Morningstar strengthens its ESG ratings tools for investors

Financial data supplier Morningstar said Wednesday that is has beefed up its Morningstar Sustainalytics flagship ESG Risk Ratings, covering more than 16,000 companies globally. The company said corporate governance methodology enhancements went into effect on May 30 and stronger material ESG risk measures will be implemented in the coming months.

“The world is constantly changing, creating a challenging environment for investors, and our ESG risk metrics need to evolve along with it,” said Laura Lutton, director of ESG product management, Morningstar Sustainalytics, in a release announcing the rollout. “Our clients look to Morningstar … to better address a myriad of ESG-related risks and opportunities and provide a consistent independent lens on financially material ESG issues.”

The ESG ratings help investors identify company exposure to industry-level ESG risks and how effectively companies are managing that exposure. Morningstar said the enhancements represent the most significant change to its methodology since the first ESG ratings tools were introduced to investors in 2018.

In its second annual Voice of the Asset Owner Survey which canvassed viewpoints on ESG investing from 500 asset owners globally, Morningstar MORN found that 67% believe ESG has become more material to investment policy in the past five years. With ESG-related issues and risks increasingly becoming a part of company operations and a focus of senior leadership, Morningstar decided to revamp its corporate governance methodology.

High governance standards can help improve investor confidence, reduce risk, enhance brand value and increase employee engagement. Ongoing scrutiny from the market, shareholders and key stakeholders has helped highlight a number of examples of poor corporate governance in recent years, Morningstar said.

“Corporate governance is not only a core component of ESG, but a vital consideration in any investment decision and a material element of sustainable investing,” said Henry Hofman, ESG research director, corporate governance, Morningstar Sustainalytics

Hoffman cited a growing number of concerns raised by its investor clients on several developing corporate governance issues including voting structures at Meta META , board independence questions at Tesla TSLA   and lawsuits directed at shareholders of ExxonMobil XOM .

The new tool reflects these areas of heightened scrutiny, Hoffman said. “The methodology is now easier to interpret and more transparent, leading to a stronger corporate governance signal and improving investors’ ability to identify key issues and material risks across a global portfolio.”

Sustainalytics will also strengthen its material ESG risk measures, with added data points for raw materials use and water and an expanded data privacy and cybersecurity section, which underpin the ESG risk ratings methodology.

The enhanced thematic research will be implemented on a company-by-company, rolling basis as Morningstar Sustainalytics rated companies go through their regular review cycle. It is expected that all companies in the coverage universe will be updated under the new metrics by September.

Read more: 7 stock picks for ESG-conscious investors