New Morningstar Sustainability Ratings – an opinion

Posted on: July 14th, 2016

New Morningstar Sustainability Ratings – an opinion

 New Morningstar Sustainability Ratings – an opinion

Yesterday I had the pleasure of meeting Jackie Beard and Jamie Goodwin of Morningstar to discuss the new Sustainability rating system – launched in March this year.

My aim was to gain a better understanding of a system that I can see has the potential to greatly impact the international SRI community – for better or for worse.

Our meeting was detailed and constructive and my hope is that we will speak again soon.

I have been asked about this area often recently so here are my thoughts so far:


• Their interest in ESG / Sustainability will help to ‘mainstream’ its consideration by investors. Raising the profile of this area is essential if we are to transition towards more sustainable lifestyles – so this is a important ‘positive’.

• Their methodology is trusted by many. They are an international business and are considering sustainability within its international context – which is essential given that both issues and investments are global.

• Their market reach is significant so Morningstar has the potential to inform many investment decisions.

• Morningstar have chosen to partner with Sustainalytics who have a longstanding and sound reputation in ESG research.

• They have a robust and pragmatic approach that copes with the fact that perfect research is not always available.

• Their ratings are potential ‘door openers’ for the SRI community.

• They are open and transparent, their information is freely available online and their aim is to enhance investment decision making.


• Morningstar now rate conventional funds according to their ESG/sustainability performance even though those funds are not managed on that basis. This is intellectually interesting but risks being misused or misunderstood. (Morningstar pointed out that this is not a problem that is unique to SRI and that they aim to reduce risks by analysing longer term investment decisions. However I remain of the view that this could have unintended consequences.)

• Their ‘Globe’ ratings make relative comparisons within specific Morningstar sectors – which means that there will be winners and losers in each group. This can generate odd outcomes – particularly within specialist sectors where approaches vary. This risks being even more of a concern if a user (incorrectly) compares funds in different groups – as is likely to happen on occasions. For example given the methodology a clean tech focused fund could easily ‘appear’ worse than a conventional equity fund – which could lead to poor advice outcomes.

• The system appears to cope well with ESG analysis for larger companies but companies and funds with a more niche ‘deep dive’ sustainability remit or theme risk being misunderstood. This could be because the relevant data for smaller, positive ‘transition enabling’ companies might not exist (either because they are too new or too small to write the necessary documents or because researchers may be asking questions that are irrelevant to more specialist businesses). This matters because ‘sustainability’ is not just another dataset (ie it is hugely important to future business success and far beyond). To risk inadvertently undermining ‘the small and the brave’ in favour of consistency of process appears contrary to Morningstar’s aims and at odds with what users might expect from them.

• Terminology is always difficult but their use of the name ‘Sustainability Ratings’ may benefit from a rethink. The data they use amalgamates the Sustainalytics ‘ESG’ data with their ‘Controversy’ data to generate a ‘Sustainability Rating’.  My view is that this equation does not really work. This is not to imply that their system does not work, however it does mean that it is open to misunderstanding as sustainability per se is not what is really being represented.

• Morningstar rates fund ‘Sustainability’ in a number of ways including a ‘1-5 Globes’ system – based on a numerical scoring system, to show better ESG performance relative to peers. The higher the Sustainability score the more globes, yet some of the outcomes are odd. Their further explanation that more ‘Globes’ is not necessarily intended to mean a fund is better at ESG per se as performance is relative to Morningstar peer groups.  Data availability etc may also be relevant factors.   The way the globes are likely to be used in practice (ie ‘more is better’) is potentially at odds with Morningstar’s intentions and a potential problem given peer group benchmarking.   (See below – ‘About ratings’) . [Updated 19/7/16]

Some thoughts

Morningstar’s options for addressing these challenges are many and various – and probably quite straight forward. They include adding extra comments/metrics/ratings for ‘sustainability specialist or expert investors’, adding text about the core aim of a fund ie along the lines of what we do in our UK only www.Fund fund tool – where ‘core aims’ are highlighted through the use of our ‘SRI Styles’ and additional filters.

They could even consider temporarily withdrawing from measuring some of the more specialist funds until their research base is more sophisticated.

In addition the balance between support documentation (which is extensive) and information shown within fund listings (which is necessarily limited) might usefully be revisited.

Other options will no doubt emerge over time.

If I were running this I would also look reconsider the tone of some of their online training videos.  Some imply (rather strongly) that some SRI themed funds do not ‘do what they say they do’. We have been here before. Many times. Old hands will know that this could be right for some funds but it is definitely not right for others. My impression is that this view probably originates from the huge diversity of this market, the (over?) complexity of some options and perhaps a dash of researcher/marketing subjectivity here and there. Either way this is not in my view a constructive line to take – unless backed with evidence and an accompanying verbal explanation of their own methodology.

To advance I would like to see Morningstar commit resource to better understanding the financially savvy change agents (companies and fund managers) in all areas of the international SRI community. This includes those who do great ESG integration work, those with leading responsible ownership strategies, those with ESG savvy ethical options AND specialist sustainability themed options.

A note about ratings

In part my concerns relate to the use of ratings such as, in this case, awarding ‘1-5 globes’. The pictorial representation of data is hugely powerful – which is of course why data providers use it. However it diverts people away from looking at what funds actually do, which can lessen the quality of research in an area that in most cases that should be truly client-centric. (This is why Fund EcoMarket has steered away from ratings).

As soon as a research provider allocates a number of stars, crowns, globes or other similar metrics to a fund the users of that data will read ‘the more the better’ and respond accordingly – irrespective of the provider’s intention. SRI is more nuanced than that.

Morningstar appear to understand these limitations but may not yet have thought through the potential unintended consequences (eg misrepresentation, favouring funds with particular types of companies). This matters a whole lot given the subject matter.


Morningstar has taken a bold step into a complex and crucial area and deserve credit for doing so.

They are new to the field and have much to offer.

They appear to be open to discussion about areas of concern and were already familiar with most of the issues I raised.

For many in the wider SRI community (ESG integrators in particular) this system appears to work well. For those who are less comfortable with their methods I am hopeful that Morningstar will continue to engage and respond appropriately.

The people I met at Morningstar stressed that their system has already changed significantly since launch – only 4 months ago – and that they expect it to change further. I see this as very positive… Rome was not built in a day.

I also hope Morningstar increasingly recognises that SRI is not just about data – and so ensure their system is as robust (or clearly caveated) as possible in order to guard against misuse or misinterpretation – and also to maximise its benefits.

They are now players in the sustainable, responsible and ethical investment market. Over time they will either aid progress towards greater sustainability or they will hinder it.

At this very early stage they appear to be doing a bit of both.

My inclination is that with some tweaking this tool could please most of the people most of the time – and become as ‘socially useful’ as I suspect many of its users will want it to be.   Time will tell!

14 July 2016


Morningstar sustainability literature:

Press pages:

Fund EcoMarket:

Fund EcoMarket SRI tool and hub created by article author Julia Dreblow: