Low Carbon Transition Rating
ESG Risk Rating: Updates to Model
Learn which Material ESG Issues have been added, enhanced or removed
June 2024
Morningstar Sustainalytics has made several notable enhancements to the ESG Risk Ratings model so that it remains relevant and impactful by providing a more granular assessment of ESG risks and performance.
The main updates, effective from June 2024, include the incorporation of Corporate Governance Material ESG Issues (MEIs) into the ESG Risk Ratings model. Other key updates include the following:
- A new Water MEI to enhance the assessment of water-related risk.
- Enhancements to the Raw Material Use MEI, which includes previously available indicators and new indicators.
- Enhancements to the Data Privacy and Security MEI by expanding on Cybersecurity.
- The merger of two MEIs -- Business Ethics and Bribery and Corruption -- to enhance consistency and comparability among subindustries.
- Enhancements to various management indicators to capture the latest standards in reporting and policies and to help us further refine our assessments.
Until now, Sustainalytics used a separate, standalone Corporate Governance product methodology to assess how issuers manage corporate governance risk. This approach, however, added complexity for users (investor clients and rated companies).
We have now aligned our Corporate Governance methodology to that of our Material ESG Issues. This alignment has three major components:
1. Exposure
The new Corporate Governance MEI has a subindustry-based variation in exposure scores, and betas that allow for variation according to company. Previously, all companies received the same Exposure score of 9.0.
2. Pillars
- The methodology no longer consists of six pillars.
- The Stakeholder Governance pillar has become its own MEI, separated from the Corporate Governance MEI.
- The management indicators of the remaining five corporate governance pillars are represented in the Management Indicators for the new Corporate Governance MEI.
3. Management Indicator Scoring
All management indicator scoring is on a 0-100 scale, identical to the scoring used for all other management indicators in the Risk Rating model.
MEI.0.CG Corporate Governance
Material ESG Issues
The MEI.0.CG Corporate Governance focuses on the frameworks, systems, processes and practices that determine how a company is operated and controlled. This includes, for example, the structure and composition of the company's board, management remuneration and shareholder rights. The emphasis is on ensuring accountability and transparency throughout the company and promoting the alignment of the interests of shareholders, management, directors and employees.
The former MEI.0 Corporate Governance was revised to simplify its structure and align it to that of other MEIs within the Risk Rating product. The changes include the split of the former MEI.0 Corporate Governance into the MEI.0.CG Corporate Governance and the MEI.0.SG Stakeholder Governance, the removal of the pillar structure and of the weighted scoring of pillar and indicators driven by geographical region, and the introduction of three beta indicators: an event beta replacing event-like indicators, a shareholder voting power beta to assess ownership of public companies and, a manual beta overlay.
Within the MEI, the scoring of CG indicators changed from a system centered around a neutral score of 50 to a liner scoring ranging from 0 to 100, while the overall number of management indicators and tick boxes was reduced to bring focus on core corporate governance principles and eliminate redundancies and market-driven assessments.
| Subindustry | Type of Change | Former Exposure Score | New Exposure Score |
|---|---|---|---|
| Advertising | MEI Activation | 9 | 7 |
| Aerospace and Defence | MEI Activation | 9 | 7 |
| Agricultural Chemicals | MEI Activation | 9 | 7 |
| Agricultural Machinery | MEI Activation | 9 | 7 |
| Agriculture | MEI Activation | 9 | 7 |
| Air Freight and Logistics | MEI Activation | 9 | 7 |
| Airlines | MEI Activation | 9 | 7 |
| Airports | MEI Activation | 9 | 7 |
| Aluminum | MEI Activation | 9 | 7 |
| Asset Management and Custody Services | MEI Activation | 9 | 7 |
| Auto Parts | MEI Activation | 9 | 7 |
| Automobiles | MEI Activation | 9 | 7 |
| Automotive Retail | MEI Activation | 9 | 7 |
| Beer, Wine and Spirits | MEI Activation | 9 | 7 |
| Biotechnology | MEI Activation | 9 | 7 |
| Broadcasting | MEI Activation | 9 | 7 |
| Building Products | MEI Activation | 9 | 7 |
| Business Support Services | MEI Activation | 9 | 7 |
| Cable and Satellite | MEI Activation | 9 | 7 |
| Casinos and Gaming | MEI Activation | 9 | 7 |
| Coal | MEI Activation | 9 | 7 |
| Commercial Printing | MEI Activation | 9 | 7 |
| Commodity Chemicals | MEI Activation | 9 | 7 |
| Communications Equipment | MEI Activation | 9 | 7 |
| Conglomerates | MEI Activation | 9 | 7 |
| Construction Materials | MEI Activation | 9 | 7 |
| Consumer Electronics | MEI Activation | 9 | 7 |
| Consumer Finance | MEI Activation | 9 | 7 |
| Consumer Services | MEI Activation | 9 | 7 |
| Data Processing | MEI Activation | 9 | 7 |
| Department Stores | MEI Activation | 9 | 7 |
| Development Banks | MEI Activation | 9 | 7 |
| Distribution | MEI Activation | 9 | 7 |
| Diversified Banks | MEI Activation | 9 | 7 |
| Diversified Chemicals | MEI Activation | 9 | 7 |
| Diversified Financial Institutions | MEI Activation | 9 | 7 |
| Diversified Insurance Services | MEI Activation | 9 | 7 |
| Diversified Metals Mining | MEI Activation | 9 | 7 |
| Diversified Real Estate | MEI Activation | 9 | 7 |
| Drug Retail | MEI Activation | 9 | 7 |
| Electric Utilities | MEI Activation | 9 | 7 |
| Electrical Equipment | MEI Activation | 9 | 7 |
| Electronic Components | MEI Activation | 9 | 7 |
| Electronics Equipment | MEI Activation | 9 | 7 |
| Electronics Manufacturing | MEI Activation | 9 | 7 |
| Electronics Retail | MEI Activation | 9 | 7 |
| Enterprise and Infrastructure Software | MEI Activation | 9 | 7 |
| Entertainment Software | MEI Activation | 9 | 7 |
| Facilities Maintenance | MEI Activation | 9 | 7 |
| Financial Exchanges and Data Services | MEI Activation | 9 | 7 |
| Food Distribution | MEI Activation | 9 | 7 |
| Food Retail | MEI Activation | 9 | 7 |
| Footwear | MEI Activation | 9 | 7 |
| Forestry | MEI Activation | 9 | 7 |
| Gas Utilities | MEI Activation | 9 | 7 |
| Gold | MEI Activation | 9 | 7 |
| Health Care IT Services | MEI Activation | 9 | 7 |
| Heavy Machinery and Trucks | MEI Activation | 9 | 7 |
| Highways and Railroads | MEI Activation | 9 | 7 |
| Home Appliances | MEI Activation | 9 | 7 |
| Home Improvement | MEI Activation | 9 | 7 |
| Home Improvement Retail | MEI Activation | 9 | 7 |
| Homebuilding | MEI Activation | 9 | 7 |
| Household Products | MEI Activation | 9 | 7 |
| HR Services | MEI Activation | 9 | 7 |
| Independent Power Production and Traders | MEI Activation | 9 | 7 |
| Industrial Gases | MEI Activation | 9 | 7 |
| Industrial Machinery | MEI Activation | 9 | 7 |
| Insurance Brokers | MEI Activation | 9 | 7 |
| Integrated Oil & Gas | MEI Activation | 9 | 7 |
| Internet Software and Services | MEI Activation | 9 | 7 |
| Investment Banking and Brokerage | MEI Activation | 9 | 7 |
| IT Consulting | MEI Activation | 9 | 7 |
| Laboratory Equipment and Services | MEI Activation | 9 | 7 |
| Life and Health Insurance | MEI Activation | 9 | 7 |
| Luxury Apparel | MEI Activation | 9 | 7 |
| Managed Health Care | MEI Activation | 9 | 7 |
| Marine Ports | MEI Activation | 9 | 7 |
| Medical Devices | MEI Activation | 9 | 7 |
| Medical Distribution | MEI Activation | 9 | 7 |
| Medical Facilities | MEI Activation | 9 | 7 |
| Medical Services | MEI Activation | 9 | 7 |
| Medical Supplies | MEI Activation | 9 | 7 |
| Metal and Glass Packaging | MEI Activation | 9 | 7 |
| Mortgage REITs | MEI Activation | 9 | 7 |
| Motorcycles | MEI Activation | 9 | 7 |
| Movies and Entertainment | MEI Activation | 9 | 7 |
| Multi-Sector Holdings | MEI Activation | 9 | 7 |
| Multi-Utilities | MEI Activation | 9 | 7 |
| Non-Residential Construction | MEI Activation | 9 | 7 |
| Office Services | MEI Activation | 9 | 7 |
| Oil & Gas Drilling | MEI Activation | 9 | 7 |
| Oil & Gas Equipment | MEI Activation | 9 | 7 |
| Oil & Gas Exploration and Production | MEI Activation | 9 | 7 |
| Oil & Gas Refining and Marketing | MEI Activation | 9 | 7 |
| Oil & Gas Storage and Transportation | MEI Activation | 9 | 7 |
| Online and Direct Marketing Retail | MEI Activation | 9 | 7 |
| Other Financial Services | MEI Activation | 9 | 7 |
| Packaged Foods | MEI Activation | 9 | 7 |
| Paper and Pulp | MEI Activation | 9 | 7 |
| Paper Packaging | MEI Activation | 9 | 7 |
| Personal Products | MEI Activation | 9 | 7 |
| Pharmaceuticals | MEI Activation | 9 | 7 |
| Precious Metals Mining | MEI Activation | 9 | 7 |
| Property and Casualty Insurance | MEI Activation | 9 | 7 |
| Publishing | MEI Activation | 9 | 7 |
| Rail Transport | MEI Activation | 9 | 7 |
| Real Estate Development | MEI Activation | 9 | 7 |
| Real Estate Management | MEI Activation | 9 | 7 |
| Real Estate Services | MEI Activation | 9 | 7 |
| Regional Banks | MEI Activation | 9 | 7 |
| Reinsurance | MEI Activation | 9 | 7 |
| REITs | MEI Activation | 9 | 7 |
| Renewable Power Production | MEI Activation | 9 | 7 |
| Research and Consulting | MEI Activation | 9 | 7 |
| Restaurants | MEI Activation | 9 | 7 |
| Retail Apparel | MEI Activation | 9 | 7 |
| Security Services and Correctional Facilities | MEI Activation | 9 | 7 |
| Semiconductor Design and Manufacturing | MEI Activation | 9 | 7 |
| Semiconductor Equipment | MEI Activation | 9 | 7 |
| Shipping | MEI Activation | 9 | 7 |
| Soft Drinks | MEI Activation | 9 | 7 |
| Specialized Finance | MEI Activation | 9 | 7 |
| Specialty Chemicals | MEI Activation | 9 | 7 |
| Specialty Retail | MEI Activation | 9 | 7 |
| Steel | MEI Activation | 9 | 7 |
| Technology Distribution | MEI Activation | 9 | 7 |
| Technology Hardware | MEI Activation | 9 | 7 |
| Telecommunication Services | MEI Activation | 9 | 7 |
| Textiles | MEI Activation | 9 | 7 |
| Thrifts and Mortgages | MEI Activation | 9 | 7 |
| Tires | MEI Activation | 9 | 7 |
| Tobacco | MEI Activation | 9 | 7 |
| Toys and Sporting Goods | MEI Activation | 9 | 7 |
| Trading and Distribution | MEI Activation | 9 | 7 |
| Travel, Lodging and Amusement | MEI Activation | 9 | 7 |
| Trucking | MEI Activation | 9 | 7 |
| Water Utilities | MEI Activation | 9 | 7 |
Management Indicators
This indicator assesses the degree to which the company's audit committee possesses the financial and industry expertise necessary to effectively carry out its oversight responsibilities.
High quality, sound financial reporting creates confidence for shareholders. To this end, an audit committee helps to ensure the integrity of financial reporting through specific oversight procedures. Independent committee members’ financial expertise is key to ensuring proper execution of the committee's mandate, while industry experience equips them to navigate through industry-specific challenges.
Sustainalytics may consider this indicator together with Audit Committee Independence, to give a full view of the effectiveness of the Audit Committee.
Sustainalytics applies this indicator to all subindustries.
This indicator assesses gender representation on the Board of Directors to verify whether there is gender balance. The assessment evaluates gender identities across male, female, and non-binary.
Gender diversity has been shown to positively impact corporate performance by reducing groupthink, widening the range of perspectives, and facilitating better decision-making. As such, gender balance is considered a key attribute of a high-performing board.
Sustainalytics may consider this indicator together with Board Gender Representation Target, to give a full view of the board's approach to gender diversity.
Sustainalytics applies this indicator to all subindustries.
This indicator assesses the strength of a company's target to ensure board gender equality. The adoption of a gender representation target demonstrates a company's commitment to board diversity and inclusiveness and increases transparency for stakeholders. By adopting a gender representation target, a company holds itself accountable for achieving gender-diversity goals and allows stakeholders to monitor progress.
Sustainalytics may consider this indicator together with Board Gender Diversity, to give a full view of the board's approach to gender diversity.
Sustainalytics applies this indicator to all subindustries.
This indicator assesses the effectiveness of the company’s board by evaluating the independence, expertise and commitment of the board and its leadership.
Sustainalytics applies this indicator to all subindustries. All publicly listed companies are expected to establish an independent and competent board leadership, regardless of the industry they operate in.
This indicator assesses the percentage of independent directors on the board, as defined by Sustainalytics' criteria for judging director independence.
Sustainalytics may consider this indicator together with Board Committee Structure and Committee Independence to provide a full picture of the levels of independence at the most senior levels of an organization.
Sustainalytics applies this indicator to all subindustries. All publicly listed companies are expected to establish a board of directors with an appropriate level of independence, regardless of the industry they operate in.
This indicator assesses the percentage of independent members of the remuneration committee, as defined by Sustainalytics' criteria for judging director independence.
The remuneration committee should ensure that remuneration arrangements support the strategic aims of the business and enable the recruitment, incentivization and retention of senior executives, while complying with applicable regulations.
Sustainalytics applies this indicator to all subindustries.
This indicator assesses the percentage of independent members of the nominating committee, as defined by Sustainalytics' criteria for judging director independence.
Sustainalytics applies this indicator to all subindustries.
This indicator assesses the percentage of independent members of the audit committee, as defined by Sustainalytics' criteria for judging director independence.
The audit committee is responsible for overseeing the financial reporting process, ensuring the accuracy of the company's financial statements, and monitoring the independent auditor's performance.
The audit committee also plays a key role in evaluating the effectiveness of the company's internal controls, risk-management practices, and compliance with legal and regulatory requirements. Audit committees should ideally be composed of independent directors to ensure the impartial execution of these duties.
Sustainalytics may consider this indicator together with Audit Committee Experience, to give a full view of the effectiveness of the Audit Committee
This indicator assesses a company's risk-management system, with an emphasis on the board's role in the supervision of the risk-management framework.
Sustainalytics applies this indicator to all subindustries.
This indicator assesses the quality and integrity of a company’s board by identifying whether the board of directors collectively possesses the appropriate executive experience to effectively discharge its oversight responsibilities.
The indicator can be considered in conjunction with Board Non-Executive Experience, to give a full view of the effectiveness of the directors’ relevant experience.
Sustainalytics applies this indicator to all subindustries. All publicly listed companies are expected to appoint a board of directors with the appropriate knowledge, regardless of the industry they operate in.
This indicator assesses the quality and integrity of a company’s board by identifying whether the board of directors collectively possesses the appropriate non-executive experience to effectively implement its oversight responsibilities.
Sustainalytics may consider this indicator in conjunction with Board Executive Experience, to give a full view of the effectiveness of the directors’ relevant experience.
Sustainalytics applies this indicator to all subindustries. All publicly listed companies are expected to appoint a board of directors with the appropriate knowledge, regardless of the industry they operate in.
This indicator assesses a company's programmes related to aligning the shareholder's voting power with their economic investment. The presence of mechanisms that allow deviations from this principle result in certain shareholders having more power than others.
A shareholder(s) with more voting power than economic investment has limited financial liability. This can lead to decisions that expose the company to higher risks.
Sustainalytics applies this indicator to all subindustries.
This indicator assesses the company's two most recent annual general meetings (AGMs), as well as extraordinary general meetings (EGMs) held within the same period, to determine whether shareholder dissent exceeding 30% of the total vote cast was registered against board recommendations.
Sustainalytics applies this indicator to all subindustries. Shareholders of publicly listed companies are presented with the opportunity to voice their concerns over the company's decisions, policies and/or practices. Instances of elevated shareholder dissent might signal a misalignment between shareholders' interests and the actions taken by the company's board and/or management.
This indicator assesses a company's say-on-pay programme to determine shareholders' right to vote on decisions related to executive remuneration.
Sustainalytics applies this indicator to all subindustries. Say-on-pay mechanisms give shareholders the opportunity to provide feedback on executive remuneration by including remuneration-related topics on the annual general meeting (AGM) agenda. Shareholder opposition to pay decisions can trigger improvements to companies' incentive plans, resulting in better alignment of pay with performance, and ultimately, shareholder interests.
This indicator assesses a company's remuneration programmes to identify whether the short-term incentives for its executive team are aligned with the company's short-term (one-year) performance.
Sustainalytics may consider this indicator together with Long-Term Incentive Programme and Executive Compensation Clawback, to give a full view of the remuneration programmes in place.
Sustainalytics applies this indicator to all subindustries. Publicly listed companies implement short-term incentives (STI) as forms of variable compensation based on the achievement of short-term performance and objectives.
This indicator assesses a company's remuneration programmes to identify whether the short-term incentives for its executive team are aligned with the company's short-term (one-year) performance.
Sustainalytics may consider this indicator together with Long-Term Incentive Programme and Executive Compensation Clawback, to give a full view of the remuneration programmes in place.
Sustainalytics applies this indicator to all subindustries. Publicly listed companies implement short-term incentives (STI) as forms of variable compensation based on the achievement of short-term performance and objectives.
This indicator assesses a company's commitment to recover excess compensation from executive officers in the event of financial restatement, executive misconduct and/or malfeasance.
Clawback policies provide for the recovery of compensation from executive officers in the event of fraud, a financial restatement, misconduct or other triggers. These policies can deter unethical actions or behaviours and ensure repayment of compensation amounts unduly paid to executives.
Sustainalytics may consider this indicator together with Short-Term Incentive Programme and Long-Term Incentive Programme, to give a full view of the remuneration programmes in place.
Sustainalytics applies this indicator to all subindustries.
This indicator assesses a company's remuneration to its Chief Executive Officer (CEO) compared to that of peers headquartered in the same region. Comparing the CEO's remuneration to that of peers helps to identify outliers. Both excessive and low levels of remuneration present risks.
Sustainalytics may consider this indicator in conjunction with CEO Pay Magnitude (Industry) to give a full view of pay compared to peers.
Sustainalytics applies this indicator to all subindustries.
This indicator assesses a company's remuneration to its chief executive officer (CEO) compared to that of industry peers. Comparing the CEO's remuneration to that of peers helps to identify outliers. Both excessive and low levels of remuneration present risks.
Sustainalytics may consider this indicator together with CEO Pay Magnitude (Region) to give a full view of pay compared to peers.
Sustainalytics applies this indicator to all subindustries.
This indicator assesses a company's establishment of key board committees and whether they are influenced by a controlling shareholder.
A board of directors will often delegate authority or oversight to various committees focused on key topics. The presence of a controlling-shareholder representative on these committees increases the risk that the controlling shareholder will exert undue influence over the committee’s deliberations amid any favoritism (versus smaller shareholders).
Sustainalytics may consider this indicator together with the Committee Independence and Audit Committee Experience indicators to give a full view of the effectiveness of board committee structures.
Sustainalytics applies this indicator to all subindustries.
Event & Beta Indicators
This event indicator assesses incidents related to the quality and integrity of a company’s corporate governance structures. This includes topics relating to the board of directors and executive management, shareholder rights and value, executive and non-executive remuneration and the auditing function, among corporate governance issues.
Sustainalytics applies this indicator to all subindustries. Publicly listed companies are subject to increased scrutiny and risks stemming from corporate governance incidents, regardless of the industry they operate in.
This indicator assesses the relative portion of voting rights controlled by the largest shareholder (or grouping of shareholders) as measured by voting rights. The presence of a major shareholder serves as an indication that the company may take advantage of existing control-enhancing mechanisms to entrench the major shareholder, the board or management. This entrenchment could in turn compromise minority shareholders' ability to address potential value destruction resulting from mismanagement. It is therefore a signal that the company is exposed to corporate governance issues.
Sustainalytics activated this indicator to allow for an adjustment of the exposure to the MEI 0.CG.
Deactivated Indicators
CG.5.2 Audit Committee Effectiveness
CG.5.1 Audit Committee Structure
CG.5.4 Audit Rotation Policy
CG.5.5 Auditor Change
CG.5.3 Auditor Fees
CG.1.3 Board Capture
CG.2.9 Board Diversity
CG.1.1 Board Experience
CG.2.3 Board Independence
CG.2.1 Board Leadership
CG.2.2 Board Tenure
CG.6.8 Bribery & Corruption Policy
CG.1.9 Business Practices Controversies
CG.3.4 Capital Issuance Risks
CG.4.10 CEO Termination Scenarios
CG.4.12 Clawback Policy
CG.3.1 Director Appointment & Removal
CG.2.5 Director Disclosure
CG.1.7 Director Stock Ownership
CG.1.2 Director Track Record
CG.2.7 Directors not Elected by Shareholders
CG.6.14 Discrimination Policy
CG.6.10 Environmental Policy
CG.6.1 ESG Governance
CG.6.5 ESG Performance Targets
CG.6.2 ESG Reporting Standards
CG.1.8 Executive/Board Misconduct
CG.6.17 GHG Reduction Programme
CG.6.4 Global Compact Signatory
CG.1.10 Governance Controversies
CG.6.18 Green Procurement Policy
CG.4.11 Internal Pay Equity
CG.6.7 Lobbying and Political Expenses
CG.4.6 LTI Performance Metrics
CG.2.4 Nominating Committee Effectiveness
CG.3.3 Ownership Structure
CG.4.4 Pay Controversies
CG.4.9 Pay for Failure
CG.4.8 Pay for Performance
CG.4.7 Pay Magnitude
CG.6.6 Political Involvement Policy
CG.3.2 Proportionality - One Share/One Vote
CG.1.6 Related Party Transactions
CG.4.2 Remuneration Committee Effectiveness
CG.4.1 Remuneration Disclosure
CG.5.6 Reporting Irregularities
CG.2.8 Risk Oversight
CG.4.3 Say on Pay
CG.6.15 Scope of Social Supplier Standards
CG.3.5 Shareholder Action
CG.1.11 Shareholder Engagement and Responsiveness
CG.4.5 STI Performance Metrics
CG.3.7 Supermajority Provisions
CG.6.13 Tax Disclosure
CG.6.3 Verification of ESG Reporting
CG.2.6 Voting Structures
CG.6.12 Whistleblower Programmes
MEI.1 Access to Basic Services
| Subindustry | Type of Update | Former Exposure Score | New Exposure Score |
|---|---|---|---|
| Medical Devices | Exposure Score Change | 4 | 5 |
Rationale for Change
Companies in the Medical Devices are primarily engaged in manufacturing health care equipment and devices, including medical instruments, drug delivery systems, cardiovascular and orthopedic devices, and diagnostic equipment. Given the essential nature of such products for many people, material risk exposure to Access to Basic Services is mainly driven by issues around the availability and affordability of their services for patients and needed people.
Our analysis of recent trends indicates that Medical Devices companies are increasingly exposed to access issues, since governments in both developed and developing markets are pressuring companies on taking regulatory measures to drive down prices. The consideration of this factor has prompted Morningstar Sustainalytics to increase the exposure to the Access to Basic material ESG issue for the Medical Devices subindustry.
MEI.4 Business Ethics
The MEI.4 Business Ethics focuses on the management of general professional ethics, such as tax avoidance, anti-competitive practices and intellectual property issues, as well as bribery and corruption. Ethical misconduct such as fraud, conflicts of interest, money laundering, sanctions violations, etc. are also covered here. Additional subindustry-specific topics – such as medical ethics, animal welfare and arms trade – are included where relevant.
Ethical considerations related to direct or indirect involvement with corrupt governments, dictatorial regimes or organizations that have a track record of human rights abuses may also be included here for some subindustries, if the company’s products or services are at risk of being used to facilitate human rights violations, for example.
The MEI enhancement focuses on the integration of the previous MEI.3 Bribery and Corruption into the MEI.4 Business Ethics, due to similarities in the risks covered by both. The merging aims at enhancing consistency and comparability across all subindustries exposed to related risks.
| Subindustry | Type of Update | Former Exposure Score | New Exposure Score |
|---|---|---|---|
| Aerospace and Defence | Exposure Score Change | 5 | 10 |
| Aluminum | Exposure Score Change | 3 | 6 |
| Business Support Services | MEI Activation | - | 4 |
| Coal | Exposure Score Change | 3 | 5 |
| Diversified Metals Mining | Exposure Score Change | 3 | 7 |
| Gold | Exposure Score Change | 3 | 7 |
| Highways and Railroads | MEI Activation | - | 2 |
| Homebuilding | MEI Activation | - | 2 |
| Integrated Oil & Gas | Exposure Score Change | 3 | 8 |
| Marine Ports | MEI Activation | - | 6 |
| Non-Residential Construction | Exposure Score Change | 4 | 6 |
| Oil & Gas Drilling | Exposure Score Change | 3 | 8 |
| Oil & Gas Equipment | Exposure Score Change | 3 | 8 |
| Oil & Gas Exploration and Production | Exposure Score Change | 3 | 8 |
| Oil & Gas Storage and Transportation | MEI Activation | - | 5 |
| Pharmaceuticals | Exposure Score Change | 6 | 7 |
| Precious Metals Mining | Exposure Score Change | 3 | 7 |
| Real Estate Development | MEI Activation | - | 5 |
| Security Services and Correctional Facilities | MEI Activation | - | 5 |
| Steel | Exposure Score Change | 3 | 6 |
MEI.8 Carbon - Own Operations
| Subindustry | Type of Update | Former Exposure Score | New Exposure Score |
|---|---|---|---|
| Medical Facilities | Exposure Score Change | 4 | 2 |
Rationale for Update
Companies in the Medical Facilities subindustry provide medical services through the ownership and operation of hospitals and long-term-care facilities and therefore rely on trained medical personnel or highly specialized skills – in particular when providing medical care and treatment services, or advanced diagnostics services.
Material risk exposure to Carbon – Own Operations for the subindustry is primarily driven by energy-intensive activities such as medical equipment use, computer and server use, food services, refrigeration laundry and HVAC systems. Companies also emit GHGs while transporting patients. Morningstar Sustainalytics has reassessed the exposure to these factors based on up-to-date GHG emissions data, considering scopes 1, 2, and 3.
Our research suggests that the GHG emissions of Medical Facilities companies have substantially decreased relatively to other subindustries in our universe. The consideration of this factor has prompted us to decrease the exposure to the Carbon-Own Operations material ESG issue for the Medial Facilities subindustry.
MEI.6 Data Privacy and Cybersecurity
The MEI.6 Data Privacy and Cybersecurity focuses on risks to personal information and/or cybersecurity and how companies manage these risks. Where personal information is collected, stored, or processed, emphasis is placed on privacy practices and programmes, as well as related cybersecurity management. Separately, some industries are targets of cyberattacks, due to the damage that disruption poses to economies or societies. Where this distinct type of risk is material, the MEI focuses on cybersecurity, including cybersecurity programmes, critical infrastructure security and technology product security.
Some industries lie at the intersection of both data privacy and cybersecurity and this MEI assesses how companies manage both of these risks. The MEI enhancement focuses on the integration of risks assessments related to critical infrastructure and industrial automation; expansion of indicators coverage beyond personal data to account for a broader range of data types; and alignment with the most updated best practices.
| Subindustry | Type of Update | Former Exposure Score | New Exposure Score |
|---|---|---|---|
| Air Freight and Logistics | Exposure Score Change | 2 | 3 |
| Airlines | Exposure Score Change | 3 | 5 |
| Coal | MEI Activation | - | 2 |
| Electric Utilities | MEI Activation | - | 4 |
| Gas Utilities | MEI Activation | - | 4 |
| Independent Power Production and Traders | MEI Activation | - | 3 |
| Integrated Oil & Gas | MEI Activation | - | 3 |
| Managed Health Care | Exposure Score Change | 6 | 8 |
| Medical Facilities | Exposure Score Change | 5 | 6 |
| Medical Services | Exposure Score Change | 5 | 6 |
| Multi-Utilities | MEI Activation | - | 4 |
| Oil & Gas Equipment | MEI Activation | - | 3 |
| Oil & Gas Exploration and Production | MEI Activation | - | 3 |
| Oil & Gas Refining and Marketing | MEI Activation | - | 3 |
| Oil & Gas Storage and Transportation | MEI Activation | - | 3 |
| Rail Transport | MEI Activation | - | 4 |
| Renewable Power Production | MEI Activation | - | 2 |
| Security Services and Correctional Facilities | MEI Activation | - | 5 |
| Telecommunication Services | Exposure Score Change | 8 | 9 |
| Water Utilities | MEI Activation | - | 4 |
MEI.7 Emissions, Effluents and Waste
| Subindustry | Type of Change | Former Exposure Score | New Exposure Score |
|---|---|---|---|
| Auto Parts | MEI Activation | 2 | |
| Communications Equipment | MEI Activation | 2 | |
| Electronics Equipment | MEI Activation | 2 | |
| Electronics Manufacturing | MEI Activation | 2 | |
| Heavy Machinery and Trucks | MEI Activation | 2 | |
| Luxury Apparel | MEI Activation | 3 | |
| Semiconductor Equipment | Exposure Score Change | 3 | 2 |
| Textiles | Exposure Score Change | 3 | 5 |
MEI.17 ESG Integration - Financials
| Subindustry | Type of Update | Former Exposure Score | New Exposure Score |
|---|---|---|---|
| Diversified Metals Mining | MEI Activation | - | 7 |
| Financial Exchanges and Data Services | Exposure Score Change | 4 | 5 |
| Gold | MEI Activation | - | 7 |
| Oil & Gas Exploration and Production | MEI Activation | - | 7 |
| Precious Metals Mining | MEI Activation | - | 7 |
| Steel | MEI Activation | - | 7 |
Diversified Metals Mining
The Diversified Metals Mining subindustry includes royalty companies, which are uniquely exposed to the indirect risks of financing mines. Mining royalty and streaming companies do not operate mines directly but rather provide funding for specific mines, plants or projects upfront in return for future revenues. Revenues are tied to the level of production (royalties) or to pre-arranged contracts for the purchase of a percentage of output (streams).
As such, royalty companies face risks associated with the ESG performance of financed mines or projects, which may be mitigated through proper due diligence and governance both prior to investment and for ongoing investment streams. Although indirect, this represents the largest source of ESG risk for royalty companies, due in part to the fact that financing is typically concentrated in a specific extractive industry with known ESG risks, often involving a relatively small number of mines or projects.
Based on these factors, Morningstar Sustainalytics has activated the ESG Integration - Financials material ESG issue (MEI) for the Diversified Metals Mining subindustry. The MEI will be disabled for all non-royalty companies.
Financial Exchanges and Data Services
The Financial Exchanges and Data Services (FEDS) subindustry comprises two separate business models:
- Financial exchanges that provide platforms and infrastructure for securities trading; and
- Data service companies that provide raw financial data, as well as complex data-driven products.
Material risk exposure to ESG Integration – Financials is related to products and services that integrate the environmental, social and governance (ESG) perspective as a distinguishing feature. Financial exchanges play a significant role in promoting sustainable capital markets by providing listed companies with sustainability frameworks on how to implement and report on ESG-related activities, managing ESG-related indexes and establishing transparent marketplaces for trading carbon credit.
On the other hand, data service companies that offer rating and market intelligence services can further incorporate ESG performance into their products and services. The integration of ESG issues in the assessment of issuer creditworthiness, for example, is considered key for informing investors of potential systems-level risks, such as climate change, that may increase credit risks. In addition, regulations requiring institutional investors to disclosure on their ESG-related practices (e.g. SFDR) create additional business opportunities for data services companies.
In this context, as investor demand and scrutiny around sustainable financial products has substantially increased in recent years, FEDS companies face additional reputational risks if do not assess those factors properly. In addition, the non-consideration of ESG factors into their products could lead to increasingly loss of business opportunities.
Based on these factors, Morningstar Sustainalytics has increased exposure to the ESG Integration - Financials material ESG issue for the Financial Exchanges and Data Services subindustry.
Gold
The Gold subindustry includes royalty companies, which are uniquely exposed to the indirect risks of financing mines. Mining royalty and streaming companies do not operate mines directly but rather provide funding for specific mines, plants or projects upfront in return for future revenues. Revenues are tied to the level of production (royalties) or to pre-arranged contracts for the purchase of a percentage of output (streams).
As such, royalty companies face risks associated with the ESG performance of financed mines or projects, which may be mitigated through proper due diligence and governance both prior to investment and for ongoing investment streams. Although indirect, this represents the largest source of ESG risk for royalty companies, due in part to the fact that financing is typically concentrated in a specific extractive industry with known ESG risks, often involving a relatively small number of mines or projects.
Based on these factors, Morningstar Sustainalytics has activated the ESG Integration - Financials material ESG issue (MEI) for the Gold subindustry. The MEI will be disabled for all non-royalty companies.
Oil & Gas Exploration and Production
The Oil & Gas Exploration and Production subindustry includes royalty companies, which are uniquely exposed to the indirect risks of financing the development of petroleum and natural gas. Oil and gas royalty and streaming companies do not operate assets directly but rather provide funding for specific assets, plants or projects upfront in return for future revenues. Revenues are tied to the level of production (royalties) or to pre-arranged contracts for the purchase of a percentage of output (streams).
As such, royalty companies face risks associated with the ESG performance of financed assets or projects, which may be mitigated through proper due diligence and governance both prior to investment and for ongoing investment streams. Although indirect, this represents the largest source of ESG risk for royalty companies, due in part to the fact that financing is typically concentrated in a specific extractive industry with known ESG risks, often involving a relatively small number of assets or projects.
Based on these factors, Morningstar Sustainalytics has activated the ESG Integration - Financials material ESG issue (MEI) for the Oil & Gas Exploration and Production subindustry. The MEI will be disabled for all non-royalty companies.
Precious Metals Mining
The Precious Metals Mining subindustry includes royalty companies, which are uniquely exposed to the indirect risks of financing mines. Mining royalty and streaming companies do not operate mines directly but rather provide funding for specific mines, plants or projects upfront in return for future revenues. Revenues are tied to the level of production (royalties) or to pre-arranged contracts for the purchase of a percentage of output (streams).
As such, royalty companies face risks associated with the ESG performance of financed mines or projects, which may be mitigated through proper due diligence and governance both prior to investment and for ongoing investment streams. Although indirect, this represents the largest source of ESG risk for royalty companies, due in part to the fact that financing is typically concentrated in a specific extractive industry with known ESG risks, often involving a relatively small number of mines or projects.
Based on these factors, Morningstar Sustainalytics has activated the ESG Integration - Financials material ESG issue (MEI) for the Precious Metals Mining subindustry. The MEI will be disabled for all non-royalty companies.
Steel
The Steel subindustry includes royalty companies, which are uniquely exposed to the indirect risks of financing mines. Mining royalty and streaming companies do not operate mines directly but rather provide funding for specific mines, plants or projects upfront in return for future revenues. Revenues are tied to the level of production (royalties) or to pre-arranged contracts for the purchase of a percentage of output (streams).
As such, royalty companies face risks associated with the ESG performance of financed mines or projects, which may be mitigated through proper due diligence and governance both prior to investment and for ongoing investment streams. Although indirect, this represents the largest source of ESG risk for royalty companies, due in part to the fact that financing is typically concentrated in a specific extractive industry with known ESG risks, often involving a relatively small number of mines or projects.
Based on these factors, Morningstar Sustainalytics has activated the ESG Integration - Financials material ESG issue (MEI) for the Steel subindustry. The MEI will be disabled for all non-royalty companies.
MEI.13 Human Capital
| Subindustry | Type of Update | Former Exposure Score | New Exposure Score |
|---|---|---|---|
| Semiconductor Design and Manufacturing | Exposure Score Change | 8 | 7 |
| Technology Distribution | MEI Activation | - | 2 |
Semiconductor Design and Manufacturing
Companies in the Semiconductor Design and Manufacturing subindustry are primarily engaged in manufacturing semiconductors and related products, including chips, microprocessors, solar cells, digital signal processors and interface circuits. Material risk exposure to Human Capital is driven primarily by labour intensity and labour skills, i.e., respectively, the amount of human capital a subindustry has at its disposal on average, and the level of average skill or training required by employees in a subindustry.
Morningstar Sustainalytics’ research suggests that labour and skill-intensive subindustries face added risk to their human capital consideration from both higher implicit expenses such as wage and benefits and implicit costs of heightened employee turnover. We have reassessed exposure to each of these factors based on up-to-date metrics such as revenues per employee and labour costs per employee.
Our research indicates that, while the Semiconductor Design and Manufacturing subindustry is considerably reliant on labour, the skill level of its employees has decreased in the past three years and is currently lower than the global average. A key driver for this trend is the increasing commoditization of many types of semiconductors. In addition, the assessments of human capital-related events in the past years indicates a low propensity for employees to strike/protest within the subindustry.
Based on these factors, we have decreased exposure to the Human Capital material ESG issue for the Semiconductor Design and Manufacturing subindustry.
Technology Distribution
Companies in the Technology Distribution subindustry are primarily engaged in the distribution of technology hardware and equipment products, including communications equipment, computers and devices, semiconductors, electronic equipment, and components. Material risk exposure to Human Capital is driven primarily by labour intensity and labour skills, i.e., respectively, the amount of human capital a subindustry has at its disposal on average, and the level of average skill or training required by employees in a subindustry.
Morningstar Sustainalytics’ research suggests that labor and skill-intensive subindustries face added risk to their human capital consideration from both higher implicit expenses such as wage and benefits and implicit costs of heightened employee turnover. We have reassessed exposure to each of these factors based on up-to-date metrics such as revenues per employee and labor costs per employee.
Our research indicates that the average degree of labour skill required by the Technology Distribution subindustry has increased in the past three years. Furthermore, the companies in this subindustry face higher human capital risk due to the increasing number of people unwilling to work in the sector, which results in either a labour shortage or the requirement to pay higher wages to attract and retain talent.
Based on these factors, we have activated the Human Capital material ESG issue for the Technology Distribution subindustry, in alignment with other technology subindustries.
MEI.18 Product Governance
| Subindustry | Type of Update | Former Exposure Score | New Exposure Score |
|---|---|---|---|
| Automobiles | Exposure Score Change | 10 | 8 |
| Casinos and Gaming | MEI Activation | - | 3 |
| Consumer Finance | Exposure Score Change | 10 | 8 |
| Data Processing | Exposure Score Change | 2 | 3 |
| Drug Retail | Exposure Score Change | 5 | 6 |
| Electric Utilities | Exposure Score Change | 6 | 5 |
| Enterprise and Infrastructure Software | Exposure Score Change | 2 | 3 |
| Gas Utilities | Exposure Score Change | 6 | 5 |
| Heavy Machinery and Trucks | Exposure Score Change | 8 | 6 |
| Industrial Machinery | Exposure Score Change | 8 | 6 |
| IT Consulting | Exposure Score Change | 2 | 3 |
| Multi-Utilities | Exposure Score Change | 6 | 5 |
| Packaged Foods | Exposure Score Change | 8 | 6 |
| Rail Transport | Exposure Score Change | 8 | 6 |
| Real Estate Services | MEI Activation | - | 3 |
| Steel | MEI Deactivation | 3 | - |
| Water Utilities | Exposure Score Change | 8 | 7 |
MEI.22 Raw Material Use
The MEI.22 Raw Material Use focuses on how efficiently and effectively a company uses its critical raw material inputs (excluding energy and petroleum-based products, and water) in the production process and how well it manages related risks.
These risks stem from the increased demand for raw materials that are key to the low-carbon transition and increased scrutiny on the environmental impact of a company’s production processes. Responsible use of raw materials includes best practices such as recycling programmes, eco-design, circularity, and substitutes for scarce resources.
The development of the new MEI is an outcome of the MEI.20 Resource Use splitting into two distinct MEIs: this one focused on non-water critical raw materials (MEI.22 Raw Material Use) and another one focused on water (MEI.21 Water Use - Own operations).
| Subindustry | Type of Update | Former Exposure Score | New Exposure Score |
|---|---|---|---|
| Aerospace and Defence | MEI Activation | - | 3 |
| Auto Parts | MEI Activation | - | 2 |
| Automobiles | MEI Activation | - | 3 |
| Building Products | MEI Activation | - | 2 |
| Construction Materials | MEI Activation | - | 2 |
| Consumer Electronics | MEI Activation | - | 3 |
| Diversified Chemicals | MEI Activation | - | 2 |
| Electrical Equipment | MEI Activation | - | 4 |
| Electronic Components | MEI Activation | - | 4 |
| Industrial Gases | MEI Activation | - | 2 |
| Industrial Machinery | MEI Activation | - | 4 |
| Metal and Glass Packaging | MEI Activation | - | 3 |
| Non-Residential Construction | MEI Activation | - | 2 |
| Semiconductor Design and Manufacturing | MEI Activation | - | 3 |
| Specialty Chemicals | MEI Activation | - | 4 |
| Steel | MEI Activation | - | 3 |
| Tires | MEI Activation | - | 4 |