Dive Brief:
- Morningstar launched an index of companies Tuesday who demonstrate “strong LGBTQ+ inclusive policies and practices.”
- The Morningstar Developed Markets LGBTQ+ Leaders Index will utilize data from Sustainalytics, its ESG research, ratings and analytics arm, and ExecuPride, a data company monitoring advancements in LGBTQ+ inclusion, according to the release.
- The offering is aimed at bringing greater transparency to LGBTQ+ workplace practices and policies and how companies are incorporating them into their strategy, according to Rob Edwards, Morningstar Indexes global director of ESG product management. “While there are a number of broad socially focused indexes available in the market today, few options focus on sexual orientation or gender identity,” Edwards said in a release.
Dive Insight:
The index will use a two-step process to determine the 100 mid- and large-market capitalization stocks that make up the portfolio. First, companies are screened using Morningstar Sustainalytics’ data and research team for involvement with controversial products, compliance with the United Nations Global Compact — a nonbinding pact for businesses to align with sustainable and socially responsible practices — and for severe ESG controversies. Companies are then ranked according to ExecuPride’s seven-point assessment scale and by size.
The initial portfolio currently has the highest exposure to the financial services (22.87% of the portfolio); technology (21.93%); healthcare (15.47%); and communications services (12%) industries, according to a Morningstar paper accompanying the launch.
Morningstar Indexes and Sustainalytics President Ron Bundy said in the release that the product hopes to fill a “market need” and enable investors to target companies with leading LGBTQ+ policies “whether for values alignment, or to pursue investment opportunity, or a combination.”
Companies that score zero on ExecuPride’s assessment show no public effort or commitment to integrate diversity and inclusion into the company’s culture. The social data company gives one point to companies for “some visible effort” to evaluate diversity and inclusion and a score of two to companies with “a clear diversity and inclusion approach.” From there companies score up to seven for a clear diversity and inclusion approach with a mention of LGBTQ+ matters (three); having a LGBTQ+ employee resource group (four); officially supporting the UN Standard Conduct Tackling Discrimination against Lesbian, Gay, Bi, Trans, & Intersex People (five); having senior leaders communicate support for LGBTQ+ community and having the employee resource group leadership made public (six); and doing all of the above and having an LGBTQ+ community member or ally on the executive team (seven).
After starting with a universe of over 1,450 companies — made up of an index that includes the top 85% of the investable market cap of developed markets — 849 companies scored above a three on ExecuPride’s scale. Those companies were then ranked and whittled down to 100 accordingly.
Bundy said companies ranked on the higher end of the scale also represent the top holdings in the index and “have demonstrated direct evidence of DEI policies, initiatives and support structures as well as a prominence of LGBTQ+ representation and advocacy at the leadership level.” Morningstar said it looked to utilize a “high standard” in selecting the portfolio because even though sustainable investors have increasingly weighted DEI in portfolios, they have not signaled a willingness to sacrifice profits.
“History shows that investors need not expect lower returns for investing with DEI criteria in mind,” Morningstar said in a paper accompanying the launch. “As LGBTQ+ identities become more ubiquitous, inclusive investing will continue to develop.”
The Pride Month launch added the Developed Markets LGBTQ+ Leaders index to a social product line that also includes indexes for gender diversity, women’s empowerment and minority empowerment.
On the environmental side, Morningstar launched a set of indexes in March that targets 50% of each industry’s market cap that is doing the best on preparing for the transition to a low-carbon economy, without excluding the energy or other high-emitting sectors. At the time, Edwards told ESG Dive that Low Carbon Transition Leaders indexes target the share of investors “that want to maintain lower active risk to the market by maintaining exposure to high carbon-intensive sectors.”
