Morningstar - Q3 2021 - M1

A supplement to Morningstar magazine
The magazine of independent research for the world's financial professionals
Q3 2021
Sustainable
Funds
Universe:
The U.S. List
Sustainable investing incorporates a full consideration
of environmental, social, and corporate governance,
or ESG, concerns, both to enhance investment
performance and improve societal outcomes. Global
warming clearly poses significant investment and
societal risks. The COVID-19 pandemic has
underscored the need for corporations to focus on
other stakeholders, especially workers. Sustainable
investment supports the transition to a net-zero
economy and to a stakeholder model that
can create more value for shareholders, people,
and the planet over the long run.
The number of sustainable open-end and exchangetraded
funds available to U.S. investors now exceeds
400. Every year since 2015, dozens of new
sustainable funds have been launched and many
existing funds have been repurposed as sustainable
funds. Hundreds more funds now consider
ESG to some degree in their investment process.
For a fund to be included in the sustainable
funds universe, ESG concerns must be central to
its investment process. This intent should be
apparent from a simple reading of the fund's
prospectus. In particular, the Principal Investment
Strategies section of the fund's prospectus
should contain enough detail to leave no doubt that
ESG concerns figure prominently in the fund's
investment process.
Traditional investment managers are beginning
to recognize the materiality of ESG risks and
opportunities in security selection. In 2020,
Morningstar's manager research analysts initiated
discussions with asset managers about the
ESG commitment level of funds under Morningstar
analyst coverage. Their initial findings indicate
that virtually all asset managers have incorporated
ESG to some degree, or have plans to do so. But
in many cases, firm-level commitments have
yet to make a significant impact at the fund level.
This list does not include the many funds that
mention ESG briefly somewhere in their prospectus
but have not made it a central feature of their
investment strategy.
The list is organized by broad asset class
and Morningstar Category. Most sustainable funds
broadly integrate ESG concerns throughout their
security-selection and portfolio-construction
process, and can be used in lieu of conventional
strategies in investor portfolios. A deeper dive will
reveal underlying differences in approach, however.
Some strategies focus on avoiding the worst ESG
performers, for example, and some on emphasizing
ESG leaders. A subset of the strategies on the
list are specialized sector funds focused on " green
economy " industries like renewable energy,
energy efficiency, environmental services, water,
infrastructure, and green real estate. (These
are listed under " Specialty " starting on Page 12.)
Sustainable funds tend to have lower ESG risk
and lower carbon risk in their portfolios than
conventional funds. The list includes the Morningstar
Sustainability Rating, which provides an
objective measure of a portfolio's ESG risk based
on underlying company ESG Risk Ratings. It
also indicates which funds have a Morningstar
Low Carbon Designation.
The Morningstar ESG Risk Rating Assessment measures a company's exposure
to industry-specific material ESG risks and how well a company manages those
risks. This assessment uses the same globe iconography used in the Morningstar
Sustainability Rating for funds.
Turn to Page 14 for a select list of companies with wide economic moat ratings
and ESG Risk Rating Assessments of at least 4 globes.
Severe Risk
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Negligible Risk

Morningstar - Q3 2021

Table of Contents for the Digital Edition of Morningstar - Q3 2021

Contents
Morningstar - Q3 2021 - Cover1
Morningstar - Q3 2021 - Cover2
Morningstar - Q3 2021 - 1
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Morningstar - Q3 2021 - Contents
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Morningstar - Q3 2021 - Cover3
Morningstar - Q3 2021 - Cover4
Morningstar - Q3 2021 - M1
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