Sustainability at Morningstar

Sustainability at Morningstar (Morningstar Investment Conference #MICUS) in Chicago was an important topic, growing in popularity. As posted, their research found “72% of the United States population expressed at least a moderate interest in sustainable investing.” Nice to know many value a habitable planet as well as profits. However, research from Morningstar also finds we can divest from fossil fuels and other sectors without suffering underperformance. [Photo credit, Wyckoff-Tweedie Photography. Jon Hale of Morningstar, Michael Jantzi of Sustainalytics, Jackie Cook of Morningstar.]

Sustainability at Morningstar: Research, Data, and Ratings Innovation

During a panel it was announced that 82% of asset managers think ESG can lead to higher profitability. 43% had ramped up engagement and proxy voting. 62% think more ESG data will help them maximize returns.  51% of advisors were discussing sustainability with clients. 30% provide sustainability investing as option. 40% wait for clients to bring it up; down from 48% in 2017.

Michael Jantzi of Sustainalytics noted that increasingly company ratings must factor in ESG data to assess risk. Unmanagable risk vs manageable. Clients expect it. UN SDGs provide a great taxonomy for evaluation.

It but a good idea was to divide your portfolio by priorities into 12 areas and build it around companies focused on those specific SDGs.

From Jon Hale, Sustainability Investing Research Director at Morningstar:

Sustainable investing emphasizes material ESG issues that contribute to more-thorough financial analysis. It encourages direct investment in areas like renewable energy and green technologies as the world transitions to a low-carbon economy. It also encourages more-responsible corporate behavior, which results in firms reducing negative externalities, helps them attract and retain a competitive workforce, enhances their intangible value, and strengthens confidence in the overall financial system. (Sustainable Funds U.S. Landscape Report: More funds, more flows, and strong performance in 2018)

With all those considerations, it is no wonder that ESG investing becomes additive. Hale defines sustainable funds as “those open-end funds and exchange-traded portfolios that, by prospectus, either state that they consider ESG criteria as part of their investment processes or indicate that they pursue a sustainability-related theme or that they seek measurable sustainable impact alongside financial return.” At the end of 2018, he found 351.

Sustainability at Morningstar: 5 Key Takeaways

1. The universe of sustainable funds continues to grow, increasing by
   almost 50% from last year.
2. Despite unfavorable market conditions, sustainable funds had their third consecutive year of record flows.
3. ETFs rising.  Sustainable ETF net flows grew to 40% of overall sustainable fund flows in 2018 from 20% over the previous two years.
4. Sustainable funds come in four varieties: ESG Considerations, ESG Full Integration, Impact, and Sustainable Sector.
5. Sustainable funds outperformed in 2018. Sixty-three percent of sustainable funds finished 2018 in the top half of their respective categories. Sustainable equity funds held up better than conventional peers in a negative market for stocks.

Sustainability at Morningstar: More Proactive Proxy Voting

Proxy voting and submitting shareholder proposals can add value. Sustainability funds were found more likely to engage through dialogue, proxy voting on ESG-related issues, and willingness to sponsor or co- sponsor ESG-related shareholder resolutions. ESG integration funds supported  resolutions at a higher rate than others.  See table (Exhibit 19) below.Of course, not all ESG funds vote the same, as Jackie Cook has shown. See Morningstar Direct Uncovers ESG Hypocrites.

3 Ways to Make Your Portfolio More Climate-Aware

In another post, click on above title, Jon Hale referencing Jeremy Grantham, offers the following:

1. Divest from fossil fuels. “Oil may have a last hurrah before the electric cars arrive, but when they do, there will be some tough times for a long time.” See table at the top of this post.
2. Invest in companies building the green economy. Invest for the long-term of yourself, your children and life on planet earth.
3. Urge companies in your portfolio to be more sustainable. Invest in engaged funds that vote in favor of shareholder resolutions urging companies to take action on climate change.

A Closer Look at Shareholder Democracy and the Proxy Process by Morningstar’s Jackie Cook explains how shareholders address ESG issues through resolutions. Consider filing shareholder proposals. If you need help, read our Shareowner Action Handbook.

Still need help? Contact me. We can file a proposal together as I walk you through the steps.

Update Show Spike in ESG Flows