A view of the sustainable investing landscape in the United States.
By Jon Hale, Morningstar Research Services LLC
By Jon Hale, Morningstar Research Services LLC
Read Time: 3 Minutes
Sustainable funds are often grouped with so-called “socially conscious” or “values-based” funds, but there are important differences between these types of funds.
Sustainable funds are funds that use environmental, social, and corporate governance (ESG) criteria to evaluate investments or assess their societal impact. They may pursue a sustainability-related theme or explicitly aim to create measurable social impact.
The sustainable-fund universe can and should be distinguished from funds that simply employ values-based criteria, such as those that exclude so-called “sin stocks,” like tobacco, alcohol, and gambling, or those that use faith-based criteria to restrict their investments.
Certainly, there are values-based elements to sustainable investing; namely, the recognition that investors can have an impact on the creation of a low-carbon global economy that works for more people.
But sustainable investing also has a value-driven component that many investors find at least as salient: The idea that integrating ESG into an investment process can add valuable material information that might otherwise be overlooked in traditional financial analysis and thereby may be able to help reduce risk or generate alpha.
At the end of 2017, there were 235 sustainable funds in 56 Morningstar Categories available to U.S. fund investors.
A record 40 funds were launched in 2017, including the first sustainable target-date series, global real estate fund, and floating-rate fund. This came on the heels of 36 new sustainable funds in 2016.
In just the past three calendar years, 102 funds, or 43% of the overall group, have been launched. Among them, 67 are open-end funds and 35 are exchange-traded funds. Another 23 pre-existing funds have formally added ESG criteria to their investment process in the past two years.
Overall assets under management stand at $95 billion after two straight calendar years of record net flows.
Sustainable funds generally have excellent Morningstar Sustainability Ratings. That’s perhaps not surprising, but our globe rating provides an independent measure of a fund’s sustainability.
Prior to the rating’s existence, there was no way to evaluate sustainable outcomes either in funds that are consciously incorporating sustainability into their investment approach or in those that do not. More than 75% of sustainable funds have an average Morningstar Sustainability Rating of 4 or 5 globes over the past 12 months.
Sustainable funds as a group performed better than the overall fund universe in 2017. The returns of more than half of the funds, or 54%, ranked in the top half of their respective Morningstar Categories. That showing was consistent across stock and bond funds. And the group has performed similarly well in the past three calendar years, even as it has grown from 119 funds with full-year records in 2015 to 181 in 2017.
These are some of the findings in Morningstar’s Sustainable Funds U.S. Landscape Report, which focuses on the universe of sustainable open-end mutual funds and exchange-traded portfolios available in the U.S. This report can help advisors, retirement-plan administrators, and everyday investors better understand the growing number of choices now available in the space.
Advance the sustainability conversation with clients using our robust portfolio management software. Morningstar® Office integrates ESG data, analytics, and ratings with Sustainalytics. An advisor who can present clients with how they can incorporate sustainable funds in a portfolio may develop a deeper bond.
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