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President Trump Drives Investors to ESG

Usage of ESG fund data has quadrupled among US Morningstar Direct users since Trump’s inauguration and performance of sustainably focused funds is promising

Jon Hale 9 August, 2017 | 2:46PM

Since the November election and January inauguration of Donald Trump, I have received a lot of questions about whether the new president will have a chilling effect on sustainable investing. The term refers to any investment approach that systematically includes environmental, social and corporate governance (ESG) criteria in the investment process and/or the consideration of ESG impacts on investors, stakeholders, the environment, society, economy and financial system.

To my knowledge, Trump has never mentioned sustainable investing, but if he has, I’d wager that the terms “hoax” or “fad” were involved. With the new administration trying to bring back coal, pulling the U.S. out of the Paris Agreement, and favouring broad deregulation of business, has sustainable investing now become a risky proposition?

Will companies that have been improving their sustainability profiles start abandoning their progress? Will the stocks of “bad” companies suddenly start outperforming, causing sustainable strategies to underperform?

So Far, So Good

So far, there is little evidence of a chilling effect. If anything, Trump in the White House is having a galvanising effect, as sustainable investors become more committed to the idea and draw even more into their ranks, as more people seek ways to counter Trumpism outside of the political sphere.

Most of the nearly $9 trillion in assets invested sustainably in the U.S. are institutional, and I’ve seen no indication that institutional investors are abandoning the concept. To the contrary, institutional investors in May led the charge for greater climate risk disclosure at ExxonMobil and Occidental Petroleum, and many signed a pledge to keep working towards fulfilling the carbon emissions reductions in the Paris Agreement.

Among retail investors in the U.S., interest continues to build. It has taken a while for that interest to translate into investible assets as financial advisers have had to educate themselves about sustainable investing and asset managers have had to launch more funds in a climate favoring ultralow-cost market index funds.

We’ve noticed a big change in the use of ESG data within our Morningstar Direct Cloud platform, which is used by asset managers, advisory firms and independent wealth managers. Usage of ESG data has quadrupled since Trump’s January inauguration, an indication that the subject is on the minds of an increasing number of our users.

In addition, a dozen open-end funds or ETFs have been launched so far this year in the U.S., including the first sustainable target-date funds for defined-contribution retirement savings plans and two sustainable index funds from fund-giant Fidelity. That follows on the heels of 35 new funds launched in 2016, bringing the total number of sustainable investment funds in the U.S. close to 200. The new flows into these funds in just the first half of 2017 is already more than the net flows for 2014 or 2015, and are on pace to top the group’s $4.8 billion in net flows last year.

Performance Proves Promising

Among the 17 funds focused on renewable energy, water, and clean tech, 14 have outpaced the S&P 500 so far this year, with a dozen posting double-digit returns. By comparison, the iShares S&P 500 Energy Sector ETF lost 12.8% during the first half.

With more Morningstar users referencing our sustainability ratings, retail investors putting money into sustainable funds, and those funds generally outperforming for the first half, Trump being in the White House appears to have done little to slow the momentum of sustainable investing in the U.S.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Jon Hale  Jon Hale is a consultant with Morningstar Institutional Investment Consulting.