Sustainable funds reached historic records in 2020 with more than $ 51 billion in new investments, more than double the previous record set in 2019, according to a new report by investment research firm Morningstar. This represents a quarter of all the money recently invested in the past 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 that prioritize women in leadership positions.
There are many reasons for the accelerated popularity of sustainable investment in 2020, says Jon Hale, director of sustainable investment research at Morningstar 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 the place where they invest their money sends a broad signal about consumer sentiment, he says.
“Many people have sustainability preferences, you can call them, which are being 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 their investments.”
To make matters worse, the report also finds that sustainable funds outperformed conventional funds and indices, on average, last year. Three out of four sustainable equity funds ranked in the top half of their Morningstar category in 2020, or groups of funds with similar stakes.
Investors who want to make a statement with their dollars do not have to give up the return to do so, says Hale.
‘Everything is pointing to even more growth’
Hale says he does not expect ESG’s popularity to decline anytime soon.
On the one hand: investors have more options than ever. There are now almost 400 sustainable funds available, according to Morningstar, compared to just 139 in 2015. The variety of funds makes it easier for investors to know and invest in sustainable funds.
“There are now enough funds for those who want to invest this way, to have a full range of portfolio options allocated to stocks and bonds, large and small capitalization, in the United States and internationally,” he says. “From the investor’s point of view, it is good to have so many out there.”
Although the report does not divide investments by age group, the funds are especially popular with generation Y and female investors, says Hale. As the millennium generation ages and has more money to invest, he expects ESG funds to grow even more.
The good performance of sustainable funds – along with the fact that President Joe Biden may be more open to ESG funds than the Trump administration – makes them more likely to become more widely adopted in 401 (k) plans in the coming years .
This means that even more investors will be exposed to sustainable funds.
“Everything is pointing to even greater growth,” says Hale.
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