Higher Sustainability Ratings Can Mean Lower Risk
Our research shows that large-cap U.S. funds with high Morningstar Sustainability Ratings have lower risk.
There is a tendency to assume that sustainable investing is only about those who want their investments to reflect their values. But large numbers of institutional investors and asset managers are incorporating into their investment processes the consideration of how companies address material environmental, social, and governance issues not to make any kind of statement about values but because they find company ESG evaluations pertinent information that should be considered in any complete investment analysis. In a 2015 CFA Institute survey, 73% of respondents said they now consider ESG issues in their investment analysis or decisions. When asked why, most (63%) said they did so to help manage investment risks.
Companies that address material issues facing their business, ranging from resource scarcity and climate change to supply-chain management, product safety, and corporate ethics, can reduce their operational and reputational risks. Information on how firms are managing their ESG risks and opportunities has been made increasingly more accessible to asset managers over the past decade as more high-quality firm-level ESG data and research has become available.