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The following article is part one of a series of excerpts from the Morningstar research report, Integrating ESG Into Your Client s Portfolio, available to Morningstar Office and Direct clients here.
As with any other aspect of financial planning, when it comes to environmental, social, and governance investing, it is important to establish goals at the outset. Without a clear vision for an investor’s desired ESG outcomes in a portfolio, it is very difficult to determine which types and degrees of change to introduce. This difficulty is compounded by the fact that no commonly agreed upon set of terms and definitions currently exists. Morningstar is developing its own taxonomy and tools to assist advisors and investors in making these kinds of assessments. Advisors may have access to such tools from their own firms or other third-party providers. But even short of refined tools, we can set out some broader definitions as a guide.
Amid the market turmoil brought about by the outbreak of the coronavirus pandemic, funds focused on buying stocks that score well on environmental, social, and governance-related metrics proved to be a safer harbor for investors. These sustainable funds had an impressive year in 2020: Three out of four sustainable equity funds beat their Morningstar Category average. And even though the first quarter of 2021 was a challenging one for the performance of sustainable investments, the long-term investment case for ESG remains encouraging: The fact that ESG screens have led to resilience in recent down markets, driven by the relationship between sustainability and attributes like corporate quality and financial health, supports the view that ESG risk is material.