Morningstar - Q3 2021 - M14

Data Dashboard
The Morningstar
ESG Risk Rating
Assessment
Every company is exposed to some degree of
environmental, social, and governance
risk. In large part, the industry a company
operates in dictates the ESG risk it faces.
For example, an oil and gas company will be
highly exposed to environmental risk,
while consumer technology businesses tend
to be more exposed to social issues such
as data privacy.
But there's another dimension to ESG risk:
How well does the company manage the
ESG risks it faces, both those native to the industry
it operates in and those idiosyncratic to its
business? Has the company taken appropriate
actions and implemented effective policies to
manage ESG risks? Have there been controversies?
Companies that ignore or mishandle ESG
issues could incur significant economic costs that
jeopardize their ability to earn long-term,
sustainable profits.
The Morningstar ESG Risk Rating Assessment
measures how at risk a company's enterprise
value is from ESG issues. A 5-globe rating means
the company faces negligible financial risks
from ESG issues; 1 globe means it is exposed to
significant ESG risk. The ESG Risk Rating
Assessment is an absolute measure: In other
words, it is comparable across different issues,
companies, and industries.
Underlying the rating are two main components:
" Exposure " measures a company's vulnerability to
ESG risks. " Management " refers to actions
taken to manage ESG issues. Controversies can
have a negative impact on a firm's management
score because they often reveal that company
initiatives were ineffective. The ESG Risk
Rating Assessment blends the exposure score
and the management score together into a
single score.
Because unmanaged ESG risk poses valuationrelevant
risks, Morningstar equity research
analysts have begun incorporating ESG
risks when determining intrinsic value for stocks.
" Under our process, Morningstar analysts use
Sustainalytics' Material ESG Issues, which
are the building blocks supporting the ESG Risk
Rating Assessment, as key inputs into the
equity research process, " says Adam Fleck, director
of equity research, ESG.
Morningstar analysts integrate these risk
factors into two principal ratings: the Morningstar
Economic Moat Rating and the Morningstar
Uncertainty Rating. These ratings inform
Morningstar's assessment of intrinsic value and
required margin of safety, respectively, and
are rolled into the Morningstar Rating for stocks.
Here's how the ratings incorporate ESG:
Economic Moat Rating Morningstar's measure
of a firm's sustainable competitive advantage,
the framework to determine a company's
moat rating, has been updated to capture the
long-term threat ESG risks may pose to
the value-creation capabilities of an otherwise
competitively advantaged business, thereby
precluding or limiting an economic moat.
Uncertainty Rating The framework for the
uncertainty rating, which gauges the
relative predictability of future cash flows, has
been updated to formally capture long-term
ESG risks alongside other factors, such
as a firm's sensitivity to the overall economy,
product concentration, and pricing power.
The following is a select list of companies
under Morningstar coverage. Morningstar's
analysts have completed their initial
ESG integration of relevant risk factors for these
companies. These picks have wide economic
moat ratings within that framework,
as well as ESG Risk Rating Assessments
of at least 4 globes.
Wide-Moat Companies With Low ESG Risk Rating Assessments
Company
ABB ABB
Accenture ACN
Agilent Technologies A
American Express AXP
Amgen AMGN
Ansys ANSS
Applied Materials AMAT
14
Sector
Industrials
Technology
Healthcare
Financial Services
Healthcare
Technology
Technology
ESG Risk Rating
Assessment
;;;;
;;;;
;;;;
;;;;
;;;;
;;;;
;;;;
Economic Moat
Uncertainty
Rating
Wide Medium
Wide Medium
Wide Medium
Wide Medium
Wide Medium
Wide Medium
Wide
High
Morningstar
Rating
QQ
QQ
Q
QQ
QQ
Q
QQQ
Price
($)
33.99
294.79
147.81
165.23
243.75
347.06
142.40
Fair Value
($)
30.00
220.00
100.00
133.00
215.00
237.00
125.00
P/FV
1.13
1.34
1.48
1.24
1.13
1.46
1.14
Morningstar - Q3 2021

Table of Contents for the Digital Edition of Morningstar - Q3 2021
