Morningstar - Q3 2021 - 37

Eight Top Funds for Sustainable Investing
These medalists earn high ESG
Commitment Level ratings.
Alyssa Stankiewicz
FUNDS
We recently launched environmental, social,
and governance-specific ratings on more than 800
funds. In this article, we explain the work and
highlight our analysts' assessments of some of the
elite funds in this area.
The ability to outperform traditional benchmarks
while pursuing sustainability initiatives has
often seemed an elusive goal for investors. Using
the Morningstar Analyst Rating together with
the newly launched Morningstar ESG Commitment
Level, investors can now identify funds that
deliver the best of both worlds.
The Morningstar ESG Commitment Level helps
investors understand where a strong ESG
approach fits within a fund's broader investment
objectives. It is a qualitative measure of the extent
to which asset managers and funds incorporate
ESG considerations into their investment processes.
The scale runs from best to worst: Leader,
Advanced, Basic, and Low.
Firms and strategies that earn the Leader
designation integrate ESG factors fully into their
security analysis and portfolio construction,
and they deliver desirable ESG outcomes at the
portfolio level, such as a high sustainability
profile or advancement of the United Nations
Sustainable Development Goals. These firms
boast impressive ESG resources, and they typically
havebest-in-class practices for reporting and
disclosure. For Advanced firms and strategies,
ESG considerations are a key part of the
investment process, even if they fall short of
Leader funds in one or more areas. We currently
have ESG ratings on more than 800 strategies and
70 asset managers.
The Top Funds
The Morningstar 500 is a select list of funds
that are among the industry's most notable. It is
featured exclusively in the Morningstar
FundInvestor newsletter. Eight Morningstar 500
funds earn top marks for both their Morningstar
Analyst Ratings, which evaluate a strategy's
potential for outperformance, and ESG Commitment
Levels. EXHIBIT 1 shows the Morningstar
500 funds that earn Analyst Ratings of Gold, Silver,
or Bronze and an ESG Commitment Level of
either Leader or Advanced.
Parnassus is the sole asset manager on this list
that earns an ESG Commitment Level of Leader at
the firm level. It boasts decades of experience
in responsible investing, as evidenced in the high
quality of its ESG integration.
Leader Funds
Parnassus Core Equity PRBLX, Parnassus Mid-Cap
PARMX, Parnassus Mid Cap Growth PARNX
Parnassus offers three equity funds that are
Morningstar Medalists and earn ESG Commitment
Levels of Leader. These funds are driven by
a rigorous, firmwide approach to ESG investing
that is a head above the competition. The firm's
focus on sustainable investing dates to its 1984
inception, resulting in a steady investment team
with substantial experience in the field. This
experienced team produces topnotch ESG research,
which is a key driver of security selection
and portfolio construction, risk management,
and proxy-voting strategies.
Parnassus' funds apply the same firmwide
philosophy in each strategy. The process excludes
companies involved in controversial businesses
and then employs ESG, quality, and valuation
screens to filter out about 85% of the benchmark.
From there, managers look for companies with
sustainable competitive advantages, increasingly
relevant products or services, exemplary
management, and ethical practices. For example,
VF VFC is an outdoor apparel company focused on
improving its sustainability by setting sciencebased
targets for carbon intensity and leading the
way in circular business models.
The resulting portfolios are concentrated, with
a focus on downside protection and stable
competitive footing. This leads to a quality bias,
but the managers also consider valuation,
ensuring that the portfolio holdings are not overly
expensive. Management skillfully blends
sound investing principles and ESG expertise
in this compelling suite of funds.
TIAA-CREF Core Impact Bond TSBIX
TIAA-CREF Core Impact Bond is a worthwhile
ESG mandate wrapped in a solid relativevalue-driven
process. A robust team incorporates
traditional ESG screening alongside proprietary
rankings and impact investments, making this one
of the purest ESG bond strategies out there.
Lead manager Steve Liberatore is a firm veteran
and heads up the firm's ESG and impact investing
efforts in fixed income. He is backed by two
comanagers and over 100 investment professionals.
The firm's 28-person ESG team ranks potential
investments according to a proprietary ESG
framework. Most of the fund's assets are invested
in the top performers according to this ESG
research. The remainder of the portfolio is
dedicated to impact investments, which are bonds
issued to finance a project that results in a
" direct and measurable " impact toward some ESG
goal. The fund's ESG mandate, robust resources,
and incorporation of impact investments make
for a strong overall fund.
Advanced Funds
Brown Advisory Sustainable Growth BIAWX
An experienced group with solid ESG
resources drives Brown Advisory Sustainable
Growth's patient and unique approach to
sustainable investing.
morningstar.com/lp/magazine
37
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