Which Stock Market Will Deliver Sustainable Profits?

The Morningstar Sustainability Rating gives investors a way to evaluate portfolios based on the sustainability profile of their underlying holdings

Francesco Paganelli 17 October, 2016 | 11:26AM

The Morningstar Sustainability Rating gives investors a way to evaluate portfolios based on the sustainability profile of their underlying holdings. In essence, it allows one to measure how well the holdings in a portfolio are managing their ESG risks and opportunities relative to a portfolio's Morningstar Category peers. The ratings for funds and exchange-traded portfolios are normally distributed into five groups, represented by one to five globes. These are assigned after sorting funds in each Morningstar Category by their respective Morningstar Portfolio Sustainability Scores.

The scores are an asset-weighted roll-up of company ESG scores from Sustainalytics research, with deductions taken for involvement in ESG-related controversies. Sustainalytics has ESG scores on 4,500 companies and controversy scores on 10,000 companies. Morningstar normalises Sustainalytics’ company ESG scores to make them comparable across industry peer groups, a necessary step when scoring diversified portfolios.

Industry peer groups have varying ESG score ranges and means, and, because the relevance of particular ESG issues varies across the peer groups, a unique combination of indicators is used within each peer group to determine the company-level ESG score. From a geographic standpoint, certain regions and countries tend to score higher than others.

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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.

About Author

Francesco Paganelli  is a Fund Analyst for Morningstar in Italy

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