New Morningstar Indexes Research Uncovers Hidden ESG Risks Potentially Lurking in Investor Portfolios

Have you considered how “ESG friendly” your investment portfolio is today? Morningstar Indexes recently examined a variety of investment approaches as represented by Morningstar equity indexes. The analysis applied company-level Sustainalytics ESG Risk Ratings and Carbon Data to explore this question for its investor clients.

This analysis yielded some surprising results:

• A dividend-oriented portfolio carries nearly 20% more ESG risk than the overall market.
• A renewable energy portfolio is roughly 10 times as carbon-intensive as the global equity market.
• Value- and size-oriented portfolios may provide long-term performance advantages, but also carry higher ESG risk and carbon intensity.
• Strategies that tend to overweight utilities or industrials, such as high dividend yield, minimum volatility and infrastructure can lead to carbon-intensive, high ESG risk areas of the market.

Dan Lefkovitz, Index Strategist, Morningstar:

“There are so many different facets to sustainable investing that investors need to consider for their portfolio that it can be a difficult road to navigate. For our study, we applied company-level ESG risk insights from Sustainalytics to our broader index measures for a more holistic portfolio-level view on ESG. This led to some interesting and, for potentially for some, unexpected results.”

Kasey Vosburg, Director of ESG Research, Sustainalytics:

“As the ESG landscape becomes increasingly complex, investors need consistent and comparable ESG data to uncover hidden ESG risks within their portfolios. Sustainalytics’ ESG Risk Ratings offer a transparent, robust framework for identifying the ESG risks that can impact a company’s financial performance. As an absolute measure of ESG risk, Sustainalytics’ ESG Risk Ratings enable investors to compare Tesla to JPMorgan Chase, for example, focusing on the specific ESG issues that are most material for each company.”

Every investor is different, with different desired investment outcomes and strategies to pursue those outcomes. You may not wish to take an ESG-oriented approach to your investments, but regardless of your approach it is best to go in with your eyes open.

ESG-oriented market measures and indexes from Morningstar, powered by the leading ESG analytics and ratings of Sustainalytics, can help in this process. To speak with our experts in more detail on this new research, please reach out to Tim Benedict at tim.benedict@morningstar.com or (203) 339-1912.

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