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Q&A: What to Know About Sustainable Investing Trends

Identifying opportunities and obstacles for sustainable funds

Jon Hale, Morningstar Research Services LLC

Environmental, social, and governance investing continues to be a force to be reckoned with: In 2018, a record 37 sustainable funds were launched and 62 existing funds added ESG criteria to their prospectuses, as shown in Morningstar’s Sustainable Funds U.S. Landscape Report.

Even so, financial advisors and asset managers tend to be concerned about ESG investing and risks. In Morningstar’s inaugural ESG quarterly webinar, Jon Hale, head of sustainable investing, discussed this and other sustainable investing trends. Below, read Jon’s answers to some of the more common questions from the discussion.

What are the most common misconceptions about sustainable investing?

  • It underperforms. The overwhelming evidence from academic and industry studies is that sustainable investing does not underperform conventional investments. And more recent research shows that companies handling their financially material sustainability issues more effectively outperform those that are not.
  • It’s all about exclusions. While some sustainable portfolios employ exclusions, the more common thread today is the integration of environmental, social, and corporate governance analysis. All other things equal, a sustainable fund tilts toward companies that are managing their ESG issues effectively, and away from those that are not.
  • It’s values-based. It’s more accurate to say that sustainable investing is primarily about driving financial value. Some sustainable funds also try to deliver measurable societal impact alongside financial return, so it might be said they aim to create blended value for their shareholders.

What constitutes sustainable investing and how can we avoid funds that claim to be sustainable, but really are not?

Sustainable funds are those that integrate ESG analysis and/or impact as a fundamental part of their investment process, which includes everything from security selection to portfolio construction to active engagement with companies they own. I sorted sustainable funds into three categories—ESG Integration, Impact, and Sustainable Sector funds—in my recent Sustainable Funds U.S. Landscape Report.

Additionally, a rapidly growing number of funds now say they “consider” ESG in security selection. While it is often unclear what this includes—and these ESG consideration funds should not be confused with those using the comprehensive approach outlined above—it is encouraging to see many mainstream asset managers adding ESG to their process. 

What are the obstacles to broader ESG adoption? 

While large percentages of end investors are interested in sustainable investing, many intermediaries—for example, financial advisors, 401(k) sponsors—are not up to speed on this rapidly growing area and are hesitant to recommend sustainable funds. Some still hold the misconceptions discussed above, so they don’t understand that sustainable investing is well-aligned with fiduciary duty. On the other hand, the widespread adoption of ESG analysis by the world’s leading asset managers means that assets invested in funds that are at least considering ESG will continue to grow.

How does the growth of ESG funds differ between public equities and fixed income? Is one class growing more rapidly than the other?

While the majority of sustainable funds are equity offerings, the number of fixed-income funds has increased over the past four years. Sustainable bond funds use ESG analysis to evaluate issuers and also can enhance impact by considering a bond’s use of proceeds. Many such funds hold green bonds that finance projects contributing to the transition to a low-carbon economy.

As ESG investing continues to grow in popularity, advisors need to stay up to date on the nuances and developments in this area. Morningstar’s quarterly webinar can serve as an effective ongoing resource to enhance your understanding of sustainable investing trends.

For more insight on ESG trends from Jon Hale, director of sustainability strategy Gabriel Presler, and Calvert Research and Management CEO John Streur, check out our webinar, “The Morningstar Sustainable Investing Quarterly Webinar: Inaugural Edition.” And be on the lookout for more information about our next Sustainable Investing Quarterly Webinar this fall.  

To learn more about the state of the sustainable fund universe and its potential for growth, download “Sustainable Funds U.S. Landscape Report.”

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