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Morningstar passive sustainable report highlights sector’s growth

A new report from Morningstar, ‘Passive Sustainable Funds: The Global Landscape,’ reviews trends in asset growth, asset flows, and product development of index-tracking sustainable funds and is designed to illuminate the choices currently available to investors worldwide.

Morningstar writes that as of 31 December 2017, there were nearly 270 sustainable index mutual funds and ETFs worldwide, with collective assets under management of approximately USD102 billion.
Passive sustainable funds’ market share has increased globally from less than 6 per cent five years ago to about 12 per cent, coinciding with the overall trend towards passive investing and the development of more sophisticated indexes on the back of better environmental, social, and governance (ESG) data.
Growth across regions has not been uniform, Morningstar says. Over the past five years, US assets have quadrupled. European funds have dominated inflows over that same span and retain the lion’s share of assets—accounting for 85 per cent of the global total. Europe’s dominance is largely supported by institutional investors with sustainable mandates, particularly Scandinavian public pension, sovereign wealth, and insurance funds. Assets in the rest of the world have struggled to grow.
The universe of passive sustainable funds represents a broad range of approaches addressing various sustainability and investment objectives. While broad-based ESG funds dominate the landscape, thematic funds are gaining prominence, especially those focused on climate change and gender diversity, two issues that are increasingly resonant with investors.
Fixed-income funds are underrepresented, Morningstar comments, with less than 3 per cent of passive sustainable assets are in bond funds, compared to a figure of 25 per cent across the wider passive universe. This imbalance is a striking feature of the market and is likely to be an area of growth in the coming years.
Passive sustainable funds tend to charge higher fees than their plain-vanilla peers, Morningstar says but reports a string of new launches that undercut existing funds.
Hortense Bioy, Director of Passive Strategies and Sustainability Research for Europe, comments: “Looking ahead, we expect investor demand, coupled with better data quality and disclosure, to continue to drive product development. Specifically, we expect to see more passive funds that invest in themes derived from the United Nations Sustainable Development Goals. Low-carbon in particular will continue to grow. Looking under the hood of the newly launched funds, it is also clear that complexity is on the rise. Understanding the nuanced differences in index methodology with respect to security selection and weighting approaches is crucial. Selecting a responsible asset manager who votes company shares and engages with companies on a variety of ESG issues is also important.”
The report also provides a list of key criteria investors should consider when choosing a passive sustainable fund. These include ESG focus and metrics, exclusions, sector and geographic biases, tracking error, and fees.

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