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Large-Growth Medalists at the Extremes of Sustainability

Quite a few good large-growth funds earn high Sustainability Ratings despite not being explicitly ESG-oriented.

The Morningstar Sustainability Rating for Funds is designed as a tool for investors who are interested in sustainability, in addition to more-traditional investment criteria. The rating, which we rolled out in March, measures funds on a variety of environmental, social, and governance (ESG) criteria, such as environmental and workplace policies, product safety, and corporate responsibility, and also dings companies involved in controversies, such as

's (

) recent emissions scandal. Funds with a Sustainability Rating of High (represented by 5 globes) have holdings that collectively score very well on ESG factors, while funds with lower scores earn lower ratings, down to Low (represented by 1 globe).

Since introducing the Sustainability Rating, we've done some preliminary studies to see how the rating correlates with other investment factors. Not surprisingly, funds that explicitly commit themselves to sustainability as part of their mandate tend to have high Sustainability Ratings, with 80% earning ratings of Above Average or High. We also found that Morningstar Medalists (funds with a Morningstar Analyst Rating of Gold, Silver, or Bronze) tend to have modestly higher Sustainability Ratings than the universe as a whole. We also looked at some of the funds in each Morningstar Category that earn the highest Sustainability Ratings, whether or not they're consciously ESG-oriented.

In this article, we'll drill down in more depth into the large-growth category and the Sustainability Ratings of individual funds, with a focus on Morningstar Medalists. The following table shows the large-growth medalists with Sustainability Ratings of High or Low, the two extremes. In addition to each fund's Morningstar Analyst Rating and Sustainability Rating, we also show the elements that go into the Sustainability Rating. Each fund gets separate ratings for environmental, social, and governance factors (where High is best and Low is worst), and these are combined into an overall ESG rating. Each fund also gets a Controversy score, which measures its exposure to risks from controversies; this is deducted from the ESG score (with a High Controversy score causing the biggest deduction, a Low score the smallest deduction) to get the fund's Sustainability Rating. (See the Sustainability Rating Methodology document for all the details on how the rating is calculated.)

Out of the 48 large-growth medalists, the only one with an explicit ESG focus is Bronze-rated

The most notable large-growth funds to earn high Sustainability Ratings are a quartet managed by the Primecap team:

The Primecap funds are the only large-growth funds that combine the highest Analyst Ratings and Sustainability Ratings, but a couple of Silver-rated funds in the category earn a 5-globe Sustainability Rating. One of these is

Five Bronze-rated large-growth funds also earn the top Sustainability Rating. In addition to the above-mentioned Neuberger Berman Socially Responsive and Amana Growth, there's also

What happens when we turn to the opposite end of the spectrum--large-growth medalists with low Sustainability Ratings? A low Sustainability Rating doesn't mean a fund is bad; medalists are good funds by definition. The two biggest large-growth funds by assets,

One of the most prominent examples of a large-growth medalist with a Sustainability Rating of Low is Bronze-rated

Among the other large-growth medalists with Low Sustainability Ratings are

The Morningstar Sustainability Rating is just one more tool that investors can use in choosing where to put their money. Funds without an intentional ESG focus can still vary quite a bit in how attractive their portfolios are from an ESG perspective, and these ratings help to measure that.

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