Switching from conventional to sustainable investing has minimal impact on risk exposure, says Morningstar.
Despite investors often expressing concerns about the implications of substituting conventional investments with sustainable options, Morningstar’s latest report finds that investors in Europe and Asia can do so without significant alterations in risk exposures.
“This is because sustainable funds, whether active or passive, generally differ very little in size and style exposures to their conventional counterparts, thus providing a reassuring option for investors seeking to invest sustainably,” said Ronald van Genderen, senior manager research analyst at Morningstar.
The report found that both active and passive sustainable strategies tend to have a limited growth bias relative to their conventional peers. However, while this is a constant for passives across different factors, including sector, region, size and style, the growth bias for active strategies varies by category.
For the size factor, Morningstar found that active sustainable strategies show a slight bias toward smaller market capitalisations than their conventional peers and the category benchmark. The differences are more pronounced for passive sustainable strategies, which show much greater variation in size exposure than their conventional peers.
Morningstar said the technology sector is favoured among active sustainable strategies, followed by healthcare. Meanwhile, the range of sector allocations of passive sustainable strategies shows a much wider dispersion and is skewed toward technology stocks.
On a geographical basis, active global sustainable strategies are overweight on North American equities and underweight on Asia and emerging markets. On the passive side, the regional allocations of conventional and sustainable global equity funds are quite similar, with both tending toward North America.
The investment research group said investors in Europe and Asia have many options for switching without significantly changing portfolio exposures. However, while the tilts of sustainable funds tend to be modest, Morningstar warned that there are “extreme outliers” and investors should carefully consider the tilts of each strategy when looking to switch their portfolios.
