Sustainable funds hit record highs in 2020 with more than $ 51 billion in new investments, more than double the previous record set in 2019, according to a new report from investment research firm Morningstar. It is a quarter of all the money that has been invested last year.
These funds are usually aimed at investing in companies with good environmental, social and governance (ESG) practices. A sustainable fund that meets 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, director of research on sustainable investment 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 wherever they invest their money it sends a signal about consumer sentiment broadly, he says.
“A lot of people have sustainability preferences, you might say, that are reinforced by so many things happening in the world right now,” Hale says. “More people realize they can express their sustainability preferences through their investment.”
To top it off, the report also notes that sustainable funds outperformed conventional funds and indices last year on average. Three out of four sustainable equity funds ranked in the top half of their Morningstar category in 2020, or groups of funds with similar holdings.
Investors who want to make a statement with their dollars don’t have to give up returns to do so, Hale says.
“Everything points to even greater growth”
Hale says he doesn’t expect ESG’s popularity to decline anytime soon.
On the one hand, investors have more options than ever before. There are now 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 of and invest in sustainable funds.
“There is now enough funds for anyone who wants to invest in this way to have a full range of portfolio options allocated between stocks and bonds, large-cap and small-cap, US and international,” he says. “From an investor’s point of view, it’s good to have a lot of them.”
While the report did not break down investments by age groups, the funds are especially popular with millennial and female investors, Hale says. As millennials age and have more money to invest, expect ESG funds to grow even more.
The fact that sustainable funds work well, along with the fact that President Joe Biden may be more open to ESG funds than the Trump administration, makes them more likely to be adopted more in the 401 (k) plans in the next years.
This means that even more investors will be exposed to sustainable funds.
“Everything points to even greater growth,” Hale says.
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