Sustainable and ESG Investment Awards finalist interview: Morningstar's Robert Edwards

Catching up with this year's nominees

Morningstar recently made the finalists list in no fewer than five categories at this year's Investment Week Sustainable and ESG Investment Awards.

The group made the shortlists in the following categories: Best Sustainable and ESG Research Team, Best Sustainable & ESG Research & Ratings Provider, and Best Newcomer with its MPS - ESG Range and Best Sustainable & ESG Index or Service Provider. 

Meanwhile, Morningstar also had two papers shortlisted for the Best Thought Leadership category: Investing in Times of Climate Change: An Expanding Array of Choices for Climate-Aware Investors and Asset Managers as Stewards of Sustainable Business: Implications of the Rise in Passive Investing. 

In this interview, Investment Week speaks to Robert Edwards, product manager, EMEA at Morningstar Index Products, about the Morningstar Global Sustainability Index Family, which was a finalist in the Best Sustainable & ESG Index or Service Provider category. 

Can you explain the thinking behind the launch of the Morningstar Global Sustainability Index Family? What is the structure of the range and what are you trying to offer clients? 

Morningstar believes that all investors, no matter their size or influence, have the right to know all the facts about their investments.

As our data shows, global sustainable investment funds reached a record-breaking $1trn in Q2 2020, demonstrating that ESG is fast becoming the new standard for long term investing.

This means that today, access to the facts means access to ESG data. We look to enable investors to understand the full range of ESG risks of their investments and align their sustainability preferences with their investment decisions.

So, the Morningstar Global Sustainability Index Family launched in 2016 is very much part of this company-wide sustainability initiative. 

The 21 distinct equity indexes that comprise the Morningstar Global Sustainability Index Family delivers access to companies that carry low levels of ESG-related risk while maintaining low tracking error to the underlying equity market.

The Morningstar Global Sustainability Index Family is different. The indices alignment with Morningstar's widely recognised, highly intuitive global standard for ESG, the Morningstar Sustainability Rating for funds (the Globe Rating), as well as the utilisation of Sustainalytics' innovative data makes these indices stand out.   

What is the methodology behind the construction of the index family? 

Morningstar defines sustainable investing as an approach that considers environmental, social, and governance factors and their impact throughout the investment process.

The core of the index methodology is the Sustainalytics' ESG Risk Rating. Sustainalytics, a global leader in ESG research, ratings and data - and a Morningstar-owned company - provides ESG Risk Rating scores on more than 11,000 companies across the globe.

The ESG Ratings measures how well companies proactively manage the environmental, social and governance issues that are the most material to their business. 

The Morningstar Sustainability Index family delivers a best-in-class approach, investing in companies that carry low levels of ESG-related risk while maintaining broad market-like exposure.

Companies that have been assigned a 'severe' ESG Risk Rating are excluded, as are companies with Sustainalytics'-assigned 'Controversy Scores' of 4 or 5, which gauges the intensity and impact of ESG-related incidents related to a company.

Companies are ineligible if more than 50% of their revenues are derived from tobacco or if they have any involvement in the production of controversial weapons (such as land mines) or the manufacturing and sale of firearms to civilian customers or key components of small arms. 

The indexes with the universe draw from the large- and mid-cap subsets of the Morningstar Global Equity indexes, which represent 90% of global market capitalisation in developed and emerging markets.

The eligible universe currently comprises more than 4,000 companies.  

How do you as an index provider engage with companies and maintain an ongoing assessment of names in the indices? How do you see the family developing in the future? 

The indexes are reconstituted (membership reset) semi-annually and rebalanced quarterly. At this time, the most up-to-date views of Sustainalytics are integrated into the index.

For example, companies with a recent material controversy at rebalance are removed from the portfolio.

As a part of its annual review process, Sustainalytics updates its ESG Risk Rating scores on the 11,000 companies in its coverage universe. Sustainalytics' Controversy Scores are updated based on business incidents/events. 

With global demand continuing to grow, we see this Index family expanding into new markets and asset classes.

For example, Morningstar has also recently launched our first fixed income Sustainability Index family, which utilises many of the same core concepts.

As an index provider, we are always evolving and are continuously reviewing our index methodologies.

Morningstar does this work to ensure we are doing everything in our control to deliver the best end investor experience and meeting consumer and regulatory demands.

The Sustainable & ESG Investment Awards take place online on 26 November. Click here for more information.