Sustainable funds reached record highs in 2020 with over $51 billion in new investments, more than double the previous record set in 2019, according to a new report from investment research firm Morningstar. That's one-quarter of all newly invested money last year.
These funds generally aim to invest in companies with sound environmental, social and governance (ESG) practices. A sustainable fund adhering to these principles may invest in companies promoting clean energy or that prioritize women in leadership roles.
There are many reasons for sustainable investing's accelerated popularity in 2020, says Jon Hale, Morningstar's director of sustainable investing research and the author of the report, including the worsening climate crisis, the coronavirus pandemic and the Black Lives Matter movement.
Additionally, more and more investors are realizing that where they invest their money sends a signal about consumer sentiment broadly, he says.
"A lot of people have sustainability preferences, you might call them, that are being reinforced by so many things going on in the world today," says Hale. "More people are realizing they can express their sustainability preferences through their investing."
To top it off, the report also finds that sustainable funds outperformed conventional funds and indexes, on average, last year. Three out of every four sustainable equity funds ranked in the top half of their Morningstar Category in 2020, or groups of funds with similar holdings.
Investors who want to make a statement with their dollars don't have to give up returns to do so, says Hale.
Hale says he doesn't foresee ESG's popularity waning any time soon.
For one: Investors have more options than ever. There are now almost 400 sustainable funds available, according to Morningstar, compared to just 139 in 2015. The breadth 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 this way to have a full range of portfolio options allocated across stocks and bonds, large cap and small cap, U.S. and international," he says. "From an investor standpoint, it's good to have this many out there."
Though the report did not break down the investments by age group, the funds are especially popular among millennial and female investors, says Hale. 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 they will become more widely adopted in 401(k) plans in years to come.
That means even more investors will be exposed to sustainable funds.
"It's all pointing to even more growth," Hale says.
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