Morningstar - Q3 2021 - 18

Dispatches
ESG ratings serve as a proxy for the more
qualitative, but abstract, concept of company
sustainability that more investors today
think of as important in developing a more
complete understanding of a company. ESG ratings
of a single company, therefore, should
hardly be expected to always agree. In that sense,
ESG ratings are no different than traditional
analyst ratings of a company, in which there is
seldom consensus.
So, where does that leave us in considering the
ESG performance question? At the portfolio
level. And here is what to know: ESG portfolios are
managed in many different ways. Some may
have a recipe for strong performance, while others
may not. Some may have managers who
can execute their strategies better than others.
In these ways, ESG strategies are no different
from other strategies. Value managers don't
all look at value in exactly the same way, nor do
growth managers look at growth the same
way. Some of these funds outperform, some
underperform. On the whole, there may be times
when the common elements in many ESG
funds help them outperform as a group; other
times, they may underperform.
Course Correction
That's the performance piece, but there is also
the consideration of broader impact. Sustainable
investing is about encouraging companies
to be more purpose-driven and more attuned to
their stakeholders, and about embedding
these ideas into their long-term strategy. It's not
about not maximizing shareholder value;
it's more of a course correction, reminding
investors and companies that long-term success
depends on more than a single-minded focus
on shareholders.
ESG data provides information investors
need to understand how to evaluate companies
on this basis, while ESG engagement helps
companies understand how to improve. As the
number of sustainable investors increases, more
companies will shift their focus, which should
not only benefit these firms over the long haul but
also help create broad systemic benefits to
workers, communities, and the environment.
18
Morningstar Q3 2021
In the end, for most everyday mutual fund
investors, investing in an ESG fund is a bit
like many other consumer purchases we're faced
with on a regular basis. We are in the market
to purchase a product, and we find that some
versions of the product have sustainability benefits
alongside whatever utilitarian benefit we're
going to get out of purchasing the product. We
can therefore assume that ESG fund returns
are going to be essentially the same over the long
haul as those of conventional funds, but with
added positive impact. This could end up costing a
little more, but competitive returns are well
established among ESG funds, as are fees. K
Jon Hale, Ph.D., CFA, is a director on Morningstar's
ESG strategy team. He is a member of the editorial board
of Morningstar magazine.
checking the proverbial box but not really leaning
and leading into this transformational opportunity.
I was reminded of this when I spoke with
a colleague who relayed the story of a dinner with
advisors where diversity became a topic of
discussion, followed by a shared admission that
a number were simply checking the box. In
other words, they were taking superficial
actions, at most, and saying the right things but
little more. I suspect that this could explain
our painfully slow progress as an industry on this
critical front.
It also led me to wonder about the cost to
otherwise astute business leaders: Why are they
consciously choosing to underleverage this
opportunity and at what detriment to their firms?
The Case for Real
DEI in Your Advisory
Business It takes
more than just
checking the boxes to
see the benefits.
Walter K. Booker
DEI
How much have you embraced diversity, equity,
and inclusion at your firm?
Chances are that your answer reveals whether
you see DEI as an important opportunity or as yet
another addition to an already full plate of advisory
and executive responsibilities, and while perhaps
a meaningful goal, just not a business priority.
Between these two poles is another group: those
who have taken a few steps to address DEI but
have yet to embrace it fully. They are, in effect,
Classic leadership theory suggests three possible
responses to this query: (1) Many advisors
lack the skill to pursue DEI successfully, (2) many
advisors lack the will to do so, or (3) some
combination of these two.
Advisors in the first category probably don't
have much personal experience with DEI or
relationships with colleagues or consultants who
do. Those in the second category probably
perceive the cost of this change to be too great
relative to its impact, which means they
don't understand-or possibly don't accept-
the business case for DEI.
I suspect most advisors are in the third camp:
They know diversity is the right thing to do, but
they're not sure it's really worth the effort
for their particular firm and they don't know where
to get help developing an achievable strategy.
The Math Behind DEI and Your Business
Let's start with the business case. Simply put,
the research shows that the more diverse
your firm, the greater the likelihood that it will
outperform over time, which is true if you're
a two-person shop or a firm with billions of dollars
under management.
To assess the business case for DEI, the consulting
firm McKinsey began publishing its " Diversity
Matters " series. Among its findings:

Morningstar - Q3 2021

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Contents
Morningstar - Q3 2021 - Cover1
Morningstar - Q3 2021 - Cover2
Morningstar - Q3 2021 - 1
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