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Morningstar Sustainalytics’ Engagement Guidance


Why have we reached out to you?

Morningstar Sustainalytics’ Stewardship Services works alongside and on behalf of investors who have various motivations for engaging with companies that are either existing or potential investee companies. We are contacting you, as the investors that we represent wish to better understand how you are managing ESG risks, capitalizing on ESG opportunities, and to discuss investor ESG expectations and motivations.

Alongside our investor clients, we have been engaging with companies globally for more than 20 years to bring about positive measurable ESG change. Based on our experience, we believe that Morningstar Sustainalytics’ ESG engagement process can add value to your company’s ESG performance, through:

  • Increasing your company’s ESG attractiveness to mainstream investors. Sustainable investment moved from roughly 15% of total global AUM in 2014 to about 36% in 2020 and is projected to grow to around 50% by 2025. Through our engagement, your company will gain a direct understanding of our investors' current ESG expectations.
  • Investor representation. We are commissioned to engage issuers on ESG topics by about 130 institutional investor clients, which combine represent more than USD 4.2 trillion in AUM. The service is provided at no cost to companies.
  • Effective communication. Engaging with us means we channel the information to our institutional investor clients, thereby reducing the number of individual dialogues and communication channels for your company.
  • A critical but balanced and independent stakeholder. Similar to many issuers, we share the goal of improving ESG practices. We engage with issuers with a view to supporting them in finding the best solutions to complex ESG challenges. We take a balanced approach, listening to companies, aiming for candid conversations while providing examples of best practice and sharing investors’ ESG perspectives and expectations. Because we are not commissioned by issuers for our engagement services, we maintain our independence.
  • We are experts in a wide range of ESG topics across various sector groups. We aim to bring new perspectives and insights, best practices, key initiatives, and collaboration to the table to support your company in building a successful and sustainable business, aligned with investor expectations and addressing material ESG risks.
  • Goal-oriented engagements. Our point of departure for any engagement with issuers is a pre-defined engagement objective. This supports a focused and effective engagement process, with a clear start and end point.

Who are we?

Morningstar Sustainalytics is a leading ESG research, ratings and stewardship firm that supports investors around the world with the development and implementation of responsible investment strategies. For 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 which incorporate ESG and corporate governance information and assessments into their investment processes. Of the top 20 Asset Managers, Morningstar Sustainalytics serves 18.

Morningstar Sustainalytics also works with hundreds of companies and their financial intermediaries to help them consider sustainability in policies, practices and capital projects. With 16 offices globally, Morningstar Sustainalytics has more than 1,800 staff members, including more than 800 analysts and over 40 Engagement Managers with varied multidisciplinary expertise across more than 40 industry groups.

For more information, visit www.sustainalytics.com

Who are our investor clients?

Morningstar Sustainalytics has over 1,000 clients globally, including more than 130 investors who have engaged our stewardship services. Our global investor footprint consists of both asset owners (pension funds, insurers, etc.) and asset managers (mutual funds, institutional investors, etc.). Their combined “Assets Under Engagement” total more than USD 4.2 trillion across our five stewardship services.

Why do our investor clients use our services?

Investor clients subscribe to Morningstar Sustainalytics Stewardship Services for various reasons and at different stages of the investment process, including pre- and post-investment.

Some typical use cases that we have identified include:

  • Compliance – investors are increasingly required to be aligned with relevant ESG regulations, guidelines, and codes.
  • ESG integration – investors need insights into companies’ readiness to address ESG risks and opportunities to inform investment decision-making and portfolio management.
  • Impact investment strategy – investors use engagement as the key driver of tangible ESG impact.
  • Screening – investors use engagement to build investment list and/or avoid exclusion.

Morningstar Sustainalytics does not provide investment or divestment advice; the decision of investment or divestment lies solely with the client. Sustainalytics merely provides engagement services with companies, and in light of the engagement outcome it is the client's sole responsibility and decision on how to manage their portfolio.

Also, we do not collect information on our investor clients’ portfolio holdings. Clients may communicate such information to us and the engaged company, however, this is only at their discretion.

How do we collaborate with our investor clients?

Morningstar Sustainalytics Stewardship Services investor clients are an important stakeholder in our engagement process, and we encourage their active participation throughout the process.

For example, investor clients are invited to join our engagement conference calls and meetings in person; they may add their contributions to the agenda or ask questions directly during the call/meeting. They are also invited to join engagement events with other like-minded investors, such as roundtables, panel discussions or webinars.

Stewardship Services’ clients have direct access to our engagement specialists, and they can discuss individual cases or companies they are interested in, ESG trends and developments, or any other aspects of stewardship. We are often an extension of, or a complement to investors’ internal resources hence close collaboration is standard practice.

What does engagement mean in practice?

Morningstar Sustainalytics’ engagement approach is based on constructive dialogue, which means that we attempt to listen as much as we speak. We make a great effort to get the facts right and understand the perspective of each company we engage with and the context in which it operates.

As a starting point, Morningstar Sustainalytics’ Stewardship Services will contact your company via email to inform you about the topic we plan to cover. We will then set up an introductory call to discuss the background of our request, our engagement objectives, and your view on the topic. We will also aim to provide you with best practice examples on relevant policies, ESG management programmes and systems, and related disclosures. We will then follow up via emails, phone calls and meetings (video or in-person).

On average, we seek to speak with your company twice a year, until our engagement objective has been met. We also seek to keep in touch throughout the year via email to exchange ideas and ask clarifying questions in between calls. Morningstar Sustainalytics’ high professional standards ensure that the team is well prepared for our joint meetings and other exchanges. We understand companies’ time and capacity constraints and aim for effective and focused exchanges. At the same time we believe that there is a strong correlation between the frequency and depth of the exchanges we have with companies and our ability to produce quality engagement results.

Our investor clients may want to join calls and meetings. We attempt to let you know in advance if there is investor interest in joining a meeting, however investors can and may join calls unannounced. We take meeting minutes that we share with your company for feedback and clarification. You will have 10 working days to review draft meeting minutes and respond before they are uploaded to our password-protected platform, exclusive to our Stewardship investor clients.

We provide regular updates to our investor clients on your company’s level of response as well as the progress you are making on the ESG issue(s) in focus. When companies do not respond to our communication or decline to engage, we have an alternative set of activities that we may undertake. These include, among others, investor letters, collaborative engagement with other investor groups and engagement-related voting recommendations.

If, despite those efforts, there is a persistent lack of response and/or progress, we might issue a “disengage” status. This means that we stop our engagement efforts; however, we continue to monitor the company and contact it periodically to enable an opportunity to enter into engagement dialogue, should it wish to do so. A “disengage” status may also be issued in other scenarios, for example, when a company is under sanctions or in financial distress.

Morningstar Sustainalytics’ Stewardship Services does not provide investor clients with investment/divestment advice. Our role is to engage in dialogue to align investor and corporate ESG expectations and practices. Our clients seek engagement to promote progress on ESG matters, reduce ESG-related portfolio risks and fulfil their fiduciary duties, among other things. Our investors, therefore, appreciate your willingness, time and efforts to engage with us.

What information do we collect and how?

We utilize information from public sources, media and NGOs, as well as information from companies. We look for relevant materials available on your website, your company’s annual or Sustainability/CSR reports and any additional relevant disclosable information you may want to share with us. We occasionally reach out to regulators and industry groups to learn their perspectives and gain a broader view.

We collect information that substantiates progress towards the pre-defined engagement objectives, such as insights into policies, process descriptions, impact assessments or audit results. Additionally, to better understand your company’s ESG policies, practices and performance data, Morningstar Sustainalytics’ Stewardship Services team interacts with company management and the board of directors when relevant.

Information types and the way in which they are taken into account and reflected in our engagement are detailed in the following document: Information Types Engagement Guidance 20211105-vPDF.pdf (sustainalytics.com). In principle, Morningstar Sustainalytics’ Stewardship Services will accept publicly available information (i.e., published on a website or as part of a filing available to the public at large), or accessible upon request (i.e., information you are willing to share upon request to any third party who is asking for it), or internal information (i.e. information that is not available in the public domain, nor intended to be shared with any third party that asks for it; internal information is not material but may be sensitive in some contexts). Morningstar Sustainalytics’ Stewardship Services will not ask for, nor accept any confidential or material nonpublic information (MNPI) information.

All the information collected is intended to be shared with our investor clients; therefore, such information should be disclosable. We, however, acknowledge that you may want to share with us information that is internal (such as, for example, internal policies, internal or draft reports, business continuity plans) and which you do not wish to be shared outside our dialogue. Once that has been signalled by you and agreed upon, we will not make this information available to our investor clients.

How do we share information with our investor clients?

During the engagement process, we are committed to providing high transparency on the developments in our dialogue with issuers.

We log meeting notes and all correspondence with your company for publication on our password-protected platform, exclusive to our Stewardship investor clients. The information available on the platform may include company contact names and job titles. Concerning meeting notes, Morningstar Sustainalytics’ Stewardship Services provides these for your review before sharing them with our investor clients. We commit to accurately portray the facts of the engagement, and we will invite you to confirm the accuracy of the facts reflected therein. Any documents you share will be made available to our investor clients and will be referenced with their name and receipt date unless otherwise agreed.

We also communicate with our investor clients through other channels, such as quarterly, biannual and annual reports. These reports contain information extracted from the online investor platform but may also provide additional reflections and assessments.

How do our investor clients share information obtained from us?

Morningstar Sustainalytics Stewardship Services supports our investor clients with their needs for internal and external stakeholder communications. We have developed detailed guidelines for clients on the use of Sustainalytics’ Stewardship information and standard reports in clients’ stakeholder reporting.

In most cases, our investor clients are allowed to share such information as the names of the engaged companies, case statuses and/or information reflecting engagement progress. As clients are subject to increasing regulatory and/or soft law reporting requirements, they may approach us to obtain a permission to disclose more data. Morningstar Sustainalytics considers such requests on a case by case basis. We, however, always take special care to protect the correspondence with issuers such as emails or meeting minutes or our case commentaries, among other things.

What stewardship services does Morningstar Sustainalytics offer to our investor clients?

Morningstar Sustainalytics’ Stewardship Services offers five different services to investors.

1. Risk & Strategy (Material Risk Engagement)

Proactive engagement service focused on companies with unmanaged financially material ESG risks. This engagement service leverages Morningstar Sustainalytics’ ESG Risk Rating to identify companies with high and severe unmanaged ESG risk.

2. Incidents (Global Standards Engagement)

Reactive, incident-driven engagement service focusing on companies that cause, contribute to or are linked to alleged violations of international norms and standards concerning one or more principles of the UN Global Compact and related international conventions, norms and standards. This service leverages Morningstar Sustainalytics’ Global Standards Screening research that identifies companies assessed as “Watchlist” and “Non-Compliant” for engagement.

3. Impact Driven (Thematic Engagement)

Proactive engagement service that focuses on tackling the most challenging systemic ESG issues, from climate change, through to modern slavery, board oversight and corporate accountability. Companies in scope for engagement are identified through a bilateral selection process. We firstly identify the more material sectors that drive risk or opportunity and secondly identify the companies in these sectors that participating investors have prioritized for engagement on this topic.

4. ESG Voting (ESG Voting Policy Overlay)

Provision of voting recommendations in line with widely accepted ESG principles, sustainability objectives, ongoing engagements and ESG trends with a demonstrated momentum among investors. This service combines research with engagement insights that generate voting recommendations to our clients.

5. Engagement 360

Holistic engagement and stewardship service consolidating the engagement and proxy voting advice of all our stewardship services. Engagement 360 ties together the engagement on incidents, risk and impact with vote recommendations on corporate and portfolio levels.

For more information, visit www.sustainalytics.com.

What are Morningstar Sustainalytics’ other services?

In addition to the Stewardship Services, your company might be in contact with a different Morningstar Sustainalytics team, in connection to the following products or services (this list is not exhaustive):

1. ESG Risk Rating (ESG RR)

Measures a company’s exposure to industry-specific material ESG risks and how well a company is managing those risks.

2. Global Standards Screening (GSS)

Assesses a company’s impact on stakeholders and the extent to which a company causes, contributes to or is linked to alleged violations of international norms and standards.

3. Morningstar Sustainalytics’ Corporate Solutions (SCS)

Offers ESG-related products and services to public and private companies, banks, underwriting firms and other organizations. The SCS business unit products and services include ESG Risk Rating licences, Competitive Insights and Performance Analytics benchmarking products, and Second Party Opinions on green, social and other sustainable bond or loan issuances.

For more information, visit www.sustainalytics.com.

How are our services related?

Morningstar Sustainalytics provides a vast array of products, services and solutions to meet the various needs of both institutional investors and issuers.

We aim to provide investors with integrated and consistent solutions; therefore, several of our Stewardship services are leveraging ESG research and analysis from other Morningstar Sustainalytics products and services. Global Standards Engagement uses Global Standards Screening research, while Material Risk Engagement builds upon the ESG Risk Rating and various elements of Morningstar Sustainalytics’ ESG research provide input to Thematic Engagement.

Protecting the interests of clients and key stakeholders is of utmost importance to us. Morningstar Sustainalytics uses a combination of conflict management policies, procedures and organizational and technical measures to manage potential conflicts of interest. Our robust conflict management framework specifically addresses the need for analyst independence, process consistency, structural separation of commercial, research and engagement teams, data protection and systems separation.

In line with the above, Morningstar Sustainalytics’ Stewardship Services operates as a separate department and as a separate set of services from Morningstar Sustainalytics’ ESG Research.

Throughout our engagement dialogue with issuers, an important focal point is to improve their ESG transparency and disclosure. Any progress that a company makes in that area, corresponding to the objectives set for the engagement, will be reflected in our engagement reporting. At the same time, ESG Research products, including the ESG Risk Rating and Global Standards Screening, have their own methodology and independent assessment and review processes, which are based on issuers’ public disclosure. Therefore, insights collected through the engagement process are not shared with the research analysts, nor used to determine any updates to research products.

Any questions in relation to ESG Research should be directed to [email protected].


Material Risk Engagement and ESG Risk Rating

Constructed as an engagement overlay to Morningstar Sustainalytics’ ESG Risk Rating (ESG RR), Material Risk Engagement focuses on companies considered high or severe risk, as determined by the ESG RR. Material Risk Engagement is change-oriented and aims to address the management gaps, supporting the target company to improve its ESG risk management, disclosure and performance.

While Engagement Managers have access to ESG RR research and use such assessments to determine focus companies, information and insights collected through the engagement process are not shared with ESG RR analysts and are not used to update the ESG RR scoring. Updates to the ESG RR scoring are made only according to the dedicated product methodology.

Any recognized progress that a company makes with regard to the set engagement objectives are reflected in the engagement reporting.

Any questions in relation to the ESG RR should be directed to [email protected].


Global Standards Engagement and Global Standards Screening

Morningstar Sustainalytics’ Global Standards Engagement has been developed as an engagement overlay to Morningstar Sustainalytics’ Global Standards Screening (GSS). Global Standards Engagement uses GSS assessments to identify companies in scope for engagement.

Although both services focus on the same list of companies and cases, each has their own independent assessment and review processes. Global Standards Engagement will, in general terms, conclude its engagement when the alleged incident has been addressed and/or mitigated, and appropriate measures have been implemented to prevent a reoccurrence. The decision is based on publicly available information as well as information obtained through the engagement dialogue.

While Engagement Managers have access to GSS research, in order to better understand the incidents and the extent of their impact on people and/or the environment, information and insights collected through the engagement process are not shared with GSS analysts, nor used to inform any GSS updates. Updates to GSS assessments are made only according to the dedicated product methodology.

Any recognized progress that a company makes with regard to the set engagement objectives will be reflected in the engagement reporting.


Stewardship and Morningstar Sustainalytics’ Corporate Solutions

The clients of Morningstar Sustainalytics Corporate Solutions (SCS) are corporates/issuers, while the clients in Morningstar Sustainalytics’ Stewardship Services are investors. SCS provides various services to issuers and Stewardship Services may engage with the same corporates on behalf of investors (clients). The services from SCS and Stewardship Services can have an overlapping purpose of supporting corporates/issuers to improve ESG risk management, but the approach differs due to the different client perspective. Information is not shared between the two business lines.

If you have any questions, please contact your Engagement Manager or [email protected].