©2018 Morningstar, Inc. All rights reserved.
Nikolaj Holdt Mikkelsen, CFA, CIPMChief Analyst & Head of Office, Morningstar Denmark
ESG Ratings, 9 July 2018, CSR Link
Morningstar Sustainable Investing Initiative
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Morningstar Sustainability Ratings and analytics are integral to
our mission of creating great products that help investors reach
their financial goals. We want to provide a new lens that
investors, advisors, and asset managers can use to evaluate how
well the companies in a fund are managing their environmental,
social, and governance risks and opportunities so they can put
their investments to work in ways that are meaningful to them.
Our mission is to create great products that help investors reach their financial goals.
Morningstar Sustainable Investing Initiative
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Has Investor Interest Really Been Growing?Morningstar Sustainable Investing Initiative
g 1,712 UNPRI signatories globally with $63 Trillion in Assets Under Managementg $23 Trillion in Sustainable Investments Globally: 25% growth since 2014g $8.72 Trillion in Sustainable Investment Assets in the U.S.: 33% growth since 2014g $5.57 Trillion in Retail Assets; 96% growth since 2014
g Newer wealth holders think differently: ESG allows managers reach new audiences
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Products Energy/Chemicals WeaponsTobacco products Nuclear power Controversial weapons
Alcoholic beverages Thermal coal Military contracting
Gambling Pesticides Small arms
Palm oil Animal testing
Socially Responsible Investing – traditional values-based approach that used exclusionary screening to avoid exposure to certain types of products or industries
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Environmental Issues Social Issues Governance IssuesClimate change and carbon emissions
Product safety Board composition
Air/water pollution Data protection/privacy Audit committee structure
Energy efficiency Gender and diversity Executive compensation
Water scarcity Employee engagement Lobbying
Waste management Supply chain management Political contributions
Deforestation Labor standards Bribery and corruption
Sustainable Investing is a long-term orientedinvestment process that incorporates Environmental, social, and governance factors
Source: Environmental, Social, and Governance Issues in Investing, CFA Institute, 2015.
• Leading provider of independent investment research
• Serves individuals, advisors, asset managers, retirement plan sponsors and providers, and other businesses around the world
• Deep commitment to bottom-up research: Thirty years of local expertise, global research coverage, and a deep analyst bench
• Transparent methodologies to track, research and rate more than 250,000 managed products
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Morningstar Sustainable Investing Initiative
• Global leader in independent ESG research and analysis
• Serves investors and financial institutions around the world
• Deep commitment to bottom-up research: Over twenty years of local expertise, global research coverage, and highly experienced analyst team
• Transparent methodology providing up to 70 indicator level scores at the company level for over 4,000 companies
Bottom-up research. Transparent methodologies. Global reach. Independent voice.
Two firms, one commitment to research
• Ratings are generated on the basis of a weighted balanced score card.
• Companies are assessed within a sector specific context.
• Transparent assessment of companies based on up to 70 indicators per sector.
• Analyst provides rating commentary based on key ESG issues.
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Company ESG Research - Two Main Signals:Sustainalytics
Company ESG RatingsOverall ESG Score (0–100)
Environmental Score
Social Score
Governance Score
Company Controversy AssessmentsBased on 10 issue areas
Scored from 1 (low) – 5 (high)
Outlook
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Sustainalytics Company Report – Controversies Mærsk
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Measure how well a portfolio's holdings manage ESG risks and opportunitiesMorningstar Sustainable Investing Initiative
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100
0
100
0
65
45
Retail Oil & Gas
70s 70o
s oSustainability Score: 55 46,6 :Sustainability Score
- Illustrated with a fund portfolio with only two stocks Sustainalytics’ company ESG scores are normalized across sectors
𝑬𝑬𝑬𝑬𝑬𝑬𝒏𝒏𝒏𝒏𝒏𝒏𝒏𝒏. = 𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝑬𝑬𝑬𝑬𝑬𝑬𝒏𝒏𝒏𝒏𝒏𝒏𝒏𝒏. = 𝟓𝟓𝟓𝟓,𝟔𝟔𝟔𝟔s
o
Morningstar Sustainability Fund Score: 50,8
Sustainability Scores for funds in the category Global Large-Cap Value Equity
Funds 1-10 58.0 57.8 57.6 57.0 56.8 56.6 56.4 56.3 56.1 56.0
Funds 11-20 55.4 55.2 54.8 54.5 54.3 54.0 53.8 53.6 53.5 53.3
Funds 21-30 52.0 51.8 51.7 51.6 51.5 51.4 51.3 51.0 50.8 50.7
Funds 31-40 50.5 50.3 50.2 49.7 49.5 49.1 48.8 48.5 48.2 48.0
Funds within the category: Global Large-Cap Value Equity
Our Fund
• 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.
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• As with the Morningstar Rating the Morningstar Sustainability Score 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 62.8 and thus resulted in five globes.
Sustainability Score forour example fund
50.8
48 – 48.8
49.1 – 51
51.3 – 54.5
54.8 – 56.8
57 – 58
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Measure how well a portfolio's holdings manage ESG risks and opportunitiesMorningstar Sustainable Investing Initiative
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Using the Morningstar Sustainability Ratings & ESG Metrics
The Morningstar Sustainability Score, Rating, Methodology Paper etc. available for free on our global websites to help investors better understand the sustainability performance of companies held in a fund portfolio
Investors, advisors and institutions may use the metrics:
• To build portfolios of sustainable investments
• To learn how well an existing portfolio is doing on sustainability
• To assess how well an intentional sustainable fund is living up to its mandate
• To expand the universe of funds acceptable to a sustainable investor
• To set a sustainability threshold for funds, as part of fund-selection criteria
• To ask questions of asset managers about their ESG process
• To report to clients on the sustainability performance of their portfolio
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NameScore -
ESGScore -
EnvironmentalScore - Social
Score - Governance
Sustainalytics Peer Group
Sustainalytics Peer Group Classification
Company Highest Controversy Level
Company Highest Controversy Topics
Coloplast A/S B 84 70 85 72 Healthcare Industry Leader Moderate Customer
Novo Nordisk A/S B 82 70 86 76 Pharmaceuticals Industry Leader Significant Customer
ISS A/S 71 69 71 64 Commercial Services Industry Leader Low Employee
SAS AB 71 73 59 73 Transportation Industry Leader Moderate Customer
Nordea Bank AB 70 63 68 73 Banks Industry Leader Moderate Business Ethics,Customer
Chr. Hansen Holding A/S 68 72 57 68 Chemicals Industry Leader None
Danske Bank A/S 66 64 65 64 Banks Outperformer Significant Business Ethics
GN Store Nord A/S 63 45 61 78 Healthcare Outperformer None
Novozymes A/S B 63 67 51 66 Chemicals Outperformer Low Business Ethics,Governance
Vestas Wind Systems A/S 63 62 62 59 Electrical Equipment Outperformer Moderate Society & Community
Orsted A/S 63 62 65 54 Utilities Outperformer Low Social Supply Chain,Customer
Carlsberg A/S B 62 63 59 56 Food Products Outperformer Moderate Business Ethics,Employee,Customer
Pandora A/S 59 58 62 56 Textiles & Apparel Average Performer None
H. Lundbeck A/S 58 62 58 48 Pharmaceuticals Average Performer Significant Customer
William Demant Holding A/S 55 49 62 46 Healthcare Average Performer Low Business Ethics
A. P. Moller Maersk A/S 54 45 57 63 Transportation Average Performer Significant Operations
G4S PLC 53 56 46 60 Commercial Services Average Performer Severe Society & Community
FLSmidth & Co. A/S 53 48 49 65 Construction & Engineering Average Performer Low Customer
DSV A/S 53 46 55 56 Transportation Average Performer Low Customer
SimCorp A/S 51 47 49 62 Software & Services Average Performer None
Topdanmark A/S 51 52 50 51 Insurance Average Performer Low Customer
Tryg A/S 50 50 55 48 Insurance Average Performer None
Jyske Bank A/S 50 48 40 60 Banks Average Performer Moderate Business Ethics,Customer
Company ESG Summary – Danish Equities
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Highlights in a Broader Context
60 5954
4639
48 4640
48 45
0
10
20
30
40
50
60
70
Sustainability Score65 63 61
5043
5155
42
5349
0
10
20
30
40
50
60
70
ESG Score
5
4
7
4 43
9
1
65
0123456789
10
Controversy Score
61 59 6053
4654 57
43
53 52
0
10
20
30
40
50
60
70
Environmental Score
6863 60
5045
51 5444
53 50
0
10
20
30
40
50
60
70
80
Social Score65 63
59
4642
4650 49
5548
0
10
20
30
40
50
60
70
Governance Score
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How Well Does SRI-Funds Do Within ESG-Rating?
Fund Portfolio
Sustainability Score
Sustainability
Percent Rank in
Category
Morningstar
Sustainability Rating
Globes
Sparinvest INDEX DJSI World KL 55 4 High 5Maj Invest Global Sundhed 50 12 Above Average 4Nykredit Invest Engros Glb Akt Basis ESG 52 13 Above Average 4Nykredit Invest Engros Eurokredit SRI 55 14 Above Average 4Nordea Invest Global Stars 51 15 Above Average 4Nykredit Invest Euro Virksomhedsobl SRI 54 20 Above Average 4Nykredit Invest Bæredygtige Aktier 51 21 Above Average 4Nordea Invest Nordic Stars 57 22 Above Average 4Danske Invest Engros Global Restricted 50 23 Above Average 4Nordea Invest Engros Int. Aktier - Etisk 50 27 Above Average 4Nordea Invest Engros Abs Return Eq II Et 50 37 Average 3Sydinvest Verden Etik KL W DKK 50 40 Average 3Danske Invest KlimaTrends KL 51 45 Average 3Wealth Invest AKL SEB Gl Aktier SRI P 49 45 Average 3Nordea Invest Emerging Stars 45 50 Average 3Nykredit Invest Engros Glb Aktier SRI 49 55 Average 3Nykredit Invest Globale Aktier SRI 49 55 Average 3C WorldWide Globale Aktier Etik KL 48 58 Average 3Nordea Invest Klima og Miljø 49 62 Average 3Danske Inv Eng Euro IG Corp Bds Rest KL 51 69 Below Average 2BankInvest Virksomhedsobl IG Etik A 51 72 Below Average 2BankInvest Basis Globale Aktier Etik A 48 73 Below Average 2Investin K Invest Low Carbon Global Eq 49 79 Below Average 2
Avg. 51 40 3,3
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Any link between sustainability and performance?
R² = 0.0024
30
35
40
45
50
55
60
65
70
0 10 20 30 40 50 60 70 80 90 100
Port
folio
Sus
tain
abili
ty S
core
Total Return 3 Yrs. Percent Rank
R² = 0.005
0
2
4
6
8
10
12
14
0 10 20 30 40 50 60 70 80 90 100
Port
folio
Con
trov
ersy
Sco
re
Total Return 3 Yrs. Percent Rank
49.2 49.3 49.5 49.2 49.0
0.010.020.030.040.050.060.070.080.090.0
100.0
1 2 3 4 5
Morningstar Star Rating
Sustainability Score
5.6 5.6 5.6 5.4 5.2
0.01.02.03.04.05.06.07.08.09.0
10.0
1 2 3 4 5
Morningstar Star Rating
Portfolio Controversy Score
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Characteristics of intentional and mainstream funds
Intentional ctr. Mainstream funds – European Domiciled Funds
3.22 3.27
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Star Rating
Mainstream Intentional
49.1 52.0
-
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
Sustainability Score
Mainstream Intentional
5.54
4.64
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Controversy Score
Mainstream Intentional
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Controversy - Coloplast
Based on results for European Domiciled Funds
100m Sprint
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10.75
10.81
10.78
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Morningstar Landingpage: http://www.morningstar.com/company/sustainability
Nikolaj Holdt Mikkelsen, CFA, [email protected] +45 33 18 60 10
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New Carbon metric - Why Carbon?
gInvestors and Scientists agree
gClimate change is a risk and an opportunitygInvestors are increasingly looking to manage carbon risk in their portfolios
gWorld Leaders agreegGlobal warming has to be contained under 2 degrees C
gIncrease in national pledges to reduce emissions
g170 countries ratified COP21 agreement in 2015 (UN United Nations Climate Change Conference)
gRegulatory and industry pressures mount
gFrench Energy Transition law gTCFD
gFossil fuel divestment rising globally
gIndividuals, foundations and endowments joining Divest-Invest coalition
gInvestors want to make social and environmental impact
gEnvironmental issues drive interest to sustainable and impact investing
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Investors Taking action against climate change
DECARBONIZING
g Global Agreement: 174 of 197 Countries agreed to keep global temperature from rising by more than 2 degrees Celsius during COP21 (UN Conference on climate change)
Pension Plans Respond: low carbon mandates g AP4: $17 bn global equity portfolio changed
policy benchmark to low carbong FRR: invested $4 bn into low carbong UK EAPF: invested $500kg CalSTRS: invested $2.5 bn
DIVESTING
g Divest-Invest Coalition unites individuals, endowments and foundations with the total AUM of $4.6 trillion in a pledge to divest out of fossil fuels and invest into renewable energy
Pension Plans Respond by divestment: g Norway Pension Fund / Norges Bank (Coal)g UK local authorities (Southwack, Waltham
Forest, Hackney)g Church of England (Coal and tar sands)g SF Employees Retirement Fund
DISCLOSING RISK
g Growing Climate Related Disclosure: BlackRock, Vanguard and State Street committed to pressuring companies for better climate-risk disclosure
g Task Force on Climate-related Financial Disclosures (TCFD) : driving voluntary and consistent climate-related financial risk disclosures in mainstream filings
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Morningstar Low Carbon Designation
g The low carbon designation helps investors easily identify low-carbon funds across the global universe and encourages funds to minimize their carbon risk – it’s not a rating
g The “low” carbon-risk threshold is consistent with Sustainalytics’ threshold for a low carbon-risk company; it represents unmanaged and unmanageable carbon risk inherent in a firm’s operations
g Exposure to fossil fuels is the biggest source of carbon intensity; funds with less than 7% of assets are underweight fossil fuels relative to a global universe
Carbon Risk Score (12 Month Average)
High Intensity Fossil Fuel Involvement
(12 Month Average)
Funds must have acarbon risk score < 10
Funds must have<7% exposure tofossil fuels
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Carbon SAL Fund Component
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Why Morningstar’s carbon metrics?
g A unique Carbon Risk Score, which moves beyond carbon footprinting to an assessment of the carbon risks and opportunities embedded in a portfolio
g Carbon metrics covering more than 30,000 funds and managed portfolios across the global Morningstar database integrated with the vast financial data across Morningstar platforms
g An in-depth set of more than 70 portfolio carbon metrics
g Reaches a broad audience of more than 10 million investors globally
g Helps investors achieve positive asset societal and environmental impact by combating climate change
g Helps asset managers tell their story on successful de-carbonization and fossil fuel divestment using Morningstar’s Low Carbon Designation via ESG Essentials
g Supports Morningstar’s goal to provide a comprehensive sustainability solution