The Power of ESG. Plan sponsors are seeking advice on ESG. The Science of Satisfaction

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1 The Power of ESG Environmental, social, and corporate governance (ESG) investments may make retirement plans a more powerful benefit. The Science of Satisfaction The Science program offers you insights and actionable ideas designed to help you retain and deepen your existing clients and grow your retirement business. Get the full ESG Science program: Plan sponsor presentation Conversation Starter Funds Line-up Input Sheet Funds Sustainability report Funds Sustainability report FAQ Plan sponsors are seeking advice on ESG ESG investing is growing fast by virtually every metric, including assets under management, the number of ESG funds, RFP inquiries, and adoption by investors and plan sponsors. As a result, you can expect plan sponsor clients to ask whether and how they should incorporate ESG. Are you ready for that conversation? The information in this guide can help you: Become well versed in ESG investing Prepare you for meaningful discussions with your clients Help your clients learn about ESG and help them assess their plans

2 1 in 3 investors says an ESG option would make them feel more favorably toward their employer. 1 Research suggests that you should bring up ESG with clients even if they re not asking about it. Wells Fargo and Gallup recently completed a study 1 showing that incorporating ESG investing may increase participant engagement and improve employees perceptions of their employers potentially making defined contribution (DC) plans more powerful benefits for participants and plan sponsors alike. ESG priorities 78 % of surveyed investors expressed interest in protecting the environment, including fighting climate change and supporting innovations in energy, pollution, and waste management 76 % of surveyed investors expressed interest in doing social good, such as promoting diversity and inclusion, improving education, and protecting human rights 59 % of surveyed investors are interested in all three issues 74 % of surveyed investors expressed interest in responsible corporate governance, including ethics and other behaviors Plan sponsors want information and insights that can help them make the most of their plans. You may add value by providing that expertise including the latest on ESG investing. 2

3 What is ESG? We define ESG as the environmental, social, and governance issues that can have a material impact on a company s performance. The impact may come from reputational, operational, or financial risks, or from commercial opportunities, such as clean technology innovations to accelerate the transition to a low-carbon economy. ESG s real-world impact Environmental Climate change Renewable energy Biodiversity and land usage Green building Water stress/pollution Social Human capital Consumer protection Diversity and inclusion Labor standards Privacy & data security Governance Accounting Board structure Business ethics and fraud Corruption Executive compensation INCIDENT BP Deepwater Horizon oil spill April 2010 INCIDENT Equifax data breach September 2017 INCIDENT Enron accounting fraud October 2001 IMPACT Environmental: More than 200 million gallons of oil pumped into the Gulf of Mexico Financial: Record fines of more than $20 billion IMPACT Social: Personal information compromised for 143 million Americans Financial: Short-term stock price dropped 20%, a loss of $4 billion in shareholder value IMPACT Governance: Largest corporate bankruptcy at the time with more than 20,000 jobs lost Financial: Stock price dropped from $13.90 to $0.26 in one month 3

4 ESG myths Research has shown that resistance to adopting ESG often is rooted in misunderstandings about what ESG is and how it works. Dispel misperceptions about ESG so that your clients can make well-informed decisions. MYTH 1 ESG means sacrificing performance REALITY A large body of academic research shows that ESG investments have performed at least as well as traditional investments. 2 MYTH 2 ESG simply screens out unwanted investments REALITY ESG strategies have become more proactive about seeking out investments with positive ESG characteristics. MYTH 3 ESG may violate DOL guidelines REALITY DOL guidance states that fiduciaries need to evaluate ESG investments and select only where they can reasonably conclude that future returns will be competitive on a risk-adjusted basis. 3 MYTH 4 Only a narrow group of investors is interested REALITY Research shows that ESG has broad appeal, and that women and millennials are particularly interested. 1 MYTH 5 ESG is limited to public equity investments REALITY ESG strategies are employed across all asset classes. 4

5 How ESG can help clients get more from DC plans Helping your clients consider ESG investments for their fund lineups may deliver value to them through the following benefits: Potential ESG benefits to DC plan sponsors Employee engagement ESG is a great way to engage participants around financial matters, particularly for women and younger employees. 1 Employee connection Investors want to do good plan sponsors can provide the tools to meet this demand. When participants can connect their social impact values with specific impact they are having with their investments, their interest more than doubles. 1 Reputational benefits with stakeholders The availability of ESG investments in DC plans can provide internal reputational benefits; employees feel more favorable about the company they work for. Get ready We recommend taking the following steps to prepare for conversations about ESG with your retirement plan clients. Use the tools in our The Science program The Power of ESG to help you prepare and navigate these client conversations effectively. 1. Learn about ESG To present confidently to clients and help them think through issues related to ESG, you and members of your firm first must become fully versed on the topic. The following resources can help you get up to speed on the state of environmental, social, and governance investing today. Review Wells Fargo Asset Management presentation The Benefits of ESG in DC Plans is an informational presentation with speaker s notes for your use at the bottom of each slide. Use it to prepare for and deliver client presentations. Explore Industry resources The resources on the next page provide detailed information and additional training opportunities from global organizations at the forefront of ESG investing. 5

6 The Forum for Sustainable and Responsible Investment Information about a broad range of ESG investment vehicles (Click on Mutual Funds and ETFs ) Principles for Responsible Investing (PRI) Insight into ESG investing in many different asset classes (Click on Investor Tools ) Global Impact Investing Network (GIIN) Education about investments that aim for positive social or environmental impacts (Click on About Impact Investing ) 2. Begin conversations with clients Segment clients by likely level of interest Introduce ESG first to clients who seem most likely to be receptive, based on what you already know about them. For example, you could prioritize clients that have already defined ESG or corporate social responsibility objectives or have implemented ESG with other pools of corporate assets. Introduce ESG Use the WFAM presentation (plan sponsor version) to introduce the topic to retirement plan clients. Your presentation can kick off a preliminary conversation that reveals clients questions and priorities with respect to ESG. Provide ESG benefits: Explain that WFAM research shows that incorporating ESG may offer plan sponsors a number of benefits, including improved employee engagement, morale, and retention. 3 Resource: The Benefits of ESG in DC Plans Discover needs: Use the WFAM ESG Conversation Starter. This easy-to-follow outline can help you determine where clients stand with respect to ESG including their general impressions of ESG investing, how important they consider ESG to be, and steps the organization has taken already. It will help improve your understanding of each client s priorities and perspectives on ESG, so you can approach the topic in ways that suit them best. Resource: ESG Conversation Starter 3. Analysis and implementation Collect plan s fund information Offer to assess the client s current plan. Use our one-page form to collect fund identifier information for analysis. Then send it to the WFAM team to create the Fund Sustainability reports. Resource: Fund Line-up Input Sheet. Meet with clients to review the Fund Sustainability Report Review results, checking for overall sustainability ratings as well as scores on environmental, social, and governance factors. Look for particularly high or low scores on a fund-by-fund basis. Resources: Sustainability Report and Sustainability Report Frequently Asked Questions. 6

7 If appropriate, discuss possible approaches to incorporating ESG criteria Plans might incorporate ESG in many different ways; the right approach will depend on each individual client s goals. The hypothetical examples below demonstrate the variety of actions clients might take. A B C ESG exploration to implementation Plan sponsor A did an initial assessment and decided to do nothing further Plan sponsor B conducted a preliminary survey to understand which ESG issues were important to its employees Plan sponsor C wanted to understand the ESG impacts made by its investments to help communicate with beneficiaries The Fund Sustainability Report WFAM has licensed Morningstar s Fund Sustainability Report: an in-depth, holdingsbased analysis that shows how funds score on Morningstar s ESG and sustainability criteria. Partner with your WFAM DC Specialist to give clients access to this powerful resource, which can help you assess how well a plan s current investment menu scores on a variety of sustainability measures. D Plan sponsor D informed its investment managers that it considered ESG criteria important and asked for information about whether and how ESG factors were incorporated into the managers investment processes E Plan sponsor E added language to its IPS stating that ESG factors should be integrated into investment decision-making F Plan sponsor F replaced two funds in its lineup after determining that they invested in companies that did not align with participants goals G Plan sponsor G added a clean energy impact fund to its lineup to align with the results of an employee survey H Plan sponsor H integrated ESG investment criteria across all investments in pursuit of better risk-adjusted returns I Plan sponsor I added factor-based ESG target date funds to achieve broad ESG improvements across its multi-asset portfolios Note: DOL guidance states that fiduciaries need to evaluate ESG investments and select only where they can reasonably conclude that future returns will be competitive on a risk-adjusted basis. 3 7

8 The implementation process When working with clients who are interested in implementing ESG in their plans, we recommend using the following process. Determine ESG goals and priorities Understanding which aspects of ESG are most important to your client and its employees can help you focus on specific themes and priorities. Where appropriate, suggest employee surveys. Assess Consider the plan s current options by analyzing the sustainability scores of the funds and whether the funds have explicit ESG objectives. Flag funds with high and low scores for further discussion and investigation. Understand how specific managers integrate ESG in their strategies. Align investment strategies to ESG goals Take steps to bridge gaps: Offer to help clients with stewardship and active ownership activities as a way to improve corporate management responsibility and investment performance. Target improved ESG exposures using broad ESG integration, screening and/or impact approaches (see the graphic below). Consider modifying the Investment Policy Statement to better represent ESG goals and priorities. Report Effective reporting is key to making the most of ESG s potential for DC plans: Interest in ESG more than doubles when investors can understand and connect with its impact. 1 Communicate to stakeholders on ESG performance and impact in an easily understandable format. Highlight good results. Point out funds with especially strong performance and sustainability ratings. 8

9 Impact approaches for ESG integration ESG integration Values alignment Impact Investing in a changing world Investing in the world I believe in Investing to change the world Incorporating material ESG considerations to gain additional insight into the risks and opportunities that can affect the performance of an investment, with the aim of providing better risk-adjusted returns. Seeking to ensure investments are aligned with client priorities. Can include negative screening (sector exclusions), norms-based screening, or positive screening (e.g., optimizing on ESG metrics). Delivering both returns and impact by identifying environmental or social themes with investment opportunity and also ability to generate and/or accelerate longterm global sustainability. Stewardship and active ownership Working with management to seek improved investment performance Drive positive changes in investee companies through activities such as engaging with management and proxy voting on ESG issues to promote long-term value creation. The growing demand for ESG ESG is in growing demand among investors and plan sponsors alike, and for good reason: For investors, ESG investments offer a chance to use their financial clout to make the world a better place, however they define it; for plan sponsors, ESG provides the opportunity to enhance risk-adjusted returns as well as employee engagement and morale. You can demonstrate your value by introducing the topic proactively, and by showing clients the power of ESG for their DC plans. Get started today Take advantage of the unique tools in The Science program, which are designed to further your practice s reach and your clients satisfaction. Call your Wells Fargo Asset Management defined contribution investment specialist at or visit wellsfargofunds.com/dcio. 9

10 I would like to learn more about your organization s consideration and use of environmental, social, and governance (ESG) criteria in plan portfolio decisions. This will help us decide if you are interested in taking more steps toward incorporating ESG into your plan. in investment decisions? pools such as DB plan, balance sheet, or corporate foundation? (If yes, why not DC plan?) scope of your DC plan? Such as: board meetings, risk management meetings, shareholder meetings. Updated plan s investment policy statement to include ESG criteria Identified which ESG issues that are most important to firm and plan participants Asked investment managers how they integrate ESG criteria into their investment process Made changes to the investment lineup to include ESG criteria criteria into your plan? Such as: Reflects participant and firm priorities Improves the risk profile of the portfolio May increase rates of return over the long run Increases employee participation and engagement your plan? Such as: I don t know enough about it/not sure how to get started Concerned about performance of ESG investments Concerned about ERISA/fiduciary issues Not important to the company/plan participants you would implement? A discrete option in the core funds lineup Integrate into every fund across the core funds lineup In the qualified default investment alternative (QDIA) Make available in brokerage window or managed account The Morningstar Sustainability report will show how a fund s score on overall sustainability and specific ESG criteria compared to other funds in the same category. Funds are assigned a Globe rating similar to the Morningstar Star rating. The following information is required to run the Morningstar Sustainability Report: Advisor/Consultant Name Plan Name Plan Type Plan Assets ($) Advisor/Consultant Advisor/Consultant phone Fund Identifier/ Fund Name CUSIP/Ticker Notes (optional) Send fund information to: Christopher.M.Miller@wellsfargo.com, Please allow 5 business days for report completion Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo & Company. Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Funds. Other affiliates of Wells Fargo & Company provide subadvisory and other services for the funds. The funds are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA, an affiliate of Wells Fargo & Company. Neither Wells Fargo Funds Distributor nor Wells Fargo Funds Management holds fund shareholder a counts or assets. This material is for general informational and educational purposes only and is NOT intended to provide investment advice or a recommendation of any kind including a recommendation for any specific investment, strategy, or plan. FOR INVESTMENT PROFESSIONAL USE ONLY NOT FOR USE WITH THE RETAIL PUBLIC 2018 Wells Fargo Funds Management, LLC. All rights reserved. FN IHA As of Date: 5/31/2018 Allocation--50% to 70% Equity Oakmark Equity And Income Investor Vanguard Wellington Inv American Funds American Balanced R4 Diversified Emerging Mkts Wells Fargo Emerging Markets Equity R6 Equity Precious Metals Oppenheimer Gold & Special Minerals A Foreign Large Blend Dodge & Cox International Stock Foreign Large Growth American Funds Europacific Growth F1 High Yield Bond Fidelity High Income Intermediate-Term Bond PIMCO Total Return R Morningstar Sustainability Rating Morningstar Sustainability Scorecard June 2018 Portfolio Sustainability Score Sustainability Percent Rank in Category Portfolio Controversy Score Portfolio Environmental Score Portfolio Social Score Portfolio Governance Score Sustainability Mandate No High No No Above No No Below No Below No Not FDIC Insured No Bank Guarantee May Lose Value FOR INVESTMENT PROFESSIONAL USE ONLY - NOT FOR USE WITH THE RETAIL PUBLIC How should investors use the Sustainability Ratings? The Morningstar Sustainability Rating allows investors to assess how well the companies held by a fund are managing their ESG risks and opportunities. The rating will also allow investors to compare funds across categories and relative to benchmarks. The ratings can serve as an initial screen for investors interested in sustainability and ESG. They are a useful starting point for investors wanting to know more about a manager s investment process and how it relates to sustainable investing. They will help investors determine the level of sustainability in their portfolios. Some may prefer only funds that have high ratings; others may wish to avoid funds with low scores. Still others may wish to achieve an above-average score across all funds in their portfolios. The ratings should not be the sole basis for an investment decision. This is because they do not reflect a fund s performance on either an absolute or risk-adjusted basis, or any qualitative Morningstar evaluation of a fund s merits. What are the key things I should be pointing out to my client? The overall Sustainability Ratings for their funds. How well their ESG priorities align with the fund s environmental, social, and governance scores. Particularly high or low ratings or scores. What is the main statistic I should be looking at? The Sustainability Rating from High (5 globes) to Low (1 globe) is a key measure. It summarizes all input into one overall rating within a Morningstar category. When and why should I look at the others? If your client is interested in a specific area such as environmental factors, the Portfolio Environmental Score, for example, will give more insight into that particular area. The definitions state that higher scores are better, but what is a high score and what is a low score? As of June 4, 2018, the highest Portfolio Sustainability score in the Morningstar database is The lowest is Generally, funds with a sustainability mandate (indicated by prospectus) have a higher absolute score, but all ratings and rankings are within a given Morningstar category. FOR INVESTMENT PROFESSIONAL USE ONLY - NOT FOR USE WITH THE RETAIL PUBLIC Advisor Name Advisor Phone Advisor Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Bond values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates. Changes in market conditions and government policies may lead to periods of heightened volatility in the bond market and reduced liquidity for certain bonds held by the fund. In general, when interest rates rise, bond values fall and investors may lose principal value. Interest-rate changes and their impact on the fund and its share price can be sudden and unpredictable. Investing in environmental, social and governance (ESG) carries the risk that, under certain market conditions, the investments may underperform products that invest in a broader array of investments. In addition, some ESG investments may be dependent on government tax incentives and subsidies, and on political support for certain environmental technologies and companies. The ESG sector may also have challenges such as a limited number of issuers and liquidity in the market, including a robust secondary market. Investing primarily in responsible investments carries the risk that, under certain market conditions, an investment may underperform funds that do not utilize a responsible investment strategy. Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo & Company. Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Funds. Other affiliates of Wells Fargo & Company provide subadvisory and other services for the funds. The funds are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA, an affiliate of Wells Fargo & Company. Neither Wells Fargo Funds Distributor nor Wells Fargo Funds Management holds fund shareholder accounts or assets. This material is for general informational and educational purposes only and is NOT intended to provide investment advice or a recommendation of any kind including a recommendation for any specific investment, strategy, or plan. FOR INVESTMENT PROFESSIONAL USE ONLY NOT FOR USE WITH THE RETAIL PUBLIC 2018 Wells Fargo Funds Management, LLC. All rights reserved. FN lha No No The power of ESG tools available to Advisors Available on WFAM s website for retirement professionals at wellsfargofunds.com/dcio The Benefits of ESG in DC Plans An educational PowerPoint presentation you can use with clients Fund Sustainability Report A holdings-based analysis that scores a plan s fund lineup on ESG criteria ESG Scorecard Environmental, Social, and Governance (ESG) Investing in DC Plans FOR INVESTMENT PROFESSIONAL USE ONLY NOT FOR USE WITH THE RETAIL PUBLIC. 1 ESG Conversation Starter Questions to guide your conversations with clients about ESG Fund Sustainability Report FAQ A guide to help you interpret the Fund Sustainability Report ESG Discussion Guide 1. In your organization, what level of priority is given to incorporating ESG criteria 2. Has your organization implemented ESG investment criteria in any other asset 3. Has your organization discussed any ESG investment strategies beyond the 4. Have you taken any steps to incorporate ESG into your investment process? Such as: 5. What do you see as most important reason to incorporate ESG investing 6. What do you see as the barriers to incorporating ESG investing criteria into 7. If you were to incorporate ESG investments in your DC plan, how do you think Frequently asked questions Fund lineup input sheet A worksheet you use to request a plan-specific Fund Sustainability Report Plan Sponsor Flyer Use this flyer customized with your firm s information to generate client meetings Funds Impact Report Input 59 % of surveyed investors in the Wells Fargo/Gallup Investor and Retirement Optimism Index survey expressed interest in all three ESG themes. Did you know? Investors are interested in financial and ESG goals. Call today to schedule your complimentary consultation on ESG approaches for DC plans Gain valuable insights to help you better understand: Benefits of incorporating ESG into your plan Steps to help you get started with ESG Different approaches to ESG integration How your fund line up aligns with your participants ESG goals Contact me to learn more about ESG Investing in DC Plans. 10

11 The Science This program adds real value to plan sponsor guidance and materials to deliver higher levels of client satisfaction. Best practices Gain practical ideas from our new research on sponsor/ advisor relationships. Useful tools Let our tools help strengthen your plan sponsors. FOR INVESTMENT PROFESSIONAL USE ONLY NOT FOR USE WITH THE RETAIL PUBLIC The Science This program adds real value to plan sponsor guidance and materials to deliver higher levels of client satisfaction. Best practices Gain practical ideas from our new research on sponsor/ advisor relationships. Useful tools Let our tools help strengthen your plan sponsors. Defined contribution Retirement survey results Findings The Science Higher levels of client satisfaction may be achieved when you use the ideas and the tools of this program to add real value to plan sponsor relationships. Practical ideas Best practices from our new research to reinforce your value proposition. Ready-made tools Let our tools help strengthen your reputation with plan sponsors. FOR INVESTMENT PROFESSIONAL USE ONLY NOT FOR USE WITH THE RETAIL PUBLIC Overview of adding value to plan sponsor relationships Annual review guide for plan advisors New advisor survey results spotlight disconnects between what sponsors want and what advisors think they want The Science This program adds real value to plan sponsor guidance and materials to deliver higher levels of client satisfaction. Best practices Gain practical ideas from our new research on sponsor/ advisor relationships. Useful tools Let our tools help strengthen your plan sponsors. The Science This program adds real value to plan sponsor guidance and materials to deliver higher levels of client satisfaction. Best practices Gain practical ideas from our new research on sponsor/ advisor relationships. Useful tools Let our tools help strengthen your plan sponsors. The Science This program adds real value to plan sponsor guidance and materials to deliver higher levels of client satisfaction. Best practices Gain practical ideas from our new research on sponsor/ advisor relationships. Useful tools Let our tools help strengthen your plan sponsors. Annual summary guide for plan advisors Participant education planning guide for plan advisors Annual calendar guide for plan advisors Explore our broader programs The Science Looking to demonstrate the value you add, engage meaningfully with clients, and boost plan sponsor satisfaction? Use the tools provided in The Science program to prepare yourself and educate clients on topics critical to your success. Tools include: Formulas for satisfaction Formulas for Satisfaction Gain tips and insights from our plan sponsor survey Annual summary for satisfaction Annual Summary for Satisfaction Reinforce your value by creating an annual summary for each plan Client feedback surveys: A step-by-step guide for retirement plan advisors Client Feedback Surveys for Satisfaction Measure the satisfaction of your plan sponsor clients Education planning for satisfaction Education Planning for Satisfaction Create custom participant education plans Checklist for satisfaction Checklist for Satisfaction Organize your annual review committee meetings Calendar for satisfaction Calendar for Satisfaction Organize your time and set client expectations The Science of Superior Service The Science of Superior Service from our Science of Superior Service study help you identify the disconnects between what you provide and what plan sponsors really want, so you can enhance your service model and your value to clients. 11

12 1. Wells Fargo/Gallup Investor and Retirement Optimism Index, as of December 12, Journal of Sustainable Finance & Investment. Gunnar Friede, Timo Busch, and Alexander Bassen ESG and Financial Performance: Aggregated Evidence From More Than 2000 Empirical Studies, Journal of Sustainable Finance & Investment, 5:4, , DOI: / U.S. Department of Labor Fidelity Assistance Bulletin (FAB) No Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Bond values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates. Changes in market conditions and government policies may lead to periods of heightened volatility in the bond market and reduced liquidity for certain bonds held by the fund. In general, when interest rates rise, bond values fall and investors may lose principal value. Interest rate changes and their impact on the fund and its share price can be sudden and unpredictable. Investing in environmental, social, and governance (ESG) carries the risk that, under certain market conditions, the investments may underperform products that invest in a broader array of investments. In addition, some ESG investments may be dependent on government tax incentives and subsidies and on political support for certain environmental technologies and companies. The ESG sector also may have challenges such as a limited number of issuers and liquidity in the market, including a robust secondary market. Investing primarily in responsible investments carries the risk that, under certain market conditions, an investment may underperform funds that do not use a responsible investment strategy. Wells Fargo Asset Management (WFAM) is the trade name for certain investment advisory/management firms owned by Wells Fargo & Company. These firms include but are not limited to Wells Capital Management Incorporated and Wells Fargo Funds Management, LLC. Certain products managed by WFAM entities are distributed by Wells Fargo Funds Distributor, LLC (a broker/dealer and Member FINRA). This material is for general informational and educational purposes only and is NOT intended to provide investment advice or a recommendation of any kind including a recommendation for any specific investment, strategy, or plan. FOR INVESTMENT PROFESSIONAL USE ONLY NOT FOR USE WITH THE RETAIL PUBLIC 2018 Wells Fargo Funds Management, LLC. All rights reserved. IHA FASS