Sustainable Bottom Line: Taking account of investment management firms’ stewardship principles expands investment fund options for sustainable investors seeking to adopt an ESG integration approach.
Introduction and summary
Investors seeking focused or labeled sustainable mutual funds or ETFs have fewer choices than those selecting from the universe of conventional funds. However, investors interested in adopting a sustainable investing approach involving ESG integration in particular can take advantage of the option to expand the variety of eligible funds beyond focused funds by considering conventional investment options offered by investment management firms that practice ESG integration across their entire franchise or, in some cases, on a more limited basis, beyond focused sustainable funds. Across the universe consisting of the largest ten investment management firms that manage about $43.6 trillion in assets#, six firms engage in full ESG integration based on stewardship reporting, while three firms report that ESG integration is limited to certain asset classes, platforms or boutique firms and one firm doesn’t integrate ESG, except in connection with its focused sustainable fund offerings. Nine of the ten firms also offer a selection of focused sustainable mutual funds as well as ETFs.
Sustainable investors pursuing an ESG integration approach to investing
Investors in mutual funds and ETFs interested in pursuing a sustainable investing approach via focused sustainable funds have far fewer investment fund options than their conventional investor counterparts. Focused or labeled sustainable mutual funds and ETFs are investment vehicles employing various approaches that consider environmental, social, and governance (ESG) factors in their investment decision making as part of or in addition to fundamental company analysis, and which are codified in a fund’s prospectus and/or Statement of Additional Information (SAI). These sustainable approaches fall into seven categories, including values-based investing, positive/negative screening or exclusions, impact and thematic investing, ESG integration, shareholder advocacy, issuer engagement and proxy voting and structural sustainability. The most widely practiced approach, at around 77% of firms, is ESG integration which refers to the practice by which environmental, social and governance factors are systematically analyzed and, when these are deemed relevant and financially material to an entity’s performance, they will influence decisions on whether to buy or hold a security, and to what extent. Such considerations may also lead to the liquidation of a security from the portfolio but at the same time, these factors may also identify investment opportunities. Definitions of the various sustainable investing approaches can be found at the end of the article.
A limited number of focused sustainable funds restricts investor choices
Regardless of strategy, sustainable investors in the U.S. have a limited number of investment options if their universe of eligible mutual funds and ETFs is limited to focused or labeled mutual funds and ETFs. Here is an example that applies to the universe of three-core asset/investment classes that make up the building blocks of a diversified portfolio, consisting of U.S. equity funds, international equity funds and taxable fixed income funds. In the U.S. sustainable investors can select from a field of 623 focused sustainable mutual funds/share classes (a total of 233 individual funds) and 136 ETFs that cover the three-core asset/investment classes. At the same time, conventional investors can choose from 5,519 mutual funds/share classes and 865 ETFs that cover the same core asset/investment classes, or a staggering 8.4 times as many funds. Because there are so many different fund options, conventional investors have access to a wider range of choices. Conventional funds are managed by a more expansive and diverse group of asset managers, they offer a greater number of investment categories and strategies, including a greater number of index tracking funds, fund sizes are, on average, larger and therefore more liquid and efficient, while their expense ratios are, on average, somewhat higher. As an aside, because of these large disparities between conventional and focused sustainable funds, an evaluation of comparative investment performance results is difficult to undertake and is not likely to produce meaningful results.
Notes of Explanation: Data is as of February 28, 2026 captures funds that are classified as US Equity, International Equity and Taxable Fixed Income funds by Morningstar. Funds=share classes. Average fund size and expense ratios are calculated as arithmetic averages. Sources: Morningstar and Sustainable Research and Analysis LLC.
Investment options can be extended by considering a fund firm’s stewardship principles
That said, investors in mutual funds and ETFs who wish to express their sustainability preferences by investing in funds that engage in the most widely practiced ESG integration approach, and also, to varying degrees, pursue corporate engagement and direct or pass-through voting rights, have the option to expand their universe of eligible funds beyond focused funds by taking stock of asset managers that practice ESG integration across their franchise or on a more limited basis but still covering their fund categories.
Over the past decade, an increasing number of U.S. asset managers have adopted a policy of issuing annual stewardship reports. In fact, of the ten largest investment management firms by assets under management, six firms engage in full ESG integration based on stewardship reporting, while three firms report that ESG integration is limited to certain asset classes, platforms or boutique firms (in the case of BNY Mellon), and one firm doesn’t integrate ESG, except in connection with its focused sustainable fund offerings. For example, PIMCO’s ESG integration spans all major fixed income asset classes but does not extend to equities. BlackRock, on the other hand, the largest asset manager, integrates ESG across its platform via the firm’s Aladdin Climate Risk analytics system and proprietary ESG metrics. Based on stewardship reporting, sustainable investors wishing to express their sustainability preferences by adopting an ESG integration approach in their U.S. equity, international and taxable fixed income allocations can choose from a minimum expanded universe of 2,300 funds on top of the 759 focused or labeled sustainable mutual funds and ETFs listed today. These stewardship documents typically detail the investment management firm’s proxy voting rationale, issuer engagement programs, ESG research infrastructure, and the firm’s overall philosophy toward environmental, social, and governance factors in its investment process. Click here for a summary of the stewardship principles and ESG integration parameters disclosed by the top 10 firms: Stewardship Summary Top10 Table.
These stewardship reports are not marketing materials. They are operationally specific disclosures, detailing, for example, how many issuers the firm engaged, on which topics, with what outcomes, how the firm voted on executive compensation, board composition, climate disclosure, and shareholder rights resolutions, and why. Also typically covered is whether the firm employs dedicated ESG research analysts, whether it participates in collaborative engagement initiatives, and if the firm offers investors direct or pass-through voting rights.
For investors whose primary objective is to ensure that relevant and material ESG factors are considered in investment decisions, rather than requiring explicit ESG fund labeling, stewardship reports provide substantive evidence of a firm’s actual practices across their entire platform, not just within a dedicated product sleeve. Reliance on such reports can be used as basis for expanding the number of available publicly registered investment options for sustainable investors.
#Based on AUM as of December 2023 with figures from Pensions and Investments/Thinking Ahead Institute.
Sustainable investing defined
While there is no universally accepted framework and definitions continue to evolve, today sustainable investing refers to a range of overarching investment approaches or strategies. That said, many practitioners agree that these approaches encompass the following strategies that may be employed individually or in combination:
Values-based investing. Also referred to as faith-based investing, socially responsible investing, responsible investing, ethical investing or investing based on a set of morals, the guiding principle is that investments are based on a set of beliefs with a view toward achieving a positive societal outcome. Typically, this approach is executed using exclusions as well as negative/positive screening.
Negative/positive screening or exclusionary strategies. Negative/positive screening is the process of identifying companies or other entities that score poorly or highly on environmental, social and governance (ESG) factors relative to their peers and underweighting or overweighting these in investment portfolios. On the other hand, an exclusionary strategy refers to the exclusions of companies or certain sectors from portfolios based on specific ethical, religious, social, environmental or governance guidelines or preferences. Traditional examples of exclusionary strategies cover the avoidance of any investments in companies that are fully or partially engaged in gambling and sex related activities, the production or manufacturing of alcohol, tobacco or firearms, or even atomic energy. These exclusionary categories have been extended in recent years to incorporate additional considerations, for example, firms that are the subject of serious labor-related actions or penalties by regulatory agencies or demonstrate a pattern of employing forced, compulsory or child labor, or firms that exhibit a pattern and practice of human rights violations or are directly complicit in human rights violations committed by governments or security forces, including those that are under US or international sanctions for grave human rights abuses, such as genocide and forced labor. That said, it should be noted that significant policy shifts and investor sentiment are taking place in North America and Europe regarding the treatment of nuclear energy and the defense sector, driven by recognition of nuclear energy’s role in meeting the dual goals of energy security and net zero emissions while the war in Ukraine has been responsible for shifting the perception and interest among institutional investors in the defense sector.
Closely related is the strategy of divestiture or divestment. Divestiture strategies involve current holdings that are liquidated over time as their eligibility is no longer consistent with the owner’s objectives, such as fossil fuel companies. But divestiture strategies may also involve a much broader universe of securities, such as when for example, divestiture strategies were applied to apartheid practices in South Africa in the 60s and 70s. At that time, any company doing business with South Africa was taken off the list of eligible investments.
Impact investing. Still a relatively small but growing slice of the sustainable investing segment, impact investments are incremental (additional) moneys directed to companies, organizations, and funds with the intention to achieve measurable social and environmental impacts alongside a financial return. Impact investments can be implemented in both emerging and developed markets and made across asset classes, such as equities, fixed income, venture capital, and private equity. In each instance, the objective is to direct capital to address challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services, including housing, healthcare, and education.
Historically, impact investments have targeted a range of returns from below market to market rate, depending on the investors’ strategic goals. But increasingly, impact investing strategies are expected to at least achieve risk-adjusted market rates of return.
A more widely practiced yet less rigorous definition of impact investing involves providing direct exposure to issuers or projects that managers believe have the potential to achieve social or environmental benefits.
Thematic investing. An investment approach with a focus on a particular idea or unifying concept, for example securities or funds that invest in renewable energy such as solar energy, wind energy, nuclear energy, clean tech and even gender diversity, to mention just a few of the leading sustainable investing fund themes. That said, it’s insufficient to treat sustainability as a sectoral or thematic thesis without a binding commitment to any sustainable principles or practices or without explicitly addressing potential ESG risks. This is because the implementation of some themes may involve exposure to certain risks that may not otherwise be accounted for. For example, renewal energy projects, such as installation of solar panels, rely on rare minerals (silver, indium, tellurium) and energy-intensive processes, often in carbon-heavy supply chains, end-of-life panel disposal, or land use conflict with local communities. Another example is nuclear energy development and implementation that expose investors to risk implications in the form of radioactive waste disposal, high water consumption and community impact and push back, to mention just a few.
ESG integration. This is a widely practiced (some data suggests the most widely practiced) investment approach by which environmental, social and governance factors and risks are systematically analyzed and, when these are deemed financially relevant and material to an entity’s performance, they will influence decisions on whether to buy or hold a security, and to what extent. Such considerations may lead to the liquidation of a security from the portfolio but at the same time, these factors may also identify investment opportunities.
Shareholder advocacy, issuer engagement and proxy voting. These strategies, which leverage the power of stock ownership in publicly listed companies and, regarding engagement, the power of bond investments, are action-oriented approaches that rely on learning about each company’s ESG practices and related risks and opportunities. These strategies also extend to influencing corporate behavior through direct corporate engagement, filing shareholder proposals and proxy voting.
Structural sustainability. The scope for expressing sustainability objectives through security selection or ownership rights in money market funds is inherently limited by regulatory requirements and liquidity mandates. As a result, many sustainable money market fund offerings pursue sustainability objectives through structural mechanisms that operate outside traditional portfolio construction, such as inclusive intermediation practices (e.g., broker-dealer selection and distribution partnerships) and the allocation of adviser revenues to charitable or social purposes. In this analysis, such approaches are characterized as forms of “structural sustainability,” reflecting their focus on market processes and economic flows rather than on portfolio composition or issuer engagement.
Updated 3/25/2026
