ESG Investing  

Morningstar to integrate ESG into all investment analysis

Morningstar to integrate ESG into all investment analysis

Morningstar has begun integrating environmental, social and governance factors into all its analysis of stocks, funds and asset managers.

The research provider announced today (November 17) it would provide qualitative and quantitative research to help inform investors’ ESG decisions to unpack the investment risks and to meet growing demand.

When assessing funds and asset managers, Morningstar’s research analysts will now look at the extent to which strategies and fund houses incorporate ESG factors.

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Morningstar will consider how clearly the fund house has articulated its ESG philosophy and policies and the degree to which those policies impact its own culture as well as its investment process.

Each fund and asset manager will be awarded an ‘ESG commitment level’ — leader, advanced, basic or low.

Haywood Kelly, Morningstar's head of research, said: “Investors are expressing their investment objectives in more-encompassing terms than ever before, and they're putting their money where their mouth is.

“For companies, evaluating ESG risk is a business imperative to both meet diverse stakeholder needs and mitigate potential legal, operational, or reputational risks. 

“Morningstar's equity and manager research teams aim to address these trends and empower investors through long-term, methodological research approaches, bolstered by qualitative analysis and independent thinking."

The move also means ESG risks will now inform a company's Morningstar rating. Using Sustainalytics — which the firm acquired in July this year — analysts are able to identify valuation risks for each company, and evaluate the probability such risks materialise and the potential impact on share price.

Results from the research will inform Morningstar’s assessment of a company before it is assigned a rating between one- and five-stars.

ESG investing has boomed in popularity in recent years as fears over climate change have led investors to consider the impact of their money and as a growing number of millennials have begun investing.

Recent data from the Investment Association shows inflows into ESG funds have quadrupled in 2020 so far, with £7.1bn invested in such funds over the first three quarters of this year compared to £1.9bn.

Proponents of ESG investing often argue exactly that ESG risk is, in fact, investment risk, as those firms that do not adhere to ESG standards are less likely to be sustainable businesses.

A recent report from Fidelity found that stocks at the top of the fund house’s ESG rating scale outperformed those with weaker ratings by 23 per cent over the first nine months of the year.

Similar trends were found in fixed income: the bonds of companies with an ‘A’ rated ESG score lost around 0.5 per cent on average over the nine months, compared with a 4.6 per cent and 4.4 per cent loss for those at the bottom of the spectrum.

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