The Morningstar Sustainability Rating
The Morningstar Sustainability Rating
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Jon Hale Head of Sustainability Research Morningstar, Inc. ©2015 Morningstar, Inc. All rights reserved.
The Morningstar Sustainability Rating: Giving investors the tools they need to make sound financial decisions
2
Investors – especially younger -- want to express values, focus on positive impact, and believe they can achieve competitive returns
80% 70% 60% 50% 40% 30% 20% 10% 0%
Age 70+ Boomers Gen X Millennials Express Values
Source: US Trust Insights on Wealth and Worth, 2014
3
Positive Impact
Competitive Returns
Advisors less interested; lack information
70% 63% 60% 50% 40% 30%
30% 20%
7%
10% 0%
Highly interested
Somewhat interested
Little or no interest
Source: Cerulli Associates advisor survey cited in “Social Fund Inflows Could Make Big Shops See Green, “ Matthew Beaton, Ignites, March 5, 2015
4
A need for portfolio-level ESG analytics
Asset Owner
Asset Manager
Advisor
Retail Investor
Portfoli os Managed Products
Market Demand
Individual Securities
5
Bottom-up research. Transparent methodologies. Global reach. Independent voice.
g Global leader in sustainability research and analysis
g Leading provider of independent investment research
g Serves investors and financial institutions around the world
g Serves individuals, advisors, asset managers, retirement plan sponsors and providers, and other businesses around the world
g Deep commitment to bottom-up research: Twenty years of local expertise, global research coverage, and a deep analyst bench g Transparent methodology providing 70 indicator level scores at the company level for more than 4,500 companies 6
g Deep commitment to bottom-up research: Thirty years of local expertise, global research coverage, and a deep analyst bench g Transparent methodologies to track, research and rate more than 250,000 managed products
Company ESG Research Two Signals Used by Morningstar Company ESG Ratings Overall ESG Score (0– 100) • Environmental Score • Social Score • Governance Score
Controversy Assessments • •
Based on 10 issue areas Scored for severity 1 (low) – 5 (high) Outlook
•
6
ESG Ratings
4,600 unique issuers
Controversy Research
15,000 unique issuers
Company ESG Research Research Process A. Ongoing Review
Stress & Company Scenario Feedback Testing
Analysis
7
Publication Risk of ESGAppetite Rating Report
Research Risk Process Culture
Quality and Peer Review
B. Daily News and Media Monitoring
Company Data
Media and NGO Information
Daily News Screening
Daily Incident Creation
Bi-weekly Controversy Updates
A new lens for portfolio sustainability analysis • The Rating is a category-relative measure of the sustainability performance of companies held in a portfolio • Sustainability performance = how well companies are managing their ESG risks and opportunities • Applies to all funds, globally • Based on quality ESG research • Part of broader Morningstar Sustainable Investing initiative
9
Step One: Portfolio Sustainability Score Portfolio Sustainability Score = Asset-weighted roll-up of company-level ESG scores with deductions made for holdings with controversial incidents • Company-level ESG scores and controversial incidents from Sustainalytics • Company-level analytics apply to stocks and bonds • Scoring threshold: 50% of AUM must have ESG scores for a portfolio to receive a score Measures how well the companies in a portfolio are managing their ESG risks and opportunities relative to their industry group 10
Step Two: Morningstar Sustainability Rating Morningstar Sustainability Rating = Portfolio Sustainability Score relative to Morningstar Category • Sorted into five normally distributed groups Score
Percent
Word Label
5
Top 10%
High
4
Next 22.5%
Above Average
3
Next 35%
Average
2
Next 22.5%
Below Average
1
Bottom 10%
Low
• Rating threshold: At least 10 portfolios in a category must have portfolio scores for any funds in the category to receive a rating Measures how well the portfolio’s holdings are managing ESG risks and opportunities relative to the fund’s category peers 11
12
Using the Ratings 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. Investors may use the Rating: • To learn how well an existing portfolio is doing on sustainability • To assess how well an intentional sustainable fund is living up to its mandate • To set a sustainability threshold for funds, as part of fund-selection criteria • To ask questions of asset managers about their ESG process • To report to clients on the sustainability performance of their portfolio • To expand the universe of funds acceptable to a sustainable investor • To build portfolios of sustainable investments 13
Sustainable/Responsible Funds: Through a Sustainability Lens U.S. sustainability mandate
45.0%
45.0% 35.0%
35.0%
35.0%
22.5%
25.0%
22.5% 16.0%
15.0% 10.0%
10.0% 1.0%
Score: 5 Label: High
4 Above Average
N=106 Data as of 1/31/16 14
3 Average
2 Below Average
3.0% 1 Low
5.0%
-5.0%
Gold Rated Active Funds: Through a Sustainability Lens Analyst rating of Gold 40.0% 35.0%
35.0% 30.0%
26.0%
22.5%
22.5% 19.0%
20.0%
16.0% 10.0%
10.0%
10.0%
4.0% 0.0%
Score: 5 Label: High
4 Above Average
3 Average
2 Below Average
1 Low
Morningstar analyst rating of Gold, globally, active funds only (n=114), as of 2/29/16 15
In Summary
Sustainable Investing is values-based, value-driven, and impactoriented Investors care about it more and more, from institutional investors to mainstream investors, especially those just starting to accumulate wealth Our rating will help investors think about sustainability and how they wish to see it reflected in their investments
16
dddddd
Jon Hale Head of Sustainability Research Morningstar, Inc. ©2015 Morningstar, Inc. All rights reserved.
The Morningstar Sustainability Rating: Giving investors the tools they need to make sound financial decisions
2
Investors – especially younger -- want to express values, focus on positive impact, and believe they can achieve competitive returns
80% 70% 60% 50% 40% 30% 20% 10% 0%
Age 70+ Boomers Gen X Millennials Express Values
Source: US Trust Insights on Wealth and Worth, 2014
3
Positive Impact
Competitive Returns
Advisors less interested; lack information
70% 63% 60% 50% 40% 30%
30% 20%
7%
10% 0%
Highly interested
Somewhat interested
Little or no interest
Source: Cerulli Associates advisor survey cited in “Social Fund Inflows Could Make Big Shops See Green, “ Matthew Beaton, Ignites, March 5, 2015
4
A need for portfolio-level ESG analytics
Asset Owner
Asset Manager
Advisor
Retail Investor
Portfoli os Managed Products
Market Demand
Individual Securities
5
Bottom-up research. Transparent methodologies. Global reach. Independent voice.
g Global leader in sustainability research and analysis
g Leading provider of independent investment research
g Serves investors and financial institutions around the world
g Serves individuals, advisors, asset managers, retirement plan sponsors and providers, and other businesses around the world
g Deep commitment to bottom-up research: Twenty years of local expertise, global research coverage, and a deep analyst bench g Transparent methodology providing 70 indicator level scores at the company level for more than 4,500 companies 6
g Deep commitment to bottom-up research: Thirty years of local expertise, global research coverage, and a deep analyst bench g Transparent methodologies to track, research and rate more than 250,000 managed products
Company ESG Research Two Signals Used by Morningstar Company ESG Ratings Overall ESG Score (0– 100) • Environmental Score • Social Score • Governance Score
Controversy Assessments • •
Based on 10 issue areas Scored for severity 1 (low) – 5 (high) Outlook
•
6
ESG Ratings
4,600 unique issuers
Controversy Research
15,000 unique issuers
Company ESG Research Research Process A. Ongoing Review
Stress & Company Scenario Feedback Testing
Analysis
7
Publication Risk of ESGAppetite Rating Report
Research Risk Process Culture
Quality and Peer Review
B. Daily News and Media Monitoring
Company Data
Media and NGO Information
Daily News Screening
Daily Incident Creation
Bi-weekly Controversy Updates
A new lens for portfolio sustainability analysis • The Rating is a category-relative measure of the sustainability performance of companies held in a portfolio • Sustainability performance = how well companies are managing their ESG risks and opportunities • Applies to all funds, globally • Based on quality ESG research • Part of broader Morningstar Sustainable Investing initiative
9
Step One: Portfolio Sustainability Score Portfolio Sustainability Score = Asset-weighted roll-up of company-level ESG scores with deductions made for holdings with controversial incidents • Company-level ESG scores and controversial incidents from Sustainalytics • Company-level analytics apply to stocks and bonds • Scoring threshold: 50% of AUM must have ESG scores for a portfolio to receive a score Measures how well the companies in a portfolio are managing their ESG risks and opportunities relative to their industry group 10
Step Two: Morningstar Sustainability Rating Morningstar Sustainability Rating = Portfolio Sustainability Score relative to Morningstar Category • Sorted into five normally distributed groups Score
Percent
Word Label
5
Top 10%
High
4
Next 22.5%
Above Average
3
Next 35%
Average
2
Next 22.5%
Below Average
1
Bottom 10%
Low
• Rating threshold: At least 10 portfolios in a category must have portfolio scores for any funds in the category to receive a rating Measures how well the portfolio’s holdings are managing ESG risks and opportunities relative to the fund’s category peers 11
12
Using the Ratings 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. Investors may use the Rating: • To learn how well an existing portfolio is doing on sustainability • To assess how well an intentional sustainable fund is living up to its mandate • To set a sustainability threshold for funds, as part of fund-selection criteria • To ask questions of asset managers about their ESG process • To report to clients on the sustainability performance of their portfolio • To expand the universe of funds acceptable to a sustainable investor • To build portfolios of sustainable investments 13
Sustainable/Responsible Funds: Through a Sustainability Lens U.S. sustainability mandate
45.0%
45.0% 35.0%
35.0%
35.0%
22.5%
25.0%
22.5% 16.0%
15.0% 10.0%
10.0% 1.0%
Score: 5 Label: High
4 Above Average
N=106 Data as of 1/31/16 14
3 Average
2 Below Average
3.0% 1 Low
5.0%
-5.0%
Gold Rated Active Funds: Through a Sustainability Lens Analyst rating of Gold 40.0% 35.0%
35.0% 30.0%
26.0%
22.5%
22.5% 19.0%
20.0%
16.0% 10.0%
10.0%
10.0%
4.0% 0.0%
Score: 5 Label: High
4 Above Average
3 Average
2 Below Average
1 Low
Morningstar analyst rating of Gold, globally, active funds only (n=114), as of 2/29/16 15
In Summary
Sustainable Investing is values-based, value-driven, and impactoriented Investors care about it more and more, from institutional investors to mainstream investors, especially those just starting to accumulate wealth Our rating will help investors think about sustainability and how they wish to see it reflected in their investments
16
