These Low-Turnover Medalist Funds Are Sustainable, Too
While faster-trading funds' sustainability scores could prove ephemeral, these offerings are likely to retain high marks.
Although there's a healthy contingent of Morningstar.com readers who don't give a hoot about sustainability (to whom I say, channeling my mom, "Just ignore it!"), a growing share of investors do care about how their investments stack up on environmental, social, and governance fronts. Not only have the number of investment offerings dedicated to ESG principles multiplied over the past decade, but ESG assets under management also have catapulted in value. The assets under management dedicated to sustainable investing scaled $21 trillion in 2014, according to the Forum for Sustainable and Responsible Investment, and that number has likely climbed higher still over the past few years.
In recognition of the fact that a growing share of investors look for investments that reflect their sustainability concerns, the Morningstar Sustainability Rating for mutual funds and other managed products launched this year. The ratings aim to go beyond the relatively small subset of funds that have specific mandates to invest in accordance with sustainable or socially responsible principles; instead, they rate all funds based on how the companies in their portfolios stack up on ESG metrics. An external firm, Sustainalytics, evaluates companies based on ESG metrics, then Morningstar calculates a Portfolio ESG Score, subtracting points from that score based on whether the firms in the portfolio have been embroiled in controversies that could have a negative impact on society, the environment, or the companies themselves. The net score is the portfolio's Sustainability Score; those scores are then stacked up relative to other funds within each category, resulting in a rating. Funds with the highest sustainability scores relative to their peer groups receive 5 globes, while those with the lowest receive 1. Investors can click here to read more about the methodology.
Christine Benz has a position in the following securities mentioned above: VPCCX. Find out about Morningstar’s editorial policies.