Why Morningstar Launched a New Way to Rate Funds

Sustainable investing has come to the fore - financial advisors, individuals and institutions want to invest for the long term in companies that have staying power

Emma Wall 21 March, 2016 | 8:26AM
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Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Haywood Kelly, Head of Global Research for Morningstar.

Hi, Haywood.

Haywood Kelly: Hello. Thanks for having me.

Wall: Pleasure to have you. So, why do you think that sustainable investing has come to the fore right now?

Kelly: That's a great question. I'd say it's been a crescendo over the past decade, say. So, we've over the past couple of years certainly heard an increasing number of our clients, whether that's financial advisors, individuals, institutions, coming to Morningstar and asking what we were doing around ESG and the analytics around ESG? Could we help them make sense of all the products that are proliferating out there?

I think regulatory bodies and others out there have just raised awareness around a whole host of ESG issues, not just around climate and the environment, but also about gender equality, labour issues. I mean, these are just at the forefront of people's minds the way they weren't, say, when I started 25 years or so ago in the industry.

Wall: And I think that's a really important point, isn't it? We've created this Morningstar sustainability rating and a lot of people may think, you know, but that will only apply to a small section of funds, a small section of companies, those that have to do with climate change. But ESG is a much broader issue than that, isn't it?

Kelly: It is. It is. So, the methodology that we're using and our partner, Sustainalytics, uses, it looks at all companies. So, they rate about 4,600 companies. And it's not just environment or oil and gas and tobacco, some of the companies that may immediately come to mind when you think socially responsible investing or ESG.

But we're looking at a whole host of environment issues around companies, social issues, so again, gender-type issues, labour force relations and then governance issues, how well-positioned is the company's management and what policies do they have in place to make sure that company is governed in an appropriate way and that applies to all companies.

So, all industries, it's relevant. So, Sustainalytics will score companies across the entire spectrum and of course, we need that at Morningstar if we're going to analyse mutual funds we have a whole companies across a wide variety of industries.

Wall: And this is definitely something that people are caring more about. You mentioned governance issues there. I mean, even the creation of the new Nikkei Index that screens companies in Japan which don't look after shareholders, gender pay gaps, social issues which affect us individually but also affect us as investors.

Kelly: Absolutely. So, again, we're seeing a growing interest in this field and you can see it on the asset manager side, they are launching a lot of products, a lot of funds to cater to this interest. So, that really ups the ante on firms like ourselves who need to provide investors more and better information to sort through this wide variety of funds. It's always been part of Morningstar's mission to take a complicated landscape, the thousands of options that people have out there and help them make sense of it.

So, our new sustainability ratings provide a level playing field where investors can rank and screen funds across the universe; who is really doing a good job on these kind of issues. So, we think it's a very important step to just transparency in this whole area.

Wall: Adding to the suite?

Kelly: That's right, adding to our suite of analytics.

Wall: Thank you very much, Haywood.

Kelly: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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