The New Morningstar Sustainability Rating

Transcription

1 The New Morningstar Sustainability Rating A new lens for investors Morningstar SRI Breakfast Milano 19 Aprile 2016 Davide Pelusi CEO, Morningstar Italy 2016 Morningstar, Inc. All rights reserved.

2 AGENDA g About Morningstar g Mission g Why Morningstar Sustainability Rating g Methodology g GlobeStarating g Italian Statistics g Where you can find MSR 2

3 About Morningstar g Morningstar is a leading provider of independent investment research in North America, Europe, Australia, and Asia. g The company offers an extensive line of products and services for individual investors, financial advisors, asset managers. g Morningstar provides data on more than 510,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 17 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. g Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement and management as of Dec. 31, g The company has operations in 27 countries. 3

4 About Morningstar Our Capabilities 4

5 Morningstar Mission Create great products that help investors reach their financial goals 5

6 Why does Morningstar introduce? 6

7 Trends creating broad interest g Climate change g Sustainable citizenship /Consumer /Workplace /Political /Investor g Investors seeking meaningful impact from their investments 7

8 UN Principles for Responsible Investment Signatories: 1,380 With $59 trillion AUM Assets under management (US$ trillion) Number of Signatories US$ Tril apr-06 apr-07 apr-08 apr-09 apr-10 apr-11 apr-12 apr-13 apr-14 apr Source: UN-PRI April

9 Significant growth in global sustainable investment assets Assets invested with a sustainable mandate reached $21.4 trillion in 2014, +61% since 2012 US SIF The Forum for Sustainable and Responsible Investment $ % $6, % RIA Responsible Investment Association $13, % EuroSIF The European Sustainable Investment Forum $53 +32% ASrIA The Association for Sustainable and Responsible Investment in Asia RIAA Responsible Investment Association Australasia $ % Source: Global Sustainable Investment Review 2014, Global Sustainable Investment Association 9

10 Worldwide AUM growth, but Europe leads Reprinted from Morningstar magazine December/January

11 High interest among younger investors and women 84% 90% 76% 71% 62% 80% 70% 60% 50% 40% 30% 20% 10% Millennials Women Overall Men 0% Source: Sustainable Signals: The Individual Investor Perspective, Morgan Stanley Institute for Sustainable Investing, February

12 Investors especially younger ones want to express values, focus on positive impact, and believe they can achieve competitive returns Age 70+ Boomers Gen X Millennials 67% 62% 62% 75% 73% 73% 61% 58% 80% 70% 60% 44% 47% 50% 34% 36% Express Values Positive Impact Competitive Returns 40% 30% 20% 10% 0% Source: US Trust Insights on Wealth and Worth,

13 Growing evidence that ESG factors are material to financial performance g CFA Institute: There is a lingering misperception that the body of empirical evidence shows that ESG considerations adversely affects financial performance g Department of Labor bulletin: Fiduciary duty may compel consideration of ESG factors in investment analysis and ownership practice Percent of Studies with Positive ESG Outcome 90% 88% 80% 100% 80% 60% 40% 20% Lower cost of capital Better operational perfiormance Better stock price performance 0% Source: From the Stockholder to the Stakeholder, University of Oxford and Arabesque Partners, 2015, 13

14 Performance of socially conscious funds in Morningstar s global database skews positive Socially Conscious Global Fund Universe 38% 35% 40% 35% 28% 30% 23,00% 23,00% 25% 19% 20% 10% 10% 5% 10% 15% 10% 5% 5 Stars 4 Stars 3 Stars 2 Stars 1 Star 0% Source: Morningstar Direct, September 30,

15 Demand broadens, Morningstar responds Investors, advisors, and asset managers will increasingly require portfolio-level information about the sustainability of their investments Portfolios Managed Products Past: Assets are institutional and data is at the security level Future: Long-term industry shift to meet emerging demand Today: Innovation to deliver sustainability ratings across all funds to asset managers, advisors, and investors Sustainalytics MSCI Individual Securities Asset Owner Asset Manager Advisor Individual Investor 15

16 Morningstar sustainable investing initiative: Responding to demand Morningstar's Sustainability Ratings for funds will address needs across a wide variety of audiences and platforms. INSTITUTIONS Morningstar helps asset managers assess and communicate their funds sustainability ghighlight funds sustainability to advisors and investors through an independent source genable portfolio management, including impact analysis gprepare spokespeople to address advisor and investor concerns gconduct competitive analysis ginfluence product development ADVISORS Morningstar helps advisors serve clients who value ESG factors galign investments with values by selecting sustainable funds and portfolios greach new audiences and build an ESG practice gextend services to foundations and endowments that (must) invest following ESG overlay gdevelop new screening criteria INDIVIDUALS Morningstar educates investors on this trend with Sustainability Ratings, webinars, videos, and analysis galign investments better with personal values gidentify and screen for funds with high Sustainability Ratings gmitigate risks coming from nonfinancial metrics 16

17 How do the work? 17

18 Bottom-up research. Transparent methodologies. Global reach. Independent voice. g Global leader in sustainability research and analysis g Serves investors and financial institutions around the world g Deep commitment to bottom-up research: Twenty years of local expertise, global research coverage, and a deep analyst bench g Transparent methodology providing 70 indicator level scores at the company level for more than 4,600 companies g Leading provider of independent investment research g Serves individuals, advisors, asset managers, retirement plan sponsors and providers, and other businesses around the world g Deep commitment to bottom-up research: Thirty years of local expertise, global research coverage, and a deep analyst bench g Transparent methodologies to track, research and rate more than 250,000 managed products 18

19 Company ESG research: Two signals used by Morningstar Company ESG Ratings g Overall ESG Score (0 100) /Environmental Score /Social Score ESG Ratings 4,600 unique issuers /Governance Score Controversy Assessments g Based on 10 issue areas g Scored for severity 1 (low) 5 (high) Controversy Research 15,000 unique issuers g Outlook 19

20 Methodology overview 20

21 Deep dive into 21

22 A Fund Portfolio with Only Two Stocks Fund Category: Global Large-Cap Value Equity Retail 100 Oil & Gas SUSTAINALYTICS Overall ESG Score s o Controversy Score

23 Normalization Process of Raw ESG Scores In order to calculate a Sustainability Score for the portfolio we must look at the set of stocks in the two sectors. A simple example below shows what a set could look like (note: in reality the sets are much larger). The Retail sector has a more narrow span and a higher average compared to the Oil & Gas sector. Standard deviation is a measure that explains how much the data points varies from the average. We will see later why this is of importance. ESG-scores Low High Average Std.dev. Retail Oil & Gas

24 Normalization Process of Raw ESG Scores Cont. Oil & Gas Retail Our Oil & Gas company seems to have done better compared to its group peers while the Retail company is not that much better than its peers. So how can we translate this into a portfolio Sustainability Score? 24

25 Normalization Process of Raw ESG Scores Cont. By normalization of the two companies ESG scores they can be compared. The normalization formula looks as follows. ZZ pppppppp = EEEEEE ssssssssss cccccccccccccc μμ pppppppp σσ pppppppp The Z-value calculated explains how many standard deviations from the mean an ESG-score is. The normalization procedure is required otherwise ESG scores from different sectors couldn't be compared. 25

26 Normalization Process of Raw ESG Scores Cont. If we complete the normalization of our two companies we will get the following result: Oil & Gas Retail ZZ pppppppp = ZZ pppppppp = = 11, 5555 =

27 Normalization Process of Raw ESG Scores Cont. With the Z-score the normalized ESG score can be calculated: EEEEEE NNNNNNNNNNNNNNNNNNNN = 50 + ZZ pppppppp xx 10 Oil & Gas Retail EEEEEE NNNNNNNNNNNNNNNNNNNN = ,58 xx 10 = 6666, 8888 EEEEEE NNNNNNNNNNNNNNNNNNNN = ,85 xx 10 = 5555, 5555 By normalization we now can compare these two scores. Initially they had the same score, 70, but the Oil & Gas company seemed to be better than its peers. By normalization this can be interpreted as how much better a company is from its peer group average and by doing so we now can compare them. From this we can conclude that the Oil & Gas company was better in its sector compared to the Retail company. 27

28 A Fund Portfolio with Only Two Stocks Fund Category: Global Large-Cap Value Equity Retail 100 Oil & Gas 100 s 70 o s EEEEEE nnnnnnnn. = 5555, 5555 o 45 EEEEEE nnnnnnnn. = 6666,

29 Controversy Scores We now have the normalized ESG scores and the last step is to deduct for the controversies for the companies. The amount deducted for controversies is presented in the table below. Remember Controversies for the stocks: Oil & Gas= 5 Retail = 2 Controversy Deduction from Normalized ESG Score No evidence of controversy 0 29

30 Sustainability Score With the normalized ESG score and the table for controversy deduction, each stocks individual Sustainability score can be calculated: SSSSSSSSSSSSSSSSSSSSSSSSSSSS SSSSSSSSSS iiiiiiiiiiiiiiiiiiii = EEEEEE NNNNNNNNNNNNNNNNNNNN CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC Oil & Gas Retail SSSSSSSSSSSSSSSSSSSSSSSSSSSS SSSSSSSSSS iiiiiiiiiiiiiiiiiiii = 65,85 20 = 4444, 8888 SSSSSSSSSSSSSSSSSSSSSSSSSSSS SSSSSSSSSS iiiiiiiiiiiiiiiiiiii = 58,55 4 = 5555, 5555 In comparison with the normalized ESG score the Sustainability score is lower after the deduction of controversies. Note: The controversies could, as in this example, have a significant impact on the Sustainability score. 30

31 How to Aggregate a Portfolio Sustainability Score All the necessary data to calculate the aggregated portfolio Sustainability score are now available We assume here that the investment is 50/50 in the two stocks Oil & Gas Retail SSSSSSSSSSSSSSSSSSSSSSSSSSSS SSSSSSSSSS iiiiiiiiiiiiiiiiiiii = 4455, 8888 SSSSSSSSSSSSSSSSSSSSSSSSSSSS SSSSSSSSSS iiiiiiiiiiiiiiiiiiii = 5544, 5555 PPPPPPPPPPPPPPPPPP SSSSSSSSSSSSSSSSSSSSSSSSSSSS SSSSSSSSSS = SSSSSSSSSSSSSSSSSSSSSSSSSSSS SSSSSSSSSS ssssssssss xx WWWWWWWWWWW ssssssssss PPPPPPPPPPPPPPPPPP SSSSSSSSSSSSSSSSSSSSSSSSSSSS SSSSSSSSSS = 45,85 xx 0, ,55 xx 0,50 = 5555,

32 A Fund Portfolio with Only Two Stocks Fund Category: Global Large-Cap Value Equity Retail 100 Oil & Gas 100 s 70 o s Sustainability Score: 54,55 45 o 45,85 :Sustainability Score Morningstar Sustainability Score for the fund: 50,2

33 Funds Within the Category: Global Large-Cap Value Equity The Sustainability score is now calculated and the only thing left to do is to compare the fund with its peers in the category. In the table below the funds in the category are listed in descending order. Sustainability Scores for funds in the category Global Large-Cap Value Equity Our Fund Funds Funds Funds Funds

34 Funds Within the Category: Global Large-Cap Value Equity Below we can see the span of the peer group s Sustainability Scores, which is populated from the table on previous slide. Span of Sustainability scores within the fund category 40% 35% 30% Sustainability Score for our example fund % 20% % 10% % 0% Bottom 10 % 22.5 % 35 % 22.5 % Top 10 % As we can see our fund is in the lower half of the peer group. 34

35 Morningstar Sustainability Scores and Rating The Morningstar Sustainability Rating will be visually presented with symbols. The symbols will be globes as seen below. Thus our example fund would receive two globes. However if the underlying stocks in the fund had 0 in Controversy Score, the funds Sustainability Score would have been 62.2 and thus resulted in five globes. Sustainability Score for our example fund 50.2 Sustainability Score with zero Controversy

36 GLOBESTARATING 36

37 Italian Top 10 Funds - Sustainability Percent Rank 37

38 How Well Do SRI-Funds do on Sustainability Rating? Starating 38

39 Average Sustainability Percent Rank Across Fund Companies Source: Morningstar Direct 39

40 Where can one find the? 40

41 In research and analysis tools (Morningstar Direct) 41

42 In Fund ESG Reports 42

43 On public websites 43

44 For more information: Or contact your local Morningstar office