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Morningstar Sustainability Rating

Definition

The Morningstar Sustainability Rating is a measurement used to evaluate how effectively companies within a fund’s portfolio manage environmental, social and governance (ESG) risks and opportunities in comparison with their category peers. It’s derived from the company-level ESG analytics provided by Sustainalytics, a leading provider of ESG research. The rating ranges from Low (1-star) to High (5-star), reflecting a lower or higher degree of sustainable practices, respectively.

Phonetic

The phonetic pronunciation of “Morningstar Sustainability Rating” is:Morn-ing-star Su-stain-a-bil-ity Ray-ting

Key Takeaways

The Morningstar Sustainability Rating evaluates the sustainability practices of mutual funds and ETFs on a scale of one to five globes. Here are the three main takeaways:

  1. An Assessment of Portfolio Holdings: The Morningstar Sustainability Rating is fundamentally an evaluation of a fund’s investment portfolio. It assesses how well the businesses in the fund’s portfolio are managing their environment, social, and governance (ESG) risks and opportunities compared to their peers.
  2. A Relative Measure: A fund’s sustainability score is assigned relative to other funds in the Morningstar Category. Therefore, it doesn’t solely depend on an absolute assessment of a company’s ESG performance, but rather how it performs compared with other similar funds.
  3. Quarterly Updates: Morningstar updates its Sustainability Ratings monthly. However, the ESG research reports upon which the ratings are built, are updated quarterly. Therefore, the rating may reflect the most recent available ESG data for a fund’s holdings.

Importance

The Morningstar Sustainability Rating is significant in the business and finance sector because it provides a dependable benchmark for evaluating how investments align with environmental, social, and governance (ESG) criteria. By assessing different investment portfolios and delivering a rating reflecting their ESG risk, Morningstar promotes transparency and empowers investors to make more conscious, value-driven decisions. When considering sustainability factors, investors can manage potential risks and opportunities associated with ESG factors, thereby aligning their investment strategies with their personal values and potentially driving positive social change. Therefore, Morningstar Sustainability Rating acts as an essential tool for socially conscious investment planning.

Explanation

The primary purpose of the Morningstar Sustainability Rating is to assess the environmental, social and corporate governance (ESG) performance of about 20,000 mutual funds and ETFs. The rating is aimed at helping investors identify funds or ETFs that are heavily focused on sustainable investments and understand how these specific investments are meeting ESG criteria in comparison to their counterparts. This rating system provides a quantitative and objective measure of a company’s sustainability performance, making it an important tool for investors interested in socially responsible investing.In practical usage, the Morningstar Sustainability Rating is used by investors to determine which funds are likely to outperform in the long run. Funds that have higher sustainability ratings are less likely to face risks associated with ESG issues, and are therefore considered safer for investment. The rating informs investors about the ESG risks associated with their portfolios, and allows them to make investment decisions aligned with their personal values. It acts as a comparative tool to evaluate the ESG performance of different funds, aiding investors in constructing a more diversified and sustainable portfolio.

Examples

Example 1: T. Rowe Price Equity Index 500 FundBased on historical data, one real-world example that can be mentioned is the T. Rowe Price Equity Index 500 Fund. This fund was rated with a high Morningstar Sustainability Rating, indicating that the company has a high level of assets in sustainable investing. The rating demonstrated that the companies selected for this fund are responsibly working on their environmental, social, and governance (ESG) factors.Example 2: Fidelity ContrafundAnother example would be Fidelity Contrafund, which had previously scored low on the Morningstar Sustainability Rating. This indicates that the fund’s portfolio does not adhere to best practices regarding ESG factors compared to its peers. It points out a need for reviewing the fund’s ESG strategy and adopting better sustainability practices.Example 3: Vanguard’s European stock index fundVanguard’s European stock index fund was awarded a high Morningstar Sustainability Rating as per its responsible investment practices. This index fund held a high percentage of companies that scored well on various ESG measures, demonstrating Vanguard’s commitment to investing in sustainable and socially responsible companies.

Frequently Asked Questions(FAQ)

What is the Morningstar Sustainability Rating?

The Morningstar Sustainability Rating is an assessment tool that rates investments and portfolios based on sustainability practices. It is provided by Morningstar, a company specializing in investment research and management.

How is the Morningstar Sustainability Rating determined?

The rating is determined by evaluating the environmental, social, and governance (ESG) performances of a company, fund, or portfolio. Morningstar collaborates with Sustainalytics, a leading provider of ESG and corporate governance ratings and research, to get the data needed for the rating.

What does a high Morningstar Sustainability Rating mean?

A high Morningstar Sustainability Rating indicates that a company or fund excels in minimizing the ESG risks in comparison to other companies or funds within the same category.

How can I access a company or fund’s Morningstar Sustainability Rating?

The Morningstar Sustainability Rating can be accessed via Morningstar’s website. You will need to search for the company or fund’s profile to view the rating.

Can the Morningstar Sustainability Rating change over time?

Yes, the rating can change over time as it is based on the company’s current and potential ESG risk exposure, which can vary based on their continuous actions and business performance.

How often is the Morningstar Sustainability Rating updated?

The Morningstar Sustainability Ratings are updated monthly.

Is the Morningstar Sustainability Rating a guarantee of a company’s future behaviour?

No, the rating is not a guarantee of future behavior. While it can provide valuable insights into a company’s current practices, it can’t predict future actions or performances.

Can I use the Morningstar Sustainability Rating to make investment decisions?

The rating should not be used in isolation when making investment decisions, but it can serve as a helpful tool for investors looking to consider sustainability practices in their investment strategies. Always consult with a financial advisor or do further research before making investment decisions.

Related Finance Terms

  • Sustainable Investing: This refers to the investment approach aiming to consider environmental, social, and governance factors in investment decision-making and active ownership.
  • Environmental, Social, and Governance (ESG): ESG factors are a subset of non-financial performance indicators which include sustainable, ethical and corporate governance issues.
  • Morningstar Rating: Morningstar rates mutual funds from one to five stars based on how well they’ve performed after adjusting for risk and accounting for sales charges in comparison to similar funds.
  • Portfolio Performance: This is a measure of how an investment portfolio – whether managed by a professional or an individual investor – performs in terms of its rate of return and volatility over a given time period.
  • Investment Risk: Pertains to the probability or likelihood of occurrence of losses relative to the expected return on an investment.

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