2019 was a boffo year for sus- tainable investing. Not only did fund flows explode, setting new
records, but performance excelled.
According to a recent report from
Morningstar, sustainable asset fund flows
reached a record $21.4 billion in 2019, four
times the amount in the previous year.
The number of sustainable mutual funds
and ETFs increased by more than 30.
As of the end of 2019, there were 303
sustainable funds, compared with 270
last year, and 564 funds that consider
environmental, social and governance
factors in their investment strategy, up
from 81 funds in 2018.
Many of these funds also outperformed their traditional fund counterparts. Thirty-five percent of sustainable
funds finished 2019 in the top quartile
for performance and two-thirds ended
in the top half, according to Morningstar.
Sustainable equity funds did even better, with 41% ranking in the top quartile
of their respective categories and 68%
placing in the top half. Fixed income
sustainable funds, in contrast, clustered
in the middle two quartiles, performing
in line with the averages of traditional
funds in the same categories.
Beyond these data points are the recent
announcements by BlackRock that sustainability is its “new standard for investing” and by State Street championing the
importance of sustainability in investment strategies. On Tuesday, JPMorgan
announced that it will no longer finance
oil and gas drilling in the Arctic or mining
for coal, as Goldman Sachs had announced
previously, and will allocate $200 billion
by 2025 to finance sustainable projects.
Morningstar expects asset managers
will continue to introduce new sustain-
able funds, which come in three types:
ESG focus; impact/thematic funds,
which use diversified strategies in lieu
of conventional ones across most asset
allocations; and sustainable sector funds,
which invest more narrowly in indus-
tries and companies that produce sus-
tainable products and services needed
for a transition to a low-carbon economy.
In addition there are funds that consider ESG criteria in their investment
analysis, though the criteria may not play
a role in the selection of specific assets
and funds that were repurposed from traditional to ESG focus or impact/thematic.
Jon Hale, Morningstar’s director of
sustainability investing research who
wrote the report, is optimistic about
the growth of sustainable investing. He
expects asset managers to launch more
sustainable funds and increase the use of
“ESG consideration” in the investment
process of all their funds.
Regulators will require more ESG dis-
closures from companies and view ESG
analysis as “an important component of
fiduciary duty,” Hale expects. Also, “inter-
mediaries [will] more fully embrace sus-
tainable investing” and evaluate the tools
funds use to apply ESG factors and achieve
impact beyond financial return, he says.
That said, most financial advisors
currently “are not proactively incorporating ESG into their investment process,” according to a new report from
Practical Perspectives based on a survey
of 685 advisors in January 2020, 85% of
which were RIAs or IBDs.
Fewer than one in 10 advisors “
incorporate ESG as an explicit element of their
value proposition to clients and believe
strongly in the concept or investment case
for ESG investing,” although 35% do use
some ESG strategies for clients, usually at
the client’s request, according to the report.
It found that the main impediments
to using ESG investments were lack of
standards defining ESG or the absence
of methodologies to assess solutions,
lack of interest from clients and lack of
training and education about ESG.
Don’t Need To Avoid Traditional Index Funds
You don’t have to invest clients’ money in funds focused on ESG concerns
to address their preference for socially
responsible assets. A traditional index
fund may suffice if the fund management
company has a record of voting in favor of
ESG-related shareholder proposals, and
more asset managers are doing just that,
according to a new Morningstar report.
Morningstar studied how the 50 largest fund companies voted on 1,033 ESG-related shareholder resolutions over the
past five years — excluding the votes of
their ESG-themed funds — and found
By Bernice Napach
SI Surges as Advisors Remain Skeptical
Funds move toward ESG investing, while shareholder and proxy voting
takes on new life.