Morningstar Magazine - June/July 2017 - 40

Spotlight: The Future of Investing

EXHIBIT 2

because it brings together company analysts with
sector and industry experts to define ESG
materiality and help companies understand how to
report these metrics. It aims to standardize ESG
disclosure filings similar to the way the Financial
Accounting Standards Board helped standardize
financial disclosure filings. SASB wants to become
the sustainability standard.

Star Performance The ratings of ESG-focused mutual funds have improved.

These organizations all are increasingly visible as
sources of information and education about the
field to investors, the public, and policymakers.

Q

ESG Portfolios and Performance

Although the vast majority of assets invested in
ESG strategies is institutional, the past decade has
seen a large increase in the number of ESG-focused
funds globally and in the United States. In 2006,
there were about 1,200 ESG-focused open-end
funds globally. At the end of 2017's first quarter,
the Morningstar database listed 2,180 such funds.
The past decade has seen some improvement in
the risk-adjusted performance of ESG-focused
funds, too. At the end of 2006, the number of
ESG-focused funds with bottom third Morningstar
Ratings (1 or 2 stars) slightly outnumbered
those with top third Morningstar Ratings (4 or 5
stars). At the end of 2016, those with top third
Morningstar Ratings significantly outnumbered
those with bottom third ratings (E X H I BI T 2 ).
Navigating the Mainstream

What's likely to happen from here? Most of the
world's most prominent asset managers are now
incorporating ESG, at least to some degree.
Many are PRI signatories and have taken formal
steps to integrate ESG analysis into their
investment processes. Some have also launched
ESG-focused funds. Given the interest investors are
showing in "impact investing," look for asset
managers, especially those long committed to the
space, to develop more strategies that measure
the environmental and social impact of their
portfolios and to place more emphasis on proxy
voting and discussions with companies about
their ESG practices.
All indications are that individual investors,
including high-net-worth investors, are interested
in sustainable investing, particularly women

40

Morningstar June/July 2017

Morningstar Rating

2006%

2016%

8.0

10.1

QQQQ

23.1

27.7

QQQ

34.8

38.7

QQ

25.9

18.1

8.5

5.4

QQQQQ

0%

Source: Morningstar. Data as of 03/31/2017.

10

20

30

40

EXHIBIT 3

Disconnect Investors are interested in ESG, but most advisors don't use it.
Percent of High-Net-Worth Investors Who
Say They Are Interested in ESG

%

Percent of Advisors Who Say They Don't Use,
Use, or Plan to Use ESG in Their Practices

%

Men

46

Advisors not using

53

Women

73

Advisors using

44

Millennials

93

Advisors planning to increase use in next year

29

GenX

68

Source: Cerulli Associates.

Baby Boomers

51

Age 70+

45

Source: US Trust Insights on Wealth and Worth, 2016

and millennials (EXHIB IT 3 ). This is the main reason
asset managers are launching more ESGfocused funds.

Eccles, R.G., Ioannou, I., & Serafeim, G. 2014. "The Impact
of Corporate Sustainability on Organizational Processes
and Performance," Management Science, Vol. 60(11), pp.
2835-2857.

Yet it's not easy for individual investors to
incorporate sustainability into their investments.
Most are being guided to buy low-cost index funds,
exchange-traded funds, and target-date funds.
Getting an advisor's help is difficult because few of
them incorporate ESG into their practices, as we
see in E X HIB IT 3 . These are some of the challenges
ahead for sustainable investing. K

Friede, G., Busch, T., & Bassen, A. 2015. "ESG and Financial
Performance: Aggregated Evidence From More Than 2000
Empirical Studies." Journal of Sustainable Finance &
Investment, Vol. 5, No. 4, p. 221.

Jon Hale is director of sustainability research with
Morningstar Research Services. He is a member of the
editorial board of Morningstar magazine.
References
Arabesque Partners & University of Oxford. 2015. "From the
Stockholder to the Stakeholder: How Sustainability Can
Drive Financial Outperformance." White Paper.

Zoltan, N., Kassam, A. & Lee, L.E. 2015. "Can ESG Add
Alpha?" MSCI, June 2015.
Mercer & the U.N. Environment Programme Finance
Initiative. 2007. "Demystifying Responsible Investment
Performance." White Paper.
Statman, M. & Glushkov, D. 2016. "Classifying and
Measuring the Performance of Socially Responsible Mutual
Funds." The Journal of Portfolio Management, Vol. 42, No. 2,
pp. 140-151.
Zoltan, Nagy, Kassam, Altaf, & Lee, Linda-Eling. 2015. "Can
ESG Add Alpha," MSCI, White Paper, June 2015.



Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2017

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