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Do Morningstar Medalists Have Higher Sustainability Ratings?

The initial data suggests yes, though it's too early to draw hard conclusions.

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Does the Morningstar Sustainability Rating align with the Morningstar Analyst Rating? One might intuitively expect some correlation between the two. The Sustainability Rating is a portfolio's Sustainability score relative to its Morningstar Category peers. The score measures how well a fund's holdings are managing environmental, social, and governance, or ESG, risks and opportunities relative to their industry groups. Funds with higher ratings are arguably managing company-specific risk better, which might lead to stronger risk-adjusted performance over the long term.

A look at the initial release of the data suggests that Morningstar Medalists in the United States tend to have modestly higher Sustainability Ratings. As of March 14, 2016, 341 medalists had Sustainability Ratings. (In order to receive a rating, at least 50% of a portfolio's assets under management must have an underlying company ESG score, and bond, small-cap, and allocation funds often do not meet that hurdle.) Those Sustainability Ratings skewed slightly positive, compared with the normal distribution used to assign the ratings overall: 36.4% were High or Above Average, while 32.1% were Low or Below Average--the expected distribution is 32.5% for both groups.

Laura Lallos does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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