Sustainable funds reached 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. This is a quarter of all money recently invested.
These funds usually aim to invest in investments with sound environmental, social and management practices (ESG). 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 investments in 2020, says Jon Hale, Morningstar’s director of sustainable investment research 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 where they invest their money is sending a signal about consumer sentiment in general, he says.
“A lot of people have sustainability preferences, you could call them, that are reinforced by so many things going on in the world today,” Hale says. “More people are realizing that they can express their sustainability preferences through their investment.”
To top it off, the report also finds that sustainable funds outperformed conventional funds and indices on average last year. Three out of every four sustainable equity funds were in the top half of their Morningstar category by 2020, or groups of funds with similar holdings.
Investors who want to make a statement with their dollar do not have to give returns to do so, Hale says.
‘It all points to even more growth’
Hale says he does not anticipate that ESG’s popularity will decline any time soon.
First, investors have more options than ever before. According to Morningstar, there are now nearly 400 sustainable funds available, compared to just 139 in 2015. The size of funds makes it easier for investors to become aware of and invest in sustainable funds.
“There are now enough funds for anyone who wants to invest in this way to share a full range of portfolio options on equities and bonds, large-cap and small, in the US and internationally,” he says. “From an investor’s point of view, it’s good to have so much out there.”
Although the investments are not set out by age group in the report, the funds are especially popular among millennial 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 performing well – coupled with the fact that President Joe Biden may be more open to ESG funds than the Trump administration – makes it more likely that it will be adopted more widely in 401 (k) plans in the coming years.
This means that even more investors will be exposed to sustainable funds.
“It all points to even more growth,” Hale says.
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