©2018 Morningstar, Inc. All rights reserved.

Julie KoskaDirector of Product & Project Management, Sustainability

Morningstar DirectExplore New Avenue with Sustainable Investing

Agenda

gESG demand

gESG capabilities in Direct

g4 Trends

/Asset managers incorporate ESG more extensively into the investment process

/Asset managers increasingly engage with companies on ESG issues

/Increased need to address carbon change

/Sustainable investing advisor education

gDirect Cloud ESG workflow demo

gRoadmap

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What is ESG?

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3 Dimensions of Sustainable Investing

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Why is Sustainable Investing Important?

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Sustainable Investment Growth

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Where does Sustainable Investing Demand Come From?

Source: Morgan Stanley Sustainable, Responsible, and Impact Investing Trends, 2016

Trend 1: The Morningstar Sustainability Rating Measures how Asset Managers Incorporate ESG into the Investment Process

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Company ESG ResearchSustainalytics

Portfolio Sustainability ScoreMorningstar

Sustainability RatingMorningstar

Company ESG Scores (0–100)

Controversy Scores (1–5)

Asset-weighted roll-up of company ESG scores with deductions for controversies

Portfolio Sustainability Scorerelative to Morningstar Category

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Sustainability Rating Methodology Changes

gIncorporate Historical Sustainability Scores from the last 12 months

gAssign the Sustainability Rating based on Morningstar Global Categories

gIncrease rating threshold to 67% of portfolio assets covered

gIncrease peer group size threshold to 30 scored portfolios to receive Sustainability Ratings

gInclude fund of funds in the calculations

gChanges are effective 10/31/2018 and will be reflected in the November 8th

rating calculations

ESG Adoption Increases in Morningstar Cloud

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gUsage of ESG Fund Data increased by 366%+ in 2017 in Morningstar Cloud; momentum continues in 2018 with a 104% increase

g90+ asset managers screen, conduct due diligence, peer analysis, and market their funds based on sustainability criteria

Trend 2: Drive Engagement Activities with Proxy Voting Data

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Interconnected datasets enable sophisticated analysis on proxy voting and stewardship

gMorningstar recently acquired FundVotes, a high quality proxy voting database covering over 90 Million votes across 14 years

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Trend 3: Understand Climate Risk Using the Morningstar Low Carbon Designation

Trend 4: Sustainable Investing Advisor Education

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gOnline courses (Nov 2018 – Q1 2019)gWorkshops/forums (ongoing)gThought leadership (ongoing)

More information is available at: www.mmi-sii.org

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Direct Cloud Demo

Sustainability Roadmap

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Stay Connected to Morningstar on Sustainable Investing Topics

www.global.morningstar.com/sustainableinvesting

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Appendix

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Overcoming Myths: Sustainable Funds and Performance

Sustainable Funds have strong star ratings

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Overcoming Myths: Sustainable Funds and Performance

Understand How Companies Drive Sustainability Ratings

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Direct Cloud ESG Workflow

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Asset Managers Screen, Research, and Conduct Peer Analysis in Direct

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Portfolio Product Involvement Aligns Investor Values with Investments

gProduct Involvement for Portfolios assesses holdings exposure to: Adult Entertainment, Alcohol, Animal Testing, Contraceptives/Abortives/Stem Cells, Controversial Weapons, Fur & Specialty Leather, Gambling, GMO, Military Contracting, Nuclear, Palm Oil, Pesticides, Small Arms, Thermal Coal, and Tobacco

gProduct involvement addresses investor values, but is not incorporated into the Sustainability Rating

View and Screen ESG Company Data in Cloud

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Examine Company Product Involvement Data in Cloud

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Assess Key Sustainability Metrics for Model Portfolios

gProduce portfolio calculations on marquee ESG data points for custom portfolios in Portfolio Editor

gCustomize portfolio holding weights and portfolio dates

ESG Ratings Analysis

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gAllows clients to import a client portfolio and determine the hypothetical sustainability rating and key sustainability statistics for that particular portfolio

gUsers can compare different portfolios to assess their sustainability levels

gSettings allow the user to view the portfolio or model for different dates

U.S. Large Blend category style risk signature: 5 Globe funds v. 1 Globe funds

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5 Globe Funds more value-oriented, higher quality, and less risky.

Morningstar Global Risk Model Style Factor Exposures

5 Globe 1 Globe

Valuation 0.26 0.22 Higher is cheaper

Economic Moat 1.29 1.09 Higher is stronger moat

Valuation Uncertainty -1 -0.79 Lower is less uncertainty

Financial Health 0.64 0.49 Higher is stronger financial health

Ownership Risk -0.63 -0.36 Lower is less ownership risk

Ownership Popularity -0.05 -0.18 Higher is more popular

Value-Growth 0.25 0.47 Lower is more value-oriented

Portfolio Size -1.43 -1.29 Lower is larger cap

Portfolio Liquidity 0.42 0.6 Lower is less liquid

Momentum -0.19 -0.07 Lower is less momentum

Portfolio Volatility -0.8 -0.53 Lower is less return volatility