Schwab Introduces Third-Party ESG Ratings for Individual Stocks

Third-party ESG ratings added to growing list of ESG resources and investment choices

Charles Schwab today announced that it has begun providing clients with access to MSCI’s Environmental, Social, and Governance (ESG) Ratings for individual securities. The ratings are now available to clients through the Research tool on Schwab.com or by viewing the stock’s Schwab Equity Ratings® Report.

“A growing number of people want to align their investments with their beliefs and values,” said Malik Sievers, Head of ESG Strategy, Schwab Asset Management™. “Having an easy way to review a company’s ESG rating during the research process is something today’s investors find useful as they seek to integrate ESG in their portfolios and evaluate a company’s resilience to ESG risks.”

An MSCI ESG Rating is designed to measure a company’s resilience to long-term industry material ESG risks. MSCI rates over 8,500 companies (14,000 issuers including subsidiaries). The ratings model uses a rules-based methodology to identify industry leaders and laggards according to their exposure to financially relevant ESG risks and how well they manage those risks relative to peers. Companies are rated on a AAA to CCC scale relative to the standards and performance of their industry peers.

“An ESG rating measures a company’s exposure to long-term environmental, social, and governance risks, but they are often not highlighted in traditional financial reviews. Investors can use ESG ratings to supplement financial analyses and gain a broader view of a company’s long-term potential,” said Sievers.

According to Schwab’s Q1 2022 Retail Client Sentiment Report, nearly a quarter of clients said they make investing decisions today in accordance with their values or areas of interest and another one in five say they would like to invest more closely based on personal values or interests.

This new feature is the latest example of Schwab’s overall commitment to help clients personalize their investment portfolios and invest based on their specific objectives. Schwab recently introduced a number of products and services designed to help clients personalize how they invest, whether it’s specific to ESG investments or giving clients the ability to build their portfolio based on their personal preferences:

• In November 2021, Schwab Asset Management launched the Schwab Ariel ESG ETF, followed shortly by making two positive impact Wasmer Schroeder Strategies available to Schwab clients.
• In March, Schwab announced the launch of thematic stock lists, a new resource designed for self-directed investors who want to invest in stocks aligned with their personal interests and values.
• Earlier this month, Schwab introduced Schwab Personalized Indexing™, a new direct indexing solution that offers powerful tax management and portfolio management capabilities to people who want to personalize their investments to fit their circumstances and perspectives.
• Schwab also provides access to hundreds of third-party ESG products, in addition to education and screening tools, including product lists to help clients explore the ESG universe.

Schwab also created an Environmental, Social, and Governance (ESG) Investing hub to centralize information on ESG strategies, ESG options at Schwab, and timely insights.

About Charles Schwab

At Charles Schwab we believe in the power of investing to help individuals create a better tomorrow. We have a history of challenging the status quo in our industry, innovating in ways that benefit investors and the advisors and employers who serve them, and championing our clients’ goals with passion and integrity.

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The Schwab Ariel ESG ETF is different from traditional ETFs.

Traditional ETFs tell the public what assets they hold each day. This fund will not. This may create additional risks for your investment. For example:

• You may have to pay more money to trade the fund’s shares. This fund will provide less information to traders, who tend to charge more for trades when they have less information.
• The price you pay to buy fund shares on an exchange may not match the value of the fund’s portfolio. The same is true when you sell shares. These price differences may be greater for this fund compared to other ETFs because it provides less information to traders.
• These additional risks may be even greater in bad or uncertain market conditions.
• The ETF will publish on its website each day a “Proxy Portfolio” designed to help trading in shares of the ETF. While the Proxy Portfolio includes some of the ETF’s holdings, it is not the ETF’s actual portfolio.

The differences between this fund and other ETFs may also have advantages. By keeping certain information about the fund secret, this fund may face less risk that other traders can predict or copy its investment strategy. This may improve the fund’s performance. If other traders are able to copy or predict the fund’s investment strategy, however, this may hurt the fund’s performance.

For additional information regarding the unique attributes and risks of the fund, see Proxy Portfolio Risk, Premium/Discount Risk, Trading Halt Risk, Authorized Participant Concentration Risk, Tracking Error Risk and Shares of the Fund May Trade at Prices Other Than NAV in the Principal Risks and Proxy Portfolio and Proxy Overlap sections of the prospectus and/or the Statement of Additional Information.

Disclosures:

Investors should consider carefully information contained in the prospectus, or if available, the summary prospectus, including investment objectives, risks, charges and expenses. You can obtain a prospectus, or if available, a summary prospectus by visiting schwabassetmanagement.com/schwabetfs_prospectus. Please read it carefully before investing.

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares of ETFs are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

Active Semi-Transparent (also known as Non-Transparent) ETF Risk: Active semi-transparent ETFs operate differently from other exchange-traded funds (ETFs). Unlike other ETFs, an active semi-transparent ETF does not publicly disclose its entire portfolio composition each business day, which may affect the price at which shares of the ETF trade in the secondary market. Active semi-transparent ETFs have limited public trading history. There can be no assurance that an active trading market will develop, be maintained or operate as intended. There is a risk that the market price of an active semi-transparent ETF may vary significantly from the ETF’s net asset value and that its shares may trade at a wider bid/ask spread and, therefore, cost investors more to trade than shares of other ETFs. These risks are heightened during periods of market disruption or volatility.

Proxy Portfolio Risk: Unlike traditional ETFs, this fund does not disclose its portfolio holdings (Actual Portfolio) daily. The fund instead posts a Proxy Portfolio on its website each day. The Proxy Portfolio is designed to reflect the economic exposures and risk characteristics of the fund’s actual holdings on each trading day, but it is not the same as the fund’s Actual Portfolio. Although the Proxy Portfolio is intended to provide investors with enough information to allow for an effective arbitrage mechanism that will keep the market price of the Fund at or close to the underlying NAV per Share of the Fund, there is a risk (which may increase during periods of market disruption or volatility) that market prices will vary significantly from the underlying NAV of the fund. ETF trading on the basis of a published Proxy Portfolio may trade at a wider bid/ask spread than ETFs that publish their portfolios on a daily basis, especially during periods of market disruption or volatility, and therefore may cost investors more to trade. Also, while the Fund seeks to benefit from keeping its portfolio information secret, market participants may attempt to use the Proxy Portfolio to identify a Fund’s trading strategy, which if successful, could result in such market participants engaging in certain predatory trading practices that may have the potential to harm the Fund and its shareholders.

Proxy Portfolio Construction – The Proxy Portfolio is designed to recreate the daily performance of the Actual Portfolio. This is achieved by performing a “Factor Model” analysis of the Actual Portfolio. The Factor Model is comprised of three sets of factors or analytical metrics: market-based factors, fundamental factors, and industry/sector factors. The fund uses a “Model Universe” to generate its Proxy Portfolio. The Model Universe is comprised of securities that the fund can purchase and will be a financial index or stated portfolio of securities from which fund investments will be selected. The results of the Factor Model analysis are then applied to the Model Universe. The Proxy Portfolio is then generated as a result of this Model Universe analysis with the Proxy Portfolio being a small sub-set of the Model Universe. The Factor Model is applied to both the Actual Portfolio and the Model Universe to construct the fund’s Proxy Portfolio that performs in a manner substantially identical to the performance of its Actual Portfolio.

The Proxy Portfolio will only include investments the fund is permitted to hold. The fund’s SAI contains more information on the Proxy Portfolio and its construction. Proxy Portfolio and Proxy Overlap Information regarding the contents of the Proxy Portfolio, and the percentage weight overlap between the holdings of the Proxy Portfolio and a Fund’s Actual Portfolio holdings that formed the basis for its calculation of NAV at the end of the prior Business Day (the Portfolio Overlap), is available by visiting the fund’s website www.schwabassetmanagement.com.

Thematic stock lists are not intended to be investment advice or a recommendation of any stock. Investing in stocks can be volatile and involves risk, including loss of principal. Consider your individual circumstances prior to investing.

Environmental, social and governance (ESG) strategies implemented by mutual funds, exchange-traded funds (ETFs), and separately managed accounts are currently subject to inconsistent industry definitions and standards for the measurement and evaluation of ESG factors; therefore, such factors may differ significantly across strategies. As a result, it may be difficult to compare ESG investment products. An investment product’s ESG strategy may significantly influence its performance. Carefully review an investment product’s prospectus or disclosure brochure to learn more about how it incorporates ESG factors into its investment strategy.

Please refer to the Charles Schwab Investment Management, Inc. Disclosure Brochure for additional information.

Portfolio Management for Schwab Personalized Indexing is provided by Charles Schwab Investment Management, Inc., dba Schwab Asset Management, a registered investment adviser and an affiliate of Charles Schwab & Co., Inc. ("Schwab"). Both Schwab Asset Management and Schwab are separate entities and subsidiaries of The Charles Schwab Corporation.

As of July 1, 2020, the portfolio management teams for the Wasmer Schroeder Strategies transitioned to Schwab Asset Management with Schwab Asset Management assuming portfolio management services for the Strategies. Schwab Asset Management is a registered investment adviser and an affiliate of Charles Schwab & Co., Inc. (“Schwab”). Both Schwab Asset Management and Schwab are separate entities and subsidiaries of The Charles Schwab Corporation. Wasmer Schroeder Strategies are available through Schwab's Managed Account Connection® program ("Connection"). Please read Schwab's disclosure brochure for important information and disclosures relating to Connection and Schwab's Managed Account Services®.

Schwab Asset Management™ is the dba name for Charles Schwab Investment Management, Inc. (CSIM), the investment adviser for Schwab Funds, Schwab ETFs, and separately managed account strategies. Schwab Funds are distributed by Charles Schwab & Co., Inc. (Schwab), Member SIPC. Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO). Schwab Asset Management and Schwab are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation and are not affiliated with SIDCO.

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