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Morningstar Sustainability Rating: Explained - YouTube
Channel: Morningstar Europe
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[Music]
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welcome to the Morningstar series ask
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the expo I'm Holly black with me as
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Hortense pure she's head of
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sustainability research at Morningstar
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hello hi holy so you're here today
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because you're changing the way you rate
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fund on terms of sustainability why are
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we changing this yes absolutely so maybe
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it would help to give her a bit of
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background so Morningstar introduces
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sustainability rating three years ago in
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2016 like powered by sustained ethics
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ratings so our sustained take is our
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partner and they provide company level
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ESG ratings so at the time in 2016 I
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mean it was pretty innovative that was
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the first tool available for investors
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who want to evaluate funds through a
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sustainability lens but back then we
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knew there were three years ago we knew
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that because the stability space evolved
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very quickly that mythology who was
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going to evolve as well so last year
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sustained etics introduced a new rating
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it's called the ESG risk rating right
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and for us we think I mean it really
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stands as you know the the best thinking
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in terms of how you should evaluate
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companies through assistant maintenance
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and this year we decided to adopt that
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rating so that's it that's a while so
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what are the key changes that we're
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going to say so that really two main
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changes the first one is that the new
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rating will have an increased focus on
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material ESG risk so the the old rating
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was mainly a way to evaluate how how
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well prepared companies are to handle
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the ESG issues the new rating will
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really focus on the Elia es and G issues
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that are material to a company's
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performance that's the first difference
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the second difference is that it's going
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to allow better comparability across
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sector
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so the original rating focused more on
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within industry differences
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whereas this one will consider that
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where there are sectors that face more
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ESG risk than than others for example if
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you take the oil and gas sector right
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this sector face more obviously the
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primarily environmental risk like carbon
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emissions but also other ways but the
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oil and gas sector face more risk than
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the software industry sector so we so we
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had to reflect that so how is how is
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that reflected in in the ratings was an
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example of how that's actually going to
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work in practice
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so yeah an example will illustrate that
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very well so for example if you take two
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companies shell Royal Dutch Shell and
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Microsoft obviously those two companies
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are operating two very different sectors
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one is Olin gas the other one is
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software right which means that they are
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exposed to different sets of ESG risks
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at the moment Royal Dutch Shell and
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Microsoft score exactly the same right
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so because those two companies are well
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prepared to face the ESG risk however as
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I just said you know the oil and gas
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sectors sector face more ESG rest so we
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had to reflect that right so this is
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what we're going to do so under the new
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ESG risk framework basically shell will
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have a higher ESG risk score than than
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Microsoft which means that in a
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portfolio if you hold shell the den
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shell will will contribute more to the
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portfolio's ESG risk than than Microsoft
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obviously it's still better to hold
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shell than ExxonMobil which has an even
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higher ESG risk score that would seems
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to make sense so would that make it
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easier to understand how the ratings are
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applied absolutely actually you know the
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current rating is requires a quite a
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complicated calculation so we had to
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deduct controversies we had to normalize
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course now there is none of this
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the portfolio ESD risco will just be a
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rollup of company risk scores on the
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right on an asset weighted basis so it's
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going to be very simple and transparent
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and easier to understand for investors
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and the actual scale doesn't change it's
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still one globe to five absolutely
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absolutely and the rating is continues
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to be peer group relative right so then
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each month in each amongst our global
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category you'll have a distribution of
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globes assigned to portfolios based on
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the portfolio risk score well thank you
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so much for your time Thank You Holly
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and thanks for joining us
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