Navigating Controversy Ratings in the Era of Double Materiality

This document is a technical report detailing the updated methodology of Morningstar Sustainalytics' Controversy Ratings, focusing on the assessment of environmental, social, and governance (ESG) incidents through the lens of double materiality. The report introduces a structured framework that separates financial risk signals from stakeholder and environmental impact signals, enhancing clarity and transparency for investors. By distinguishing between risk-driven and impact-driven controversies, the methodology aligns with regulatory requirements and meets investor demands for transparency. The report outlines how investors can utilize these ratings to manage financial risks and engage with companies based on their ESG objectives. It also presents case studies that illustrate the application of the new methodology, demonstrating how separate risk and impact signals can inform investment decisions. The report emphasizes the importance of double materiality in understanding the implications of ESG factors on both financial performance and societal impact, thereby providing a comprehensive tool for investors.