Why All Investors Should Care About Sustainability

Time and time again investors are reminded about the significant impact that the controversies have on company's financial performance

Muna Abu-Habsa 12 October, 2016 | 10:15AM
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Muna Abu-Habsa: It's been six months since we launched the Morningstar Sustainability Rating for funds and ETFs. The idea of the rating is to empower investors with a tool that shows them the sustainability profile of a fund relative to its Morningstar categories based on the companies it holds. So it's based on what fund managers have chosen to invest in, in their portfolios as opposed to being based on their stated intentionality.

And if I were to compare this with a tool that we use in everyday life, I'd say it's comparable with the efficiency rating that we see on electrical appliances. So it might not be the first thing that you look for when you are choosing an appliance, but it does influence your choice not only because of the environmental concerns that you may have but also because of the associated costs of choosing a less efficient option. So, we think of the Morningstar Sustainability Rating in a similar way.

Just to remind you, the rating has two components. The first component looks at company's environmental, social and governance disciplines and the second component is an assessment of controversies. Time and time again investors are reminded about the significant impact that the controversies have on company's financial performance.

Whether it's in emissions or an accounting scandal, the share prices of those companies take a very long time to recover and some never recover at all. And that's exactly why we think the rating shouldn't be confined to a specific group of specialist investors; it's relevant for all investors.

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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Muna Abu-Habsa  is a senior investment research analyst at Morningstar