As ESG and other thematic strategies gain importance in the eyes of the next generation of clients, advisors will need to develop the strategies necessary to evaluate their investment options. The survey suggests that the Morningstar Sustainability rating is one of the top tools used by advisors to evaluate ESG strategies, with 22% of advisors saying it is a “very important” factor in their consideration.
Morningstar developed this tool to gauge the risks that environmental, social and governance factors may have on a particular investment strategy. A one-globe rating means a fund or company is vulnerable to potential ESG factors, while a five-globe rating means the fund represents a lower risk due to these influences. The Morningstar rating appears to be a useful surrogate for evaluating how deeply ESG factors are embedded in a company or fund manager’s approach, as it outranks many of the other factors advisors could consider.
In addition, performance remains an important factor in advisors’ evaluation process. For instance, when considering a fund manager’s brand, nearly half (45%) of advisors say fund performance is critically important. The next most common answer is third-party ratings, which are deemed critically important by just 14% of advisors. Third-party ESG ratings, by contrast, are deemed critically important by just 10% of advisors—although 57% say they are at least somewhat important.