Integrating Stewardship, Investing and ESG at Northern Trust

Sustainable Investing Approach

We employ a rigorous analytical investment approach, leveraging quantitative and fundamental research and expertise to uncover financially relevant information that can impact a company’s performance.

To implement this approach, our sustainability and stewardship specialists work in tandem with investment management teams to identify investment and engagement opportunities. Our actively designed investment solutions purposefully employ a robust four-step investment approach: analyze, measure, monitor and engage.

Four-Step Investment Approach

1. Analyze
We seek out topics and issues that are financially material and industry specific that can shape short- and longterm results. We develop proprietary frameworks of measurable ESG targets by leveraging a mix of leading industrystandard frameworks, such as SASB and TCFD, and our more than 30 years of practical ESG portfolio-building experience.

2. Measure
We believe the companies that put sustainability at the core of their business — those with a strong strategic vision and a deep understanding of the interconnectivity between people, planet and profit — are likely to reap long-term rewards. We use all the tools at our disposal — external best-in-class ESG data sets, our proprietary research and analytics, custom exclusionary screens and decades of experience — to select the key performance indicators that measure how well publicly traded companies are performing on the ESG topics and issues we deem businessrelevant and financially material.

3. Monitor
We continuously assess the sustainability performance of the securities we select for our ESG portfolios. From industry-specific frameworks to our proprietary ESG Vector Score and custom exclusionary criteria, we develop a comprehensive view that helps us separate the leaders from the laggards and flag the companies that require additional research or targeted engagement.

4. Engage
Stewardship is an integral part of our investment process, rooted in our firmly held belief that it is our duty to regularly engage with the companies in our portfolios. We communicate with these companies through dialogue and voting on issues of substance: those that can affect business on many levels. This active ownership approach applies to all companies we invest in, whether the investment strategy is actively managed or indexed. Our disciplined proxy voting policy and multi-cycle engagement program encourage the companies in which we invest to pursue and disclose sustainable business practices that we believe will lead to long-term value.

Collaborating with Investment Research

The sustainable investing and stewardship team regularly collaborates with NTAM’s fundamental equity, fixed income and quantitative research teams.

Our fundamental equity research team provides sector and company insights to help assess the financial impact of a company’s ESG risks, which helps the stewardship team prioritize companies to engage with and topics to discuss. As thought leaders, the research teams participate in SASB Standards advisory groups on various topics, including social media content management, human capital management, and extractives and mineral processing. The teams collaborate on clientfocused research and thought leadership.

The fixed income research team provides insights on the magnitude of ESG risks of bond issuers, aiding the stewardship team in determining the appropriate depth of engagement with those companies. In 2021, the fixed income research team began joining the stewardship team for company meetings.

Lastly, a multi-disciplinary team of quantitative research analysts, product developers, strategists and portfolio managers supports the ongoing development of our proprietary ESG assessment framework, the ESG Vector Score.

The Proprietary ESG Vector Score

The ESG Vector Score focuses on the magnitude and direction of key ESG-related business issues likely to have a financial impact on companies, and hence a portfolio’s performance.

It provides a consistent, transparent methodology to gain greater clarity when building and managing sustainable portfolios. Additionally, it acts as a valuable indicator of corporate management of sustainability risks and can play an important role in stewardship activities by drawing attention to financially material issues to engage and track progress on with companies.

As the demand for ESG-driven investing has accelerated, so too has the number of data providers and varying ESG methodologies. This growing challenge has created the need for a more transparent and disciplined framework that helps reduce the confusion and subjectivity that exists today. Such a framework should draw upon the guidance from leading industry groups, which have paved the way in establishing more consistent standards and recommendations.

ESG Vector Score Benefits

Enables more purposeful and transparent integration of ESG considerations into investment processes, addressing the need for a consistent way to measure and report on ESG investments.

Provides a consistent, transparent methodology to gain clarity when building and managing sustainable portfolios, by focusing on the magnitude and direction of key ESG-related business issues likely to have a financial impact on companies.

Offers more precision in identifying ESG-related business risks that could impact portfolio performance, whether constructing portfolios using best-in-class security selection or exclusionary techniques.

Assists in prioritizing corporate engagements, further aligning sustainable investments and stewardship — leading to more deliberate engagements and the ability to track progress over time with a consistent metric.

Our industry-first approach marries two leading sustainability disclosure standards and frameworks — the SASB Standards, which are industry-specific sustainability disclosure standards focused on financial materiality, and the thematic structure of the TCFD recommendations. The design enables more purposeful and transparent integration of ESG considerations into investment processes, addressing the need for a consistent way to measure and report on ESG investments.

The ESG Vector Score forms the core of several investment products. In 2021, we launched eight exchange-traded funds that use the score to help select equities, investment grade bonds and high yield bonds. Additionally, in the U.S., the ESG Vector Score and additional ESG-related exclusionary criteria support equity index strategies to provide exposure to companies with sustainable business practices in diversified portfolios.

Similarly, in Europe, we designed a series of investment products that combine our quantitative factor-based equity investment process, exclusionary criteria and the ESG Vector Score. The products have a better aggregate ESG Vector Score than their benchmarks.

Training and Education to Deepen ESG Integration

The sustainable investing and stewardship team in 2021 led numerous training sessions for investment professionals, executive leadership, clients and employees to enhance their understanding of ESG, our sustainable investing business and sound investment practices.

These included training or educational sessions on:

• The ESG Vector Score for the equity research, institutional sales and intermediary sales teams.
• ESG product launches and systemic climate risk for sales teams.
• Sustainable investment philosophy and ESG integration for new employees, on a quarterly basis.
• ESG-related strategy, policies, emerging regulations and market insights for our fund boards.
• Progress on our integration of sustainable principles into our investment process to the Northern Trust Sustainability, Inclusion and Social Impact Council and Northern Trust board of directors.
• Principles for Responsible Investing (PRI) reporting updates to clients, consultants and stakeholders globally.
• Our sustainable investing philosophy and business for our internal professional development groups, including NTAM Align, the Advancing Professionals Resource Council, and the Northern Trust Sustainability Network.

Improving the Integration of Stewardship, Sustainability and Investing

We are developing a process, between the stewardship specialists and the investment team, to link progress more seamlessly between our stewardship engagements and our investment decisions.

As a guide for this effort, we are using the UN Principles for Responsible Investment Active Ownership 2.0 objectives, which encourage investors to shape sustainability outcomes through more assertive and effective stewardship activities.

Read the full report here.