This month, Morningstar expanded coverage of its ESG Commitment Level assessments, to include an additional 251 funds and 30 asset managers, globally.
What is the Morningstar ESG Commitment Level?
The Morningstar ESG Commitment Level is a qualitative measure of the extent to which asset managers and funds incorporate ESG considerations into their investment processes. It aims to help investors better understand how environmental, social, and governance factors inform investment strategies, and also which funds and asset managers are committed to delivering the ESG outcomes that best meet their preferences.
The ESG Commitment Level assessments are assigned by Morningstar research analysts and come in addition to quantitative ESG tools such as the Morningstar Sustainability Rating and the Morningstar Low Carbon Designation, which measure the ESG risks in a portfolio.
So far, the ESG Commitment Level only applies to a subset of funds under Morningstar analyst coverage. Last November, we unveiled the results of our first set of evaluations. Last week, we unveiled the results of our second set of evaluations, which consists of 251 funds, representing 140 strategies, and 31 asset managers.
The Leader Board
Commitment level assessments for asset managers consider three “key pillars,” including resources, philosophy and process, and active ownership. The scale runs from best to worst as follows: Leader, Advanced, Basic, and Low. Here’s how the ratings break down broadly among different firms.
Leader
ESG is core to their identity. They have long histories committed to ESG investing, and ESG considerations are ingrained and pervasive in their investment processes, strategies, voting records, and in their own operations. This time around, we awarded our top accolade of Leader to only one firm, Australia’s Affirmative Investment Management.
Advanced
Asset managers carrying an Advanced rating are among the industry’s strongest ESG proponents and are deliberate in integrating ESG considerations into their investment processes using robust resources and formal monitoring. However, there are areas of their combined portfolios to which ESG investing principles are not deliberately applied, unlike asset managers assigned to the Leader level. Five European asset managers earned an Advanced Morningstar ESG Commitment Level: Amundi, BNP Paribas, HSBC, Jupiter, and LGIM.
Basic
Many of these firms are still in the early stages of their ESG incorporation journey, while others are much further along, although not far enough to be classified as Advanced. Some have a well-intentioned approach and dedicated resources, but their proxy-voting records and disclosures may still be works in progress. This is the largest group of fund managers and includes Allianz Global Investors, Invesco, JPMorgan, State Street, and T. Rowe Price.
Low
Firms at this level are typically just getting started on incorporating ESG considerations into their processes, using ESG criteria in a limited or more-variable way, or simply not incorporating ESG at all. Twelve earned an ESG Commitment Level of Low, including Franklin Templeton, Janus Henderson, Mellon Investments, and VanEck land in this group.
ESG Commitment Level for Strategies
At the fund level, out of the 140 strategies assessed this time around, only 20 received our top accolades of Leader and Advanced. This is mainly because our second cohort contains a majority of funds that do not focus on ESG. Out of the 140 strategies, 98 are conventional strategies that may incorporate ESG considerations but do not seek to achieve a specific ESG outcome and for which ESG is not a determining factor. Only one was awarded an ESG Commitment Level of Leader, Affirmative Global Bond Fund domiciled in Australia.
Leader funds integrate ESG factors fully into their security analysis and portfolio construction, and they deliver desirable ESG outcomes at the portfolio level, such as a high sustainability profile, advancing the UN Sustainable Development Goals, or similar. To achieve this outcome, these funds’ investment teams are armed with a large amount of data sources, and analysis is carried out by a well-size team with strong expertise in ESG topics. Finally, Leader strategies incorporate purposeful proxy voting and corporate engagement to push companies toward more sustainable practices, and they typically have best-in-class procedures for reporting and disclosure.
Advanced
We have awarded a Morningstar ESG Commitment Level of Advanced to 19 strategies. This group includes actively managed funds such as Fidelity Sustainable Asia Equity, in addition to exchange-traded funds including iShares € Corp Bond ESG ETF and UBS (Lux) FS MSCI EM SRI. For these funds, ESG considerations are a key part of the strategy even if they fall short of ESG Leader funds in one or more areas. ESG data affects security selection and portfolio weights and may drive portfolio-level targets to meet certain sustainable metrics. To deliver such outcomes, Advanced strategies have investment teams that exhibit strong ESG credentials.
Basic
Fifty-nine strategies have received a Morningstar ESG Commitment Level of Basic. This group encompasses the broadest range of ESG practices, from simple exclusionary screens, such as those applied by Vanguard ESG Developed World All Cap Equity Index Fund, to more-integrated approaches like those seen in Jupiter European Growth, Robeco QI Global Conservative Equities, and Schroders MidCap. These funds may not explicitly pursue any ESG outcomes, but they demonstrate some degree of ESG incorporation and have the resources and expertise to implement it.
Low
We have assigned a Morningstar ESG Commitment Level of Low to 61 strategies, including Fundsmith Equity, Capital Group New World, and iShares Global Water. This group is the largest of the 140 strategies in our second cohort, a natural outcome given the cohort is heavily populated with nonintentional ESG strategies. For these funds, ESG considerations play only a minor role, if any, in the execution of the strategy. Some are just beginning to incorporate ESG research into their processes.