Morningstar - Q3 2020 - 48

Strategies

category but small blend for the trailing year.
The results were mixed over the three- and
five-year periods. Note that with the additional
higher-globe screen, some categories were left
with very few funds. Standard deviation
showed modest improvement for the one-year
and five-year periods.

Two Standout ESG Funds
One large-blend fund with a standout risk
profile is Parnassus Core Equity Investor PRBLX,
which has a Morningstar Analyst Rating
of Silver and a Morningstar Sustainability Rating
of 5 globes.
For the $8.6 billion fund, ESG analysis is integrated
into the fund's principal investment approach.
Companies must meet Parnassus' ESG criteria,
covering various factors such as corporate
governance and business ethics, charitable giving,
product safety, and environmental impact.
Morningstar analyst Connor Young notes that
the fund fared better than the S&P 500 during
March's sell-off, and it no doubt benefited from
Parnassus Investments' firmwide decision
to stop investing in fossil fuel companies in the
fourth quarter of 2019.
Parnassus Core Equity Investor only captured
75.5% of the market's downturn over one
year through March 31, while the average nonESG large-blend fund captured 94.6%. Its
long-term risk profile also greatly outperforms
the category average: Over the 10-year period

ended March 31, the fund captured 83.1% of
the market's downside, while the average
large-blend fund's downside was slightly more
than the market's.
Large growth is another category where
ESG funds posted better risk results. A standout
among those is Calvert Equity CSIEX, with a
5-globe Sustainability Rating and $3.5 billion in
assets. Calvert's ESG analysts analyze companies
of $10K
byGrowth
using The
Calvert Principles for Responsible
Investment. They analyze each company
$16K
relative to an appropriate peer group based on
13.9
PRBLX
as determined by Calvert. 14
material ESG factors
12.8
Over one year through March 31, Calvert
12
Equity's performance during down markets was
a stellar 39 percentage points better than
Morningstar US
10
the average non-ESG fund.
Over three years, the
Large Core
8
fund was 33.8 percentage points better than
07/2017
07/2018
07/2019
the average fund during down markets. Over five
years, it was 33 percentage points better,
and the fund was 21.3 percentage points better
on a 10-year basis.

Star Ratings
Another way that a better risk profile for ESG
funds can manifest is in the funds' Morningstar
Rating. Otherwise known as the "star rating,"
it rates funds based on past risk-adjusted
performance versus their Morningstar Category
peers. If ESG funds had a better risk profile,
their star-rating characteristics would be better
than the broad fund universe.

By design, star ratings are dispersed on a bell
curve. The best-performing 10% of funds earn 5
stars, the next 22.5% earn 4 stars, the middle
35% get 3 stars, the next 22.5% 2 stars, and the
bottom 10% 1 star. But ESG funds on our list
showed a clear bias toward higher star ratings
(data includes all share classes):
Star Rating Breakdown
Star Rating

ESG Funds (%)

Q

Parnassus Core Equity Investor PRBLX

Calvert Equity CSIEX

Growth of $10K

Growth of $10K

$16K

$20K

13.9

PRBLX

14
12.8

17.5
16.6 16

Morningstar US
Large Growth

12
Morningstar US
Large Core

07/2017

07/2018

07/2019

12

10
8

CSIEX

8
07/2017

07/2018

07/2019

Morningstar Category

Large Blend

Morningstar Category

Large Growth

Morningstar Rating

QQQQQ

Morningstar Rating

QQQQ

Expenses (%)

0.86

Expenses (%)

0.99

Source: Morningstar Direct. Data as of 06/30/2020.

48

Growth of $10K

Source: Morningstar Direct. Data as of 06/30/2020.

4.6

QQ

10.2

QQQ

27.0

QQQQ

39.1

QQQQQ

10.9

Source: Morningstar Direct. Data as of 03/31/2020.

More Compelling
Evidence continues to build that ESG funds provide
less downside risk than do their traditional peers.
Investing in sustainable strategies has the
potential to offer investors beneficial portfolio risk
attributes and downside cushioning. Add in the
long-run benefits of investing in companies better
poised to navigate risks posed by climate change
or highlighted by the COVID-19 pandemic,
and the ESG story is becoming more compelling. K
Tom Lauricella is editor of Morningstar Direct.
Jess Liu is an associate project manager with Morningstar
Europe, Middle East, and Africa.
Morningstar - Q3 2020

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