Sustainability Takeaways From the Morningstar Investment Conference

Sustainable investing was a prominent topic at last week's Morningstar Investment Conference. We had a workshop on the Morningstar Sustainability Rating, a panel of portfolio managers who run intentionally sustainable funds, and a general session with leading experts in the field. Here are the key take-aways:

Sustainable investing is rapidly becoming part of the investment mainstream. In contrast to what used to be known as socially responsible investing, or SRI, which was something of a niche activity, what we call sustainable investing today has more widespread appeal to investors of all stripes. Institutional investors and many asset managers increasingly believe that an evaluation of how well companies are managing their environmental and social challenges, as well as their corporate governance practices, should be part of any well-rounded investment analysis. Individuals who practice sustainability as consumers, in the workplace and at home, are saying they want to incorporate sustainability into their investments. According to Hilary Irby, who runs Morgan Stanley's Investing for Impact Initiative, large majorities of women and younger investors feel this way.

Performance concerns are unfounded. The traditional SRI approach, with its reliance on exclusionary screening, was often dismissed as a recipe for underperformance, but the evidence, again from Morgan Stanley's Irby, is that such strategies have held their own, or even slightly outperformed, conventional investments. But perhaps a more telling point was made by Lisa Woll, CEO of US-SIF, the Forum for Sustainable, Responsible Investing: Today's approaches to sustainable investing, which rely less on negative screens and more on the positive selection of companies based on how well they're handling the environmental, social, and governance, or ESG, challenges they face in their businesses, are based on a growing body of research that suggests that positive ESG performance leads to better financial outcomes. That view, Woll noted, is reflected in recent Department of Labor guidance for ERISA plan fiduciaries, which said ESG issues may be used to evaluate competing investment choices.

With new sustainable investing strategies being launched, along with the Morningstar Sustainability Rating, advisors have more options to choose from to address their clients' needs. Brown Advisory Sustainable Growth, for example, represented by comanager Karina Funk on our portfolio manager panel, focuses on fast-growing companies that are actively addressing their environmental risks and opportunities to drive growth. And Calvert Investments' Lynne Ford described the firm's recently launched suite of passive ESG funds. Advisors can use the Morningstar Sustainability Rating to help confirm these types of funds are investing in companies that are better ESG performers. Because the rating applies to all funds regardless of their sustainability intent, it also can be used to expand the universe of funds that could play a role in the portfolio of clients wanting to incorporate sustainability.

What does all this mean for advisors? 1. A tremendous opportunity to connect with investors, in particular, younger and female investors, especially for early movers. 2. If anything, performance is a positive, not a negative. It should not be used to persuade, not dissuade, investors interested in incorporating sustainability into their portfolios. 3. Between the growing number of intentional sustainable funds and the Morningstar Sustainability Rating, there are many options available for building client portfolios.