(pictured: Anthony Serhan)
Morningstar has introduced its global sustainability ratings to Australia, with an unlikely group of managers at the top of the list and a plan to roll out increased access to advisors so they can assess their own portfolios on detailed ESG factors.
The initiative, which was announced last year, has been developed such that Morningstar has now rated 230 of Australia’s largest companies and subsequently rated the managed funds that invest in them. Globally, Morningstar is now rating about 4,600 companies for ESG factors – on top of its usual company assessments. They account for about 85 per cent of the world’s listed market capitalisation.
The top three Australian fund managers, in each of four equities categories covering all funds (not just ESG-type offerings), in the preliminary findings announced last week, are:
- Australian shares, large blend: 1, Alphinity Socially Responsible Share Fund; 2. PM Capital Australian Companies; 3. Milton Corporation.
- Australian shares, large value: 1. Antares Dividend Builder; 2. AMP Capital Australian Equity Value; 3. MLC Income Builder.
- Global shares, large blend: 1. Stewart Investors Worldwide Sustainability; 2. Candriam Sustainable Global Equity; 3. iShares MSCI EAFE.
- Global shares, large value: 1. Polaris Global Equity Fund; 2. Grant Samuel Epoch Global Equity Shareholder Yield; 3. Wingate Global Equity Fund.
The inclusion of managers such as AMP Capital’s value fund and MLC’s income fund is interesting, which have no specific ESG overlays, suggests there are various investment styles which will translate better than others to the ESG space.
Anthony Serhan, Morningstar managing director of research strategy for Asia Pacific, said that it was now apparent that you could not adequately analyse the future cashflows of companies without having an understanding of the ‘E’, ‘S’ and ‘G’ influences on those companies.
“It used to be the view that this was a ‘touchy feely’ thing, but that’s no longer. Also, there is government pressure on companies to disclose their positions,” he said.
Morningstar has contracted the largest research firm in the world specialising in ESG, Sustainalytics, to provide the ground-level data for its own assessments. Sustainalytics, which has about 250 staff globally, opened an Australian office last year, with Morningstar as its first client. The firm dates back to 1992 in Canada and is now controlled by Dutch fiduciary investment interests.
The trick for Morningstar, which offers its own clients both stock and managed fund research and analysis, was to translate the Sustainalytics research at the security level to the wider global level of managed funds. Morningstar provides information on 23,000 ‘vehicles’ and 33,000 portfolios globally.
Serhan said that Morningstar started its Australian screening in July and the firm would be tracking whether there was persistence in the ESG rankings. It would also use the rankings as part of the roll-out of its education for clients, and their clients, on ESG matters.
For open-ended Australian-domiciled funds, the preliminary Morningstar research shows that the largest percentage of index funds – about 47 per cent – are below average on the sustainability ratings. Of Morningstar’s most recommended funds – its gold, silver and bronze funds – those with “low’ sustainability ratings range from 6 per cent to 10.5 per cent.
Interestingly, of the manager strategies with a dedicated ESG or similar focus, not all rate highly on the Morningstar analysis. About 53 per cent are in the ‘high’ category, 15 per cent are ‘average’ and 4 per cent are ‘below average’.
The Morningstar sustainability ratings are currently available to the firm’s institutional and wholesale (dealer groups and platforms) clients and will be progressively rolled out to individual planners. Sustainalytics has its separate marketing strategy for investors and financial planners which Morningstar has to fit in with.