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Morningstar launches ESG scoring for mutual funds, ETFs

Our new scores for environmental, governance and social factors will help investors with an interest in sustainability and responsibility.

Jess Chapman: For, I'm Jess Chapman. For 31 years, Morningstar has given you all the financial data you can need on mutual funds and ETFs – and now we're going beyond the numbers. I'm joined by Jon Hale, Morningstar's director of manager research for North America. He is in Chicago today.

Jon, tell us about the new scores we're launching this year.

Jon Hale: Well, Jess, we're going to be launching an ESG score, which means we're going to be calculating a score for funds based on the holdings that they have in their portfolio that are measured on a number of environmental, social and governance metrics which are important to sustainable investors. So, by environmental, social and governance, we as a short hand are calling them ESG scores, and this is something that's become increasingly of interest, we think, to a lot of investors globally, and for the first time we'll be able to give investors a sense of how they can compare funds and other managed products on these criteria.

Chapman: What sparked the decision for Morningstar to start looking at these ESG metrics?

Hale: Well, we're just seeing so much interest in sustainable investing across the board from institutional investors all the way to financial advisors and individuals. A lot of it is driven by concern over climate change and the environment, but a lot of it is also sort of demographic. A lot more women are becoming important investment decision makers, whether they are part of an institutional investment committee or they are doing their own personal investing, and women tend to have a high level of interest in sustainable investing and having an impact with their investments beyond financial return. But the same is true also for younger people, the under-50 set, becoming more and more important economic decision makers who have an interest in sustainable impact investing. But the thing is, they don't really have great tools to help them evaluate investments on the basis of these ESG factors. So that's where we are going to step in and hopefully provide them with the kinds of tools they need to not only make great financial decisions for their investment bottom line, but also good decisions that help them have an impact on the sustainable global economy and environment over the long run.

Chapman: And we're not doing it alone; we're partnering with Sustainalytics to get a lot of this data, and that's a firm based in Amsterdam, and they are very well regarded for their research into responsible investment.

Hale: Yes and I might add they have a presence in Toronto as well. Their CEO, Michael Jantzi, is based in Toronto, and actually the firm is a combination of several smaller firms that merged together several years ago to form the global Sustainalytics company. So their CEO is there in Toronto and, yes, they are very well regarded. What they do is evaluate companies on a variety of environmental, social and governance metrics, about 4,500 globally, and we're going to be using their baseline research to apply to portfolios. We'll roll up those ratings on an asset-weighted basis to provide our portfolio level ESG scores.

Chapman: And some other European interest as well. We have the Swiss private banking group Julius Baer being the first firm to license this data from Morningstar.

Hale: Yeah, we are really anxious to provide this information to Julius Baer. A lot of interest in Europe, but a lot of interest also in North America where our phone has been ringing off the hook for the last week or so with people that are interested in what we're going to do. So we feel like it will have strong presence in Europe, but also in the North American markets as well.

Chapman: For sure. And what sort of impacts do you think these new ESG scores will have on our existing Morningstar readers?

Hale: Well, what eventually people will be able to do who are interested in sustainable investing is look at the scores, compare portfolios on their ESG metrics. So one portfolio that you might have in your overall portfolio might score very high on ESG metrics and other one might not score very high. You might want to replace that if one of your goals is to have a sort of stronger ESG footprint in your portfolio. So, really, for the first time, investors will be able to make those kinds of comparisons when it comes to ESG factors.

Chapman: And when are we looking at the launch for these scores?

Hale: So we'll be launching the scores late this year. They will be available in kind of more of a data feed type format to clients like Julius Baer and they will start showing up in our products in 2016.

Chapman: Well, we're very excited to see them there, Jon, and we're very proud of you for spearheading this project. Thanks very much.

Hale: Thank you.

Chapman: Visit for your investment news and updates.