Since 1992, the Heart Rating has been the leading tool investors use to get a snapshot of Socially Responsible Investing (SRI) mutual funds’ Environmental, Social, and Governance (ESG) performance.
As there are no universal ESG standards, funds use varied criteria, formats, and language to describe their approach. Some may screen out only tobacco companies, some incorporate numerous avoidance and affirmative screens, while others engage in shareholder advocacy and community development investing.
To address this diverse continuum, the Rating uses objective, standardized criteria to award funds (1 heart) to (5 hearts), similar to the Morningstar® rating that measures financial performance. The Rating provides an overview of the breadth and depth of social responsibility criteria applied by each fund, but it does not evaluate each holding within a fund, so investors are urged to consult a fund’s website, quarterly reports, and annual reports to review its holdings.
The Rating methodology, based on a questionnaire and prospectus information, addresses avoidance and affirmative screening, shareholder advocacy, community investing, and the firm’s research process.
The manager’s application of each element is weighted and scored, and then the funds are ranked. Those in the lowest percentile group (0-20%) are awarded (1 heart), those in the highest percentile group (81-100%) (5 hearts). It is not uncommon for funds to rate differently over time given changes in their social responsibility policies. The chart below lists funds in order of overall Rating, and also includes ratings of each of the underlying three categories so you can see where funds are strongest.
The Rating does not include any consideration of financial performance.
A fund could earn (5 hearts) from NI and still have a poor financial track record, while a fund with a (1 heart) or (2 hearts) rating that addresses a limited number of social issues may be a very desirable investment to build a diversified portfolio of SRI mutual funds, or it may address issues of special relevance to a particular investor, such as religious values. Investors would be wise to discuss these variables with a financial professional to assure that you have a good match for your personal social criteria, risk tolerance, and financial expectations.