Title: What Is the Morningstar Sustainability Rating — How it Works, What It Means, and Practical Steps for Investors
Key takeaways
– The Morningstar Sustainability Rating (the “globe” rating) compares mutual funds and ETFs on environmental, social, and governance (ESG) characteristics of the companies held in their portfolios. (Morningstar)
– Ratings run from one to five globes; higher is more ESG-friendly, three globes is average, and ratings are updated monthly. (Morningstar)
– Ratings are built on company-level ESG risk scores from Sustainalytics (a Morningstar company), aggregated to the fund level, and adjusted for sovereign exposure; at least 67% of a fund’s assets must have company ESG scores to receive a rating. (Morningstar)
– The globe rating is relative to industry peers (category-relative), so the same numeric company score may imply different ESG standing in different peer groups. (Morningstar)
What the Morningstar Sustainability Rating is
The Morningstar Sustainability Rating is a fund-level ESG scoring framework introduced in 2016 to help investors compare thousands of mutual funds and ETFs by the sustainability characteristics of their holdings. It condenses company-level ESG risk assessments into a single, easy-to-read measure—one to five globes—so investors can quickly see how ESG-friendly a fund’s holdings are relative to other funds in its Morningstar category. (Morningstar)
How the rating is constructed (overview of methodology)
Morningstar derives fund sustainability ratings through a multi-step process based on Sustainalytics’ company ESG risk ratings and sovereign assessments. The process, in plain terms:
1. Company ESG risk scoring: Sustainalytics measures the degree to which unmanaged ESG issues pose a material risk to a company’s enterprise value. Companies are scored on an open-ended scale (commonly seen in a 0–50 range), with lower scores indicating lower ESG risk. Scores are calculated relative to global industry peers. (Sustainalytics; Morningstar)
2. Portfolio coverage requirement: To compute a fund sustainability score, a fund must have ESG scores for at least 67% of its assets under management. If coverage is below that threshold the fund does not receive a sustainability rating. (Morningstar)
3. Aggregate to fund level: Morningstar aggregates company ESG risk scores to the fund level by weighting each holding’s score by its portfolio weight, producing a corporate-sustainability component. For funds with sovereign exposure (bonds issued by countries), sovereign sustainability factors are calculated as well. (Morningstar)
4. Combine components and normalize: Morningstar applies weights to the corporate and sovereign components and sums them to produce a fund-level sustainability score, then rounds this score to the nearest whole number for the final output. (Morningstar)
5. Category-relative ranking → globes: The fund-level score is placed in a peer distribution (the fund’s Morningstar category) and translated into a globe rating from one (worst) to five (best); the ratings are updated monthly. (Morningstar)
Important nuances
– Relative, not absolute: Ratings are category-relative. Two funds with the same globe rating may differ in absolute ESG metrics if they sit in different peer groups. Conversely, two funds that hold identical companies can receive different ratings if they’re in different Morningstar categories. (Morningstar)
– Direction of scale: For company scores derived from Sustainalytics, lower scores indicate lower unmanaged ESG risk. For the globe rating, higher globes indicate better relative ESG profiles for a fund’s holdings. (Sustainalytics; Morningstar)
– Coverage minimum: At least 67% of AUM must have company ESG scores for a fund to receive a sustainability rating. (Morningstar)
Morningstar Star Rating vs. Morningstar Sustainability Rating
– Morningstar Star Rating: A risk-adjusted, historical performance measure (one to five stars) that compares funds on past risk-adjusted returns within a category. It is backward-looking and performance-focused.
– Morningstar Sustainability Rating (globes): A forward-looking, holdings-based measure of ESG risk aggregated from company-level ESG risk ratings (Sustainalytics). It is not a performance rating and does not predict returns.
Example: A fund can have a high star rating (strong historical risk-adjusted returns) but a low sustainability rating, or vice versa. Both metrics serve different decision purposes. (Morningstar)
What is a “good” Morningstar Sustainability Rating?
– Three globes = category average.
– Four or five globes = above-average to best-in-class ESG profile within the fund’s category (generally considered “good” to “very good”).
– One or two globes = below-average ESG profile.
Use the globe rating as a tiebreaker among otherwise similar funds, but not as the sole decision criterion. (Morningstar)
Pros and limitations
Pros
– Simple, comparable fund-level ESG signal for retail and institutional investors.
– Built from company-level risk metrics (Sustainalytics) and applied consistently across many funds.
– Helps investors tilt existing portfolios toward lower ESG risk without restricting to dedicated SRI funds. (Morningstar; Investopedia summary)
Limitations
– Category-relative: A high globe rating means “better than peers,” not necessarily “low absolute ESG risk.”
– Coverage and data limitations: Funds with insufficient coverage don’t receive ratings. Data accuracy depends on company disclosures and Sustainalytics’ methodology.
– Different ESG providers diverge: MSCI, Bloomberg, Refinitiv, and the credit-rating agencies use different approaches and can give different scores for the same company. Cross-checking is prudent. (Investopedia; Sustainalytics)
Which firms provide ESG ratings?
Common providers include:
– Morningstar (via Sustainalytics)
– MSCI
– Bloomberg
– Refinitiv (now LSEG)
– Credit rating agencies’ ESG/reporting offerings: Moody’s, S&P Global, Fitch
Each uses different data inputs, definitions, weights, and methodologies, which explains rating divergences. (Investopedia)
Which companies have strong ESG scores?
Morningstar and Sustainalytics publish top-rated ESG companies lists. For example, U.S. firms in Sustainalytics’ 2024 global top-50 included the Inter-American Development Bank, Keysight Technologies, and Universal Display. No single firm universally “has the best ESG report” — it depends on the scoring approach and which ESG factors you prioritize. (Sustainalytics; Morningstar)
Practical steps for investors — how to use the Morningstar Sustainability Rating
1. Start with your investment goals:
– Decide whether ESG characteristics are an objective (impact) or a preference (risk tilt).
2. Look up the fund’s globe rating:
– Use Morningstar.com, the fund company’s site, or your brokerage. Confirm the rating is current (ratings update monthly). (Morningstar)
3. Check coverage and methodology:
– Verify at least 67% coverage of AUM (if rated). Read the fund’s Morningstar sustainability summary or methodology page to understand what was included or excluded. (Morningstar)
4. Compare within the category:
– For apples-to-apples comparisons, compare globe ratings among funds in the same Morningstar category, and use globes as a tiebreaker when costs, strategy, and historic performance are otherwise similar.
5. Inspect holdings and exclusions:
– Look at a fund’s top holdings and sector/country exposures. A high globe rating can come from low exposure to high-ESG-risk industries, but the exact holdings matter for alignment with your values and risk tolerance.
6. Combine metrics — don’t rely only on globes:
– Consider fees, historical performance (star rating), manager quality, turnover, and active ownership/stewardship policies (voting and engagement).
7. Cross-check with other ESG providers and the fund’s own disclosures:
– If ESG is central to your decision, review MSCI, Bloomberg, or the fund’s sustainability report to get different perspectives.
8. Monitor over time:
– Because holdings and companies’ ESG scores change, review the globe rating periodically and after major portfolio changes. Morningstar updates monthly. (Morningstar)
When to use the globe rating vs. an SRI or ESG-labeled fund
– Use the globe rating if you want to tilt a broad fund universe toward lower ESG risk while preserving diversified exposure (e.g., choosing between index funds).
– Use SRI/ESG-labeled funds if explicit exclusions, screening, or intentional impact strategies matter to you—keeping in mind these products can be a small subset of available funds and may have different tradeoffs. (Investopedia; academic references)
The bottom line
The Morningstar Sustainability Rating provides a convenient, category-relative measure of how ESG-friendly a fund’s holdings are, using Sustainalytics’ company-level ESG risk ratings aggregated to the fund level. It’s a useful input to fund selection but should be combined with traditional performance, cost, holdings review, and other ESG data sources. Understand that the globe rating is relative to peers and depends on data coverage and the underlying ESG provider’s approach.
Sources and further reading
– Morningstar. “Morningstar Sustainability Rating: Methodology.” Morningstar.
– Sustainalytics. “2024 ESG Top-Rated Companies.”
– Maria‑Teresa Sorrosal‑Forradellas et al., “A New Rating of Sustainability Based on the Morningstar Sustainability Rating.” European Research on Management and Business Economics, Vol. 29, No. 1 (2023).
– Investopedia. “Morningstar Sustainability Rating” (summary and examples).
– Morningstar. “Sustainability and Quality Go Hand in Hand.” (research note)
– Yahoo! Finance / Morningstar fund pages (example: Fidelity Total Market Index Premium, FSTVX).
If you’d like, I can:
– Compare the sustainability ratings of two specific funds you’re considering.
– Walk through how to find and interpret a fund’s sustainability detail page on Morningstar.
– Show an example of recalculating a portfolio sustainability tilt using globe-rated funds. Which would you prefer?