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Sharpening the Tools of the ESG Investor: Morningstar’s View

Improvements to ESG metrics and disclosures matter for all investors.

12 August, 2020 | 9:00

Globally, more and more investors are putting their money in sustainable investments. In the United States, mutual funds focused on sustainable investing attracted more than $20 billion in assets in 2019, more than four times the flows in 2018. And investor interest in sustainable funds has been even higher in Europe, with more than EUR 35 billion in new net assets each year since 2016. In 2019, fund flows reached a new record for European-domiciled funds of EUR 120 billion, according to Morningstar data.

And this is not a trend that is separate from mainstream investing. Rather, conventional investors are increasingly incorporating analysis of environmental, social, and governance, or ESG, factors into their process.

Morningstar’s own long-term investment philosophy also embraces the use of these factors, as they can materially affect a company’s future financial performance. We find a company’s long-term profitability and growth are consistent with a business model that leads to community well-being, engaged employees, and shared values with customers. Therefore, our analysts need a detailed view of ESG factors to determine the likelihood that a firm will continue to generate or expand cash flows.

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