updated ESG guidelines. Consideration of various factors for purposes of assessing the true value of a company and its exposure to risks and opportunities, whether these are in the form of qualitative considerations, such as business model and competitive position, and/or various metrics, such as PE ratios, sales-growth, return on capital, and earnings growth, to mention just a few, and/or any relevant and material environmental, social and government factors, should always be part of the investment tool kit available to fund managers and, to the extent one or more of these tools are revised or updated, shareholder approval should not be required. On the other hand, the type of modifications adopted by Amundi Pioneer, involving the exclusion of corporate issuers that do not meet or exceed minimum ESG standards and companies significantly involved in certain business activities, arguably rise to a level that should invite positive shareholder consent. Such changes could impact current and future fund holdings and the future investment performance of the fund. Also, investors might incur additional expenses in the event that securities have to be sold to comply with the funds’ updated investment guidelines at the time of implementation. Since the beginning of the year, nine fund firms adopted ESG mandates of varying types by amending the prospectuses applicable to 48 funds comprised of 214 share classes with assets of about $40 billion. Refer to Chart 1. Admittedly, shareholders can always vote with their feet. Also, a mitigating factor in the case of Amundi Pioneer is that the firm’s ESG focus is apparently not new. In a press release announcing the change, Ken Taubes, Chief Investment Officer, was quoted as follows: “ESG-related considerations are core elements of Amundi Pioneer’s research process and play a key role in security selection decisions across a broad array of our actively managed investment strategies. Investing in companies with sustainable business models and strong competitive positions has been a core focus of our firm for decades. Our view is that ESG factors are becoming increasingly important in understanding investment risk, and our ability to identify companies that have the potential to outperform over the long term.” That may indeed be the case, and if so, the company’s statement summons the question of why Amundi Pioneer does not extent this approach to cover the firm’s entire universe of mutual fund offerings as they too would benefit from this additional research. But Amundi Pioneer is going beyond strictly ESG integration. The funds also now permit certain exclusions that could restrict the implementation of the portfolios’ strategies and may also call for the liquidation of certain securities that might impact performance and lead to additional expenses should current holdings have to be sold to conform to the new prospectus language. For example, Pioneer Classic Balanced Fund held shares of BHP Biliton, Ltd (BBL), the Australian-based mining operator, and Honeywell International, Inc. (HON) which is involved in defense work within the aerospace division of the company. At the same time Pioneer Fund held shares of both HON and Raytheon Company (RTN), a major U.S. defense contractor and industrial corporation with core manufacturing concentrations in weapons and military and commercial electronics. While the parameters for exclusion are not spelled out, to the extent that these investments qualify as a mining company or as a firm involved in certain controversial military weapons, these might have to be sold and in the process the funds would, at the very least, have to absorb some incremental transaction fees.

August 13, 2018 DUE DILIGENCE Alert: MODERATE COMPETITIVE Alert: 2 Event: BlackRock sustainable funds continue to maintain positions in Turkey in face of crisis. Briefing Points: i) Blackrock’s sustainable investment funds continue to hold debt positions in Turkey as sovereign concerns rise, ii) Giulla Pellegrini, who heads BlackRock’s EMD sustainable investments stated that they have, however, lessened their exposure in light of recent events, and iii) Mr. Pellegrini notes that “policy unpredictability” with a new government and potentially less central bank “independence” are factors affecting the outlook for Turkey. Affected Fund(s):  BGF EM Bond Funds Asset Classes:  Non-US and Emerging Bond Funds Management Company:  BlackRock, Inc. (New York, NY) DD Concern:  Change in risk profile Marketing Considerations: Addressing the financial crisis in Turkey will serve as a solid test of the manager’s analytical and management capabilities in the “hot” EM market. Of course, if the fund takes a hit, it will erase any “bragging” rights.

In an Opinion article published in The New York Times entitled “More Cities and States Should Divest From Private Prisons,” Scott M. Stringer, comptroller of New York City and trustee for New York City’s Retirement Systems, along with Javier H. Valdés, a community organizer, made the case for divesting from private prison company holdings in public pension fund investments. They argued that “pension funds have a fiduciary duty to make sound investments that grow their portfolios and help fund retirement benefits for their members.” That means, according to the two authors, constantly evaluating the long-term viability and risk of investments across the pension funds’ portfolios, which is what the New York City Comptroller’s Office does every day. Specifically, the authors observe that “investment in for-profit prison companies exposes the system to undue legal and regulatory risks and worker-safety issues that are inconsistent with the board’s risk profile and objectives.”  While the argument has merit on moral, social and potentially financial grounds, the impact of divestment is unclear and open ended, its application has limitations as well as financial consequences and, in the end, there may be more effective ways to address these and similar concerns both on the part of the City as well as other institutional and retail investors. This is not the first time in recent years that one or more of the five funds that make up the $194 billion New York City Retirement Systems have promoted a divestment strategy. In January of this year, it was announced that city officials have set a goal of divesting some of New York City’s pension funds from fossil fuel companies within five years.  According to the accompanying press release issued at that time, it was noted that the City’s five pension funds have about $5 billion in fossil fuel investments.  And earlier, in January 2016, it was announced that a resolution had been submitted to the NYC Police Pension Fund to analyze gun divestment, the first step necessary to ensure that no public pension funding flows to gun manufacturers who produce assault weapons and high-capacity ammunition magazines and market these wartime products for civilian purchase. This followed several high profile shooting tragedies involving assault weapons. While the merits of the concerns expressed around the operation of private prisons, in in terms of their moral, social and potentially financial dimensions, are valid, divestment actions taken by New York City and other public pension funds raise a number of important questions that apply more generally not only to public pension funds but also institutional as well as retail investors. For starters, these include the following: What is the ultimate objective of divestment and what are the trade-offs that the New York City’s Retirement Systems are making? On the one hand, the City’s actions make a political statement and send a loud and clear message. On the other hand, the effectiveness of divestment campaigns remains unclear and, in any case, their application at the portfolio level may be limited. That is to say, such actions are typically restricted to direct holdings or do the actions extend to index fund holdings, pooled fund accounts as well as REITs that may hold such investments? At the same time, the actions risk sacrificing investment performance and compromising investment strategies at a time when at least three of the city’s five pension funds are underfunded[1] and emphasis should be placed on maximizing risk adjusted financial returns. The City’s pension funds have already considered three divestment initiatives in the last three years. Where does the city draw a line since divestment may be a slippery slope without an end in sight? For example, what about companies that provide financial, logistical support or administrative support to private prisons? Or thinking about divestment more expansively, what about support for companies and their investors that offer ride-hailing services that siphon riders away from public transportation and are responsible for a significant increase in CO2 emissions, particularly in large metropolitan areas? To that end, has the City of New York’s pension funds adopted a broad divestment policy, perhaps like the one applicable to economically targeted investments, within the context of its Corporate Governance and Responsible Investment policy? Are there more effective ways for the city to carry out its fiduciary responsibility? For example, engaging with companies more actively, proxy voting initiatives, or, to the extent justifiable, taking legal actions and exercising additional governmental oversight over private prisons, to name a few options, that are already aligned with the pension system’s current practices. Alternatives to a divestment strategy that may better serve investors and potentially have greater net impact include, but are not limited, to the following: (1) advocating for the proactive integration of relevant and material environmental, social and governance (ESG) risks and opportunities in investment strategies.  Applying this to private prisons, as an example, the decision on whether to buy, hold or sell the stocks and/or bonds of private prison companies such as CoreCivic (CXW), and Geo Group (GEO) should take into consideration any relevant and material risk exposures faced by these companies, such as the consequence of political and reputational risks, direct and indirect financial consequences on the firm’s operations, and legal liabilities, to mention just a few. Alternatively, to the extent these private prison operations modify their operations, investments in these companies could lead to opportunities, (2) taking a more active role via corporate engagement as well as proxy voting initiatives, either individually or collaboratively, in an effort to alter the behavior and strategies of these companies, and (3) for individual investors, at least, seeking to maximize risk-adjusted financial returns from their portfolios and allocating a portion of the gains to advocacy groups aligned with their environmental social, moral or ethical preferences. [1] Source:  Milliman 2017 Public Pension Funding Survey discloses that two of the five NYC public pension funds, namely the Police Pension Fund and Employees’ Retirement System have a funding ratio of 69.4% and 69.6%.

July 30, 2018 DUE DILIGENCE Alert: MODERATE COMPETITIVE Alert: 2 Event: Co-Head of responsible investing announced for MAN Group. Briefing Points: i) Jason Mitchell is MAN Group’s new co-head of responsible investing, a position he will share with Steven Desmyter who will focus on client- and corporate-level efforts in the same area:  ii) Mr. Mitchell’s main responsibility is to “ensure the firm’s investment processes follow ESG principles” and to develop strategies including, impact, thematic, and ESG factor integration:  iii) Mr. Mitchell was previously a sustainable strategist at MAN. Affected Fund(s): All MAN Group funds, strategies, and SMAs Asset Classes: All US and Non-US Equities and Fixed-Income Management Company: MAN Group plc (London, UK) DD Concern: Competitive strategic move and repositioning Marketing Considerations: The firm’s international and institutional presence can be expected to gain traction, although its US retail status is not likely to benefit in the near-to-mid-term.  The elevation of the “co-head” positions to the corporate level suggests a serious corporate-wide commitment to the sustainable space as well as the likelihood of increased resource allocation to advance the initiative.      

July 10, 2018 Due Diligence Alert:  MODERATE Competitive Alert: 3 Event: Raymond James offers proprietary ESG model portfolios. Briefing Points: i) Raymond James is operationalizing its first range of ESG 3-party sub-advised model portfolios: ii) The model portfolio offerings are proprietary to Raymond James’ advisors and will be overseen by the firms in-house due-diligence team: iii) ESG managers will be selected based upon their “dedication to a sustainability mandate”, their incorporation of ESG factors in their financial analysis process, and the presence of “dedicated resources and personnel” to ESG-related issues. Affected Funds: Raymond James Freedom Model Portfolios Asset Classes: US Equities and Fixed Income Management Company: Raymond James Asset Management Services (St. Petersburg, FL) DD Concern: New untested mandate and/or management team Marketing Considerations: The proprietary nature of the new portfolios may reinforce the company’s reps position in the marketplace – it will lessen the possibilities of reps turning to other providers. It is not expected to result in near-to-mid term inroads into other firms’ ties to their reps, particularly over the near-to-mid term.

Summary The imposition of recently announced tariffs on imported solar cells and modules are likely to drive the prices of solar panels higher and potentially reshuffle the renewable-energy industry. But this is not expected to adversely impact the renewable energy sector as it is projected to expand the fastest, relative to other fuel sources, between today and 2040 and continuing to mid-century. Investors generally and sustainable oriented investors, in particular, seeking to gain exposure to the renewable energy sector can do so by allocating a segment of their portfolio to this theme. Although their characteristics vary, investors can choose from at least 14 actively and passively managed mutual funds, exchange-traded funds (ETFs) and exchange-traded notes (ETNs). U.S. Imposed Safeguard Tariffs on Imported Large Residential Washing Machines and Imported Solar Cells and Modules Last week the Office of the U.S. Trade Representative announced that President Trump has approved recommendations to impose safeguard tariffs on imported large residential washing machines and imported solar cells and modules. Published on January 22, 2018, the agreed upon tariffs fell in the middle of the range of recommended options available to the President and were in response to findings by the independent bipartisan U.S. International Trade Commission (ITC) that increased foreign imports of washers and solar cells and modules are a substantial cause of serious injury to domestic manufacturers. The tariffs affect the building blocks of the solar panels that cover rooftops and utility fields across the U.S. and are likely to drive the panel’s prices higher and potentially reshuffle the renewable-energy industry. For imports of solar cells and modules, the relief that was approved will include a tariff of 30 percent in the first year, 25 percent in the second year, 20 percent in the third year, and 15 percent in the fourth year.  Additionally, the first 2.5 gigawatts of imported solar cells will be exempt from the safeguard tariff in each of those four years. The action is expected to impact solar stocks to varying degrees as the tariff will drive up prices in one of the solar market’s promising segments, however, in the long run solar power is expected to continue to get cheaper and replace fossil-fuel generated electricity. Renewable energy is projected to expand the fastest as a fuel source between today and 2040 and continuing to mid-century at 2050 While projections can vary substantially, renewable energy is projected to expand the fastest between today and 2040, increasing from almost 4% of share to an estimated 8.04% and an even higher 9.73% share by mid-century in 2050[1]. According to the U.S. Information Administration’s Annual Energy Outlook 2017 overall energy consumption projections remains relatively flat through 2040, rising 5% from the 2016 level and somewhat close to its previous peak. That said, the fuel mix changes significantly. Lower prices combined with global initiatives to combat the threat of climate change by reducing carbon dioxide emissions in line with the Paris Climate Agreement’s aim to keep a global temperature rise this century well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5°C, are contributing to the increased demand for natural gas. This is led by demand from the industrial and electric power sectors which is expected to rise more than other fuel sources in terms of quantity of energy consumed. Petroleum consumption remains relatively flat as increases in energy efficiency offset growth in the transportation and industrial activity measures. At the same time, coal consumption decreases as coal loses market share to natural gas and renewable generation in the electric power sector while renewable energy, on a percentage basis, grows the fastest. This is attributable to the continued decline in capital costs with increased penetration and expectation for the continued strong support long-term for the use of renewable energy internationally and in the U.S. at the federal, state and local levels, notwithstanding reversals at the federal level in the short-to-intermediate-term. Refer to Chart 1. Chart 1: Energy Consumption: 1980- 2040 Source: U.S. Information Administration Annual Energy Outlook 2017 14 actively and passively managed mutual funds, exchange-traded funds (ETFs) and exchange-traded notes (ETNs) In addition to individual stocks and bonds, including green bonds or plain vanilla bonds that raise capital specifically to be allocated to finance environmentally beneficial projects, investors generally and sustainable oriented investors in particular seeking to gain exposure to the renewable energy sector by allocating a segment of their portfolio to this theme can choose from at least 14 actively and passively managed mutual funds, ETFs and ETNs. These range from two ETFs that focus exclusively on companies participating in the wind or solar energy industries to three mutual funds, for a total of 5 including share classes, and 10 ETFs that invest more broadly in alternative energy and alternative energy technology companies globally or listed for trading in the US. One ETN provides exposure to the global price of carbon. Refer to Table 1 for a complete listing of these fund along with brief descriptions.  For expanded descriptions, refer to the Investment Research/Basics/Sustainable Investment Strategies tab. In addition to geographic exposures, each of these funds pursues varying strategies and emphasizes different aspects of the renewable energy market segment, in some cases reflecting only slight variations. In general, the funds performed well in 2017, but their performance track record over the last 3, 5 and 10-years, to the extent they were in operation, is mixed. Five of the 12 ETFs/ETNs remain small in size, with less than $50 million in assets, while expense ratios in general fall outside the lowest end of the range for both specialty ETFs as well as mutual funds. Refer to Table 2. As is the case with all investments, investors should understand the variations mentioned above before making an investment decision. In addition, investors should consider the skills of the investment adviser, track record and risk profile, fund expenses, size and tenure of the fund. [1] Source: U.S. Information Administration Annual Energy Outlook (AEO) 2017, based on the Reference case projection which assumes trend improvement in known technologies, along with a view of economic and demographic trends reflecting the current central views of leading economic forecasters and demographers. It generally assumes that current laws and regulations affecting the energy sector, including sunset dates for laws that have them, are unchanged throughout the projection period. The potential impacts of proposed legislation, regulations, or standards are not reflected in the Reference case. Projections in the AEO should be interpreted with a clear understanding of the assumptions that inform them and the limitations inherent in any modeling effort.

During a year when a number of high profile environmental, social and governance (ESG) related events unfolded, sustainable funds[i] assets under management in the US, including mutual funds, exchange-traded funds (ETFs) and exchange-traded notes (ETNs) achieved limited gains.  Net inflows, including new fund launches, are estimated at $2.9 billion or an increase of 1.5% relative to 2016. While lines in the sector may be blurring in the future, fund flows into the sustainable investing sector should pick up as the segment continues to pivot away from a focus on religious/ethical and exclusionary strategies in favor of integrating ESG factors to improve fundamental investment decisions and with increasing emphasis on shareholder engagement and proxy voting. The trend is expected to accelerate with the entry of traditional investment managers. Firms such as JPMorgan, Morgan Stanley, Hartford/Schroders, PIMCO and AllianceBernstein Investments, have entered the sustainable investment sphere with new and repurposed fund offerings.  In the process, these organizations shifted $13.7 billion in assets into the sector with their designated sustainable funds, and two traditional firms moved into the ranks of the top 10 based on assets. These and other investment managers are expected to continue to introduce more robust product offerings that should lift returns over time. When combined with effective pricing and expanded sustainable oriented disclosures, along with the potential uptake through robo advisor platforms, these developments should serve to attract a larger segment of individual and institutional investors.  This should also in time open the market to the $7.5 trillion defined contribution plan retirement market. As is, sustainable funds recorded strong absolute total returns in 2017 but large capitalization equity funds, based on the performance of the SUSTAIN Large Cap Index, trailed the S&P 500 Index by 265 basis points. Bond funds and world funds, on the other hand, performed well both on an absolute and relative basis. Beyond offering explicitly identified sustainable products, traditional managers stepped up their proxy voting initiatives and engagements on ESG issues with corporations in the US and abroad and this is likely to gain further traction in the coming years. At the same time, engagements with corporations by sustainable fund managers have led to changes in commitments on products, processes or practices. Sustainable Investing Trends Buttressed by Environmental, Social and Governance Events In 2017 Hardly a day went by in 2017, or so it seems, without coming across some reference on the part of financial commentators and analysts to the growing attraction of sustainable investing and the potential for asset growth in this segment driven by institutional and retail investors seeking to achieve a positive societal outcome while at the same time realizing market based financial results. This was bolstered by third party research and surveys reporting that assets managed in line with responsible investing strategies throughout the globe have surged to almost $23 trillion and about $8.7 trillion in the US on the back of asset growth rates of 33% or even higher since 2014[ii].  Asset owners such as pension funds, insurance companies, sovereign funds, endowments and foundations are leading the transition while individual investors interested in sustainable investing and millennials, in particular, are reported to be 2X more likely than other individual investors to invest in companies or funds that target specific social or environmental outcomes. Buttressing this investing trend were some high profile and not so high profile environmental, social and governance linked events that unfolded in 2017.  For example, on the environmental front, extreme weather and natural disasters that were experienced during the year, in the form of violent hurricanes Harvey, Irma and Maria that ravaged Houston, Puerto Rico and other locations, raging wild fires again punishing vast areas of the American West, in particular California, and historically warm atmospheric temperatures. These developments, coupled with the present US Administration’s out of step positioning with respect to climate change, reinforced the sense of urgency associated with the Paris Agreement’s central aim of strengthening the global response to the threat of climate change by keeping a global temperature rise this century to well below 2C°. On the social front, a focus on economic and social inequality continued throughout the year, punctuated, in part, by the rally that turned violent in Charlottesville, Virginia and protests in St. Louis in September.  These events were overtaken toward the end of the year, at least temporarily, by sexual harassment revelations and reports of assaults against women in the workplace and elsewhere and rekindling the dialogue around gender diversity and worker treatment practices and, even more broadly, the role of the private sector in addressing these issues in the absence of leadership in Washington DC. As for governance, while lower profile, Wells Fargo was reported to have received regulatory criticism for forcing hundreds of thousands of borrowers to buy unneeded auto insurance when they took out a car loan, for ignoring signs of problems in the auto loan unit as well as its handling of the problems once they were detected.  Coming on top of the previous year’s fake credit cards scandal that led to a management shakeup and fines, these developments once again fueled concerns regarding the firm’s corporate governance, ethics as well as worker and customer treatment. Taken collectively or on a case by case basis, these developments likely influenced the investment decisions of asset owners, individual and institutional investors as well as managers. As the new-year begins, Sustainable Research and Analysis takes a look at last year’s trends and developments in the US sustainable investing sector through the prism of mutual funds and exchange-traded funds that employ sustainable investment management strategies and offers its outlook for 2018. Sustainable Funds Assets Under Management Experienced Limited Gains in 2017 From New Flows, Estimated at $2.9 Billion or an Increase of 1.5% Relative to 2016 Sustainable funds ended 2017 with $250.4 billion in assets under management (AUM) across 774 funds, including 63 ETFs/ETNs and 711 mutual funds and their corresponding share classes, largely invested in stock, stock-like assets and balanced portfolios. This represents a year-over-year increase of $57.3 billion, or a gain of 30% relative to $193.1 billion in explicitly designated sustainable fund assets at the end of 2016.  For perspective, the gain experienced by sustainable funds exceeds by 10% the asset growth posted by the entire mutual funds and ETF industry in 2017.  While year-end 2017 data is not yet available, year-over-year figures through November 30, 2017 puts the fund industry’s gain at almost $3.2 trillion or an increase of 19.9%. While the top line gain achieved by sustainable funds is significant on the surface, a more detailed analysis portrays a different and much less vigorous year-over-year growth profile. In fact, research shows that the asset gains achieved by the sector are largely attributable to capital appreciation and the repurposing of existing mutual funds.  These two categories are estimated to have sourced $40.7 billion[iii] and $13.7 billion in assets, respectively, for a combined $54.4 billion or 95% of the year-over-year gain.  When combined with assets associated with mutual funds and ETFs/ETNs that commenced operations during 2017, for a total of $4.05 billion, the sector experienced an estimated net gain of only $2.9 billion or 1.5%.  In fact, if not for assets linked to new funds and share classes, the sustainable sector is estimated to have experienced net outflows of $1.15 billion during 2017.  Refer to Chart 1.  These numbers fall short of expectations given the enthusiastic growth projections made on behalf of sector.  A shortage of product offerings with sufficiently long management and performance track records, effective pricing and limited strategy and impact disclosures may be combining to deter investors from investing in sustainable funds in greater numbers.  That said, the sustainable investment landscape is undergoing a positive fundamental change as described further along. By way of comparison relative to the $19.1 trillion long-term mutual fund and ETF industry as a whole as of November 30, 2017, the sustainable funds segment remains quite small at 1.3% of assets.  The broader industry, excluding money market funds, is still heavily dominated by equity and hybrid investments which, at 76% of total net assets versus 97% of the total for sustainable funds and ETFs suggests that in time additional fixed income funds and assets are likely to materialize in this segment.  Refer to Chart 2. Sustainable Funds Sector is Experiencing Notable Shifts: Reduced Concentration in Sector with the Arrival of Traditional Asset Managers Emphasizing ESG Integration Strategies Fund flows aside, the sector experienced some notable developments and shifts during the course of the year that will likely translate into new funds and improved flows in 2018 and beyond. These developments include: The sustainable funds segment expanded with the addition of 24 new fund groups that introduced new products, some as few as one fund, which along with new share classes and additional funds from existing firms, added about $4.05 billion in net assets during 2017. Entering 2017, there were 86 fund groups, offering one or more sustainable mutual funds or ETFs/ETNs. The segment expanded to 110 firms by the end of 2017. There was also merger and acquisition activity in 2017 which led to the merger of assets into the Touchstone Funds upon the sale of the Sentinel Funds Group that no longer exists and the acquisition of Pax World Management, one of the oldest sustainable asset managers, by UK-based Impax Asset Management Group. Pax will retain the name of its funds. The segment, which became less concentrated, continued to shift beyond narrower-based exclusionary practices such as avoidance of tobacco and alcohol companies. While the sustainable investments segment remains highly concentrated, with the top 10 fund groups controlling $197.8 billion in assets, or 79% of the segment’s total assets under management, this level of concentration represents a decline from 85% at the end of 2016 due to the entry of new firms and/or expansion of offerings on the part of existing firms. The list of the top 10 sustainable fund groups is still dominated by firms like American Funds, American Century Investments and Dimensional Fund Advisors, or firms that largely employ exclusionary practices, which together account for about 46% of the sustainable segment’s assets under management or an even higher 54% when the religious/ethical oriented GuideStone Funds group is added in. The segment’s sustainable strategies, however, are expanding and shifting beyond narrower-based strategies that rely on company exclusions. In contrast, the new firms along with their new investment fund offerings are moving away from a focus on religious and ethical mandates that rely almost entirely on exclusionary practices and instead are embracing more robust sustainable investing strategies such as ESG integration, thematic investing, shareholder engagements and proxy voting. Traditional asset managers are entering the space. Just as meaningful for the segment, the transition in favor ESG integration is being led by traditional asset managers. Two new firms, JPMorgan and Morgan Stanley not only launched sustainable products during 2017, but they also repurposed existing funds by adopting ESG strategies that combine with fundamental investment decisions to inform better investment decisions. Refer to Table 1.  In the process of doing so, they made their way into the ranks of the top 10 firms in the segment.  Also, these two firms are not alone.  While they didn’t make their way into the top 10, traditional firms like BlackRock (outside of its iShares ETFs), PIMCO, AllianceBernstein, Fidelity Investments as well as John Hancock have also ventured into the sustainable investing sphere with active and/or passive investment product offerings.  In so doing, the competitive landscape is intensifying for firms that have been dedicated to sustainable investing and this makes it even harder for them to compete with their relatively resource-rich counterparts. 112 New Funds and ETFs Add $4.05 Billion in AUM in 2017 Excluding funds that revised their investment mandates by adopting sustainable investing strategies, 112 new funds and share classes augmenting existing funds as well as ETFs were added to the universe of sustainable funds during 2017, with $4.05 billion in assets under management. Highlights include: Bond Funds Bond funds in particular recorded gains. Still dominated at the end of 2016 by a cohort of higher/high priced funds and/or funds focused on religious/ethical strategies or thematic approaches and with limited offerings in the investment-grade intermediate term corporate space, the segment consisted of 103 mutual funds/share classes with $15.9 billion in assets and none in the form of ETFs. The sector began to undergo a material shift with the addition of actively managed fixed income products, including thematic funds, from traditional managers as well as ETFs. Corporate bond funds. PIMCO Total Return ESG Fund and PIMCO Low Duration ESG Fund changed their names and at the same time modified their investment strategies effective 6 January 2017 to take into account the efficacy of an issuer’s environmental, social and governance (ESG) practices, to exclude securities issued by certain issuers from the portfolio and to engage proactively with issuers to encourage them to improve their ESG practices. In addition to shifting almost $1.2 billion in assets under management into the sector, the funds join previously launched BlackRock and John Hancock funds to expand the offerings that track the Bloomberg Barclays Aggregate U.S. Bond Index. These funds were followed by the repurposing of the JPMorgan Corporate Bond Fund and newly launched corporate bond funds by Brown Advisory and RBC Capital. Municipal funds also expanded in number. Two traditional asset managers, JPMorgan and AllianceBernstein, introduced new or repurposed municipal bond funds during the year, bringing the total to 5 management firms and 15 funds/share classes. AllianceBernstein launched the AB Impact Municipal Income Shares, a brand new fund investing in securities that score highly on environmental, social and governance criteria and are deemed by AB to have an environmental or social impact in underserved or low socio-economic communities. The JPMorgan Municipal Income Fund, which has been around since 1993, repurposed itself and became a sustainable fund, based on the fund’s updated February 28, 2017 prospectus. As of that date, this $271.1 fund started to invest the majority of its assets in securities whose proceeds provide positive social or environmental benefits, including investments in green bonds. Dedicated green bond funds. While these are not the only two funds, sustainable or otherwise, that invest in green bonds, two dedicated green bond funds, one ETF and one bond fund, were launched during 2017. These include the first green bond ETF, the VanEck Vectors Green Bond ETF managed by Van Eck Associates that commenced operations March 3, 2017. The fund seeks to track the performance of the S&P Green Bond Select Index. The second, an actively managed mutual fund, was launched by Mirova in early 2017. The fund is managed by a unit of Natixis Asset Management, a French Paris-based investment management firm. The funds benefit from an expanding universe of green bonds issued by sovereigns, sub-sovereigns, corporations, financial institutions and special purpose vehicles issuing structured transactions, that in 2017 reached yet another yearly high of $155.4 billion while cumulative issuance stood at about $350 billion. Equity Funds 78 new equity oriented mutual funds and share classes, the source of $3.3 billion in new assets, commenced operations in 2017. These included launches by existing as well as new managers. New share classes introduced by American Funds’ Washington Mutual for sale through certain registered investment advisor and fee-based programs and the addition of target date funds for institutional investors by GuideStone Funds, both focused on religious/ethical and/or exclusions oriented strategies, accounted for $2.5 billion or 77% of the new assets. New to the US, investment management firm Arabesque Investment Management Ltd. launched the Arabesque Systematic USA Fund, bringing in a total $18.8 million by year-end. The fund combines Arabesque’s proprietary assessment of non-financial risk factors such as environmental, social and governance issues using a proprietary tool that relies on machine learning and big data, to systematically combine over 200 environmental, social and governance metrics with news signals from over 50,000 sources across 15 languages. Also, Fidelity Investments introduced two low-cost index mutual funds. One is focused on US equities while the second invests internationally. In both instances, the funds provide MSCI index exposure to companies with high environmental, social, and governance performance relative to their sector peers, as rated by MSCI ESG Research.  Excepting for Fidelity’s long-time select environmental and alternative energy fund, these are Fidelity’s first sustainable fund offerings. Target-Date Sustainable Funds Mirova also launched a first to market series of target-date ESG funds. The series, consisting of 10 funds that employ an asset allocation strategy designed for investors planning to retire within a few years of the target year designated in the fund’s name, follows a sustainable investing approach that selects U.S. and non-U.S. securities, including emerging markets securities, based on ESG criteria with respect to such issues as fair labor, anti-corruption, human rights, fair business practices and mitigation of environmental impact, seeking a diversified portfolio of investments that contribute to a more sustainable future. While its track record is limited, this is an important product offering that paves the way for making inroads into the defined contribution 401(k) retirement plan market with sustainable investment options. Based on data as of June 30, 2017, $7.5 trillion is held in employer-based defined contribution retirement plans, including $5.1 trillion is held in 401(k) plans. Yet surveys conducted by the US SIF Foundation and Mercer, which specifically focused on sponsors of defined-contribution plans, found that while 14% of the 421 DC plan sponsors responding to the survey offered one or more SRI options, SRI options represented a low percentage of assets of around 1%. Until recently, uncertainty about the compatibility of sustainable investing and a plan sponsor’s fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA) was a factor in inhibiting companies from introducing sustainable investing options in 401(k) plans. Guidance in late 2015 issued by the Department of Labor, however, has substantially clarified this issue and made it easier for plan sponsors to offer sustainable investments.  An expanding universe of sustainable product offerings with established track records that are effectively priced and which provide impact oriented disclosures would serve to complement the DOL’s action and eliminate barriers to the introduction of sustainable fund investment options in 401(k) plans. ETFs The ETF universe of sustainable funds also expanded with the addition of 18 ETFs. In October, Nuveen Fund Advisors, LLC, a unit of Teachers Insurance and Annuity Association of America (TIAA), launched the NuShares ESG U.S. Aggregate Bond ETF, an index tracking exchange-traded fund that seeks to replicate the investment results of the Bloomberg Barclays MSCI US Aggregate ESG Select Index which, in turn, is derived from the Bloomberg Barclays U.S. Aggregate Bond Index. The fund invests in a broad-based portfolio of US investment grade bonds that satisfy certain ESG criteria while at the same time excluding various bonds of companies that are involved in controversial business activities. This is the first broad-based investment grade fixed income ESG oriented ETF within a still small universe of such funds and one for which there is no mutual fund equivalent in the market today. Attractively priced, the ETF is also the first to seek to replicate the broad investment grade US bond market by covering US government securities, debt securities issued by US corporations, residential and commercial mortgage-backed securities, asset-based securities and US dollar-denominated debt securities issued by non-U.S. governments and corporations (the residential and commercial mortgage-backed securities as well as asset-based securities to be held in the fund are not evaluated and selected on the basis of ESG scores). In doing so, the fund extends coverage beyond the corporate sectors tracked by the two iShares ESG fixed income ETFs launched by BlackRock in June of last year, namely the iShares ESG 1-5 Year USD Corp. Bond ETF and USD Corporate Bond ETF. 15 Funds with About $13.7 Billion Were Repurposed During 2017 by Adopting ESG Strategies At least five traditional investment management firms repurposed 15 existing mutual funds by adopting ESG investing strategies and adding about $13.7 billion in assets under management to the sustainable sector during the year. In some cases, disclosures around this action are very limited, restricted to simply noting in regulatory filings that in addition to fundamental analysis a company’s exposure to environmental, social and governance factors will be considered.  Still, in the case of JPMorgan and Morgan Stanley, the repurposing of existing funds immediately established these firms among the top ten in the sustainable investing sphere, based on assets under management.  Table 2 summarizes the key investment management firms that repurposed funds during the year: In addition, several fund companies refined their sustainable strategies during the year. The most notable include Dreyfus Third Century, one of the oldest SRI funds, which adopted a broader-based ESG integration strategy.  The second is the Alger Responsible Investment Fund that until December 30, 2016 was named the Alger Green Fund but adopted a new mandate that allows the fund to invest in companies identified on the basis of fundamental research as having promising growth potential while demonstrating that they conduct business in a responsible manner relating to ESG matters.  Alger expressed the belief that innovative companies embracing sustainable ESG practices can potentially provide attractive returns for shareholders and support the environment and overall society. Sustainable Large Capitalization Equity Funds Record Strong 2017 Gains but Lag the S&P 500 while Bond Funds and World Equity Funds Outperform Bolstered by positive economic data in the US and abroad, steady job growth, rising corporate legislative tax cuts, investors overcame geopolitical uncertainties to drive stocks to new record highs throughout the year. The S&P 500 Index posted a full year total return gain of 21.83% with limited volatility while the Dow Jones Industrial Average closed the year even higher, generating a total return of 25.1% versus last year’s increase of 13.4%.  Even such stellar results, however, were eclipsed by the performance of the technology heavy Nasdaq 100, up 32.99%, and emerging markets, measured by the MSCI Emerging Markets Index, which delivered an even greater 37.3% return.  Emerging markets posted the best increase since 2009 as well as the highest result across the major assets classes.  Investment grade bonds, up 3.54%, turned in the second best performance in the last five years. This exceeded last year’s 2.65% increase and represents the second best performance in the last five years for the Bloomberg Barclay’s U.S. Aggregate Bond Index. Against this goldilocks backdrop, the universe of 662 sustainable mutual funds and their corresponding share classes, ETFs and ETNs that were in operation for the full 2017 calendar year, regardless of their sustainable investment strategies, recorded an average total return of 20.32%. Returns ranged from eye popping highs posted by share classes of the Morgan Stanley Institutional Asia Opportunity Fund, ranging from 76.82% to 74.85% due to varying expense ratios, to a low of 51 basis points (bps) registered by GuideStone Funds Money Market Investor. Bond funds posted an average return of 4.56% while equity, balanced and equity-like funds ended the year up an average of 23.46%. At the same time, similarly managed active mutual funds that employ sustainable investing strategies beyond absolute reliance on exclusionary practices, namely funds emphasizing ESG, performed well in 2017 on an absolute basis and in some cases also on a relative basis. This is illustrated in the results achieved during the calendar year 2017 by the Sustainable (SUSTAIN) Large Cap Equity Fund Index, a fund index that tracks the total return performance of the ten largest actively managed large-cap US oriented sustainable equity mutual funds. The index delivered strong absolute total return results in 2017 with its gain of 19.18% while the ten funds that comprise the index delivered returns that ranged from a high of 25.79% posted by Calvert Equity A to a low of 15.42% achieved by the Domini Impact Equity Investor share class.  For each of the funds that has been in operation over the previous five years, the results achieved last year rank second only to the returns posted in 2013 when the S&P 500 was up 32.39%.  That said, the S&P 500 Index, up 21.83% for the year, outperformed the SUSTAIN index by 265 bps.  Refer to Chart 3. Only one of ten funds that comprise the SUSTAIN Index outperformed the S&P 500 with a gain of 25.79%. The Calvert Equity Fund A overcame its high 1.09% expense ratio and reversed last year’s significant underperformance by its emphasis in 2017 on growth-oriented stocks in the strong performing technology, healthcare and financial services sectors. The fund also benefited from its avoidance of the energy sector which experienced a 2017 decline of about -4.30%.  On a 3-year and 5-year basis, however, the fund trailed the S&P 500 Index. In contrast to the large-cap equity fund returns, smaller cohorts of sustainable bond funds and world funds, ex USA, including developed and developing countries, consisting, in each case, of five actively managed funds with similar investment objectives, produced superior absolute as well as relative results. The Sustainable (SUSTAIN) Bond Fund Indicator and Sustainable (SUSTAIN) World Fund Indicator, each consisting of similarly managed funds that likewise employ sustainable investing strategies beyond absolute reliance on exclusionary practices, were up 4.09% relative to the Bloomberg Barclay’s U.S. Aggregate Bond Index, or an excess return of 55 basis points, and 27.05% relative to the MSCI All Country World Index ex USA (MSCI ACWI ex USA), or an excess return of 940 basis points.  Refer to Chart 4. Stepped Up Reporting and Disclosure on ESG Strategies and Impact Would Accelerate Investor Confidence in Sector In recent years, investors have been demanding greater disclosure and transparency from corporations about their exposures to environmental, social and governance risks and efforts to address and mitigate these threats. So far there has been limited progress on requiring mandatory disclosures or developing a consensus around voluntary disclosure guidelines in the US or internationally, excepting perhaps for the initiative undertaken by the Financial Stability Board's (FSB) Task Force on Climate-related Financial Disclosures (TCFD) set up by Bank of England Governor Mark Carney and spearheaded by Michael Bloomberg that on June 29, 2017 published a set of recommendations. The recommendations describe information that both financial and non-financial companies should disclose to help investors, lenders, and insurance underwriters better understand how they oversee and manage climate-related risks and opportunities, as well as the material climate-related risks and opportunities to which they are exposed.  While its still early, the Task Force’s recommendations seem to be gaining some traction. In a similar vein, sustainable investors who seek to achieve a positive societal outcome with their investments need help to better understand how a fund manager’s sustainable strategies are implemented and the range of sustainable outcomes, if any, that are associated with their investments. By providing results that can be tracked, evaluated and compared, investors would be given the opportunity to better understand their fund’s sustainability performance in addition to financial results and, at the same time gain confidence that the strategy is having some positive impact or outcome—optimally in line with investor expectations. Mutual funds, exchange-traded funds and other similar investment vehicles are required to publish semi-annual and annual reports that describe the financial results achieved by the funds and to compare the results relative to securities market indexes, to disclose securities holdings and to provide other relevant financial information. Some fund firms report to investors even more frequently.  Yet when it comes to funds with explicit sustainable mandates, no such requirement regarding non-financial disclosures applies. Some funds limit their disclosures to a short reference to the effect that research analysts seek to assess the risks presented by certain ESG factors. On the other hand, a  number of self-described sustainable oriented investment firms do offer regular and, in some cases, extensive voluntary sustainability oriented fund level updates, in particular describing linkages between ESG considerations and stock purchase and sale decisions as well as shareholder engagement activities and results, even as the level and extent of disclosures vary.  Some of the larger firms in the sector, such as Calvert, Domini, Neuberger Berman and TIAA, fall into this camp but it’s fair to say that such disclosures are not limited to these firms.  It is also evident that such disclosures are evolving and are in the process of improving. For example, Calvert and Neuberger Berman have recently begun to publish fund specific impact reports that describe, through the use of selected metrics and key performance indicators, how portfolios are performing with regard to sustainability and ESG considerations. This is very much in line with what investors should expect to receive from such funds along with expanded insights into the way sustainability considerations are integrated into the investment process. All firms offering sustainable investment products, both actively managed and passive funds, should boost disclosures in this area. To clarify, disclosures of sustainability ratings or rankings, whether these are applied to individual securities or to funds in the aggregate, much like the Morningstar Sustainability Ratings that were introduced in 2017, are useful in that they offer a point in time opinion about how well the underlying companies held by a fund rank on the basis of their ESG factors when compared to similar funds. These rankings, however, are not substitutes for outcome oriented disclosures. Sustainable Investors Attracted to Robo Advisors, but Offerings Are Limited The number of firms offering robo-advisory platforms, online advisors that use computer algorithms to recommend diversified low cost portfolios tailored to the individual clients, continues to expand along with the number of robo advisors offering products that attempt to align portfolios with investors’ values. According to InvestmentNews, the top five U.S. robo-platforms currently have a combined $100 billion in client assets. In addition to Vanguard Personal Advisor Services, the largest platforms in the segment include Schwab Intelligent Portfolios, Betterment, Wealthfront and Personal Capital. According to a 2016 KPMG study, the value of robo advisor controlled assets under management could reach an estimated $2.2 trillion by 20120 [iv].  Refer to Chart 5. To attract sustainable investors who express interest in the concept of socially-responsible investments, platforms have either launched with or they have expanded their socially-conscious offerings. TIAA introduced the Personal Portfolio in June of last year with socially responsible fund options that that leverage the firm’s expertise in sustainable investing and relies on its own Social Choice funds, the oldest of which commenced operations in 1999.  Betterment launched a responsible investing option on its platform over the course of the summer in 2017. The socially responsible investing option also relies on low cost mutual funds and ETFs to integrate environmental, social and governance factors into the investment portfolio based on ESG scores provided by MSCI. At this juncture, however, the SRI portfolio is restricted in that it includes only one SRI fund along with non-SRI funds because Betterment believes that only the U.S. large-capitalization stocks asset class meets the firm’s requirements for low fees and liquidity. Earlier in the same year, Motif Investing also launched a values-based investing tool at the same time, a number of platforms have been established to focus on SRI investing. These include at least the following three firms: OpenInvest, Earthfolio and Grow Invest. Each of these firms operate with different minimum investment requirement and fee structures and each offers different investment options that largely rely on sustainable ETFs that, with the exception of TIAA, are constructed around indexes that integrate ESG considerations or pursue thematic investing strategies. In each case, sustainable investor profiles supplement financial and risk considerations to fashion a recommended investment portfolio. That said, an investor’s sustainable goals and objectives are very broadly qualified and fund selections do not appear to be subjected to a nuanced evaluation process. Some of the Largest Traditional Managers Stepped Up Their Engagement and Proxy Voting on ESG Issues Beyond exercising their stewardship responsibility to vote proxies on behalf of mutual fund and ETF investors at annual shareholder meetings, mutual fund managers can also engage in direct discussions with senior executives and directors of companies in which the funds invest for the purpose of advocating a point of view and/or potentially influencing their behavior. During the past year, in addition to shareholder engagements led and supported by established and more active sustainable investment management firms such as Boston Common, Calvert, Domini, Pax World, TIAA and Walden Asset Management, some of the largest traditional management firms stepped up their engagements on ESG issues and disclosures with corporations in the US and abroad. Such efforts, which are expected to gain more traction, will likely serve to blur the lines between designated sustainable funds and firms that become more active in corporate engagement activities and proxy voting. BlackRock, the largest asset management firm in the world, was reported to have sent letters from its corporate-governance team in December to about 120 companies, urging them to report climate dangers in line with the recommendations of the Financial Stability Board’s Task Force as those in the energy, transportation and industrial sectors. This was on top of BlackRock’s 2017 annual letter to corporate CEOs written by Laurence D. Fink, CEO, which for the second year in a row, highlighted the firm’s view that companies should devote more attention to issues of long-term sustainability and improve disclosure of their annual strategic frameworks for long-term value creation. This message was kicked up a notch in BlackRock’s just released 2018 letter, that, in the mold of silicon valley H-P pioneers David Packard and William Hewlett, calls upon chief executives to think not only about delivering financial results but to also recognize the responsibility of companies to address broader societal challenges and to show how their companies are making a positive contribution to society. Vanguard, the second largest asset management firm worldwide, outlined in its 2017 Investment Stewardship Annual Report the firm’s commitment to investment stewardship and discloses that the team devoted to this activity has doubled in size since 2015 to more than 20 analysts, researchers, and operations team members.  The report also notes that for the first time Vanguard’s funds supported a number of climate-related shareholder resolutions opposed by company management. Vanguard is also discussing climate risk with company management and boards more than ever before and is committed to engaging with a range of stakeholders to inform its perspective on these issues, and to share its thinking with the market, its portfolio companies, and investors. At the same time, Vanguard successfully pushed back on a resolution to make an ongoing commitment to genocide-free investing within its funds, and in particular for targeted divestiture from companies that support government-sponsored genocide in Sudan, submitted for consideration at its October 2017 Joint Special Meeting of Shareholders in Scottsdale, Arizona. While acknowledging that the humanitarian issues are of consequence and deep concern, Vanguard argued that meaningful long-term solutions to these issues require diplomatic and political resources to come together to implement change, that the funds are compliant with all applicable US laws on this matter and in addition the proposal would interfere with the advisors’ fiduciary duty to manage funds in line with their investment objectives and strategies. Finally, Vanguard added that the divestment contemplated by the proposal would be an ineffective means to implement the social change it seeks. The third largest management firm, State Street Global Advisors (SSGA), issued a memo and press release in March 2017 calling on 3,500 global companies, representing more than $30 trillion in market capitalization, to increase the number of women on corporate boards. In a significant shift, SSGA indicated that it will vote against the chair of a board’s nominating and/or governance committee if a company fails to take action to increase the number of women on its board. SSGA has been following up on this campaign and in November announced that it will expand its effort beyond the U.S., U.K. and Australia to big Japanese and Canadian companies. Another indication of the changing ESG sentiments on the part of more traditional managers, the three firms, in an apparent reversal, were reported to have lent their support and voted in favor of a proxy proposal submitted by the New York State Common Retirement Fund 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 globally agreed upon 2 degree target. For the first time, investors with 62.3% of shares voted in favor of the resolution. More generally during the 2017 proxy season, there was a renewed focus on key corporate governance principles and a heightened focus on environmental and social issues by institutional investors. Across four broad categories of shareholder proposals, including governance and shareholder rights, environmental and social issues, executive compensation and corporate civic engagement, the most frequently submitted were approximately 345 proposals covering environmental and social topics. Further, there was an unprecedented level of shareholder support for environmental proposals. Refer to Chart 6. These developments complemented engagement efforts with portfolio companies in an effort to bring about improvements in corporate practices on environmental, social and governance issues in the US and abroad. For example, according to Boston Common as reported in its 2017 Annual Report, the firm, either in a leadership role or along with other investors, engaged at some level 195 companies that led to 44 significant changes in commitments on products, processes or practices with companies. Some of the impacts reported by Boston Common include: Over 23 out of the 28 of the world’s largest banks now have policies to enhance due diligence for carbon intensive sectors and to increase funding for renewable energy. PepsiCo adopted new global reformulation goals to reduce salt, sugar, saturated fat and transfat, one of 22 companies to improve management of obesity and/or under-nutrition issues following assessment by the Access to Nutrition Index. Google, Microsoft, and Samsung under the Electronic Industry Citizenship Coalition’s new Raw Materials Sourcing Initiative joined 22 other companies to ensure the mining of cobalt does not involve child labor or contravene other environmental and social red lines. Mitsubishi UFJ Financial Group, Standard Chartered and PNC Financial adopted better guidance and/or assessment criteria with clients that risk the world’s ability to achieve the Paris Agreement goals. Air Liquide, BMW, and National Grid reported steps to improve operational energy efficiency including energy and water use, emissions and waste. Leading U.S. pharmacist CVS Health added 100 chemicals of concern to its Restricted Substances List for its CVS brand products. In April 2017, CVS announced its intention to remove all parabens, phthalates and the most prevalent formaldehyde donors across nearly 600 beauty and personal care products by the end of 2019. [i] Sustainable funds refer to designated mutual funds, exchange-traded funds and exchange traded notes that employ sustainable investing strategies.  Sustainable investing is an umbrella term that encapsulates social investing, SRI investing and ESG investing and refers to 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. While it’s been changing somewhat, this concept captures a range of four prominent investment approaches or strategies.  These are: (1) Screening out or excluding companies from investment portfolios for a variety of reasons, (2) Impact investing and thematic investing or investing to achieve a  targeted social or environmental objective that is measurable, (3) Integrating environmental, social and governance (ESG) considerations as a proactive and integral component of the investment research and portfolio construction processes, and (4) Shareholder and bondholder advocacy and engagement in an effort to influence corporate behavior and proxy voting. [ii] Global Sustainable Investment Alliance (GSIA) and Forum for Sustainable and Responsible Investment (US SIF). [iii] Capital appreciation estimated based on returns achieved in 2017 by equity, equity-like and balanced funds as well as bond funds. [iv] Source: KPMG Robo Advisory Catching Up and Getting Ahead

Summary Sexual harassment reports and assaults against women in the workplace and elsewhere may have reached an important inflection point in our culture. These are less likely to occur when companies are well managed and have positive morale and high employee satisfaction. For investors interested in seeking out investment options that focus, in particular, on gender diversity, a number of options are available that should be considered within the context of their overall goals and objectives and risk tolerances. These include five available thematic funds that offer exposure to companies selected on the basis of practices intended to promote gender diversity. That said, these funds are relatively new and their performance results to-date are mixed. Sexual Harassment Reports and Assaults Against Women May Have Reached an Important Cultural Inflection Point The recent and continuing flood of sexual harassment reports and assaults against women in the workplace and elsewhere and, to a much more limited extent, against men, may have reached an important inflection point in our culture. In the months since the first allegations of sexual misconduct by Harvey Weinstein, co-founder of The Weinstein Company (TWC), were widely reported in September of this year, millions of working women according to The Wall Street Journal have shared their experiences of sexual harassment instigated by high-profile men in entertainment, media, politics and business via the social media movement #metoo. As observed in a recently published Barron’s article, these developments are a piercing wake-up call for corporations and investors. “Companies that tolerate or cover up sexual harassment, perpetuate a culture that fosters it, or fail to provide proper avenues for employees to report concerns and offenses, could pay in multiple ways, from difficulties in attracting, retaining, and motivating talented workers to customer defections, ruined business deals, and lost revenue and profit.[1]” Indeed, in addition to the many and serious social consequences affecting women, in particular, we have also observed in recent months that corporate culture and corporate behavior of top employees can impact profits, stock prices, a company’s competitive position and, in extreme cases, lead to the disintegration of the company. This appears to the case with The Weinstein Company that was reported to be on the verge of bankruptcy. The Barron’s article goes on to note that while sexual harassment has many causes, it tends to flourish when workplace culture is poor and corporate governance is weak. Conversely, this is less likely to occur when companies are well managed and have positive morale and high employee satisfaction. Further, it is believed that such companies are more likely to perform well over the long-run. Options For Investors Seeking Out Investments Focused On Gender Diversity For investors interested in seeking out investment options that focus, in particular, on gender diversity, a number of options are available that should be considered within the context of their overall goals and objectives and risk tolerances. They can, for example, consider investments in (1) stocks and bonds of companies that are well-governed and promote diversity and gender equity practices in the workplace, supply chains and communities in which they operate, (2) investment products offered by management firms that have telegraphed their broad commitment to evaluate corporate governance, including approaches to environmental and social concerns, (3) various product offerings, such as actively or passively managed sustainable mutual funds, exchange-traded funds (ETFs) or separate accounts, to mention just a few, that have explicitly adopted sustainable investing strategies which recognize and take into account gender diversity factors in their assessment of social and governance considerations, and/or (4) thematic oriented funds that offer US investors a focused exposure to companies that are selected on the basis of practices intended to promote gender diversity. Increasingly Investment Management Firms Paying More Attention to Gender Diversity Increasingly, investment management firms in the US are paying more attention to gender diversity, even if that is through the prism of board diversity. Recently, for example, F. William McNabb III, Chairman and Chief Executive Officer of Vanguard, noted in his letter to shareholders dated October 13, 2017 that “a growing body of research has demonstrated that greater diversity on boards can lead to improved governance and company performance.[2]” In this connection, Vanguard is advocating that boards incorporate diverse perspectives and experiences into their strategic planning and decision-making. One example offered by Vanguard to illustrate its commitment to more diverse boards is the firm’s participation in the 30% Club, a global coalition working to increase the representation of women in boardrooms and leadership roles. Funds Pursuing Sustainable Investing Strategies For some investors, the level of engagement implemented by a firm like Vanguard may be satisfactory while others may seek to invest with management firms and funds offering designated sustainable funds, actively or passively managed, that include explicit gender diversity considerations at the portfolio level. An example is the Neuberger Berman Investment Advisers managed Neuberger Berman Socially Responsive Fund. The fund discloses that gender diversity is an explicit consideration that takes into account factors such as the number of women on the board of directors, women in the C-suite, as board chairs and/or executive management with P/L responsibility, established diversity programs, established supply-chain diversity programs and products and services that benefit women. In addition, the fund has published white papers on this subject, it engages with corporations on this topic, and votes its proxies accordingly. Further, Neuberger Berman publishes a fund specific sustainable profile/impact report that covers selected portfolio focused environmental, social and governance metrics, including the number of holdings by weight that have at least one woman on the board and the number of holdings by weight that have been recognized for favorable workplace practices. Not all sustainable funds, however, offer this level of transparency. Consider, for example, the PIMCO Total Return ESG Fund which in early January 2017 adopted a set of exclusionary practices, an ESG integration strategy and issuer engagement approaches to improve ESG practices. With regard to ESG integration, the funds notes that it may avoid investment in the securities of issuers whose business practices with respect to the environment, social responsibility, and governance (ESG) are not to PIMCO's satisfaction. In determining the efficacy of an issuer's ESG practices, PIMCO will use its own proprietary assessments of material ESG issues and may also reference standards as set forth by recognized global organizations such as entities sponsored by the United Nations. Further details around gender diversity, however, are not provided; and subsequent reporting by PIMCO in the form of its first semi-annual report following adoption of its ESG integration strategy is no more transparent on this or related subjects. Five Funds Offer Focused Exposure to Companies Selected Based On Practices Promoting Gender Diversity For investors interested in funds that offer focused exposure to companies that are selected on the basis of practices intended to promote gender diversity, five relatively new options offered by five management firms are available today. These funds, the earliest of which was introduced in 2014, have attracted $577.2 million in net assets as of November 30, 2017. Included are two exchange-traded funds with a combined total of $386.4 million that account for 67% of the segment’s total net assets, two mutual funds, an actively managed fund as well as an index fund with two share classes, and one exchange-traded note (ETN). A sixth firm, Impact Shares, recently announced plans to launch a sixth fund in January 2018, the Impact Shares YWCA Women’s Empowerment ETF (NYSE Arca: WOMN). The ETF will hold stocks of companies that empower women, including promoting women’s health and women’s advancement initiatives in line with the Equileap North American Women’s Empowerment Index. Each of these funds relies on key performance indictors and screening criteria focused on gender diversity factors, such as the ratio of female executives and female members of the board of directors or equal employment opportunity disclosures in publicly available documents. These data points are easier to collect and evaluate than trying to qualify a company’s corporate culture or even effective governance.   Refer to Table 1 for a listing of funds offering focused exposure to companies selected based on practices intended to promote gender diversity. Table 1: Funds With Focused Exposure to Companies Selected Based On Gender Diversity     Performance Interval has been short and results to-date are mixed Since these funds are relatively new, with one exception, their performance track record is limited to one year intervals and their investment results to-date have been mixed. Pax Ellevate Global Women’s Index Fund, which invests in companies in the US as well as developed markets outside the US is the longest running offering since its merger in 2014 with the Pax World Global Women’s Equality Fund. It is one of two funds that outperformed its designated or prospectus benchmark, the MSCI World (Net) Index, during the twelve month interval ended November 30, 2017. Its institutional share class has also outperformed the index by a slight margin over the last three year period. The fund and its two share classes have achieved these results at lower levels of volatility relative to the MSCI World index and notwithstanding higher expense ratios relative to other sustainable index mutual funds. The Glenmede Women in Leadership Fund, an actively managed fund utilizing proprietary, multi-factor, sector-specific models to rank stocks within each sector, also outperformed its Russell 1000 benchmark during the previous twelve months by a margin of 85 basis points, even with its steep 1% expense ratio. The same can’t be said about the three other funds that over the twelve month period ended November 30, 2017 have lagged the S&P 500 Index by margins ranging from a low of 2.3% recorded by the Workplace Equality ETF to a high of 7.85% achieved by the Barclays Women’s Leadership ETN. Except for The Workplace Equality Portfolio ETF that also carries a high 0.75% expense ratio relative to other sustainable ETFs, these returns have been achieved with lower levels of volatility relative to the S&P 500 Index. It should be noted that unlike an ETF, an ETN is a senior unsecured obligation of the issuer, Barclays Bank PLC, and investors are exposed to the creditworthiness of the issuer for any payments due in addition to the performance risk of the index. [1] Barron’s, Tipping Point, November 6, 2017. [2] Vanguard Shareholder Letter dated October 13, 2017.

Recent Reports Raise Questions Regarding TIAA Sales Practices It was recently reported in The New York Times (NYT) that New York State’s Attorney General subpoenaed TIAA, the financial services organization, seeking documents and information relating to the firm’s sales practices. The action was taken following the October publication of an article in the NYT that raised questions about the TIAA’s selling practices. In particular, the action appears to be linked to disclosures by former employees who felt that they were pressured to sell products generating more revenue for the firm but were more costly to clients while adding little value. This raises questions regarding TIAA’s conduct as a fiduciary as well as concerns about its governance practices more generally and whether the firm might have breached any federal laws governing how it interacts with clients. This revelation is a shock, given TIAA’s reputation as a highly ethical company. TIAA’s core values are to “take care of people, act with integrity and deliver excellence.” If validated, however, the Attorney General’s actions could lead to the filing of civil or criminal charges. At this point, the investigation is still in a very early phase and TIAA announced that it is cooperating fully with regulators. TIAA has also begun its own investigation, but it may take some time to reach closure. In the meantime, the reports are troubling and sustainable fund investors in TIAA’s sustainable mutual funds as well as exchange-traded funds (ETFs) have reason to be concerned about how the firm’s actions, this investigation and potential ramifications might affect these investments and what actions, if any, to take at this juncture. TIAA offers a total of 12 sustainable investment vehicles, including four mutual funds and 20 share classes in total, and eight ETFs, with about $4.5 billion in assets under management advised or sub-advised by Teachers Advisors, LLC, a wholly owned indirect subsidiary of Teachers Insurance and Annuity Association of America (TIAA). These allegations, which should be considered within the context of the TIAA’s otherwise outstanding reputation, do not appear to directly affect the investment activities of the sustainable mutual funds and ETFs offered by the firm, or, for that matter, other funds distributed by TIAA that may have been purchased directly or through financial advisors independent of TIAA. At this stage, it would be premature for investors to take any action to either sell or curtail future investments in any of TIAA’s sustainable funds. At the same time, investors should be vigilant and monitor developments in the case as it moves forward, continue to evaluate fund performance and remain alert to any new announcements relating to the TIAA sales practices investigation. Rebranded in 2016, TIAA, the World’s 20th Largest Asset Management Firm, Has Enjoyed a Reputation as a Highly Ethical Company TIAA, formerly TIAA-CREF, or Teachers Insurance and Annuity Association—College Retirement Equities Fund, is a  Fortune 100 financial services organization offering a wide range of products to the general public while continuing to serve its core constituents in the academic, medical and research fields. Its TIAA Global Asset Management unit, operating as a multi-boutique structure, is the 20th largest asset management firm in the world with about $882 billion in assets under management[1]. TIAA enjoys a reputation as a highly ethical company. For example, for the third straight year, TIAA was recognized again in 2017 as one of the World’s Most Ethical Company by the Ethisphere Institute based on TIAA’s “role in society to influence and drive positive change, consider the impact of their actions on their employees, investors, customers and other key stakeholders and use their values and culture as an underpinning to the decisions they make every day.[2]” TIAA has been engaged in sustainable investing since the 1970’s and offers a suite of sustainable mutual funds available to the public since the launch of the Social Choice Equity Fund in 1999. Since then, TIAA has expanded its sustainable fund offerings by introducing a US bond fund in 2012 and an international equity fund as well as a low-carbon equity fund in 2015. The TIAA Social Choice Bond Fund, in particular, has delivered outstanding results since its launch, beating the non-ESG Bloomberg Barclays U.S. Aggregate Bond Index in each of the last one, three and five year intervals across all share classes. Refer to previously published Product Profile.  The same, however, can’t be said about the Social Choice Equity Fund. At the same time, the performance results achieved by the latest offerings, including the Low-Carbon Equity Fund and related five share classes that have outperformed their non-ESG benchmark based on 12-month results to October 31, 2017, do not extend beyond a full year given their launch in the third-quarter 2015. Following the acquisition of Nuveen Investments in 2014, TIAA rebranded its asset management arms under the Nuveen imprint and expanded its sustainable fund offerings by launching for the first time index tracking ETFs, eight in total to-date, each of which integrates environmental, social and governance (ESG) factors into the relevant index. These low cost ETF options, which have been trading since June 2016 and December 2017, are listed in Table 2. TIAA was founded in 1918 as a nonprofit organization with a $1.0 million grant from the Carnegie Foundation to provide investment products that would generate retirement income for teachers who were not covered under traditional pension schemes. TIAA remained a nonprofit organization until 1997, when Congress revoked its tax exemption.  Most of TIAA’s clients invest with the firm because their employers have hired it to administer their workers’ retirement plans.  These include some 15,000 colleges, hospitals and other nonprofit organizations.  TIAA typically acts as record keeper to these institutions, administering accounts that allow plan participants to choose among an array of mutual funds and annuities. When TIAA is a plan’s record keeper, its in-house funds are typically among the investments offered. The company earns a record-keeping fee from the institutions whose accounts it oversees, but can generate more revenue when investors buy its annuities and funds, including purchases of such products based on guidance provided by TIAA’s more than 850 financial advisors[3]. This function presents opportunities for potential conflicts that must be governed carefully and effectively. The Allegations Against TIAA and Its Sales Practices The New York State Attorney General Eric Schneiderman subpoenaed information from TIAA regarding its sales practices. The subpoenaing of information from TIAA followed allegations of predatory sales practices used by the firm that was reported in an October 21, 2017 New York Times article. The NYT story, based in part on a whistleblower complaint obtained by the Times that was filed by former TIAA workers with U.S. Securities and Exchange Commission regulators, disclosed that TIAA representatives pressured customers into buying financial products that add little or no value for them but generate higher fees. The story also cited interviews with 10 former TIAA employees who said they were given hard-to-meet sales quotas, coupled with instructions from management to meet the quotas by increasing clients’ fears of having insufficient retirement funds and by finding other “pain points.”  The article further stated that the whistleblower complaint alleges that TIAA began a fraudulent scheme in 2011 to convert “unsuspecting retirement plan clients from low-fee, self-managed accounts to TIAA-CREF-managed accounts” that cost more. According to the NYT, TIAA has said in the past that its financial advisers and consultants do not get commissions on products they sell, a rule that helps to protect investment clients. But former employees reportedly told the NYT that the firm gives out bonuses to salespeople who convince customers to purchase more expensive TIAA products and services.  For example, investors might have been encouraged to transfer funds from institutional plans, where annual costs may be about 0.3% of assets under management, into managed accounts with fees ranging from 0.7% to 1.0%. TIAA Sustainable Mutual Fund Offerings and ETFs The following table lists the sustainable mutual funds offered and managed by TIAA. The listed funds can be purchased directly by investors, through financial advisors or through retirement plans that offer these funds as investment options. Table 1: Sustainable Equity and Bond Funds Offered by TIAA, Including Fund Objectives, Share Classes/Expense Ratios and Total Net Assets (TNA)[4] Table 2 lists the sustainable exchange-traded funds offered by TIAA. These are listed for trading on the NYSE. Table 2: Listing of Sustainable ETFs Offered by TIAA, Including Objectives, Expense Ratios and Net Assets Investor Action Steps The investigation is still in a very early phase and TIAA announced that it is cooperating fully with regulators. It may take some time to reach closure. These allegations, which should be considered within the context of the TIAA’s otherwise outstanding reputation, do not directly impact the investment activities of the sustainable mutual funds and ETFs offered by the firm or its affiliates, or, for that matter, other funds distributed by TIAA that may have been purchased directly or through financial advisors independent of TIAA. At this stage, it would be premature for investors to take any action to either sell or curtail future investments in any of TIAA’s sustainable funds. At the same time, investors should be vigilant and monitor developments in the case as it moves forward, continue to evaluate fund performance and remain alert to any new announcements relating to the TIAA sales practices investigation. [1] P&I/Willis Towers Watson:  The World’s 500 Largest Asset Managers. [2] Source: Ethisphere Institute, based on Ethics Quotient (EQ) Framework. [3] TIAA Q2 2017 Facts and Stats. [4] Expense ratios range across share classes; B=Billions.

Amazon, General Electric and Wells Fargo Attract Negative Coverage Recently and Challenge Sustainable Investors Last weekend three prominent publicly listed companies, Amazon.com, Inc. (AMZN), General Electric Company (GE), and Wells Fargo & Company (WFC), were the focus of negative articles in The Wall Street Journal as well as The New York Times. The coverage was linked to continuing financial and non-financial sustainability oriented issues. These companies are widely held in actively managed and passively invested equity-oriented portfolios, given their sizable market capitalizations that place them in the top 20 companies of the S&P 500 Index. At the same time, their potential ownership introduces challenging questions for sustainable investors-in terms of whether to own or avoid owning stock in these companies. In the case of Amazon, on top of other past socially oriented concerns, the weekend’s reports invited further questions regarding the firm’s gender diversity and worker treatment practices. In the case of GE, where the coverage was focused on financial performance, sustainability oriented concerns are linked to the company’s involvement with the weapons industry and nuclear power plants. As for Wells Fargo, the articles surfaced new developments and renewed concerns regarding corporate governance, ethics as well as worker and customer treatment. Financial considerations aside, these recent as well as past occurrences and how they are translated into portfolio holdings provide a prism through which it’s possible to gain further insights into the varying approaches used to evaluate sustainable corporate performance on the part of mutual fund and exchange-traded fund (ETF) managers with explicit sustainable mandates as well as index providers. Given the variations in approach and investment conclusions, in the absence of a universally accepted sustainability framework, this also serves to illustrate the challenges faced by individual and institutional investors who wish to invest sustainably through managed funds but who also want to ensure that their individual preferences are reflected in a given manager’s sustainability strategies and polices. In turn, it suggests that to do so effectively calls upon investors to conduct some degree of independent due diligence. Sustainability Issues: Line of Business Concerns, Governance, Ethics, Gender Diversity, Worker Treatment and Worker Treatment Issues Surface To summarize, the following developments were the subject of widespread reporting over the past weekend: Amazon. After sexual harassment accusations going back to 2015 led to the departure last week of Roy Price, who oversaw Amazon Studios, employees expressed concerns within the firm regarding the dearth of gender diversity within the upper ranks of Amazon which might have contributed to greater leniency toward Mr. Price. This, even as Amazon has taken some steps in recent years to make working at the company more appealing to women.  This new development resurfaced concerns regarding Amazon’s gender diversity and worker treatment practices. General Electric Co. The company, which has seen its stock price drop 25% this year through last Friday and 29.7% through 10/25/2017, announced lower than expected earnings on Friday and also slashed its 2017 projections. At the same time, the company’s chief executive officer John Flannery, who succeeded Jeff Immelt in August, started to outline his plans to restructure the struggling conglomerate.   While it is also engaged in such activities as renewable energy and healthcare, GE’s portfolio includes the production of military equipment, such as engines, as well as advanced atomic reactor technologies generally offered through joint ventures. Wells Fargo & Co. The New York Times reported that a confidential Office of the Comptroller of the Currency preliminary report sent last week criticized Wells Fargo for forcing hundreds of thousands of borrowers to buy unneeded auto insurance when they took out a car loan, for ignoring signs of problems in the auto loan unit as well as its handling of the problems once they were detected.  This comes on top of the weekend’s reports of potential problems within Wells Fargo’s foreign exchange business unit and last year’s scandal in which its employees allegedly created over 2 million fake credit card and bank accounts that had not been requested by its customers, eventually leading to the ouster of the bank’s chief executive and regulatory fines in the millions of dollars.  Once again, this leads to concerns regarding the firm’s corporate governance, ethics as well as worker and customer treatment. Examining the Holdings of Sustainable Funds for Insights into these Issues Unless deferring to index providers to construct index funds, each investment management firm offering sustainable mandates will typically frame its distinctive sustainable investing philosophy, develop analytical methods, define relevant and material sustainability factors, identify relevant key performance indicators and data sources, analyze and weight these to arrive at results that are translated into portfolio decisions within the context of a portfolio’s overall investment strategy. That said, financial considerations aside, developments affecting the three companies provide a prism through which it’s possible to gain further insights into the variety of practices that characterize how investors approach the assessment of sustainable corporate performance. To do so, an examination was conducted of the most recent and past holdings of the largest 10 sustainable large cap equity oriented funds with explicit sustainable mandates to identify their positions relative to Amazon, GE and Wells Fargo. These funds are the largest actively managed large cap domestic equity mutual funds that employ a broad-based sustainable investing strategy beyond absolute reliance on exclusionary practices for religious, ethical or social reasons. The funds comprise the SUSTAIN Large Cap Equity Fund Index and account for around 20% of the entire sustainable US equity sector’s assets under management.  Refer to Table 1 and also article entitled “Introducing the Sustainable Large Cap Equity Fund Index (SUSTAIN Large Cap Equity Fund Index).   Five Funds Have Exposure to Amazon or Wells Fargo; None to GE The following observations are based on the examination of the most recent and past holdings of the largest 10 sustainable large cap equity oriented funds with explicit sustainable mandates for the purpose of identifying their positions, if any, in Amazon, GE and Wells Fargo: None of the funds have exposure to GE stock. While there may be financial reasons for avoiding GE, especially given recent developments and announcements, each of the ten funds employ exclusionary screens that preclude investments in companies involved in certain activities, including the manufacturing of weapons—which is the case with GE. Some funds, but not all, also explicitly reference the exclusion of companies involved in the construction of nuclear power plants. For example, Neuberger Berman Socially Responsive Fund notes that while these judgments are inevitably subjective, the fund “endeavors to avoid companies that derive revenue from gambling or the production of alcohol, tobacco, weapons, or nuclear power. The fund also does not invest in any company that derives its total revenue primarily from non-consumer sales to the military.” It should be noted that a company’s eligibility for exclusion is determined based on the level of revenue derived from restricted activities. In the absence of specific financial thresholds, such determinations are subject to judgments on the part of the investment advisory firm. Two of the eight funds have exposure to Amazon. For years, Amazon has weathered criticism over its worker treatment, recycling practices, its practices with regard to the sale of certain weapons (its prohibited weapons policy has been amended), as well as other sustainability metrics. Financial considerations aside, because of Amazon’s performance around these issues, some sustainable funds do not invest in Amazon. At the same time, other investment management companies will do so, as is the case with Pax and Domini. Domini, for example, holds the view that “sustainability is a journey, and no company is perfect.” Domini is willing to work with companies that face significant challenges but demonstrate a commitment to improve. It does so through its corporate engagement efforts. In the case of Amazon, for example, Domini in 2014 reported that following a Domini-authored letter on behalf of institutional investors as well as further conversations with Domini, Amazon agreed to remove several categories of semi-automatic weapons accessories from its website and to amend its prohibited weapons policy. Parnassus and its three sustainable equity funds listed in Table 1 is currently the only management company, out of eight firms, with exposure to Wells Fargo. Parnassus began to accumulate Wells Fargo stock back in May 2016 just ahead of the bank’s initial fake credit card and bank account announcement in September 2016. Passively managed sustainable funds, or funds that attempt to replicate the performance of securities market indices, and their securities holdings also illustrate variations based on the index provider’s rules-based evaluation of sustainability and the equities held in the funds. A similar review of recent investments held by the five largest broadly diversified US-based sustainable equity index funds, representing about $7.0 billion and accounting for approximately 82% of the net assets in this segment, illustrates the variation in approaches. Funds tracking the MSCI KLD 400 Index and MSCI USA ESG Select Index did list any exposures to the three companies.  On the other hand, three of the five underlying indexes and, in turn, the index funds themselves, maintained exposure to one or more of the three companies.  The GuideStone Funds Equity Index Fund, a Christian faith based/ethical index fund with a mandate that relies largely on industry and company exclusions that is overlaid on top of the S&P 500 Index, had exposure to each of the three companies, Amazon, GE and Wells Fargo, as of 9/30/2017.  Refer to Table 2. Aligning Positive Outcomes with a Portfolio Requires Some Investor Due Diligence When it comes to investing in line with personal values or desired societal outcomes, no two investors, either individual or institutional investors, are expected to be exactly alike. Some may be passionate about mitigating climate change but at the same time they may wish to avoid investing in companies engaged in building atomic power plants while others might be especially concerned about governance, gender diversity and business ethics. Some investors might have an aversion to firms engaged in the production of alcohol, guns, gambling, and tobacco while others may not hold such views or advocate for a different set of excluded industries or companies.  Still other investors may gravitate to companies that provide clean water and clean energy while others may be more committed to firms building electric cars or constructing and installing wind turbines. At the same time, sustainable investors, regardless of whether they choose to invest via actively or passively managed funds, have to recognize that there are variations in the way sustainable investing can be implemented. This, in turn, introduces challenges for investors who have to take an extra step to ensure that their societal goals and objectives are aligned with their investment choices.  In addition to conducting financial due diligence either on their own or via the assistance of third parties, investors have to assess and clearly define their sustainability preferences, goals, and objectives.  Once they have done so, they will be in a better position to evaluate each investment manager’s/funds’ approaches to sustainable investing to ensure that their individual preferences are aligned with a given manager’s sustainability strategies and polices.  Some managers may offer complete and satisfactory levels of transparency in their published documents.  In the absence of same, however, a conversation with the management company may be required.  Sometimes, it will not be possible to achieve complete alignment between an investor’s personal values or desired societal outcomes.  In that case, some compromises will have to be made along the way or a target portfolio might have to be created—one consisting of funds, managed accounts and/or individual securities. 

Bloomberg Signs Principles for Responsible Investment (PRI) Last week, Bloomberg L.P., a privately held global information and technology company, announced that the firm, in its capacity as a US corporate retirement plan sponsor, was becoming a signatory to the Principles for Responsible Investment (PRI). The PRI, which was conceived in 2005 and launched by the United Nations in 2006 along with a number of large institutional investors, now operates as an independent UN sponsored advocate for responsible investment to promote its six Principles for Responsible Investment. At this juncture, these represent both a voluntary and aspirational collection of investment principles that offer a menu of possible actions for incorporating environmental, social and governance (ESG) issues into investment practices. Refer to Table 1. As a signatory, Bloomberg became the first US corporate retirement plan sponsor to sign on to the PRI principles, and one of about 1,750 signatories across 50 countries accounting for some $70 trillion in assets under management. In the process, Bloomberg also noted that it had reviewed opportunities to integrate environmental, social and governance considerations into the company’s global retirement plans and that this included adding an ESG-themed equity fund to its US 401(k) menu of plan investment options. While not the first company to do so, Bloomberg is still in the minority with respect to companies that have added a sustainable investing option to a defined contribution (DC) retirement plan[1]. This, however, is likely to change in time as an alignment of investor beliefs and interests and company values combine to stimulate further development and availability of effective sustainable investment product offerings. $7.5 Trillion Held in Employer-Based Defined Contribution Retirement Plans Based on data as of June 30, 2017, $7.5 trillion is held in employer-based defined contribution retirement plans. Of this sum, $5.1 trillion is held in 401(k) plans while the rest is sourced to other private-sector defined contribution plans ($575 billion), 403(b) plans ($949 billion), 457 plans ($297 billion) and the Federal Employees Retirement System’s Thrift Savings Plan (TSP) ($526 billion)[2]. Refer to Chart 1. About 65% of the assets held in these plans, or $3.3 trillion, are managed through mutual funds. The most common type of funds held in 401(k) plans are equity funds, followed by hybrid funds which also include target date funds. At the same time, sustainable investment options in 401(k) plans are quite limited, in terms of assets, number and type. Chart 1: Defined Contribution Plan Assets-$7.5 Trillion in Assets Less Than 1% of Retirement Plan Assets Invested in Sustainable Investments An analysis by the US SIF Foundation of the holdings that 2,390 private sector retirement plans reported as of year-end 2014 to the Department of Labor found that less than 1% of the assets were invested in funds that explicitly market themselves as socially responsible investments (SRI). An earlier survey by the US SIF Foundation and Mercer, which specifically focused on sponsors of defined-contribution plans, found that while 14% of the 421 DC plan sponsors responding to the survey offered one or more SRI options, SRI options represented a low percentage of assets (around 1%). Until recently, uncertainty about the compatibility of sustainable investing and a plan sponsor’s fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA) was a factor in inhibiting companies from introducing sustainable investing options in 401(k) plans. Guidance in late 2015 issued by the Department of Labor, however, has substantially clarified this issue and made it easier for plan sponsors to offer sustainable investments. DC Plans Primary Mechanism for Retirement Saving and Investing DC plans have become the primary mechanism by which American workers save and invest for retirement. Notwithstanding the emergence of defined contribution plans such as 401(k) as an anchor in helping workers achieve financial security during retirement, supported by numerous tax and savings advantages, data from the U.S. Department of Labor indicates that about 30% of eligible workers don’t participate in their employer's retirement investment plan. Auto enrollment, the process by which new employee workers are automatically enrolled in the plan unless they opt out, leads to higher rates of participation, with more than 90% electing to remain in the plan. On the other hand, this approach has led to lower levels of savings. According to the Employee Benefit Research Institute, based on data as of 2011, an estimated 40% of new workers at companies that automatically enroll workers in a 401(k) plan end up saving less than they would if they had signed up voluntarily. A variety of factors affect participation levels, including the complexity of plans and participation mechanics, planning time horizon and the reality that more pressing short-term needs take precedent relative to long-term retirement savings considerations, and the lack of financial literacy, to mention just a few. While not intended as a silver bullet, perhaps actuating a growing interest in sustainable investing on the part of individual plan participants by incorporating investing options through funds that pursue a positive societal outcome without compromising financial performance results could motivate employees to higher levels of participation and savings in company sponsored plans. Individual Investors Would Like Investments to Reflect Their Personal Values Surveys conducted by financial institutions lead to the observation that individual investors are interested in sustainable investing and millennials, in particular, are 2X more likely than other individual investors to invest in companies or funds that target specific social or environmental outcomes. This, according to research conducted by Morgan Stanley in 2015[3]. Similarly, a survey conducted by Natixis in 2016 with results published to coincide with the firm’s launch of the first of its kind ESG focused target date retirement product for 401(k) plans in the US, concludes that interest in ESG investments runs strong among plan participants. According to the survey, 84% of respondents across varying age groups, both male and female, said that they would like their investments to reflect their personal values. Refer to Chart 2 for survey results relating to interest in ESG investments. Chart 1: Natixis Global Asset Management 2016 Survey of Defined Contribution Plan Participants:   Interest in ESG Investments Source: Natixis Global Asset Management 2016 Survey of Defined Contribution Plan Participants Adding Sustainable Investing Options to Retirement Plans Can Potentially Drive Higher Levels of Participation and Savings Adding sustainable investing options to retirement plans can potentially tap into these attitudes and help motivate employees to achieve higher levels of participation and savings. Doing so can also serve to align a company’s mission and corporate values. That said, adding sustainable investment options to an existing line-up of investments through additional mutual fund offerings, either as a one-off or single offering within a dominant asset class, such as domestic large cap equities, or in a way that provides exposure to a balanced and diversified sustainable investment option may be challenging given the limitation of offerings in the space today. Regardless, companies will have to go through a formal due diligence evaluation process that likely includes the following action steps: 1.Formulating the rationale for the idea and determining the level of interest within the company or entity, such as educational institution or municipality. 2.Seeking input from plan participants. This is an important step because when it comes to investing in line with personal values or desired societal outcomes, no two individuals are likely to be exactly alike. Some are passionate about mitigating climate change while others might be averse to high CEO pay. Some might have an aversion to investing in firms engaged in the production of alcohol, guns, gambling, and tobacco while others may not hold such views. Still, others may gravitate to companies that provide clean water and clean energy while others may be less committed to these sectors. While it may be impossible satisfy all points of view, engaging and seeking inputs from plan participants will help identify the best way of meeting the diversity of opinion on this subject. 3.Evaluating the potential alignment of sustainable investment options within the context of the current plan offerings. 4.Reviewing and updating, as appropriate, the plan’s investment policy statement. 5.Establishing selection criteria and evaluating and selecting the proper investment options and funds. 6.Expanding periodic plan communications beyond financial results and plan/fund related material developments to include summaries of societal impacts achieved by the sustainable investment funds. 7.Monitoring funds, not only to ensure adherence to managerial and financial guidelines but also sustainability outcomes that could, in turn, be communicated back to plan participants.   1] Sustainable investing is an umbrella term that encapsulates social investing, SRI investing and ESG investing. Sustainable investing refers to 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. While it’s been changing somewhat, this concept captures a range of four prominent investment approaches or strategies.  These are: (1) Screening out or excluding companies from investment portfolios for a variety of reasons, (2) Impact investing and thematic investing or investing to achieve a  targeted social or environmental objective that is measurable, (3) Integrating environmental, social and governance (ESG) considerations as a proactive and integral component of the investment research and portfolio construction processes, and (4) Shareholder and bondholder advocacy and engagement in an effort to influence corporate behavior.  For further information, refer to The ABCs of Sustainable Investing   [2] Like a 401(k) plan, a 403(b) is a retirement plan that's designed for public schools and other nonprofits while a 457 plan is 457 Plan is a retirement savings benefits for governmental employees. [3] Morgan Stanley Institute for Sustainable Investing, “Sustainable Signals: The Individual Investor Perspective” (February 2015).

Tax-Exempt Sustainable Bond by MBTA  The Massachusetts Bay Transportation Authority (MBTA) announced on September 18, 2017 that it is planning to issue about $574 million in bonds on Tuesday, September 26, 2017, consisting, in part, of Subordinated Sales Tax Bonds 2017 Series A in the combined amount of $232.7 million, including $100.1 million, or 43% of Series A, in Sustainable Bonds (Subseries A-1)[1].  This offering is the first of its kind tax-exempt sustainable bond transaction in the U.S. or elsewhere and it should receive a strong reception from a growing base of sustainable institutional and retail investors.  Although likely overstated, according to US SIF demand for sustainable and impact investing is growing and investors now consider environmental, social and governance (ESG) factors across $8.72 trillion of professionally managed assets in the U.S.[2] MBTA Eligible Sustainable Projects The bond’s proceeds will be used by the MBTA to exclusively finance eligible projects as part of its capital investment program that provides environmental and/or social benefits.  Social benefits may include but are not limited to access to essential services and affordable infrastructure, critical health and safety improvements, and socioeconomic advancement. This offering, with its expected ratings of Aa3 from Moody’s Investors and AA from S&P Global, will be issued in multiples of $5,000 in principal amounts across varying maturities extending from 2025 to 2046 at rates and yields that are yet to be determined. Bonds maturing subsequent to 2027 are subject to early redemption. What are Sustainable Bonds? Sustainable bonds, which straddle green bonds on the one hand and social bonds on the other, are securities whose proceeds are exclusively applied to finance and re-refinance a combination of both green and social projects. Like green bonds and social bonds, sustainable bonds are generally issued pursuant to a set of voluntary guidelines or a best practices framework known as The Sustainable Bond Guidelines 2017. With the exception of the use of proceeds, these mirror the Green Bond Principles (GBP) administered by the International Capital Market Association (ICMA)[1].  Refer to Investing in Green Bonds.  The GBP guidelines include criteria applicable to the use of proceeds, the issuer’s process for project evaluation, the management of proceeds and follow-on reporting on a periodic basis. Still, there are variations around the interpretation and application of the GBP guidelines which may be mitigated by relying on external independent reviews for assurances or certifications to the effect that the bonds are aligned with the GBP. Sustainable bonds are equivalent to any other fixed income securities, both taxable and tax-exempt, except that these bonds raise funds specifically to finance new and existing socially oriented projects.  While the proceeds from the issuances are earmarked for sustainable projects, the bonds themselves are serviced from the cash flows attributable to the entire operations of the issuer--not just the sustainable projects. The first such bond was issued in the U.S. by Starbucks in May 2016. This was a $500 million, 2.45%, senior unsecured taxable bond maturing in 10-years with the proceeds earmarked to purchase sustainable coffee and make loans to coffee growers to help meet environmental and social standards developed by the firm.  The bonds relied on an external reviewer’s opinion. MBTA’s Sustainability Bond is Self-Designated The MBTA issue is a self-designated sustainability bond, meaning that the MBTA has voluntarily adopted the set of standards and elected to conform to the Sustainable Bond Guidelines.  The MBTA has established a framework for project evaluation and selection, to be conducted by a committee made up of internal stakeholders, directors and managers, management of proceeds and reporting on project impacts over time.  The MBTA disclosed that it expects to allocate the proceeds of the bonds within 24-months bonds and that the funds may be reallocated to other eligible projects at any time during the term of the bond.  Further, the MBTA expects to issue annual sustainable impact reports “using qualitative performance indicators and, where feasible, quantitative performance measures of the environmental and social objectives of the eligible projects.[2]”  Methods and key underlying assumptions will also be provided, and such reports will be produced until such time as the proceeds have been fully allocated.  At the same time, the MBTA has elected not to adopt the recommendation of The Sustainability Bond Guidelines to use an external reviewer to confirm the alignment of their sustainability bonds with key features of the guidelines. According to the MBTA, its capital investments program covers some 200 projects. Of these, about 125 have been deemed to qualify as sustainable.  While specific programs have not been directly linked to the anticipated $101.1 capital raise, the MBTA did provide some illustrations of eligible projects, as follows:   [1] Refer to Green Bond Principles (GBP). [2] Source:  Preliminary Official Statement dated September 15, 2017 [1] $281.7 million Subordinated Sales Tax Bond Anticipation Notes will also be offered. [2] Source: The Forum for Sustainable and Responsible Investment, Report on US Sustainable, Responsible and Impact Investing Trends 2016.

Summary Beyond implementing sustainable investing strategies by investing directly in individual securities, mutual funds, exchange-traded funds (ETFs) as well as other asset types, investors with a desire to achieve positive societal outcomes with their investments have another option, albeit a limited one at this time. This is the opportunity to invest via investment management advisory firms and their product offerings that, in turn, contribute part of their revenues or management fees to charitable organizations.  While not entirely a new concept, at least four firms have in the last two years or so introduced charitable giving programs. These firms include Aspiration Fund Adviser LLC, Infrastructure Capital Advisors, LLC (ICA), Loncar Investments and State Street Global Advisors (SSG).  It should be noted, however, that the investment product offerings available at these firms may not, in each instance, align with sustainable strategies and investors first need to conduct due diligence to assure themselves that the management firm and its product offerings are in alignment with their investment objectives and sustainability strategies.  Also, as is the case with investing more generally, investors should evaluate the management profile of the firm, the firm’s skills to effectively combine financial and sustainability characteristics, the fund’s demonstrated performance track record and consistency of results, and importantly, fund expenses as well as any other relevant operational considerations. Charitable Giving Programs Table 1 below lists the four investment management firms and their funds, whether the firm’s offer sustainable products along with a description of the charitable program. In the case of the four programs described in Table 1, the fund adviser has committed to direct to a single charity or multiple charities a percentage of the firm’s entire revenue stream or a percentage of the fees derived from a particular product offering. The percentage of fees to be allocated or the charitable organization may or may not be specifically identified. For example, State Street Global Advisers, a unit of State Street Bank, directs a portion of the revenue derived from the $329.9 million[1] SPDR SSGA Gender Diversity Index ETF (SHE) to nonprofit organizations. This is achieved through SHE Impacts[2], a donor-advised fund created by State Street to support gender-diverse leadership that helps develop girls as leaders in business and science. The fund, which is an index fund that tracks the SSGA Gender Diversity Index, invests in large-cap U.S. companies that are leaders in advancing women through gender diversity on their boards of directors and in management. In this instance, investing in the SHE ETF offers a dual benefit to sustainable investors interested in promoting and advocating in favor of gender diversity. That said, the exact dollar amounts or the recipient nonprofit organizations are not specifically disclosed. In contrast, Aspiration Fund Adviser LLC through its “Dimes Worth of Difference” program reflects the firm’s commitment to donate ten cents of every dollar of the company’s revenue to charitable activities focused on expanding economic opportunity by working with partners such as the Accion U.S. Network, a provider of micro-loans to assist struggling Americans transform their lives. Aspiration’s offers two mutual funds and a savings product. The first fund is the Redwood Fund, a $32.8 million sustainable fund started in 2015 that incorporates an analysis of companies’ sustainable environmental, workplace, and governance practices with the aim of finding investments that the adviser believes are poised for growth. The second fund, the Aspiration Flagship Fund, is a non-sustainable fund, with $9.6 million in assets. Conclusion The investment management listed above do not concentrate exclusively on offering sustainable mutual funds or ETFs, and, in the case of ICA, none at all. Further, with the exception of State Street, Loncar and Aspiration don’t offer a sufficiently diverse menu of funds to allow for the construction of a comprehensive investment program. To the extent any of the individual charitable programs are appealing, the corresponding sustainable, thematic oriented or broad-based funds may complement an existing portfolio. That said, as is the case with investing more generally, before investing in any one of these funds, investors are advised to conduct their own due diligence.  The funds should be evaluated starting with the management profile of the firm, the firm’s skills to effectively combine financial and sustainability characteristics, the fund’s demonstrated performance track record and consistency of results, and importantly, fund expenses as well as any other relevant operational considerations, such as the fund’s size and ears of operation, etc. In any case, investors have to be clear about their sustainability objectives to ensure that these are properly aligned with the fund profiles. Table 1: Fund Advisers with Charitable Giving Programs Notes of Explanation: (1) Refers to sustainable fund, (2) State Street offers other sustainable ETFs but SHE is the only ETF linked to a chartable program, (3) Investors in the funds may pay the Aspiration a fee in the amount they believe is fair, ranging from 0% to 2.00% of the value of the account. [1] As of August 31, 2017. Based on net assets as of that date, the fund generates about $660K in annual management fees. [2]  The donor-advised fund is administered by the National Philanthropic Trust, a 501(c) (3) public charity, SHE Impacts will provide grants to organizations that prepare and encourage girls to take their place in industries where women have low representation today, such as STEM (Science, Technology, Engineering, and Math). SHE Impacts also will seek to support programs that promote gender diverse leadership in the workplace.

Since the announcement on August 11 and successful placement of Tesla’s $1.80 billion Senior Notes, some disappointment has been expressed by the fact that Tesla didn’t formally qualify as green the company’s newly issued notes. It was suggested that issuing designated green bonds (or notes, in this instance) would have been a way to highlight Tesla’s obvious green credentials for the benefit of an investment community that’s thirsty for green bonds. A formal green bond designation would certainly have been noteworthy, especially in the U.S. where there has been and continues to be more limited corporate green bond issuance. A green bond label for a high-profile issuer like Tesla would have also served to sustain and even elevate awareness of climate change risks and needed mitigation efforts, particularly given the recent environmental policy shifts in the U.S. Moreover, such a designation would have potentially qualified the bonds for investment by a larger segment of the sustainable investing universe, consisting of various actively and passively managed funds and separate accounts, which is being hamstrung by limited supplies of green bonds. In the first half of 2017, about $49.1 billion in green bonds have been issued. That said, it seems difficult to argue that Tesla’s notes, and other fixed-income instruments with similar profiles, are not green, on their face, even if the offering does not embrace the Green Bond Principles, a set of voluntary best practice guidelines that have been widely adopted to qualify green bonds. After all, Tesla is on a mission is to accelerate the world’s transition to sustainable energy and it is leading an electric automobile revolution that could eventually bring about a material reduction in greenhouse gas emissions. This argues that even if the bonds are not formally designated as green, the Tesla notes, and other bonds with similar profiles, should be considered as such by investors.Tesla's Sustainable BackgroundOn August 11, 2017, Tesla, Inc. agreed to issue and sell $1.80 billion aggregate principal amount of 5.30% Senior Notes due 2025 in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act. The notes are senior unsecured debt obligations of the company and will initially be guaranteed on a senior unsecured basis by SolarCity Corporation, a wholly-owned subsidiary of Tesla. The company intends to use the net proceeds from this offering to strengthen its balance sheet during the period of rapid scaling with the launch of Model 3, and for general corporate purposes. The obligations are considered non-investment grade, having been assigned a B3 rating with a stable outlook by Moody’s Investors Service.What are Green Bonds?Green bonds are equivalent to other fixed income securities, both taxable and tax-exempt, except that these types of bonds or other similar debt instruments raise funds specifically to finance new and existing projects with environmental benefits. 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) . The GBP, which emphasize disclosure and transparency, includes criteria 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 may lead to some uncertainties. The offerings can be informed and the potential uncertainties can be mitigated, but not eliminated entirely, by relying on external independent reviews for assurances or certifications which are recommended but not required by the GBP. Organizations like Climate Bond Initiative, CICERO (Center for International Climate & Environmental Research-Oslo), Moody’s Investors and Sustainalytics, to mention just a few, offer such external reviews. About two-thirds of green bonds globally come to market with the benefit of such independent reviews.Green Bonds Project CategoriesGreen bond proceeds may be used to finance a variety of project categories aimed at addressing key areas of concern such as climate change, natural resource depletion, and loss of biodiversity and/or pollution control. While not limited to these, the following categories will generally qualify for the ultimate investment of 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.Green Bonds Uniquely Suited to Finance Environmental Risk Mitigation and Adaptation InitiativesFinancial considerations aside, for investors focused on supporting the Paris Climate Agreement objectives of reducing greenhouse gas emissions to levels consistent with holding the increase in the global average temperature to well below 2° Celsius relative to pre-industrial levels, and who focus on environmental risks and opportunities, 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 and issuers who qualify their bonds as green make commitments to disclose, in the form of periodic reporting, usually annually, the allocation of proceeds and their expected environmental impacts, either in quantitative and/or qualitative terms. At the same time, their yields, as well as pricing, are in line with any other equivalent bond issued by the same issuer.Tesla’s Senior NotesTable 1 summarizes in brief the best practices encapsulated by the Green Bond Principles and the alignment of Tesla’s notes.Tesla’s Use of Bond ProceedsAs noted above, Tesla did not formally integrate the GBP’s best practices into its offering and as such the company’s senior notes were not qualified as green. That said, Tesla intends to use the net proceeds from this offering to strengthen its balance sheet during the period of rapid scaling with the launch of its Model 3 electric vehicle, a lower-priced sedan designed for the mass market, and for general corporate purposes. The company’s core strategy is to design, develop, manufacture, and sell high-performance fully electric vehicles. It also designs, manufactures, installs and sells solar energy generation and energy storage products and energy products. It is currently producing and selling a Model S sedan and a Model X SUV and the sales of these vehicles represents the firm’s primary source of revenues, even post Tesla’s Solar City merger. Beyond electric automobiles, the company’s other lines of business include alternative renewable energy products for residential and commercial applications, also eligible project categories under the GBP.Quantifying Environmental Benefits and Impact While Tesla is not committed to disclosing environmental benefits and impacts in line with the GBP best practices, it’s not difficult for investors to conduct a simplified back of the envelope calculation of the minimum potential environmental benefits associated with its automotive activities alone. For example, according to the Environmental Protection Agency (EPA), the annual estimated emissions sourced to a typical passenger vehicle in the U.S. is 4.7 metric tons of CO2. Assuming that each of Tesla’s electric vehicles displaces a typical combustion engine passenger vehicle, the sale of Model S and Model X vehicles in 2017, conservatively estimated at 94,200 , is already contributing to emissions savings of about 442,740 metric tons of CO2 per year. By the end of 2018, this could be increased to 2.35 million metric tons of CO2 per year, based on Tesla’s optimistic production projections, some hold, and contribute toward the reduction of emissions in the transportation segment that accounts for about 32 percent of total U.S. CO2 emissions.ConclusionsFinancial risk considerations aside, green bonds are uniquely suited to meet the objectives of investors focused on environmental considerations supporting the Paris Climate Agreement objectives of keeping the earth’s surface temperatures from rising above 2° Celsius as well climate-related risks and opportunities. While this may not be the case for all issuers, and in particular bond offerings with limited disclosure, the Tesla notes, even if they were not qualified as green, are consistent with a green mandate and a 2° Celsius scenario. Regrettably, the Tesla notes were only made available to qualified institutional investors and retail investors were excluded from investing in these debt instruments directly. They could, however, do so indirectly through mutual funds and ETFs that might have purchased these notes. At the same time, the broader universe of sustainable investors, including any with ESG mandates, for example, will also have to address any Tesla specific governance and social considerations before deciding to invest in the company’s notes.

In a filing with the Securities & Exchange Commission as of August 4, 2017 BlackRock Fund Advisors recorded substantial reductions in the expense ratios applicable to two international equity oriented ESG Exchange Traded Funds. These ETFs included the iShares MSCI EAFE ESG Optimized ESG ETF (ESGD) and the iShares MSCI EM ESG Optimized ETF (ESGE) whose expense ratios dropped from 0.40% or 40 bps to 0.20% or 20bps and from 0.45% or 45 bps to 0.25% or 25 bps--reductions of 50% and 45%.  A third fund, the domestic iShares MSCI USA ESG Optimized ETF (ESGU), also experienced a significant decline in its expense ratio from 0.28% or 28 bps to 0.15% or 15 bps, or a reduction of 46%. Launched in June 2016 as the iShares MSCI EAFE ESG Select ETF and the iShares MSCI EM ESG Select ETF, the ETFs were renamed as of August 22, 2016. The funds have benefited from strong developed Asian and European equity markets performance as well as emerging markets performance during the 12-month interval to July 31, 2017.  The iShares MSCI EAFE ESG Optimized ESG ETF and the iShares MSCI EM ESG Optimized ETF gained 17.08% and 25.57%, respectively and have tracked their corresponding non-ESG indexes, either positively or negatively, within 1.1% or less.  See Chart 1. ESGU was launched as of December 1, 2016 and has registered a gain of 11.62% during the 7-months through July 31, 2017 versus 11.86% for the underlying index. Since their inception, ESGD, ESGE and ESGU have attracted $122 million, $74.5 million and $5.4 million, respectively. They are three of 56 sustainable ETFs funds that have garnered almost $6.0 billion in assets under management.  BlackRock’s fee reduction may be designed to accelerate their growth and improve their competitive position relative to Nuveen Fund Advisors’ recently introduced NuShares ETFs that are focused on similar market segments with their ESG tilts and expense ratios ranging from 35 bps and 45 bps.  Regardless, this is a positive development for sustainable investors, especially so since there only a few actively managed international and emerging market ESG funds with attractive attributes that combine sustainable practices, performance and cost. By lowering their expense ratios to 28 bps, 25 bps and 20 bps, the fees fall into the lowest expense ratio category or first quartile for ETF funds whose expense ratios, based on an analysis of these as of July 31, 2017 adjusted for the new BlackRock fees, average 0.46% and range from a minimum expense ratio of 0.12% and a maximum of 0.95%. Expense ratios that fall into the lowest expense ratio category or first quartile extend from 0.12% to 0.335%[1]. The ESG strategies applicable to the three funds are described below. iShares MSCI EAFE ESG Optimized ESG ETF (ESGD) The Fund seeks to track the investment results of the MSCI EAFE ESG Focus Index, an optimized equity index designed to reflect the equity performance of companies that have positive environmental, social and governance (ESG) characteristics as determined by MSCI while exhibiting risk and return characteristics similar to those of the MSCI Market Cap Weighted Index. The index excludes securities of companies involved in the business of tobacco and controversial weapons companies, as well as securities of companies involved in very severe business controversies (as determined by MSCI). After excluding firms that fall into these categories, MSCI then follows a quantitative process that is designed to determine optimal weights for securities to maximize exposure to securities of companies with higher ESG ratings, subject to maintaining risk and return characteristics similar to the index.  For each industry, MSCI identifies key ESG issues that can turn into unexpected costs for companies in the medium to long term. MSCI then calculates the size of each company’s exposure to each key issue based on the company’s business segment and geographic risk and analyzes the extent to which companies have developed robust strategies and programs to manage ESG risks and opportunities. Using a sector-specific key issue weighting model, companies are rated and ranked in comparison to their industry peers. As of June 30, 2016, the MSCI Market Cap Weighted Index consisted of securities from the following 21 developed market countries or regions: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. The index may include large- and mid-capitalization companies. Components of the index primarily include consumer discretionary, financials, healthcare and industrials companies. iShares MSCI EM ESG Optimized ETF (ESGE) The fund seeks to track the investment results of the MSCI Emerging Markets ESG Focus Index, an optimized equity index designed to reflect the equity performance of companies that have positive environmental, social and governance (ESG) characteristics (as determined by MSCI), while exhibiting risk and return characteristics similar to those of the MSCI Market Cap Weighted Index. The index excludes securities of companies involved in the business of tobacco and controversial weapons companies, as well as securities of companies involved in very severe business controversies (as determined by MSCI). After these companies have been excluded from the universe of eligible securities, MSCI then follows a quantitative process that is designed to determine optimal weights for securities to maximize exposure to securities of companies with higher ESG ratings, subject to maintaining risk and return characteristics similar to the MSCI Market Cap Weighted Index. For each industry, MSCI identifies key ESG issues that can turn into unexpected costs for companies in the medium to long term. MSCI then calculates the size of each company’s exposure to each key issue based on the company’s business segment and geographic risk and analyzes the extent to which companies have developed robust strategies and programs to manage ESG risks and opportunities. Using a sector-specific key issue weighting model, companies are rated and ranked in comparison to their industry peers. As of June 30, 2016, the MSCI Market Cap Weighted Index consisted of securities from the following 23 countries: Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Peru, the Philippines, Poland, Qatar, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey and the United Arab Emirates. The index may include large- and mid-capitalization companies. Components of the index primarily include consumer discretionary, financials and information technology companies. iShares MSCI USA ESG Optimized ETF (ESGU) The fund seeks to track the investment results of the MSCI USA ESG Focus Index, an optimized equity index designed to reflect the equity performance of U.S. companies that have positive environmental, social and governance (ESG) characteristics (as determined by MSCI) while exhibiting risk and return characteristics similar to those of the broader, non-ESG oriented, MSCI USA Index. MSCI begins with the MSCI USA Index and excludes securities of companies involved in the business of tobacco and controversial weapons companies, as well as securities of companies involved in very severe business controversies (as determined by MSCI), and then follows a quantitative process that is designed to determine optimal weights for securities to maximize exposure to securities of companies with higher ESG ratings, subject to maintaining risk and return characteristics similar to the MSCI USA Index. For each industry, MSCI identifies key ESG issues that can lead to unexpected costs for companies in the medium- to long-term. MSCI then calculates the size of each company’s exposure to each key issue based on the company’s business segment and geographic risk and analyzes the extent to which companies have developed robust strategies and programs to manage ESG risks and opportunities. Using a sector-specific key issue weighting model, companies are rated and ranked in comparison to their industry peers. The MSCI USA Focus Index may include large- or mid-capitalization companies. Components of the MSCI USA Focus Index primarily include financials, healthcare and information technology companies. [1] Based on an analysis of 54 sustainable ETFs as of July 31, 2017.  Data source:  STEELE Mutual Fund Expert, Morningstar data.

Introduction and Summary Over the course of the previous two calendar years, the greatest number of sustainable fixed income or bond mutual funds and share classes, a total of 26, were added to an already existing stable of sustainable bond offerings the first of which was introduced as early as 1982. Based on the number of launches so far in 2017 when 13 new funds/share classes were introduced through the end of May, the record of 2015 and 2016 is likely to be exceeded.  See Chart 1.  Significantly, the new funds were launched or repurposed by investment management firms that have not traditionally operated in the sustainable fixed income mutual fund space. These include firms such as BlackRock, J.P. Morgan, John Hancock and PIMCO, to name just four that are changing the landscape of the sector by introducing more robust sustainable investing strategies and options while moving away from a focus on ethical and religious mandates that rely almost entirely on exclusionary practices.  Since these funds are relatively new, it’s too early to evaluate their performance results net of fees. New Fixed Income Sustainable Fund Launches In 2016 and 2015 a total of 26 funds and share classes were launched. This is more than in any previous year and represents a greater number even than the prior five years combined.  These new offerings included 7 share classes offered by already existing funds.  At the same time, 19 funds and share classes were launched by investment advisory firms that have not previously managed or distributed mutual funds in the sustainable bond sector.  So far in 2017, 13 new funds/share classes have been added.  These include newly launched funds and share classes as well as repurposed fixed income funds.  Including the new funds and share classes added through the end of May 2017, investors can choose from 110 available sustainable bond funds and share classes.  These funds are distributed by 26 different firms featuring both retail and institutional share classes that have accumulated $16.2 billion in assets managed across 12 fixed income investment categories and varying sustainable strategies.  Refer to Chart 2.  Of these, institutional funds represent $9.1 billion in assets or about 56% of net assets.  The remainder is sourced to retail investors. Growth in Sustainable Assets Under Management According to the 2014 Global Sustainable Investment Review, an estimated $21.4 trillion in worldwide assets under management are linked to SRI investments[i].  This represents a strong increase of 57% over the last two years when $13.6 trillion was sourced to sustainable strategies.  According to a more recent report focused just on the US market as of early 2016, assets sourced to sustainable strategies reached $8.7 trillion, or an increase of 33% since 2014[ii].  While these numbers are likely inflated due largely to confusion over terminology, lack of industry standards and definitions as well as double counting, it’s difficult to argue that the trend in favor of SRI investing, or sustainable investing, is experiencing a strong upswing. Available Sustainable Bond Fund Strategies As also noted in Chart 2, sustainable investing bond funds straddle 12 different traditional bond fund categories or investment objectives but these are dominated by five categories. These include intermediate-term, intermediate-term government, short-term, ultra-short and high-yield funds that, based on assets under management, represent $13.9 billion and account for about 86% of sustainable bond assets.  Seven other bond fund categories make up the rest, for a total of $2.3 billion or 14% of total net assets. Changing Profile of Sustainable Fixed Income Mutual Funds The expansion in the number and type of sustainable fixed income funds since 2015 is, in part, attributable to the addition of new share classes on the part of investment managers that have been offering sustainable investing products for some years. These include a total of seventeen managers that have been offering sustainable investing bond mutual funds through the end of 2014.  But contributing more meaningfully to the expansion has been the entry of new managers with a variety of robust sustainable investing strategies that combine one or more of the following strategies:  Exclusions, ESG integration, impact investing and bondholder advocacy.  In fact, nine new managers entered the sustainable fixed income sphere since 2015 by launching ten new bond fund offerings consisting of 30 share classes.  These included two firms, PIMCO and J.P. Morgan that repurposed funds already in existence. Refer to PIMCO and JPMorgan New Product Profiles.  On top of that, one fund firm already operating in the space expanded its offerings by launching a core bond fund.  As of May 31, 2017, a total of 26 firms manage mutual fund products, an increase of 31% over the previous 27 months. The new entries are changing the landscape of the sector by introducing more robust sustainable investing strategies and options while moving away from a focus on ethical and religious mandates that rely almost entirely on exclusionary practices. Such strategies have historically delivered below market-based rates of return, net of expenses. Since the new crop of funds are relatively new, it’s too early to evaluate how their performance results might evolve over time. [i] Source: 2012 Global Sustainable Investment Review, Global Sustainable Investment Alliance [ii] Source: US SIF Foundation, 2016 Trends Report on Sustainable, Responsible, and Impact Investing

  Synopsis Like its counterpart the PIMCO Total Return ESG Fund, the PIMCO Low Duration Fund, which is a short-term corporate bond fund, changed its name to PIMCO Low Duration ESG Fund effective January 6, 2017. At the same time, the fund modified its investment strategy to take into account the efficacy of an issuer’s environmental, social and governance (ESG) practices, to exclude securities issued by certain issuers (exclusionary strategies) from the portfolio and to engage proactively with issuers to encourage them to improve their ESG practices.  The fund’s one, three, five and 10 year performance track record net of fees has been consistently above benchmark across its three institutionally oriented share classes.  But its ESG strategy is newly adopted and without the benefit of a track record.  The outcome will take some time to become evident so it’s not as yet possible to evaluate the firm’s strategy implementation.  That said, factors that contribute to the High Conviction assessment are PIMCO’s formidable fixed income franchise, the explicit nature of the newly adopted ESG strategy and the fact that the firm is dedicating resources to the ESG initiative.  This, in combination with an already established fund that at the end of June held $164.9 million in net assets gives the team a strong foundation to implement the strategy. So far, the fund’s year-to-date performance exceeds that of its BofA Merrill Lynch 1-3 Year U.S. Treasury Index.  But as in the past, the fund’s future results have to overcome higher than median expense ratios, the lowest of which is 0.52% applicable to the Inst Class shares and rising to 0.77% applicable to the Admin Class.  The fund is not directly open to retail investors give that the three share classes are each subject to $1.0 million initial investments. Analysis The fund, which is managed by Pacific Investment Management Company LLC (PIMCO), a member of the Allianz Group and one of the top 10 asset managers in the world with about $1.6 trillion in assets under management, seeks to achieve a maximum total return while preserving capital. To do so, the fund invests at least 65% of its total assets in a diversified portfolio of fixed income instruments of varying maturities, including U.S. and non-U.S. securities and derivative instruments.  The fund invests primarily in investment grade instruments, but it may invest up to 10% of its total assets in high yield (non-investment grade) securities. Also, the fund may invest up to 30% of its total assets in securities denominated in foreign currencies, with limitations on its foreign currency exposures and exposures to securities and instruments that are economically tied to emerging market countries, and may invest beyond this limit in U.S. dollar-denominated securities of foreign issuers. While providing significant flexibility this strategy has not produced above average volatility in returns, however, turnover has been considerably higher than average at 257% as of the last fiscal year.  The average portfolio duration of the fund, which recently stood at 1.57 years, normally varies from one-to-three years based on the investment manager’s interest rate forecasts. The fund has adopted a set of exclusionary practices, an ESG integration strategy and issuer engagement approach to improve ESG practices that are clearly set out in the fund’s prospectus. These are described more fully, as follows: Exclusionary practices The fund will not invest in the securities of any issuer determined to be engaged principally in the manufacture of alcoholic beverages, tobacco products or military equipment, the operation of gambling casinos, the production of coal, or in the production or trade of pornographic materials. In addition, the fund will not invest in the securities of any issuer determined to be engaged principally in the provision of healthcare services or the manufacture of pharmaceuticals, unless the issuer derives 100% of its gross revenues from products or services designed to protect and improve the quality of human life, as determined on the basis of available information. To the extent possible on the basis of available information, an issuer will be deemed to be principally engaged in an activity if it derives more than 10% of its gross revenues from such activities. In addition, the fund will not invest directly in securities of issuers that are engaged in certain business activities in or with the Republic of the Sudan. ESG Integration The fund may avoid investment in the securities of issuers whose business practices with respect to the environment, social responsibility, and governance (ESG) are not to PIMCO's satisfaction. In determining the efficacy of an issuer's ESG practices, PIMCO will use its own proprietary assessments of material ESG issues and may also reference standards as set forth by recognized global organizations such as entities sponsored by the United Nations. Shareholder/Bond holder engagement PIMCO may engage proactively with issuers to encourage them to improve their ESG practices. PIMCO's activities in this respect may include, but are not limited to, direct dialogue with company management, such as through in-person meetings, phone calls, electronic communications, and letters. Through these engagement activities, PIMCO seeks to identify opportunities for a company to improve its ESG practices, and will endeavor to work collaboratively with company management to establish concrete objectives and to develop a plan for meeting these objectives. The fund may invest in securities of issuers whose ESG practices are currently suboptimal, with the expectation that these practices may improve over time either as a result of PIMCO's engagement efforts or through the company's own initiatives. It may also exclude those issuers that are not receptive to PIMCO's engagement efforts, as determined in PIMCO's sole discretion. Performance Track Record While the PIMCO Low Duration Fund has been operating since its launch as of December 31, 1996, the new ESG mandate only recently became effective. Under its prior mandate, the fund has delivered strong net returns relative to the BofA Merrill Lynch 1-3 Year U.S. Treasury Index by consistently exceeding the benchmark across each of the three share classes over the previous 1, 3, 5 and 10 year time periods by margins ranging from a low of 0.06% to a high of 1.78%. So far this year, the fund is off to a good start and it is outperforming the BofA Merrill Lynch 1-3 Year U.S. Treasury Index on a year-to-date basis to June 30, 2017.   See Exhibit 1.                 Expense Ratios The fund’s expense ratios are above the median for an institutionally oriented fund. Of its three share classes, the lowest, applicable to Inst Class, is subject to a 0.52% expense ratio.  This places the charge above the median at 0.47% for a universe of institutionally oriented corporate fixed income funds and slightly below the threshold of 0.55% for the third quartile.  The expense ratios charged Class P shareholders and Admin Class shares, at 0.62% and 0.77% rank even worse and fall into the fourth quartile[1].   For a description of the methodology used to stratify expense ratios, refer to Stratifying Expense Ratios:  An Explanation. Bottom Line With its minimum investment of $1 million, the fund is not available to retail investors on a direct basis. Further, while PIMCO Low Duration Fund has been operating since December 31, 1996, the fund’s modified investment strategy that takes into account the efficacy of an issuer’s environmental, social and governance (ESG) practices, to exclude securities issued by certain issuers (exclusionary strategies) from the portfolio and to engage proactively with issuers to encourage them to improve their ESG practices, has only been in effect since January 6, 2017. The fund’s one, three, five and 10 year performance track record net of fees has been consistently above benchmark across its three institutionally oriented share classes.  But its ESG strategy is newly adopted and without the benefit of a track record.  The outcome will take some time to become evident so it’s not as yet possible to evaluate the firm’s strategy implementation.  That said, factors that contribute to the High Conviction assessment are PIMCO’s formidable fixed income franchise, the explicit nature of the newly adopted ESG strategy and the fact that the firm is dedicating resources to the ESG initiative.  This, in combination with an already established fund that at the end of June held $164.9 million in net assets gives the team a strong foundation to implement the strategy. So far, the fund’s year-to-date performance exceeds that of its BofA Merrill Lynch 1-3 Year U.S. Treasury Index.  But as in the past, the fund’s future results have to overcome higher than median expense ratios, the lowest of which is 0.52% applicable to the Inst Class shares and rising to 0.77% applicable to the Admin Class.  The fund is not directly open to retail investors give that the three share classes are each subject to $1.0 million initial investments [1] Based on an analysis of expense ratios applicable to 123 institutional funds as of June 30, 2017. Refer to article entitled Stratifying Expense Ratios:  An Explanation.

PTSAX Synopsis Effective January 6, 2017 the PIMCO Total Return Fund, which is an intermediate-term diversified investment grade portfolio of fixed income instruments, including non U.S. dollar denominated securities, changed its name to the PIMCO Total Return ESG Fund and at the same time modified its investment strategy to take into account the efficacy of an issuer’s environmental, social and governance (ESG) practices, to exclude securities issued by certain issuers (exclusionary strategies) from the portfolio and to engage proactively with issuers to encourage them to improve their ESG practices. The fund’s one, five and 10-year performance results have been above benchmark. But its ESG strategy is newly adopted and without the benefit of a track record.  The outcome will take some time to become evident so it’s not as yet possible to evaluate the firm’s strategy implementation.  That said, factors that contribute to the High Conviction assessment are PIMCO’s formidable fixed income franchise, the explicit nature of the newly adopted ESG strategy and the fact that the firm is dedicating resources to the ESG initiative which, when combined with the fund’s $1.0+ billion in net assets (assuming no defections), should give the team a strong headwind to implement the strategy. So far, the fund’s year-to-date performance exceeds that of its Bloomberg-Barclays U.S. Aggregate Bond Index benchmark. But as in the past, the fund’s future results have to overcome higher than median expense ratios, the lowest of which is 0.55% applicable to the Inst Class shares and higher for the Class P and Admin Class shares. The fund is not directly open to retail investors given that the three share classes are each subject to $1.0 million initial investments. PIMCO Total Return ESG Fund Detailed Analysis The fund, which is managed by Pacific Investment Management Company LLC (PIMCO), a member of the Allianz Group and one of the top 10 asset managers in the world with about $1.6 trillion in assets under management, seeks to achieve a maximum total return, consistent with the preservation of capital and prudent investment management. It generally invests at least 65% of its total assets in a diversified portfolio of fixed income instruments, including bonds, debt securities and other similar instruments issued by various U.S. and non-U.S. public- or private-sector entities. The fund will invest primarily in investment grade securities, but may invest up to 20% of its total assets in high yield securities, including mortgage-related securities. The fund may also invest, within limits, in securities denominated in foreign currencies, in U.S. dollar-denominated securities of foreign issuers, and in securities and instruments that are economically tied to emerging market countries.  These types of exposures are expected to contribute to the fund’s higher volatility profile relative to its designated Bloomberg-Barclays U.S. Aggregate Bond Index benchmark. The fund’s average portfolio duration normally varies within two years (plus or minus) of the portfolio duration of the securities comprising the Bloomberg Barclays U.S. Aggregate Index which, as of May 31, 2016, was 5.35 years. The fund has adopted a set of exclusionary practices, an ESG integration strategy and issuer engagement approach to improve ESG practices that are clearly set out in the fund’s prospectus. These are described more fully, as follows: Exclusionary practices The fund will not invest in the securities of any issuer determined to be engaged principally in the manufacture of alcoholic beverages, tobacco products or military equipment, the operation of gambling casinos, the production of coal, or in the production or trade of pornographic materials. In addition, the fund will not invest in the securities of any issuer determined to be engaged principally in the provision of healthcare services or the manufacture of pharmaceuticals, unless the issuer derives 100% of its gross revenues from products or services designed to protect and improve the quality of human life, as determined on the basis of available information. To the extent possible on the basis of available information, an issuer will be deemed to be principally engaged in an activity if it derives more than 10% of its gross revenues from such activities. In addition, the fund will not invest directly in securities of issuers that are engaged in certain business activities in or with the Republic of the Sudan. ESG Integration The fund may avoid investment in the securities of issuers whose business practices with respect to the environment, social responsibility, and governance (ESG) are not to PIMCO's satisfaction. In determining the efficacy of an issuer's ESG practices, PIMCO will use its own proprietary assessments of material ESG issues and may also reference standards as set forth by recognized global organizations such as entities sponsored by the United Nations. Shareholder/Bond holder engagement PIMCO may engage proactively with issuers to encourage them to improve their ESG practices. PIMCO's activities in this respect may include, but are not limited to, direct dialogue with company management, such as through in-person meetings, phone calls, electronic communications, and letters. Through these engagement activities, PIMCO seeks to identify opportunities for a company to improve its ESG practices, and will endeavor to work collaboratively with company management to establish concrete objectives and to develop a plan for meeting these objectives. The fund may invest in securities of issuers whose ESG practices are currently suboptimal, with the expectation that these practices may improve over time either as a result of PIMCO's engagement efforts or through the company's own initiatives. It may also exclude those issuers that are not receptive to PIMCO's engagement efforts, as determined in PIMCO's sole discretion. PTSAX Performance Track Record While the PIMCO Total Return fund has been operating since May 1, 1999, its new ESG mandate only became effective January 6, 2017. Under the prior mandate, with the exception of the three-year period through June 30, 2017, the fund has delivered strong net returns relative to the Bloomberg-Barclays U.S. Aggregate Bond Index albeit with somewhat higher levels of volatility. While still in a transition period, the fund is off to a good start in 2017 and it is outperforming the Bloomberg-Barclays U.S. Aggregate Bond Index on a year-to-date basis.   See Exhibit 1.   Funds' Expense Ratios The fund’s expense ratios are above the median for an institutionally oriented fund. Of its three share classes, the lowest is subject to a 0.55% expense ratio.  This places the fund’s fees above median for a universe of institutionally oriented corporate fixed income funds and on the cusp of the third quartile.  The expense ratios of the P Class and Admin Class, at 0.65% and 0.80% rank even worse and fall into the fourth quartile[1]. PIMCO Total Return ESG Fund (PTSAX) Bottom Line With its minimum investment of $1 million, the fund is not available to retail investors on a direct basis. Further, while PIMCO Total Return has been operating since 1 May 1999, the fund’s modified investment strategy that takes into account the efficacy of an issuer’s environmental, social and governance (ESG) practices, to exclude securities issued by certain issuers (exclusionary strategies) from the portfolio and to engage proactively with issuers to encourage them to improve their ESG practices, has only been in effect since January 6, 2017. The fund’s one, five and 10-year performance results have been above benchmark.  But its ESG strategy is newly adopted and without the benefit of a track record and the outcomes will take some time to become evident so it’s not as yet possible to evaluate the firm’s strategy implementation.  That said, factors that contribute to the High Conviction assessment are PIMCO’s formidable fixed income franchise, the explicit nature of the newly adopted ESG strategy and the fact that the firm is dedicating resources to the ESG initiative which, when combined with the fund’s $1.0+ billion in net assets (assuming no defections), should give the team a strong headwind to implement the strategy. So far, the fund’s year-to-date performance exceeds that of its Bloomberg-Barclays U.S. Aggregate Bond Index benchmark. But as in the past, the fund’s future results have to overcome higher than median expense ratios, the lowest of which is 0.55% applicable to the Inst Class shares and higher for the P Class P and Admin Class shares. [1] Based on an analysis of expense ratios applicable to 123 institutional funds as of June 30, 2017. Refer to the article entitled Stratifying Expense Ratios:  An Explanation.

In the first six months of the year through June 30, 2017, 29 U.S. entities issued an equivalent number of taxable and tax-free green bonds valued at about $8.0 billion. This is roughly in line with U.S. issuance during the first 6 months of 2016. Worldwide volume, on the other hand, reached $49.1 billion so far this year versus about $37.2 billion last year, or a 32% increase.  Based on year-to-date activity, the U.S. represents about 16.3% of global issuance.  The pace of issuance during the second quarter, which was fueled by tax-exempt issuers that accounted for 50% of the volume, eclipsed the first three months of the year by a ratio of 2.6X—perhaps signaling the start of a response to the damaging environmental policy initiatives commenced by the present administration in Washington DC.  Even with 29 issues hitting the market so far this year, retail investors are still likely to be challenged in efforts to directly invest in green bonds for their portfolios due to competition from institutional investors with their strong demand for green bonds, buy and hold strategies and a continuing demand-supply imbalance. As an alternative, investors can also gain exposure to green bonds through a number of mutual funds and one newly launched ETF. What are Green Bonds? Green bonds are equivalent to other fixed income securities, both taxable and tax-free, except that these types of bonds raise funds specifically to finance new and existing projects with environmental benefits that are ultimately geared toward reducing greenhouse gas emissions and limiting the effects of climate change. 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 the short-to-long term as well as different rates of interest or yields.  Importantly, green bonds trade at levels that are equivalent to their non-green counterparts.  In other words, investors can support environmental projects with the intent to achieve positive outcomes while at the same time realizing market-based rates of return. Refer to the article entitled Investing in Green Bonds. Who Issued Tax-Exempt Green Bonds in 1H 2017? While green bonds were issued by four issuer types during the first six months of the year, the municipal tax-exempt sector led the pack with $4.1 billion in bonds that accounted for 51% of total volume. The second quarter saw an uptick in tax-free issuances that rose from $1.2 billion to almost $3 billion in the second quarter.  Corporates, led by Apple Inc. which issued its second green bond in the amount of $1.0 billion, were the next largest but distant second place issuers. Third were securitized transactions, consisting of Property Assessed Clean Energy (PACE) loans and residential solar panel loans, with 4 transactions and almost $800 million.  Refer to Exhibit 1.    Refer to Appendix 1 at the end of the article for a complete listing of U.S. green bond issuers. Green Bond Investment Options Even with 29 issues hitting the market so far this year, retail investors are still likely to be challenged in their efforts to directly invest in green bonds for their portfolios. This is due to competition from institutional investors with their strong appetite for green bonds, buy and hold strategies and a continuing demand-supply imbalance.  Oversubscription is common as green bonds tend to be gobbled up by institutional investors.  According to some sources green bonds tend to be oversubscribed by 1.5X to 3X the final book.  As an alternative, investors can also gain exposure to green bonds through a number of mutual funds and one newly launched ETF.  These investment offerings, however, should be evaluated on a case by case basis.  See Exhibit 2 for a listing of currently available green bond funds and ETFs.   Refer also to article entitled Investing in Green Bonds.  Exhibit 2: Listing of currently available green bond funds and ETFs     Appendix 1: Green Bonds, Type and Dollar Amount Issued:  January 1, 2017 - June 30, 2017 (Listed in alphabetical order)  

Last week BlackRock announced the launch of two fixed income ETFs, the iShares ESG USD Corporate Bond ETF (SUSC) and the iShares ESG 1-5 Year USD Corporate Bond ETF (SUSB). These are intended to track fixed income indexes designed to deliver similar risk and return characteristics as the traditional benchmarks but further qualified on the basis of constituent environmental, social and governance (ESG) scores while at the same time excluding certain companies from consideration. While not equivalent to a broad-based U.S. focused fixed income benchmark, such as the widely followed Bloomberg Barclays Aggregate Bond Index, these are the first of their kind passively managed fixed income ESG ETFs which are not even available as yet in the form of mutual funds. Just as significantly, the two ETFs are offered at the lowest expense ratios relative to other sustainable ETFs. The addition of these two fixed income ETFs brings to three the number of sustainable fixed income ESG oriented ETFs, with the first consisting of a green bond index ETF launched by VanEck in January of this year. The two new ETFs expand the roster of what is now a universe of 50 sustainable ETFs that have attracted a total of $5.6 billion in net assets as of June 30, 2017. The BlackRock iShares Index ESG Fixed Income ETFs The first fund, the iShares ESG USD Corporate Bond ETF (SUSC), seeks to track the investment results of the Bloomberg Barclays MSCI US Corporate ESG Focus Index which, in turn, is designed to capture the performance of U.S. dollar-denominated, investment-grade fixed rate and taxable corporate bonds that have remaining maturities of greater than or equal to one year issued by companies that have positive ESG characteristics while exhibiting risk and return characteristics similar to those of the Bloomberg Barclays US Corporate Index. As of May 31, 2017, the index included 2,297 issues from the following countries: Australia, Bermuda, Brazil, Canada, the Cayman Islands, Chile, Colombia, Curacao, France, Guernsey, Ireland, Isle of Man, Italy, Japan, Jersey, Luxembourg, Mexico, the Netherlands, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. A significant portion of the index consists of securities of financials and industrials companies. These had an average maturity of 7.15 years and the average credit rating was BBB+. The second ETF, the iShares ESG 1-5 Year USD Corporate Bond ETF (SUSB), seeks to track the investment results of the Bloomberg Barclays MSCI US Corporate 1-5 Year ESG Focus Index that, in turn, is designed to reflect the performance of U.S. dollar-denominated, investment-grade corporate bonds with remaining maturities between one and five years and issued by companies that have positive ESG characteristics, while exhibiting risk and return characteristics similar to those of the Bloomberg Barclays US Corporate 1-5 Years Index. As of May 31, 2017, the index included 543 issuers with an average maturity of 2.74 years and an average credit rating of A-. A significant portion of the index is represented by securities of financials and industrial companies from the following countries: Australia, Canada, the Cayman Islands, Chile, Colombia, Curacao, France, Germany, Ireland, Italy, Japan, Luxembourg, Mexico, the Netherlands, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. Exclusions and ESG considerations The two aforementioned indexes were developed by Bloomberg Barclays Capital Inc. with environmental, social and governance-related inputs provided by MSCI ESG Research LLC. The starting point for the construction of these indexes is the exclusion of securities of companies involved in the business of tobacco and controversial weapons companies, as well as securities of companies involved in very severe business controversies (as determined by MSCI ESG Research). Once these companies have been isolated, a quantitative process is applied to determine optimal weights for securities to maximize exposure to securities of companies with higher ESG ratings, subject to maintaining risk and return characteristics that are similar to the basic index. For each industry, MSCI ESG Research identifies key ESG issues that can lead to substantial costs or opportunities for companies (e.g., climate change, resource scarcity, demographic shifts). MSCI ESG Research then rates each company’s exposure to each key issue based on the company’s business segment and geographic risk and analyzes the extent to which companies have developed robust strategies and programs to manage ESG risks and opportunities. MSCI ESG Research scores companies based on both their risk exposure and risk management. To score well on a key issue, MSCI ESG Research assesses management practices, management performance (through demonstrated track record and other quantitative performance indicators), governance structures, and/or implications in controversies, which all may be taken as a proxy for overall management quality. Controversies, including, among other things, issues involving anti-competitive practices, toxic emissions and waste, and health and safety, occurring within the last three years, lead to a deduction from the overall management score on each issue. Using a sector-specific key issue weighting model, companies are rated and ranked in comparison to their industry peers. Key issues and weights are reviewed at the end of each calendar year while corporate governance is always weighted and analyzed for all companies. The Universe of Sustainable Exchange Traded Funds As of June 30, 2017, a total of 50 ETFs pursuing sustainable strategies are listed on various exchanges and available to sustainable investors as well as other investors. These include 49 equity oriented ETFs and, until the introduction of the latest two funds, just one fixed income ETF that collectively pursue sustainable strategies ranging from exclusions of companies and sectors, to ESG integration, impact strategies as well as thematic orientations or sector themes, such as investments in water, solar, energy and wind energy. Some ETFs employ one of more of these strategies and their geographic focus may be limited to U.S. based companies or these may extend beyond the U.S. to encompass developed and developing countries in Europe, Asia and Latin America. Refer to Chart 1 for a breakdown of these ETFs by traditional category along with assets under management. At 20 offerings, ETFs focused on thematic sector investments are the largest in number. A total of 15 ETFs provide stock exposure to large capitalization, mid-cap and small-cap stocks in the U.S. while a total of 7 ETFs provide exposure to world stocks qualified on the basis of sustainable strategies. Chart 1: Sustainable ETFs by Traditional Investment Categories and Net Assets Even with these many ETFs, the sustainable ETF segment is highly concentrated, with only five ETFs accounting for 57% of net assets. Refer to Chart 2. Chart 2: Five Largest Sustainable ETFs as of June 30, 2017 Sustainable ESG Funds Feature Higher Than Average Expense Ratios Along with their sustainable strategies, what further distinguishes the two newly launched BlackRock ETFs and qualifies these as particularly compelling offerings for investors are their very attractive expense ratios. According to our analysis, the expense ratios of both funds fall into the lowest tier. The iShares ESG USD Corporate Bond ETF (SUSC) and the iShares ESG 1-5 Year USD Corporate Bond ETF (SUSB) are subject to expense ratios of 0.12% or 12 bps and 0.18% or 18 bps, respectively. These rank within the lowest or first quartile of expense ratios within the universe of 50 ETFs.  For further information on the methodology used to stratify expense ratios, refer to the article  Stratifying Expense Ratios:  An Explanation. In general, the universe of sustainable ETFs charges high average and median expense ratios of 0.48% and 0.46% or 46 bps, respectively. In fact, only 20 funds fall within the lowest expense ratio segment whose charges run as low as 0.20% or 20 bps. At the other end of the range, expense ratios are as high as 0.95%--a level that is exceedingly high for passively manage fund offerings.

    Assessment Low Conviction Synopsis As of February 28, 2017, the date of the fund’s updated prospectus, it was noted that this municipal bond fund now invests the majority of its assets in securities whose proceeds provide positive social or environmental benefits, including investments in green bonds. This was not previously the fund’s main investment strategy. That said, the fund’s prospectus does not elaborate on the fund adviser’s methodology for evaluating the eligibility of securities based on use of proceeds beyond the enumeration of qualifying bond categories, as noted below. This municipal ESG bond fund is a welcome addition to a category that, as of the date of this writing,  consists of only three funds, but the cost of entry for retail investors, in particular, remains high.  While it declines to 0.0% for purchases of $1.0 million, the JPMorgan Municipal Income Fund imposes on new retail investors a 3.75% up-front sales charge (Class A shares) and 1.0% up-front charge for Class C shares, on top expense ratios of 0.73% and 1.28%, respectively, that place the fund in the second quartile and third-quartile of expense ratios within a universe of municipal bond funds.  Institutional investors benefit from a more favorable 0.48% expense ratio but this still places the fund in the second quartile across a universe of institutional municipal funds. While it’s premature to evaluate the fund’s performance based on its newly adopted ESG oriented strategy, the potential drag of fund fees can be gleaned from the results achieved by the fund’s historical annualized total return performance across the fund’s various share classes. Only the institutional share class (Select Shares) has managed to outperform the index/benchmark—and only once at that over the 1-year ended February 28, 2017. On the positive side, the fund’s asset base, provided its current investors stay put, means no start-up risks provided a smooth transition is executed to the new strategy. Analysis This $271.1 million fund (as of February 28, 2017) with 3 share classes (A, C and Select) and an original launch date in 1993 is managed by J.P. Morgan Investment Management Inc., one of the top 10 asset managers worldwide, under the guidance of two portfolio managers who have managed the fund since 2006. The fund invests in a portfolio of municipal bonds, including municipal mortgage-backed and asset-backed securities. While current income is the fund’s primary focus, it seeks to produce income in a manner consistent with the preservation of principal.  Under normal circumstances, the fund invests at least 80% of its assets in municipal bonds, the income from which is exempt from federal income tax. The fund’s current average weighted credit quality, at single A, is upper medium grade. Its average maturity can range from three to 15 years, but the fund’s average weighted maturity is currently at 5.13 years while its average duration is 4.75. The fund’s turnover rate was 22%, 12-month yield stood at 2.74% while total return performance, net of expenses, largely lagged the fund’s designated benchmark. See Exhibit 1.                                                                                                                           The fund invests the majority of its assets in securities whose use of proceeds provide positive social or environmental benefits. In order to identify and invest in bonds that provide positive social or environmental benefits, the adviser determines and assesses each bond’s intended use of proceeds. J.P. Morgan will generally view bonds that finance affordable housing, healthcare, municipal water & sewer, education, mass transit, not for profits and issuer designated green bonds as promoting positive social or environmental benefits. In addition to the uses of proceeds, the adviser may identify additional uses of bond proceeds that it believes will provide positive social or environmental benefits and may invest in such bonds as part of the fund’s investment strategy. The use of proceeds determination for securities purchased by the fund will be made at the time of purchase. If the use of proceeds of a security changes after the time of purchase so as to no longer provide positive social and/or environmental benefits, the fund may continue to hold the security.               As for the fund’s fees, the up-front sales charges noted above are high enough. On top of these, retail investors are subject to expense ratios that fall outside the lowest end of the range and rank in the second and third quartiles within a universe of national municipal bond funds and share classes.  Institutional investors purchasing Select shares, on the other hand, are not exposed to any up-front sales charges, however the fund’s expense ratio falls into second quartile, but still lower than the median expense ratio, within a universe of institutional national municipal funds.[1].                                                                                                                            While first quartile expense ratios are preferred, the fund’s placement in the second quartile should not be the basis for rejecting the fund out of hand. Yet when combined with the additional considerations outlined above, including transparency and track record, it’s difficult to advocate for this fund at this time either as a stand-alone investment or in combination with other funds that make up an ESG portfolio. Bottom Line Low Conviction. The fund was recently rebranded and it now invests the majority of its assets in securities whose use of proceeds is intended to provide positive social or environmental benefits. That said, the fund’s prospectus does not elaborate on the adviser’s methodology for evaluating the eligibility of securities based on use of proceeds beyond the enumeration of qualifying bond categories.  The fund’s historical total return performance, which does not as yet extend to the fund’s newly adopted strategy, has generally failed to exceed the selected securities benchmark over the last 1, 3, 5 and 10 year time intervals.  At the same time, fund expenses for retail shares, combining both up-front sales charges and expense ratios applicable to Class A and C shares are high.  Expenses are more tolerable for the institutional Select shares were it not for the transparency and historical performance issues that’s don’t as yet reflect the adoption of the fund’s ESG oriented strategy. [1] The analysis is based on a universe of 621 retail oriented ESG and non-ESG municipal bond funds/share classes, including investment grade and non-investment grade and 131institutional funds/share classes as of February 28, 2017.

Vanguard Social Index Fund Summary Assessment:High Conviction Advised by the Vanguard Group, Inc., this index tracking fund offers an effective US equity-focused sustainable strategy that combines an exclusionary approach along with the integration of environmental, social and governance (ESG) factors. The fund has been in existence since May 2000, although its current underlying index, the FTSE4Good US Select Index, was adopted as of December 16, 2005.  It is a liquid, large sized fund at around $2.9 billion that tracks the performance of a cross section of tradable US stocks with a combined retail and institutional investor base.  Importantly, the fund is offered at a low fee (expense ratio) of 0.22% (Investor Shares) and an even more attractive 0.12% (as of December 22, 2016) for institutional investors subject to a minimum investment of $5.0 million (VFTNX).  The fund has produced a strong track record relative to the non-ESG S&P 500 Index over the previous three and five years while lagging somewhat over the previous ten years due to poor relative performance in the early years.  As an index vehicle, the fund also benefits from lower turnover (16% over the last physical year) and tax efficiencies. VFTSX Review and Analysis This $2.9 billion fund, advised by the world’s second largest asset manager with about $3.8 trillion in assets under management as of September 30, 2016, offers two share classes: Investor Shares subject to a $3,000 minimum investment and Institutional Shares subject to a minimum investment of $5.0 million.  Originally launched in August 2000 to track the Calvert Social Index, the fund adopted the current FTSE index as of December 16, 2005. The fund seeks to track the performance of the FTSE4Good US Select Index, a benchmark that is composed of the primarily large and mid-cap tradable stocks of US companies that are screened for certain social and environmental criteria, related to the environment, human rights, health and safety, labor standards and diversity. The fund attempts to replicate the index by investing all, or substantially all, of its assets in the stocks of companies that make up the index. The FTSE 4Good Index is derived from a selection of constituents that comprise the FTSE ESG ratings universe. As of September 2014, FTSE implemented a new ESG assessment methodology.  The new model contains over 300 Indicators, 14 Themes and 3 Pillars, including governance, social and environmental considerations. Environmental themes include climate change, water use, biodiversity and pollution and resources as well as supply chain considerations.  Social themes include customer responsibility, human rights and community, labor standards, health and safety and supply chain considerations; and the governance theme includes corporate governance, risk management, tax transparency and anti-corruption. Based on publicly available data, each company in the research universe is given an FTSE ESG Rating ranging from 0 to 5, with 5 being the highest rating. From June 2015 companies with an FTSE ESG Rating of 3.3 and above have been added to the index, subject to any additional requirements that comprise the overall methodology.  FTSE intends to revise down the inclusion threshold to 3.0 over time.  Constituents of the FTSE4Good Index with an ESG Rating below 2.5 are at risk of deletion from the FTSE4Good Index. Companies which manufacture the following products are excluded from the FTSE4Good Index Series: Tobacco, weapons systems, components for controversial weapons; cluster munitions, anti-personnel mines, depleted uranium, chemical/biological weapons and nuclear weapons as well as coal companies. FTSE includes other screens around controversies, water, nuclear power and manufacturing of infant formula, to ensure that these meet certain health and safety as well as customer responsibility criteria. Vanguard ESG Total Return Performance Results Expense Ratios The fund’s expense ratios covering both its Retail Shares and Institutional Shares are classified as lowest and lower, respectively. The Retail Shares expense ratio, at 0.22%, falls well within the first quartile and significantly below the median expense ratio of 0.55% for a universe of equity index mutual funds.  The Investor Shares expense ratio, at 0.12%, is classified as moderate as it falls right on the 0.12% median expense ratio for institutionally oriented equity index mutual funds.  Still, the fund’s performance over the last three-to-five years justifies its selection as a stand-alone product offering or a core component in a sustainable portfolio. Bottom Line This index tracking fund offers an effective US equity-focused sustainable strategy that combines an exclusionary approach along with the integration of environmental, social and governance (ESG) factors that are considered in a comprehensive and transparent manner. The fund has closely tracked the index, with a tracking error (R2) of 1.0.  Importantly, it has delivered strong results over the last three to five years, bolstered by lower to the lowest expense ratios applicable to it's institutional and retail share classes. The fund qualifies as a core position in any sustainable investment strategy or a stand-alone holding.

    Assessment Monitor       Synopsis On March 3, 2017 Van Eck Associates Corp.launched the VanEck Vectors Green Bond ETF, an index fund that seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the S&P Green Bond Select Index. The index is market value weighted and designed to capture the most liquid and tradable segment of green-labeled bonds issued globally. This is the first green bond ETF available in the USand, with an expense ratio that is currently limited to 0.40% (unless extended beyond September 1, 2018, the fee waiver of 0.07% will kick up the expense ratio to 0.47%), it is the cheapest available managed green bond fund option open to retail investors. Having just been launched, the fund is still quite small at $4.9 million as of March 10, 2017.  It’s not fully diversified as it only holds 41 securities out of a possible total of 189 bonds registered by the index as of February 17, 2017. The fund is also trading at a slight premium to its net asset value (NAV) and its trading costs are likely to be higher than average until the fund gains some heft. This fund could be an attractive entry point for investors interested in green bonds.  That said, the fund bears monitoring over the next three months while it gains traction and until such time as the portfolio is fully deployed across the S&P index constituents and preferably it reaches about $50 million in assets. Analysis Van Eck Associates Corp. is a New York based manager of mutual funds and ETFs with about $42.14 billion in assets under management as of January 31, 2017.  The firm launched the VanEck Vectors Green Bond ETF, an index fund that seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the S&P Green Bond Select Index.  The index is market value weighted and designed to capture the most liquid and tradable segment of green-labeled bonds issued globally. The index is designed to provide a broad measure of the performance of the investable green bond market consisting of fixed-income securities issued globally, both taxable and tax-exempt, that raise funds specifically to finance new and existing projects with environmental sustainable benefits.For a bond to be eligible for inclusion in the index, the issuer of the bond must self-qualify the bond as green and provide the rationale behind it, such as the intended use of proceeds. As an additional filter, the bond must be flagged as green by Climate Bonds Initiative (CBI), London-based green bond standards setting not-for-profit organization, to be eligible for inclusion in the index. The index is comprised of supranational, corporate, government related, sovereign and securitized green bonds, and may include both investment grade and below investment grade rated securities, or junk bonds.The maximum weight of below investment grade bonds in the index is capped at 20%. The index has no specific restriction on the market of issue for green bonds denominated in G10 currencies, which are the U.S. dollar, the Euro, the Japanese yen, the British pound sterling, the Swiss franc, the Australian dollar, the New Zealand dollar, the Canadian dollar, the Swedish krona and the Norwegian krone. Bonds issued in non-G10 currencies in the native market of that currency will be excluded from the index. Bonds issued in non-G10 currencies in global markets will be eligible for inclusion in the index. Further, the index includes bonds across sectors, countries, currencies and maturities. No more than 10% of the index can be focused in a single issuer. As of February 17, 2017, the index consisted of 189 bonds issued by 99 issuers and the weighted average maturity of the index was approximately 7.3 years. As of the same date, approximately 54% of the index was comprised of Regulation S securities and 18% of the Index was comprised of Rule 144A securities. The index is rebalanced monthly. Bonds that are no longer rated or have defaulted are removed from the index at the next rebalancing. Alternative Mutual Fund Offerings At this point, investors interested in a dedicated green bond fund have a limited number of options—none optimal.  Beyond the just launched Mirova Global Green Bond Fund, only two funds that are invested in at least around 10% of net assets in green bonds are currently available in the market. While the TIAA-CREF Social Choice Bond Fund offers the best management/price combination, 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. While it’s effectively managed, the fund’s retail class expense ratio is 28 bps higher than the Van Eck Vectors Green Bond ETF. The Calvert Green Bond Fund, on the other hand, is just too expensive given the 88 bps expense ratio and upfront sales charge. Green Bond Mutual Funds         Bottom Line This fund could be an attractive entry point for investors interested in green bonds.  Available options in the form of mutual funds are either not sufficiently invested in green bonds or are too expensive. That said, the Van Eck Vectors Green Bond ETF is newly launched, it bears monitoring over the next three months or so while it gains traction and/or until such time as the portfolio is fully deployed across the S&P index constituents and preferably it reaches about $50 million in assets.