Sustainable funds hit record highs in 2020, with more than $ 51 billion in new investment, more than double the previous record set in 2019, according to a new report by investment research firm Morningstar. This is a quarter of all money newly invested last year.
These funds generally aim to invest in companies with sound environmental, social and governance (ESG) practices. A sustainable fund that adheres to these principles can invest in companies that promote clean energy or prioritize women in leadership roles.
There are many reasons for the accelerated popularity of sustainable investment in 2020, says Jon Hale, Morningstar’s director of sustainable investment research and author of the report, including the worsening climate crisis, the coronavirus pandemic and the Black Lives Matter movement.
In addition, more and more investors are realizing that where they invest money they are sending a signal about consumer sentiment in general, he says.
“A lot of people have sustainability preferences, you might call them, that are reinforced by so many things that are happening in the world today,” says Hale. “More people are realizing that they can express their sustainability preferences through investment.”
In addition, the report also notes that sustainable funds outperformed conventional funds and indices on average last year. Three of the four equity funds ranked in the top half of the Morningstar category in 2020 or groups of funds with similar holdings.
Investors who want to make a statement with their dollars do not have to give up profitability to do so, says Hale.
“Everything indicates even greater growth”
Hale says he doesn’t expect ESG’s popularity to decline any time soon.
First: investors have more options than ever before. There are currently nearly 400 sustainable funds available, according to Morningstar, compared to just 139 in 2015. The breadth of funds makes it easier for investors to become aware and invest in sustainable funds.
“There are now enough funds for anyone who wants to invest in this way to have a full range of portfolio options allocated between equities and bonds, high capitalization and low capitalization, US and international,” he says. “From an investor point of view, it’s good to have so many there.”
Although the report did not break down investments by age group, the funds are particularly popular with millennial and female investors, says Hale. As the millennia age and have more money to invest, he expects ESG funds to grow even more.
The fact that sustainable funds are behaving well – coupled with the fact that President Joe Biden may be more open to ESG funds than the Trump administration – makes them more likely to be widely adopted in 401 (k) plans in the coming years.
This means that even more investors will be exposed to sustainable funds.
“Everything indicates even higher growth,” says Hale.
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