Impact Investing

Here's how to track how well your impact investments are performing

Key Points
  • The number of funds and companies that are addressing climate change and other social issues has grown in recent years.
  • As those investments have developed, so have ratings that can track how well those ETFs, mutual funds and companies are performing against their stated goals.
  • These measurements can let you begin to evaluate how well your portfolio really is addressing environmental and social issues.

You want to make money on your investments and put your money to work to do good in the world at the same time.

But you don't want to get taken for a ride.

Enter the new world of sustainability ratings, which allow you to track how well the impact investments stack up when it comes to their stated goals.

Activists participate in the Global Climate March in front of the Reichstag Building on November 29, 2015
Carsten Koall | Getty Images News | Getty Images

More investors are turning to socially responsible investing — SRI — or environmental, social and governance-focused — ESG — funds.

The total assets under management in sustainable funds climbed to $161 billion as of the end of 2018, according to Morningstar. That's across 351 funds, which is up almost 50 percent from 2017.

As the funds have evolved, so have the measurements of how well they do.

What's more, the measurements actually do affect where investors put their money. Research from the University of Chicago on the ratings from Morningstar found that funds with the highest ratings took in $24 billion in additional inflows the year the ratings came out. Funds on the lower end of the spectrum, meanwhile, fell by about $12 billion.

Morningstar Sustainability Rating

Morningstar, a Chicago-based financial research firm, debuted its sustainability rating in 2016 after seeing there was a lack of meaningful ways to evaluate these funds, according to John Hale, sustainability research expert at the firm.

Morningstar collects data on thousands of mutual fund, ETF and managed portfolios around the world. The firm works with Sustainalytics, its partner firm that focuses on company-level data, to come up with asset-weighted scores for the funds.

The scores range from five globes, the highest score, to one globe, the lowest. The top 10 percent of funds in each category receive five globes, which means both traditional and sustainable funds can come out on top.

To access the ratings, investors can go to the Morningstar website, where they can also see funds' overall scores.

MSCI ESG Ratings

MSCI, a provider of indexes and portfolio analysis tools, also has a group of its own sustainability scores.

The company currently covers about 7,000 individual companies and evaluates them based on how well they are addressing ESG issues, according to Larry Lawrence, executive director and head of ESG products for the wealth management market at MSCI ESG Research.

MSCI also measures how well mutual funds and ETFs are doing when it comes to ESG. In 2016, the ratings covered about 20,000 funds, and have grown from there, according to Lawrence.

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The scores for companies and funds generally range from zero to 10, with 10 being the highest.

The company also provides its sustainability analysis in multiple formats, such as through indexes, individual company and fund reports and portfolio analytics.

Unlike Morningstar, MSCI's ratings cannot be accessed by just going to their website. The scores are generally available through third-party distributors, such as large brokerage platforms. But you may see MSCI's data and research if you're a client of a firm or financial advisor who uses it.

Other measurements

Individuals who are looking to access research on potential ESG investments can also look to organizations such as As You Sow, a non-profit shareholder advocacy group. Its Clean 200 list, which is updated every six months, identifies the publicly-traded companies that are doing the most to transition to clean energy, based on its research.

Sustainalytics, Morningstar's partner firm, also has its own individual company ratings. By looking up a publicly-traded company in Yahoo Finance, you can see the sustainability score it has received.

General Electric, for example, has a sustainability score of 62 out of 100. Still, it is labelled an "outperformer" for that grade, which puts it in the 86th percentile in comparison to peer companies.

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