MSCI Inc. is an American finance company headquartered in NYC. It provides investing indices, portfolio analysis tools, and ratings on subjects including ESG, equity, loans, mutual funds, ETFs, and countries.
ESG ratings are systems that assess companies on their ESG policies, processes, and measures.
ESG Ratings are designed to measure resilience to financially material environmental, societal, and governance risks.
This means that such ratings inform on one’s approach to risk and financial performance; ratings can be performance-based or risk-based, but should not be confused with ESG standards or frameworks, which provide guidance on how to address key sustainability issues.
The MSCI ESG Ratings are one such rating system. It operates by identifying leaders and laggards in different industries based on ESG risk exposure and risk management in comparison with peers.
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The dates below provide a quick overview of MSCI’s activities as they relate to the establishment of the rating system.
The MSCI ESG Ratings are prominent in the world of ESG ratings.
According to MSCI’s website, aside from being the only dataset with live history of ~15 years demonstrating economic relevance, they also boast 40+ years of experience in measuring and modeling ESG performance.
MSCI is recognised by the Deep Data Delivery Standard as a ‘Gold Standard data provider,’ and was voted 'Best Firm for SRI research' and ‘Best Firm for Corporate Governance research' by the Extel & SRI Connect Independent Research in Responsible Investment (IRRI) Survey in 2015, 2016, 2017 & 2018/19.
Thus, the scores issued by MSCI are well-trusted in the sustainability field.
MSCI uses a tool aligned with the UN Sustainable Development Goals (SDGs).
The MSCI SDG Alignment Tool is built to provide a holistic view of companies’ net contribution towards the 17 SDGs, through qualitative SDG Net Alignment assessments and scores. These assessments analyse things like operations, products and services, policies, and practices for each company.
MSCI also utilises data from other standards and frameworks.
One category of information that MSCI uses to visualise a company’s ESG landscape is voluntary corporate disclosure aligned to ESG reporting frameworks; this category of data uses one of the four major corporate sustainability disclosure frameworks:
This means that information obtained using other prominent ESG frameworks is included and taken into consideration in the MSCI ESG Ratings.
Moreover, MSCI analysts do support other ESG frameworks and standards in a feedback-providing capacity. For example, MSCI has weighed in on the SASB framework, the TCFD, and the EU Taxonomy working group.
MSCI states that they will continue to support ESG reporting initiatives, but do not emphasis one framework over another.
ESG Ratings are a useful tool for appraising company performance, and as with any tool, it is important to understand the parameters for use.
The MSCI ESG Ratings assess risk management in comparison with company peers, not across industries; different industries face different risks, so financially material issues will rarely stay constant across industries. Moreover, MSCI utilises a financial materiality approach, which means that their choice of material issues may be narrower than another rating agency that adheres to a double or dynamic materiality approach.
In a 2021 report by Bloomberg Businessweek, titled “The ESG Mirage”, it was found that instead of measuring the impact a company has on the environment and society, MSCI measured the risk that the world poses to the company. For instance, despite McDonalds’s producing 54 million tons of CO2 emissions in 2019, MSCI upgraded its rating after determining climate change did not pose a risk to the firm’s profits.
Similarly, an upgrade based on a chemical company’s “water stress” score would not measure the company’s impact on the water supplies of the communities where it makes chemicals; instead, it measures whether the communities have enough water to sustain their factories.
This prioritisation of company profit has to do with MSCI’s financial materiality approach whereby factors are considered material based on their potential to impact the company.
Bloomberg also reported that MSCI disproportionately increased scores due to changes in corporate behavior, such as changes to governance policies like employment practices and data protection, even if other behaviors (eg. in the Environment and Social categories) stayed the same.
There are some other concerns regarding transparency and consistency with ESG ratings, using MSCI data, as well.
The OECD has questioned the variability of ESG ratings in general, and a study in 2021 found a “quantity bias effect,” where there is a correlation between the level of ESG data disclosure and MSCI’s ESG ratings.
There is currently a debate in the sustainability field on whether ESG ratings should be regulated, with MSCI taking the stance that ESG ratings should not be standardised.
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