Head to Head: FP WHEB Sustainability vs. Jupiter Ecology

More than 50% of funds with explicit sustainable mandates received the highest Morningstar Sustainability Ratings - how do these two compare?

Fatima Khizou 15 April, 2016 | 1:40PM
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One would expect funds that have environment, social and governance, or ESG, disciplines at the core of their investment process to exhibit a high sustainability score. According to our data, more than 50% of funds globally with explicit sustainable mandates received the highest Morningstar Sustainability Ratings of four and five globes, which represents more than double percentage of funds overall.

Sustainable investing can differ and it remains crucial to understand each fund's approach

Pleasingly, this demonstrates that a good proportion of intentional ESG funds, though not all, are delivering on their promise and that most managers are indeed investing in companies with strong ESG characteristics.

The score disparity between those funds can be attributable, in some instances, to a high controversy score which will negatively weigh on the overall Morningstar portfolio sustainability score for a specific fund and thereby the Morningstar Sustainability Rating. Indeed, the portfolio sustainability score is derived from the Morningstar portfolio ESG score, which is a weighted average of Sustainalytics’ company-level ESG ratings, and the Morningstar portfolio controversy score, which is a weighted average of controversy involvement of companies in a portfolio, as measured by Sustainalytics’ controversial incidents indicator.

The portfolio ESG score is reduced depending on the extent of controversial involvements of companies. This methodology is a purely holdings-based measure of how the underlying companies in a fund are managing their ESG risks and opportunities.

There are some limitations, however. For example, the extent of managers’ engagement with companies on their ESG shortcomings and developing better ESG practices is not captured. Strategies that are predicated on significant engagement practices can therefore have a low portfolio ESG score compared with funds whose underlying companies exhibit more sustainable practices.

How Sustainable Funds Compare

The FP WHEB Sustainability fund, which has a Morningstar Analyst Rating of Bronze, aims to generate alpha by investing in companies that provide solutions to sustainability challenges. The fund’s Morningstar sustainability score is below average, which is the outcome of a low portfolio ESG score and a low controversy score, the latter suggesting significant controversial involvement; the two components that make up the overall sustainability score. This highlights that approaches to sustainable investing can differ and it remains crucial to understand how each management team is approaching this investment concept.

Some intentional strategies may attempt to deliver on their sustainability objective through different channels which are at the heart of the investment process. For example, the Jupiter Ecology fund, which has a Morningstar Analyst Rating of Bronze, invests in companies that are providing solutions to environmental and social problems as well as those that are actively managing their environmental and social impacts – that is good governance companies – and it also avoids some industries using exclusionary screens.

The fund receives a higher Morningstar sustainability score compared with FP WHEB Sustainability. Both components of the overall score, portfolio ESG score and portfolio controversy score, are scored average. Given the investment approach here which does not solely look to invest in companies that are providing a solution but also in those that are already exhibiting strong ESG characteristics, it is of little surprise that this proposition scores higher.

It is worth noting that an offering which exhibits a higher sustainability score is not guaranteed to perform better than its category peers. Investors should be aware that the fund’s performance will be the result of different factors including the manager’s investment philosophy and ESG focus, any particular sector and market-cap biases, as well as skill.

The Morningstar Sustainability Rating, however, does enable investors to compare funds on sustainability in a standardised and consistent way, in conjunction with other factors, when selecting a fund.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
FP WHEB Sustainability C293.34 GBP0.62Rating
Jupiter Ecology L Inc618.22 GBP0.74Rating

About Author

Fatima Khizou  is an Investment Research Analyst for Morningstar

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