Comparison of ESG-Mandated and Non-Mandated Funds Using Morningstar Measures of Sustainability and Performance.

Sustainable investing refers to a range of practices in which investors work toward financial goals while incorporating environmental, social, and governance (ESG) considerations into the investment process. There is growing suspicion that many firms and investment companies may have only a nominal commitment to sustainability. We investigate mutual funds and exchange-traded fund (ETFs) that report a sustainability mandate in their prospectus, as identified by Morningstar, and find that 85% of these mutual funds and 60% of these ETFs possess a Morningstar Sustainability rating in the top one-third of all funds. Morningstar ratings indicate that while mandated mutual funds have done well in the past, their short-term financial outlook, according to analysts, is below their non-mandated peers. Additionally, mandated mutual funds tend to invest in stocks with better longer-term economic moats and typically have lower expense ratios, but are more likely to carry a load charge. Mandated ETFs offer investors lower expenses than mandated mutual funds but do not have as strong of a commitment to sustainability. Although Morningstar's Analyst ratings predict similar performance, mandated ETFs with Quantitative ratings are projected to outperform not only their non-mandated peers but also mandated mutual funds. Overall, mandated funds appear to be walking the sustainability walk and not charging more for doing so, allowing investors to include ESG considerations in the selection process without being financially impaired. [ABSTRACT FROM AUTHOR]