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Morningstar Sustainalytics Enhances ESG Risk Ratings with Major Updates to Methodology and Measures

Morningstar Sustainalytics Enhances ESG Risk Ratings with Major Updates to Methodology and Measures

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Upgrade to corporate governance methodology and strengthening of three material ESG risk measures for Sustainalytics flagship product began May 30 and represents the most significant updates since industry-leading ratings were introduced in 2018.

Morningstar, Inc., a leading provider of independent investment insights, today announces significant enhancements to Morningstar Sustainalytics flagship ESG Risk Ratings, covering more than 16,000 companies globally. The corporate governance methodology enhancements were implemented on May 30 and stronger material ESG risk measures will be implemented in the coming months.

Laura Lutton – Director of ESG Product Management, Morningstar Sustainalytics

Our clients look to Morningstar Sustainalytics to provide leading edge sustainable investment data, research and ratings to better address a myriad of ESG-related risks and opportunities and provide a consistent independent lens on financially material ESG issues. Our ESG Risk Ratings help investors identify company exposure to industry-level ESG risks and how effectively companies are managing that exposure. The world is constantly changing, creating a challenging environment for investors, and our ESG risk metrics need to evolve along with it. These enhancements represent the most significant change to our methodology since we introduced our flagship ESG Risk Ratings to investors in 2018. We’re extremely excited to offer this capability to our clients and to the market.

As the first step in a series of enhancements to its industry leading ESG Risk Ratings, on May 30 Morningstar Sustainalytics introduced an upgrade to its corporate governance methodology. In its second annual Voice of the Asset Owner Survey which canvassed viewpoints on ESG investing from 500 asset owners globally, Morningstar found that two of three asset owners (67%) globally believe ESG has become more material to investment policy in the past five years. With ESG-related issues and risks increasingly becoming a material part of company operations and a focus of senior leadership, corporate governance is taking center stage. Good governance is being viewed as a foundational element – the “wiring” if you will – that enables companies to operate in a robust way and avoid ESG-related business-specific and systemic risks. High governance standards can help improve investor confidence, reduce risk, enhance brand value and increase employee engagement. Ongoing scrutiny from the market, shareholders and key stakeholders has helped highlight a number of examples of poor corporate governance in recent years.

Henry Hofman – ESG Research Director, Corporate Governance, Morningstar Sustainalytics

Corporate governance is not only a core component of ESG, but a vital consideration in any investment decision and a material element of sustainable investing. Our clients have expressed growing concern on a number of developing corporate governance issues including voting structures at Meta, board independence questions at Tesla and lawsuits directed at shareholders of ExxonMobil. We are aligning our corporate governance methodology for our ESG Risk Ratings to that of our material ESG issues and adding enhancements to reflect areas of heightened scrutiny. The methodology is now easier to interpret and more transparent, leading to a stronger corporate governance signal and improving investors’ ability to identify key issues and material risks across a global portfolio.

Related Article: Morningstar Sustainalytics Partners with Climate Bonds Initiative to Advance Sustainable Finance

Sustainalytics will also strengthen its material ESG risk measures (MEIs), with new MEIs for raw materials use and water and an expanded data privacy and cybersecurity MEI which underpin the ESG risk ratings methodology. This enhanced thematic research will be implemented on a company-by-company, rolling basis as Morningstar Sustainalytics rated companies go through their regular review cycle. It is expected that all companies in the coverage universe will complete this process by September 2024.

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