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What's New in Sustainable Funds

There are more options than ever for socially conscious fund investors.

David Kathman, CFA, 10/03/2016

When Morningstar launched our Sustainability Rating for Funds back in March, it gave investors a valuable tool to measure how sustainable a mutual fund's portfolio is--that is, how well the companies it owns are handling the various environmental, social, and governance issues they face. That's a good thing, because sustainable investing (also known as ESG or impact investing) has been steadily growing in popularity, as my colleague Jon Hale noted last year. Industry group US SIF, in its 2014 Report on US Sustainable, Responsible, and Impact Investing Trends, identified $6.6 trillion invested sustainably in the United States in 2014, a 76% jump from two years earlier, including almost $2 trillion invested in retail vehicles such as mutual funds, exchange-traded funds, and variable annuities. A 2015 survey by the Morgan Stanley Institute for Sustainable Investing found that millennial investors are especially interested in investing sustainably, so opportunities to do so are only likely to grow.

Given all that, it's no surprise that the number of mutual funds with a sustainable mandate has been growing over the past decade, and especially in the past few years. Of the 200 or so ESG-oriented U.S. mutual funds in Morningstar's database, roughly half have been launched within the past 10 years, and 32, totaling $1.8 billion in assets under management, have launched since the beginning of 2015. The pattern is even more striking with ETFs, which have not traditionally been a big area for sustainable investing. Of the 35 U.S.-based sustainable ETFs in our database, half have launched since the beginning of 2014, and 10 have launched in 2016, more than the nine sustainable open-end funds that have started up this year. My colleague Ben Johnsonsurveyed the rapidly growing world of sustainable ETFs in June. This growth has been accompanied by an expansion of the variety of sustainable funds available to investors; there are now multiple funds that emphasize strong corporate sustainability performers, low-carbon or fossil free options, and gender equity, among other things.

Here's a brief survey of some of the sustainable/ESG-focused funds, both open-end and exchange-traded, that have launched within the past couple of years. This is far from an exhaustive list, but the funds surveyed here represent some of the trends that have become apparent recently in the sustainable investing world. Most of them don't have too many assets yet, but several are managed by experienced teams with backgrounds in sustainable investing.

TIAA-CREF Social Choice Low Carbon Equity TNWCX 
This fund, launched in August 2015, is very similar to TIAA-CREF Social Choice Equity TISCX, which has a Morningstar Analyst Rating of Bronze and aims to replicate the risk characteristics of the Russell 3000 benchmark while following a thorough set of ESG criteria. The only difference is that this fund, in addition to the regular ESG constraints, favors companies that do a good job of limiting their carbon emissions and have limited exposure to fossil fuel reserves. Low-carbon investing (or "carbon free" or "fossil-fuel free") has been a hot topic in the sustainable investment community recently, as people become more concerned about climate change. In addition to this fund, there are several similar ETFs, such as SPDR S&P 500 Fossil Fuel Reserve Free ETF SPYX, which launched in late 2015, iShares MSCI ACWI Low Carbon Target CRBN, and SPDR MSCI ACWI Low Carbon Target ETF LOWC. Also, Calvert is in the process of making all its funds fossil fuel-free, and other shops are trying to limit their exposure to fossil fuels on a case by case basis.

ClearBridge Sustainability Leaders LCISX 
This fund, which came out in March 2015, is run by Mary Jane McQuillen, ClearBridge's head of ESG investment, and Derek Deutsch, who also helps run ClearBridge Mid Cap SBMAX and ClearBridge Mid Cap Growth LBGAX. McQuillen, who was on a panel about ESG investing at the 2015 Morningstar Investment Conference, has worked on ESG investing for ClearBridge and its predecessor firms for the past 20 years, but this is the first ESG-focused retail mutual fund in the ClearBridge lineup. ClearBridge is just one of several big fund shops that have come out with their first ESG offerings in the past couple of years, which illustrates the mainstreaming of sustainable investing; other examples include BlackRock Impact U.S. Equity Investor BIRAX (launched October 2015), BlackRock Impact Bond BIAAX (August 2016), Columbia U.S. Social Bond CONAX (March 2015), John Hancock ESG Large Cap Core JHJAX (June 2016), and John Hancock ESG All Cap Core JHKAX (June 2016).

Saturna Sustainable Equity SEEFX and Saturna Sustainable Bond SEBFX 
These two funds were launched in March 2015 by Saturna Capital, the advisor to Bronze-rated funds Amana Growth AMAGX and Amana Income AMANX. While the Amana funds are religiously screened and invest in accordance with Islamic law, these are secular ESG funds without the religious elements. However, the funds are actually very similar in many ways, because the Amana funds have shifted toward including secular ESG criteria alongside their religious screens. That's part of a mini-trend toward funds that combine religious and secular ESG investment criteria; another example is Neutral-rated Eventide Gilead ETGLX, which mixes sustainability with Bible-based Christianity. Also, Saturna Sustainable Bond is one of a spate of sustainable bond funds that have come out recently, reflecting the greatly increased fixed-income options for ESG investors.

SPDR SSGA Gender Diversity ETF SHE 
This ETF was launched in March of this year and already has $277 million in assets, though $250 million of that was seed money from CalPERs, the pension fund for California state employees. As its name implies, it favors companies with good records of gender diversity; it tracks the SSGA Gender Diversity Index, which includes companies with high percentages of female executives and board members. Traditional ESG investors have long included gender diversity among the factors they look at, but this is one of several new vehicles that bring it to the forefront. They include an open-end fund, Glenmede Women in Leadership US Equity GWILX (launched in December 2015), and an exchange-traded note, Barclays Women in Leadership ETN WIL (launched in July 2014). There's also Pax Ellevate Global Women's Index PXWEX; it's not technically a new fund, but it was repurposed in May 2014 into an index fund tracking the Pax Global Women's Leadership Index. This fund is a partnership between longtime ESG shop Pax World and Ellevate Asset Management, an asset manager founded by former Wall Street executive Sallie Krawcheck to invest in companies that embrace gender diversity and provide investment options geared toward women's needs.



David Kathman, CFA, is a senior fund analyst with Morningstar.

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