Low Carbon Transition Rating
Controversies Research
FAQ For Companies
Introduction
Morningstar Sustainalytics ("Sustainalytics") assesses companies within our product coverage universe for involvement in incidents with negative environmental, social and governance (ESG) impacts. The Controversies Research product provides assessments on a scale from category 1 to 5, where category 5 is the worst rating.
Morningstar Sustainalytics sells Controversies Research to the institutional investment community – asset owners and asset managers. Investors use this research for a variety of investment strategies, including screening out companies from portfolios to meet investment mandates, or to inform stewardship and proxy voting strategies.
The research is available as a standalone report (ESG Controversy Report) or via the Issuer Gateway portal:
1. ESG Controversies Report (PDF)
- This report has the most detailed information on each Controversy and Event indicator. If you would like a copy of this report, please contact [email protected]. (The report is not yet available on the Issuer Gateway portal).
2. Issuer Gateway
- ESG Risk Rating research online: Sustainalytics uses a subset of Events within the ESG Risk Rating scoring model. Issuers can view the scoring impact of any controversies on their ESG Risk Rating. (Also see FAQ section below: Events and ESG Risk Rating Scoring).
- ESG Risk Rating PDF: Sustainalytics provides details within the appendix of this PDF report on how we have scored Event Indicators.
- Comprehensive Ratings Framework Companies: See details in the Appendix under relevant Material ESG Issues (MEIs).
- Core Ratings Framework Companies: See details in the Appendix under Management Details.
Methodology
ASSESSMENT FRAMEWORK
The Controversies Research product provides overall company Ratings ranging from a Category 0 to a Category 5. Each company is rated according to the following assessment framework:
ESG Themes and Controversy Sub-Themes
Each ESG theme – Environment, Social, and Governance – is associated with a set of Controversy sub-themes:
Environment
- Environmental Supply Chain
- Operations
- Product & Services
Social
- Customer
- Employee
- Social Supply Chain
- Society & Community
Governance
- Business Ethics
- Governance
- Public Policy
Events
The 10 Controversy sub-themes have an associated set of Event indicators. Events refer to activities by a company that have (or allegedly have) a negative impact on the environment or society. There are 40 Event indicators. (See the final question below for a list of 40 Event Indicators with definitions).
Incidents
An Incident is the building block to the Controversies Research product. An Incident is a record of an activity by a company (or companies) that has (or is alleged to have had) a negative impact on the environment or society.
ASSESSMENT METHODOLOGY
Controversy assessments consist of two key components: Incidents and Events.
Incidents
An Incident is a specific company activity with negative environmental, social or governance impact on one or more company stakeholders. Each individual incident is assessed based on both the impact (breadth and severity) on stakeholders and the reputational risk that this activity poses to the company. Each assessment criterion is scored on a scale of 1 to 10. Incidents are researched by the Morningstar Sustainalytics Incidents Research team.
Events
Events consist of one or more incidents that are related to the Event definition.
Events are assessed by the Controversies Research Team.
To assess an Event, an analyst considers the following factors:
- Impact: Negative impact of the incident(s) on the environment and/or society.
- Risk: Business risk to the company due to the incidents.
- Management: A company’s existing relevant management systems and the company’s specific response to incident(s).
Incident Impact and Risk scores are reviewed by the Event analyst, but they do not determine the final Event assessment.
ASSESSMENT CATEGORIES
| Category 5 - Severe | The event has a severe impact on the environment and society, posing serious risks to the company. |
| Category 4 - High | The event has a high impact on the environment and society, posing significant risks to the company. |
| Category 3 - Significant | The event has a significant impact on the environment and society, posing moderate risks to the company. |
| Category 2 - Moderate | The event has a moderate impact on the environment and society, posing minimal risks to the company. |
| Category 1 - Low | The event has a low impact on the environment and society, posing negligible risks to the company. |
| Category 0 - No evidence of controversies | N/A |
CONTROVERSIES RATING
An incident is typically archived if there is no update after three years. However, an (Event) analyst can decide to keep an Incident indefinitely if it is part of an ongoing pattern of similar Incidents.
Sustainalytics recognizes three distinct levels of corporate ownership:
- Controlling interest: Over 50% of voting shares. For Joint Ventures, each partner is treated as having a controlling interest.
- Minority interest: Typically, between 10-50% ownership of voting shares.
- Insignificant interest: Typically, less than 20% ownership of voting shares.
Please note, Sustainalytics may determine a company has a controlling interest even when it does not meet the formal criteria above. In those instances, Sustainalytics will explain the reason.
Sustainalytics researches the parent company for its own incidents plus any incidents at its controlled entity(ies).
Sustainalytics’ assessment of the owner may reflect a reduced level of accountability for the incident if it occurred at an owned entity. This is proportional to the level of control exercised by the owner and the size of the owned company relative to the owner.
Sustainalytics researches the owned entity independently of its owner when reviewing incidents unless the owned entity is a non-autonomous entity such as a Special Purpose Vehicle (SPV) or financing entity. For non-autonomous entities that we cover, Sustainalytics provides the research assessments of its owner. If a controversy happens at an owner, the controversy is not recognized at the owned entity unless the owned entity is also involved in the controversy, or the controversy is enabled by the owned entity.
An owned entity’s involvement can include cases where the owned entity benefited from the owner’s misconduct or cases where the controversy has negative repercussions for the owned entity. Owned entities may be considered to enable the owner when the owned entity accounts for more than 50% of the owner’s revenue or the owned entity contributed partially or fully to the provision of products and services that were involved in the misconduct at the owner. If a controversy happens at an owner and the controversy is linked to or enabled by an owned entity, Sustainalytics’ events assessment of the owned entity reflects its level of accountability in the controversy.
ENVIRONMENT
| Code | Indicator Name | Description |
| EV.3 | Animal Welfare | This event indicator assesses incidents related to a company’s failure to ensure the wellbeing of animals kept for human consumption, animal testing or other purposes. |
| EV.12 | Land Use and Biodiversity | This event assesses incidents related to a company’s failure to adhere to sustainable land use practices, resulting in negative impacts on land or ecosystems, such as biodiversity. |
| EV.14 | Emissions, Effluents and Waste | This event indicator assesses incidents related to the release or improper disposal of waste, effluents or emissions (excluding carbon dioxide) into the environment. |
| EV.15 | Energy Use and GHG Emissions | This event indicator assesses incidents related to the poor management or excess release of greenhouse gas (GHG) emissions from a company’s business activities. |
| EV.17 | Environmental Impact of Products | This event indicator assesses incidents related to a product’s negative impact on the environment, as well as those related to products from a company's suppliers. Incidents may emerge as a result of lawsuits, product bans, recalls or stakeholder scrutiny due to the negative impact of a company’s product. |
| EV.33 | Water Use | This event indicator assesses incidents of excessive water use associated with a company’s operations, or activities in water scarce areas. |
| EV.35 | Animal Welfare - SC | This event indicator assesses incidents related to the failure of a company’s suppliers to ensure the wellbeing of animals kept for human consumption, animal testing or other purposes. |
| EV.39 | Emissions, Effluents and Waste - SC | This event assesses incidents in the supply chain related to the release or improper disposal of waste, effluents or emissions (excluding carbon dioxide) into the environment. |
| EV.40 | Energy Use and GHG Emissions - SC | This event assesses incidents related to the poor management or excess release of greenhouse gas (GHG) emissions from business activities in a company’s supply chain. |
| EV.43 | Land Use and Biodiversity - SC | This event indicator assesses incidents related to the failure of a company’s supplier to adhere to sustainable land use practices, resulting in negative impacts on land or ecosystems, such as biodiversity. |
| EV.45 | Water Use - SC | This event indicator assesses incidents of excessive water use associated with a company’s suppliers, or activities by suppliers in water scarce areas. |
| EV.46 | Carbon Impact of Products | This event indicator assesses incidents related to the harmful environmental impacts of carbon dioxide emissions associated with the use of a company’s products. For financial institutions, this may include the financing of projects or companies whose products result in significant carbon dioxide emissions. |
SOCIAL
| Code | Indicator Name | Description |
| EV. 1 | Access to Basic Services | This event indicator assesses incidents related to a company’s failure to ensure access to essential products or services, such as food, water and health care. |
| EV.10 | Community Relations | This event assesses incidents related to company activities that negatively impact local communities, including indigenous communities, and how companies respond to and manage conflicts with affected groups. |
| EV.20 | Occupational Health and Safety | This event indicator assesses incidents related to a company's activities that have a negative impact on workers' health and safety. These include workplace accidents, chemical contamination, diseases and labour activities that endanger employee safety. |
| EV.22 | Labour Relations | This event indicator assesses incidents related to poor compensation or unfair working conditions that are raised by a company's own employees or their representatives, such as labour unions. It also includes incidents related to discrimination and harassment in the workplace. |
| EV.24 | Marketing Practices | This event indicator assesses incidents related to false or deceptive marketing practices, such as using misleading or incorrect statements in promotional materials or targeting vulnerable consumers. |
| EV.25 | Media Ethics | This event indicator assesses incidents related to breaches in editorial standards, content or general ethical principles for the media, including broadcast, print, digital and other types of media outlets. |
| EV.27 | Data Privacy and Security | This event indicator assesses incidents related to breaches of customer data privacy, unauthorized disclosure, collection or use of personal data, or failure to protect customer data. |
| EV.28 | Quality and Safety | This event indicator assesses incidents related to alleged quality or safety issues associated with a company’s products or services, which may result in negative impacts on the safety or wellbeing of consumers, or society. |
| EV.29 | Resilience | This event assesses incidents related to the ability of financial institutions to withstand negative shocks arising from changes in economic conditions, and therefore avoid negative impacts on taxpayers and other stakeholders. |
| EV.32 | Social Impact of Products | This event indicator assesses incidents related to a product’s negative impact on society. Incidents may emerge as a result of lawsuits, product bans, recalls or stakeholder scrutiny due to the negative impact of a company’s product. |
| EV.34 | Weapons | This event indicator assesses incidents related to the production or sale of weapons that are subject to arms export regulations, or otherwise controversial weapons, as well as the sale of weapons to countries that are especially prone to armed conflict and human rights violations. |
| EV.38 | Community Relations - SC | This event assesses incidents related to activities by a company’s suppliers that negatively impact local communities, including indigenous communities, and how a company responds to and manages conflicts with affected groups. |
| EV.42 | Labour Relations - SC | This event indicator assesses incidents relating to poor compensation or unfair working conditions in a company's supply chain. |
| EV.44 | Occupational Health and Safety - SC | This event indicator assesses incidents related to activities by a company’s suppliers that have a negative impact on worker health and safety. Such incidents include occupational hazards such as workplace accidents, chemical contamination, diseases and labour activities that endanger employees' safety. |
| EV.47 | Employees - Human Rights | This event indicator assesses incidents related to violations of the human rights of employees within a company's own operations. This includes incidents involving the use of forced labour, slavery and child labour, discrimination or sexual exploitation. |
| EV.48 | Society - Human Rights | This event indicator assesses incidents related to a company's direct or indirect involvement with corrupt governments, dictatorial regimes or parties that have a track record of human rights violations or are engaged in human rights abuses. This indicator also analyzes incidents regarding a company's direct or indirect activities in occupied territories and non-self-governing territories. |
| EV.49 | Employees - Human Rights - SC | This event indicator assesses incidents related to violations of the human rights of workers within a company's supply chain. This includes incidents involving the use of forced labour, slavery and child labour, discrimination or sexual exploitation. |
| EV.50 | Society - Human Rights - SC | This event indicator assesses incidents related to a company's suppliers' direct or indirect involvement with corrupt governments, dictatorial regimes or parties that have a track record of human rights violations or are engaged in human rights abuses. This indicator also analyzes incidents regarding a company’s suppliers' direct or indirect activity in occupied territories and non-self-governing territories. |
GOVERNANCE
| Code | Indicator Name | Description |
| EV.2 | Accounting and Taxation | This event indicator assesses incidents related to accounting irregularities as well as efforts to reduce the amount of taxes paid through tax evasion (use of illegal means to evade taxes) or tax avoidance (the use of legal means to reduce tax liabilities). |
| EV.4 | Anti-Competitive Practices | This event assesses incidents related to attempts to prevent, reduce or restrict competition in a market, primarily through alleged violations of antitrust regulation. |
| EV.6 | Bribery and Corruption | This event indicator assesses incidents related to bribes that are paid or accepted by a company to or from government officials or other private entities to secure an unfair advantage over other companies. |
| EV.7 | Business Ethics | This event indicator assesses incidents related to ethical violations committed by a company or its employees. This includes fraud or enabling fraud, money laundering, manipulation, misuse of power or of corporate assets, and conflicts of interest, among others. |
| EV.13 | Corporate Governance | This event assesses incidents related to the quality and integrity of a company’s corporate governance structures, including the structure and oversight of its board of directors and shareholder rights and remuneration. |
| EV.21 | Intellectual Property | This event indicator assesses incidents related to breaches of intellectual property rights, such as patents, copyright, industrial design rights, trademark, or trade secrets. |
| EV.23 | Lobbying and Public Policy | This event assesses incidents related to lobbying or public spending that is perceived to violate ethical or legal standards. |
| EV.30 | Sanctions | This event indicator assesses incidents related to corporate activities that result in a breach of international sanctions, issued by supranational organizations or individual countries. |
| EV.36 | Bribery and Corruption - SC | This event indicator assesses incidents related to bribes or kickbacks that are paid or accepted by a company’s suppliers to government officials or other private entities to secure an unfair advantage over other companies. |
| EV.37 | Business Ethics - SC | This event indicator assesses incidents related to ethical violations committed by a company’s suppliers. This includes fraud or enabling fraud, money laundering, manipulation, misuse of power or of corporate assets, and conflicts of interest, among others. |
Research Process
A Morningstar Sustainalytics analyst reviews all Event assessments at least once per year. Typically, this occurs during the annual update of a company’s ESG Risk Rating.
In addition, the ESG Research team monitors sources daily for both new incidents and updates to existing incidents. Publication of new incidents and corresponding updates to Events can occur daily.
Yes, the ESG Research team reviews sources daily for both new incidents and updates to existing incidents.
For both Incidents and Events, analysts conduct research based on robust internal guidelines. Incidents are reviewed by a dedicated research team.
Events assessed as Categories 4 and 5 must meet an additional level of scrutiny by the Research analyst and review by a quality control committee.
The committee, known as the Events Oversight Committee, is staffed by senior members of the Research team. It reviews the following types of Events:
- Events that are initially proposed to be a Category 3 with a negative Outlook.
- Category 4 or 5.
- Any proposed changes to existing Category 4 or 5 Events.
In addition, the Sustainalytics Controversy Research team conducts the following reviews:
- Category 4-5: A quarterly review of Assessments and Outlooks.
- Category 3: A 6-month review of Assessments and Outlooks.
Annual Update
Every company that has an ESG Risk Rating is alerted to their upcoming annual update and encouraged to review their existing Controversy Rating at that time.
Special Outreach for Category 4 and 5 Events
If we intend to assess a company as Category 4 or 5, Sustainalytics will email the company when there is a potential rating change to allow the company an opportunity to provide more information.
Companies can submit comments on any controversial events via the Issuer Gateway portal.
Companies should focus their comments on factual errors.
Companies can provide updates to events. Sustainalytics is looking for updates to incidents where the controversy has been resolved or settled as confirmed in publicly available or disclosable information.
Any new information should be supported by relevant documentation.
Sustainalytics will review the following types of documents only:
- Public: Published on the website or as part of a filing available to the public at large.
- Public – Accessible Upon Request: Not published on the website, but the company will share the information upon request and without restriction.
- Internal: Information not published on the website and which the company may not share. Although this information is not material - i.e., may not affect the price of the securities/ financial instrument - it may, if widely disclosed, commercially affect the issuer.
We do NOT accept the following types of documents:
- Confidential: Proprietary information, including details relating to business activities and operations, technical information, and trade secrets, that is confidential to its owner at the time of disclosure and should be understood by a reasonable person to be of a proprietary or confidential nature.
- Material Non-Public Information: This information refers to any information that may have a positive or negative impact on the market price of the company’s securities and could be reasonably expected to be considered relevant by reasonable investors in their investment decision-making.
Sources
Sustainalytics' Controversies research utilizes publicly available sources including:
- Company disclosures such as annual reports, financial documents (e.g. 10-K or 8-K reports in the U.S.), proxy statements, and sustainability reports, which are published in accordance with legal and regulatory requirements.
- Media sources, such as news outlets, NGO (non-governmental organization) reporting, legal documents, regulatory decisions, government websites, and open data platforms, as well as other publicly available sources.
Sustainalytics assesses sources using our sources protocol, which focuses on understanding political bias and the accuracy of reporting. We use credible news media and select NGO sources to support parts of our research. In the research areas where it is relevant, these secondary sources are used by our research teams to identify and evaluate the impacts of individual Incidents or Controversies.
Sustainalytics is a non-partisan research, data and ratings organization. When compiling data using primary sources or using news and other editorial content from secondary sources, we are dedicated to taking an unbiased approach and presenting only the facts within our research. We are apolitical and do not support or oppose any government, party, company, individual or issue.
We look for specific sets of information related to impact, company response, company accountability, reputational impact and exceptionality. The information extracted from these sources does not alone determine any research outcome. The information is applied to static research methodologies and analyst guidance documents to ensure consistent research outcomes. In all cases we review multiple sources.
In addition, our dedicated team of controversies analysts and sector analysts assign the Controversy Ratings by assessing incidents, corporate disclosure on issues as well as other publicly available information. We also analyze information provided by companies as part of a company feedback process.
Events and ESG Risk Rating Scoring
A subset of Events is used in the ESG Risk Rating scoring model.
For Comprehensive Ratings Framework companies, Events that are part of the ESG Risk Rating model impact the management score of each Material ESG Issue (MEI). Our ESG Risk Rating model determines which Events are mapped to MEIs. It is important to note that not all Incidents, Events and Controversy assessments are part of the ESG Risk Rating, but all are featured in our Controversy Report.
For Core Ratings Framework companies, the impact of any Events that are part of the model applies to the Management Score.
In general, the scoring impact of an Event is as follows:
| Category 1 | 5% |
| Category 2 | 10% |
| Category 3 | 25% |
| Category 4 | 25-50% |
| Category 5 | 50% or more |