Investors will now be able to evaluate funds based on environmental, social and governance (ESG) factors with Morningstar's new sustainability rating for funds.
Morningstar rolled out sustainability ratings, first announced in August, and related ESG metrics on Tuesday for approximately 20,000 funds globally.
The new rating will allow investors to evaluate mutual funds and exchange-traded funds based on how well the companies held in their funds are managing their ESG risks and opportunities.
"We know that investors care about sustainability in general – they recycle, they buy brand products, they like companies that treat their employees well," said Joanna McGinley, global head of alliances and redistributor solutions at Morningstar, during a webinar. "We'll really be able to show them how well their funds are doing on a sustainability metric. And we'll allow them to really align their investments with their personal values and with their interests."
Morningstar calculates the rating based on the underlying fund holdings and company-level ESG research and ratings from Sustainalytics, a leading independent provider of ESG and corporate governance ratings and research.
Morningstar assigns ratings to all funds that have more than half of their underlying assets rated by Sustainalytics, not just funds with explicit sustainable or responsible investment mandates. There also must be at least 10 other scored funds per category in order to create rankings.
Funds receive sustainability ratings described as "low," "below average," "average," "above average" and "high." These ratings are depicted by globe icons where a "low" equals one globe and a "high" equals five globes.
Of the approximately 20,000 funds with Morningstar Sustainability Ratings, 10% received five globes, 22.5% received four globes, 35% received three globes, 22.5% received two globes, and 10% received one globe.
Of the funds with explicit sustainable or responsible mandates (which comprise only about 2% of the fund universe), Morningstar's initial analysis of the ratings found that these funds are generally practicing what they preach.
