Morningstar’s new ratings

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For those who are interested in socially responsible, or sustainable, investing, Morningstar says its new Sustainability Ratings are only the beginning.

The ratings were introduced in March 2016, and they evaluate the environmental, social and governance (ESG) characteristics of 20,000 mutual funds and exchange-traded funds (ETFs). The ratings are in partnership with Sustainalytics, which researches how companies handle ESG issues, such as the use of clean energy, community volunteerism or financial transparency.

Funds are assessed based on the “sustainability” of the companies that compose the fund—the more companies that are in a fund that score high in ESG, the higher the rating. The funds are rated from one to five globes, with five being the best. Morningstar grades on a curve, so only the top 10 percent of rated funds get five globes. (Morningstar says the ratings don’t take financial results into consideration, so they should be used along with other data when you evaluate a fund.)

Two experts whom we interviewed applaud Morningstar’s efforts but say the ratings are incomplete, not only in the number of funds that are covered but also in the amount of information that’s provided.

However, Jon Hale of Morningstar tells us that the company will bring additional information to the public, including rating more funds.

For example, Hale says, Morningstar is building a database that would identify how companies carry out their ESG mandates, among other items. In addition, he expects that Morningstar eventually will issue ratings for individual stocks as well as mutual funds and ETFs. Hale says the rollout of additional materials was expected to start October 2016 and continue into 2017.

Cary Krosinsky, who is a lecturer on sustainable investing at Yale College and Brown University, says that’s good news.

“ESG is a set of issues, not data,” he says. “There are different strategies involved in ESG, and if you don’t parse the data, you don’t accurately portray the field.”

Krosinsky adds that Morningstar likely will have competition soon. “In the last year, everyone suddenly for the first time understands the need to be checking this field out,” he says, thus the demand for more data. “Everyone needs to be in the game.”