Morningstar has announced that it has begun a formal integration of the environment, social, governance (ESG) factors into its analysis of stocks, fund and asset managers.
The firm said its equity research analysts would be employing a globally-consistent framework to capture ESG risk across over 1,500 stocks and analysts would identify valuation-relevant risks for each company using Sustainalytics’ ESG risk ratings, which measure a company’s exposure to material ESG risks, and then evaluate the probability those risks materialize and the associated valuation impact.
Also, Morningstar manager research analysts would analyse the extent to which strategies and asset managers were incorporating ESG factors as part of its new Morningstar ESG Commitment Level evaluation.
This would mean that in conducting the strategy evaluation, the analysts would assess the analytics and personnel committed to each strategy and the extent to which the strategy would incorporate those resources into the investment process.
To perform the evaluation of asset managers, analysts would also consider how clearly the firm articulated its ESG philosophy and policies, and the degree to which it has driven those policies through its culture and investment processes, the firm said.
The ESG Commitment Level evaluation of strategies and asset managers would follow a four-point scale of leader, advanced, basic, and low.
“Integrating ESG directly into the marrow of our research methodology helps us to widen the aperture of the traditional financial analysis and more precisely capture ESG risks that can exert a profound influence on long-term competitive dynamics and the sustainability of a company’s earnings,” Dan Rohr, head of equity research for Morningstar, said.
Analysts would also use Sustainalytics’ ESG Risk Ratings as the basis for identifying valuation-relevant risks, which measured a company’s exposure to industry-specific material ESG risks and how well a company was managing those risks.
Morningstar would begin to roll out the equity research rating enhancements on 9 December, 2020 and the incorporation of ESG factors would update on a rolling basis through 2021, the firm said.
