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Relative Importance of Sustainability Measures and Costs in Mutual Fund Selection

Impact investing has become a mainstream investment practice, especially for millennial investors. More financially savvy than their Generation X predecessors and with an increased concern for environmental and social justice issues, Millennials are transforming socially responsible investing from unconventional to commonplace. This article examines the relationship between sustainability and mutual fund returns (both historical and anticipated) to identify beneficial information that socially responsible investors can use in making investment decisions. Using Morningstar sustainability ratings, star ratings, and analyst ratings, the authors find a very low correlation between sustainability and fund returns. Sustainability ratings do not vary across Morningstar star ratings or analyst ratings; nor do Morningstar star or analyst ratings vary within high or low sustainability groupings. The practical relevance of these findings is that socially responsible investors do not have to sacrifice financially when investing with a positive social inclination. However, the authors document the ability to enhance sustainable investment returns by limiting fund costs in the form of load charges and expense ratios. Low costs are associated with higher Morningstar star ratings and forward-looking analyst ratings. Hence, it is possible to “do well” financially by selecting less expensive funds with high sustainability ratings. TOPICS: ESG investing, mutual fund performance Key Findings • The practical relevance of these findings is that socially responsible investors do not have to sacrifice financially when investing with a positive social inclination. • The authors document the ability to enhance sustainable investment returns by limiting fund costs in the form of load charges and expense ratios. • Hence, it is possible to “do well” financially by selecting less expensive funds with high sustainability ratings.