Morningstar shines an ESG light on all mutual funds and ETFs

Zero-to-100 rating would indicate the environmental, social and governance impact of a fund's holdings

Aug 14, 2015 @ 8:58 am

By Jeff Benjamin

Morningstar Inc. will be doing its part to inform investors on environmental, social and governance causes across the investment landscape by attaching impact scores to all mutual funds and exchange-traded funds.

The scores, which will be calculated based on the ESG scores of each portfolios' holdings, are a long-time coming, according to some financial advisers who say investors increasingly want this kind of information.

“Morningstar has been a holdout for many years in this area, but they're finally coming around to realizing this is a risk tool,” said Allan Moskowitz, owner of Affirmative Wealth Management.

“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,” he said. “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.”

Jon Hale, Morningstar's director of manager research, North America, acknowledged that the addition of the ESG scoring system was driven by demand from the broad universe of investors, but said that the scoring system should not be interpreted as a new rating system by the fund-tracking firm.

“We will simply be taking portfolio holdings and asset-weighting the scores for each fund,” he said. “We're just going to roll up the scores; we're not rating or characterizing them based on the scores.”

The ratings on the underlying companies will be done by Amsterdam-based research firm Sustainalytics, which applies scores ranging from zero to 100 based on a company's perceived ESG impact. A higher score is considered more ESG-friendly.

Morningstar will adopt the same zero-to-100 scoring system, which will start showing up on its various platforms' data feeds later this year, Mr. Hale said.

“Investors could gather that a higher ESG score is better, but what we're trying to do here is provide a sense of what the ESG footprint is on any given fund,” he said. “We're seeing interest in this from all quarters, but the idea is also that this is important to younger generations of investors.”

The general universe of funds that screen for social, environmental and governance causes is eclectic and sometimes conflicting. But, according to the 2014 report on U.S. Sustainable, Responsible and Impact Investing Trends, globally there is $6.2 trillion in investments that incorporate ESG factors.

Of that total, $4.8 trillion was identified within funds (not necessarily labeled ESG) or community investing institutions.

“We do see this as a growth area, because investors want a measurable trend to link their capital to their global concerns and values,” said Amy O'Brien, managing director and head of responsible investment at TIAA-CREF, which this week added two funds to its suite of socially responsible investments.

“We're definitely seeing interest from a broader range of financial advisers,” she said. “Our focus is to continue to build out in this area.”

That's music to the ears of advisers like Mark Rioboli, owner and director of wealth management at Independence Advisors.

“I have a client who is very interested in socially responsible investing, and it has been very challenging to find investments, so any research would be helpful,” he said.

Rose Swanger, principal at Advise Finance, said the demand from clients is far from overwhelming, but when a client wants something in the ESG arena, it has not always been easy to locate.

“I subscribe to Morningstar's newsletters and it's only occasionally that they have mentioned socially responsible or ESG investments, but I always save it for future reference,” she said. “So, I do applaud Morningstar's initiative to help categorize those funds.”

At this point, as Mr. Hale indicated, Morningstar is a long way from offering any kind of rating or opinion on ESG strategies, but this is a step forward, considering advisers currently looking for ESG funds have to apply their own screens across the various platforms.

“Providing fund scores on [ESG] factors is a natural extension of our work,” Mr. Hale said. “We want to bring even greater transparency and accountability to the investment industry with ESG research, data and tools, while helping investors put their money to work in ways that are meaningful to them."


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