Mainstreaming sustainable investing

May 09, 2016

Morningstar’s Jon Hale says the research firm’s new ESG ratings for funds will move sustainable investment from niche to everyday.


In March, Morningstar launched our Sustainability Rating for funds, along with additional ESG metrics, giving mainstream investors for the first time tools they can use to evaluate funds based on the overall sustainability performance of the companies in their portfolios. Our sustainable investing initiative has several important implications for the field of sustainable investing and corporate sustainability.

The first is that fund investors who want to incorporate their sustainability concerns into their portfolios now have an expanded universe from which to choose. No longer must they select funds from the tiny sliver of the investment universe consisting of funds that have an intentional focus on sustainable/responsible investing. Now investors can select, category by category, from among the many funds that have higher portfolio sustainability ratings. These ratings are an indication of how well the companies held in a portfolio are managing their ESG-related risks and opportunities, and are based on company research by Sustainalytics, a leading ESG research firm. To be sure, intentional sustainable/responsible funds tend to score very well on our metrics, but so do many conventional funds. Our rating is category-relative, meaning that we have identified portfolios with the best (and worst) sustainability scores in most Morningstar Categories. This enables fund investors to more easily incorporate sustainability concerns into their personal portfolios while maintaining a suitable asset allocation.

Second, by identifying conventional funds that score well on sustainability and those that do not, our ratings will cause more fund managers to take notice of ESG factors and how these factors may be affecting their portfolios. Our scores are not intended to be the final word on sustainability, but managers of portfolios with lower scores, at minimum, will need to better understand the reasons why companies they hold have poor sustainability profiles because fund investors interested in sustainability are now more likely to demand an explanation. Managers of funds with higher scores will also want to know the drivers and, presumably, many of them will want to maintain their high ratings. As a result, our ratings seem likely to accelerate the trend of asset managers incorporating ESG factors into their investment process, and to lead to greater scrutiny from fund managers as they interact with companies on corporate sustainability issues.

Third, as more investors ease their way into sustainable investing by using our ratings as part of their criteria for fund selection, more of them will inevitably gravitate toward intentional “outcome-oriented” sustainable/responsible investment strategies. Asset managers are already launching more of these strategies, and added demand should result in a continuation of that trend. One of the key features of most intentional strategies is active ownership, which includes establishing proxy voting policies on ESG issues, willingness to sponsor and support shareholder resolutions, and most importantly, direct corporate engagement activity around ESG issues. As assets in these strategies grow, more and more shareholder capital will back these active ownership efforts undertaken by sustainable investment managers.

Finally, our ratings will contribute to the mainstreaming of sustainable investing, helping the field move from the province of the institutional and high-net-worth investor to the everyday investor. With a new lens for everyday investors to view their fund portfolios, they can more easily incorporate their sustainability concerns into their investments. This will inevitably lead to more widespread public recognition of companies with strong corporate sustainability performance profiles while giving greater incentive to those with poor profiles to improve.


Jon Hale, Ph.D., CFA, is head of sustainability research for Morningstar. He directs the company’s research initiatives on sustainable investing, beginning with the launch of the Morningstar Sustainability Rating™ for funds in 2016. Before assuming this role in 2016, Hale was director of manager research, North America, for Morningstar, where he led approximately 60 manager research analysts based in North America and oversaw the team’s operations, thought leadership, and manager research coverage across asset classes.