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Stock-selection risk (ESG-related risk)

Compensated style risk

Significant over/under-weights to sectors

Historically uncompensated risks

Our research showed that portfolios with higher ESG ratings took a significant amount of risk in areas unrelated to ESG. Consequently, they had a high exposure to risks that are typically not compensated. Active risk is necessary to generate excess returns or to gain higher ESG exposure relative to the benchmark, but not all risks are created equal. Some have been historically proven to generate excess returns over long periods (compensated risks) and some have not (uncompensated risks).

Only 40% of active risk in higher ESG-rated portfolios was from ESG-related sources.

BREAKDOWN OF ACTIVE RISK IN PORTFOLIOS WITH HIGHER-ESG RATINGS*

17%

21%

40%

Institutional investors and their consultants regularly partner with Northern Trust Asset Management and leverage our risk-aware, quantitative investing expertise, gained over two decades, to provide insight on why portfolios haven’t delivered on expected outcomes.

Given an increasing question for investors is “how do ESG-related considerations impact portfolios?,” this year we added a new dimension and examined portfolios through an ESG lens. This special edition of The Risk Report identifies the five important ESG-related trends we observed.

REPORT DEMOGRAPHICS*

Key findings from our six-year analysis of institutional portfolios through an ESG lens:

1,300+

Investment Strategies

$250+ billion

Equity Portfolio Assets

88 Institutional

Investors

Here's what we found

Over the past six years, 280 equity portfolios have been analyzed and the aggregated findings are presented in The Risk Report.

The Risk Report

Uncompensated Risks

Uncompensated risks were prevalent in portfolios with higher ESG scores.

Historically uncompensated risks:

Sector

Specific exposures to countries or regions

Country

High-volatility, low-dividend, low-value (expensive), low-quality, low-momentum or large-size securities

Style

Exposure to changes in foreign currencies

Currency

Cancellation effect

Portfolios with higher ESG scores experienced a greater dilution of active risk.

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“Sleeved” approach to integrating ESG had a minimal impact.

While many institutions did not have specific ESG objectives, there was clear evidence of hiring ESG managers as “sleeved” or “satellite” allocations. Unfortunately, if there were ESG-oriented outcomes intended in those scenarios, it rarely materialized at the portfolio level. When the ESG managers were combined with the rest of the portfolio, the aggregate ESG score significantly declined due to the cancellation effect. While the aggregate portfolio ESG score vs. the benchmark has varied through the years, the impact of the cancellation effect has been fairly consistent.

ESG manager score vs. benchmark

Aggregate portfolio score vs. benchmark*

ESG SCORES VS. BENCHMARK BY CALENDAR YEAR

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Total manager active risk

Aggregate portfolio active risk

3.98%

2.59%

35%

Canceled out

Portfolios with low ESG scores**

Portfolios with high ESG scores**

2.48%

45%

Canceled out

4.52%

AVERAGE ACTIVE RISK: UNDERLYING INVESTMENT MANAGERS’ VS. AGGREGATE INSTITUTIONAL PORTFOLIO

A cancellation effect caused by offsetting exposures among underlying holdings reduced the active risk of portfolios with higher ESG ratings by nearly half. While 45% cancellation is similar to the average cancellation effect we identified in The Risk Report, it is significantly higher when compared to portfolios with lower ESG ratings. This higher susceptibility to active risk cancellation is something investors with higher exposure to ESG-related risks should watch out for.

Source: Northern Trust Asset Management. Data as of December 31, 2021. Please note, numbers on the page may not sum to 100% due to rounding.

Source: Northern Trust Asset Management. Data as of December 31, 2021. Please note: Only portfolios containing two or more investment strategies were considered in the analysis for aggregate portfolio active risk.

Source: Northern Trust Asset Management. Data as of December 31, 2021. Note: A manager was classified as an ESG manager when their strategy had a higher MSCI ESG IVA Rating Score compared to its benchmark.

ACTIVE VS. PASSIVE

Active managers caused a larger drag on portfolio ESG scores.

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The proportion of active vs. passive investment strategies in a portfolio made a material difference in the overall ESG score — with active managers tending to cause a larger drag. Most active strategies had a lower overall ESG score due to a significantly lower rating for the environmental pillar. Meanwhile, passive strategies tended to maintain, or even slightly improve, the ESG profile. This may be explained by the increasing valuations for ESG leaders that have made active managers less willing to own them. Between 2018 and 2021, the price/book differential between ESG leaders and the MSCI World Index nearly doubled.**

Source: Northern Trust Asset Management. Data as of December 31, 2021.

OVER-DIVERSIFICATION

ESG was highly sensitive to over-diversification.

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Our research showed that governance scores were least impacted by over-diversification. In contrast, environmental and social scores experienced a significant dilution when the number of underlying managers increased. The consistent correlation between strong corporate governance standards and financial performance may have led most underlying managers to hold stocks with stronger governance metrics. This would result in the aggregate portfolio being less subject to dilution.

Governance has been least impacted by over-diversification.

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Our research showed a material impact to the overall ESG score occurred as the number of underlying managers increased. While adding underlying managers into the portfolio line-up can potentially reduce overall risk, it also showed a clear dilution effect on the ESG profile of the overall portfolio. As the number of underlying managers in the aggregate portfolio increases, the overall ESG score of the portfolio tends to decrease. This was generally caused by the increased number of active managers with more concentrated positions, which tended to have low ESG scores on average.

Source: Northern Trust Asset Management, MSCI Barra. Actual investor data as of March 31, 2016. The numbers represent the average % change in MSCI ESG IVA Rating Score vs. Benchmarks across manager buckets.

Impact of style investing - Previous slide

INVESTOR ESG TRENDS

Benchmarks outpaced investors on environmental scores, but not governance.

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While institutional portfolios have not kept pace with the advancing environmental scores of market indices, there’s been a significant rise in social and governance scores. Portfolios’ environmental scores fell between 2017 and 2020, and remained negative in 2021 despite investors’ progress on carbon reduction. Investors focused on carbon reduction are generally surprised by this result, but it’s quite common. This is driven by industry environmental ratings that are increasingly emphasizing additional themes such as natural capital (e.g. biodiversity) and pollution and waste (e.g. toxic emissions, packaging material). Social scores saw large increases in 2020 and 2021, which likely reflects the growing awareness of social issues and the actions being taken by companies around the globe. Governance scores continue to outpace market indices, but the sizable increase in 2021 may mark an even higher investor focus going forward.

Source: Northern Trust Asset Management. Data as of December 31, 2021. Please see the “Definitions and Methodology” section for more information about the benchmarks used for comparison.

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Definitions and Methodology

Investor ESG Trends

Over-Diversification

Active vs. Passive

Cancellation Effect

Uncompensated Risks

Superannuation funds

Sovereign wealth funds

Public funds

Insurance

Healthcare

Endowments & foundations

Financial services

Family offices

Corporate pensions

14%

24%

17%

14%

Asia-Pacific

Europe & the Middle-East

North America

INVESTOR GEOGRAPHY

Specific risk from individual securities, generally derived from fundamental active investment strategies. ESG exposure is a stock-specific attribute and is best quantified through this stock-selection category.

Stock-selection risk (ESG-related risk):

Exposures such as small-size, low-volatility, high-momentum, high-value, high-dividend and high-quality securities that have historically outperformed over time, based on academic studies.**

Compensated style risk:

About Northern Trust Asset Management

Northern Trust Asset Management is a global investment manager that helps investors navigate changing market environments, so they can confidently realize their long-term objectives. Entrusted with $1.2 trillion in assets,* we understand that investing ultimately serves a greater purpose. We believe investors should be compensated for the risks they take — in all market environments and any investment strategy. That’s why we combine robust capital markets research, expert portfolio construction and comprehensive risk management to craft innovative and efficient solutions that deliver targeted investment outcomes. As engaged contributors to our communities, we consider it a great privilege to serve our investors and our communities with integrity, respect and transparency.

Uncompensated risks

Uncompensated risks were prevalent in portfolios with higher ESG scores.

Uncompensated Risks

KEY DISCOVERIES

Cancellation effect

Portfolios with higher ESG scores experienced a greater dilution of active risk.

Cancellation Effect

Active vs. Passive

Active managers caused a larger drag on portfolio ESG scores.

Active vs. Passive

Investor ESG Trends

Benchmarks outpaced investors on environmental scores, but not governance.

Investor ESG Trends

Over-Diversification

ESG was highly sensitive to over-diversification.

Over-Diversification

*Total manager active risk is the weighted average active risk of all underlying managers in the aggregate portfolio. The number illustrates what the aggregate portfolios’ total active risk would be if there was no cancellation effect among underlying managers (i.e. if the managers were perfectly correlated). **A portfolio was categorized as having a “high (low) ESG score” if its overall ESG score ranked in the top (bottom) quintile of all portfolios analyzed in our sample.

22%

71%

* Source: Northern Trust Asset Management. Data collected and analyzed from December 31, 2015 to December 31, 2021.

INVESTOR TYPE

INVESTOR GEOGRAPHY

*As of March 31, 2024.

Sustainable Investing

Uncompensated risks:

Stock-selection risk

Compensated style risk

Style

Currency

Sector

Country

*Higher ESG-Rated Portfolios are determined by ranking all portfolios in the study by ESG score and breaking them into quintiles. Higher-rated portfolios fall into the top quintile. **Choi, James R and Zhao, Kevin. “Did Mutual Fund Return Persistence Persist?” The National Bureau of Economic Research. Issued January 2020.

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Source: Northern Trust Asset Management. Data as of December 31, 2021. The numbers represent the average % change in MSCI ESG IVA Rating Score vs. Benchmarks across manager buckets.

The portfolios we analyzed ranged in size, geography and investment objectives — while some had specific ESG targets, most did not. Researching this diverse sample allowed us to isolate fundamental ESG risks at the portfolio level, revealing five findings investors should be aware of whether they are intentionally targeting ESG or not.

ESG SPECIAL EDITION

12%

derived from ESG-related risks

40%

derived from uncompensated risks

40%

2/3

Source: Northern Trust Asset Management. Data as of December 31, 2021. “Exposure” is measured by the z-score, which represents the number of standard deviations from the mean data set.

Style tilts generally make up ~30% of a portfolio’s active risk, and while that number remained fairly consistent regardless of a portfolio’s ESG score, it was the large differences in the individual style exposures that could lead to unintended outcomes. Portfolios with higher ESG ratings had significantly more exposure to high quality and low volatility compared to the average portfolio. While these style risks tend to be consistent sources of excess return (i.e. compensated risks), the tilts to large size and low momentum are not. Large differences in style exposures at the portfolio level often occur unintentionally, and can be caused by various style biases from underlying investment strategies. And while the impact of these unintended (or “hidden”) risks might not be felt at the individual strategy level, these occurrences compound at the portfolio level and potentially create unwanted outcomes.

Hidden style risks created differences in portfolio exposure.

Exposure

0.2

0.1

0.0

-0.1

-0.2

-0.3

Low volatility

High value

Large size

High quality

Low momentum

High dividend yield

Average portfolio

Higher ESG-rated portfolios

STYLE BETS ACROSS PORTFOLIOS

3/3

CORRELATION

0.8

0.2

0.0

-0.2

-0.4

-0.8

High momentum

Large size

MSCI WORLD INDEX HIGHER ESG-RATED PORTFOLIO: THREE-YEAR ROLLING CORRELATIONS BETWEEN ESG AND STYLE RISKS

Source: Northern Trust Asset Management. Data as of August 31, 2022. It is not possible to invest directly in any index. Please note: Higher-rated ESG Portfolio represents the top 20% of MSCI World ranked by MSCI ESG IVA Rating score.

Since early 2020, the likelihood that ESG may come with “hidden” style risks has grown. From 2015 to 2019 there was a relatively low correlation between ESG and most style risks. However, that correlation has now increased significantly — making unintended outcomes more likely. The phenomenon may be related to the increased appetite for ESG investing sparked by the pandemic. For example, stocks with high ESG ratings had high levels of inflows as many outperformed during that period, which greatly increased their correlation with momentum.

Research insight:

High quality

High value

High dividend yield

Low volatility

0.6

0.4

-0.6

-0.50

-0.36

0.22

0.27

0.49

0.70

2016

2017

2018

2019

2020

2021

2022

Portfolios with higher ESG scores experienced a greater dilution of active risk.

The cancellation effect occurs when investment managers within a portfolio take opposing positions (e.g. sector bets, style tilts, etc.) that ultimately offset one another. For example, a manager might take a 3% overweight in a company while another manager takes a 3% underweight, effectively canceling each other out. Or there is high value bias in one strategy that is offset by a high growth bias in another strategy.

WHAT IS THE CANCELLATION EFFECT?

2017

2018

2019

2020

2021

6.8%

1.2%

8.6%

-0.1%

7.7%

-2.4%

7.0%

-5.7%

7.5%

-0.7%

Active managers caused a larger drag on portfolio ESG scores.

*Active investment strategies is defined as if the Active Risk of the manager relative to their stated benchmark is higher than 2.5%. The active MSCI ESG IVA Rating Score (%) used in above chart are averages across the Active and Passive portfolios from the sample set. **Top 20% of MSCI World stocks ranked by MSCI ESG IVA Rating score.

1.3%

-6.1%

-0.1%

1.5%

0.8%

-1.9%

0.6%

-6.1%

Environmental

Social

Governance

ESG

Passive investment strategies

Active investment strategies*

MANAGEMENT STYLE IMPACT ON PORTFOLIO ESG SCORES VS. BENCHMARK

ESG was highly sensitive to over-diversification.

Less than 5 managers

-0.2%

AGGREGATE PORTFOLIO ESG SCORE VS. BENCHMARK (%)

-3.6%

10 or more managers

-4.0%

5–9 managers

1.1%

0.0%

Less than 5 managers

5–9 managers

10 or more managers

Governance

Environmental

AGGREGATE PORTFOLIO E, S AND G SCORE VS. BENCHMARK (%)

Social

-0.2%

2.1%

-0.8%

-2.1%

1.4%

-1.2%

-3.0%

1.7%

0.0%

0.5%

2017

2018

2019

Governance

Social

Environmental

AVERAGE PORTFOLIO ESG SCORES VS. BENCHMARK BY CALENDAR YEAR

Overall ESG Score

1.0%

-1.0%

1.5%

-0.1%

-1.1%

1.1%

-1.1%

-0.8%

-2.9%

1.4%

-0.4%

-1.9%

1.0%

2.4%

1.1%

-0.9%

2020

2021

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AVERAGE PORTFOLIO CO2 INTENSITY VS. BENCHMARK

Source: Northern Trust Asset Management. Data as of December 31, 2021. Please see the “Definitions and Methodology” section for more information about the benchmarks used for comparison.

Family offices

-3.0%

All institutions have gained ground on carbon reduction.

CO2 intensity = Scope 1 and 2 carbon emissions in tons of CO2 /USD million sales.

Superannuation funds

-2.6%

Public funds

-3.9%

Financial services

-5.0%

Corporate pensions

-14.6%

Sovereign wealth funds

-21.6%

Insurance

-25.4%

Healthcare

-26.4%

Endowments and foundations

-27.9%

Institutions have reduced the carbon exposure within their equity assets over the past six years. While some carbon reductions were minor, most were sizeable and likely intentional. These meaningful shifts have been persistent over this multi-year period and may mark a notable long-term shift in investor objectives.

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Definitions and Methodolgy

The analysis is based on the results of 280 Northern Trust Asset Management portfolio factor analyses (PFA) for 88 institutional investors. The regional breakdown based on investor location is: 71% North America/22% APAC/7% EMEA. Additional information on investor type can be found on page 2 of this report.

How many portfolios were analyzed?

No, the portfolios analyzed had a range of targeted objectives and the majority of portfolios did not have specific ESG objectives. This enabled us to get an objective view on how various ESG-oriented issues were impacting various pools of assets.

Does the analysis only include ESG-oriented portfolios?

To ensure consistency and transparency, the ESG score used in our analysis is based on the MSCI ESG Intangible Value Assessment (IVA) Rating Score that measures corporate management, environmental and social risk factors for 5,500 companies globally.

What ESG score is used in the analysis?

This classification is not based on whether the strategy has an explicit ESG mandate or not. The higher-rated ESG portfolios are determined by ranking all portfolios in the study by ESG score and grouping them into quintiles. The higher-rated portfolios fall into the top quintile.

What is the definition of “higher-rated ESG portfolios”?

The manager classification (active or passive) was not provided by the client. As a proxy, we classified the managers as active/passive based on the following definition: If the active risk of a manage rrelative to the respective broad market index exceeds 2.5%, then the manager would be considered “active.”

What is the definition of active/passive managers?

The benchmarks referred to in the report were the actual benchmarks used by the investors we worked with. Benchmarks can range from ASX 100 to ACWI IMI or custom benchmarks, depending on the portfolios. Hence, the results are a broad comparison of portfolios against their benchmarks.

What are the benchmarks used for comparison?

When looking at aggregated portfolios, we apportion all underlying managers with the actual weights used in the investor portfolios (not equally weighted). The ESG score is then calculated at the stock level of the aggregated portfolio (it is not a weighted average of single managers).

How is the ESG score of aggregated portfolios calculated?

In a risk model context, investors can quantify the sector, country, currency and style (value, quality,size, etc.) exposures of the portfolio. What is leftover is the “idiosyncratic” or “specific” risk — the residual risk — which is where ESG lies. This is because ESG is a stock level phenomenon.

Why is “ESG risk” defined as stock-specific risk?

What ESG score is used in the analysis?

Does the analysis only include ESG-oriented portfolios?

How many portfolios were analyzed?

What is the definition of “higher-rated ESG portfolios”?

The manager classification (active or passive) was not provided by the client. As a proxy, we classified the managers as active/passive based on the following definition: If the active risk of a manager relative to the respective broad market index exceeds 2.5%, then the manager would be considered “active.”

What is the definition of active/passive managers?

What are the benchmarks used for comparison?

How is the ESG score of aggregated portfolios calculated?

In a risk model context, investors can quantify the sector, country, currency and style (value, quality, size, etc.) exposures of the portfolio. What is leftover is the “idiosyncratic” or “specific” risk — the residual risk — which is where ESG lies. This is because ESG is a stock level phenomenon.

Why is “ESG risk” defined as stock-specific risk?

Portfolio score better than benchmark

Portfolio score worse than benchmark

*The aggregate portfolios include at least two managers and at least one among them should be an ESG manager.

About Sustainable Investing At Northern Trust Asset Management (NTAM), we define Sustainable Investing as encompassing all of NTAM’s investment strategies and accounts that utilize values-based and norms-based screens, best-in-class and ESG integration, or thematic investing that may focus on a specific ESG issue such as climate risk. NTAM’s Sustainable Investing includes portfolios designed by NTAM as well as those portfolios managed to client-defined methodologies or screens. As the data, analytical models and aforementioned portfolio construction tools available in the marketplace have evolved over time, so too has NTAM. NTAM’s Sustainable Investing encompasses strategies and client assets managed in accordance with client-specified responsible investing terms (historically referred to as Socially Responsible), as well as portfolios that leverage contemporary approaches and datasets, including ESG analytics and ESG thematic investing. NTAM may utilize an ESG framework in certain investment strategies. Considering ESG factors may result in reduced or increased exposure to certain companies or industries, which may cause the applicable strategy’s performance to be lower than that of strategies that do not consider ESG factors. In addition, the added cost of ESG-related diligence in assessing the ESG parameters of an investment may also reduce the profitability of an applicable strategy’s investments. There may also be different views of what it means for an issuer to have positive or negative ESG characteristics. There can be no guarantee that NTAM’s determinations regarding an issuer’s ESG characteristics will be accurate, including whether any such ESG characteristics are financially material or immaterial; any such inaccuracies could adversely affect a strategy’s performance. About the Rankings and Awards ShareAction report “Voting Matters,” January 2022. NTAM ranked 23rd overall globally and 1st among U.S. index asset managers. ShareAction ranked asset managers from IPE’s 2022 top 500 asset managers based on the following criteria: largest 35 asset managers based on AUM, next largest 35 European asset managers based on AUM, next largest 12 UK asset managers based on AUM. Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company. For Asia-Pacific, this material is directed to expert, institutional, professional and wholesale investors only and should not be relied upon by retail investors. The information contained herein is intended for use with current or prospective clients of NTAM. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice. This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions. Investing involves risk — no investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, adviser risk and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve proﬁts or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe Northern Trust’s efforts to monitor and manage risk but does not imply low risk. Past performance is no guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by Northern Trust. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reﬂect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For additional information on fees, please refer to Part 2a of the Form ADV or consult a Northern Trust representative. Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information. If presented, hypothetical portfolio information provided does not represent results of an actual investment portfolio but reflects representative historical performance of the strategies, funds or accounts listed herein, which were selected with the beneﬁt of hindsight. Hypothetical performance results do not reflect actual trading. No representation is being made that any portfolio will achieve a performance record similar to that shown. A hypothetical investment does not necessarily take into account the fees, risks, economic or market factors/conditions an investor might experience in actual trading. Hypothetical results may have under- or overcompensation for the impact, if any, of certain market factors such as lack of liquidity, economic or market factors/conditions. The investment returns of other clients may differ materially from the portfolio portrayed. There are numerous other factors related to the markets in general or to the implementation of any specific program that cannot be fully accounted for in the preparation of hypothetical performance results. The information is confidential and may not be duplicated in any form or disseminated without the prior consent of Northern Trust. This information is intended for purposes of Northern Trust marketing of itself as a provider of the products and services described herein and not to provide any fiduciary investment advice within the meaning of Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Northern Trust is not undertaking to provide impartial investment advice or give advice in a fiduciary capacity to the recipient of these materials, which are for marketing purposes and are not intended to serve as a primary basis for investment decisions. Northern Trust and its affiliates receive fees and other compensation in connection with the products and services described herein as well as for custody, fund administration, transfer agent, investment operations outsourcing and other services rendered to various proprietary and third party investment products and ﬁrms that may be the subject of or become associated with the services described herein. © 2024 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.

30+ years managing socially responsible portfolios for many of the world’s most sophisticated and progressive investors.

• Managing $137 billion of AUM in sustainable strategies 1 • Best-performing US Index Asset Manager – ShareAction “Voting Matters, 2022” published January 17, 2023. NTAM ranked 23rd globally and first among US index asset managers. 2 • Founding signatory of Climate Action 100+ • 12 of 15 PRI Assessment Metrics at or Above Median (2021 PRI report published September 8, 2022) 3 • TCFD supporter • ISSB Investor Advisory Group member

Demonstrated leadership:

• Best-performing US Index Asset Manager – ShareAction “Voting Matters, 2022” published January 17, 2023. NTAM ranked 23rd globally and first among US index asset managers. 2

• Founding signatory of Climate Action 100+

• 12 of 15 PRI Assessment Metrics at or Above Median (2021 PRI report published September 8, 2022) 3

• TCFD supporter

• ISSB Investor Advisory Group member

1 As of December 31, 2022. 2 ShareAction ranked asset managers from IPE’s 2022 top 500 asset managers based on the following criteria: largest 35 asset managers based on AUM, next largest 35 European asset managers based on AUM, next largest 12 U.K. asset managers based on AUM. 3 For the full Northern Trust PRI Transparency Report, visit www.unpri.org.Assessment methodology can be found at https://www.unpri.org/reportingand-assessment/how-investors-are-assessed-on-their-reporting/3066.article. Above rankings are not indicative of future performance.

Demonstrated leadership

Above rankings are not indicative of future performance.

For the full Northern Trust PRI Transparency Report, visit www.unpri.org.Assessment methodology can be found at https://www.unpri.org/reportingand-assessment/how-investors-are-assessed-on-their-reporting/3066.article.

ShareAction ranked asset managers from IPE’s 2021 top 500 asset managersbased on the following criteria: largest 19 asset managers based on AUM, nextlargest 36 European asset managers based on AUM, next largest 10 U.K. assetmanagers based on AUM.

As of September 30, 2022.

• ISSB Investor Advisory Group member

• TCFD supporter

• 12 of 15 PRI Assessment Metrics at or Above Median (2021 PRI report published September 8, 2022)

• Founding signatory of Climate Action 100+

• Best-performing U.S. asset manager — ShareAction“Voting Matters, 2021,” published December 15, 2021.NTAM ranked 34th overall globally and first among U.S. asset managers

• Managing $122 billion of AUM1 in sustainable strategies

Demonstrated leadership:

for many of the world’s mostsophisticated and progressive investors.

30+ years managing socially responsible portfolios

Sustainable Investing

Our comprehensive work with large institutions across the globe presented a distinct opportunity to provide clarity around how ESG may be impacting various asset pools. Five key trends emerged from our analysis.

The changing relationship between ESG and style risks makes unintended outcomes more likely.

Benchmarks outpaced investors on environmental scores, but not governance.

Uncover the underlying sources of risk impacting your portfolio outcomes

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Insights & Research

About Us

What We Do

Who We Serve

Investor ESG Trends

Over-Diversification

Active vs. Passive

Cancellation Effect

Uncompensated Risks

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Timing Manager Changes

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Definitions and Methodology

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