Sustainable funds hit record highs in 2020 with more than $ 51 billion in new investment, more than double the previous record in 2019, according to a new report from investment research firm Morningstar. That’s a quarter of all the money invested last year.
These funds typically focus on investing 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 roles.
There are many reasons for the accelerated popularity of sustainable investing in 2020, said Jon Hale, Morningstar’s director of sustainable investing research and the 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 where they invest their money is a broad signal about consumer confidence, he says.
“A lot of people have sustainability preferences, you could call them, which are 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 by investing.”
To top it off, the report also finds that sustainable funds outperformed conventional funds and indices last year. Three out of four sustainable equity funds that were in the top half of their Morningstar category in 2020, or groups of funds with similar interests.
Investors who want to make a statement with their dollars don’t have to declare a return, Hale says.
‘It all points to even more growth’
Hale says he doesn’t expect ESG’s popularity to wane anytime soon.
First, investors have more options than ever. According to Morningstar, nearly 400 sustainable funds are now available, up from just 139 in 2015. The breadth of the funds makes it easier for investors to become aware of and invest in sustainable funds.
“There is now enough money for anyone who wants to invest in this way to have a full range of portfolio options divided into stocks and bonds, large-cap and small-cap, US and international,” he says. “From an investor’s point of view, it is good to have so many.”
While the report doesn’t break down investments by age group, the funds are especially popular among millennials and female investors, Hale says. As millennials get older and have more money to invest, he expects ESG funds to grow even more.
That sustainable funds are doing well – coupled with the fact that President Joe Biden may be more open to ESG funds than the Trump administration – makes it more likely they will be more widely adopted in 401 (k) in the coming years – plan.
That means even more investors are exposed to sustainable funds.
“It all points to even more growth,” says Hale.
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