3 Easy Steps to Find a Suitable ESG Fund

Sustainalytics, which was acquired by Morningstar, assesses company-level ESG risk. Their more than 200 research analysts evaluate the extent to which a company is exposed to material ESG risks and how well it's managing these issues. Importantly, the analysts also emphasise a company’s measurable behavior, by examining incidents and controversies. 

Environmental factors include company behaviour and policies on issues like climate, pollution, energy efficiency, and renewable energy. The social factor evaluates things like a company’s commitment to inclusion and diversity in the workplace, fair wages, forced labour, supporting the local community, customer privacy, and product safety. Finally, the governance factor measures things like executive pay, political donations and lobbying, bribery and corruption, and board-level attention to sustainability and climate issues.

How to Find Some ESG Funds Worth Considering

As the number of funds claiming they invest with an ESG focus increases, investors may struggle to compare them. Our ESG Screener provides a way to easily filter Morningstar’s vast database to find mutual funds that intentionally integrate ESG analysis into their investment process. It also allows users to target those funds that have most effectively eliminated material ESG risk from their portfolios. And users can also home in on funds whose risk-adjusted returns have outperformed their Morningstar Category peers (which includes all funds in the category, not just those with an ESG focus). 

Here’s how to do it, starting on our Fund Screener page:

1.   Find the dropdown menu that says "Morningstar Sustainability Rating™" and set it to '5 Globes'.

This step narrows the list of potential funds to those that are doing the best job of managing investors’ overall exposure to ESG risks.

The Morningstar Sustainability Rating starts with each company’s ESG Risk score, which measures the degree to which individual companies in the portfolio face financial risks from ESG issues. We then roll those individual scores up into an overall, portfolio-level score. The rating is easy to interpret: 5 globes means the overall portfolio has negligible ESG risk; 1 globe means it is exposed to significant ESG risk.

2. Select a Morningstar Category

Global Equity Large Cap is selected because funds in the large-cap category invest mainly in stocks of large corporations. Funds that track the MSCI AC World Index tend to fall into the large-cap blend category. Closer to home, Greater China Equity is another option in the drop-down menu if a specific geographic focus is preferred. 

3. Find the "Morningstar Rating" dropdown, and select 4.

This will narrow the list to funds that have 4- and 5-star ratings. Though past performance is not always predictive of what is to come, funds with higher star ratings have earned higher returns than their peers (after adjusting for risk and accounting for sales charges).

These four criteria filter Morningstar’s vast global equity fund database and result in a list of 36 funds, 101 share classes in total (some funds have multiple share classes available to investors depending on how they are distributed). So far, one Greater China Equity fund has made it to the top in both Morningstar Sustainability and Star Rating.

Of course, this is only the beginning when it comes to evaluating potential funds for your portfolio. Whether funds have an ESG focus or not, it pays to look for funds with skilled, experienced management teams; sensible and repeatable investment processes; and low price tags, among other key factors.