Morningstar expands access to ESG fund scores for socially conscious investors

Investors can see how funds rate when it comes to sustainability factors. But public access could mean more pressure and focus on ESG issues from clients

Mar 17, 2016 @ 11:11 am

By Jeff Benjamin

Morningstar Inc.'s new mutual fund sustainability rankings have been rolled out to the general public, giving individual investors a new tool for determining how well specific funds score when it comes to environmental, social and corporate governance issues.

Financial advisers first gained access to the research earlier this month, but public access could mean more pressure and focus on ESG issues from clients.

Expanded access for investors, starting on Thursday, follows the March 1 launch of the first batch of 21,000 mutual funds given ESG scores based on the underlying holdings of each fund. That data was initially available only on select Morningstar workstations, but is now accessible on each fund's quote page at Morningstar.com.

“For the first time, approximately 10 million investors will have access to an independent, standardized sustainability assessment to include in their investment decisions,” said Steven Smit, head of sustainability at Morningstar.

The ESG scoring system, which Morningstar first announced in August, applies scores at both the fund and category levels. The scores are calculated and tracked through a Morningstar partnership with ESG-researcher Sustainalytics.

HOW IT WORKS

Funds 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, a sustainability researcher 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.”

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 invested in ESG strategies in the U.S., which is up from $4.3 trillion in 2014, and up from $202 billion in 2007.

GROWING APPETITE

Morningstar's expanded ESG research follows a growing trend toward socially-responsible investments being joined with traditional financial analysis.

“ESG is a big part of what we do,” said Mitchell Kraus, owner of financial advisory firm Capital Intelligence Associates.

“I don't think my clients will make more or less by investing this way,” he added. “If you're passionate about it, it's a huge plus because you can sleep at night knowing you're investing in companies you believe in.”

Jon Quigley, chief investment officer at Great Lakes Advisors, is among those financial advisers who have been applying his own various types of ESG screens long before it became an accepted form of portfolio management.

“Investor appetite for this is certainly growing, and people are realizing you don't have to sacrifice return,” he said. “But there is still a very wide spread misperception, particularly among some financial advisers that haven't seen the developments over the past 10 years, that you give up performance with ESG investing.”

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