Morningstar Expands Social Offering with LGBTQ+ Index

The first of its kind for institutional investors, the tool was created to meet growing demand and is powered by increased data availability.

Morningstar’s recently released Developed Markets LGBTQ+ Leaders Index has looked to answer growing interest from institutional investors, with social-focused products still lagging behind environmental offerings.

The new index offers investors exposure to 100 large- and mid-cap companies showing strong LGBTQ+ inclusive policies and practices from a range of regions and sectors, adding to Morningstar’s growing suite of social indexes. Those currently include the Morningstar Minority Empowerment Index, Gender Diversity Index and Women’s Empowerment Index.

“Most of the market is predominately focused on environmental products,” Rob Edwards, Global Director of ESG Product Management at Morningstar Indexes, told ESG Investor. “We talked to a lot of institutional investors and there’s still a lack of focus on socially focused investment products in general.”

According to Morningstar, while there has been a rapid rise in environmental products and investment opportunities such as renewable energy, clean technology and carbon footprint reduction, there remain fewer options for investors looking to incorporate social factors – despite rising demand.

“There’s been such an evolution around the environmental side of indexing, [but] the social side is still much less developed, so it will be quite some time until there is more of a concrete framework,” said Edwards. “You do see institutional investors having a demand for different socially focused products, [and wanting] to focus on topics where they think they can make a difference, such as LGBTQ+ policies and practices.”

Data development

The index methodology was designed by Morningstar Indexes and is underpinned by data from Morningstar Sustainalytics and ExecuPride – which describes itself as a socially focused enterprise that harnesses data science to monitor company advancements on LGBTQ+ inclusion.

Edwards noted that improvement in data was a key factor behind the creation of the index, alongside the lack of products on the market.

“If you look at this topic in particular, there’s very little focus from an investment or investment option perspective, and quite honestly I don’t think [this index] is something we could have done three to five years ago because the data was not available,” he said.

ExecuPride scores companies between zero and seven based on data science that monitors advancements and provides insights in various regions. A score of zero reflects a lack of effort or commitment on a company’s website and in annual reports on diversity and inclusion, while a seven is awarded to companies with an LGBTQ+ or ally on their executive team, in addition to other criteria.

Fewer than 1000 companies in developed countries have so far proven eligible for the LGBTQ+ index – for which they need to score above three. Companies that scored a seven included HSBC, JP Morgan, PepsiCo and Veolia, while the most common score across all surveyed firms was four. Financial services had both the highest average LGBTQ+ inclusion score and percentage of firms scoring six or seven.

“Our new index fulfils a market need by enabling investors to tap into global companies with leading LGBTQ+ policies to pursue their objectives – whether for values-alignment, or to pursue investment opportunities, or a combination,” said Ron Bundy, President of Morningstar Indexes and Morningstar Sustainalytics.

Growing interest

For Morningstar, the results underscore what the index can achieve for both social and investment outcomes while applying “rigorous” selection criteria to ensure only companies with strong LGBTQ+ inclusion policies and practices are included.

“History shows that investors need not expect lower returns for investing with diversity, equity and inclusion criteria in mind,” Morningstar noted. “As LGBTQ+ identities become more ubiquitous, inclusive investing will continue to develop.”

Although last year, just 3% of investment managers were found to identify as LGBTQ+, things are rapidly changing. In a report published last month, the Open For Business coalition highlighted that investors have been increasingly favouring LGBTQ+-inclusive companies.

Increasingly, inclusion is being perceived as a key indicator of a well-run and successful company, with benefits including better financial performance, stronger brand preference, and improved talent attraction and retention. According to Morgan Stanley, 45% of US investors are now interested in investment products and strategies that advance LGBTQ+ inclusion.

Last October, the CFA Institute launched its Diversity, Equity, and Inclusion Code for the Investment Profession in the UK, with the goal of accelerating change, improving representation and bolstering industry resilience. It had already published similar codes for the US and Canada.

Also in the UK, financial watchdogs the Financial Conduct Authority and Prudential Regulation Authority have been consulting on the need to introduce a new regulatory framework to improve diversity and inclusion in the financial sector. The consultation closed in December and next steps are yet to be outlined.

“[Given] these areas of the market are still quite nascent, we’re always going to be tweaking, changing and evolving our indexes to make sure they stay relevant with what information is available and what investors are asking for,” said Edwards.

Morningstar is now seeking a partner on the investment side – an asset manager, asset owner or investment bank – to help “bring the index to life” by creating an investment product around it.

“We want to find a partner who is committed to this topic and willing to put their voice behind a product such as this one,” Edwards added.

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