Excerpts from Jon Hale, Morningstar Research Services LLC • January 31, 2018
A view of the sustainable investing landscape in the U.S.
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 those 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.
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 RatingTM 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.
Why does this matter to YOU? Performance has, and should be, our focus.