Morningstar Sustainalytics Introduces Significant Enhancements to its ESG Risk Ratings
Morningstar announced significant enhancements to its Sustainalytics ESG Risk Ratings on May 30. Key updates include a revised corporate governance methodology and the addition of three new material ESG risk measures. These changes affect over 16,000 companies globally and represent the most substantial updates since the ratings were introduced in 2018. Morningstar's research shows that 67% of global asset owners find ESG increasingly material to investment policy. The new methodology aims to improve investor confidence, reduce risks, and enhance brand value. Full implementation of these updates is expected by September 2024.
- Enhanced corporate governance methodology implemented on May 30.
- Addition of three new material ESG risk measures.
- Coverage extended to over 16,000 companies globally.
- 67% of global asset owners find ESG increasingly material to investment policy.
- Improved investor confidence, reduced risks, and enhanced brand value expected.
- Full implementation by September 2024.
- Potential complexity and challenges during the transition phase.
- Full benefits might not be realized until September 2024.
- Increased scrutiny and higher expectations could expose companies to more frequent evaluations and potential criticism.
Insights
Morningstar's recent enhancements to its Sustainalytics ESG Risk Ratings reflect an evolving landscape where ESG factors are becoming increasingly critical in investment decisions. From a financial perspective, these upgrades could lead to more precise risk assessment and potentially better portfolio management for investors.
Enhanced corporate governance methodology and stronger material ESG risk measures signify more detailed analysis of how companies manage their resources and comply with governance standards. This can lead to more accurate predictions on which firms may provide sustainable returns. This precision in ESG assessment could result in a more attractive product to institutional investors, who are more likely to integrate ESG factors into their decision-making processes.
For individual investors, the improved transparency and detail of these ratings will help in better understanding the risk profiles of their investments, thereby potentially lowering investment risks related to poor corporate governance or environmental degradation.
The introduction of new material ESG risk measures, including those focusing on raw materials use, water and cybersecurity, indicates Morningstar's commitment to staying ahead of emerging trends. For investors, this means that the ESG Risk Ratings will not just reflect current issues but also anticipate future risks, increasing the relevance of these ratings over time.
By focusing on new areas such as data privacy and cybersecurity, Morningstar is recognizing the growing impact of technological advancements and the need for robust data protection. Companies that score well in these new areas are likely to be viewed positively by the market, potentially leading to a re-rating and possible upward movement in their share prices.
Furthermore, the enhancement of the thematic research will provide a deeper, more nuanced understanding of how companies are addressing specific ESG issues, making it easier for investors to align their portfolios with their values without compromising on returns.
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.
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 (
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.”
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.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment insights in
About Morningstar Sustainalytics
Morningstar Sustainalytics is a leading ESG data, research, and ratings firm that supports investors around the world with the development and implementation of responsible investment strategies. For more than 30 years, the firm has been at the forefront of developing high-quality, innovative solutions to meet the evolving needs of global investors. Today, Morningstar Sustainalytics works with hundreds of the world's leading asset managers and pension funds who incorporate ESG information and assessments into their investment processes. The firm also works with hundreds of companies and their financial intermediaries to help them consider material sustainability factors in policies, practices, and capital projects. Morningstar Sustainalytics has analysts around the world with varied multidisciplinary expertise across more than 40 industry groups. For more information, visit www.sustainalytics.com.
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Tim Benedict, +1 203 339-1912 or newsroom@morningstar.com
Source: Morningstar, Inc.
FAQ
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