How to Choose a Sustainable Equity Portfolio

Investors are flocking to sustainable equity funds, with inflows breaking new records in 2020. But choosing a sustainable equity manager is still challenging. Here’s what investors should look for to identify portfolios that align with their responsible investing goals.

Sustainable equities are becoming increasingly popular. By the end of 2020, global assets under management for open-end sustainable equity funds reached $1 trillion, according to Morningstar. Growing awareness of environmental, social and governance issues, coupled with lessons learned during the pandemic, have added urgency to sustainable investing agendas.

But choosing a sustainable equity portfolio is perhaps harder than ever. According to Morningstar, approximately 2,300 sustainable equity funds are now available worldwide. How can investors differentiate between competing strategies and identify those most aligned with their responsibility ethos and investing goals? Start by asking the following three questions.

1. What Does Sustainability Mean to You?

Sustainability means different things to different people. For some, it’s about positively screening a benchmark for companies with certain attributes, for example, companies in which women comprise 50% of the board. Others might focus on improving environmental and social outcomes and seek a portfolio that invests in companies whose products or services contribute to such goals.

But not every sustainable portfolio clearly explains how it integrates sustainability into its investing process. Investors should look for managers with a clear and coherent definition of sustainability so they understand what they’re getting. Many investment managers follow the United Nations Sustainable Development Goals (SDGs) as a roadmap. But since these are a vast set of concepts, investors need a practical plan to translate the SDGs into actionable investment ideas. In our view, the SDGs are a set of forward-looking opportunities that can inform investment themes and help define an investment universe.