Opinion: Here’s how to know if your mutual fund sees ESG investing clearly

Funds with high portfolio turnover have an inherent challenge in pursuing sustainability goals.

Mutual fund investors are placing more emphasis on sustainable investing, which has been part of a larger trend across the financial industry. Sustainable investing refers to a range of practices in which investors aim to achieve financial returns while promoting long-term environmental or social objectives.

“Long term” is key: In the context of sustainable funds, mitigating environmental impact or having positive social impact requires upfront costs, but often these benefits accrue only after several years. Investors need to have a sufficiently long horizon to assess the cost-benefit tradeoff of these actions by companies. 

So how do you gauge if an equity mutual fund is truly investing sustainably? And what does ‘long term” mean with respect to a fund’s investment objectives? 

I propose a simple transparent solution: Measure the investment horizon of equity funds.

In 2009, in the aftermath of the global financial crisis, the U.S. Securities and Exchange Commission released new rules to make it easier for investors to access and interpret relevant and important mutual fund information. One of these metrics is the portfolio turnover ratio, which is reported by every open-end mutual fund in its annual N1A filing and prospectus.

Based on the SEC definition, the portfolio turnover ratio is measured as the smaller number of dollar purchases or sales divided by average fund value over a 12-month period.  For example, an equity fund with 100% portfolio turnover rate is holding stocks on average for one year. When compared to another fund that has 20% turnover, the latter fund will “turn over” its portfolio completely within a five-year window. 

There are two reasons why the portfolio turnover ratio is important. First, turnover generates trading commissions and taxes. This measure helps investors understand transaction costs and fund expenses, which impact fund performance.  Second, the portfolio turnover ratio gives us a sense of a fund’s investment horizon, which I used to examine funds that are classified as “sustainable.” The goal was to see if the stated “sustainable” mandate is manifested in the investment horizon as measured by the portfolio turnover ratio.   

I focused on U.S. equity funds, as this is the largest category in terms of assets under management, and obtained the portfolio turnover ratio for the most recent fiscal year as reported in the prospectus.  

The starting point was investment researcher Morningstar’s database of open-end funds as of July 2023, screened using its “sustainable investment” filter.  Morningstar defines a strategy as a “sustainable investment” broadly, including a fund if it is described as focusing on sustainability, impact, or considering any ESG factors in its prospectus, offering document, or regulatory filings.

This filter generated a list of more than 2,000 funds, which I then filtered further using the narrower criterion of “sustainable investment by prospectus.”. Eliminating fixed income and asset allocation funds, index funds, exchange-traded funds and target-date funds yielded a set of 201 funds (see table below).  Of these, 100 are U.S. equity funds with considerable diversity in their investing styles.

Morningstar Fund Category


Global Emerging Markets Equity


Global Equity Large Cap


Global Equity Mid/Small Cap


US Equity Large Cap Blend


US Equity Large Cap Growth


US Equity Large Cap Value


US Equity Mid Cap


US Equity Small Cap




The average 12-month turnover for the fund group was 57%, and the median was 32%.  This implies that on average, equity funds which describe their investment mandate as sustainable in their prospectuses are turning over their stock portfolios completely in less than two years.

Even more striking, half of these funds are holding stocks for less than three years.  In terms of fund families, Calvert funds had low turnover on average, while turnover at funds from Blackrock, HSBC, Goldman Sachs and JP Morgan Chase, for example, were all above 100%.

How should we interpret these results?  One could legitimately argue that a growth fund may have higher turnover than a value fund. However, we are looking at the use of the phrase “sustainable investment” in a fund’s informational materials.  In a carefully researched paper on portfolio turnover, Anne Tucker, a corporate law professor at the University of Georgia School of Law, finds an average holding period in the range of 15 to 17 months across all mutual funds in the period 2005-2015, and concludes that scholars and policymakers may think of mutual fund investment time horizons as short.

We can draw several inferences from this analysis.  First, investors concerned about promoting sustainability efforts by companies should pay attention to the mutual fund portfolio turnover ratio, as it is an indicator of the fund manager’s investment horizon.  Funds with high portfolio turnover have an inherent challenge in pursuing sustainability goals alongside those of financial return. Second, equity funds are using sustainability messaging that is confusing at best and could be misleading for retail investors, creating the risk of greenwashing.  

The bottom line: Sustainable investments require a long term focus. It is encouraging to see that funds which have historically had a sustainable mandate do indeed hold investments in companies for three years or more, allowing more time for the dual agenda to play out to the benefit of their investors and the companies they invest in. 

Gita Rao is a senior lecturer in finance, and associate faculty director of the Master of Finance program at the MIT Sloan School of Management.

Also read: ESG funds are often a bet on AI. It’s boosting returns.

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