- When the Morningstar Sustainability Style Indexes are compared to their non-ESG counterparts on the Morningstar Style Box, they plot very closely, both in the US and globally.
- The Morningstar Sustainability Style Indexes meaningfully lower ESG risk relative to their traditional counterparts.
Investors across the globe like to express style-related views, whether it’s a preference for fast-growing companies benefitting from secular trends or cheap stocks that can surprise on the upside. A staggering $3.5 trillion of investor capital worldwide sits in mutual funds and ETFs classified by Morningstar as taking a growth or value approach to large-cap US equities, while scores of mid- and small-cap strategies also have a growth or value mandate. Meanwhile, the Morningstar database includes style-specific categories for global equity funds in Europe, Australia, and the United States, with a cumulative $586 billion in assets as of 2022’s fourth quarter.
Where style investing is underdeveloped, however, is on the dimension of sustainability. Environmental, social, and governance factors are becoming increasingly central to investing. Several catalysts—from regulatory initiatives, to the rise of stakeholder capitalism, to the societal impact of the pandemic—have pushed sustainable investing into the mainstream. Even traditional asset managers acknowledge that incorporating ESG risk analysis is additive to the investment process.
Of the thousands of funds globally that Morningstar has identified as putting environmental, social, and governance factors at the center of their investment process, only a small cohort of sustainable equity funds have a style mandate. Style oriented sustainable investments struggle to benchmark their strategies given a scarcity of credible indexes on the market.
As sustainable investing becomes increasingly mainstream across geography and investor segments, a broad range of objectives must be met. Sustainable investors need to assemble diversified portfolios across asset class and investment style. Also, active sustainable investors must do a better job accounting for style bias in performance measurement by using sustainable style benchmarks.
The Morningstar Sustainability Style Indexes represent broad equity market segments while emphasizing companies facing fewer material ESG risks. Aligned with the Morningstar Style Box™—an industry standard for defining security size and investment style—constituent weights are anchored to their weights in the parent benchmark and then tilted according to their Sustainalytics ESG Risk Ratings. As companies across the market decarbonize, commit to diversity, and improve corporate governance, sustainable investors will need an increasingly flexible array of tools that can span the entire spectrum of investment solutions. The Morningstar Sustainability Style Indexes are aligned with the ongoing evolution of sustainable investing, allowing ESG considerations to be weaved into the core of investor portfolios.
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