
The idea of having investments be influenced by one’s values and a desire to advance the social good (in addition to personal profits) is not new, but in recent decades there has been substantial growth in various forms of socially responsible investing (SRI) strategies. However, given the relatively limited number of SRI funds in the marketplace, investors haven’t had a lot to choose from, and the nature of buying an SRI fund or not means the investor is either all-in or all-out for the strategy (at least with that particular portion of the allocation).
Yet with the recent launch of Morningstar Sustainability Ratings, in partnership with Sustainalytics, it now becomes feasible to not just “buy an SRI fund” (or not), but to tilt any portfolio towards sustainable investing, simply by choosing the most sustainable of the available choices in any investment category. With Morningstar’s Sustainability Rating applied to upwards of 20,000 different funds (both mutual funds and ETFs), the investor (or advisor) can screen out the lowest-rated 1- and 2-globe funds, or focus exclusively on the 4- or 5-globe funds (given the 1-to-5 globe rating system).
In fact, the raw Morningstar Sustainability Scores actually reveal that some non-SRI funds are just as sustainably invested as their SRI counterparts, when drilling down to look at the underlying holdings. Despite the explicit sustainability mandate, the funds are nonetheless buying companies that align to relevant environment, social, and governance (ESG) factors anyway – ostensibly because some fund managers (directly or indirectly) find those to be good investment criteria, anyway.
Yet with more investors seeking out sustainable investing – particularly amongst the rising Millennial generation – and the potential to use Morningstar Sustainability Ratings to tilt any portfolio towards sustainable investing simply by using the number of globes as a screen, it suddenly becomes possible for sustainable investing to actually begin to influence markets in the aggregate. After all, as the growth of Morningstar style boxes and their supporting benchmarks have shown, a common “scoring system” for investors to assess outcomes can have a significant impact on fund manager behavior. In turn, if dollars shift more towards sustainable investing strategies – even by just tilting at the margin – it gives fund managers more capital to deploy to companies that score well on ESG factors, and draws capital away from the rest, which means corporate leadership may finally have the incentive it needs to truly behave in a more socially responsible manner?