Socially Responsible Investing: How do you Manage the Managers?

Let’s say you’ve made the decision to move from traditional investments to a socially responsible fund.
How do you know if a fund you are looking to purchase is actually avoiding firearms? Are the funds
investing in oil companies? Are there ESG funds that have more comprehensive screeners compared to
others?

We will look to answer these questions and outline the resources available for you to determine which
socially responsible funds are the most responsible. There are different agencies that rate funds utilizing
their own particular methodology. Let’s take a look a three of the most prominent ESG fund and
company screeners.

Morningstar:

Morningstar has been evaluating funds and ETFs for a long time. In addition to their five-star rating
system, they’ve developed two ratings to help ESG investors: a Morningstar Sustainability rating and a
carbon metrics rating. The Morningstar Sustainability utilizes company level ESG ratings from
Sustainalitics to create a five tier or globe rating system from low to high the measures the financial risks
associated with ESG. One globe is not good, and five globes is very good.

Morningstar uses a three-step process to evaluate funds and ETFs. First, they calculate the sustainability
score for the trailing 12 months. Second, they use those scores to calculate a historical score. Third, they
create a score based on the fund’s sustainability relative to its global category. Morningstar’s rating
system is designed so that even a “good” firearm company would still receive a lower rating compared
to a tech company.

The carbon metrics rating with Morningstar works in a similar fashion to their sustainability rating, but
with a focus solely on how companies in a portfolio are prepared to handle a transition to a low carbon
economy.

MSCI:

MSCI uses a combination of technology, AI and over 200 analysts to create their ESG ratings system.
MSCI uses a seven-tier rating system on a scale of CCC to AAA. The seven-tier rating system is broken
down into Laggard (CCC – B), Average (BB -A) and Leader (AA – AAA). Like Morningstar, MSCI focuses on
ESG risk factors for companies within a portfolio. MSCI assigns a percentage of risk based on 37 ESG
categories and then creates the end score based on those percentages.

Their reports will show a company’s historical ESG scores, which ESG areas the company is a leader and
where they lag or are average. You can screen mutual funds and ETFs with MSCI’s screener.

Thompson Reuters:

Thompson Reuters partners with TureValue Labs in order to create their ESG scores. Thompson Reuters
takes ESG data and scores of over 6,000 public companies dating back to 2002 which dates back longer
than most other ESG rating companies. Thompson Reuters combines historical data with real time ESG
data create their scores. Unlike Morningstar and MSCI, Thompson Reuters screeners are for investment
professionals only. They do not have any publicly available screeners.

Hopefully, this article has cleared up some of the mystery surrounding how rating agencies rate
companies, funds and ETFs based on their ESG risks. Figure out what is most important to you and your
beliefs and then utilize these screeners to help ensure that your portfolio is in line with your values.

Derek Mazzarella, CFP® is an LPL Financial Advisor with Gateway Financial Partners based in
Glastonbury Connecticut.

Disclosure: All investing involves risk including the possible loss of principal. No strategy assures success
or protects against loss.