What is Morningstar Sustainability Rating?

883 reads · Last updated: December 5, 2024

The Morningstar Sustainability Rating is a reliable and objective way for investors to see how thousands of mutual funds and exchange-traded funds (ETFs) are meeting environmental, social, and corporate governance (ESG) challenges.Introduced in 2016, Morningstar’s Sustainability Ratings are expressed using a five-globe system indicating whether the investment is at the bottom end of the rating for its industry group (one globe), below average (two globes), average (three globes), above average (four globes) or at the high end (five globes) of its industry group rating. Investors can find Morningstar’s sustainability ratings on the right-hand side of morningstar.com’s fund quote pages. The Morningstar Portfolio Sustainability Ratings are issued monthly.

Definition

The Morningstar Sustainability Rating is a reliable and objective way for investors to understand how thousands of mutual funds and exchange-traded funds (ETFs) address environmental, social, and governance (ESG) challenges. The rating uses five globe icons to indicate a fund's performance within its industry group, ranging from one globe (bottom) to five globes (top).

Origin

The Morningstar Sustainability Rating was introduced in 2016 to help investors assess funds' ESG performance. As ESG investing gained popularity, Morningstar developed this tool to meet the demand for sustainable investment information.

Categories and Features

The Morningstar Sustainability Rating is divided into five levels: one globe indicates a fund is at the bottom of its industry group, two globes indicate below average, three globes indicate average, four globes indicate above average, and five globes indicate top performance. The rating is updated monthly to reflect the latest ESG performance of funds.

Case Studies

Case Study 1: A global equity fund received a four-globe Morningstar Sustainability Rating in 2023, indicating it outperformed most peers in ESG aspects. The fund improved its ESG score by investing in renewable energy companies and implementing strict corporate governance policies. Case Study 2: An emerging market bond fund was rated two globes in 2024, showing below-average ESG performance. The fund was criticized for investing in high carbon-emission industries, leading to its lower rating.

Common Issues

Investors often misunderstand the Morningstar Sustainability Rating as an indicator of financial performance. In reality, the rating only reflects a fund's ESG performance, not its financial returns. Additionally, ratings may fluctuate due to market changes, so investors should regularly check for updated ratings.

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