Morningstar’s Sustainability Indexes: Portfolio Tilts and Performance Implications

The law of unintended consequences applies well to investment screens. Select for dividends, and you can end up with a big overweight to the consumer defensive sector. Pick stocks based on fundamental criteria—e.g. revenues—and you introduce a value tilt.

Dan Lefkovitz 21.11.2016 | 12:31

The law of unintended consequences applies well to investment screens. Select for dividends, and you can end up with a big overweight to the consumer defensive sector. Pick stocks based on fundamental criteria—e.g. revenues—and you introduce a value tilt.

Screening companies for “sustainability” (also known as Environmental, Social, and Governance ESG) is no different. In his study Unintended Biases in ESG Index Funds, Morningstar analyst Alex Bryan found that methodological differences between ESG indexes cause divergent portfolio exposures across sector, style, region, and market capitalization. These biases impact risk and return. Now that Morningstar has created its own suite of sustainability indexes, we can compare them to their non-ESG counterparts on a portfolio and performance basis.

Morningstar’s broadest ESG index, global equities screened for sustainability, has recorded a very similar risk/return profile to the non-ESG global equities index over 4+ years of back-tested history. This similarity persists despite real differences at the holdings level. Narrower country-level indexes have exhibited more potential for differentiated performance.

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Dan Lefkovitz

Dan Lefkovitz  er innholdsstrateg for Morningstars indeksvirksomhet. 

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