By Sunny Lewis,
CHICAGO, Illinois, March 3, 2016 (Maximpact.com News) – Evaluating mutual funds and exchange-traded funds based on how well the companies they hold manage their environmental, social, and governance (ESG) risks and opportunities just became easier.
Based in Chicago, the publicly-traded provider of independent investment research, Morningstar, Inc., has just introduced the Morningstar Sustainability Rating™ for some 20,000 funds around the world.
“Given the widespread and growing interest in sustainable investing around the world, investors need better tools to help them determine whether the funds they own or are considering adding to their portfolios reflect best sustainability practices,” said Steven Smit, CEO of Morningstar Benelux.
Smit has been named Morningstar’s head of sustainability. He will be responsible for leading the company’s initiative to bring the new ratings and metrics to investors globally.
He says the goal is to create transparency and get to one global measure – a global sustainability standard for funds worldwide.
“Creating more insight into sustainability investing is a passion of mine and many others at Morningstar,” Smit shared. This initiative will help us better serve investors who place particular importance on incorporating ESG factors into their investment decisions.”
Morningstar has operations in 27 countries in North America, Europe, Australia, and Asia. The company offers investment management services through its subsidiaries, with more than US$180 billion in assets currently under advisement and management.
“Our Sustainability Rating and related metrics will provide investors with an ESG lens they can use to evaluate funds and, eventually, other managed products,” said Smit. “It’s not so much about what the fund says it does, but what it actually holds.”
Sustainable investing goes beyond the exclusionary approach of socially responsible investment, or SRI, strategies, say Morningstar executives. Sustainable investing is a long-term approach that incorporates ESG factors into the investment process.
Jon Hale, PhD, CFA, former head of manager research for North America, has been named head of sustainability research.
“Many investors are interested in sustainable investing but unsure how to put it into practice,” Hale said. “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,” said Hale.
Morningstar calculates the ratings based on the underlying fund holdings and company-level ESG research as well as ratings from Sustainalytics, an independent provider of ESG and corporate governance ratings and research.
Sustainalytics has been analyzing companies’ ESG performance and impact since its origin as Janzi Research in Canada in 1992. The company has since joined with other analytics groups around the world and now has offices in North America, Europe, Australia and Singapore.
To help investors compile a low-carbon portfolio, Sustainalytics offers an expanded suite of Carbon Solutions, which includes portfolio analytics, data and research. Increasingly, investors are aiming to better understand their portfolio exposure to carbon, to reduce this exposure and to implement low-carbon mandates.
The new Morningstar Sustainability Rating calculation is a two-step process.
First, each fund with at least 50 percent of assets covered by a company-level ESG score from Sustainalytics receives a Morningstar®Portfolio Sustainability Score™.
The Portfolio Sustainability Score is an asset-weighted average of normalized company-level ESG scores with deductions for companies involved in controversies over such activities as environmental accidents, fraud, or discriminatory behavior.
The Morningstar Sustainability Rating is the Portfolio Sustainability Score compared with at least 10 category peers, assigned in a bell curve distribution.
Funds can receive any of five Sustainability Ratings – Low, Below Average, Average, Above Average, and High. Ratings are indicated by globe icons. Low equals one globe and High equals five globes.
Of the 20,000 funds with Morningstar Sustainability Ratings, 10 percent received five globes, 22.5 percent received four globes, 35 percent received three globes, 22.5 percent received two globes, and 10 percent received just one globe.
“Some firms say that they invest according to sustainability principles, but it’s been hard to verify,” Hale explained. “Now investors can draw their own conclusions, using an independent, robust check of that claim that’s based on comprehensive analysis of a fund’s holdings.”
Morningstar will update Portfolio Sustainability Scores when it receives new fund holdings data and will base them on the latest company scores from Sustainalytics.
Morningstar will update the Sustainability Rating each month using the most recent Portfolio Sustainability Scores.
Morningstar’s first analysis of the ratings shows that funds with explicit sustainable or responsible mandates are generally practicing what they preach. But Morningstar notes that such funds make up only about two percent of the fund universe.
Two out of three funds with explicit sustainable or responsible mandates received the highest ratings, more than double the percentage of all funds with Sustainability Ratings.
Morningstar Chairman and CEO Joe Mansueto said, “Sustainability research is the next big initiative at Morningstar. We’re incredibly excited about it. … We believe our new sustainability research will be good, not just for investors, but also for society.”
Award-winning journalist Sunny Lewis is founding editor in chief of the Environment News Service (ENS), the original daily wire service of the environment, publishing since 1990.