Independent investment research provider Morningstar, Inc. announced Monday the first funds sustainability rating denoting their environmental, social and governance (ESG) factors.
Entitled the Morningstar Sustainability RatingTM, the new rating will enable investors to assess mutual or exchange-traded funds based on how their ESG risks and opportunities are being managed by the companies.
These ESG metrics will be provided by Morningstar for around 23,000 funds globally through the company's research platform for asset managers and wealth management professionals, Morningstar DirectSM, as well as Morningstar OfficeSM, the practice management system for independent financial advisors. In the weeks to come, ratings will be launched on other platforms, such as Morningstar® Advisor WorkstationSM, Morningstar.com® and other websites.
CEO of Morningstar Benelux, Steven Smit, has been named head of sustainability and will subsequently be responsible for leading the company's initiative to bring the new ratings and metrics to investors globally. Meanwhile, former head of manager research for North America, Jon Hale, Ph.D., CFA, has been appointed head of sustainability research.
"Given the widespread and growing interest in sustainable investing around the world, investors need better tools to help them determine whether the funds they or are considering adding to their portfolios reflect best sustainability practices," commented the head of sustainability. "Our Sustainability Rating and related metrics will provide investors with an ESG lens they can use to evaluate funds and, eventually, other managed products. Creating more insight into sustainability investing is a passion of mine and many others at Morningstar. This initiative will help us better servce investors who place particular importance on incorporating ESG factors into their investment decisions."
Independent ESG and corporate governance ratings and research provider, Sustainalytics, will provide the necessary underlying fund holdings and company-level ESG analysis to enable Morningstar to calculate the rating.
"Many investors are interested in sustainable investing but unsure how to put it into practice," explained Hale. "Our new rating makes it easier to compare funds based on their ESG attributes. In that way, investors can better determine how to incorporate sustainable investing into their portfolios, or assess the extent to which their fund investments are upholding best sustainability practices." He added that the comprehensive analysis will allow investors to "draw their own conclusions".
The two-step process of the Morningstar Sustainability Rating calculatin begins with the Morningstar Portfolio Sustainability ScoreTM, provided by Sustainalytics for a fund with at least 50% of assets covered by a company-level ESG score. The Portfolio Sustainability Score is an asset-weighted average of normalised company-level ESG scores with deductions made for companies involved in controversial incidents, such as environmental accidents, fraud, or discriminatory behaviour. Each fund receuves a Sustainability Rating that ranges from Low, Below Average, or Average, to Above Average or High, exhibited through icons whereby Low is equal to one globe and High is represented by five globes. Morningstar assigns ratings to all funds that have more than half of their underlying assets rated by Sustainalytics, not just funds with explicit sustainable or responsible investment mandates.
Of the 22,836 funds who have received Morningstar Sustainability Ratings, 11% held 5 globes, 22% received 4 globes, 35% were awarded 3 globes, 22% ownes 2 globes, and 10% only 1 globe. New fund holdings data and Sustainalytics company scored will enable Portfolio Sustainability Scores to be verified or updated each month.
Initial analysis has suggested that almost two out of three funds with explicit sustainable or responsible mandates were true to their word and received the highest ratings, more than double the percentage of funds with Sustainability Ratings overall. These types of funds comprise only about 2% of the fund universe.
Morningstar additionally announced plans to extent the number and types of investments to receive Sustainability Ratings as awell as add additional sustainable investing analytics and research.
