Investment research giant Morningstar says it plans to tweak how it produces its sustainability ratings for funds amid continuing anger from asset managers who say it has cost them client business.
The US company entered the market in 2016 aiming to be a ‘global standard for sustainable investing’. Along the way it acquired a 40% stake in ESG research house Sustainalytics, from where it sources its sustainability research on companies. The NASDAQ-listed firm also bought Jackie Cook’s proxy-tracking firm Fund Votes.
The Sustainalytics research feeds into an analysis of fund holdings to produce a sustainability score.
But the system met resistance from fund managers who complained that the ratings failed to capture true sustainability. Schroders’ Head of Sustainable Research, Andy Howard, for example, called it ‘painting by numbers’.
And now one fund manager has admitted the system has cost it business. Craig Bonthron, who manages the one-globe-rated (low sustainability) Kames Capital’s Global Sustainable Equity fund, explained how one client really liked the fund but was unable to invest.
The client’s internal processes precluded it from taking such a low-rated fund. In Bonthron’s phrase it was a case of: “Computer says no!”
Speaking at the UKSIF Analysts Conference in Edinburgh last week, he illustrated the dilemma with a video of one of the fund’s holdings, software-as-a-service firm Everbridge.
It’s a relatively small company, he explained, without the investor relations and PR teams to ensure it gets a good sustainability rating. This and similar holdings – which Kames holds because of their sustainability potential – ultimately results in a low Morningstar rating for the fund.A holding such as tobacco giant BAT, with a high ‘best in class’ ESG rating, would have – paradoxically – improved the fund’s score.
Bonthron, formerly the joint fund manager of the SWIP Global Sustainable Equity fund and the SWIP Global Islamic Equity Fund, said Kames now runs a blog called Sustainability Soapbox to get its views across.
“If you want the tail to wag the dog, get someone else to run the fund.”
Speaking on the same panel was Hortense Bioy, Director, Passive Strategies and Sustainability Research at Morningstar. She said of the methodology that the firm was “planning to enhance it again this year”, moving to an absolute risk methodology.
The methodology was updated last year (see RI feature here) to incorporate historical holdings and increase the rating threshold to 67% of portfolio covered.
But Bonthron said: “If you want the tail to wag the dog, get someone else to run the fund.”
Kames itself has a 30-year ESG history, having launched an ethical fund back in 1989. In January it was appointed by US-based Advisors Asset Management as Portfolio Consultant for a new sustainable unit investment trust.
This is not the first time the issue has come up at the UKSIF event in Edinburgh. It came up two years ago, for example.
Meanwhile, Morningstar has released research showing that ESG funds from BlackRock, Vanguard, Fidelity Investments, and TIAA– CREF, among others, in 2018 “cast a number of votes that seemingly conflict with an ESG mandate, including funds specifically aimed at the environment”.