Morningstar Direct Explore New Avenue with Sustainable Investing Julie Koska Director of Product & Project Management, Sustainability 2018 Morningstar, Inc. All rights reserved.
Agenda gesg demand gesg capabilities in Direct g4 Trends /Asset managers incorporate ESG more extensively into the investment process /Asset managers increasingly engage with companies on ESG issues /Increased need to address carbon change /Sustainable investing advisor education gdirect Cloud ESG workflow demo groadmap 2
What is ESG? 3
3 Dimensions of Sustainable Investing 4
Why is Sustainable Investing Important? 5
Sustainable Investment Growth 6
Where does Sustainable Investing Demand Come From? 7 Source: Morgan Stanley Sustainable, Responsible, and Impact Investing Trends, 2016
Trend 1: The Morningstar Sustainability Rating Measures how Asset Managers Incorporate ESG into the Investment Process Company ESG Research Sustainalytics Company ESG Scores (0 100) Controversy Scores (1 5) Portfolio Sustainability Score Morningstar Asset-weighted roll-up of company ESG scores with deductions for controversies Sustainability Rating Morningstar Portfolio Sustainability Score relative to Morningstar Category 8
Sustainability Rating Methodology Changes gincorporate Historical Sustainability Scores from the last 12 months gassign the Sustainability Rating based on Morningstar Global Categories gincrease rating threshold to 67% of portfolio assets covered gincrease peer group size threshold to 30 scored portfolios to receive Sustainability Ratings ginclude fund of funds in the calculations gchanges are effective 10/31/2018 and will be reflected in the November 8 th rating calculations 9
ESG Adoption Increases in Morningstar Cloud g Usage of ESG Fund Data increased by 366%+ in 2017 in Morningstar Cloud; momentum continues in 2018 with a 104% increase g 90+ asset managers screen, conduct due diligence, peer analysis, and market their funds based on sustainability criteria 10
Trend 2: Drive Engagement Activities with Proxy Voting Data Interconnected datasets enable sophisticated analysis on proxy voting and stewardship gmorningstar recently acquired FundVotes, a high quality proxy voting database covering over 90 Million votes across 14 years 11
Trend 3: Understand Climate Risk Using the Morningstar Low Carbon Designation 12
Trend 4: Sustainable Investing Advisor Education gonline courses (Nov 2018 Q1 2019) gworkshops/forums (ongoing) gthought leadership (ongoing) More information is available at: www.mmi-sii.org 13
Direct Cloud Demo 14
Sustainability Roadmap 15
Stay Connected to Morningstar on Sustainable Investing Topics www.global.morningstar.com/sustainableinvesting 16
Appendix 17
Overcoming Myths: Sustainable Funds and Performance Sustainable Funds have strong star ratings 18
Overcoming Myths: Sustainable Funds and Performance 19
Understand How Companies Drive Sustainability Ratings 20
Direct Cloud ESG Workflow 21
Asset Managers Screen, Research, and Conduct Peer Analysis in Direct 22
Portfolio Product Involvement Aligns Investor Values with Investments g Product Involvement for Portfolios assesses holdings exposure to: Adult Entertainment, Alcohol, Animal Testing, Contraceptives/Abortives/Stem Cells, Controversial Weapons, Fur & Specialty Leather, Gambling, GMO, Military Contracting, Nuclear, Palm Oil, Pesticides, Small Arms, Thermal Coal, and Tobacco g Product involvement addresses investor values, but is not incorporated into the Sustainability Rating 23
View and Screen ESG Company Data in Cloud 24
Examine Company Product Involvement Data in Cloud 25
Assess Key Sustainability Metrics for Model Portfolios g Produce portfolio calculations on marquee ESG data points for custom portfolios in Portfolio Editor g Customize portfolio holding weights and portfolio dates 26
ESG Ratings Analysis g Allows clients to import a client portfolio and determine the hypothetical sustainability rating and key sustainability statistics for that particular portfolio g Users can compare different portfolios to assess their sustainability levels g Settings allow the user to view the portfolio or model for different dates 27
Morningstar Global Risk Model Style Factor Exposures U.S. Large Blend category style risk signature: 5 Globe funds v. 1 Globe funds 5 Globe Funds more value-oriented, higher quality, and less risky. 5 Globe 1 Globe Valuation 0.26 0.22 Higher is cheaper Economic Moat 1.29 1.09 Higher is stronger moat Valuation Uncertainty -1-0.79 Lower is less uncertainty Financial Health 0.64 0.49 Higher is stronger financial health Ownership Risk -0.63-0.36 Lower is less ownership risk Ownership Popularity -0.05-0.18 Higher is more popular Value-Growth 0.25 0.47 Lower is more value-oriented Portfolio Size -1.43-1.29 Lower is larger cap Portfolio Liquidity 0.42 0.6 Lower is less liquid Momentum -0.19-0.07 Lower is less momentum Portfolio Volatility -0.8-0.53 Lower is less return volatility 28