Morningstar - Q3 2020 - 46

Strategies

Median performance is measured against the category index,
as a percentage of the benchmark's loss. A negative difference
indicates outperformance...

Outperformance, shaded green in exhibits 2
and 3, denotes a decline less than the category
benchmark.

-0.56

-0.33

-0.48

-0.37

-0.41

-0.28

EXHIBIT 2

Category Breakdown If we focused only on the categories containing at least four ESG funds, the downside risk story was still
in ESG's favor.
ESG Funds Down Capture

ESG Funds Standard Deviation
Difference Between ESG Median
and Non-ESG Average

Down Capture Ratio (%)

Average Standard Deviation (%)

Difference Between ESG Average
and Category Average

Number of Funds

1 Year

3 Year

5 Year

1 Year

3 Year

5 Year

1 Year

3 Year

5 Year

1 Year

3 Year

5 Year

Large Blend

95.71

98.16

98.82

-4.41

-1.48

-2.16

19.75

15.35

13.78

-0.33

0.10

0.16

Large Growth

99.68

96.43

100.04

-7.17

-5.36

-6.02

17.83

15.04

13.86

-0.48

-0.37

-0.23

Foreign Large Blend

90.81

94.49

96.07

-7.71

-2.71

2.30

19.68

14.55

14.38

-0.56

-0.33

0.58

World Large Stock

88.23

91.59

94.04

-8.87

-5.56

-2.89

19.16

14.40

13.62

-0.41

-0.28

0.38

Allocation-50% to 70% Equity

85.55

97.74

101.73

-24.02

-14.52

-9.08

12.44

9.46

8.84

-1.18

-0.58

-0.14

Mid-Cap Growth

103.10

102.54

115.27

-0.40

-0.99

11.68

21.75

18.41

18.86

0.12

0.81

3.18

Mid-Cap Blend

85.40

86.53

85.49

-22.14

-20.12

-17.86

21.97

16.41

14.32

-3.32

-2.02

-1.70

Small Blend

91.11

87.65

75.14

-13.59

-14.36

-22.43

26.23

19.49

15.96

-2.08

-1.59

-2.65

World Small/Mid Stock

74.71

74.78

83.79

-16.69

-18.49

-10.15

23.49

16.03

16.74

-0.16

-1.07

1.63

90.48

92.21

94.49

-11.67

-9.29

-6.29

20.26

15.46

14.49

-0.93

-0.59

0.14

Category

Average
Note: Data is for funds' oldest share class.
Source: Morningstar Direct. Data as of 03/31/2020.

February, we showed that investors can build
a global portfolio of companies with positive ESG
attributes without compromising returns.
Morningstar has also found that companies
that can tackle ESG risk in their industries
create or strengthen their economic moats over
the long term.
The COVID-19 pandemic has added new elements
to the ESG equation. For example, under the
social umbrella now falls questions about how well
companies are prepared to take care of their
employees during a health crisis.
Our Study
We started with a list of 230 diversified stock
and allocation funds with an ESG mandate,
as designated by Jon Hale, Morningstar's director
of sustainability research.

Morningstar Q3 2020

When screening for ESG funds, we met one of
the same hurdles advisors and investors face:
The overall number of ESG funds is still relatively
small. Some categories have only a half dozen
offerings, and many have less. Many strategies are
new, and many have a tiny level of assets.
Nearly 100 of the funds didn't even crack the $100
million mark, so we decided to draw the line
at $50 million. This left us with a list of 137 funds
across 19 categories.

The Results
For the trailing one year through March 31, the median ESG fund only lost an amount equal to 98.3% of
its category benchmark's decline ( EXHIBIT 1 ). This
was much better than the average non-ESG fund,
which actually posted losses 4.8% greater than the
category benchmark index. As a result, the median
ESG fund outperformed by capturing 6.5 percentage
points less of its category benchmark's decline
than did the average non-ESG fund in its category.

One caveat to the data: In eight of the categories,
only one or two funds made it through the
screen, such as foreign large growth and foreign
small/mid-growth. While we included those
categories in the overall medians, for most of this
article, we focused on the 11 more-populated
categories, such as U.S. large blend, foreign large
blend, large growth, and mid-cap blend.

It was a broad-based outperformance. Out
of the 19 categories, the average ESG fund in 16
categories captured less of the downside return
of its Morningstar Category benchmark over
the past one and three years through March 31. For
the five-year period, the average ESG fund in 14
out of the 19 categories showed better downside
performance than its category becnhmark.

Morningstar - Q3 2020

Table of Contents for the Digital Edition of Morningstar - Q3 2020