3 Top ESG Rated Global Equity Funds

As Fundsmith launches an ESG fund for institutional investors we reveal the global equity funds which score highest on Morningstar's Sustainability Rating

Emma Wall 1 November, 2017 | 8:01AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and joining me today is Morningstar Fund Analyst, Fatima Khizou, to talk about sustainable investing.

Hi, Fatima.

Fatima Khizou: Hi, Emma.

Wall: So, kicking us off today is the news that Fundsmith is launching a Sustainable Equity fund, which will embody ESG considerations in its stock selection, but it will screen out certain sectors, including casinos, gas companies, porn, tobacco and brewers, which means some of the stalwart stocks in Fundsmith Equity, such as, Philip Morris, Imperial Brands and Diageo will not be there. This is an institutional fund. So, it's not for our readers. But it does signify the growing interest in sustainable investing, doesn't it?

Khizou: Yeah, it does certainly. We have seen a surge in terms of demand from investors for sustainable investments. And looking at the assets over the last five years, we've seen a significant increase in terms of assets dedicated to this type of investment. And while historically it's been mostly on the institutional side, we have seen that there has been a significant rise in terms of assets that are dedicated to retail side segment. For example, in terms of the overall assets, retail side represented in 2012 about 10% of that and in 2016, it's 25%. So, there has been increasing interest from retail side as well.

Wall: And investors who want to incorporate ESG factors into their fund selection, for those that do, we do have a Morningstar Sustainability Rating, don't we, which can help people pick funds that score above average on ESG ratings?

Khizou: Yeah, we do. And our Sustainability Rating is holdings-based. So, it will provide investors for any type of fund, whether it's tagged as socially conscious or not, how those companies that a fund manager has invested score well in terms of the E, S and G. And so, the investor can use this further metric to spot a good fund if he has an interest in ESG consideration.

We've seen an increased interest, or we've seen from fund managers, that they are more and more taking into account those factors as well, and some of them that have been already been taking them into account have made more efforts to express them so that investors know about them.

So, our sustainability rating will tell you whether a fund scores well on those metrics or not and you can actually spot funds that are actually not socially conscious but actually because of the approach taken by the fund manager those companies score really well. And you can spot similar characteristics of those funds usually to look for high-quality companies with high barrier to entries, so a very hard business model to replicate but also with cash flow generation, higher margins. So, most of those funds that score really well tend to have similar characteristics.

Wall: And what about a couple of funds which do score highly on ESG factors that also have an Analyst Rating? Perhaps you could highlight a couple for us.

Khizou: Yeah. Sure. Actually, the Fundsmith Equity Fund that we rate Gold scores quite well on those metrics. It scores above average which is what you call four globes as well. And there's also two Silver-rated among our global universe that we rate which are the BNY Mellon Long-Term Global Equity Fund, scores above average, and also, the MFS Global Equity Fund which actually scores very high, so five globes.

Wall: Fatima, thank you very much.

Khizou: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BNY Mellon Long-Term Global Eq Int W Acc3.94 GBP-0.34Rating
Fundsmith Equity I Acc7.28 GBP-0.01Rating
MFS Meridian Global Equity W1 USD36.57 USD-0.13Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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