©2015 Morningstar, Inc. All rights reserved.
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The Morningstar Sustainability Rating
Jon Hale
Head of Sustainability Research
Morningstar, Inc.
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The Morningstar Sustainability Rating:
Giving investors the tools they need to make
sound financial decisions
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0%
10%
20%
30%
40%
50%
60%
70%
80%
Express Values Positive Impact CompetitiveReturns
Age 70+
Boomers
Gen X
Millennials
Source: US Trust Insights on Wealth and Worth, 2014
Investors – especially younger -- want to express
values, focus on positive impact, and believe they
can achieve competitive returns
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Advisors less interested; lack information
Source: Cerulli Associates advisor survey cited in “Social Fund Inflows Could Make Big Shops See Green, “ Matthew Beaton, Ignites, March 5, 2015
7%
30%
63%
0%
10%
20%
30%
40%
50%
60%
70%
Highly interested Somewhat interested Little or no interest
5
A need for portfolio-level ESG analytics
Asset
Manager Advisor
Market
Demand
Asset Owner
Ind
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Se
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Ma
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Pro
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Retail Investor
g Leading provider of independent
investment research
g Serves individuals, advisors, asset
managers, retirement plan sponsors
and providers, and other businesses
around the world
g Deep commitment to bottom-up
research: Thirty years of local
expertise, global research coverage,
and a deep analyst bench
g Transparent methodologies to track,
research and rate more than 250,000
managed products 6
g Global leader in sustainability
research and analysis
g Serves investors and financial
institutions around the world
g Deep commitment to bottom-up
research: Twenty years of local
expertise, global research coverage,
and a deep analyst bench
g Transparent methodology providing
70 indicator level scores at the
company level for more than 4,500
companies
Bottom-up research. Transparent methodologies.
Global reach. Independent voice.
Company ESG Research
Two Signals Used by Morningstar
Company ESG Ratings Overall ESG Score (0–100)
• Environmental Score
• Social Score
• Governance Score
Controversy
Assessments • Based on 10 issue areas
• Scored for severity 1 (low) – 5 (high)
• Outlook
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ESG Ratings
4,600 unique issuers
Controversy Research
15,000 unique issuers
Daily News Screening
Daily Incident Creation
Bi-weekly Controversy
Updates
B. Daily News and Media Monitoring
Company ESG Research
Research Process
A. Ongoing Review
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Risk Appetite
Company Data
Media and NGO Information Analysis
Stress & Scenario Testing
Risk Culture
Research Process
Publication of ESG Rating Report
Quality and Peer Review
Company Feedback
A new lens for portfolio sustainability analysis
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• The Rating is a category-relative measure of the sustainability performance of companies held in a portfolio
• Sustainability performance = how well companies are managing their ESG risks and opportunities
• Applies to all funds, globally
• Based on quality ESG research
• Part of broader Morningstar Sustainable Investing initiative
Step One:
Portfolio Sustainability Score
Portfolio Sustainability Score =
Asset-weighted roll-up of company-level ESG scores with deductions made for holdings with controversial incidents
• Company-level ESG scores and controversial incidents from Sustainalytics
• Company-level analytics apply to stocks and bonds
• Scoring threshold: 50% of AUM must have ESG scores for a portfolio to receive a score
Measures how well the companies in a portfolio are managing their ESG risks and opportunities relative to their industry group
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Step Two:
Morningstar Sustainability Rating
Morningstar Sustainability Rating =
Portfolio Sustainability Score relative to Morningstar Category
• Sorted into five normally distributed groups
• Rating threshold: At least 10 portfolios in a category must have portfolio scores for any funds in the category to receive a rating
Measures how well the portfolio’s holdings are managing ESG risks and opportunities relative to the fund’s category peers
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Score Percent Word Label
5 Top 10% High
4 Next 22.5% Above Average
3 Next 35% Average
2 Next 22.5% Below Average
1 Bottom 10% Low
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Using the Ratings
The Sustainability Rating is a portfolio-based, not performance-based, metric
to help investors choose sustainable investments. It should be used in
conjunction with other metrics, such as risk, investment style, and an
assessment of the portfolio manager’s process and how well it has been
executed over time.
Investors may use the Rating:
• To learn how well an existing portfolio is doing on sustainability
• To assess how well an intentional sustainable fund is living up to its mandate
• To set a sustainability threshold for funds, as part of fund-selection criteria
• To ask questions of asset managers about their ESG process
• To report to clients on the sustainability performance of their portfolio
• To expand the universe of funds acceptable to a sustainable investor
• To build portfolios of sustainable investments
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Sustainable/Responsible Funds: Through a Sustainability Lens
45.0%
35.0%
16.0%
1.0% 3.0%
10.0%
22.5%
35.0%
22.5%
10.0%
-5.0%
5.0%
15.0%
25.0%
35.0%
45.0%
Score: 5Label: High
4Above Average
3Average
2Below Average
1Low
U.S. sustainability mandate
N=106 Data as of 1/31/16
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Gold Rated Active Funds: Through a Sustainability Lens
16.0%
26.0%
35.0%
19.0%
4.0%
10.0%
22.5%
35.0%
22.5%
10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Score: 5Label: High
4Above Average
3Average
2Below Average
1Low
Analyst rating of Gold
Morningstar analyst rating of Gold, globally, active funds only (n=114), as of 2/29/16
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In Summary
Sustainable Investing is values-based, value-driven, and impact-oriented
Investors care about it more and more, from institutional investors to mainstream investors, especially those just starting to accumulate wealth
Our rating will help investors think about sustainability and how they wish to see it reflected in their investments