Morningstar - Q1 2020 - 38

Spotlight: ESG Risk

score is between 30 and 35, its sustainability
rating is scaled down to 3 globes.

35 and 40, its sustainability rating is scaled
down to 2 globes.

score is 40 or above, its sustainability rating is
scaled to 1 globe.

The iShares Global Energy ETF IXC has a
sustainability score of 36.1 and is also in the High
ESG risk range. Within the global fund
equity energy category, the fund's percentile rank
is 40, so its preliminary rating would be 3
globes. Because the fund's score is between

Franklin Gold and Precious Metals FRGOX has a
sustainability score of 40, which places it in
the Severe ESG risk range. Within the global fund
equity precious metals category, the fund's
percentile rank is 76, so its preliminary rating
% of Portfolios
would be 3 globes. Because the fund's
15

At a category level, we can see that the threshold
requirements alter the distribution of certain
categories. EXHIB IT 3 shows the distribution of the
equity precious metals category's underlying
Historical Portfolio Sustainability Scores and the
resulting sustainability ratings distribution.
In the first chart, we can see that a handful
of portfolios have scores of less than 30, meaning
they have a Medium ESG risk level. These
scores put the funds at the top of their peer group,
earning them a 4- or 5-globe sustainability rating.
Conversely, a sizable portion of portfolios
are classified as having High or Severe ESG risk
(with scores of 30 or more) and, therefore,
automatically earn a 1- or 2-globe sustainability
rating. As a result, shown in the second
chart, the overall sustainability rating distributions
are skewed negative.

EXHIBIT 3

10

Thresholds at Work Because a large amount of funds in the precious metals
category have sustainability scores in the High and Severe risk range, most of them
can only earn 1 or 2 globes.

5

Historical Sustainability Score Distribution for the Precious Metals Global Category

% of Portfolios0
22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 50+
15
Historical Sustainability Score

10

5

0
22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 50+
Historical Sustainability Score
Morningstar Sustainability Ratings Distribution for the Precious Metals Category

% of Portfolios
60
52.24

40

First Step
The Morningstar Sustainability Rating for funds
now provides investors with an assessment of
ESG risk embedded in a portfolio that is
evaluated relative to peers. Using Sustainalytics'
new company ESG Risk Ratings, the sustainability
rating focuses on materiality and reflects both
within-industry and across-industry assessments
of company-level ESG risk.

While those investors evaluating intentional
sustainable investment funds should expect them
to have low amounts of ESG risk, the sustainability
rating should just be a first step in a broader
evaluation of those funds. Investors may
also want to know how funds with a sustainableinvesting mandate engage with companies,
vote proxies, and, more broadly, seek to provide
impact alongside financial return. K
Madison Sargis is an associate director of quantitative
research with Morningstar.

20

17.66

15.74

12.90
1.46

Sustainability Rating

% of Portfolios0
60

52.24

Sources: Morningstar, Sustainalytics. Data as of 10/31/2019.

40
38

Morningstar Q1 2020

Jon Hale, CFA, Ph.D., is director of sustainability research
with Morningstar Research Services. He is a member of
the editorial board of Morningstar magazine.
Morningstar - Q1 2020

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