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4 Topnotch ESG Funds

These Morningstar Medalists are great building blocks for a portfolio focused on sustainable investing.

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Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. The number of funds dedicated to investing in companies that score well on environmental, social, and governance issues have soared. In fact, these days, an investor can build a pretty well diversified portfolio strictly of ESG funds. Joining me today to talk about some of Morningstar's favorite ESG funds across a variety of categories is Russ Kinnel. Russ is Morningstar's director of manager research and editor of Morningstar FundInvestor.

Hi, Russ. Thank you for being here today.

Russ Kinnel: Glad to be here.

Dziubinski: We've seen some growth in ESG funds in fund categories where there really wasn't a lot of representation before. Let's talk a little bit about that.

Kinnel: Well, that's right. As you mentioned, if you go back in the history of ESG funds, say, 10 or 15 years ago, most of them were large-cap U.S. equity funds. But now, you really see ESG strategies across the board, just about any kind of equity or bond category, and certainly, bonds have really taken off. So, as you say, there's many more options now if you're an ESG investor.

Dziubinski: Actually, one of the first picks we're going to talk about is a bond fund, Pimco Total Return ESG, and this is Pimco's flagship fund but with an ESG spin to it. Is that right?

Kinnel: That's right. So, same managers, same core strategy, but they adapted to ESG a little bit. But in order to do that, they will overweight issuers with improving ESG factors and underweight some with declining ESG factors. As you might guess, that manifests itself mostly in the corporate-bond sleeve. It leaves the fund with a slightly higher-quality tilt for corporate bonds than Pimco Total Return, which kind of makes sense if you think about ESG being a bit of a risk framework that might lead you to a little higher quality, but performance has been good, and in general it's very close to what you see from Pimco Total Return.

Dziubinski: And this fund in particular gets a Gold fund analyst rating, is that right?

Kinnel: That's right. We rate it Gold.

Dziubinski: And then, pivoting over to equities, a fund we like is Parnassus Core Equity, and Parnassus has been doing ESG investing for a really long time. Tell us a little bit about the strategy here.

Kinnel: This is a Silver-rated fund run by Todd Ahlsten, a large-blend fund with some ESG screens that screen out quite a bit of the universe, but they have a relatively focused portfolio of high-quality names, and after those ESG screens, of course, they're looking for companies that can outperform, just like any active manager. And if you look at the performance, you can see they've really succeeded.

Dziubinski: Another fund we like that focuses largely on U.S. large caps is Brown Advisory Sustainable Growth? Tell us a little bit about that strategy.

Kinnel: This is a Silver-rated large-growth fund. Growth strategies do work pretty well with ESG because they take you away from some of the energy and coal and other industries like tobacco. So, growth is sort of a natural place. And again, we've got ESG screens, good results. Our analyst rating is about the likelihood of outperformance versus a benchmark, so ESG funds still have to go through the same basis that we put regular funds through. So, we still obviously think highly of it as that Silver rating indicates.

Dziubinski: And then, overseas we have Vanguard ESG International Stock. We assign that one a Gold fund analyst rating, and that fund hasn't been around for very long, right?

Kinnel: That's right. It's only a couple of years old. It's an ETF. And you mentioned that one of the changes is that a lot of funds that are in a lot of areas that didn't exist before for ESG, but another change is that now you can get ESG really cheap. This is only 15 basis points for an ETF. It used to be pretty costly to get an ESG fund. This is an international index screen for ESG criteria. So, you get an ESG investment, but you get it for very cheap. You get broad exposure. So, it's a nice core holding, and we rate it Gold.

Dziubinski: Well, Russ, thank you so much for your time today and giving us some great ideas, some great building blocks to build an ESG portfolio around. We appreciate your time.

Kinnel: You're welcome.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.

Russel Kinnel has a position in the following securities mentioned above: PTTRX. Find out about Morningstar’s editorial policies.