Morningstar’s Edwards: ‘An LGBTQ+ index would not have been possible a few years ago’

Assessing the Morningstar Developed Markets LGBTQ+ Leaders index

Theo Andrew

Rob Edwards

The ‘S’ in ESG is continuously overlooked by asset manager and index providers alike.

The ability to accurately track social factors has proved a huge challenge, but with improving data and renewed initiative product offering in the space looks set to grow.

The recently launch the Morningstar Developed Markets LGBTQ+ Leaders index is one such product that is looking to impact the space.

Robert Edwards (pictured), director of product management EMEA and ESG indices a Morningstar, speaks to ETF Stream about why it decided to launch the index, the challenges of accurately tracking LGBTQ+ leading companies and future product development.

Why has Morningstar decided to launch a LGBTQ+ index for developed markets?

It is about investor choice. There has been a surge in the availability of products and investment opportunities focusing on environmental considerations such as renewable energy, clean technology, and carbon footprint reduction.

However, there are fewer options for investors looking to incorporate social factors, especially those focused on issues tied to diversity, equity, and inclusion (DEI). Looking across the landscape, there were limited options for investors that want to align to companies that have strong LGBTQ+ policies and practices.

What is the aim of the index?

The goal of the new index is to highlight corporate leaders in LGBTQ+ inclusion within the context of a broadly diversified index. We do this by targeting 100 large and mid-cap stocks diversified across region and sector and selecting companies with strong policies and practices related to their LGBTQ+ workforce. The index is underpinned by data from Morningstar Sustainalytics and ExecuPride, a socially focused enterprise that harnesses data science to monitor advances and provide insights into corporate LGBTQ+ inclusion.

How is the index constructed and what makes it so innovative?

It is a mix of a high-quality underlying index with forward-looking social metrics. We start with our Morningstar Developed universe which targets the largest 85% of companies by market capitalization and then apply screening based on Sustainalytics and ExecuPride ratings. Companies that have poor scores on ExecuPride’s seven-level assessment scale or breach one of several factors from Sustainalytics are not eligible for selection. Companies are weighted by market capitalisation and capped at a 5% weight. To further emphasise LGBTQ+ leaders, companies with higher relative scores are given additional weighting.

There has never been an index product in the market tackling LGBTQ+ practices in policies on a global level. We are excited to bring such a new and transparent product in the market where we believe there is demand from investors.

What are the data challenges in creating the index, and how can these be improved?

This was an index that realistically could not have been built just a few years ago. Not only has technology improved to be able to capture the necessary data, but there has been momentum is companies publicly referencing their initiatives for their LGBTQ+ employee base. That is a trend we are hoping to continue to encourage and improve on with the launch of this index. Of course, with any new initiative like this, data will evolve, and that is why we are constantly reviewing and improving our range of sustainability indexes.

Does Morningstar plan to expand this range to cover more markets?

Potentially! We wanted to start with developed markets as we felt comparing corporates in developed markets countries is an apples-to-apples comparison, especially when thinking about large and mid-caps.

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