To help investors evaluate mutual funds and ETFs based on environmental, social and governance (ESG) factors, Morningstar recently launched its own sustainability rating tool. The first-of-its-kind scoring system is a significant response to the growing ethical investing movement of the last 20 years and provides data for about 20,000 managed funds worldwide. Its intent is to assess the degree to which the holdings of these funds are consistent with good ESG practices. But whether this research tool actually meets the needs of those who place a premium on ethical investing is up for debate.
For those who want to quickly see if a fund is investing in ethical and sustainable companies, the tool is generally very good, says Dan Hallett, director of asset management for HighView Financial. But, he adds, it has its limitations, as there’s no perfect way to evaluate all sustainable factors. The key is to familiarize yourself with how the stock screens tool’s work in order to ensure a fund lines up with your values, he notes.
Not all investment experts are convinced Morningstar’s tool works, though. “Generalizing ESG scores and then deducting for all controversial incidents such as environmental accidents, fraud or discrimination strikes me as a bad idea,” argues Norm Rothery, a chartered financial analyst, MoneySense and contributing editor. A better approach, he says, is to look at your own sustainability interests and do your own research. “Some people are anti-defence, others are anti-smoking or anti-guns.
But what about the performance of ESG-friendly funds? The upside, says Hallett, is that the companies that make up these funds are typically well-run businesses. “Over a long period of time, there isn’t a significant investment performance difference compared to funds with ESG risks.”
Still, if investment returns are of paramount importance to you, then Morningstar’s rating tool “would be one of the last possible things I would look at,” says Rothery. “Returns, low fees and good company stewardship are all more important to your bottom line than the factors this index attempts to measure.”