Lipper plans ESG scoring system for mutual funds

Citing the growing appeal of sustainable investing, Lipper aims set the bar for ESG ratings

Mar 12, 2019 @ 4:34 pm

By Jeff Benjamin

In the latest acknowledgment by the financial services industry of a more socially conscious investor universe, Lipper plans to roll out a system for grading mutual funds based on social, environmental and corporate governance parameters.

The rating system, which has been in the works for more than two years, isn't expected to launch until the end of this year at the earliest.

Robert Jenkins, Lipper's global head of research and head of mutual fund propositions, didn't have a lot of details to share, but acknowledged the new ratings system will be similar to existing rating systems in that it will be applied to a broad universe of funds, not just those that describe themselves as following strategies.

"ESG investing is not a flavor of the month, it's a generational shift that gets reinforced with every crazy weather event we see," Mr. Jenkins said. "Ten or 15 years ago it wasn't as big a deal, but it is very important to the growing millennial base who will have to live with this a lot longer than us non-millennials."

Morningstar rolled out its sustainability ratings for mutual funds in 2016 with a similar objective of rating funds based on ESG scores. In December, UBS Global Wealth Management announced its own ESG scoring of mutual funds and exchange-traded funds available to advisers on its platforms. And MSCI applies ESG ratings to the holdings of active and passive ETFs listed on

Lipper's ESG ratings system was inadvertently announced during the firm's annual mutual fund awards ceremony last week, and Mr. Jenkins said it is still too early to discuss the details of Lipper's plans.

"We don't just put a methodology out there until we've talked to our clients," he said. "Certainly, this is an area that warrants that."

He described the Lipper client base as "the largest buy-side shops in the world."

"We want to get all of our clients in the room and tell them what we're doing," he said. "We always do it this way. There's nothing worse than just having something imposed on you."

Careful not to show his hand, Mr. Jenkins suggested that the Lipper ESG rating system will not just duplicate what already exists.

"It's not an easy problem to tackle," he said. "I'm very concerned about not repeating what's already out there. I'd love to do something that's new and different and extraordinary useful."

A 2018 report from the Forum for Sustainable and Responsible Investment calculates that professionally managed sustainable investments total $12 trillion, which is up 38% from 2016, and now represent a quarter of all U.S. assets under professional management.

Yet clarity is still in short supply when it comes to better understanding ESG investing strategies.

"The ratings are developed by humans and therefore are flawed," said Mitchell Kraus, a partner at the advisory firm of Capital Intelligence Associates.

"I don't find general ESG ratings to be helpful for clients with very specific ESG focuses," he said. "But I have other clients who want to make sure their portfolio is managed for companies with higher ratings, and I find the ratings to be very helpful for those clients."

Devin Pope, partner and senior wealth adviser at Albion Financial Group, appreciates the way more ratings are being applied to funds and individual companies regardless of where they might publicly stand on ESG issues.

He cited Clorox Co. as an example of a business that's known for making bleach and other chemicals, but also has "strong recycling processes and the CEO takes public transportation to work, instead of flying in on a helicopter."

Another example he cited is Tesla. "They make battery-powered cars, but you could ask whether it's socially responsible to give tax breaks to people who spend $100,000 on a car when that money might be put to better use feeding the hungry," Mr. Pope said.

"The ratings do have an impact," he added. "But we try to take the approach of looking at what the business does and the strategy behind the business."

That kind of deeper look is all part of what ratings across the broad universe of investment products are designed to flesh out.

"Investor interest in ESG products is slowly increasing and demand is likely to pick up over time," said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

"It is a largely misunderstood and under-covered part of the marketplace," he added. "Having more tools will be useful."


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