Follow us on  linkedin facebook twitter    New Support BASIC

[Event Recap] [BASIC Event] Perspectives on rating funds on sustainability performance with Morningstar and Sustainalytics

Bjoern P. Stengel

On March 7th the Boston Area Sustainable Investment Consortium hosted an event on ESG integration into fund analysis. Our two guest speakers, Jon Hale of Morningstar and Diederik Timmer of Sustainalytics, introduced the topic by presenting their companies’ joint approach on ESG portfolio integration, specifically the Morningstar Sustainability Rating.

The topic has become increasingly relevant, as an emerging generation of investors (particularly millennials, according to Hale) want to better understand the various underlying factors that determine fund performance. At the same time, more and more people aim to make a positive impact with their investment behavior, and they require adequate information in order to make financial decisions that are aligned with their greater interests.

“Investors – especially younger -- want to express values, focus on positive impact, and believe they can achieve competitive returns”

-        Jon Hale


As a result, firms such as a Morningstar are working with leading researchers like Sustainalytics to meet this growing demand.

Sustainalytics, as a global leader in sustainability research and analysis, provides bottom-up research on more than 4,500 companies, using 70 indicator level scores. This approach, according to Timmer, allows for the comparison of companies within and across different sectors. Sustainalytics’ analysts use a comprehensive pool of information – media and news sources, reports published by NGOs, as well as companies’ feedback – in order to get a detailed view of each company’s performance.

sustainability rating research process
Sustainalytics’ ESG Research Process

Morningstar then applies Sustainalytics’ ESG research to its equity and fixed income portfolio analysis. While the ESG ratings do not relate to the funds’ financial performance, Morningstar uses a granular scoring model that disintegrates ESG factors into separate Environmental, Social, and Governance components and allows for a unique ESG performance evaluation, depending on each funds’ underlying securities’ performance. For a fund to receive a sustainability score from Morningstar, 50% of the fund’s AUM must have ESG scores. If a portfolio qualifies for a Portfolio Sustainability Score, it tells investors how well the companies in a portfolio are managing their ESG risks and opportunities relative to their industry group.

“The Sustainability Rating is a portfolio-based, not performance-based, metric to help investors choose sustainable investments. It should be used in conjunction with other metrics, such as risk, investment style, and an assessment of the portfolio manager’s process and how well it has been executed over time.”

- Jon Hale & Diederik Timmer –

At least 10 funds within any Morningstar Category must have portfolio scores for any funds in the category to receive a Sustainability Rating. As a result, investors will get an idea about how well the portfolio’s holdings are managing ESG risks and opportunities relative to the fund’s category peers.

With millennials entering the investment community and becoming more and more influential, as they move up the career ladder, it will be exciting to see how ESG factors will become an increasingly important part of mainstream investment practices. Further empirical evidence showing that responsible investing does not underperform conventional investments will further fuel this movement.

Key takeaways from this BASIC event:

·       Sustainable Investing is values-based, value-driven, and impact-oriented

·       Investors increasingly care about ESG investment practices, from institutional investors to mainstream investors, especially those just starting to accumulate wealth

·       Morningstar’s and Sustainalytics’ rating methodology will help investors think about sustainability and how they wish to see it reflected in their investments