One theme that has emerged in the global investing landscape over the past few years is the importance of environmental, social, and governance criteria. To respond to this investor-driven demand, fund companies have both launched new ESG offerings and added ESG lenses on existing funds. The rapid rise in these offerings makes it harder for investors to gauge what funds are actual leaders in the space.
Enter the Morningstar ESG Commitment Level.
As Christopher Traulsen, Morningstar director of global manager research ratings, and one of the authors of the methodology paper that explains the new Morningstar ESG Commitment Level explains, quantitative measures such as the Morningstar Sustainability Rating are part of the solution, however, the Morningstar ESG Commitment Level for funds expresses our analysts’ assessments of asset managers’ and individual strategies’ commitment to incorporating ESG into their investment organisation and processes.
The scale runs from best to worst as follows: Leader, Advanced, Basic, and Low.
The new measure will launch on a group of just over 100 funds and 40 asset managers covered by our global teams, including our Hong Kong-based analysts. Going forward, we will produce the Morningstar ESG Commitment Level for strategies and asset managers for which we produce Analyst Ratings.
How Can You Use This? Why Should You Care?
“As investors’ awareness in ESG grows, they need help in identifying fund products that are aligned with their ESG preferences. For each fund product Morningstar qualitatively covers, the ESG Commitment Level provides a comprehensive, qualitative assessment on its ESG attributes so investors are empowered to make an informed decision by incorporating the ESG Commitment Level into its fund selection process,” explains Wing Chan, Morningstar’s director of manager research practice, EMEA & Asia.
He suggests that, while considering a fund, investors use both the Morningstar ESG Commitment Level and the Morningstar Analyst Rating in tandem.
‘The Morningstar Analyst Rating focuses on a fund product’s investment merit, and it expresses our analysts’ expectations that a fund will be able to outperform its category benchmark over time on a risk-adjusted basis. The ESG Commitment Level focuses on the level of incorporation of ESG. Investors may find it helpful to use the two measures in tandem, but it should be noted that they don’t interact,” Chan explains.
For investors in Asia, this is an opportunity to begin looking at investments through an ESG lens.
“Fund investors in Asia are relatively early in their ESG journey, though there are no shortage of fund products that claim to possess varying degrees of ESG attributes. With local regulations on ESG disclosure still taking shape, we hope the ESG Commitment Level will provide investors an independent and objective assessment that can help investors identify the most appropriate ESG fund products that align with their ESG preferences,” Chan says.
Which Funds Have ESG Commitment Levels?
Chan identifies 15 funds that currently have ESG Commitment Levels. Nine of the funds are equity funds, five are fixed income, while one is an allocation fund. There are four funds that earn the highest ESG Commitment Level of Leader, and all are equity funds. One fixed-income fund earns the lowest Commitment Level of Low. The rest are spread out among the other two levels. Here is the list:
Let’s look at the Leaders in some detail. All the following information is from the ESG Commitment Level methodology paper, which can be found here.
Stewart Investors Asia Pacific Sustainability
Pacific Assets Trust
ESG Commitment Level: Leader
Asset Manager: Stewart Investors
Stewart Investors Asia Pacific Sustainability ranks among the industry’s finest Asia Pacific ex-Japan equity ESG options, and it earns a Morningstar ESG Commitment Level of Leader as a result.
This strategy is led by David Gait, who heads Stewart Investors’ 12-member Sustainable Funds Group. This group is experienced and stable and includes other seasoned team members such as Sashi Reddy and Nick Edgerton. The team focuses on hiring individuals with a passion for ESG matters, and all members fully incorporate ESG research into their daily work. A recent addition to the team was Pablo Berrutti, who joined as a senior investment specialist in July 2019. Berrutti has a long tenure in the ESG investing space, focuses on company engagement and outreach, and has impressed in meetings thus far.
ESG is also ingrained into all aspects of the investment approach. The team focuses on finding management teams with a shared vision of driving sustainable development in the markets in which they operate. A byproduct of this philosophy is that the strategy will not invest in companies with material exposure to harmful products, including weapons, tobacco, alcohol, fossil fuels, and gambling. What’s more, the vision extends to more-subjective areas, including certain soft drink and snack manufacturers, with the rationale being the negative health effects of their product portfolios on the general population.
Stewart Investors Worldwide Leaders Sustainability
Stewart Investors Wholesale Worldwide Leaders
ESG Commitment Level: Leader
Asset Manager: Stewart Investors
Stewart Investors Worldwide Leaders ranks among the industry’s finest global equity ESG options, earning it a Morningstar ESG Commitment Level of Leader.
This large-cap strategy is led by Sashi Reddy, who is part of Stewart Investors’ 12-member Sustainable Funds Group. This group is experienced, stable, and, alongside Reddy, includes seasoned team leaders such as David Gait and Nick Edgerton. The team focuses on hiring individuals with a passion for ESG matters, and all members fully incorporate ESG research into their daily work. A recent addition to the team was Pablo Berrutti, who joined as a senior investment specialist in July 2019. Berrutti has a long tenure in the ESG investing space, focuses on company engagement and outreach, and has impressed in meetings thus far.
ESG is also ingrained into all aspects of the investment approach. The team focuses on finding management teams with a shared vision of driving sustainable development in the markets in which they operate. A byproduct of this philosophy is that the strategy will not invest in companies with material exposure to harmful products, including weapons, tobacco, alcohol, fossil fuels, and gambling. The team parted with Berkshire Hathaway in 2019, for example, because of several ESG issues such as succession risk and Berkshire’s significant exposure to coal and gas transportation because of its rail business.
Impax Global Equity Opportunities
Pax Global Opportunities
ESG Commitment Level: Leader
Asset Manager: Impax
Impax Global Equity Opportunities earns a Morningstar ESG Commitment Level of Leader.
This strategy has a strong sustainability focus as it invests in companies that managers see as likely to benefit from the transition to a more sustainable economy. To identify such companies, the team applies proprietary Impax industry sustainability research that ranks economic subindustries by ESG-related opportunities and risks. Given this positive inclusion approach, negative screenings or exclusion criteria are not central to the strategy.
In addition to the positive inclusion approach, ESG is integrated throughout the entire investment process with a wide range of ESG and nonfinancial information incorporated into Impax’s 10-step company research process. Following completion of an analysis, each company is scored based on the firm’s proprietary ESG score. This sector-relative scoring ranks stocks on a five-point scale. The focus of the team is typically on the top three buckets; companies in the worst-performing group are excluded, and the team imposes a 2%-position-size cap on stocks in the second to last bucket.
The strategy benefits from a highly experienced, capable team in portfolio managers Kirsteen Morrison and David Winborne. The broader equity research team is responsible for ESG company research and is deeply involved in proxy-voting and engagements efforts. This team includes a mix of very seasoned and long-tenured sustainable investors and more-junior members, is well-resourced, and has proven ESG research capabilities.
Impax Environmental Markets
ESG Commitment Level: Leader
Asset Manager: Impax
Impax Environmental Markets is an ecology-themed strategy using the firm’s thorough approach to ESG integration. The strategy earns a Morningstar ESG Commitment Level of Leader.
This strategy invests only in companies that derive at least 50% of their business from environmental markets. Additionally, ESG is integrated throughout the investment process with a wide range of ESG and nonfinancial information incorporated into Impax’s 10-step company research process. Following completion of an analysis, each company is assigned the firm’s proprietary ESG score. This sector-relative scoring ranks stocks on a five-point scale. The team focuses typically on the top three levels, while the worst-performing companies are excluded, and it imposes a position-size cap on stocks in the second to last bucket.
Impax strives to identify companies that display positive characteristics, rather than applying exclusions. However, given its environmental focus and the positive inclusion approach, it is highly unlikely that this strategy will invest in a company involved with controversial activities.
The strategy benefits from a highly experienced, capable team in portfolio managers Bruce Jenkyn-Jones and Jon Forster, two of the most seasoned managers within Impax’s Listed Equity team. The broader equity research team is responsible for ESG company research. This team includes a mix of very seasoned and long-tenured sustainable investors and more-junior members, is well-resourced, and has proven ESG research capabilities.
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