U.S. ENVIRONMENTAL, SOCIAL, AND CORPORATE GOVERNANCE 2017 Assessing True Client Demand for ESG Criteria NEW Overview & Methodology In this new report, Cerulli examines the growing trend of environmental, social, and corporate governance (ESG) investing. In the report, Cerulli defines what constitutes an ESG investing framework and analyzes the various ways asset managers are incorporating ESG criteria into their investment methodology. The report not only assesses the true demand for ESG strategies among both retail and institutional client types, but also how asset managers can best position ESG strategies to their clients in a portfolio context. The report will uncover what kinds of vehicles and which audiences asset managers believe will offer the biggest opportunities for adoption. The report also assesses what elements of ESG matter most to investors and the methods asset managers can use when educating clients about how to implement ESG strategies into their portfolios. Benefits: y Understand how managers want to consider ESG issues whether it be incorporating it into their investment analysis, or developing new products based on ESG-focused issues y Review the variety of ways ESG can be incorporated y Examine current demand for ESG strategies across various retail and institutional client segments SUBSCRIPTION DETAILS $19,000 PURCHASE INCLUDES ANNUAL COST 92 PAGES 61 EXHIBITS y Digital copy and hardcopy in color y Unlimited online firm-wide access y Exhibits in Excel y Key findings y Analyst support y Interactive Report Dashboards NEW y Executive Summary Video NEW Questions Answered: y What is the overall size of the mutual fund and ETF ESG investment product universe? y What are the biggest challenges to increasing client receptivity of ESG issues? y What types of internal challenges are managers facing as they incorporate ESG issues? y How are asset managers implementing ESG factors/criteria into investment products? y What retail and institutional channels do managers believe have the highest demand for ESG strategies? For more information, contact us: ``info@cerulli.com Cerulli Interactive Report Dashboards NEW Experience Cerulli s digital analytics platform and explore interactive data from this report We are pleased to include these interactive report dashboards with your subscription: 1. ESG Implementation: Uncover asset managers methods for considering ESG issues and the factors included in the investment process. 2. ESG Demand: Explore expected client demand for ESG strategies by channel, institution type, generation, region, and wealth tier. 3. Product Development: Understand how asset managers position ESG products to clients, the level of priority placed on product-related initiatives, and incorporation of ESG strategies by asset class. CERULLI ASSOCIATES info@cerulli.com www.cerulli.com
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Chapter 2 Consideration of ESG Issues Integration in Process vs. Developing Product Exhibit 2.06 Asset Managers: Overall Use of E, S, and G Criteria, 2017 The most-common issues incorporated into the investment products are related to social initiatives, including labor standards, human rights, and gender diversity. Source: Cerulli Associates 10 Average Number of Issues Considered 5 7 4 0 E S G 38 The Cerulli Report U.S. Environmental, Social, and Corporate Governance Investing 2017
Table of Contents Table of Contents: Expanded Key Questions Answered... 12 1. What are managers biggest challenges to increasing client receptivity to ESG issues?...12 2. What are managers internal challenges to incorporating ESG issues?...13 3. What methods are managers considering for ESG issues?...14 4. What institutional channels do managers believe have highest demand for ESG strategies?...15 5. What retail channels do managers believe have the highest demand for ESG strategies?...16 6. What is the overall size of the ESG investment universe?...17 Chapter 1: Outlining a Framework for ESG Investing... 18 Evolution of ESG Issues in Investing...19 Exhibit 1.01. Evolution of ESG, 2017...19 Methodology for Sizing ESG Investing...21 Exhibit 1.02. Asset Managers: Challenges to Increasing Client Demand for ESG Strategies, 2017...21 Exhibit 1.03. Sizing of ESG Investing Universe, 2017...22 Outlining the Framework for ESG Investing...23 Exhibit 1.04. ESG Materiality Matrix...23 Exhibit 1.05. Asset Managers: Internal Challenges to Incorporating ESG, 2017....25 Market Sizing: Assets, Net Flows, and Product Launches...26 Exhibit 1.06. Asset Managers: Factors Driving Managers Decision to Start Using ESG Criteria in Investment Analysis, 2017...27 Exhibit 1.07. Growth of ESG Assets, 2008 3Q 2017...28 Exhibit 1.08. ESG Implementation Type by Net Flows, 2008 3Q 2017....29 Exhibit 1.09. Launch and Closure of ESG Products, 2008 3Q 2017 YTD...30 Chapter 2: Consideration of ESG Issues Integration in Process vs. Developing Product... 31 Exhibit 2.01. Asset Managers: Methods for Considering ESG Issues, 2017...32 Incorporation of ESG Issues...33 Exhibit 2.02. Asset Managers: Criteria for Exclusionary Screening, 2017...33 Exhibit 2.03. Asset Managers: Forms of Active Ownership, 2017....34 Process vs. Product...35 Exhibit 2.04. Asset Managers: Methods for Considering ESG Issues Matrix, 2017...36 The Cerulli Report U.S. Environmental, Social, and Corporate Governance Investing 2017 7
Table of Contents Exhibit 2.05. Asset Managers: Implementation of ESG Issues, 2017...37 Identifying E, S, and G Factors...38 Exhibit 2.06. Asset Managers: Overall Use of E, S, and G Criteria, 2017...38 Exhibit 2.07. Top-15 ESG Factors Included in Investment Process, 2017...39 Investment Staffing and Implementation....40 Exhibit 2.08. Top-15 ESG Factors Being Developed for Product, 2017....40 Exhibit 2.09. Asset Managers: ESG Capabilities, 2017...41 Chapter 3: Retail Investor Demand for ESG Strategies... 42 Exhibit 3.01. Asset Managers: Retail Demand for ESG Strategies in the Next 2-3 Years by Channel, 2017......................... 44 Exhibit 3.02. Asset Managers: Demand for ESG Strategies in the Next 2-3 Years by Age Demographic, 2017...45 Exhibit 3.03. Asset Managers: Demand for ESG Strategies in the Next 2-3 Years by Regional Demographic, 2017....46 Exhibit 3.04. Financial Advisors: Use of SRI/ESG Strategies Over the Next 12 Months, 2017....47 Exhibit 3.05. Financial Advisors: Use of ESG Strategies Over Next 12 Months by Channel, 2017...48 Exhibit 3.06. Financial Advisors: Reasons for ESG Use, 2017...49 Exhibit 3.07. Financial Advisors: Factors Driving Demand for Use of ESG Strategies, 2017...................................... 50 Exhibit 3.08. Financial Advisors: Reasons for Not Using ESG Strategies, 2017...51 Exhibit 3.09. Financial Advisors: Asset Class Demand for ESG Strategies, 2017....52 Exhibit 3.10. Asset Managers: Demand for ESG Strategies in the Next 2-3 Years by Wealth Tier, 2017....53 Exhibit 3.11. HNW Practices Use of ESG Strategies, 2017...54 Exhibit 3.12. HNW Practices and Asset Managers: Perceived Drivers of Socially Responsible/Impact Investing, 2017...55 Exhibit 3.13. HNW Practices and Asset Managers: Greatest Demand for ESG/SRI Strategies by Asset Class, 2017...56 Exhibit 3.14. Households Preferring Environmental and Socially Responsible Investing, 2017....57 Chapter 4: Institutional Demand for ESG Strategies... 58 Exhibit 4.01. Asset Managers: Institutional Channel Demand for ESG Strategies in the Next 2-3 Years, 2017...59 Exhibit 4.02. Consultants: Expected ESG Manager Search Activity for Institutional Asset Owners, 2017....60 Exhibit 4.03. Consultants That Have Been Hired to Evaluate ESG/SRI Capabilities, 2017...61 Exhibit 4.04. Consultants: Expected Asset Allocation Shifts for ESG Investment Strategies Over the Next 12 Months, 2017....62 Exhibit 4.05. Consultants: Anticipated Future Interest in ESG Strategies by Client Type, 2017...63 Exhibit 4.06. Health and Hospital Systems: Implementation of ESG Strategies, 2016....64 Exhibit 4.07. Percentage of OCIOs That Comprehensively Consider ESG Factors When Conducting Manager Due Diligence, 2017...65 Exhibit 4.08. Percentage of OCIOs That Have Dedicated Resources Committed to ESG Incorporation, 2017...66 8 The Cerulli Report U.S. Environmental, Social, and Corporate Governance Investing 2017
Table of Contents Chapter 5: Managers Positioning and Product Plans... 67 Exhibit 5.01. Asset Managers: Level of Priority Placed on Select Product-Related Initiatives, 2017...68 Exhibit 5.02. Asset Managers: Staffing of Resources for ESG Capabilities, 2017...69 Exhibit 5.03. Asset Managers: Current Use of Third-Party Data Providers for ESG Ratings/Data, 2017...70 Exhibit 5.04. Asset Managers: Product Development Initiatives Incorporating ESG Factors by Asset Class, 2017...71 Exhibit 5.05. Asset Managers: Development for ESG Strategies by Vehicle Type, 2017...72 Exhibit 5.06. Likelihood of Incorporation of ESG Principles into Target-Date Product Development, 2017...73 Exhibit 5.07. Financial Advisors Use of ETFs by Strategy vs. ETF Issuers Focus for New ETFs, 2017...74 Exhibit 5.08. Asset Managers: Positioning of ESG Strategies/Product to Clients, 2017...75 Exhibit 5.09. Asset Managers: Current Offering of ESG Client Reporting, 2017...76 Exhibit 5.10. Asset Managers: Types of ESG Reporting Managers Offer to Clients, 2017...77 Chapter 6: Current Landscape of the ESG Marketplace... 78 Exhibit 6.01. ESG Implementation Type Fund Count, 2008 3Q 2017 YTD....80 Exhibit 6.02. ESG Implementation Type Assets by Vehicle, 2011 3Q 2017....81 Exhibit 6.03. ESG Implementation Type Net Flows by Vehicle, 2011 3Q 2017 YTD....82 Exhibit 6.04. ESG Product Assets and Net Flows by Asset Class, 2011 3Q 2017 YTD...83 Exhibit 6.05. Top-10 Morningstar Categories by ESG Product Assets and Net Flows, 3Q 2017...84 Exhibit 6.06. Top-10 Managers by ESG Assets and Net Flows, 3Q 2017...85 Exhibit 6.07. Top-10 Managers by ESG Assets and Net Flows by Implementation Type, 3Q 2017...86 Exhibit 6.08. Top-Five Funds by ESG Assets and Net Flows, 3Q 2017 YTD...87 Exhibit 6.09. Net Expense Ratio Statistics by ESG Implementation Type, 2016...88 Exhibit 6.10. Longest-Standing Manager Tenure by ESG Implementation Type, 2017...89 Exhibit 6.11. Morningstar Sustainability Rating of ESG Funds by Implementation Type, 2017...90 Index of Companies... 91 The Cerulli Report U.S. Environmental, Social, and Corporate Governance Investing 2017 9
Index of Companies Index of Companies Allianz...37 American Century... 86 American Funds,...17, 27, 78, 85, 87 BlackRock/iShares... 17, 40, 81, 88 Bloomberg... 41, 61, 70 Boston Common... 86 Breckinridge... 86 Calvert... 40, 85 Cambridge Associates... 65 Community Capital Management... 78, 86 Cornerstone... 24 Eaton Vance... 85 Fidelity Investments... 37 GMO... 37 Guggenheim... 17, 78, 81 GuideStone... 37 Impax Asset Management... 79, 85 John Hancock... 29, 86 Mercer...61 Morgan Stanley... 44, 54 Nationwide... 16, 44 Natixis... 29, 73 Neuberger Berman... 37, 40 Northern Trust... 37 Nuveen... 29, 37, 74 Parametric... 37 Parnassus... 26, 78, 85, 87 Pathstone Federal Street... 54 Pax World... 85 Perella Weinberg... 37 PowerShares... 17, 78, 81 Privos Capital... 54 Putnam Investments... 40 Rockefeller... 54 Schroders... 45 State Street (SSgA)... 37, 88 The Cerulli Report U.S. Environmental, Social, and Corporate Governance Investing 2017 91
Index of Companies TI... 37, 87 Trillium... 26, 86 UBS... 40 Wilshire... 66 92 The Cerulli Report U.S. Environmental, Social, and Corporate Governance Investing 2017