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Portfolio > Portfolio Construction > ESG

Sustainable Funds Are Having a Good Year: Morningstar

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The first half of 2019 was a good one for sustainable mutual funds and ETFs, according to a new Morningstar analysis.

Flows into sustainable funds during the first six months of this year were more than 60% larger than flows for all of 2018: up $8.9 billion in the first half versus $5.5 billion.

Performance among the 42 funds that were at least three years old by midyear — old enough to earn a Morningstar star rating  — was also strong. Close to 70% placed in the top half of trailing annualized returns — 33% in the top quartiles and 36% in the second quartile.

On a risk-adjusted basis, 43% of those funds received four to five stars, 38% three stars and 19% one or two stars, reflecting stronger performance than the overall fund universe, split one-third in each of these ratings segments.

“So far, so good,” writes Jon Hale, head of sustainability research at Morningstar, about the performance of sustainability funds over the past three years. “These results show pretty impressive initial performance from sustainable funds.”

There are now 279 sustainable open-end mutual funds and ETFs in the market, more than double the number of 130 in late 2014, which has helped to boost asset flows, according to Hale. In addition, another 200 funds that are not ESG-focused have formally added consideration of ESG factors to their investment process, many from large fund companies like Franklin Templeton and Hartford, which have “the marketing muscle … making them more visible to investors,” writes Hale.

These “ESG consideration funds,” as Hale calls them, reflect “the growing recognition among asset managers that taking ESG factors into consideration is just common sense given the material sustainability challenges many companies face today.”

ESG factors have “become increasingly mainstream,” write Hale, citing the CFA Institute’s position statement that “encourages all investment professionals to consider ESG factors, where relevant, as an important part of the analytical and investment decision-making process.”

Among the funds that have come to market over the past three years are 47 diversified ESG ETFs, about one-third of which charge low fees between 0.09% and 0.2%, which also attracts inflows.

More recently, however, the number of new ESG funds has decelerated. Just seven were launched in the first half of the year, including two ETFs based on the MSCI USA ESG Leaders Index — one from SWS and the other iShares.


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