How Advisors Can Explore Sustainable Investing Using Morningstar Advisor Workstation

Some 77% of individual investors are interested in allocating their portfolios to companies or funds that consider both returns and positive environmental, social, and governance impact, according to research by Morgan Stanley Wealth Management.  

Despite this interest, 52% of global investors say they have limited knowledge of sustainable investing and 43% lack financial advice. Meanwhile, 58% of global investors are likely to select a financial advisor or investment platform based on their sustainable investment offerings. This creates an opportunity for financial advisors. 

Morningstar is committed to offering a wide range of data and analytics for investors of every stripe, including the ESG characteristics of a wide array of securities, financial products, and other investments. These are important for values-based clients and for those seeking to avoid particular risks.  

Advisors can research many of these on Morningstar Advisor Workstation, which includes ESG data points, sustainability reports, and an interactive client preferences questionnaire. These features allow advisors to analyze sustainability factors in a client’s portfolio with respect to risk and return. 

Below are some of the features you may find useful for sustainably minded clients. 

Financial advisors have several options to analyze sustainability when performing research in Advisor Workstation. The broad research categories for funds and stocks are illustrated below.

Sheryl Rowling, editorial director for financial advice, notes that “ESG ratings are especially important for advisors to consider when investing on behalf of clients. Investments with higher ESG ratings mean that the issuers are minimizing certain risks that aren’t necessarily captured in traditional financial metrics. Whether or not your clients are concerned with doing good for the world, ESG consideration in investing means lower risk.” 

Outlined below is a breakdown of important sustainability metrics found in Advisor Workstation. 

• Morningstar Sustainability Rating: A measure of how well the holdings in a portfolio are managing their ESG risks and opportunities relative to their global Morningstar Category peers. The rating is a holdings-based calculation using company-level ESG analytics from Sustainalytics, a leading provider of ESG research. It is calculated for managed products and indexes globally using Morningstar’s portfolio holdings database. 

To receive a Sustainability Rating, all scored funds within a category are ranked by their Historical Portfolio Sustainability Scores and divided into five groups, based on a normal distribution as described below, and depicted by a number of globes:

• ESG Risk Rating Assessment: Morningstar’s ESG Risk Assessment is a visual representation of the ESG Risk Categories on a 1 to 5 scale. This is a new rating that stock investors can use to measure the degree to which ESG risk could impact a company’s financial performance. The rating was developed from the Sustainalytics ESG Risk Rating. This measure is an absolute measure of risk. The scores and ratings are comparable across different issues, companies, and industries. Exhibit 4 demonstrates this depiction. 

Apart from being in each corresponding universe and viewing data points, there are other ways to screen for securities with particular sustainability characteristics. Advisors can screen funds and stocks under Sustainability Database views. These can be accessed by using the advanced search functionality. Similarly, in the fund universes, there is a screener that facilitates screening for sustainable funds, as shown below. 

Exhibit 6 shows the Product Involvement categories that are popular in investor decision-making. This exhibit also illustrates the Advisor Workstation Field Name that should be used in Advanced Search to account for product involvement in funds. These criteria are under the Sustainability – Portfolio Product Involvement view, as listed in Exhibit 1. 

Advisors can also generate sustainability reports. The ESG report options for funds are seen below. 

A Sustainability Report provides a summary of the funds with respective sustainability scores. This report also gives a breakdown of the holdings with regard to sustainability. In total, 20 holdings are highlighted with portfolio weight, ESG data, and accompanying risk classifications. The 20 fund holdings are pulled from four categories: largest holdings, best/worst ESG risk scores, and worst controversy levels. 

A carbon report provides a fund analysis for its use of carbon and fossil fuel involvement. 

Lastly, the Advisor Workstation has an interactive ESG client questionnaire. As the client progresses through the 14 scenarios, they can realistically set the weight of their portfolio based on the values that matter to them. Exhibit 8 shows the values clients can choose from in the questionnaire.