MSCI ESG Ratings (And Some Free ESG Tools!)

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MSCI ESG Ratings

MSCI is one of the leading providers of ESG research. MSCI’s ESG ratings system gives investors the opportunity to evaluate how well their investments measure up in terms of environmental, social, and governance investing.

MSCI also offers some pretty amazing free tools to help investors make better ESG investment decisions. These tools allow you to research companies, funds, indexes, and even entire industries to evaluate ESG standards.

Who is MSCI?

First, who is MSCI? MSCI stands for Morgan Stanley Capital International. (Although I don’t think I’ve ever actually heard them called that before.) MSCI has been around for more than 50 years. They are an investment research firm that offers both traditional and ESG investment information.

Their goal is to “bring greater transparency to financial markets, enabling the investment community to make better decisions for a better world.” I really love this mission statement. This company provides research and tools that allow investors like us to make better investment decisions.

What Are ESG Ratings?

So what are ESG ratings? ESG ratings measure a company’s commitment to environmental, social, and governance standards. These ESG ratings focus on a company’s exposure to ESG specific risks. These types of risks are not usually identified during traditional investment analysis but they can have a significant financial impact on companies that choose to ignore ESG.

Most people think about ESG ratings in terms of risk but these ratings can also help identify investment opportunities as well. ESG ratings are just another tool that investors can choose to use (or not). But personally, I know I want as much information as possible so I can make well-educated investment decisions.

How Do MSCI ESG Ratings Work?

MSCI’s ESG rating system ranks companies from a laggard rating of CCC to an ESG leader rating of AAA.

ESG laggards fall between a CCC and a B MSCI rating. A laggard is a company lagging its industry based on its high exposure and failure to manage significant ESG risks.

Average ESG companies fall between a BB and an A MSCI rating. An average ESG score means a company has a mixed or unexceptional track record of managing the most significant ESG risks and opportunities relative to industry peers.

ESG leaders fall between a AA and a AAA MSCI rating. An ESG leader is a company leading its industry in managing the most significant ESG risks and opportunities.

MSCI provides ESG ratings for more than 8,700 companies. They do an in-depth analysis of each company and they look at thousands of different data points to examine a company’s ESG performance.

The foundation of all ESG research begins with environmental, social, and governance criteria. However, under each of these areas, MSCI looks at different themes to identify the most important ESG issues.

Under the Environment Pillar, MSCI reviews risks related to climate change, natural capital, pollution and waste, and environmental opportunities.

Under the Social Pillar, MSCI looks at human capital, product liability, stakeholder opposition, and social opportunities.

And finally, under the Governance Pillar, MSCI studies corporate governance and corporate behavior.

MSCI goes deeper by researching specific key issues related to each ESG specific theme. For example, under the environmental pillar within the pollution and waste theme, MSCI evaluates how companies deal with several different forms of waste. They look at a company’s toxic emissions and waste, packaging material and waste, and electronic waste. MSCI looks at a total of 35 key issues for each company.

It is important to note that not all companies and not all industries are the same. MSCI’s ESG ratings system assesses how well companies manage risk compared with their peers in the same industry. So these ratings are relative to the specific industry you are looking at. But this also makes a lot of sense.

A company within the technology sector is going to have very different ESG risks than a company in the restaurant industry. So just keep this in mind as you look at ESG ratings.

ESG Ratings and Climate Search Tool

Some brokerages work with MSCI or other research firms to provide ESG data so you may already have some ESG tools available to you. But I also know that not everyone may have access to this type of information so I wanted to show you how to use MSCI’s free ESG Ratings and Climate Search Tool.

MSCI ranks over 2,900 different companies with this tool. And considering this tool is absolutely free, I think it provides a really good amount of information.

Let’s use a real-world example to see what type of data this tool offers. If you pull up Microsoft, ticker MSFT, with the ESG ratings tool you’ll see that this company has an ESG leader rating of AAA. Out of 152 companies MSCI ranks in this particular industry, Microsoft is in the 4% of companies that fall under the AAA rating.

You can also see the distribution of ESG scores for all of the companies in the software and services industry so you can see exactly how this company measures up compared to its peers.

Microsoft is also aligned with the global climate target goals laid out by the Intergovernmental Panel on Climate Change. And the company has set its own decarbonization targets as well.

This tool gives you a 5-year history of a company’s ESG scores so you can see if a company is improving or declining in its ESG metrics. Here we can see that Microsoft’s score has remained stable over the last 5 years.

This tool also provides a little bit of information about the specific ESG strengths and weaknesses of a company. In Microsoft’s case, you can see this company appears to have some weaknesses around corporate behavior but is considered an industry leader in corporate governance, human capital development, privacy and data security, and clean technology opportunities.

I think this is a pretty awesome tool that can be used to give you an idea of how a company measures up based on ESG metrics.

ESG Fund Ratings Search Tool

MSCI’s ESG Fund Ratings Search Tool works pretty similarly to the last tool. The only difference is that this tool covers mutual funds and exchange-traded funds rather than looking at specific companies.

This tool ranks funds compared to their peer groups but also based on the global universe of total fund options.

In my last article, I covered some of Fidelity’s best ESG funds. If you haven’t already seen that, you can find that article right HERE. In that article, we found that the iShares MSCI USA ESG Select ETF (SUSA) was one of Fidelity’s best-performing ESG funds.

Let’s just take a quick look to see how this fund ranks using MSCI’s ESG Fund Ratings Search Tool.

MSCI rates this fund as an ESG leader with a AAA rating. SUSA ranks in the 98th percentile within the Equity US peer group class and in the 94th percentile within the global universe of total funds covered. 71% of this fund’s holdings have an ESG leader rating and only 1% of the fund’s holdings are rated ESG laggards.

MSCI looks at the companies in these funds to determine what percentage of total revenue may be generated by green energy and what percentage of revenue is generated by fossil fuel-based energy. The tool also looks at the weighted average carbon intensity of the holdings in the fund. This particular fund has a low carbon intensity rating.

MSCI analyzes corporate governance by looking at board independence and board diversity.

And lastly, this tool also looks at the fund’s exposure to companies flagged for certain social safeguard screens like UN Global Compact violations, severe controversies, controversial weapons, and tobacco.

Index Profile Search Tool

MSCI’s next tool, the Index Profile Search Tool, allows you to research specific indexes to see how they measure up in terms of ESG investing. If you are already invested in or are planning to invest in an index fund (ESG or not), this tool will allow you to see how the index the fund is built upon fairs based on ESG criteria.

Let’s continue to look at the iShares MSCI USA ESG Select ETF. This fund is built from the MSCI USA Extended ESG Select Index.

And a quick side note; if you ever need to know what index a fund is based on you can always find this information in the fund’s prospectus. You should be able to find this with just a quick Google search.

Let’s just briefly look at the MSCI USA Extended ESG Select Index using MSCI’s Index Profile Search Tool. For whatever fund you put in this tool, the tool will use the MSCI ACWI Index as a benchmark to compare against. Although you do have the option of choosing your own index for comparison.

The MSCI ACWI Index is meant to represent the performance of all large and mid-cap stocks across 48 different countries. This includes both developed and emerging markets. For the most part, the goal of this index is to capture the world’s financial markets. So this index is a good comparison tool since you’ll see how the index you’re looking at compares to the world market.

The index tool will give you an overall ESG score, assess UN Global compact violations, and show you any significant controversies from the holdings in the index.

This tool also goes deeper and provides additional information and ratings for specific key issues within the Environmental, Social, and Governance pillars. For example, within the Environmental Pillar, MSCI looks at an index’s carbon emissions, exposure to fossil fuels, and overall climate impact.

ESG Industry Materiality Map

The last tool I just briefly wanted to talk about is MSCI’s ESG Industry Materiality Map. Honestly, at first glance, I really didn’t see the full value of this tool but I actually think this is a great educational resource for ESG investors.

MSCI’s Materiality Map is a great way to research some of the biggest ESG risks based upon a company’s sector and industry.

As a quick example let’s just take a look at the restaurant industry. Some of the key ESG issues in this industry are packaging material and waste, raw material sourcing, product safety and quality, opportunities in nutrition and health, labor management, and corporate governance. These are all potential issues that you should be aware of when investing in this industry.

Some companies will manage these risks better than others. And a company that is able to manage risk (ESG or not) is one that is more likely to stand the test of time.

ESG Standardization and Skepticism

There is one final thing I wanted to mention. ESG ratings are still not entirely standardized. Different research firms may have different opinions on a particular company. That’s because research firms use different methodologies for their ratings systems and may place different weights on specific ESG metrics.

I honestly don’t see this as any different from analyst ratings. There are a lot of different investment research firms and investment analysts out there and they’re not always in agreement with one another. Some skeptics will use these types of discrepancies as a reason to totally dismiss ESG investing but that’s a pretty silly argument in my opinion.

If you’ve used any of the tools I talked about in this article or if you have any other tools that you use for ESG investing then let me know in the comments below!

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