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Fund buyers get more discerning with ESG picks

Strategies rated by Morningstar as ‘high’ for sustainability see higher inflows


Elena Johansson

In December, Last Word Research commented on the rise in popularity of ESG investing and the impact Greta Thunberg is having on the financial industry.

This month, we look at the relationship between funds rated by Morningstar as ‘high’ for their ESG credentials, and those expected to have the best future performance among their peers. Funds that sit at the top of this forward-looking ranking are awarded ‘gold’.

The table below shows all UK-domiciled funds ranked gold under this system. It is clear that, despite the expectation these funds will outperform their benchmarks in the upcoming months, few are also rated ‘high’ in the Morningstar sustainability tables, with the majority labelled as ‘average’.


All UK-domiciled funds with a “Gold” Morningstar Analyst Rating Fund Size (£bn) Morningstar Sustainability Rating
Fundsmith Equity I Acc 19.65 Above Average
Vanguard FTSE U.K. All Shr Idx UT Acc 10.77 Average
Vanguard LifeStrategy 60% Equity A Acc 7.86 Average
Vanguard US Equity Index Acc 7.58 Below Average
Vanguard US 500 Stock Index Ins USD Acc 6.08 Average
iShares North American Eq Idx (UK) L Acc 5.47 Average
HSBC American Index Retail Acc 5.35 Average
Capital Group New Pers (LUX) ZL 4.76 Average
Comgest Growth Emerging Mkts USD Acc 4.36 High
L&G US Index R Acc 3.98 Average
JPM US Equity Income A Net Acc 3.81 Average
Fundsmith Equity Sicav I EUR Acc 3.73 Above Average
Vanguard LifeStrategy 80% Equity A Acc 3.72 Average
Dodge & Cox Worldwide Global Stk USD Acc 3.65 Low
Schroder ISF Asian Ttl Ret I Acc USD 3.38 Average
Comgest Growth Europe EUR Acc 3.06 High
iShares Glb Prpty Secs Eq Idx (UK) L Acc 2.84 Average
Dodge & Cox Worldwide US Stock A USD 2.34 Above Average
Fidelity Index US A Acc 1.97 Average
Man GLG Japan CoreAlpha Profl Acc C 1.90 Below Average
ASI UK Smaller Companies I Acc 1.87 Below Average
iShares Japan Equity Index (UK) L Acc 1.83 Average
Man GLG Jpn CoreAlpha Eq I JPY 1.75 Below Average
HSBC GIF Euro High Yield Bond AD 1.71 Average
Uni-Global Equities Europe SA-EUR 1.69 Above Average
iShares Dev Rl Ett Idx (IE) Instl Dis € 1.55 Average
Barings Europe Select A GBP Inc 1.54 Above Average
HSBC Japan Index Retail Inc 1.49 Average
Schroder ISF Greater China C Acc USD 1.14 Above Average
Schroder European I GBP Acc 1.02 Average
Schroder ISF Asian Eq Yld C Acc USD 0.90 Average
First State Asia Focus B Acc GBP 0.89 Average
Schroder ISF China Opps C Acc USD 0.81 Average
T. Rowe Price US Blue Chip Eq A USD 0.81 Below Average
Dimensional UK Core Equity GBP Acc 0.80 Average
JPM ASEAN Equity A (acc) USD 0.71 Above Average
Capital Group Global Allc (LUX) Z 0.57 Above Average
First State Greater China Gr B Acc GBP 0.53 Above Average
MFS Inv Global Concentrated Equity USD 0.42 High
Capital Group New World (LUX) Z 0.30 Average
Schroder ISF Taiwanese Equity C Acc USD 0.23 High
Dimensional US Sm Company B EUR 0.15 Below Average
First State Hong Kong Growth III USD Acc 0.12 Average
Uni-Global Equities Eurozone SA-EUR 0.10 High
Capital Group AMCAP (LUX) Z 0.08 Below Average
Source: Morningstar


Aiming high

Why does this matter? Investors may want to focus on a fund’s performance rather than its ESG compatibility. If this is the case, you would think they would rely just on the Morningstar analyst rating to select their next fund.

However, a recent Last Word Research study shows funds that complied with ESG challenges, and had a Morningstar sustainability rating of ‘high’, significantly outpaced those marked as ‘low’ or ‘below average’ for net fund flows, and therefore sales.

The figure below shows net flows for all UK-domiciled funds with a Morningstar sustainability rating. In every month there were net inflows into funds ranked ‘high’, which from January to December totalled £23bn. For funds marked ‘low’ there were net outflows of £15bn during the same time period.

To paint a clearer picture, figure 2 below shows net flows for all UK equity funds in 2019, which includes those with and without Morningstar sustainability ratings. As you can see, it has been a tough year for the asset class, with a whopping £57bn net outflows between January and October 2019.

Marked down

If net flows for funds within this asset class are divided up by their Morningstar sustainability ratings, as in figure 3 above, those ranked ‘high’ fared much better than their lower-ranked peers when it came to net flows.

Even during the period of significant outflows from UK equities (January-October 2019), there were net inflows totalling £10bn into funds Morningstar ranked ‘high’.

Every quarter, Last Word Research produces an asset allocation report that provides a snapshot of the forward-looking investment sentiments of some of the biggest UK fund selectors.

The last round of data was collected in November and December 2019, and it was clear that appetite for buying UK equities has not just reversed course but increased substantially. Despite this, funds with a Morningstar sustainability rating of ‘below average’ or ‘low’ were hit by further net outflows during this time.

During the past year, a trend has emerged in which funds deemed highly ESG-compliant are in aggregate beating their lower-ranked peers when it comes to net flows.

Going for gold

Why does Morningstar fail to take this into account when compiling its Morningstar analyst ratings? The table below shows all UK-domiciled funds that received a ‘high’ sustainability ranking, yet only five of these also have a ‘gold’ analyst rating.

Though strict compliance to ESG criteria does not guarantee improved future performance, or beating the benchmark, appetite for investing in ESG funds is clearly increasing, and more money has flown into funds that are highly ESG compliant.

When it comes to its analyst ratings, Morningstar may need to start considering ESG compliance or, at the very least, attach greater importance to such factors.


All UK-domiciled funds with a “High” Morningstar Sustainability Rating Fund Size (£bn) Morningstar Analyst Rating
Lindsell Train Global Equity B GBP Inc 8.40 Silver
UBS (Lux) EF China Oppo(USD) P USD acc 7.53 Silver
JPM Emerging Markets Equity A (dist) USD 6.69 Silver
LF Lindsell Train UK Equity Acc 6.66 Bronze
Fidelity Global Dividend I-Acc-EUR 6.37 Bronze
Allianz Europe Equity Growth W EUR 5.31 Bronze
Comgest Growth Emerging Mkts USD Acc 4.36 Gold
JPM Japan Equity A (dist) USD 3.86 Bronze
Fidelity European Dynamic Gr A-Dis-EUR 3.52 Silver
Merian UK Mid Cap A GBP Acc 3.49 Bronze
Comgest Growth Europe EUR Acc 3.06 Gold
Robeco Global Consumer Trends Eqs D € 2.71 Silver
Allianz Euroland Equity Growth W EUR 2.66 Neutral
MFS Meridian Prudent Wealth I1 USD 2.63 Silver
Vontobel Emerging Markets Eq A USD 2.41 Bronze
BNY Mellon Mlt-Asst Balanced GBP Inc 2.14 Bronze
T. Rowe Price EM Eq I USD 2.07 Bronze
JPM Emerging Markets C Net Acc 1.99 Silver
BNY Mellon Mlt-Asst Growth GBP Inc 1.66 Neutral
Threadneedle European Sel Ins Acc GBP 1.66 Bronze
Franklin UK Mid Cap A Inc 1.39 Silver
Fidelity Global Dividend A ACC 1.39 Bronze
MFS Meridian Prudent Capital I1 USD 1.29 Silver
AS SICAV I Indian Equity A Acc GBP 1.29 Bronze
JPM Japan A Net Acc 1.21 Bronze
Royal London Sustainable Div C Inc 1.20 Bronze
GuardCap Global Equity I USD Acc 1.11 Silver
Stt Strt EUR Sust Corp Bd Idx I EUR Inc 1.10 Bronze
Royal London Sustainable Leaders A Inc 1.06 Bronze
Royal London Sustainable World A Inc 1.04 Bronze
L&G Sterling Corporate Bond Index I Acc 1.01 Neutral
MFS Meridian Global Concntr B1 USD 0.90 Silver
JPM Pacific Equity A (dist) USD 0.86 Silver
RobecoSAM Smart Energy B EUR 0.79 Bronze
Allianz Europe Equity Gr Sel W EUR 0.62 Bronze
Heptagon Yacktman US Equity C USD Acc 0.60 Silver
Kames Ethical Equity GBP B Acc 0.58 Bronze
JPMorgan India (acc) – USD 0.57 Bronze
JPM Greater China A (dist) USD 0.56 Bronze
Jupiter Ecology 0.54 Neutral
BlackRock UK D Acc 0.53 Bronze
JPM India A (dist) USD 0.53 Bronze
Kames Ethical Cautious Managed GBP A Acc 0.43 Bronze
MFS Inv Global Concentrated Equity USD 0.42 Gold
Vontobel Asia Pacific Equity A USD 0.41 Bronze
Comgest Growth Eurp Smlr Coms EUR Acc 0.41 Silver
MFS Meridian US Concentrated Gr B1 USD 0.38 Neutral
ASI UK Ethical Equity R Acc 0.38 Bronze
MI Somerset Global Emerg Mkts B Acc 0.33 Bronze
Stewart Inv Indian Sbctnt Sustnby A GBP 0.29 Bronze
Comgest Growth China EUR Acc 0.27 Bronze
GAM Multistock Luxury Brands Eq USD C 0.25 Neutral
Schroder ISF Taiwanese Equity C Acc USD 0.23 Gold
BBH Lux Core Select I 0.19 Bronze
Legg Mason IF Royce US Smlr Coms A Acc 0.19 Neutral
Artemis Global Select I Acc 0.18 Silver
BGF United Kingdom A2 0.18 Neutral
First State Japan Equity III USD Acc 0.15 Neutral
Manulife Glbl Qual Gr(Ex-US) I USD Acc 0.11 Bronze
Uni-Global Equities Eurozone SA-EUR 0.10 Gold
Comgest Growth GEM Promis Coms EUR Acc 0.08 Bronze
Legg Mason RY US Smlr Coms C USD Dis(A) 0.06 Neutral
Uni-Global Equities Japan SA-JPY 0.06 Silver
Source: Morningstar

This article was written by Lottie McGurk, a quantitative researcher at Last Word Research

If you wish to see the full results of our research, or discuss any of this further, please contact