Information Center for Issuers

Access the complete Controversy Ratings Methodology: Version 2.0 here.   

The Controversy Ratings reflect a company’s level of involvement in ESG driven issues that are material to stakeholders and the environment or pose a financially material risk to the company. The first building 

block is an Incident, which represents a singular negative issue where the company has been involved. Incidents on the same topic are collected and combined to inform an Event on that topic. For each event, we assess two dimensions: Risk and Impact, each providing a distinct signal.

‘Risk’ speaks to the financial risk that the event poses for a company, whereas ‘Impact’ focuses on the negative impacts of the event on the environment and society. Finally, a Controversy is a collection of multiple events that have the same theme and represent the building block of the rating.

 

Exhibit 1. Building Blocks of the Controversy Rating

Source: Morningstar Sustainalytics.

 

Controversy assessments consist of two key components: Incidents and Events. 

Incidents

An incident is the starting point of a Controversy Rating. It is defined as any company activity that yields adverse effects on stakeholders and/or the environment. Incidents provide an initial indication about the materiality of the adverse event that is reported in the media.


Incidents are monitored through a range of media sources. We analyse cases if they fall within one of 58 incident types that address a broad array of environmental, social and governance issues ranging from, for instance, emissions, effluents and waste to data privacy and security, and business ethics, among others. If an incident relates to a company’s supply chain, this will be marked as such, to distinguish supply chain incidents from similar incidents that have occurred in the company.


Events

Events consist of one or more incidents that are related to the Event definition. 
Event Indicators provide a Rating Category for 41 different thematic areas, based on an assessment of the underlying incidents, both from an impact as well as risk perspective, providing clear insight into double materiality.

Each material Incident is mapped to the relevant Event Indicator built on their thematic relationship. The outcome of the assessment for each Event Indicator is expressed using one of the six Rating Categories and for Risk Event Categories. It reflects the highest Rating Category of the underlying Impact and Risk assessments that follow the same six categories.

Rating Category Summary

 

Rating Category	Description
Category 5	Category 5 represents the most severe controversies. The category highlights the most material risk or most severe stakeholder/environmental impact.
Category 4	Category 4 represents a high stakeholder/environmental impact or high level of financial materiality for the company.
Category 3	Category 3 represents a significant stakeholder/environmental impact or significant financial materiality for the company.
Category 2	Category 2 represents moderate stakeholder/environmental impact and is financially immaterial to the company.
Category 1	Category 1 represents a low stakeholder/environmental impact and is financially immaterial to the company.
No evidence of relevant controversies	Incidents involving the company have not been recorded during the relevant period.

 

Impact

The impact assessment of events assesses the impact that is associated with the company on its external environment. This includes both the environment as well as stakeholders from a social perspective. The impact is assessed according to four factors: scale, scope, remediation and role.


Risk

The risk assessment of events considers the business risk to the company that the 
event may cause. It aggregates the business risk into financially material amounts from up to five ‘risk’ factors: Operational, financial, legal, regulatory and compliance, and reputational. The financial materiality risk assessment also considers the financial health of the company involved in the controversy.

For further details, see the Controversy Ratings Methodology: Version 2.0 here.

An incident is typically archived if there is no update after three years. However, an analyst may decide to keep an Incident indefinitely if it is part of an ongoing pattern of similar Incidents. 

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 recognizes three distinct levels of corporate ownership:

1. Controlling interest: Over 50% of voting shares. For Joint Ventures, each partner is treated as having a controlling interest.

2. Minority interest: Typically, between 10-50% ownership of voting shares.

3. 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 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. 

Yes, refer to the specific list of Events, including descriptions, via the following page: Event Indicators by Theme.


See a broad list of Controversy and Event types below.

 

Controversy Type	Event Type
Operations	Emissions, Effluents and Waste Land Use and Biodiversity Energy Use and GHG Emissions Water Use
Environmental Supply Chain	Emissions, Effluents and Waste - SC Energy Use and GHG Emissions - SC Land Use and Biodiversity - SC Water Use - SC
Products & Services	Carbon Impact of Products Environmental Impact of Products
Employees	Occupational Health and Safety Employees – Human Rights Labour Relations
Social Supply Chain	Community Relations – SC Employee – Human Rights – SC Labour Relations – SC Occupational Health and Safety – SC Society – Human Rights - SC
Customers	Quality and Safety Anti-Competitive Practices Data Privacy and Security Marketing Practices Media Ethics
Society & Community	Community Relations Access to Basic Services Sanctions Social Impact of Products Society – Human Rights Weapons
Business Ethics	Accounting and Taxation Business Ethics Animal Welfare Bribery and Corruption Intellectual Property
Governance	Corporate Governance Animal Welfare – SC Bribery and Corruption - SC Business Ethics - SC Resilience
Public Policy	Lobbying and Public Policy

 

Events are updated on an ongoing basis as new information becomes available. New material incidents with high impact or risk, or new corporate developments may lead to either an upgrade or a downgrade at any point during the year. A full review of a company’s Event scores is carried out as part of one of the quarterly or annual reviews and the material events are reassessed at a minimum annually, irrespective
of the occurrence of the news. Any change to an event score may also be reflected in the Controversy score, if that event was the highest scoring Event in that Controversy category.

In addition, we periodically review the approach behind our model components, Event Indicators and Incident Tags, to ensure that it remains relevant and substantive. This process may result in changes such as the development of new Incident Tags or Event indicators, structural enhancements to existing indicators or changes to the methodological architecture of the rating. Such changes need to be reviewed
and approved by Morningstar Sustainalytics.

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. 

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. 

• To submit comments, please go to the Research Controversies section and scroll down to the Event Indicators section. 
• Select the event indicator you would like to comment on and select the Add Comment button. The save button saves your comments and allows you to go to another indicator to make additional comments.
• To submit your saved comments for review, please go to the Communications Log.  From there you may check that you have commented on all the relevant indicators and then select submit ticket to post your comments to the Sustainalytics ESG Research team. Please submit all comments at once.  

Sustainalytics reviews the following types of documents only: 

• Public: Published on the website or as part of a filing available to the public at large.

 

We do NOT accept the following types of documents:

• Internal documents of any type.
• 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.
  

• 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 publicly disclosable documentation.