Global Sustainable Activities Involvement Indexes
Morningstar launches the Global Sustainable Activities Involvement Indexes, which combines the United Nations Sustainable Development Goals (SDGs) with the revenue of listed companies to help investors choose investment targets that have more impact on the environment, society, and governance.
Morningstar believes that global investors have invested more than 1.2 trillion US dollars in the field of sustainable development to cope with challenges such as climate change. However, the impact is difficult to quantify, which brings difficulties to the investment selection.
Morningstar divided the new index into five themes, namely, human development, climate action, healthy ecosystems, resource security and basic needs. Only when 25% of a company’s revenue falls into these single themes will it be included in the corresponding index.
Different Themes of the Index
In terms of the impact measurement method of the index, Morningstar divides 17 United Nations Sustainable Development Goals into five themes:
- Human development: strengthen human capacity and promote social progress, including Quality Education, Decent Work and Economic Growth, Gender Equality, Industry, Innovation and Infrastructure, Reduced Inequalities in SDGs;
- Climate action: slow down the rise of global temperature, including Affordable and Clean Energy, Climate Action in SDGs;
- Healthy ecosystems: protect land, air and water resources, including Life on Land and Life Below Water in SDGs;
- Resource security: promote resource recycling, including Responsible Consumption and Production in SDGs;
- Basic needs: meet the basic needs of human beings, including Clean Water and Sanitation, Good Health and Well-being, No Poverty, Zero Hunger in SDGs;
After that, Morningstar divides the company’s revenue into 80 indicators, corresponding to the theme of impact. A company’s income can be dispersed into different themes, and then the impact of its business activities can be measured.
Different classifications of the Index
When 25% of a company’s revenue falls into a certain impact theme, the company can become a constituent of the theme index. Weight proportion of different companies is determined according to the revenue size of their corresponding themes and their market value. Following this procedure, Morningstar obtains five single impact themes:
- Morningstar Global Human Development and Resource Security Activities Involvement Index
- Morningstar Global Climate Action Activities Involvement Index;
- Morningstar Global Health Ecosystems Activities Involvement Index;
- Morningstar Global Resource Security Activities Involvement Index;
- Morningstar Global Basic Needs Activities Involvement Index;
In addition, Morningstar has also set the multi-impact theme index and the total impact index:
- Morningstar Developed Markets Sustainable Activities Participation Index;
- Morningstar Europe Sustainable Activities Participation Index;
- Morningstar Atlantic Sustainable Activities Involvement;
- Morningstar Global Sustainable Activities Involvement Index;
These indexes usually include more than two impact themes. Morningstar requires that at least 50% of the company’s revenue be related to these themes before it can be included as a constituent stock. The constituents of all indexes are adjusted semi-annually, and the weight is adjusted quarterly.
Basic Reality of the Index
Morningstar screens more than 8000 listed companies in the world and finds that only about 1300 companies’ operating income is related to the sustainable development goals, while only 313 stocks eventually entered Global Sustainable Activities Involvement Index. The new index mainly focuses on industrial (25%) and healthcare (25%). In terms of geographical location, North America (48.1%) and Europe (24.8%) account for the highest proportion.
From the performance of the index in the past few years, the average annual return of Global Sustainable Activities Involvement Index is 9.3%, lower than the Global Equities Index (10.6%) and the Global Sustainability Index (12.6%), which is in line with the characteristics of impact investment. However, when in the market drawback last year, the negative return of Global Sustainable Activities Involvement Index is also lower, which means it may work well in some circumstances.
Reference:
Targeting Impact with Indexes | Morningstar Indexes
