Does using Sustainalytics data affect the Morningstar Sustainability Ratings of MSCI-based funds?

When we launched our Morningstar Sustainability Rating for funds and managed portfolios last year, we partnered with Sustainalytics, which provides the company- level ESG evaluations that power our portfolio-level rating. While many other capable providers have entered the market in recent years, Sustainalytics and MSCI ESG Research are the two largest players; MSCI is the biggest.

One thing we heard from those familiar with company ESG data was that these two providers do not always agree in their ESG assessments of companies. That’s not surprising given that no standard definition of company sustainability exists, companies do not report standardized ESG information, and the two providers use different rating scales, along with somewhat different metrics and analytical frameworks. Although I would expect general agreement in most of their company assessments, I wouldn’t expect complete conformity.

From an asset manager’s perspective, I can see why this may be troubling. For one thing, if the two major providers don’t agree all the time, then perhaps the asset manager needs to consider using data from both providers or, for that matter, data from multiple providers, which increases costs and complexity. For another, if an asset manager uses MSCI ESG Research to assess company sustainability and Morningstar uses Sustainalytics, a portfolio based on the former may not receive as good of a Sustainability Rating as one based on the latter.

To examine whether that is happening, I looked at the Morningstar Sustainability Ratings of funds and ETFs that replicate MSCI ESG indexes, which are based on MSCI ESG Research’s assessments of company sustainability. We have 33 such funds and ETFs in our global database.[i]

Morningstar Direct, 5/31/17

As you can see from the table, nearly all of those funds, 30 of 33, have the highest possible Sustainability Rating (5 globes), including all eight funds and ETFs available to U.S. investors. The list includes funds that invest in all developed-markets regions, emerging markets, and global strategies:

This suggests that our portfolio-level Sustainabilty Rating is capturing the essence of ESG performance regardless of the source of a fund’s ESG analytics.

[i] Not included are funds that replicate MSCI low-carbon, ex-fossil fuels, ex-controversial weapons, or ex-tobacco indexes, as ESG ratings are not part of the selection criteria for those indexes.

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