Morningstar's sustainability effort kicks off with ESG scores on 20,000 funds

Scoring funds for social, environmental and governance factors feeds a growing investor appetite

Mar 1, 2016 @ 12:02 pm

By Jeff Benjamin

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Morningstar Inc. on Tuesday morning rolled out its first batch of mutual funds scored with sustainable-investing grades related to social, environmental and corporate governance screens applied to the underlying securities in each fund.

The fund-tracking firm, through a partnership with ESG-researcher Sustainalytics, debuted its new program with ESG scores on 20,000 funds, globally.

The ESG scoring system, which was first announced in August, will apply scores at both the fund and category levels starting today.

The scores are initially available in Morningstar DirectSM, the company's research platform for asset managers and wealth management professionals, and Morningstar OfficeSM, the practice management system for independent financial advisers.

In the coming weeks, the company plans to launch the ratings on other platforms, including Morningstar Advisor WorkstationSM and

Funds will receive scores based on the ESG metrics applied to their underlying holdings, and at least 50% of a fund's underlying holdings need to be scored in order for the fund to receive an ESG score, according to Jon Hale, head of sustainability research at Morningstar.

“Many investors are interested in sustainable investing but unsure how to put it into practice,” Mr. Hale said. “Some firms say that they invest according to sustainability principles, but it's been hard to verify. Now investors can draw their own conclusions.”

When plans for the program were initially announced last year, some advisers criticized Morningstar for being behind the curve with regard to the sustainable-investing movement.

In August, Allan Moskowitz, owner of Affirmative Wealth Management, gave Morningstar credit for “finally coming around to realizing this is a risk tool.”

“This is what I specialize in, and there is definitely more demand for this kind of information, and it's not just from individual investors. It's also coming from institutional investors,” Mr. Moskowitz added. “I think it's good that Morningstar is going to offer a tool so you can measure these things, because we all share the air and water on the planet, and we have limited resources.”


According to the latest data from The Forum for Sustainable and Responsible Investment, there is nearly $7 trillion investing in ESG strategies in the U.S., which is up from $4.3 trillion in 2014, and up from $202 billion in 2007.

“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, chief executive of Morningstar Benelux.

Liz Michaels, director of ESG investing at the $13 billion asset management firm Aperio Group, said the trend toward screens and analysis that go beyond traditional financial research is undeniable.

“Investors are becoming more sophisticated and more aware of the issue areas, and at the same time they are becoming more demanding, and I don't mean in a negative way,” she said. “The combination of information in the press, and a proliferation of products and offerings in this space means investors are no longer taking no for an answer from their advisers. That means they're either taking their money and walking, or pressuring advisers to make it work.”

Meanwhile, there are still plenty of advisers who are not subscribing to the idea of non-financial screens when the ultimate objective is to produce investor for returns.

“I'm not a big fan, and I don't invest for that,” said Paul Schatz, president of Heritage Capital.

“Investing is difficult enough without any collars or constraints,” he added. “Putting the added governors on which companies you can invest in makes it too onerous to invest for returns, and I don't think that's a long-term winning formula.”

But, according to Ms. Michaels, advisers like Mr. Schatz are part of a shrinking minority.

“In the past you had a very small group of advisers who invested in ESG strategies, and the rest of the industry thought it was stupid,” she said. “At this point, there's enough support for ESG to make even the most cynical adviser realize it is a business imperative to figure this out.”


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