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Morningstar Sustainability Measure Launched

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Recognizing the popularity of socially-conscious investing, Morningstar recently introduced its sustainability rating for funds, which will help investors evaluate about 21,000 funds based on environmental, social, and governance, or ESG, factors, the firm said.

ESG investing has grown to include over $6 trillion in U.S. investing assets, according to the Forum for Sustainable and Responsible Investment. But the non-profit also reported that many asset managers differ on how they disclose their ESG governance and strategies.

"Some firms say that they invest according to sustainability principles, but it's been hard to verify," said Jon Hale, head of sustainability research for Morningstar, in a statement. "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."

The sustainability rating is a measure of how well the companies held by a fund are managing their ESG risks. It is now available to about 10 million investors on Morningstar’s North American and European websites, as well as advisors on Morningstar’s practice management platform, according to the firm.

“Among the funds that we would expect to do well in the ratings are those that explicitly hold themselves out as being committed to sustainable investing … thanks to the sustainability rating, we now can evaluate whether they are walking the walk or just talking the talk,” Hale added.

About half of the ESG funds received the highest sustainability rating, Morningstar said. The number comes down to 10% when considering funds in the overall universe. A third of funds have ratings of “high” or “above average.”

The rating involves two steps. First, the firm derives a portfolio sustainability score, which is company-level ESG scores with deductions made for controversies surrounding companies owned by the fund.

Second, the firm puts funds into five groups — from highest 10% to lowest 10% — by comparing the fund's portfolio sustainability score with other funds in the same Morningstar category.

The rating has its limitations. So far, only one domestic small-cap fund has the new rating because few individual stock holdings of small-cap funds are rated on ESG factors, whereas a number of large- and mid-cap funds received a rating, the firm said. 

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