Morningstar CEO Kunal Kapoor says that despite the current political divisions, ESG will be a standard part of risk assessment in the future.
Kapoor spoke with ESG Clarity late last year about demands for ESG data, how it is used and how companies work to address low sustainability ratings. This is the third and final piece in a series from the interview.
We’re in an environment where ESG is political, and a lot of people have opinions about it is without necessarily understanding it. What are your thoughts on this? How have Morningstar and Sustainalytics been affected by action in some US states, such as allegations of an anti-Israel stance?
When it comes to sustainable and responsible investing, or the BDS [boycott, divestment and sanctions] concern in particular, open discussion on any of these topics is important. And one could argue that the politicisation of some of this stuff is good or bad, depending on your viewpoint. I just fundamentally believe the fact that it’s capturing the imagination of the public in one way or the other means that in the long term, it’s something people are starting to see as important.
We’re not trying to express a view. We’re not trying to make the value judgments — we’re trying to gather the data. And then people can make the value judgments.
There are firms that, logically, one would say probably are expressing opposing views, and the way it may manifest in the portfolio — but they might be using the same data, and it’s no different from other parts of the market. People tend to have the same sets of data, the same sets of research, but the application of it, the understanding of it and the conclusions people come to from it are different. And it’s going to be the case in ESG as well.
I can’t forecast political trends.
The train has left the station as it pertains to investors. And those who are going to care about this — their numbers are rising. They’re not going to get smaller.
If you’re looking at it from a societal viewpoint, and you’re a politician, and you believe that people should have choice and that they should have more engagement and control of their finances, it’s actually a good thing. It’s not a binary “you’re going to do this, or that,” which is how it’s often presented. It’s really about choice and empowerment. And that’s what I love about it.
Can you clarify how Sustainalytics responded to the BDS concerns? In the ESG world, that topic seems to be the third rail. No one wants to touch it, even though there are concerns on both sides of the issue.
I was involved myself in speaking with a number of the Jewish groups that had raised some concerns. And if you look at the history of Morningstar, it is one of openness and transparency. We can’t tell others to be open and transparent if we’re not open and transparent ourselves. The conversations with some of these groups were helpful. They have come to us with many ideas that they would like us to implement that upon further inspection we felt also deserved a deeper look.
An additional step we’re taking is to hire an international expert in these matters, who can help us and be super thoughtful about how we tackle some of these issues. The reality is, as I said earlier, we don’t want to make value judgments. We want to provide the data.
Part of the discussions we’ve had is to continue to be careful that we don’t cross that line. We provide the data in a neutral, unbiased fashion and that’s our goal when it comes to looking at our assumptions, our sources.
What responses have you had from companies or funds for sustainability ratings that are lower than they would like? Do you work with them to improve those?
In classical Morningstar style, when we give someone a rating that’s lower than they expect, we get a lot of complaints. That’s always the first step, followed by denial. And then we go through several stages until there’s acceptance and understanding of what we’re doing.
In many parts of our engagement in the past with asset managers and wealth managers, we’ve ended up getting them to a place where the outcomes are always better for investors.
Morningstar fought the battle on cost 20 years ago, and we fought the battle for people investing in their own vehicles 15 years ago. Those seemed like crazy battles at that time.
People realise we’re trying to do things in a way that brings consistency to the investor experience and holds [companies] accountable to the things they’re saying.
This topic is a little new for a lot of people. It requires a lot of in-depth understanding, and people are investing the time to understand how they can get better, if their ratings have been lower than they anticipated. I see really good engagement.
Where do you think we will be in 10 years on the ESG discussion?
I’m a horrible forecaster, so whatever I say take with 10 grains of salt.
My hunch, though, is this just won’t be a big deal. It will just be integrated into the way people build portfolios. It’ll be second nature, just as risk has become second nature today. When I came to Morningstar first and we said we were going to introduce risk into the star ratings, people thought we were insane. It was all about return.
ESG is a way to talk about preferences, to think about risk in the portfolio.
The level of sophistication of the data will only rise, and the amount of personalisation available to investors will only continue to be more meaningful.
On the flip side, for many companies, Morningstar included, when we try to gather our data, it’s a big learning curve. And there’s a lot of work that goes into setting up the processes and the systems that allow for the collection of that data.
In 10 years, many companies will be using the data themselves to make really interesting and good decisions about their workforces, about how to build sustainable long-term businesses. And I don’t use the word sustainable in the context of environmental, I just mean sustainable, enduring businesses. The data will actually do a lot of good for competitiveness, from an outcome perspective of companies as well.