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DOL Caution Won’t Stop ESG Juggernaut: Morningstar

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Guidance released in April by the Labor Department might have a chilling effect on ESG investments for ERISA products, Jon Hale, head of sustainability research at Morningstar, said at the 2018 Morningstar conference in Chicago.

He pointed out that a more comprehensive interpretive bulletin was released in October 2015, stating that environmental, social and governance criteria had to show “proper components of the fiduciary’s primary analysis of economic merits of competing investment choices.” That said, it gave leeway to fiduciaries to use ESG strategies.

But Labor’s April guidance in Field Assistance Bulletin 2018-01 doesn’t appear to have much forethought put into it and does “muddy” the waters, Hale said. That bulletin said that ESG investments weren’t always a “prudent choice” and that such factors shouldn’t “too readily” be considered as economically relevant by fiduciaries.

Still, he contends, the age of Trump won’t change companies’ responses to the ESG drive, which is accelerating dramatically.

In his session, the first of several focused on sustainable practices held during the conference, Hale discussed how sustainable practices are integrating rapidly into mainstream investing, often identified by other popular terms such as ESG or impact investing.

“Pick a term and define it and use it in your practice” when dealing with customers, he told an audience of RIAs. He said that “sustainable investing as the umbrella term describes the field as it connects with the broader concept.”

Sustainable investing has grown tremendously, with more than 40% of all sustainable funds launched in last three years, Hale noted. Inflows totaled $6.4 billion in 2017, he said, up 10% from 2016. Sustainable funds now total $95 billion in assets under management, a 58% increase since 2016, he added.

To help advisors measure funds, Morningstar has put together various tools with Sustainalytics, which developed an intricate process of measuring ESG-focused funds for preparedness, disclosure and performance. It also screens funds to see how exposed they are to “controversial” products and industries, such as weapons, coal, tobacco, alcohol, gambling and military contracting. In addition, last month Morningstar announced its new Carbon Risk Score and rating that helps investors evaluate funds’ carbon-risk exposure, again researched through Sustainalytics.

— Check out The Risks and Benefits of ESG Investing: The Advisor and the Quant on ThinkAdvisor.


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