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Morningstar Releases Sustainability Rating for 20,000 Funds

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Investors will now be able to evaluate funds based on environmental, social and governance (ESG) factors with Morningstar’s new sustainability rating for funds.

Morningstar rolled out sustainability ratings, first announced in August, and related ESG metrics on Tuesday for approximately 20,000 funds globally.

The new rating will allow investors to evaluate mutual funds and exchange-traded funds based on how well the companies held in their funds are managing their ESG risks and opportunities. 

“We know that investors care about sustainability in general – they recycle, they buy brand products, they like companies that treat their employees well,” said Joanna McGinley, global head of alliances and redistributor solutions at Morningstar, during a webinar. “We’ll really be able to show them how well their funds are doing on a sustainability metric. And we’ll allow them to really align their investments with their personal values and with their interests.”

Morningstar calculates the rating based on the underlying fund holdings and company-level ESG research and ratings from Sustainalytics, a leading independent provider of ESG and corporate governance ratings and research. 

Morningstar assigns ratings to all funds that have more than half of their underlying assets rated by Sustainalytics, not just funds with explicit sustainable or responsible investment mandates. There also must be at least 10 other scored funds per category in order to create rankings.

Funds receive sustainability ratings described as “low,” “below average,” “average,” “above average” and “high.” These ratings are depicted by globe icons where a “low” equals one globe and a “high” equals five globes.

Of the approximately 20,000 funds with Morningstar Sustainability Ratings, 10% received five globes, 22.5% received four globes, 35% received three globes, 22.5% received two globes, and 10% received one globe.

Of the funds with explicit sustainable or responsible mandates (which comprise only about 2% of the fund universe), Morningstar’s initial analysis of the ratings found that these funds are generally practicing what they preach.

Nearly two out of three such funds received the highest ratings, more than double the percentage of funds with sustainability ratings overall.

According to Jon Hale, the newly named director of sustainability research at Morningstar, this tool will help advisors serve the growing number of investors interested in ESG investing, impact investing or socially responsible investing.

“A lot of investors out there are interested,” Hale said during a webinar on Tuesday. “I’ve been a pretty close observer of this field for the past 20 years, and I’ve never seen the level of interest I see today – particularly among younger generations of investors who will be hitting their stride as investors over the next decade or so as they start to amass wealth on their own and as recipients of what appears to be enormous amounts of inherited wealth.”

Hale pointed to recent research that shows there is particularly higher interest among younger investors and women.

“Sustainable investing is something that’s going to continue to grow and in fact might just be at the beginning of a pretty significant growth spurt,” Hale said.

McGinley also believes the sustainable data on funds will help advisors better serve investors, especially younger ones.

“It is going to create a new way for advisors to really create value for their clients by selecting funds and monitoring portfolios that align with investor values,” she said. “This is an area where we really think this can help advisors reach that generational divide and establish a dialogue with this potential investor base.”

The sustainability ratings are viewable now in Morningstar Direct, the company’s research platform for asset managers and wealth management professionals, and Morningstar Office, the company’s practice management system for independent financial advisors. In the coming weeks, Morningstar will launch the ratings on other platforms, including Morningstar Advisor Workstation, and other websites around the world. 

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