More than a third of funds with an explicit sustainable or responsible investing mandate have failed to be awarded the top scores in Morningstar’s new sustainability ratings.
The ratings, which were announced last year and launched today, award a rating of between one and five globes, with the latter being awarded to the funds investing most sustainably.
However, less then two-thirds of the funds with an explicit ESG investment strategy have been awarded the highest ratings.
Around 20,000 funds in the investing universe were eligible for the ratings, with 10 per cent getting five globes and 22.5 per cent getting four globes.
Morningstar has also revealed more details of how the ratings work. It is using Sustainalytics to provide company-level data on the sustainability of a stock.
Any fund with more than 50 per cent of its assets covered by a company-level ESG score from Sustainalytics will be rated, with the portfolio score then giving an asset-weighted average of the ratings. Deductions will be made to this score for companies involved in “controversial incidents”.
The fund’s Morningstar portfolio sustainability score is then ranked relative to at least 10 peers, with the funds evenly distributed across the rating – from one globe, or low, to five, or high.
To coincide with the launch of the ratings Jon Hale has been named head of sustainability research. He was previously head of manager research for North America.
“Many investors are interested in sustainable investing but unsure how to put it into practice. Our new rating makes it easier to compare funds based on their ESG attributes,” says Hale.
“Some firms say that they invest according to sustainability principles, but it’s been hard to verify. Now investors can draw their own conclusions, using an independent, robust check of that claim that’s based on comprehensive analysis of a fund’s holdings.”
Justin Simler, investment director in the multi-asset team at Investec Asset Management, has criticised the Morningstar ratings, saying they will lead to investors choosing funds purely based on the rankings, rather than drilling down into how ESG factors are embedded in the investment process.