Investors looking for a sustainable foreign-stock fund don t have many options to choose from. Morningstar counts fewer than three dozen environmental, social, and governance funds landing in the international-equity Morningstar Categories.
But among that group are funds that have put up solid returns for their respective categories. For this article, we screened for top-performing foreign-stock ESG funds in 2020 and looked under the hood for clues that explained their strong showings.
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After holding their own in the fourth quarter, sustainable equity funds finished 2020 with a clear performance advantage relative to traditional equity funds. Sustainable funds are those that emphasize the use of environmental, social, and governance criteria to generate financial return and broader societal impact. For most of the year, the kinds of stocks that sustainable equity funds prefer those of companies with better ESG profiles and that are aligned with the transition to a low-carbon economy outperformed.
In conventional terms, many of those tend to be quality-growth stocks. The approval of COVID-19 vaccines late in the year spurred a rally among cyclical value and traditional energy stocks, which to that point had lagged severely during the pandemic. As a result, sustainable equity funds performed on par with their traditional peers in the fourth quarter.