Morningstar Sustainability Rating

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Morningstar Sustainability Rating

The Morningstar Sustainability Rating evaluates mutual funds and ETFs on environmental, social, and governance (ESG) characteristics to help investors compare how sustainably a fund’s holdings behave relative to peers.

Overview

  • Ratings use a five-globe scale: 1 globe (lowest) to 5 globes (highest). Three globes is average.
  • Ratings focus on ESG-related risk to a company’s enterprise value: lower company ESG risk → better contribution to a fund’s sustainability rating.
  • To qualify for a sustainability rating, at least 67% of a fund’s assets under management must have an ESG score.

How the rating is determined (summary)

Morningstar’s sustainability score draws on Sustainalytics’ ESG Risk Ratings and follows a multi-step process to translate company- and sovereign-level ESG risk into a fund-level globe rating:

  1. Eligibility check

  2. At least 67% of a fund’s AUM must have company ESG scores for the fund to receive a sustainability rating.

  3. Company and sovereign ESG assessment

  4. Corporate sustainability scores measure ESG risks that could affect firm value.

  5. Sovereign sustainability scores assess country-level risks (social inequality, resource management, infrastructure).

  6. Adjustments for material ESG incidents

  7. Known ESG incidents (e.g., major spills, discrimination lawsuits) can reduce a company’s contribution to a fund’s score.

  8. Historical weighting

  9. A fund’s monthly scores are combined into a 12-month weighted average, giving greater weight to recent data.

  10. Relative ranking and rating assignment

  11. Funds are ranked within their Morningstar category (peer group). Ratings are assigned based on relative position within the category, then corporate and sovereign components are combined into the final globe rating.

How to use the rating

  • Compare funds with similar investment strategies: when two funds are otherwise comparable, a higher globe rating indicates lower ESG-related value risk among their holdings.
  • The rating is a tool to tilt a portfolio toward more ESG-friendly holdings without switching exclusively to dedicated SRI funds.
  • It is not an absolute measure of “goodness” — it is relative to industry peers and to other funds in the same category.

Morningstar Star Rating vs. Sustainability Rating

  • Star Rating: evaluates past risk-adjusted returns (performance).
  • Sustainability Rating: evaluates ESG-related risk in holdings.
  • A fund can score highly on one and poorly on the other; both metrics evaluate different dimensions of fund quality.

What counts as a “good” sustainability rating?

  • Four or five globes indicate relatively strong ESG characteristics compared with peers. Three globes is average; one or two globes indicate below-average ESG alignment.
  • Use the rating alongside other metrics (performance, fees, strategy) and your own ESG priorities.

Other ESG rating providers

Morningstar/Sustainalytics is one provider. Other common ESG and sustainability data providers include:
– MSCI
– Bloomberg
– Refinitiv
– Credit rating agencies that provide ESG research (Moody’s, S&P, Fitch)

Bottom line

The Morningstar Sustainability Rating is a relative, peer-group-based tool that measures the ESG-related risks of a fund’s holdings. It helps investors compare funds on sustainability criteria and make more informed choices when ESG considerations matter alongside traditional metrics like performance and cost.