MSCI ESG RATINGS METHODOLOGY

ESG RATINGS
METHODOLOGY
Executive Summary
MSCI ESG Research

May 2015

MAY 2015

MSCI ESG RATINGS METHODOLOGY

EXECUTIVE SUMMARY
From natural resource scarcity to changing governance standards, from global workforce
management to the evolving regulatory landscape, ESG factors can impact the long-term risk
and return profile of investment portfolios. MSCI ESG Ratings are designed to help investors
to understand ESG risks and opportunities and integrate these factors into their portfolio
construction and management process.
Our global team of 140 experienced research analysts assesses thousands of data points
across 37 ESG Key Issues, focusing on the intersection between a companys core business
and the industry issues that can create significant risks and opportunities for the company.
Companies are rated on a AAA-CCC scale relative to the standards and performance of their
industry peers.
Figure 1

ESG Rating Framework and Process Overview

DATA
1000+ data points on ESG policies, programs, and performance;
Data on 65,000 individual directors; 13 years of shareholder meeting results

EXPOSURE METRICS

MANAGEMENT METRICS

How exposed is the company to

each material issue?
Based on over 80 business and
geographic segment metrics

How is the company managing

each material issue?
600 policy/program metrics, 240
performance metrics;
96 Governance KeyMetrics

SOURCES

KEY ISSUE SCORES & WEIGHTS

100+ specialized datasets

(government, NGO, models)

37 Key Issues selected annually for

INSIGHT

each industry and weighted based on

MSCIs materiality mapping framework.

Specialized ESG research team

provides additional insight
through:

Company disclosure (10-K,

sustainability report, proxy report);
1600+ media sources monitored daily
(global and local news sources,
government, NGO).

ESG RATING (AAA-CCC)

Issue scores and weights
combine to overall ESG rating
relative to industry peers.

Company reports
Industry reports
Thematic reports
Analyst calls & webinars

E, S, G scores

MONITORING &
QUALITY REVIEW

also available

DATA OUTPUTS
Access to selected underlying data

Systematic ongoing daily monitoring of

controversies and governance events;

Ratings, scores, and weights on

350,000 securities

In-depth quality review processes at all stages

of rating, including formal committee review.

16 years of history

MAY 2015

ESG RATINGS METHODOLOGY | MAY 2015

1.1

ESG RATING PROCESS OVERVIEW

DATA SOURCES
To assess companies exposure to and management of ESG risks and opportunities, we
collect data from the following sources:

Macro data at segment or geographic level from academic, government, NGO datasets

Company disclosure (10-K, sustainability report, proxy report, AGM results, etc.)

Government databases, 1600+ media, NGO, other stakeholder sources

Companies are invited to participate in a formal data verification process.

MONITORING AND QUALITY REVIEW
Companies are monitored on a systematic and ongoing basis, including daily monitoring of
controversies and governance events. New information is reflected in reports on a weekly
basis and significant changes to scores trigger analyst review and re-rating. Companies
receive an in-depth review at least annually.
Formal in-depth quality review processes take place at each stage of analysis, including
automated and quality checks of data and rating publication; industry and market lead
oversight of ratings and reports; Methodology Committee approval of any exceptions,
truncations, or major (2+) rating changes; and a Ratings Review Committee to review
contentious cases.
RISK EXPOSURE AND RISK MANAGEMENT ANALYSIS
MSCI ESG Ratings calculate each companys exposure to key ESG risks based on a granular
breakdown of a companys business: its core product or business segments, the locations of
its assets or revenues, and other relevant measures such as outsourced production.
The analysis then takes into account the extent to which a company has developed robust
strategies and demonstrated a strong track record of performance in managing its specific
level of risks or opportunities. Ongoing or structural controversies occurring within the last
three years lead to a deduction from the overall management score on each issue.
KEY ISSUE SCORES AND WEIGHTS
MSCI ESG Ratings identify six to ten key ESG issues where companies in that industry
currently generate large environmental or social externalities; these are issues where some

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ESG RATINGS METHODOLOGY | MAY 2015

companies may be forced to internalize unanticipated costs associated with those

externalities in the future. Corporate Governance is assessed for all companies.
Weights are set at the GICS Sub-Industry level (8-digit) based on each industrys relative
impact and the time horizon associated with each risk. Key Issues and weights undergo a
formal review and feedback process at the end of each calendar year.
Company-specific exceptions are allowed, subject to committee approval, for companies
with diversified business models, facing controversies, or based on industry rules.
Figure 2

MSCI ESG Key Issue Hierarchy

3 Pillars

10 Themes

37 ESG Key Issues

Environment

Climate Change

Carbon Emissions*

Financing Environmental Impact

Energy Efficiency

Climate Change Vulnerability

Product Carbon Footprint

Natural Resources

Water Stress*

Raw Material Sourcing

Biodiversity & Land Use

Pollution & Waste

Toxic Emissions & Waste*

Electronic Waste

Packaging Material & Waste

Social

Environmental
Opportunities

Opportunities in Clean Tech

Human Capital

Labor Management*

Human Capital Development

Health & Safety*

Supply Chain Labor Standards

Product Safety & Quality

Privacy & Data Security

Chemical Safety

Responsible Investment

Financial Product Safety

Health & Demographic Risk

Product Liability

Governance

Opps in Renewable Energy

Opportunities in Green Building

Stakeholder Opposition

Controversial Sourcing

Social Opportunities

Access to Communications

Access to Health Care

Access to Finance

Opps in Nutrition & Health

Board**

Ownership**

Pay**

Accounting**

Business Ethics*

Corruption & Instability

Anti-Competitive Practices*

Financial System Instability

Corporate Governance*
Corporate Behavior

* indicates universal issues assessed for all companies in MSCI World

** Board, Pay, Ownership, and Accounting carry weight in the ESG Rating model for all companies. Currently, they
contribute to the Corporate Governance score directly and 0-10 sub-scores are not available.

ESG RATINGS
To arrive at a final letter rating, the weighted averages of the Key Issue Scores are
aggregated and companies scores are normalized by their industries. After any overrides
are factored in, each companys Final Industry-Adjusted Score corresponds to a rating

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ESG RATINGS METHODOLOGY | MAY 2015

between best (AAA) and worst (CCC). These assessments of company performance are not
absolute but are explicitly intended to be relative to the standards and performance of a
companys industry peers.

1.2

PRODUCT FEATURES
MSCI ESG Ratings clients receive access to a database of company reports and industry
reports. Each company report includes relevant ESG performance data as well as an analysis
of possible ESG risks and opportunities facing the company. Industry reports provide
updates on the ESG landscape of each industry, and allow for benchmarking of how global
players are positioned to anticipate challenges and to tap opportunities relative to peers.
MSCI ESG Ratings clients also receive scores for each company that include the final
company rating and overall industry-adjusted score; weights and scores for each of the E, S,
and G pillars; weights and scores for each of the Issues that contribute to the overall rating;
and weights and scores for additional ESG issues that clients may incorporate into their own
analysis (Carbon Emissions, Water Stress, Toxic Emissions & Waste; Labor Management;
Health & Safety; Corporate Governance; Business Ethics; Anticompetitive Practices).
MSCI ESG Ratings scores and/or reports are currently available on MSCIs proprietary
platform, MSCI ESG Manager, as well as through FactSet, POINT, StyleResearch, and MSCIs
BarraOne and Barra Portfolio Manager platforms.
When used in conjunction with conventional financial analysis and valuation methods, MSCI
ESG Ratings are designed to help clients:

Integrate ESG factors into their investment approaches;

Screen portfolios and trades for emerging and overlooked risks;

Generate investment ideas using positive and negative outliers on specific ESG issues;

Generate investment ideas based on ESG developments impacting key industry drivers;

Conduct due diligence for transactions;

Determine opportunities for engagement with company management;

Support implementation of the UN Principles for Responsible Investment (PRI):

- Smoothly integrate ESG considerations into the investment processes by focusing
on the most significant issues Principle 1*
- Support efforts to engage companies on ESG issues Principle 2*
- Support efforts to encourage companies to make material ESG-related disclosure
by providing benchmarking against peers on key ESG metrics Principle 3*
- Help asset owners to monitor their implementation of ESG principles Principle 4*
- Help asset managers to report on ESG mandates Principle 6*

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ESG RATINGS METHODOLOGY | MAY 2015

*Source: http://www.unpri.org/about-pri/the-six-principles/

1.3

COVERAGE
The ESG Ratings coverage universe comprises the following as of December 2014:

MSCI World Index

MSCI Emerging Markets Index

MSCI US Investable Market Index (IMI)

MSCI UK IMI (new)

MSCI Nordic IMI (new)

MSCI Australia IMI (new)

MSCI South Africa IMI

MSCI Canada IMI

Fixed Income: ESG Ratings coverage of over 84% of the market value of a widely used
global fixed income benchmark, including:
-

Approximately 90% of the corporate investment grade (listed and non-listed)

Approximately 90% of the covered bonds

Approximately 99% of the Treasuries/Sovereign*

Approximately 85% of the government related (ex-Sovereign)*

*The overall ESG Rating for government-related bond issuers will be either in the
ESG Ratings or Government ESG Rating framework.

More than 8,000 issuers linked to 280,000 individual securities including selected
Agencies and Supranationals

Additions to the MSCI ACWI Index and the US IMI will be rated within one quarter from their
addition to the relevant index, while other companies will be rated within two quarters from
their addition to the relevant index.
Companies are monitored on a systematic and ongoing basis, including daily monitoring of
controversies and governance events. New information is reflected in reports on a weekly
basis and significant changes to scores trigger analyst review and re-rating. Companies
receive an in-depth review at least annually.

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ESG RATINGS METHODOLOGY | MAY 2015

Note: The full set of governance metrics is available to be viewed and downloaded with an ESG Ratings
subscription. A subset of metrics is available to be viewed in the company profile with an IVA subscription.

CONTACT US
esgclientservice@msci.com

AMERICAS

ABOUT MSCI ESG RESEARCH PRODUCTS

AND SERVICES

+ 1 212 804 5299

EUROPE, MIDDLE EAST & AFRICA
+ 44 20 7618 2510
ASIA PACIFIC
+ 612 9033 9339

MSCI ESG Research products and services

are provided by MSCI ESG Research Inc.,
and are designed to provide in-depth
research, ratings and analysis of
environmental, social and governancerelated business practices to companies
worldwide. ESG ratings, data and analysis
from MSCI ESG Research Inc. are also used
in the construction of the MSCI ESG
Indexes. MSCI ESG Research Inc. is a
Registered Investment Adviser under the
Investment Advisers Act of 1940 and a
subsidiary of MSCI Inc.

ABOUT MSCI
For more than 40 years, MSCIs researchbased indexes and analytics have helped
the worlds leading investors build and
manage better portfolios. Clients rely on
our offerings for deeper insights into the
drivers of performance and risk in their
portfolios, broad asset class coverage and
innovative research.
Our line of products and services includes
indexes, analytical models, data, real estate
benchmarks and ESG research.
MSCI serves 98 of the top 100 largest
money managers, according to the most
recent P&I ranking.

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ESG RATINGS METHODOLOGY | MAY 2015

For more information, visit us at

www.msci.com.

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ESG RATINGS METHODOLOGY | MAY 2015

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