Mutual fund providers have responded to investor demand for sustainable products, and have continued to expand their suite of these products, often labelled as ‘Sustainable’ or ‘ESG.’ ESG is an acronym for environmental, social and governance-related factors.
Investors have Many Sustainable Funds from Which to Choose
The growth we have seen in these products extends beyond equity strategies, which have traditionally dominated the space. Of the funds launched since August 2021, 64% were in the fixed income and multi asset class categories. This expansion reflects not only increasing investor interest in sustainable products, but also asset managers’ acknowledgement of the relative importance of factoring sustainability and related considerations into investment decisions. We also believe it highlights the increase in data availability and reporting from investee companies.
The Funds are not Always Outperformers
Despite their popularity, sustainability-focused mutual funds have faced performance challenges this year, mainly given the increased market volatility. The MSCI ACWI ESG Leaders Index lagged the MSCI ACWI Index by -1.38% and the Bloomberg MSCI Global Aggregate Sustainable Bond Index lagged the Bloomberg Global Aggregate Bond Index -0.43% over the last year.
In these types of markets, investors should ensure their investments not only align with their values but are also invested in products managed by strong investment teams with a clearly defined and well executed process. Morningstar’s Quantitative Ratings (MQR) can provide forward-looking guidance for investors unsure where to start. These ratings do not rely exclusively on performance but incorporate an assessment of the people managing the fund, the consistency and efficacy of the investment process and the parent company. On aggregate, we have found that medalist rated funds (gold/silver/bronze) have outperformed in their respective asset classes after receiving these ratings.
Top Performing Sustainable Mutual Funds
To provide investors with a well-rounded opportunity set, I highlight those medalist funds that have outperformed their category peers over the 12-month period ending August 31st, 2022 as a proxy for historical performance. I also ensured that the funds included have been identified as sustainability focused strategies by Morningstar to ensure the intentionality of their focus. The list includes:
I’ve also included other relevant information for investors to consider.
First, the Morningstar Category which is the peer group of mutual funds and ETFs used to determine a fund’s relative performance ranking.
The Morningstar Sustainability Rating (also known as the Globe Rating) is an assessment of the ESG risk inherent in each mutual fund relative to its global peer group.
Lastly, for those investors looking to ensure their ESG investments are also focused on low carbon investments, I included Morningstar’s Low Carbon Designation. This rating includes consideration of the fund’s exposure to companies exposed to risks associated with a transition to a low-carbon economy as well as those directly involved in fossil fuels.
As always, this list a place for investors to start their research. Any investment decisions must be made considering your own individual risk tolerance, and risk capacity, and also with your specific investment goals in mind.
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