Kunal Kapoor, who has led Morningstar as CEO since 2017, said he sees much potential for ESG in winning and retaining client assets in the generational wealth transfer. Younger people are in many cases finding their way to investing through an interest in sustainability, he said.
Kapoor recently spoke with ESG Clarity about the opportunities in ESG and the data provider’s aspirations to make it more accessible for advisers and individual investors.
What interests you personally about ESG? And how is that reflected on the company’s approach to it?
One of the really important parts of our mission is to empower investors.
For a long time, I felt very much like I think a lot of people, perhaps at Morningstar and in the financial services industry do, which is that everybody around us cares about their investment and finance as much as we do. Somewhere along the way it dawned on me that, actually, people are not that interested, as a whole. And it’s often because they have other things to do – they’re time-pressed in other areas. For some of them, it’s daunting. For others, they’d rather spend time elsewhere. And so, the engagement that people have with their money was lacking.
I found it disappointing in many ways, because we all today, especially if you live in many Western countries, increasingly have ownership of our own retirement plans. And so to not be engaged can end up being a significant issue as you get older and cause financial insecurity issues within society as well.
What ESG has some potential to do, and why I personally am really excited about it, is that it flips that equation on its head. It is the first thing that has come about in a long time that potentially engages people with their money. And it doesn’t have to be one way or the other. As the data provider, we’re neutral in terms of how people want to use the data. But if it means that more will engage and if that means they save a little bit more and they become investors, and that leads to better outcomes for them when they get closer to retirement, when they maybe have a big life event coming along – that’s pretty awesome. And especially if you look at the data you’re seeing more young investors, you’re seeing more women embracing ESG. And a lot of that has to do with engagement.
Sometimes the ESG debate is viewed as very binary and short term. To me, this is a decades-long trend. Many of the young investors who are learning to invest and the way they become engaged is by learning about ESG, is by thinking about what their money can do for them.
And it’s true – they don’t have as much money as older generations. But you know what? In 10 or 20 years, we won’t be having that discussion. That will be a pretty important thing to look back on.
I’m excited about the fact that engagement means people will have better financial outcomes in the long run, regardless of where they fall on what they prefer or not. In that context, ESG is very motivating to me, because it has a potential to make a difference in a lot of people’s lives and be a net plus for society as well.
From your perspective as a data provider, how much more complicated is ESG data than other types of financial data? And how do you make that meaningful when there’s a lack of standardisation right now?
It’s not the standardisation that I worry about. You can get too hung up on standardisation too quickly and set an artificially low level at which companies need to report data. One of the wonderful things that’s happening in the ESG market is that the standards are being raised as investors look at it and ask for different things. You want to be careful not to go too quickly to the standardisation argument, because it assumes that a lower base is good enough. And I don’t think a lower base needs to be enough when there’s so much innovation going on and the level of disclosure is really only getting better.
Now having said all of that, I think what you alluded to is the language of ESG is complicated. It’s not as easy, and this is going to sound a little glib, but it’s an opportunity for us.
Morningstar’s core has been about taking concepts that seem out of reach for the retail investor, for the wealth manager, and changing the language so that the jargon disappears, and it feels accessible. And that’s what we want to do in the ESG space.
If you’re an adviser [we want to] give you the language that actually allows you to talk about it. So just as when you walk into a grocery store, for example, and you’re buying something, and the packaging says, “If you buy this product, you’re going be using X percentage less plastic than a competing product.” We want to do that in the investment sphere as well.
It seems like advisers have been slower to warm to the concept of ESG, but what’s changing there? What evidence is there that they’re having these discussions with clients or that there is a lot of demand from them?
Advisers haven’t needed to change in that context, because, let’s face it, the markets until recently were all just going up in a straight line for the past decade. Flows were positive. And people want to get invested. You didn’t need to have conversation about how you came to practice. But if you’re looking ahead and building a practice today that you want to grow for 15 to 20 years – those are the advisers that are starting to have the discussions. These are not short-term discussions.
Someone who is thinking about transitioning their assets – they’re not thinking about wholesale changes, and advisers who serve those clients are unlikely to engage in that context. But if you’re someone who’s building a practice focused on women today or are focused on 30-somethings and your idea is to grow that practice over the next 20 to 25 years, of course you want to engage.
One of the big opportunities for advisers, in [the US] at least, will be as the generational transfer of wealth takes place. The early evidence seems to suggest that’s often when ESG and personalised conversations take place. It’s less ESG and more broad personalisation.
Advisers tend to lose a lot of assets when there is turnover as a result of the person they’re working with having passed away or undergoing a big life event. This language of ESG is a way to change that conversation and have connectivity through generations and build on a practice in that sense.
It’s a long-term game. It’s not something that anyone should expect themselves to sort of show up overnight.