Index Insights
ESG Can Be Pricey
US Equities Through the Lens of the Morningstar US Sustainability Moat Focus Index
One notable by-product of the rising importance of sustainable investing in the eyes of investors is the growing popularity of ESG-friendly stocks. And, according to Morningstar Indexes, ESG investors may want to take a closer look at valuations when determining which ESG-friendly stocks in which to invest.
The global index provider recently examined the US equity market through the lens of the Morningstar US Sustainability Moat Index, which targets stocks with low-to-medium ESG risk as determined by Sustainalytics and Morningstar Economic Moat Ratings of “wide” trading at fair value based on research conducted by Morningstar’s Equity Research team.
Individual company analysis shows that a number of companies that qualified for the Index based on ESG characteristics were disqualified due to their price-to-fair value ratios (as of October 22nd) being too high. These pricey ESG names include MSCI (2.06 price-to-fair value ratio), NVIDIA (1.65) and Home Depot (1.63).
Alternatively, some “wide moat” names with low-to-medium ESG risk which have qualified for the Index based on more reasonable valuations include Polaris (0.73), Bristol-Myers Squibb (0.85) and Alphabet (0.87).
Alex Bryan, Director, US Equity Indexes, Morningstar:
“As ESG investing enters the mainstream, stocks that exhibit strong relative ESG characteristics may start to command premium valuations, just as firms with strong businesses often do. However, it’s important to look at the whole picture. The Morningstar US Sustainability Moat Focus Index brings the mosaic together, digging deep to uncover stocks with durable competitive advantages, attractive ESG risk ratings analysis and reasonable valuations.”
Brandon Rakszawski, Senior ETF Product Manager, VanEck:
“As sustainable investment approaches continue to grow in scope and level of sophistication, we are seeing investors taking a more holistic view on ESG portfolio holdings and applying a more nuanced lens to evaluating potential investments. Valuation is just one of the important criteria, in addition to more traditional measures of ESG risk and opportunity, that investors are utilizing together to construct ESG portfolios.”
To speak with Alex Bryan, please contact Tim Benedict at (203) 339-1912 or tim.benedict@morningstar.com.
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