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Morningstar to Launch ESG Scores for Mutual Funds & ETFs

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There’s a new standard for fund benchmarking in town: environmental, social and governance (ESG).

On Thursday, Morningstar announced its plans to launch the industry’s first ESG scores for global mutual and exchange-traded funds.

Morningstar expects to launch the fund-level ESG scores in the fourth quarter of 2015 and through Morningstar Data feeds and its major software platforms in 2016.

“We want to bring even greater transparency and accountability to the investment industry with ESG research, data, and tools, while helping investors to put their money to work in ways that are meaningful to them.” said Jon Hale, Morningstar’s director of manager research, North America, in a statement.

Morningstar will base the scores on ESG company ratings from Sustainalytics, a leading provider of ESG and corporate governance ratings and research for more than 20 years.

Sustainalytics’ analysts focus on the relevant ESG issues within industries and across markets, assigning each company under coverage approximately 70 indicator-level scores related to environmental impact, social practices, and governance policies and procedures.

The firm provides ESG ratings on more than 4,500 companies, and Morningstar, which tracks the holdings of more than 200,000 global managed products, will use Sustainalytics’ ESG ratings in combination with its own comprehensive portfolio holdings data to create asset-weighted composite ESG fund scores.

For the first time, Morningstar says investors will be able to use ESG factors to compare global funds across categories, relative to benchmarks and over time. They will also be able to see scores for each of the three–Environmental, Social and Governance–pillars.

“One of Morningstar’s core values is ‘investors first.’ As part of our mission of helping investors reach their financial goals, we have a long tradition of innovative research centered on good stewardship, lower costs, and more transparency for investors,” Hale said in a statement. “Providing fund scores on environmental, social, and governance factors is a natural extension of our work.”

Morningstar’s announcement comes on the cusp of several recent studies that show investors and the financial services industry are placing increasing importance on ESG policies and practices.

As Michael Jantzi, chief executive officer of Sustainalytics, said in a statement, “ESG considerations, once viewed from the sidelines, are increasingly front and center for fund investors.”

February 2015 Morgan Stanley survey of 800 investors reported that 71% said they were interested in ESG investing.

And, according to a report from Spectrem Research in April, more than one-quarter of investors under the age of 45 allocate at least 25% of their investable assets in socially responsible companies. 

Further, the number of signatories on the U.N. Principles for Responsible Investing declaration has grown dramatically from nine signers in 2006 to nearly 1,380 asset owners, investment managers and service providers with $59 trillion in AUM on board.

Not only are more investors expressing an increased interest in ESG or “socially responsible” investing, but ESG assets are also growing quickly.

Hale said during a panel of ESG experts in June that ESG investing has exploded in assets under management since 1995, when there was $639 billion tagged to it, while today that amount is $6.2 trillion. 

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