For the Year Ended December 31, 2020
This report has been prepared in furtherance of our ongoing commitment to transparency for our various stakeholder groups. Our stakeholders may use this report to gauge Northern Trust’s progress on achieving our goals pertaining to Environmental, Social and Governance (ESG) matters. This report has been prepared in accordance with the Sustainability Accounting Standards Board's disclosures for Asset Management and Custody Activities. As such, the information provided in this response is primarily representative of Northern Trust’s Asset Management (NTAM) business. Additional information may exist with respect to Northern Trust’s other lines of business.
FN-AC-270a.1 - Number and percentage of covered employees with a record of investment-related investigations, consumer-initiated complaints, private civil litigations or other regulatory proceedings No Northern Trust covered employees were the subjects of new complaints or proceedings of this type during the reporting period.
FN-AC-270a.2 - Total amount of monetary losses as a result of legal proceedings associated with marketing and communication of financial product-related information to new and returning customers Please refer to Northern Trust’s periodic reports under Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), and other filings made with the U.S. Securities and Exchange Commission (SEC) for a description of material legal proceedings, if any.
FN-AC-270a.3 - Description of approach to informing customers about products and services We believe in the importance of fair and industry-consistent disclosure of investment performance results, and have thus adopted the CFA Institute's Global Investment Performance Standards which guide how we regularly communicate investment performance results and risk statistics to clients and prospects.
Our client-facing teams are trained to uphold and comply with the standards, laws, rules and regulations surrounding client and prospect communication required of the various legal entities through which we operate. These professionals, together with our investment strategists, analysts and portfolio managers, are responsible for regular communication with clients and prospects.
We use a wide range of media to communicate product and service information with our broad client and prospect set. Information may be provided through strategy and fund fact sheets, websites, blogs, webinars, and conferences. For our fund ranges, audited annual reports are made available to provide transparency as to fund holdings, transactions and valuation. Clients also receive periodic statements that relay their specific performance results, portfolio characteristics and risk statistics.
To engage with prospective clients, we may leverage tailored presentation materials that include investment strategy objectives, describe the investment process and relay historical performance outcomes with risk statistics. All standard marketing materials and client-specific presentations are subject to internal policies, procedures and review by internal compliance professionals.
Northern Trust Asset Management's approach to communication is aimed at transparency and is tailored to each client type and the jurisdictional requirements of our clients’ locations. Additional information about Northern Trust Asset Management products and services can be found through www.northerntrust.com as well as related offering-specific websites which are customized to location and investor type.
Balanced and transparent communication are at the center of Northern Trust's philosophy on client engagement. To this end, a Code of Ethics has been developed which employees agree to and receive regular training on. Northern Trust Asset Management's Code of Ethics is designed to reinforce our reputation for integrity by placing the interests of clients first, while avoiding even the appearance of impropriety and to ensure compliance with federal securities laws. The Code of Ethics sets forth procedures and limitations that govern the personal securities transactions of our employees in accounts held in their own names as well as accounts in which they have indirect ownership.
The Code of Ethics establishes general principles governing the conduct of all persons covered by the Code in connection with the Northern Trust Asset Management's investment advisory services, as well as procedures to ensure compliance with these general principles. These principles emphasize the fiduciary duties to clients and the obligation of persons covered under the Code of Ethics to uphold the following:
Northern Trust has developed policies and procedures for managing, mitigating and disclosing actual or potential conflicts of interest related to the services provided. The underlying principal of each of these polices and Northern Trust Asset Management's Code of Ethics is to place the interests of clients first. Form ADV provides information about SEC-registered investment advisers and their business, ownership, clients, employees, business practices, affiliations, conflicts of interest, disciplinary events, advisory services, and fees. The Form ADV for each of Northern Trust's investment advisers registered with the SEC is available on the SEC’s Investment Adviser Public Disclosure (IAPD) website.
FN-AC-330a.1 - Percentage of gender and racial/ethnic group representation for (1) executive management, (2) non-executive management, (3) professionals, and (4) all other employees
FN-AC-410a.1 - Amount of assets under management, by asset class, that employ integration of environmental, social, and governance (ESG) issues, sustainability themed investing, and screening We have been managing portfolios integrating sustainability considerations since 1988, when our first index equity ESG strategy was launched in the form of negative screening. Since that time, our sustainable investing assets have grown organically and as of December 31, 2020 have reached US$128.2 billion in assets under management. We have provided the following chart breakdown by asset class and approach:
FN-AC-410a.2 - Description of approach to incorporation of environmental, social, and governance (ESG) factors in investment and/or wealth management processes and strategies At Northern Trust, we have been managing portfolios in this style for more than 30 years, during which time this space has evolved significantly. We are committed to evolving and advancing the innovative, compelling capabilities available to the marketplace. Northern Trust offers investment capabilities with sustainable objectives in equity, fixed income, alternatives and listed real assets. The approach and objective of a sustainable investing strategy is multi-dimensional, and may apply differently to different asset classes and in different geographies. While sustainability factors may be broad in nature, our view focuses on certain key issues and approaches in our investment framework. It is our view, for example, that the way a company manages diversity can either create value or stifle it. Appropriate management of climate risk distinguishes industry leaders from industry laggards and affects stakeholders broadly. In this effort we are guided by international norms and standards, including the Organization for Economic Co-operation and Development (OECD) guidelines, the UN Global Compact, and the International Labour Organization (ILO) Core Conventions. Responsible stewardship is a critical step in ensuring that the capital entrusted to us is working on behalf of our clients to create value and mitigate risks as we work towards financial, environmental and social sustainability.
Northern Trust Asset Management has the ability to integrate ESG data and indicators into passive and quantitative active investment strategies. We employ a variety of ESG strategies across the sustainable investing spectrum, from exclusionary, to integration to thematic.
Our Northern Trust Custom ESG suite of exclusions employed throughout selected passive and active strategies across our firm apply a customized criteria that address broad ESG issues to create the eligible ESG universe of securities from which to begin the portfolio construction process. The Northern Trust Custom ESG criteria screens out companies with significant involvement in controversial business lines, specifically tobacco, civilian firearms, controversial weapons, conventional weapons, and thermal coal. Additionally we identify and remove any company found to have violated international norms such as the UN Global Compact or to have generally shown poor management of ESG risks and opportunities.
The NT World Green Transition, Index Fund, an example of our passive platform designed by Northern Trust Asset Management, uses thematic approach that integrates the core investment objectives of the MSCI Custom ESG Climate Series A Indices (Developed and Emerging Markets). The strategy combines the core of our Custom ESG screening process with a thoughtful approach to fossil fuel divestment and a range of positive tilts which provide opportunities to benefit from the shift to a low-carbon economy. We believe this sets a firm governance background and screens social and governance issues before allowing further exclusions to the universe. The strategy divests from fossil fuels with Energy Applications and further reduces its carbon intensity, while actively tilting towards companies that provide solutions for the transition to a low-carbon economy. The result is a climate-aware, passive solution which provides a hedge against systematic climate change risks.
Our approach to actively managed strategies is to focus on quantitative investing techniques in an attempt to efficiently capture factor exposures that we feel are compensated over full market cycles, while mitigating undesired risks. An example from our asset management practice is our Quality ESG (QESG) strategy. This strategy incorporates financial and ESG factors into our equity selection process in several ways. First, we remove companies with significant involvement in controversial business lines, specifically tobacco, civilian firearms, controversial weapons, conventional weapons, and thermal coal using the Northern Trust Custom ESG suite of exclusions. Additionally, in this strategy, we identify and remove any company found to have violated international norms such as the UN Global Compact or to have generally shown poor management of ESG risks and opportunities. Focusing on quality, our strategy then ranks companies by our quality score and removes those in the lowest 20% of each sector. With our eligible securities, our portfolio is then optimized to have a larger weight in securities with higher ESG ratings, and securities with higher quality scores, with constraints based on sector and security to balance risk, return and transaction costs. Additionally, our optimization takes into account company-specific carbon data in order to achieve our targeted reduction of the portfolio’s carbon footprint and to lean the portfolio toward companies that may benefit from a transition to a low-carbon economy. We target a carbon footprint reduction in both carbon emissions and carbon reserves of at least 50% relative to the benchmark and have historically realized a 60% emissions reduction and an 80% reduction in reserves. Carbon risk is an important sub-component of broader climate change risks and is therefore an additional point of emphasis for this strategy during the equity selection process. Following these steps of the investment process significantly helps identify those companies that not only have strong ESG practices but are also financially well-positioned.
In 2021, we launched our proprietary scoring model for assessing material ESG risks. The Northern Trust ESG Vector Score is a proprietary analytical measurement which assesses material sustainability performance for issuers in the public equity and corporate fixed income asset classes. We developed the Northern Trust ESG Vector Score for use in constructing and managing investment portfolios and stewardship activities. The 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. Our innovative approach combines two leading sustainability reporting frameworks – the Sustainability Accounting Standards Board’s (SASB) Standards, which are industry-specific, financial materiality standards, and the thematic structure of the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations. Our multi-dimensional score is unique in its application of TCFD’s anticipatory framework on governance, strategy, and risk management beyond climate issues – to all ESG risks across the entire SASB materiality map, resulting in a comprehensive assessment. 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 issues.
FN-AC-410a.3 - Description of proxy voting and investee engagement policies and procedures Northern Trust has a suite of policies and procedures to help frame our active ownership activities. They include our Sustainable Investing Philosophy; Proxy Voting Policies, Procedures and Guidelines; and Engagement Policy.
Our Engagement Policy covers both our passive and quantitative equity pooled funds. Whenever we see significant risk coming from an investee company’s behavior, we strive to make sure it is addressed by engagement – either through third-party arrangements, or directly by a Northern Trust employee. If the issue is not resolved, we may consider divesting from such securities, except when they are part of index strategies, or when investment strategy does not permit us to do so. We believe it is our duty to regularly engage with companies in our portfolios, and our experience shows that engagement and proxy voting has the biggest impact when they are used in combination. Our proactive dialogue with companies, reinforced by our voting power, encourages companies to improve practices that strengthen sustainability.
As a major index investor representing permanent capital in more than 10,000 companies globally, we see our voting at shareholder meetings as one of the best ways Northern Trust can communicate its views to companies on behalf of our clients. Academic research shows that corporate management pays attention to who is voting and how, and they are willing to negotiate on shareholder resolutions that have the backing of institutional investors. Our proxy voting policies, procedures and guidelines have a considerate and thoughtful approach to ESG issues including human rights, diversity and equal employment opportunity, and climate change. The fundamental precept followed by Northern Trust in voting proxies is to ensure that the manner in which shares are voted is in the best interest of clients / beneficiaries and will aim to maximize shareholder value.
We support shareholder resolutions when we believe conversations with companies have not led to sufficient progress on issues, especially those we view as priorities. While supporting shareholder resolutions is an important way to communicate our views, many resolutions tend to be non-binding and hold little sway with management. We find that companies are more likely to take our concerns seriously when we vote against directors who lead board committees such as those responsible for ESG risks or compensation. In particular, we vote against directors when our concerns are not acknowledged or there is little progress in addressing our concerns.
We have entered into an agreement with an independent third party, Institutional Shareholder Services (ISS), to implement our global proxy voting policy and guidelines through proxy voting. Oversight of decision making on ballots is provided by the Northern Trust Proxy Voting Committee.
Additionally, Northern Trust has entered into an agreement with Hermes Equity Ownership Services (Hermes EOS) to provide supplemental monitoring and engagement services for select portfolios. Details of the covered portfolios and approach used by Hermes EOS are described in our Engagement Policy.
FN-AC-510a.1 - Total amount of monetary losses as a result of legal proceedings associated with fraud, insider trading, anti-trust, anti-competitive behavior, market manipulation, malpractice, or other related financial industry laws or regulations Please refer to Northern Trust’s periodic reports under Section 13 or Section 15(d) of the Exchange Act and other filings made with the SEC for a description of material legal proceedings. During 2020, Northern Trust experienced no material losses in the categories listed above.
FN-AC-510a.2 - Description of whistleblower policies and procedures Northern Trust's Standards of Conduct Policy requires employees to report known or suspected legal or conduct violations and provides several points of contact including Human Resources, the Chief Compliance and Ethics Officer, the Corporate Secretary, and the Equal Employment Opportunity Officer. Employees can also access a confidential hotline which is available 24 hours a day, 7 days a week. Regional hotline numbers are in the Standards of Conduct Policy as well as the corporate intranet page. Northern Trust does not tolerate any type of retaliation against employees who make a report. This includes discrimination in the terms and conditions of employment, or other adverse action of any kind solely as a result of making a report. Any employee who violates this non-retaliation policy will be subject to disciplinary action, up to and including termination. The hotline is managed by an independent third party. Northern Trust complies with applicable whistleblower regulations including the U.S. Sarbanes Oxley Act, and the U.S. Consumer Financial Protection Act.
FN-AC-550a.1 - Percentage of open-end fund assets under management by category of liquidity classification Northern Trust is declining to respond to this disclosure. Northern Trust manages liquidity at the individual fund level and the assets in one fund may not be used to meet redemptions in another fund. As a result, aggregate liquidity classifications across funds would not provide meaningful insight as to how liquidity is managed at the fund level. In addition, in 2018, the SEC voted to adopt “Investment Company Liquidity Disclosure,” a final rule amending Rule 22e-4 of the Investment Company Act of 1940. In accordance with the Investment Company Liquidity Disclosure rule, the SEC rescinded the requirement that open-end mutual funds registered under the Investment Company Act of 1940 publicly disclose aggregate liquidity classification information at the fund level. The SEC explained that “the subjectivity of the [Rule 22e-4] classification process when applied to this public disclosure concerns us for several specific reasons.” The reasons given by the SEC included, among others, that the data “may pose a significant risk of confusing and misleading investors.” Accordingly, Northern Trust is omitting a response to this item.
FN-AC-550a.2 - Description of approach to incorporation of liquidity risk management programs into portfolio strategy and redemption risk management Portfolio managers have the primary responsibility for liquidity risk management within their respective portfolios. Risk Management provides independent oversight of Northern Trust Asset Management funds. The Credit and Liquidity Risk Management Committee (CLRMC) is responsible for overseeing Northern Trust Asset Management's liquidity risk management program. The CLRMC meets monthly and performs regular reviews of fund liquidity profiles. This includes reviews of highly liquid and illiquid levels within each fund, flow history, shareholder concentration levels, and whether a highly liquid minimum is needed for each fund.
Components of the Liquidity Risk Program
Assets
Liabilities
Tools
Swing Pricing Swing pricing is an anti-dilution mechanism which protects fund shareholders by countering the dilution effect of subscription and redemption activity. Northern Trust Asset Management employs swing pricing for 14 Netherlands-domiciled Undertakings for the Collective Investment in Transferable Securities (UCITS) funds and 6 Dublin domiciled UCITS funds. Swing factors are reviewed and approved by the UCITS Fund Board Investment Committee.
FN-AC-550a.3 - Total exposure to securities financing transactions Northern Trust lends securities owned by clients to borrowers who are reviewed and approved by the Northern Trust Capital Markets Credit Committee, as part of its securities custody activities and at the direction of its clients. In connection with these activities, Northern Trust has issued indemnifications to certain clients against certain losses that are a direct result of a borrower’s failure to return securities when due, should the value of such securities exceed the value of the collateral required to be posted. Borrowers are required to collateralize fully securities received with cash or marketable securities. As securities are loaned, collateral is maintained at a minimum 100% of the fair value of the securities plus accrued interest. The collateral is revalued on a daily basis. The amount of securities loaned as of December 31, 2020 and 2019, subject to indemnification was $157.5 billion and $138.1 billion, respectively.
Cash and other assets deposited by investment firms as collateral for securities borrowed from custody clients are managed by Northern Trust and are included in assets under custody and under management. This securities lending collateral totaled $186.9 billion and $163.0 billion at December 31, 2020 and 2019, respectively.
FN-AC-550a.4 - Net exposure to written credit derivatives Northern Trust has no exposure related to written credit derivatives.
FN- AC-000.A - Total registered and total unregistered assets under management (AUM) $1.4 trillion Assets Under Management as of December 31, 2020
FN-AC-000.B - Total assets under custody and supervision $11.3 trillion Assets Under Custody as of December 31, 2020
