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Sustainability Matters

ESG Risk in Sustainable Funds

Eighty-four percent of diversified sustainable funds receive 4 or 5 globes in the enhanced Morningstar Sustainability Rating.

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This month we released an enhanced version of the Morningstar Sustainability Rating. The globe rating now reflects environmental, social, and governance evaluations of companies in a portfolio both within and across industry groups. The original version only captured differences among companies relative to their industry peers. As a result, in the original version, portfolios that emphasized companies that were ESG "leaders" among their industry peers or avoided those that were ESG "laggards" tended to receive higher ratings.

Differences in the level of ESG risk across industry groups, however, were not reflected in the original version of the rating, even though companies in some industries clearly face more ESG risks than those in other industries. In fact, as is shown in Exhibit 1, the energy, utilities, and basic-materials sectors carry considerably more ESG risk than the real estate, technology, and communication services sectors.

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