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Portfolio > Portfolio Construction > ESG

Sustainable Investing Surges as Advisors Remain Skeptical

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2019 was a boffo year for sustainable investing. Not only did fund flows explode, setting new records, but performance excelled.

According to a new report from Morningstar, sustainable asset fund flows reached a record $21.4 billion in 2019, four times the amount in the previous year, and 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 sustainable funds also outperformed their traditional fund counterparts in 2019. 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.

(Related: JPMorgan to Stop Financing Arctic Drilling, Coal Mining)

Morningstar expects asset managers will continue to introduce new sustainable 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 industries and companies that produce sustainable 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. 

Hale also expects regulators to require more ESG disclosures from companies and to view ESG analysis as “an important component of fiduciary duty.” He expects “intermediaries to more fully embrace sustainable investing” and to evaluate the tools funds use to apply ESG factors and achieve impact beyond financial return.

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.

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