Sustainability Metrics on Custom Portfolios and Sustainability Ratings Analysis:
There are several new features and tools in our Morningstar Direct Cloud platform. We launched the capability to surface custom ESG and product involvement portfolio calculations for model portfolios and client accounts. This means users can generate the ESG and controversy scores that serve as inputs to the overall Sustainability Rating for a portfolio. Users can also view the asset weighted roll up of involvement in 15 areas relevant to investors’ values and ethics like tobacco and small arms. This can be accessed in the portfolio editor by changing the settings to display the column sets: “ESG Statistics” or “Product Involvement.” Users can assess the ESG risk profile of custom models as well as their asset weighted exposure to specific areas investors are sensitive to. This new capability could help asset management product teams create new sustainability-focused investments, and wealth managers to construct client portfolios with strong sustainability profiles.
Going one step further, we created a brand-new visualization tool to generate a hypothetical Morningstar Sustainability (“Globe”) Rating on the model or client portfolios to enable comparisons across portfolios and to a benchmark. You can access this tool by adding a new sheet to your Model Portfolio workbook, then dropping in the “Grid” component alongside the “Sustainability Ratings Analysis Component.” Edit your settings to select an appropriate category for the comparison. To see the ratings for multiple portfolios plotted at once, hit ‘Ctrl’ then select each portfolio. Wealth Managers could use this to compare multiple client accounts to each other or assess how some changes to their clients’ holdings impact the portfolio’s overall sustainability score.
New Sustainability Alerts:
Users previously had the ability to set alerts when a fund’s Sustainability Rating changed. We’ve built new alerting functionality to flag changes in some additional dimensions of a fund’s sustainability profile.
Controversy Level vs. Category
Controversies are a key input in the Sustainability Rating and evaluate significant incidents that fund holdings are involved with in areas like business ethics, employee relations, or environmental operations. Key examples of companies with high controversy levels, include Wells Fargo for their account fraud scandals and Volkswagen for their emissions scandal. Low is considered preferable to High, as it indicates fewer controversies for a fund's holdings relative to those of other funds in its category. This might indicate a need for deeper due diligence or research on whether fund is still a suitable choice for your investment criteria.
Low Carbon Designation
Back in May we launched the Morningstar Low Carbon Designation which provides a simple signal for investors to identify funds with lower risk associated with the transition to a low-carbon economy and lower than average fossil fuel involvement. Now Cloud users can receive notifications on funds assigned Low Carbon Designation or funds that received it previously, but no longer qualify for the designation. This change could prompt further investigation into whether this fund still meets the user’s criteria from an Environmental impact and risk perspective.