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Why Fund Managers Are Adding ESG to Their Processes

Jon Hale, Ph.D., CFA

Jon Hale: Hi, I’m Jon Hale, director of sustainable investing at Morningstar.

During our recent Morningstar Investment Conference, I had the opportunity to talk to a lot of fund managers, and I was struck by how many told me they’re busy incorporating ESG into their investment process firmwide.

The reason may surprise you: It’s not simply to meet growing investor demand. Instead, fund managers are incorporating ESG because they believe it can improve their overall investment process and results.

Why do they think that?

It’s tempting to point simply to the wider availability of ESG data--a relatively new source of investment information--that fund managers can now incorporate. More information can mean better, more-complete investment analysis. But I think the bigger-picture reason why asset managers are incorporating ESG is this: They are realizing that public companies face a growing set of expectations for better corporate behavior and performance from a range of stakeholders, starting with their customers and clients, continuing with their own employees--both current and prospective, including the communities in which they operate, the growing number of sustainability-minded investors, regulators, and increasingly the public at-large.

And better corporate behavior and performance relates to sustainability--or what are often called ESG issues: environmental and climate-related; the use of natural resources in an age of increasing scarcity; a whole range of issues related to human capital; what’s going on in the supply chain; safe and useful products; product packaging and recycling; protecting privacy; and governance issues like executive compensation, board capacity, and transparency around lobbying and political activities.

These expectations for better corporate behavior on sustainability issues are reinforced by massive amounts of data that can now be collected, accessed, and acted on.

More and more asset managers today understand these dynamics and therefore are taking steps to ensure they can account for them in their investment process.

That means if you're a financial advisor or an end investor, it’s worth it to take a look at how your fund managers are addressing ESG issues, even if you are not a particularly sustainability-focused investor or advisor yourself.

For Morningstar, I’m Jon Hale. Thanks for watching.