Morningstar, a provider of independent investment research, has announced its new 'Morningstar Sustainability Rating' category for funds available on its North American and European (including the UK) websites.
The rating helps investors evaluate funds based on environmental, social, and governance factors (ESG). Morningstar provides ratings for approximately 21,000 funds and ETFs, encompassing $13 trillion (£9 trillion) in assets under management, or more than half of fund assets globally.
'We're making our Sustainability Ratings available for free to users on our global investor websites. We think the ratings will be most effective if they're made widely available and placed in the hands of ultimate fund owners and advisers,' says Steven Smit, head of sustainability at Morningstar.
ARE INVESTORS REALLY INTERESTED?
'The Morningstar Sustainability Rating makes it easier for investors globally to incorporate sustainable investing best practices into their portfolios,' says Jon Hale, head of sustainable investing research at Morningstar.
'Using the rating, which is objective and based on a rigorous evaluation of a portfolio's underlying holdings, investors can better assess the sustainability performance of companies held by a fund and compare funds with peers.'
However, Laith Khalaf, senior analyst at Hargreaves Lansdown, questions whether most private investors will look at an ESG score when assessing funds to invest in.
'I think these ratings will potentially be useful to a small minority of investors,' he says. 'While there is a lot of talk about ESG, if you look at the ethical funds sector it hasn't grown as a share of total funds for more than 10 years.
'It still only makes up £1 out of every £100 invested, which suggests most investors simply aren't interested in this area.'
Khalaf thinks investors are much more focused on choosing funds which are going to perform well; he considers ESG to rank very low down the pecking order for most investors.
He adds: 'I also think an overall fund rating might still prove problematic for those investors who do wish to invest only in firms with strong ESG features.
'For instance a fund could score a high rating but still have one or two holdings with poor scores, which might be unacceptable to investors who take an active interest in these matters.'
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