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Sustainable funds ‘held their own’ in second quarter rebound: Morningstar

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BOSTON (Reuters) – Most sustainable equity funds performed well during the second-quarter comeback rally of U.S. stocks, researcher Morningstar said in a report, gaining an edge on rival funds by owning companies with lower risk levels.

The results bolster an investment approach that is gaining popularity with clients and asset managers, even as it draws scrutiny from the Trump administration on concerns the approach does not prioritize returns.

Sustainable funds use a range of investment strategies focused on various factors, including environmental, social and corporate governance (ESG) matters.

For the three months ended June 30, among 212 sustainable stock funds, 56% ranked in the top half of their categories, Chicago-based Morningstar said in a report sent by a representative on Friday. That continued their outperformance record from the first quarter and left 72% of sustainable equity funds in the top halves of their Morningstar categories for the year.

Morningstar analyst Jon Hale wrote that the funds’ better relative performances reflect their tendency to own companies with stronger environmental, social or governance criteria, and lower risk levels for those areas.

He wrote that “basing investment decisions only on the financial health of a business no longer captures the essence of the 21st-century corporation, if it ever did. Investors that use ESG insights are able to construct a more holistic view of a company.”

The performance was also noteworthy, Hale wrote, because the funds tend to underweight energy stocks such as oil companies. Energy was the top-performing sector during the market rally that made the second quarter the best for the S&P 500 since 1998.

All 26 index funds built with environmental, social or governance criteria outperformed their conventional counterparts for the year to date. The Vanguard ESG US Stock ETF (ESGV.Z), for example, had a total return of 0.23% for the period, beating 93 percent of peers.


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