Sustainable Bottom Line: Fund quality ratings can be used by investors, financial intermediaries and other stakeholders to screen, select funds and construct sustainable investment portfolios.
SRA Fund Quality Ratings-An Explanation
Fund quality ratings are assigned to funds within their designated investment category/segment, as defined by Morningstar. The investment category/segment for which the displayed ratings have been assigned falls into the focused sustainable Small Blend funds investment category, defined as mutual funds and ETFs that invest in small-capitalization companies and hold a mix of both value and growth stocks, with neither style dominating their portfolios. The “small-cap” designation refers to companies in the bottom 10% of the U.S. equity market capitalization, while the “blend” style indicates that the funds’ holdings have growth and value characteristics that are close to the small-cap average, rather than a strong bias toward one or the other. Morningstar’s universe of sustainable funds consists of funds whose official documents indicate a focus on sustainability, impact investing, or environmental, social, and governance (ESG) factors, and it uses binding ESG criteria for investment selection. Funds that only use limited exclusions or non-binding ESG considerations are not categorized as sustainable by Morningstar. It should be noted that Morningstar’s definition of a sustainable fund may be widely used but is not universally embraced. That said, the definition is transparent and its adaptation in the context of SRA Fund Quality Ratings facilitates the assignment of such ratings based on Morningstar’s investment categorization.
Focused sustainable Small Blend funds: 10 funds, $8.1 billion in assets
The focused sustainable small blend funds segment covered by SRA Fund Quality Ratings consists of 10 funds, 17 funds/share classes, with $8.1 billion in net assets as of August 31, 2025. The segment excludes funds that employ leverage, if any, as well as thematic-oriented funds (e.g. Hypatia Women CEO ETF) and any funds that have previously announced their liquidation). The funds in the small blend funds segment funds include actively managed and passively managed mutual funds as well as ETFs. Fund quality ratings, which are expressed along a five-point scale that runs from A (highest quality) to E (lowest quality), can be used to screen and select funds and to construct sustainable investment portfolios by investors and financial advisors.
Ratings combine qualitative as well as quantitative considerations and are derived based on an assessment of five fundamental factors
Ratings combine qualitative as well as quantitative considerations and are derived based on an assessment of five fundamental factors. These are: (a) Management company. A fund should be offered and managed by an established firm with a positive reputation, to ensure effective fund operations and impart trust and confidence in the organization. (b) Years in operation. The fund should be in operation for at least three years and managed pursuant to the same investment strategy or approach—to provide a sufficiently long but not excessively long view against which to evaluate the fund’s operations, strategy, and performance. Some exceptions may apply. (c) Fund size. The fund’s total net assets should generally exceed around $30 million—so that it may be managed more efficiently and provide some protection against the fund’s early liquidation or closure. Some exceptions may apply, particularly in the case of funds offered by larger, established firms. (d) Total returns. The fund’s performance results, achieved by adhering to a relatively consistent investment strategy and sustainability approach, are evaluated relative to an appropriate securities market index over a one year, three year and five-year intervals, and (e) Expense ratios. A fund’s expense ratio is evaluated relative to other funds in the same investment category/segment.
Factors d and e above are evaluated and scored quantitatively, based on a fund’s investment results over the trailing one-, three- and five-year time intervals relative to a designated benchmark as well as a fund’s expense ratio relative to its investment category/segment. Once scored, factors a, b and c are considered, and funds may be excluded from the rated funds universe based on these considerations. Fund quality ratings are then assigned to all remaining funds based on the following distribution: Top 15%=A, next 20%=B, next 30%=C, next 20%=D and final 15%=E.
NA indicates that a rating has not been assigned to the fund due to its use of leverage or the fund’s exclusion due to the consideration of factors a, b or c, for example, fund size.
How to use the ratings?
Funds assigned A and B quality ratings are considered primary candidates for the selection of funds and in the construction of a portfolio consisting entirely or partially of sustainable funds. That said, additional research to qualify a fund may be in order. In the case of thematic funds, such as renewable energy funds, investors should keep in mind that some funds may be even more narrowly focused, for example, funds investing in solar or wind energy, while others are broader based, for example, renewable energy. Fund selections should be consistent with an investor’s financial goals and objectives and sustainability preferences.
Fund quality ratings are derived based on a qualitative and quantitative evaluation of fundamental factors but do not address a fund’s sustainable investing approach and methodology. While certainly relevant, such considerations should be evaluated relative to each individual investor’s sustainability preferences, which tend to vary from one investor to the next.
Fund Quality Ratings in the A and B rating categories
A rated funds
Within the focused sustainable small blend funds segment, just two funds, four funds/share classes, are assigned fund quality ratings in the highest A category. On a combined basis, these funds manage $2.7 billion in net assets. Their average expense ratio, which is skewed by three share classes linked to one of the two funds that’s assigned an A rating, is 84 basis points (bps). Expense ratios range from a low of 17 basis points to a high of 115 bps. Funds assigned A ratings posted average annual returns of 9.7%, 10.5% and 11.4% over the trailing 12-months, 3-years and 5-years ending on August 31, 2025.
B rated funds
Within the focused sustainable small blend funds segment, only one fund offering and its two share classes are assigned fund quality ratings in the second highest B category. On a combined basis, the fund manages $108.7 million in net assets. The average expense ratio of the two share classes is 102 basis points, ranging from 94 bps to 109 bps. The B rated fund share classes posted average annual returns of 7.2% and 10.5% over the trailing 12-months and 3-years ending on August 31, 2025. Launched in September 2021, the fund’s track record doesn’t extend to five years.
