Managing

ESG Performance:

A Practical Guide on
Corporate Governance,
Business Ethics
and Human Capital

1
Contents

​Introduction: Finding a Path to Stronger ESG Performance 03

Understanding This Guide: Key Terms to Remember 05
​
Corporate Governance: The Foundation for ESG Risk Management 06 Human Capital: A Most Valuable Asset 22
Diversified Banks: The Importance of Good Governance for the Financial System 08 ​ Diversified Banks: Putting Staffing Practices in the Spotlight 24
Diversified Metals Mining: Corporate Governance in a Complex Environment 10 Diversified Metals Mining: A Challenging Landscape for Human Capital 26
Airlines: A High Stakes Subindustry Demands Strong Leadership 12 ​ Airlines: Managing Human Capital in a Labor-Intensive Subindustry 28

Business Ethics: Building a Stronger Reputation 14 Turning ESG Insight Into Action 30
​Diversified Banks: Business Ethics in a High-Risk Subindustry 16 References 33
​ Diversified Metals Mining: Lower Exposure Scores Don’t Mean Zero Risk 18 Appendix: How are ESG Risk Ratings Calculated 34
​ Airlines: Balancing Ethics and Competition 20
​

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Introduction:
Finding a Path to Stronger
ESG Performance

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Introduction: Finding a Path to Stronger ESG Performance

Introduction:
Finding a Path to Stronger ESG Performance

Businesses from nearly every industry face risks related to their

Table 1. Subindustries in Focus
environmental, social and governance (ESG) practices. A growing
segment of customers, regulators and investors is calling on Diversified banks are the traditional banks that most people will be familiar with.
Unlike specialized banks, which focus primarily on a specific customer base or sector,
Diversified
businesses to address those risks with solutions to issues such as Banking
diversified banks provide a diverse array of financial services for a wide range of
customers. These services include granting loans, underwriting and distributing
climate change and social inequality.     securities and insurance policies, managing mutual funds, and more.

How well-equipped businesses are to deliver those solutions varies. Some are just learning how to manage Mining companies provide many of the raw materials that make modern life possible.
material ESG issues (MEIs), while others are already light-years ahead. Those who do have well-defined ESG Companies in the diversified metals mining subindustry (a subset of the diversified
programs are finding it easier to lower costs, attract new customers and investors, stay ahead of regulatory Diversified metals industry) explore and mine for precious and non-precious metals, as well as
changes, and create long-term value. Those who do not may suffer reputational damage, customer losses, Metals Mining energy commodities like coal and petroleum. Those resources are used to manufacture
and fail to gain support from investors. a wide range of industrial products, capital goods, and consumer items, including
everything from computers, machines and clothing to buildings and vehicles.
For those who are looking to optimize their ESG performance, this ebook offers insights to help you
determine which ESG issues are material to your business and what the best practices may be for managing Alongside air freight and logistics, rail transport, shipping, and trucking, airlines are one
them. On the list of common MEIs that industries are tackling today, the examples we’ve chosen for this of the five subindustries that form the larger transportation industry. Beyond passenger
exercise – corporate governance, business ethics, and human capital – stand out as pivotal for the success
Airlines carriage, many airlines also offer a range of secondary services such as marketing for
of virtually any company. After all, whether your business is in aerospace, textiles, or anything in between, it hotels and sales of bus and rail tickets.
is important that your decision making remains sound, your leaders remain accountable, and your workforce
remains driven to build value together.
The case studies in this ebook have been handpicked to add context to your understanding of what ESG
management looks like in practice. Each example is based on an actual client whose name, scores and
With so many companies grappling with these fundamental aspects of ESG management, how do we identify other identifying details have been altered for anonymity. Using analysis from Sustainalytics’ researchers, we
benchmarks that any business can learn from to address the issues that are material to them? We started by examine each company’s management of corporate governance, business ethics, and human capital risks,
searching for common factors among the roughly 15,600 companies, 42 industries and 138 subindustries that break down leading practices for their respective subindustries, and identify any areas for improvement.
make up Morningstar Sustainalytics’ ESG Risk Ratings universe.
Our chief areas of focus will be the companies’ overall exposure to ESG risks, as well as their management
To make the implications of ESG risk as clear as possible, for this exercise, we have chosen to focus on scores for handling them. The analysis provides a clear picture of how companies are managing their ESG
industries that are crucial to global economic growth, and whose average ESG Risk Ratings range from performance and equips you with insights you can use to start managing your own.
medium to high. This brought us to the banking, diversified metals, and transportation industries – industries
that, for reasons we will touch on in this ebook, have found themselves facing increased scrutiny over their
ESG performance. From there, we narrowed our focus even further to illustrate how our chosen MEIs are
affecting these industries’ high-profile subindustries of diversified banks, diversified metals mining, and airlines.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Introduction: Finding a Path to Stronger ESG Performance

Understanding This Guide:

Key Terms to Remember

Before we examine the ESG performance of companies in Exposure Scores

Exposure can be thought of as a company’s overall sensitivity to an MEI. It refers to any ESG-related
our selected subindustries, let’s look at how this guide works. factors that might place a company at economic risk. Higher exposure scores indicate that the company,
or subindustry, is more sensitive to risk factors related to the MEI.
First, here are the key terms and concepts you should become familiar with, to better understand the
tables and the information presented throughout this guide.
Management Scores
KEY TERMS Management describes the commitments, actions and results that demonstrate how well a particular
company is handling its ESG risks. Management scores are calculated based on management-focused
ESG Risk Categories indicators (e.g., policies, management systems and certifications), and outcome-focused indicators (e.g.,
Based on their quantitative unmanaged risk scores, companies are grouped into one of five carbon dioxide emissions). The higher the score, the better the company is managing its MEIs.
ESG risk categories: negligible, low, medium, high, or severe (see Table 2).

Material ESG Issues

Table 2. Sustainalytics’ Risk Rating Categories
Material ESG issues (MEIs) are issues relating to a topic or set of topics that require common guidelines or
oversight. To be considered relevant and material, an issue must have the potential to substantially impact
Negligible Low Medium High Severe a company’s economic value. MEIs are assessed at the subindustry level and are reviewed annually.

0-10 10-20 20-30 30-40 40+ ESG Performance Summary Tables

Now that you understand the key terms, throughout this guide, you will find tables for each of our selected
Source: Morningstar Sustainalytics. For informational purposes only.
subindustries. The tables capture the performance metrics for each MEI (see Table 1), summarizing that
subindustry’s ESG performance. The tables provide further context for the challenges each subindustry
ESG Risk Ratings
faces and how they approach MEIs of varying risk severity.
ESG Risk Ratings are Sustainalytics’ signature ratings. They measure the extent to which unmanaged
ESG factors put a company’s economic value at risk. A company’s ESG Risk Rating includes a quantitative Table 3. Sample Table With ESG Performance Indicators
score and a risk category. Unmanaged risk is measured on an open-ended scale that typically ranges
from 0, indicating no risk, to a maximum of less than 50. See the appendix for a more detailed explanation Most Common Avg. ESG Risk Avg. Exposure Avg. Management
of how ESG Risk Rating Scores are calculated. Risk Category Rating Score Score Score

Score Range: Score Range: Score Range: Score Range:

Negligible - Severe 0-50 0-20 0-100
Lower is Better Lower is Better Higher is Better

Source: Morningstar Sustainalytics. For informational purposes only.

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Corporate Governance:
The Foundation for
ESG Risk Management

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Corporate Governance: The Foundation for ESG Risk Management

Corporate Governance:
The Foundation for ESG Risk Management 

In simple terms, corporate governance refers to the rules,

practices, and processes that determine how a company is
controlled and run. It helps ensure that the company will
conduct itself in an open and accountable manner, and its
Table 4. Six Pillars of Corporate Governance
leadership will act in the best interests of its stakeholders.
Corporate governance policies also recognize that a company’s
Board and Management The experience, track record and actions of a company’s board
board of directors, shareholders and management have
Quality and Integrity should reflect its ability to provide strategic leadership and oversight.
certain rights, and include measures to ensure that those
rights are protected.
The board’s structure should allow for sufficient oversight,
Good corporate governance aligns the interests of directors, Board Structure
representation, and accountability to shareholders.
shareholders, management, and employees, and builds trust
with investors, the community, and public officials. It also
provides guidance to leadership, can help companies raise A company’s constitution and ownership structure should respect
Ownership and
capital, and gives investors and shareholders a clear sense outside shareholders’ rights as they would for the board, management,
Shareholder Rights
of where a business is headed. Poor corporate governance and major holders.
can produce the opposite effects: undermining a company’s
reliability and integrity, as well as its ability to raise capital,
and leaving it especially vulnerable to corruption and negligence. A company’s renumeration policies and practices should incentivize
Remuneration
management to build value.
Corporate governance encompasses virtually every aspect
of management, making its risks material to all companies,
no matter the industry. This makes it essential to understand Auditing and Financial A company’s financial reports should be reliable and subject to
the six pillars of corporate governance (Table 4), which form Reporting necessary oversight.
the foundation of ESG risk management.
A company’s decision-making should reflect the needs and
Next, we’ll show you how companies in the selected Stakeholder expectations of all stakeholders, including customers, workers,
subindustries are managing corporate governance risk Governance suppliers, communities, and investors.
and highlight practices that can help manage any company’s
performance.
Source: Morningstar Sustainalytics. For informational purposes only.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital 8

Diversified Banks: The Importance of

Good Governance for the Financial System

Table 5. Corporate Governance Performance Indicators for the Diversified Banks Subindustry

Most Common Avg. ESG Risk Avg. Exposure Avg. Management

Risk Category Rating Score Score Score

Medium 4.1 8.6 52.5

Source: Morningstar Sustainalytics. For informational purposes only.

Proper corporate governance of diversified banks is especially important

given their essential role in our financial systems. As the most significant
providers of credit, their sound operations are key to maintaining financial
stability. Poor oversight of banks’ corporate governance practices can
create a snowball effect with the potential to disrupt the entire economy.

The vast majority of diversified banks have high exposure scores for
corporate governance, which corresponds to them being publicly listed.
Companies in the subindustry also have higher management scores for
corporate governance than those in other industries, which indicates that
they have been managing these issues well.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Corporate Governance: The Foundation for ESG Risk Management

Corporate Governance Case Study

ABC Bank: Addressing Bias on the Board

ABC Bank’s corporate governance management score places it among the top 50
diversified banks in Sustainalytics’ universe. While the bank’s corporate governance
Lessons From Top Performers
performance has been strong overall, analysis revealed room for improvement in a
key pillar: board/management quality and integrity. Companies with strong management of corporate governance risk
maintain board/management quality and integrity by ensuring that:
A Closer Look at ABC Bank’s Performance ownership, but three outside directors have
Compared to top performing banks, ABC Bank’s served with the CEO for over seven years,
management of board/management quality potentially leaving the board vulnerable to bias. • Their board does not include any groups • Non-executive board members have
of outside directors with longstanding relevant industry experience as executives
and integrity is average. This is because the key relationships with the CEO/chairperson. and board members at outside companies.
competencies of its directors are compromised Though related party transactions (RPTs) Such relationships can impact board Relevant industry experience provides
by concerns about their interests and oversight. are only approved by disinterested directors, dynamics and increase the risk of assurance to stakeholders that they can
non-independent directors are not excluded groupthink, potentially leading to a bias rely on the board’s leadership.
towards consensus rather than meaningful
Let’s start with the strengths. The qualifications from the process, making RPT oversight
dissent. ​ • All non-executive directors with more
of ABC Bank’s board check all the right boxes, another concern. 1
than one year of service on the board own
given that non-executive directors have relevant • No directors are linked to governance company stock so that they are incentivized
board or executive industry experience, and One way ABC Bank could potentially change controversies or performance failures to set and achieve ambitious goals.
no directors have been linked to governance at other companies. This allows the board
its approach to board/management quality
to build a relationship of trust with
or performance failures at other companies. and integrity is by adopting share ownership key stakeholders.
This helps company leadership build trust with guidelines for non-executive directors and
stakeholders and supports the credibility of disclosing stock ownership to ensure they
their decision-making. have a vested interest in the company’s
success. The company could also tackle
The potential issues for the board relate to the bias issue by limiting the number of
directors’ financial interests. Not only does the longstanding directors, being mindful of
company not disclose directors’ stock any overlaps between the CEO/chairperson
and any outside directors.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital 10

Diversified Metals Mining:

Corporate Governance in a Complex Environment

Table 6. Corporate Governance Performance Indicators for the Diversified Metals Mining Subindustry

Most Common Avg. ESG Risk Avg. Exposure Avg. Management

Risk Category Rating Score Score Score

Medium 4.2 8.9 53.3

Source: Morningstar Sustainalytics. For informational purposes only.

As the world transitions toward a low carbon economy, raw materials

are becoming increasingly important. Proper corporate governance of
diversified metals mining companies is vital, as they play an essential
role in supporting the global energy transition.

Given the complexity of the environment in which mining companies

operate difficult decisions are a part of the job. This makes it imperative
that a mining company’s board act in a responsible manner when
weighing those decisions against strategic objectives.

Like diversified banks, most companies in the industry have high

exposure scores for corporate governance, since so many of them
are publicly listed. The subindustry’s average management score
suggests that, in the broader picture, mining companies are managing
governance-related risks well.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Corporate Governance: The Foundation for ESG Risk Management

Corporate Governance Case Study

ABC Mining: Putting Pay Transparency in Focus

ABC Mining’s management score for corporate governance places it in the top
70 diversified metals mining companies in Sustainalytics’ universe. Although the
Lessons From Top Performers
company has higher than average scores for most of the six pillars of corporate
governance, its remuneration policies and practices have room for improvement. The remuneration practices of companies with strong corporate
governance risk management typically follow the guidelines below:
A Closer Look at ABC Mining’s Performance ABC Mining could make its remuneration
Compared to the industry’s top performers, policies and practices more transparent
ABC Mining’s remuneration management can by disclosing individual executive • There is granular disclosure on the • The remuneration committee is fully
remuneration of the CEO and other top independent, thus ensuring that pay
be considered average. While the CEO and compensation packages. To reduce bias, executives, with compensation disclosed decisions are not subject to conflicts of
other top executives’ remuneration amounts the company could also look at granting individually and broken down into pay interest or bias.
are disclosed, they are done so as an aggregate its personnel and governance committee components. This helps investors
rather than individually. This can make it complete independence. to assess the alignment of pay with • There are no material remuneration
performance and to identify high levels controversies. Shareholders’ opposition to
difficult for investors to evaluate executives’ pay
of CEO pay relative to other executives a specific remuneration-related resolution
in relation to their performance. Furthermore, and/or relative to peers. is a sign of potential misalignments of pay
remuneration responsibilities are handled with performance.
by ABC Mining’s personnel and governance
committee, which is not fully independent.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital 12

Airlines: A High Stakes Subindustry

Demands Strong Leadership

Table 7. Corporate Governance Performance Indicators for the Airline Subindustry

Most Common Avg. ESG Risk Avg. Exposure Avg. Management

Risk Category Rating Score Score Score

Medium 4.4 9.0 51.1

Source: Morningstar Sustainalytics. For informational purposes only.

Corporate governance and accountability are vital to airlines, where poor

performance can undermine confidence among travelers, investors,
governments, and various other stakeholders. History shows that the
industry is particularly vulnerable to volatility, which makes sound
leadership even more important.

Every single airline is highly exposed to corporate governance risk, given

that they are publicly listed. Like diversified banks and mining companies,
average risk exposure for airlines is similar to other industries. Average
corporate governance management scores for airlines are higher than
for other industries, indicating solid overall performance.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Corporate Governance: The Foundation for ESG Risk Management

Corporate Governance Case Study

ABC Jet Flights: Commitment and Responsibility Shine Through

ABC Jet Flights’ management score for corporate governance places it in the top
40 airlines in Sustainalytics’ universe. While the company has higher than average
Lessons From Top Performers
scores for each corporate governance pillar, there was still room for improvement in
ABC Jet Flights’ management of stakeholder governance. Airlines with strong management of corporate governance risk
will ensure that their stakeholder governance practices include:
A Closer Look at ABC Jet Flights’Performance Despite strong performance, there are
ABC Jet Flights’ management of stakeholder still opportunities for ABC Jet Flights to
governance is quite strong, aligning with key add more transparency to its process. • Board-level responsibility for ESG issues, • A strong environmental policy approved
ensuring that goals are considered at the by the board or senior management, with
practices of top performers. The company Developing a sustainability or integrated highest level of strategy development in the input from stakeholders impacted by the
has earned its rating by backing up words report that aligns with international organization. company’s operations. This ensures a
with concrete actions. reporting standards, for example, would company’s environmental goals support
ensure the company is providing investors • A strong whistleblower program and bribery the community in which they operate.
and corruption policy to address potential
The company’s board takes responsibility with a clear picture of its ESG performance.
legal and ethical business issues. • Executive remuneration tied explicitly to
for overseeing ESG issues, including those ESG performance targets to incentivize
relating to health and safety, product safety, The company could also enhance • A strong policy to eliminate discrimination leadership to take action on the company’s
and the climate. It also boasts a strong disclosure in its whistleblower program, and ensure equal opportunity. material issues.
greenhouse gas (GHG) reduction program disclose income tax expenses on a
• A GHG reduction program with specific • Adherence to ESG reporting standards to
and environmental policy, which features country-by-country basis, include more targets and deadlines that demonstrates both ensure stakeholders are given clear, high-
commitments to reducing emissions per details on ESG performance targets in commitment and action to key stakeholders. quality information.
passenger kilometer by 2030 and becoming its remuneration policy, and provide clear
carbon-neutral by 2050. On top of that, the guidelines and/or examples of what is and
airline features a comprehensive anti-bribery is not considered acceptable behavior in its
and corruption policy and is a signatory of anti-bribery policy.
the UN Global Compact.

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Business Ethics:
Building a Stronger Reputation

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Business Ethics: Building a Stronger Reputation

Business Ethics:
Building a Stronger Reputation

Business ethics are the moral principles and values that dictate how a company conducts itself and its Business ethics issues are material to the vast majority of industries, including 40 out of 42 industry
transactions. Poor business ethics management can severely harm a company’s reputation and lead groups in Sustainalytics’ universe (see Figure 1).
to serious financial risks. This makes it vital that a company’s strategies and operations comply with
relevant laws, regulations, and ethical business principles.

Figure 1: Unmanaged Business Ethics Risk by Industry

Industrial Conglomerates

Table 8. Common Business Ethics Indicators

Pharmaceuticals
Banks
Diversified Financials
Chemicals
Healthcare
Electrical Equipment
Seminconductors Whistleblower Programs launched to encourage and enable stakeholders in a
Construction Materials Programs company to report and prevent improper activities
Machinery
Automobile
Aerospace & Defense
Insurance
Technology Hardware
Business Ethics Programs created to ensure that a company’s stakeholders conduct
Media Programs themselves and make decisions with honesty and integrity
Auto Components
Commercial Services
INDUSTRY

Software & Services

Telecommunication Services Policies implemented to ensure that a company and its stakeholders
Traders & Distributors Money Laundering
Consumer Services comply with applicable laws and regulations related to the prevention
Policies
Household Products
Utilities
of money laundering
Construction & Engineering
Building Products
Food Products
Real Estate Political Involvement Policies outlining a company’s stance on issues related to contributions
Retailing
Textiles & Apparel
Policies to political campaigns or organizations, gifts to government officials, etc.
Consumer Durables
Transportation
Steel
Food Retailers Compliance Programs designed to ensure that a company’s employees follow
Transportation Infrastructure
Refiners & Pipelines
Programs relevant laws, rules, and regulations
Oil and Gas Products
Diversified Metals
Precious Metals
Energy Services Lobbying and Expenses paid for the purpose of influencing legislation, influencing the
Paper & Forestry
Political Expenses electorate, supporting political campaigns, etc.
0 1 2 3 4 5 6 7
RISK SCORE
Average Business Ethics Risk Score
Source: Morningstar Sustainalytics. For informational purposes only.

Source: Morningstar Sustainalytics. Data as of October 2021. For informational purposes only. Next, we’ll show you how companies in the diversified banks, diversified metals mining
and airline subindustries are managing business ethics risk and highlight practices that can
optimize any company’s performance. 

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital 16

Diversified Banks:
Business Ethics in a High-Risk Subindustry

Table 9. Business Ethics Performance Indicators for the Diversified Banks Subindustry

Most Common Avg. ESG Risk Avg. Exposure Avg. Management

Risk Category Rating Score Score Score

Medium 4.8 8.4 45.2

Source: Morningstar Sustainalytics. For informational purposes only.

Historically, diversified banks have dealt with a wide range of ethical

controversies encompassing issues like market manipulation, money
laundering, bribery, corruption, and insider trading. In recent years, this has
led to some diversified banks receiving record fines for ethics infractions.

These days, regulators and authorities are placing more scrutiny on

companies’ compliance systems, especially in banking and finance-related
industries. The diversified banking subindustry’s struggles with business
ethics are reflected in our analysis. They have the third highest average
business ethics risk score in Sustainalytics’ universe.

Given the subindustry’s high business ethics risk scores, in the face of
a strict regulatory environment, stronger measures may be required for
diversified banks to continue providing trustworthy and reliable services.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Business Ethics: Building a Stronger Reputation

Business Ethics Case Study

ABC Bank: Political Involvement in Focus

ABC Bank’s business ethics management score places it among the

highest performing diversified banks in Sustainalytics’ universe. While the
Lessons From Top Performers
bank’s business ethics performance has been exceptional overall, there are
opportunities to develop its political involvement policy. Companies with strong management of business ethics risk
will ensure that their political involvement policy:
A Closer Look at ABC Bank’s Performance To align with leading practices, ABC
ABC Bank’s political involvement policy is Bank could revisit this policy and include
relatively weak. The company’s code of conduct an updated statement in their code of • Prohibits political involvement of any kind • Addresses transparency of all forms of
on the company’s behalf, reducing the risk political spending to ensure the company
includes a statement that staff members have conduct that explicitly prohibits political that the company will be pulled into messy avoids reputational damage.
the right take part in political activities, such as involvement, contributions, or spending political or legal battles that could damage
supporting local governments or undertaking on behalf of the company under any its reputation or result in financial penalties. • Receives explicit approval from senior
specific tasks within a political party, so long circumstances. Additionally, if certain management or the board of directors to
ensure high-level oversight.
as they do so as an individual, rather than as political activities or types of contributions
a representative of the company. will not be prohibited, the company
should commit to disclosing any political
donations or lobbying expenditures.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital 18

Diversified Metals Mining:

Lower Exposure Scores Don’t Mean Zero Risk

Table 10. Business Ethics Performance Indicators for the Diversified Metals Mining Subindustry

Most Common Avg. ESG Risk Avg. Exposure Avg. Management

Risk Category Rating Score Score Score

Negligible 1.4 3.1 59.0

Source: Morningstar Sustainalytics. For informational purposes only.

While business ethics is not nearly as pervasive an issue in mining as it is in banking,

there are still challenges for the subindustry. Anti-competitive practices such as price
fixing, collusion, tax avoidance, and fraud are all issues the subindustry faces.

Given that the mining industry has a history of human rights violations, environmental
harm, and corruption, it may seem strange for business ethics exposure scores to be so
low for the subindustry. These issues are all covered by other MEIs.

For example, bribery and corruption are such significant issues for the industry that
they are considered together as a separate MEI. The vast majority of diversified metals
companies have at least significant exposure to bribery and corruption. Similarly, human
rights policies, community development programs, and indigenous rights policies are
considered in a separate MEI: community relations. Eighty-three percent of companies in
the diversified metals industry have high exposure to the community relations MEI.

When it comes to issues related to business ethics, most mining companies in

Sustainalytics’ universe have low exposure scores and strong management of the issues.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Business Ethics: Building a Stronger Reputation

Business Ethics Case Study

ABC Mining: High Performance Worth Examining

ABC Mining’s business ethics management score places it among the better
performing companies in the diversified metals mining subindustry. The company
Lessons From Top Performers
scored well on almost every business ethics indicator, but showed some
opportunities for developing its bribery and corruption program. Companies with strong management of business ethics risk
will ensure that their bribery and corruption programs:
A Closer Look at ABC Mining’s Performance ABC Mining could further develop its bribery
ABC Mining’s bribery and corruption program and corruption program by conducting
is quite strong, aligning with the key practices regular bribery and corruption assessments • Include regular bribery and corruption • Implement regular employee training on
risk assessments to identify potential risks bribery and corruption to ensure the entire
of top performers. The program’s strengths to stay ahead of any potential risks. or ongoing issues. workforce understands how to identify
stem from its clear structure and support Additionally, the company could enhance and respond to these issues.
mechanisms. Managerial responsibility is broader risk assessments by including • Outline guidelines for addressing
assigned to the chief ethics counsellor, who relevant corruption factors or pre-screening record keeping, approval procedures • Features an internal monitoring system
and appropriate behavior to ensure that flags potential issues of corruption
reports to the CEO, and personnel are required mechanisms to help prevent issues from
all teams understand their expectations so that the organization can take
to sign a code of conduct on an annual basis. slipping between the proverbial cracks. and responsibilities. proactive measures and avoid missteps.
Employees are also required to maintain
accurate records and financial reporting and • Require employees to read and sign the • Includes mechanisms for employees to
bribery and corruption policy on an annual consult and address ethical issues, such
are provided with access to a third-party
basis, so they remain informed and vigilant. as an anonymous hotline.
whistleblowing helpline should they have any
questions about ethical issues.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital 20

Airlines:
Balancing Ethics and Competition

Table 11. Business Ethics Performance Indicators for the Airline Subindustry

Most Common Avg. ESG Risk Avg. Exposure Avg. Management

Risk Category Rating Score Score Score

Negligible 1.9 3.0 38.2

Source: Morningstar Sustainalytics. For informational purposes only.

Like mining, business ethics issues for the airline industry mainly relate to anti-
competitive practices. Competition is stiff for airlines. Not only must they compete
on pricing with other carriers, but they also face stiff competition from other forms
of transportation, such as trains and buses, that operate along the same routes.

Over time, the combination of price pressures and an increasingly competitive

landscape has raised incentives for airlines to engage in anti-competitive practices,
such as price fixing and collusion on fees and surcharges. Such unethical practices
have resulted in millions of dollars in penalties and civil lawsuits, as well as the loss
of current and future business with customers.

Despite these issues, most airlines in Sustainalytics’ universe face relatively low to
negligible risk for business ethics. Average risk exposure is lower than other industries,
with all companies in the sector facing medium exposure. Average management
scores are lower as well, with the majority of airlines in the average category.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Business Ethics: Building a Stronger Reputation

Business Ethics Case Study

ABC Jet Flights: A Clear Need for Transparency

ABC Jet Flights’ business ethics management score places it in the top 60
companies in the airline subindustry. While the airline received higher than
Lessons From Top Performers
average scores for most business ethics indicators, its whistleblower program
could be revised. Companies with strong business ethics risk management ensure
that their whistleblower programs follow the guidelines below:
A Closer Look at ABC Jet Flights’Performance To address transparency, ABC Jet Flights
Robust whistleblower programs are crucial could disclose the number of reports
for helping companies identify and correct the program has received, the types of • Employees are proactively informed of • Hotlines are made available in local
the whistleblower program and educated languages to ensure non-English
potential wrongdoing before it causes misconduct that were reported, and any on how to flag any potential issues. speaking employees can make reports.
significant reputational and financial harm. disciplinary measures that were taken This ensures employees have clear
to address them. Providing this type of expectations about when and how to • Anonymity and confidentiality are
In line with the business ethics practices transparency can help encourage reporting make a report. prioritized to protect the identity of
whistleblowers.
of top performers, the ABC Jet Flights’ by fostering a sense of accountability in the
• The program is open to suppliers,
whistleblower program is available to suppliers, workplace. Sharing details on the process customers and third parties to ensure • The program includes a non-retaliation
customers and third parties, and includes a through which reports are investigated, the company can identify and respond policy to protect employees from threats.
24/7 independent ethics reporting hotline. including the parties who preside over and to issues across its entire operation and
The program prohibits any form of retaliation are accountable for them, would also help supply chain. • The company discloses the number
of reports, types of misconduct, and
against those who make reports in good faith, the company build more trust.
• The program remains completely remedial measures processed through
and the airline actively informs employees independent to avoid bias and is the program. This ensures stakeholders
about the program through its code of business In addition, to make it easier for non-English available 24/7 so employees can have a transparent view of potential
conduct and ethics. Although this builds a speaking employees to report misconduct, access it at all times. issues the company is facing and how
they are managing those issues to
solid foundation for the program, there is still the airline could consider adding dedicated
prevent further incidents.
room for adjustments to be made to increase local phone numbers and hiring local
transparency and support speakers of language speakers to receive reports and
languages other than English. translate program details.

21
Human Capital:
A Most Valuable Asset

22
Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Human Capital: A Most Valuable Asset

Human Capital:
A Most Valuable Asset

The concept of human capital embodies the adage that

people are your most valuable asset. It deals with all Table 12. Common Human Capital Indicators
aspects of human resource management – everything
from finding and keeping top talent, to creating an inclusive Policies that outline protections to prevent discrimination based on gender,
Discrimination
gender identity and expression, race, ethnicity, culture, place of origin, religion,
work culture, to labor relations issues, working hours and Policies
political affiliation, sexual orientation, age, marital status, or physical disability.
minimum wage.

Companies in all industries should strive for the strategic Gender Pay Disclosure and Policies and programs aimed at increasing the transparency
Gender Pay Equality Programs and reducing the disparity of compensation between men and women.
growth that strong human capital management can bring.
Those who fail to manage and incentivize their employees
effectively risk declines in motivation, productivity, and
Employee The measurement of the number of employees who leave an organization
business value. Most human capital incidents stem from Turnover Rate during a specified period.
issues related to labor relations, occupational health and
safety, and employee rights. For examples of benchmarks
commonly used to assess human capital management Diversity Programs designed to improve the workplace experiences and outcomes
see Table 12. Programs for groups that face pervasive disadvantage in society.

Next, we’ll show you how companies in the diversified Legal contracts between employers and a union representing the employees
Collective Bargaining
banking, diversified metals mining and airline subindustries to regulate working salaries, working conditions, benefits, and other aspects
Agreements
are managing human capital risk and highlight practices of compensation and workers’ rights.

that can improve any company’s performance.

Human Capital Policies and programs aimed at developing the talent, skills,
Development and experience of employees.

Source: Morningstar Sustainalytics. For informational purposes only.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital 24

Diversified Banks:
Putting Staffing Practices in the Spotlight

Table 13. Human Capital Performance Indicators for the Diversified Banks Subindustry

Most Common Avg. ESG Risk Avg. Exposure Avg. Management

Risk Category Rating Score Score Score

Low 3.2 6.0 49.2

Source: Morningstar Sustainalytics. For informational purposes only.

Human capital is an essential asset for companies in service industries, including

diversified banks. This is because the quality of their services, and their ability
to deliver them, is heavily dependent on their human resources. It is therefore
important that banks hire, train, and retain talented employees who can foster
customer loyalty, support a complex array of services, and drive strategic growth.

Diversified banks that fail to manage their human resources effectively risk staff
shortages, skill deficits, high training costs, and operational inefficiencies. The
subindustry’s staffing practices have come under scrutiny in recent years amidst
increasing calls for banks to diversify their workforce to better reflect the general
population.

While diversified banks generally have low risk scores for human capital, they tend
to have higher risk exposure than other industries.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Human Capital: A Most Valuable Asset

Human Capital Case Study

ABC Bank: A Renewed Commitment to Preventing Discrimination

ABC Bank’s human capital management score places it in the top 60 companies in
the diversified banking subindustry. While the company received high scores for its
Lessons From Top Performers
collective bargaining agreement and gender pay disclosure, it has room to improve
and develop its discrimination policy. The discrimination policies of companies with strong
human capital risk management typically include:
A Closer Look at ABC Bank’s Performance While these commitments are strong,
ABC Bank’s discrimination policy checks companies looking to align with leading
a lot of the right boxes but could make its practices should include at least one • A list of the types of discriminatory • A statement of commitment to ensuring
practices the company is committed to equal opportunities. This should address
commitments to equality stronger. relevant International Labour Organization eliminating. These may include gender, issues such as gender pay disparity and
(ILO) convention, such as C111, which gender identity expression, sexual diversity of both working-level employees
As it stands, the policy includes a commitment offers guidelines to prevent employment orientation, race, and religion, among and leadership. Including a clear
to providing equal employment opportunities and occupation discrimination.2 Adhering others. Clearly outlining commitments in statement ensures that talent recruiting
your company’s discrimination policies and development teams are able to set
for all employees, as well as a code of conduct to such international conventions can help
not only increases transparency with achievable goals and milestones.
that indicates zero tolerance for discrimination, assure stakeholders that your company’s stakeholders, but it also makes it easier
harassment or intimidation based on ethnicity, policies are backed by governments, to track and assess performance.
gender, motherhood, color, religion, physical or employers, and workers alike.
mental disability, or sexual orientation.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital 26

Diversified Metals Mining:

A Challenging Landscape for Human Capital

Table 14. Human Capital Performance Indicators for the Diversified Metals Mining Subindustry

Most Common Avg. ESG Risk Avg. Exposure Avg. Management

Risk Category Rating Score Score Score

Low 3.2 5.0 39.1

Source: Morningstar Sustainalytics. For informational purposes only.

Managing human capital risk in mining presents a unique set of challenges. The
industry is typically labor intensive, requiring hundreds or even thousands of workers to
operate drills, excavators, and processing and refining plants. High rates of unionization
and historically poor working conditions have made strikes and disputes common.
While a shift toward automation has increased demand for highly skilled workers, the
sector has found itself grappling with a skilled labor shortage as baby boomers retire.
With energy and labor costs on the rise and the price of commodities slumping, layoffs
are likely to become more common, further complicating labor relations.

Given that the mining industry has a poor history of human rights violations against
its workforce, it may seem strange that most companies in the diversified metals
mining subindustry are in the low-risk category for human capital. This is because, as
with business ethics, these matters are analyzed under a separate MEI. Issues related
to human rights, for example, are covered under the community relations MEI. Most
companies in the mining industry have above average management of human capital
issues when compared to other industries.

26
Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Human Capital: A Most Valuable Asset

Human Capital Case Study

ABC Mining: Top Performer Trails on Turnover

ABC Mining’s human capital management score places it in the top 40 companies
in the diversified metals mining subindustry. While the company received leading
Lessons From Top Performers
scores for its collective bargaining agreement and diversity programs, there are
opportunities to amend its approach to human capital development. A company’s human capital development program
is considered strong if it includes:
A Closer Look at ABC Mining’s Performance ABC Mining could, for example, provide
ABC Mining’s human capital development quantitative targets related to human capital
program has several strengths. The company development (e.g., decreasing voluntary • Regular formal performance reviews • Detailed reporting on human capital
for all permanent employees aligned risks the company is facing to ensure
provides employees with access to a corporate employee turnover rate) to communicate with career development, to ensure stakeholders are informed of potential
university and digital learning platform for its goals and objectives more clearly to employees can improve skills, grow their issues.
career development. Additionally, they have stakeholders. The company could also careers, and add value to the company.
implemented talent retention initiatives, such provide more detailed reports on risks • Detailed reporting on human capital-related
• Quantitative targets related to human metrics to ensure that management,
as medical assistance, dental care, and food related to human capital management,
capital development to ensure leadership employees, and external stakeholders
assistance, and a program to provide formal such as anticipated skill shortages, and can track and measure performance have a clear picture of the company’s goals
employee performance assessments. The how attracting, developing, or retaining and progress. and progress.
program includes the ability to request feedback talent impacts the business.
from other employees to better understand
development opportunities. Although the
program is strong overall, there are some
additional considerations that could be included.

27
Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital 28

Airlines:
Managing Human Capital in a Labor-Intensive Subindustry

Table 15. Human Capital Performance Indicators for the Airline Subindustry

Most Common Avg. ESG Risk Avg. Exposure Avg. Management

Risk Category Rating Score Score Score

Medium 5.1 8.0 38.2

Source: Morningstar Sustainalytics. For informational purposes only.

Like diversified metals mining companies, airlines are labor-intensive businesses

that require a large number of personnel. A high level of technical expertise is
essential – not only for pilots, but also for the countless individuals who regularly
maintain, repair and upgrade aircraft to ensure a safe flight. Given that many aircraft
accidents are caused, at least in part, by human error, it is also important that
employees are properly trained.

Unions are prevalent throughout the industry. In some companies, unionized workers
make up as much as 83% of the workforce.3 As a result, labor disputes are relatively
common and have resulted in strikes, work stoppages, slowdowns, and lockouts
that can affect hundreds of thousands of passengers. These factors make human
capital a vitally important focus for airlines. All companies in the sector have high
exposure to human capital risks and also tend to have higher management scores
than other industries.

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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Human Capital: A Most Valuable Asset

Human Capital Case Study

ABC Jet Flights: Transparency is Key

ABC Jet Flights’ human capital management score places it in the top 100
companies in the airline subindustry in Sustainalytics’ universe. While the
Lessons From Top Performers
company’s discrimination policy received a higher than average score, its
diversity program could be amended. Companies with strong human capital risk management
ensure that their diversity programs include:
A Closer Look at ABC Jet Flight’s Performance To foster a more diverse workforce, the
Based on our analysis, ABC Jet Flights’ diversity airline’s initiatives should go beyond
program is relatively weak. While the company achieving legal compliance and include • Managerial or board-level responsibility • Mentorship programs that ensure
for diversity initiatives. This ensures that employees of all backgrounds have
discloses information on its workforce’s programs to recruit and accommodate leadership is engaged on the issue and access to meaningful career development
gender diversity and female representation in individuals from underrepresented and that goals and objectives come from opportunities.
management, other details that fall under the disadvantaged groups. Examples of the top.
umbrella of diversity programs are not reported. these include initiatives that deal with • Transparent diversity monitoring, auditing,
• Targeted recruiting efforts to attract and reporting to ensure both employees
There are several opportunities for ABC Jet wheelchair ramps, parental leave, flexible
employees from underrepresented groups and external stakeholders are aligned with
Flights to further develop its diversity program. work arrangements, gender imbalance, – including women, minorities, Indigenous the goals of the company and understand
and gender pay gaps. Cross-cultural and peoples, veterans and the disabled – to its objectives.
To ensure that diversity issues are prioritized gender sensitivity training should also be ensure the company has a representative
across the company, the airline could assign workforce.
considered to promote a more inclusive
responsibility for diversity issues to a C-level work environment.
• Employee affinity groups, diversity
executive or to someone who reports directly to councils or networking groups to connect
an executive or the board itself. employees and better understand how to
meet the demands of a diverse workforce.

29
Conclusion:
Turning ESG Insight Into Action

30
Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Turning ESG Insight Into Action

Turning ESG Insight Into Action

ESG risk isn’t limited to any one industry or business, and it can be a
daunting task to determine how to manage your ESG performance.

Fortunately, no business needs to make No matter your subindustry or level

that journey alone. One thing the examples of exposure, know that there are clear
in this ebook have made clear is that while benefits to optimizing your business’s ESG
businesses may be unique, the need for strong performance. Good corporate governance
ESG risk management is not. Many material helps businesses build trust with investors
ESG issues are common to a wide range of and consumers and build long-term value,
industries, including and far beyond the worlds while strong management of business
of banking, mining, and airlines. ethics and human capital can help them
avoid reputational damage, lower costs
and attract and retain talented employees.
The fact that issues such as corporate
governance, business ethics and human
capital risk are so common creates more Benefits like these are invaluable in the
opportunities for businesses to learn from face of increasing pressure from investors,
others’ examples. Understanding how leaders regulators, and consumers to address
in yours and other industries are addressing ESG issues. A proactive approach to ESG
those issues can help you identify the best management can help businesses stay
strategy for you. The leading practices ahead of disruptive regulatory changes,
and suggested improvements that were adding stability to their operations and
highlighted in this ebook can add clarity to supporting strategic growth.
that search.

31
 Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Turning ESG Insight Into Action

Take Your ESG Performance to the Next Level

No matter where you are in your ESG risk management journey, following the tips below
will help your company stay on track to achieving its ESG goals.

Corporate Governance: Business Ethics: Human Capital:

Ensure that your company’s structure and Consider whether your company has Examine any steps your company has taken to
policies are aligned with the six pillars of fostered an ethical culture, and whether foster a diverse and equal work environment
corporate governance (Table 4). While each it is being supported through programs, where employees feel valued, included, and
pillar is an essential part of ESG risk management, procedures, and management. Remember receive advancement opportunities. Consider
the importance of accountability and proper that transparency and clear guidelines are what other measures could be applied to
oversight, especially, cannot be overstated. invaluable in this area. strengthen labor relations.

Leading Examples for Companies to Follow: Leading Examples for Companies to Follow: Leading Examples for Companies to Follow:

• Establish board-level responsibility • Install strong ethics, anti-bribery, • Establish managerial or board-level
for ESG issues. and anti-corruption programs. responsibility for diversity initiatives.

• Prioritize transparency by developing robust • Perform regular risk assessments, train • Ensure that your company’s discrimination
whistleblower programs and policies that employees on ethics on an annual basis, policy includes a commitment to providing
address issues such as bribery and corruption. establish clear operating guidelines, and equal opportunities.
put mechanisms in place for investigating
incidents and correcting actions. • Create a culture of open feedback to ensure
employees can improve skills, grow their
careers, and add value to the company.
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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital

References

1 Related party transactions refer to business dealings between two parties that have a pre-existing relationship, or
some kind of common interest or control. These parties may include individuals, companies, or organizations that
are related to each other in some way, such as through family ties, shared ownership, or common management.

2 International Labour Organization. 1958. C111 – Discrimination (Employment and Occupation) Convention.
June 25, 1958. https://www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB:12100:0::NO::P12100_Ilo_Code:C111

3 Southwest Airlines. 2023. “Labor Relations.” January 31, 2023. https://swamedia.com/labor-relations

33
Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital Appendix: How are ESG Risk Ratings Calculated

Appendix:
How are ESG Risk Ratings Calculated

When determining a company’s ESG Risk Rating, Figure 2. Summary Visualization of ESG Risk Ratings Calculation Method

Sustainalytics starts by measuring its exposure to Material ESG Issues

each material ESG issue at the subindustry level.
Risk Exposure
Next, we assess how much of the company’s risk can be effectively
managed through ESG programs and policies (manageable risk), and how Unmanaged Risk Risk Management
Carbon - Products
much cannot (unmanageable risk). We then consider how successful the and Services
company has been in addressing its manageable risk through policies
and programs. This leaves us with what can be considered a company’s Risk Exposure
total amount of managed and unmanagedrisk for a particular MEI.
Data Privacy and Unmanaged Risk Risk Management

When we add up the amount of unmanaged risk for each MEI the Security
company is exposed to, the result is the qualitative score that we
use to calculate the company’s ESG Risk Rating. Risk Exposure

Unmanaged Risk Risk Management

Resource
Use

Copyright ©2023 Sustainalytics. All rights reserved.

The information, methodologies, data and opinions contained or reflected herein are proprietary of Sustainalytics and/or content providers, and may be made available to third parties only in the form and
format disclosed by Sustainalytics, or provided that appropriate citation and acknowledgement is ensured. By way of exception, the company level data contained may not be copied, distributed or used in any
way, including via citation, unless otherwise explicitly agreed in writing.

They are provided for informational purposes only and 1) do not constitute an endorsement of any product or project; (2) do not constitute investment advice, nor represent an expert opinion or negative
Up to 10 MEIs
assurance letter; (3) are not part of any offering and do not constitute an offer or indication to buy or sell securities, to select a project or make any kind of business transactions; (4) are not an assessment of
the issuer’s economic performance, financial obligations nor of its creditworthiness; (5) are not a substitute for a professional advise; (6) past performance is no guarantee of future results; (7) have not been
per company
submitted to, nor received approval from, any relevant regulatory bodies. These are based on information made available by third parties, subject to continuous change and therefore are not warranted as to
their merchantability, completeness, accuracy, up-to-dateness or fitness for a particular purpose. The information and data are provided “as is” and reflects Sustainalytics’ opinion at the date of its elaboration
and publication.

Sustainalytics nor any of its content providers accept any liability for damage arising from the use of the information, data or opinions contained herein, or from the use of information resulting from the
application of the methodology, in any manner whatsoever, except where explicitly required by law. ESG Risk Rating Score
Any reference to content providers names is for appropriate acknowledgement of their ownership and does not constitute a sponsorship or endorsement by such owner. A list of our content providers and their
respective terms of use is available on our website. For more information visit https://www.sustainalytics.com/legal-disclaimers.

Sustainalytics may receive compensation for its ratings, opinions and other deliverables, from, among others, issuers, insurers, guarantors and/or underwriters of debt securities, or investors, via different
business units. Sustainalytics has put in place adequate measure to safeguard the objectivity and independence of its opinions. For more information visit Governance Documents or contact Source: Morningstar Sustainalytics. For informational purposes only. Unmanageable Risk Management Gap
[email protected].
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Managing ESG Performance: A Practical Guide on Corporate Governance, Business Ethics and Human Capital 35

ESG Performance Analytics

Still not sure where to start? Get in touch with

Sustainalytics’ Corporate Solutions team to learn
more about understanding your ESG performance.

Our comprehensive services enable you to better understand your

company-level ESG risk and performance to help you manage your ESG
issues. Contact us today to connect with our team and learn more.

35
About:
Morningstar Sustainalytics

Morningstar Sustainalytics is a leading ESG research, ratings and data firm that supports
investors around the world with the development and implementation of responsible
investment strategies. For nearly 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 who incorporate ESG and corporate governance information and assessments
into their investment processes. The firm also works with hundreds of companies and their
financial intermediaries to help them consider sustainability in policies, practices, and capital
projects. With 17 offices globally, Morningstar Sustainalytics has more than 1,800 staff
members, including more than 800 analysts with varied multidisciplinary expertise across
more than 40 industry groups. For more information, visit www.sustainalytics.com.

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