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By Anthony EamesDirector of Responsible Investment Strategy, Calvert Research and Management

Washington - In the U.S. and elsewhere, grappling with COVID-19 and its aftermath threw issues like income inequality, access to health care and other socioeconomic divisions into sharp relief. Against this backdrop, environmental, social and governance (ESG) strategies made headway with investors. In 2020, U.S. investors poured more assets into sustainable funds than ever before, besting prior calendar-year records set in both 2018 and 2019.

Net asset flows into sustainable open-end funds and ETFs reached $51 billion in 2020, according to Morningstar's most recent "Sustainable Funds U.S. Landscape Report."1

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That is more than double the total for 2019 — and nearly 10 times the $5.5 billion directed to sustainable funds in 2018, according to the report. For 2020, sustainable fund flows constituted nearly 25% of overall net flows into U.S. stock and bond mutual funds; not that long ago, they barely topped 1%.

And while open-end funds saw net losses of $289 billion in 2020, sustainable open-end funds attracted $17.4 billion. According to the report, "Investors overall pulled money out of U.S. equity, sector-equity, international-equity, and allocation funds, but added money to sustainable funds in each of those category groups." Overall, Calvert's sustainable funds drew strong asset flows in 2020.

Asset managers with largest flows

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Source: Morningstar Direct. Data as of 12/31/2020.

Competitive performance

On the whole, sustainable funds significantly outperformed within their Morningstar peer groups in 2020, especially equity funds. Three out of four sustainable equity funds ranked in the top half of their respective categories as of December 31, and 42% ranked in the top quartile. Only 6% ranked in their category's bottom quartile. On the fixed-income side, 56% ranked in the top half of their respective categories, and 17% placed in the bottom quartile.

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The report points out that there is no one consistent explanation for the overall outperformance of the Morningstar sustainable funds versus their non-ESG peers. The reasons vary because the funds' approaches to ESG investing differ to some degree. However, all share the characteristic that ESG concerns are central to their evaluation of securities, portfolio construction and societal impact.

The pull of ESG investing

It's not difficult to understand why sustainable funds are capturing ever-greater investor attention. Clearly 2020 was a pivotal year for ESG strategies, as the pandemic underscored the vital roles companies play in creating a sustainable global economy.

In recent years, the concepts of financial materiality and risk mitigation associated with ESG have gained considerable traction with corporations, investors and institutions. Equally important, the notion that investment returns have to be compromised to invest responsibly has also been roundly dispelled in many studies. Recent annual investment fund surveys by Barron's, Morningstar, Lipper and others have shown sustainable funds to be competitive, often outperforming their peer groups.

Bottom line: Although we think ESG investing is yet in its infancy, many investors now embrace ESG integration for its positive contributions to societal as well as financial outcomes — and asset flows into sustainable funds reflect this.

1. Sustainable Funds U.S. Landscape Report: More funds, more flows, and impressive returns in 2020. Morningstar Manager Research, February 10, 2021.

Past performance is no guarantee of future results.

Methodology:

To evaluate the investment performance of sustainable funds, Morningstar compared how their returns rank relative to their Morningstar Category peers. They used quartile distributions to compare how sustainable funds' returns rank compared with those of all funds, category by category. Morningstar combined those to get an overall distribution of sustainable fund returns ranks. By definition, all funds in a category must be evenly apportioned across quartiles. Using this method of comparison, Morningstar then determined whether sustainable funds are over- or under-represented in each quartile. For open-end funds, the returns of the oldest share class were used. Morningstar sustainable fund performance statistics are as of December 31, 2021.

Morningstar Sustainable funds are open-end funds and exchanged-traded funds that use environmental, social, and corporate governance (ESG) criteria to evaluate investments or assess their societal impact. For a fund to be included in the sustainable funds universe, ESG concerns must be central to its investment process, and the fund's intent should be apparent from a simple reading of its prospectus. ©2021 Morningstar. All Rights Reserved. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.