Trying to make information easier for investors to digest is important to the growth of sustainable investing.
Not only have several large institutions filed a petition with the SEC to standardize ESG data from companies, but a recent study by RBC on how institutional investors view ESG investing unearthed a disturbing fact: investors “had little satisfaction” with the quantity and quality of information on ESG that companies provide. The report also stated, “if anything is holding back greater adoption of ESG-integrated investing by institutional investors, it’s a lack of resources needed to do the work necessary to make it happen.”
To help at least with fund information, a pioneer in gathering and rating ESG-linked funds, Morningstar released Thursday its updated methodology underlying its Sustainability Ratings. Key changes include:
- Incorporating historical sustainability scores
- Increasing the coverage threshold for a portfolio to receive a Sustainability Score to 67% of assets
- Expanding peer groups used by the firm’s Global Category system
- Increasing the peer group threshold to 30 scored portfolios for funds in the peer group to receive Sustainability Ratings.
A key change is the historical portfolio sustainability score that will review a trailing 12 months of portfolios instead of just the most recent portfolio. “While the most-recent portfolio Sustainability Scores are valuable for helping investors analyze current holdings, they may not reflect the manager’s longer-term decision making process,” states Madison Sargis, associate director of quantitative research at Morningstar, in the report.
The single data point is constructed using a 12-month weighted average, with the most-recent holdings being the most overweight. This method also smooths out the average score.