Since 1992, the Heart Rating has been the leading tool investors use to get a snapshot of socially responsible investment funds environmental, social, and governance performance.
The Heart Rating launched in 1992 as the first fund rating system that compares the breadth and depth of the environmental, social and governance criteria (ESG) used by fund managers to select the holdings. The Rating looks at a fund’s research process, screening criteria, shareholder advocacy efforts with companies, and cash investments in communities, particularly communities of color. As a snapshot, the Rating distinguishes funds that take a comprehensive approach to ESG from those that address only a few issues.
* Fund uses particular faith-based or religious screens that are not part of Natural Investments’ Heart Rating criteria.
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The Heart Rating methodology is based on manager responses to our detailed questionnaire and our analysis of fund-disclosed information in the prospectus, which identify specific avoidance and affirmative screening criteria, shareholder advocacy strategies, community investments, and the management firm’s research process. Each practice used by a fund to select holdings is weighted and scored using objective, standardized criteria and translates to a ranking that delineates the number of points, and therefore hearts, awarded. Hearts are awarded as follows:
- 81-100% quintile – 5 hearts
- 61-80% quintile – 4 hearts
- 41-60% quintile – 3 hearts
- 21-40% quintile – 2 hearts
- 0-20% quintile – 1 heart
Funds can only receive 4 or 5 hearts if they participate in shareholder advocacy and/or community investing. Funds may change their approach and so are re-rated periodically. We do not rate each holding in the funds, merely the methodology by which the manager constructs the portfolio. Financial performance is not a part of the Heart Rating.
The chart below lists funds in order of overall Rating, and also includes ratings of each of the underlying three categories of criteria so you can see where funds are strongest. Feel free to sort the columns to find the leaders and laggards in each area. Details on the scoring criteria are provided below the chart.
The Heart Rating includes over 40 ESG criteria, categorized by theme:
- “Vices” (alcohol, firearms, gambling and tobacco
- Environment, including fossil fuel and green economy sectors
- Employment practices, including wage and workplace standards, diversity and equity, and benefits
- Corporate governance, including Board diversity and independence, responsiveness to shareholders, and
- Product quality and safety
- Military contracting
- Nuclear power
- Unnecessary animal testing
- Health issues
- Community relations, including towards BIPOC communities
- International human rights
Some fund managers have absolute criteria that automatically trigger exclusion of a holding, others make determinations on a case-by-case basis, and some use a best-in-class approach to select the best company in a given sector rather than omit the entire sector. Fund managers may also proactively seek outstanding leaders in certain ESG areas or sectors, while many managers include companies that are benign – neither offensive or outstanding.
The Heart Rating weights absolute screening more heavily than a case-by-case or best-in-class approach. Affirmative screening practices that identify leaders in responsible and sustainable practices are also weighted more heavily. ESG screening represents nearly 60% of the total score.
The use of shareholder dialogue and action with company management is a direct and powerful tool for bringing about changes in corporate behavior and policy. Each fund is evaluated for participating in dialogue with companies, drafting and supporting shareholder resolutions, and engaging in public policy efforts. Funds with dedicated advocacy staff and that take leadership roles in managing industry-wide investor advocacy campaigns are rated highly. Advocacy comprises 18% of the total score.
Funds are evaluated on the impact of their cash positions. Allocations to community development financial institutions, municipal bonds in low-income and BIPOC communities, and targeted investments such as microcredit institutions in emerging markets are given high marks, while agency securities and corporate bonds score lower. Community investing comprises 18% of the total score.
Funds are evaluated on the tools and people used to make decisions about what investments to hold. Firms with dedicated personnel and proprietary issuer research are rated more highly than those using company self-reported information or external social research services or ESG indices. Research comprises 4% of the total score.