Morningstar - Q3 2021 - 7

Letter From the Editor
Greener Pastures
Jerry Kerns
A challenge to becoming a sustainable
investor, especially for those who have built up
their portfolios over many years, is what
to do with one's current holdings. Should I green
up my portfolio by only putting new money
into sustainable funds? Or should I try to
make wholesale changes to my holdings, replacing
my traditional funds with appropriate
ESG offerings? Or is the solution somewhere
in between?
In this issue's Spotlight, Josh Charlson and
Alyssa Stankiewicz guide financial advisors and
investors through the process of converting
a standard portfolio of funds to one that performs
better on ESG metrics ( " Striving Toward
Sustainability, " Page 31). The two researchers
use a case study that shows the trade-offs that
investors may need to make to achieve their
sustainability goals. The universe of intentional
ESG funds is relatively small and doesn't
cover every asset class with funds worth investing
in. In our case study, the investor gives up some
Gold- and Silver-rated funds for much better
overall measures on sustainability. Charlson and
Stankiewicz also found that the new ESG
portfolio had been less volatile than the traditional
portfolio, capturing less of both the upside
and downside of recent turbulent markets. Is this
kind of trade-off worth it? It depends on the
investor's priorities. This article is part of a larger
research white paper, " Integrating ESG Into
Your Client's Portfolio, " that takes advisors through
a step-by-step process to help clients determine
their ESG goals. (The full paper is available
to Morningstar Office and Direct clients.) Going
through this type of process will help investors
determine the right course for them.
For investors who decide to add some highly
rated ESG funds to their portfolio, Stankiewicz next
highlights a group of strategies that score
well on Morningstar's new ESG Commitment Level
rating and have a high Morningstar Analyst
morningstar.com/lp/magazine
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Rating ( " Eight Top Funds for Sustainable
Investing, " Page 37). The ESG Commitment Level
is a qualitative measure of the extent to which
asset managers and funds incorporate ESG
considerations into their investment processes.
Three funds from venerable sustainableinvesting
firm Parnassus Investments top
Stankiewicz's list.
In the remaining pages of Spotlight, you'll
read about how an individual investor engaged
with a large multinational company to help
it disclose its material ESG risks ( " Engaging
Netflix on Sustainability, " Page 39); the framework
for impact investing ( " Financing Solutions, "
Page 42) and how municipal bonds can play
an important role ( " The Power of the Muni-Bond
Market for Impact Investing, " Page 44); and
Morningstar CEO Kunal Kapoor and Jeremy
Grantham's conversation on what the COVID-19
pandemic should teach investors about
climate change ( " Green Linings, " Page 46).
Finally, I hope you find our supplement useful.
It lists the more than 400 funds in Morningstar's
sustainable fund universe and shows how
they score on relevant data points, including the
Morningstar Sustainability Rating and Low Carbon
Designation. To make the list, a fund must
make ESG analysis central to the investment
process. The supplement also includes a list of U.S.
companies that have wide moats and good
ESG Risk Rating Assessments, meaning they are
built to withstand the challenges ahead.
http://www.morningstar.com/lp/magazine
Morningstar - Q3 2021

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