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Morningstar pays infringement notices over controversial weapons investments

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The firm has admitted to making investments that were “inconsistent” with its exclusionary screens for controversial weapons exposure.

Morningstar Investment Management Australia has paid $29,820 to comply with two infringement notices issued by the Australian Securities and Investments Commission (ASIC) in which the corporate regulator alleged that investor funds were exposed to controversial weapons investments.

The product disclosure statement (PDS) for the Morningstar International Shares (Unhedged) Fund stated that it would exclude certain securities or sectors based on environmental, social or governance factors, as listed in Morningstar’s ESG Policy.

This ESG Policy suggested that the Morningstar fund would not have exposure to any investments in controversial weapons companies.

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However, for short periods of time, the fund was found to have been directly exposed to securities in a number of weapons companies, namely Honeywell International, General Dynamics, Leidos Holdings, Northrop Grumman, and Raytheon Technologies.

“Morningstar’s ESG research arm, Sustainalytics, identifies that the above companies are involved in controversial weapons, specifically the development or production of nuclear weapons or providing core components for them,” ASIC said.

Specifically, the fund was exposed to Honeywell International from 2 November 2022 until Morningstar became aware of the investment and divested on 18 November 2022.

Additionally, the fund was exposed to General Dynamics, Leidos Holdings, Northrop Grumman, and Raytheon Technologies securities from 31 May to 13 June 2023.

In a statement provided to InvestorDaily, Morningstar noted that it had “self-identified and self-reported” the two instances in which the fund acquired securities that were “inconsistent with its exclusionary screens for controversial weapons exposure”.

“The error was identified in the ordinary course by processes implemented by Morningstar, and there were no adverse financial impacts to fund investors,” the firm said.

“We take our commitment to investor transparency and regulatory compliance seriously, and our systems and processes were enhanced and updated after we discovered the errors.”

Morningstar paid the infringement notices on 30 November, with ASIC noting that payment of an infringement notice is not an admission of guilt or liability.

In a recent speech, ASIC chair Joe Longo said it was imperative that firms avoid misrepresenting the extent to which their products or strategies are environmentally friendly, sustainable or ethical.

“Greenwashing directly undermines credible efforts to reduce emissions and address the climate crisis. ASIC is acting, and will continue to act, to prevent investor harm from greenwashing,” he told last month’s ASIC Annual Forum.

In December last year, ASIC issued three infringement notices to Vanguard due to concerns that the PDSs for the Vanguard International Shares Select Exclusions Index Funds may have been liable to mislead the public by overstating an exclusion claimed to prevent investment in companies involved in significant tobacco sales.

Later that same month, ASIC issued an infringement notice to Diversa Trustees, the issuer of the super product Cruelty Free Super (CFS), over concerns that statements made on CFS’ website may have been false or misleading by overstating exclusions.

The regulator also currently has three greenwashing-related cases before the Federal Court, including against Mercer Super, Vanguard, and Active Super.

Morningstar pays infringement notices over controversial weapons investments

The firm has admitted to making investments that were “inconsistent” with its exclusionary screens for controversial weapons exposure.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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