E S G (ESG) I TOOLS A

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) INVESTMENT TOOLS: A REVIEW OF THE CURRENT FIELD

December 2017

PREPARED FOR: The Chief Evaluation Office, US Department of Labor Contract No. DOLQ129633250

PREPARED BY: Ogechukwu Ezeokoli China Layne, PhD Mier Statman, PhD Oswaldo Urdapilleta, PhD Summit Consulting, LLC 601 New Jersey Ave NW Suite 400 Washington, DC 20001 summitllc.us

ESG Investment Tools: A Review of the Current Field

DISCLAIMER

This report was prepared for the U.S. Department of Labor (DOL), Chief Evaluation Office, under Contract Number DOLQ129633250. The views expressed are those of the authors and should not be attributed to DOL, nor does mention of trade names, commercial products, or organizations imply endorsement of same by the U.S. Government.

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ACKNOWLEDGEMENTS

We would like to thank Sonal Mahida, and Dr. David Wood for providing technical input regarding the content of the literature review and design of the environmental scan. We would also like to thank the staff at the U.S. Department of Labor's Employee Benefits Security Administration (EBSA) and the Chief Evaluation Office who provided feedback and guidance in this study. Special thanks are due to our Contracting Officer Representatives, Janet Javar and Dr. Kuangchi Chang of the Chief Evaluation Office, who provided valuable feedback. We are also grateful for the detailed review provided by EBSA's Lynn Johnson.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY .......................................................................................................................... I INTRODUCTION ................................................................................................................................... 1

ESG INVESTING AND ESG INVESTMENT TOOLS ................................................................................................... 1 IMPORTANCE OF ESG INVESTING TO RETIREMENT SECURITY ................................................................................. 3 REVIEW OF LITERATURE ON ESG INVESTING AND RETIREMENT SAVINGS............................................. 6 RESEARCH QUESTIONS AND METHODOLOGY ...................................................................................................... 6 WHO ARE THE KEY INVESTORS IN BOTH THE ESG INVESTING AND RETIREMENT SAVINGS SECTORS?............................ 6 HOW DO KEY INVESTORS ASSESS ESG INVESTMENTS FOR GENERAL AND RETIREMENT INVESTMENT PORTFOLIOS?........ 8 WHAT ARE THE COMMON CHALLENGES AND CRITIQUES OF THE METHODS FOR ASSESSING ESG INVESTMENTS? ........ 11 ESG INVESTING AND RETIREMENT SAVINGS: PRESENT STATE AND FUTURE POSSIBILITIES......................................... 17 ENVIRONMENTAL SCAN OF ESG INVESTMENT TOOLS ........................................................................ 18 RESEARCH QUESTIONS AND METHODOLOGY .................................................................................................... 18 ASSESSMENT OF ESG INVESTMENT TOOLS BY KEY FEATURES .............................................................................. 21 COMPARING ESG INVESTMENT TOOLS BY THEIR UTILITY .................................................................................... 25 ESG INVESTMENT TOOLS MATRICES BY TOOL CATEGORY ................................................................................... 26 CONCLUSION ..................................................................................................................................... 39 REFERENCES....................................................................................................................................... 41 GLOSSARY BY TOPIC........................................................................................................................... 45 APPENDIX A ? LIST OF ESG INVESTMENT TOOLS................................................................................A-1 APPENDIX B ? COMPLETE PROFILES OF ESG INVESTMENT TOOLS (INCLUDED IN MATRICES)..............B-1 APPENDIX C ? SUMMARIES OF ESG RATING METHODOLOGIES ......................................................... C-1

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LIST OF FIGURES

Figure 1: ESG Investing Landscape................................................................................................................ 7 Figure 2: Process for Conducting Environmental Scan of ESG Investment Tools ....................................... 19 Figure 3: Investments Covered by the ESG Investment Tools .................................................................... 22 Figure 4: Financial Information Provided by ESG Investment Tools ........................................................... 24 Figure 5: Fees for ESG Investment Tools..................................................................................................... 25 Figure 6: Comparison of ESG Investment Tools for Mutual Fund and ETFs ............................................... 27 Figure 7: Comparison of ESG Investment Tools for Companies ................................................................. 30 Figure 8: Comparison of ESG Indices .......................................................................................................... 35 Figure 9: Other Types of ESG Investment Tools.......................................................................................... 38

LIST OF TABLES

Table 1: General Investment Strategies for ESG Investments ...................................................................... 8 Table 2: Issues with ESG Investment Strategies ......................................................................................... 12 Table 3: Issues with ESG Investment Strategies ......................................................................................... 20 Table 4: ESG Investment Tool Utility Criteria.............................................................................................. 21 Table 5: ESG Investment Tool Categories ................................................................................................... 21 Table 6: In-Scope ESG Investment Tools (28) ............................................................................................. 22

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SG Investment Tools: A Review of the Current Field

EXECUTIVE SUMMARY

As investors increasingly consider environmental, social, and governance (ESG) factors when selecting and managing investments, questions about ESG's relevance to retirement investing have grown commensurately. With this growth comes greater interest to understand if and to what extent ESG investing might affect American workers' retirement prospects. This study seeks to understand the current state of ESG investing, specifically how it relates to retirement savings of American workers and the tools that individual investors, financial advisors, investment managers, and retirement plan administrators use to identify, assess, and select ESG investments.

This study, for which the Department of Labor (DOL) Chief Evaluation Office (CEO) and Employee Benefits Security Administration (EBSA) contracted Summit Consulting, LLC (Summit), addresses this need by providing:

? A review of the academic and industry literature regarding ESG investing and retirement savings ? An environmental scan of ESG investment tools available to investors The literature review summarizes the state of the ESG investing field and how four key investor groups--(1) financial advisors and money managers, (2) individual investors, (3) private-sector retirement plans, and (4) public pension plans--incorporate ESG investments into their portfolios. Across the investing sector, researchers have little consensus on the most effective ESG investment strategies (e.g. positive or negative screening versus ESG integration). Additionally, the literature does not provide much insight into how investors and advisors incorporate ESG investments into retirement savings, especially in private-sector retirement plans.

The environmental scan considers 28 ESG investment tools. ESG investment tools are online resources (specifically documents, applications, websites, or databases) that provide information on ESG aspects of investments and/or assist users in selecting and managing ESG investments. While not intended to be exhaustive of all available ESG investing resources, these 28 tools are representative of a segment of the ESG investing field, specifically the ESG research and products produced by third-party information providers for investors, as of May 2017. Summit grouped the 28 tools into four categories based on the types of investments they cover:

? Mutual funds and exchange-traded funds (4 tools)

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? Individual companies (16 tools) ? Market segments (6 tools) ? Other entities, e.g. investment manager strategies and retirement plans (2 tools) This research highlighted the following themes across the ESG tools on their key features and capabilities: ? Most tools (20 of 28) provide a rating that describes a particular aspect of ESG performance for the

unit of investment (i.e. mutual fund) and could be compared to the ESG performance of its peers (e.g. those in the same category or sector).1 ? More than half of the tools (16) did not provide financial information about the investments, such as historical financial performance, which demonstrates the need for these tools to be used alongside tools or resources that provide traditional investment information. At least one tool in every category provided financial information about the investments or index constituents. However, most tools in the individual company category did not provide any financial information. ? All tools are available online, but many (23) have user costs that limit their accessibility to some users.2 Most of the ESG tools that cover mutual funds, exchange-traded funds, or market segments provide some ESG information at no cost, while most tools for individual companies have user fees. Beyond familiarizing investors, advisors, and regulators with the current state of ESG investing, this study serves as a digest of the ESG investing sector upon which DOL can expand in future years as the ESG investing landscape continues to grow and mature.

Features of ESG Tools ? Most ESG tools are performance ratings or provide performance ratings. ? ESG information needs to be used alongside traditional financial metrics of

investments. ? Many tools have user fees and may not be accessible for all investor groups.

1 Twenty tools provide ESG ratings and six tools use pre-determined ESG ratings (all tools use ESG ratings to determine the constituents of ESG-focused indices). 2 Some of the fee-based tools covered in this report may cost anywhere from $450 to $200,000. The providers of some fee-based tools declined to provide cost information due to the sensitivity of such information.

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