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Chart of the Week – February 5, 2024

Long-term sustainable funds vs. conventional funds and growth of sustainable fund assets in 2023 Notes of Explanation: Notes of explanation: Sustainable funds include long-term mutual funds and ETFs but exclude money market funds. Sources: ICI, Morningstar Direct, Sustainable Research and Analysis LLC. Observations: The net assets attributable to long-term mutual funds and ETFs expanded during…

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The Bottom Line: Sustainable mutual fund and ETF investors interested in ESG integration may have to conduct research that extends beyond their fund’s prospectus language.   

Long-term sustainable funds vs. conventional funds and growth of sustainable fund assets in 2023 Notes of Explanation: Notes of explanation: Sustainable funds include long-term mutual funds and ETFs but exclude money market funds. Sources: ICI, Morningstar Direct, Sustainable Research and Analysis LLC.

Observations:

  • The net assets attributable to long-term mutual funds and ETFs expanded during 2023, benefiting almost entirely from capital appreciation, to end the year at an estimated $27.7 trillion in net assets. Sustainable funds, as defined by Morningstar, also gained, and ended 2023 at $331.7 billion.
  • On this basis, long-term sustainable mutual funds and ETFs account for just 1.2% of fund assets at the end of 2023. This is almost identical to the ratio at the end of 2022.
  • That said, it seems highly likely that the degree of adoption of one or more sustainable investing strategies by US-based mutual fund and ETF management companies is understated. This is certainly the case with regard to ESG integration, defined as the process by which relevant and material ESG factors are systematically and consistently analyzed as part of investment decisions. The focus is on both risks and investment opportunities that may contribute to long-term financial returns. Sustainable mutual funds and ETFs pursue a range of investing approaches ranging that include values-based investing, ESG screening and exclusions, thematic investing, impact investing and ESG integration. These strategies, which are not mutually exclusive, are oftentimes augmented by proxy voting and company engagement practices.
  • According to some data, the adoption of ESG criteria in US portfolios in 2022 runs as high as 61% of North American investors.
  • US based mutual funds and ETF investors interested in fund management firms that promote investment stewardship and sustainable investing need to look beyond Morningstar’s universe of classified sustainable funds. Some companies, for example, J.P. Morgan Asset Management, considers the management of financially material ESG risks and opportunities an important part of its investment decision-making process across its platform. The firm offers as many as 134 and 436 bond funds and share classes, respectively. Yet only 16 funds/share classes are explicitly identified as sustainable funds.
  •  Interested sustainable investors have to engage more directly with their advisors and fund managers to better understand their investment management firm’s current and prospective investment stewardship practices and how ESG may be accounted for in portfolio decisions.
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Research

Research and analysis to keep sustainable investors up to-date on a broad range of topics that include trends and developments in sustainable investing and sustainable finance, regulatory updates, performance results and considerations, investing through index funds and actively managed portfolios, asset allocation updates, expenses, ESG ratings and data, company and product news, green, social and sustainable bonds, green bond funds as well as reporting and disclosure practices, to name just a few.

A continuously updated Funds Directory is also available to investors.  This is intended to become a comprehensive listing of sustainable mutual funds, ETFs and other investment products along with a description of their sustainable investing approaches as set out in fund prospectuses and related regulatory filings.

Getting started

Many questions have surfaced in recent years regarding sustainable and ESG investing.  Here, investors and financial intermediaries will find materials that describe the various approaches to sustainable investing and their implementation.  While sustainable investing approaches vary and they have thus far defied universally accepted definitions, many practitioners agree that they fall into the following broad categories:  Values-based investing, investing via exclusions, impact investing, thematic investments and ESG integration.  In conjunction with each of these approaches, investors may also adopt various issuer engagement procedures and proxy voting practices.  That said, sustainable investing approaches will continue to evolve.

In addition to periodic updates regarding sustainable investing and how this form of investing is evolving, investors and financial intermediaries interested in implementing a sustainable investing approach will also find source materials that cover basic investing themes as well as asset allocation tactics.

Inesting ideas

Thoughts and ideas targeting sustainable investing strategies executed through various registered and non-registered sustainable investment funds and products such as mutual funds, Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs), closed-end funds, Real Estate Investment Trusts (REITs) and Unit Investment Trusts (UITs). Coverage extends to investment management firms as well as fund groups. 

Independent source for sustainable investment management company research, analysis, opinions and sustainable fund disclosure assessments