One in every three dollars of assets under managed (AUM) in the US is invested in a sustainable investment strategy. Within this research, Morningstar emphasises the extent to which sustainable funds have grown from 2015 to 2020. Morningstar elaborates on several elements which have led to the increase in popularity and relevance of sustainable funds, namely, record inflows, impressive risk-adjusted returns, and growth in the investible universe of funds that take Environmental, Social and Governance (ESG) factors into consideration.

The first section of the research illustrates the sheer growth in the universe of sustainable open-ended funds and exchange traded funds (ETFs) available to investors. At the end of 2020, approximately 400 sustainable funds were available to US investors. Morningstar explains that to be included in the sustainable funds’ universe, ESG concerns must be central to the investment process, and the prospectus must clearly communicate the fund’s intent concerning ESG factors. Morningstar discusses in this section the different types of sustainable funds and explains that most are diversified, with similar asset allocations to conventional funds. Diversified sustainable funds broadly integrate ESG concerns through their security selection and portfolio construction process, and can include exclusionary screens, positive screens, take an impact lens, or utilise a thematic investment approach, which can benefit from the transition to a low carbon economy and sustainable business models.

The second section of the research shows the record flows into sustainable investments during the COVID-19 pandemic in 2020. Flows reached $51.1 billion in 2020, a significant increase on previous years. In comparison to conventional equity and bond mutual fund flows, sustainable fund flows accounted for approximately a quarter of all fund flows in the US in 2020. 2020 was also the first year that ETF flows within sustainable funds exceeded open-ended flows, given the popularity of passive investing (around 72% of sustainable flows were into passive funds). The rise in flows caused the universe of sustainable funds to rapidly increase in 2020. Morningstar also reports that repurposing existing funds to include sustainable assets is a way to build sustainable AUM without needing to start a new fund and wait for it to reach scale.

The final two sections of the research analyse the investment performance of sustainable funds versus conventional funds during 2020, as well as the performance from a sustainability stance. Sustainable funds outperformed their conventional fund peers in 2020. The reasons for this are varied because not all sustainable funds take the same approach. The characteristic they do share is they put the evaluation of ESG concerns at the centre of the investment process. While sustainability performance is an area that is not well developed, Morningstar stresses its overall relevance to the evaluation of sustainable funds. Morningstar assesses a fund’s sustainability in three ways – the level of ESG risk compared with peers, how it is doing in the transition to a low carbon economy, and its impact via fund proxy voting on ESG issues. It found that sustainable funds score significantly better on all three compared to conventional funds.

1. The amount of sustainable mutual funds and ETFs available to US investors increased by 30% from 2019 to 2020, to 392 funds in total. Over the past 10 years, the number of sustainable funds has nearly quadrupled.
2. In 2020, 71 sustainable funds were launched, continuing a growth trend that began in 2015, where there have been at least 30 funds launched each year.
3. Sustainable funds attracted $51.1 billion in net flows in 2020, twice the record of 2019.
4. Due to the increased popularity in sustainable funds, in 2020, 25 existing funds were repurposed as sustainable funds. Since 2013, 69 funds have been repurposed into sustainable funds.
5. Sustainable funds generally carry less ESG risk and lower carbon risk than conventional funds, and vote in favour of key ESG shareholder resolutions more often.
6. Sustainable funds, on average, outperformed conventional funds and indexes in 2020.