# Morningstar Sustainability Rating: Definition and How It Works

## What Is the Morningstar Sustainability Rating?

The Morningstar Sustainability Rating is a framework for comparing thousands of mutual funds and exchange-traded funds (ETFs) based on [environmental, social, and governance (ESG)](https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp) standards.

Introduced in 2016 and updated since, the Morningstar Sustainability Rating uses five “globes” to indicate where a fund stands regarding ESG in its industry group, from one at the bottom to three (average), to the five globes (the highest). The ratings are issued monthly.

### Key Takeaways

*   The Morningstar Sustainability Rating helps investors evaluate funds based on environmental, social, and governance (ESG) characteristics.
*   Ratings are expressed using a five-globe system, with one globe being the lowest score and five globes the highest.
*   Sustainability ratings are based on the degree to which the value of a fund’s holdings is at risk because of ESG factors.
*   Each company in the portfolio is graded on a scale of 0 to 100 relative to its industry peers.
*   At least 67% of a portfolio’s assets under management must have a company ESG score for the portfolio to obtain a sustainability score.

## Understanding the Morningstar Sustainability Rating

Morningstar developed its rating system in part because of the dramatic increase in importance given [sustainability](https://www.investopedia.com/terms/s/sustainability.asp) in investment decisions.

> **Important**
>
> Companies are rated relative to their global peers, meaning two firms with the same score but belonging to different peer groups may not have equivalent ESG performance.

The ratings are based on research by Morningstar’s Sustainalytics firm and its ESG risk ratings, which measure how much risk to a company’s enterprise value is related to ESG factors. Each company in the portfolio is graded on an open-ended scale relative to other firms in its global industry peer group. Scores typically range from 0 to 50—the lower the score, the better.

### 67%

To receive an ESG score, at least 67% of a portfolio’s assets under management must have a company ESG score.

## Rating Methodology

Morningstar’s sustainability ratings are derived through a five-step process:

1.  **Determine the fund’s suitability for a rating**: At least 67% of the companies in the portfolio’s [assets under management](https://www.investopedia.com/terms/a/aum.asp) must have an ESG score for the portfolio to get a sustainability score. The Morningstar Sustainability Rating takes the portfolio score and subtracts points if the company has had ESG-related events warranting it. These could include oil spills, discrimination lawsuits, or other notable ESG-negative circumstances.
2.  **Calculate corporate and sovereign sustainability scores**: Two distinct assessments are used to determine corporate and sovereign sustainability scores. The corporate sustainability score represents how much a company’s value is affected by ESG factors. The greater the ESG risks a company has, the more negatively it impacts its sustainability score. The sovereign sustainability score assesses the risk associated with a country’s socioeconomic condition and whether it manages its resources sustainably. Countries with significant social inequalities, inadequate infrastructure, or a lack of natural resources get a higher score, which signifies a poorer sustainability status.
4.  **Calculate the historical scores for corporate and sovereign sustainability**: Altogether, a fund that primarily invests in countries with poor sovereign sustainability scores or a company with a high corporate sustainability score generally receives a lower score on the overall sustainability risks in the fund’s investment decisions. The third step is to calculate the weighted average of the previous 12 months of each fund’s score, with more recent outcomes given more weight.
5.  **Rank each fund’s corporate and sovereign historical sustainability scores**: Each is rated as compared with all scored funds in the same Morningstar category. To get ranked, at least 30 funds in that category must be eligible for a score.
6.  **Assign ratings**: Morningstar then assigns ratings for corporate and sovereign sustainability based on where each fund ranks within its category, with the scores breaking down as follows:

Finally, Morningstar adjusts the corporate sustainability and sovereign sustainability ratings by weighing each factor and then sums up their weighted scores. The result is rounded to the nearest whole number to produce the fund’s final sustainability rating.

## Morningstar Star Rating vs. Sustainability Rating

According to Morningstar, funds with higher sustainability ratings tend to have higher-quality holdings. They are more likely to be favored by Morningstar analysts, be less volatile, and have more exposure to financially healthy companies with [economic moats](https://www.investopedia.com/ask/answers/05/economicmoat.asp).

However, a fund could have a high star rating and a low sustainability rating. For example, Fidelity’s Total Market Index Premium fund has a four-star rating for its risk-adjusted returns. Morningstar’s analyst report called this fund “a great choice for diversified exposure to U.S. stocks of all sizes” thanks to its low cost and “broad, market-cap-weighted coverage of the U.S. market.” It also carried a gold rating, indicating that analysts expect the fund to outperform over a full market cycle of at least five years. However, it only had a sustainability rating of two globes out of five (below average) based on an 80% ranking in its category and a sustainability score of 45.

## Sustainable, Responsible, and Impact Investing Alternatives

Morningstar’s sustainability ratings help tilt your [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) toward sustainability without using sustainable, responsible, and impact (SRI, also known as [socially responsible investing](https://www.investopedia.com/terms/s/sri.asp)) funds as your means for doing so. SRI funds have several shortcomings: They represent a small percentage of the fund universe, and retail investors have long hesitated to put their money into them.

Using Morningstar’s ratings, then, can help retail and institutional investors choose one fund over another. If an investor is choosing between two large-cap growth funds with similar long-term performance and investment strategies, and one has a two-globe rating and the other a four-globe rating, the globe rating may then be the deciding factor.

## What Is a Good Morningstar Sustainability Rating?

The higher the rating, the better. Five globes imply that the fund’s investments are very ESG-friendly, whereas one globe is the worst score you can get. An average score is three globes, so four could be considered a good sustainability rating.

## Which Companies Provide ESG Ratings?

Morningstar isn’t the only firm to [score investments based on ESG](https://www.investopedia.com/company-esg-score-7480372). Others include MSCI, Bloomberg, Refinitiv, and credit rating agencies like Moody’s, S&P, and Fitch.

## Which Company Has the Best ESG Report?

This depends on which method you think is best for ranking ESG firms against one another. Morningstar takes its analysis from Sustainalytics, Morningstar’s ESG and corporate governance research, ratings, and analytics firm, to publish its list of the top-rated ESG companies. U.S. firms in the 2024 global top-50 list include the Inter-American Development Bank, Keysight Technologies, and Universal Display.

## The Bottom Line

Investors are paying more attention to the ESG characteristics of the firms they put their money into, looking for companies that help address climate change, treat their employees well, and do not slot much of their capital for executive pay. The Morningstar Sustainability Rating addresses these demands by telling investors how the stocks held by funds behave in these areas.

Qualifying mutual funds and ETFs are rated one to five based on how the companies they invest in rank in terms of ESG within their industry peer groups. The higher the Morningstar Sustainability Rating, the more ESG-friendly the fund.  

> **Article Sources**
>
> 1.  Morningstar. “[Morningstar Sustainability Rating: Methodology](https://www.morningstar.com/content/dam/marketing/shared/research/methodology/744156_Morningstar_Sustainability_Rating_for_Funds_Methodology.pdf).”
>     
> 2.  Maria-Teresa Sorrosal-Forradellas et al., via ScienceDirect. “[A New Rating of Sustainability Based on the Morningstar Sustainability Rating](https://www.sciencedirect.com/science/article/pii/S2444883422000146).” _European Research on Management and Business Economics_, Vol. 29, No. 1 (2023).
>     
> 3.  Morningstar. “[Sustainability and Quality Go Hand in Hand](https://www.morningstar.com/articles/798237/sustainability-and-quality-go-hand-in-hand).”
>     
> 4.  Yahoo! Finance. “[Fidelity Total Market Index Premium (FSTVX)](https://finance.yahoo.com/quote/FSTVX/performance/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAC1XEJjRtQKg_ZTd0fFF22AKnygp2O5MeovhKW-eLeDl4eUro4f33yZJk2Cplq-U2eDnaQgFWS0VxhuqZ0dTBP80bM7SExAV-FbJACSFooSTJz4EW5nJnH-qyxhu_YJlNf7gndGZ-NDi-C3jtNyWrFi5VTuzj77hhGquJS6aPuKQ).”
>     
> 5.  Morningstar. “FSTVX.”
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> 6.  Luc Meunier and Sima Ohadi, via ScienceDirect. “[Misconceptions About Socially Responsible Investments](https://www.sciencedirect.com/science/article/abs/pii/S0959652622034424).” _Journal of Cleaner Production_, Vol. 373, No. 1 (2022).
>     
> 7.  Sustainalytics. “[2024 ESG Top-Rated Companies](https://www.sustainalytics.com/corporate-solutions/esg-solutions/top-rated-companies).”