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TD Ameritrade

Socially Aware Portfolios
Offered by TD Ameritrade Investment Management, LLC

What is ESG Investing?

ESG practices may be a force for change

Sound ESG policies can potentially enhance stock performance

Socially Aware Portfolios are now available through Essential Portfolios

Key takeaways

TD Ameritrade Investment Management now offers Socially Aware Portfolios which leverage Environmental, Social, and Governance (ESG) investment principles that:

Allow you to align your investments with your values

Are intended to improve a company's operational performance while attempting to mitigate certain risks, which may positively influence its stock price1

Factor in corporate practices, which can help uncover investment opportunities

What is "ESG investing"?

The goal of ESG investing is to identify companies that are attractive investments and have strong ESG ratings. This investing approach evaluates a company's financial standing along with the following three factors:

Environmental issues - companies that pose less environmental risk than their peers

Social issues - companies that promote strong labor relations with their employees, allowing them to retain a high percentage of their workforce and customers

Governance issues - companies that promote transparency and diversity surrounding a firm's management framework

Socially Aware Portfolios provide exposure to ESG investing through the selection of exchange-traded funds (ETFs) that leverage ESG inputs from MSCI ESG Research, a leading provider of ESG research, ratings, and indices. If a company earns a higher score than it's industry peers across the three ESG categories (environmental, social, and governance), MSCI assigns a higher ESG rating, which is a growing factor in the investment decision-making process for many investors. Here are some common examples of ESG issues:

Environmental

Climate change & carbon emissions

Air & water pollution

Biodiversity

Deforestation

Energy efficiency

Waste management

Water scarcity

Social

Customer satisfaction

Data protection & privacy

Gender & diversity

Employee engagement

Community relations

Human rights

Labor standards

Governance

Climate Board composition

Audit committee structure

Bribery & corruption

Executive compensation

Lobbying

Political contributions

Whistleblower schemes

ESG practices may be a force for change

Many companies are improving their ESG practices to help reduce risk in response to growing interest in ESG investing from mainstream investors. Some examples of how companies have responded to ESG concerns are:

Environmental: "The health and safety record of BP in the run-up to the Gulf of Mexico oil spill in 2010 was worse than that of its peer group. When this fact was brought to the fore after BP's share price had fallen, it reinforced the need to analyze ESG performance indicators."1

Social: "In the 1990s, Nike was associated with sweatshops in its supply chain in developing countries but Nike took corrective measures to address the issue."1

Governance: Wells Fargo & Co. announced in March 2018 that "four board members will retire, less than a month after the Federal Reserve barred the bank from future asset growth beyond the current $2 trillion balance sheet until it improves corporate governance and addresses other failings. The board shakeup represents the latest fallout from allegations by regulators, customers and employees that Wells Fargo over the past decade set overly aggressive sales targets that resulted in abusive practices towards consumers...."2

Sound ESG policies can potentially enhance stock performance

An old misconception was that factoring ESG criteria into the investment equation would diminish returns. However, a number of studies show that ESG practices may favorably affect stock price performance.1 The MSCI ACWI ESG Leaders Index, which provides exposure to companies with high ESG performance relative to peers, outperformed its parent index, which doesn't consider ESG factors, over the 2008 - 2017 period and 8 out of 10 years (see table below).3 We believe strong ESG practices can lead to better operational performance, which could ultimately have a positive influence on a company's stock and bond prices.

Environmental, Social, and Governance Leaders Index Outperformed Parent MSCI Index Over 2008-2017

(Annual Performance %)

Year MSCI ACWI ESG Leaders MSCI ACWI
2017 23.77% 24.62%
2016 8.50% 8.48%
2015 -1.72% -1.84%
2014 5.40% 4.71%
2013 25.13% 23.44%
2012 15.87% 16.80%
2011 -5.77% -6.86%
2010 13.26% 13.21%
2009 35.88% 35.41%
2008 -39.81% -41.85%

MSCI ACWI ESG Leaders

MSCI ACWI

Past performance does not guarantee future results and investing success. For illustrative purposes only. Source: Based on performance of MSCI ACWI ESG Leaders Index.

Socially Aware Portfolios are now available through Essential Portfolios

TD Ameritrade Investment Management is excited to offer five Socially Aware Portfolios that provide exposure to ESG investing through low-cost, well-diversified, exchange-traded funds (ETFs) that are designed to suit different risk tolerances and investing goals. Now may be a good time to consider investing in portfolios such as these because many companies are providing more extensive data about their ESG practices, and ESG research and analysis methods have become more advanced. With Socially Aware Portfolios, you can invest in companies with stronger governance practices and implement strategies that may align with many of your values, while potentially generating returns that are competitive with non-ESG strategies.

Learn more about our Socially Aware Portfolios or contact us at 800-665-1978.

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