Morningstar’s Quintessential List of Sustainable Funds

With investor interest in sustainable investing on the rise, the number of funds dedicated to investment strategies focused on environmental, social, and governance factors has grown. There’s been an even bigger jump in the count of funds that state ESG consideration is integrated in the investment process.

This is a distinction with a real difference for investors. But it isn’t easy to ferret out the distinction without a deep dive into prospectus language.

Jon Hale, Morningstar’s head of sustainability research, has compiled a list of funds focused on sustainability that we’re now making available to Morningstar Premium Members.

Types of Sustainable Funds First, a refresher on the taxonomy, as Hale has outlined in his columns.

“ESG consideration funds” are those that refer to ESG criteria in their prospectuses as one set of factors considered in their investment process.

“ESG focus funds” are those that make sustainability factors a featured component of their processes for both security selection and portfolio construction. This group is the largest, and the funds in it tend to be active owners, engaging with companies and supporting--and sometimes sponsoring--ESG-related shareholder resolutions.

“Impact/thematic funds” focus on broad sustainability themes, and on delivering social or environmental impact alongside financial returns.

Lastly, “sustainable sector funds” focus on investment opportunities that contribute to, and aim to benefit from, the transition to a green economy in areas like renewables, energy efficiency, environmental services, water, and green real estate.

The List Morningstar's list, vetted by Hale, includes three types of sustainable funds from the above types: ESG focus funds, impact/thematic funds, and sustainable sector funds.

For this list, Hale defined the U.S. sustainable funds universe as those open-end funds and exchange-traded portfolios that, by prospectus, have sustainability and impact considerations as a core element of their investment strategy.

The list does not include funds that give short mention in their prospectuses to counting ESG factors as one of the many elements they use for investment decisions. By way of scale, Hale estimates there are currently some 500 “consideration” funds compared with the roughly 300 focused funds.

This definition also excludes funds that only use values-based exclusionary screening unrelated to sustainability issues. For example, the list does not include funds that only employ exclusions of so-called “sin stocks,” like tobacco, alcohol, and gambling, or that use faith-based criteria to restrict their investments.