• Wealth Management

How to Choose a Sustainable Mutual Fund

Identifying sustainable investments that are truly focused on environmental and social goals can be harder than you might expect. Here’s how to go about it.

Each year, I meet more investors who are interested in putting their financial resources to work to help achieve environmental and social goals. The asset-management industry has been responding with a plethora of new offerings.

More than 1,500 asset managers worldwide, with a total of $63 trillion in assets, have now signed the United Nations’ Principles for Responsible Investing. Nearly 40% of the 300 asset managers we cover at Morgan Stanley Wealth Management offer an impact investing approach for one or more offerings.

More may be better, but it can make it more challenging for investors to differentiate amongst the choices, particularly in regards to how each manager approaches environmental, social and governance (ESG) goals. In particular, investors naturally want to avoid choosing managers who may be claiming an environmental or social focus without providing many significant benefits to that cause. 

Serious About Sustainability

Manager selection is critical. Morgan Stanley has a multistep process to help clients identify the sustainable funds that are driving lasting positive impact, while generating returns that track the asset classes they invest in. These reviews are in addition to the comprehensive quantitative and qualitative analysis and business and operational review we conduct for all asset managers we cover. 

Managers considered for Morgan Stanley’s Investing with Impact Platform are evaluated across multiple dimensions. Some of the documents we review, such as a manager’s proxy voting history and prospectus or offering documents, are publicly available for interested investors. Here’s what we look for:

  • A documented sustainable investment process. Is there specific language in a prospectus or offering document that describes the ESG factors emphasized and how the impact criteria are incorporated into the investment process? We expect the process to be repeatable and defensible, with clearly drawn lines for when they will or won’t invest, based on sustainability factors. 
  • An experienced sustainable investing team. We find that the most successful asset managers hire leaders in sustainable investing to develop an investing framework and team that includes portfolio managers and analysts who perform ESG research, alongside fundamental financial analysis.
  • A well-defined and repeatable method for evaluating data. ESG data can vary by sector, region and data provider. We look at how fund companies use data from third-party providers, as well as how they deal with gaps in data and incorporate their own research.
  • Demonstrated shareholder engagement around sustainable initiatives. This is often critical in ESG investing. Managers can file shareholder resolutions, vote proxies and speak directly to company management to amplify sustainable goals.
  • Strong impact performance. We compare performance to both sustainable and traditional peers and benchmarks. Our highest conviction managers are added to our Focus List, including 18% of the eligible investment products on our Investing with Impact Platform.
  • Sustainable outcomes measurement and impact reporting. Managers are increasingly developing reports that investors can use to assess how a fund’s sustainable investing methodology lines up. These reports can help investors assess the alignment of a fund’s investments with its stated impact objectives and measure the impact. Your Financial Advisor can share what is available, or you can call the company and ask.

Not all managers take the same approach. When it comes to the investment process, managers can avoid industries and countries that have negative records or they can seek out companies with strong track records. They can also look for companies that aim to solve or impact a specific problem. While there is no right way, investors should determine what is most important to them before choosing a manager.

More Growth Ahead for Sustainable Mutual Funds

We expect the number of sustainable investment offerings to continue to grow in the coming years. A recent survey from the Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Investment Management found that 84% of the 118 global asset owners surveyed (60% of whom each had more than $10 billion in assets under management), are pursuing or actively considering pursuing ESG integration in their investment process,

Our manager evaluations team can help clients, working with their Financial Advisors, identify the portfolio managers who are likely to achieve both their investing and sustainability goals. Investors with the time and determination to dig deep into fund documents can also find answers to some of the same questions we ask every day. 

This article was based on a February 2019 special report, “Sustainable Investing: GIMA’s (Global Investment Manager Analysis) Due Diligence Perspective.” Emily Thomas, Wealth Management’s Investing with Impact Lead Analyst, was an additional author.

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