Morningstar said it has rolled out 27 indexes to give investors exposure to “high standards of sustainability” and a risk/return level that resembles the broader investment market.
The indexes cover investments in broad regional markets around the world, along with markets in developed economies, emerging markets and single-country exposure.
The index series builds on the research firm’s proprietary Sustainability Ratings for over 20,000 funds, as well as equity research on 1,400-plus companies and company sustainability scores (of 0-100) that evaluate firms based on more than 60 environmental, social and governance (ESG) metrics. It is based on company-level ESG research and ratings from Sustainalytics, an independent data provider.
“The industry needs reliable, independent indexes for research purposes. Investors and advisors want transparent benchmarks emphasizing sustainable companies,” said Jon Hale, Morningstar’s director of sustainability research, in a video discussion posted online this week by the research firm.
“It’s about defining the ESG characteristics of a portfolio and ultimately quantifying the financial impact of these factors,” Hale explained. “And with the growth of passive investing and portfolios anchored in exchange-traded products, there’s clearly appetite for more on the ESG index side.”
According to Matt Gries, director of new product development for Morningstar Indexes, there is “a need in the market for more investable benchmarks to serve as the foundation for ESG products.”
In addition, Gries sees “great potential to marry ESG with different investment factors like dividends or value.” Investors should be able to access sources of investment return “in a low-cost, low-turnover, transparent and systematic format,” he stated.
What kind of companies make it into the index? Microsoft does and Apple doesn’t, according to Gries. Microsoft scores well on environmental and governance factors, such as reducing its carbon footprint and focusing on privacy and security issues.
“Apple, by contrast, tallies average scores on environmental and governance factors and is an underperformer on the social side,” he said. The firm’s ESG standing is related to its high-profile labor and supply-chain issues, for instance.
Morningstar launched its Sustainability Ratings on March 1. The firm said they serve as “the industry’s first global standard for portfolio sustainability…based on how well the companies held in [investor-owned] funds are managing their ESG risks and opportunities.”
“We think our sustainability ratings are going to open up a whole new avenue of investment possibilities for asset managers to serve investors,” said Scott Burns, head of global asset-management solutions, in a recent online video presentation.
When looking at two similar funds or strategies, sustainability “could be the thing that helps tip the investor one way or the other in terms of where they are going to put their dollars,” Burns explained.
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