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With Lack of ESG Info Frustrating Investors, Morningstar Updates Methodology

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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.

Another notable change is peer groups used to assign the Morningstar Sustainability Rating will be based on the Morningstar Global Category system, which is broader. “For example, under the Morningstar Global Category system, all diversified emerging-markets funds are in the same peer group, regardless of where the fund is available for sale,” Sargis writes.

In conclusion, Sargis notes that not only does the 12-month view of the fund holding provide the investor with more information, it also “makes it easier for investors to assess a fund’s consistency in this area. Additionally, moving to Morningstar Global Categories results in larger, more robust peer groups.”

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