DOCUMENT TYPE

MSCI ESG
RATINGS
METHODOLOGY
Executive Summary
MSCI ESG Research

November 2020

NOVEMBER 2020

Information Classification: GENERAL

 MSCI ESG Ratings Methodology | November 2020

1 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 institutional 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 over 200 experienced research analysts assesses thousands of
data points across 35 ESG Key Issues, focusing on the intersection between a
company’s 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 100,000 individual directors; up to 20 years of shareholder meeting
results

EXPOSURE METRICS MANAGEMENT METRICS

How exposed is the company How is the company managing
to industry material issues? each key issue?
Based on over 80 business 150 policy/program metrics,
and geographic segment 20 performance metrics;
metrics 100+ Governance Key Metrics
SOURCES
KEY ISSUE SCORES & WEIGHTS
100+ specialized datasets
(government, NGO, models) 35 Key Issues selected annually for each INSIGHT
industry and weighted based on MSCI’s
Company disclosure (10-K, mapping framework. Specialized ESG research
sustainability report, proxy report); team provides additional
3400+ media sources monitored insight through:
daily (global and local news Company reports
ESG RATING (AAA-CCC)
sources, government, NGO). Industry reports
Issue scores and weights Thematic reports
combine to overall ESG
rating relative to industry Analyst calls & webinars
peers.
MONITORING & E, S, G scores
QUALITY REVIEW
also available DATA OUTPUTS
Systematic ongoing daily monitoring of Access to selected underlying
controversies and governance events; data
Systematic communication with issuers to Ratings, scores, and weights on
verify data accuracy over 600,000 securities
In-depth quality review processes at all 17 years of history
stages of rating, including formal
committee review.

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 MSCI ESG Ratings Methodology | November 2020

1.1 MSCI ESG RATINGS METHODOLOGY OVERVIEW

MSCI ESG Ratings aim to measure a company’s resilience to long-term,
financially relevant ESG risks.
• Of the negative externalities that companies in an industry generate, which issues may
turn into unanticipated costs for companies in the medium to long term?

• Conversely, which ESG issues affecting an industry may turn into opportunities for
companies in the medium to long term?
More specifically, the MSCI ESG Ratings model seeks to answer four key questions
about companies:
• What are the most significant ESG risks and opportunities facing a company
and its industry?
• How exposed is the company to those key risks and/or opportunities?

• How well is the company managing key risks and opportunities?

• What is the overall picture for the company and how does it compare to its
global industry peers?

MATERIAL INDUSTRY ESG RISKS AND OPPORTUNITIES

Environmental, social, and governance risks and opportunities are posed by large
scale trends (e.g. climate change, resource scarcity, demographic shifts) as well as
by the nature of the company’s operations. Companies in the same industry generally
face the same major risks and opportunities, though individual exposure can vary.
A risk is material to an industry when it is likely that companies in a given industry
will incur substantial costs in connection with it (for example: regulatory ban on a key
chemical input requiring reformulation). An opportunity is material to an industry
when it is likely that companies in a given industry could capitalize on it for profit (for
example: opportunities in clean technology for the LED lighting industry). The MSCI
ESG Ratings model focuses only on issues that are determined as material for each
industry.
We identify material risks and opportunities for each industry through a quantitative
model that looks at ranges and average values for each industry for externalized
impacts such as carbon intensity, water intensity, and injury rates. Companies with
unusual business models for their industry may face fewer or additional key risks
and opportunities. Company-specific exceptions are allowed for companies with
diversified business models, facing controversies, or based on industry rules. Once
identified, these Key Issues are assigned to each industry and company.

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Figure 1 MSCI ESG Key Issue Hierarchy

3 Pillars 10 Themes 35 ESG Key Issues

Environment Climate Change Carbon Emissions Financing Environmental
Product Carbon Footprint Impact
Climate Change Vulnerability
Natural Capital Water Stress Raw Material Sourcing
Biodiversity & Land Use
Pollution & Waste Toxic Emissions & Waste Electronic Waste
Packaging Material & Waste
Environmental Opportunities in Clean Tech Opportunities in Renewable
Opportunities Opportunities in Green Energy
Building
Social Human Capital Labor Management Human Capital Development
Health & Safety Supply Chain Labor
Standards
Product Liability Product Safety & Quality Privacy & Data Security
Chemical Safety Responsible Investment
Financial Product Safety Health & Demographic Risk
Stakeholder Controversial Sourcing
Opposition Community Relations
Social Opportunities Access to Communications Access to Health Care
Access to Finance Opportunities in Nutrition &
Health
Governance* Corporate Governance Ownership & Control Pay
Board Accounting

Corporate Behavior Business Ethics

Tax Transparency

* The Governance Pillar carries weight in the ESG Rating model for all companies.

ESG RATINGS
To arrive at a final ESG Rating, the weighted average of individual Key Issue Scores is
normalized relative to ESG Rating Industry peers. After any committee-level overrides
are factored in, each company’s Final Industry-Adjusted Score corresponds to a
rating between best (AAA) and worst (CCC). These assessments are not absolute
but are explicitly intended to be interpreted relative to a company’s industry peers.

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 MSCI ESG Ratings Methodology | November 2020

SETTING KEY ISSUE WEIGHTS

Once the Key Issues have been selected for a GICS Sub-Industry, we set the weights
that determine each Key Issue’s contribution to the overall rating. Each Key Issue
typically comprises 5-30% of the total ESG Rating. The weightings take into account
both the contribution of the industry, relative to all other industries, to the negative or
positive impact on the environment or society; and the timeline within which we
expect that risk or opportunity for companies in the industry to materialize, as
illustrated conceptually below.

Figure 2 Framework for Setting Key Issue Weights

Expected Time frame for
Risk/Opportunity to Materialize
Short-Term Long-Term
(<2 years) (5+ years)
Industry is major
Level of contributor to impact Highest Weight
Contribution to
Environmental or Industry is minor
Social Impact contributor to impact Lowest Weight

The framework is such that a Key Issue defined as “High Impact” and “Short-Term”
would be weighted three times higher than a Key Issue defined as “Low Impact” and
“Long-Term”.
• Level of contribution to social or environmental externality: Similar to the process
outlined above, each GICS Sub-Industry is assigned a “High”, “Medium”, or “Low”
impact for each Key Issue based on our analysis of relevant data (e.g. average carbon
emissions intensity).

• Expected time horizon of risk / opportunity: The time horizon of each Key Issue (Short-
Term, Medium-Term, Long-Term) is classified based on the type of risk or opportunity
that each Key Issue presents to companies.
Starting in November 2020, the Governance Pillar weight has been determined
assuming a “High Contribution/Long Term” and “Medium Contribution/Long Term”
assessment on Corporate Governance and Corporate Behavior respectively across
all sub-industries. Additionally, the weight on the Governance Pillar will be floored at
a minimum value of 33%.

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 MSCI ESG Ratings Methodology | November 2020

KEY ISSUE ASSESSMENT

Risks
To understand whether a company is adequately managing a key ESG risk, it is
essential to understand both what management strategies it has employed and how
exposed it is to the risk. The MSCI ESG Ratings model measures both of these: risk
exposure and risk management. To score well on a Key Issue, management needs to
be commensurate with the level of exposure: a company with high exposure must
also have very strong management, whereas a company with limited exposure can
have a more modest approach. Conversely, a highly exposed company with poor
management will score worse than a company with the same management practices
but lower exposure to the risk.
Example: Electric Utilities are typically highly water-dependent, but each
company may be more or less exposed to water related risks depending on
where its plants are – desert locations present much higher risks than those
where water supplies are plentiful. Companies operating in water-scarce
regions must take more extensive measures to mitigate these risks than
those with abundant access to water.
While Key Issues are identified by looking quantitatively at each industry as a whole,
individual companies’ exposure to each issue will vary. MSCI ESG Ratings calculate
each company’s exposure to key ESG risks based on a granular breakdown of its
business: its core product or business segments, the locations of its operations, and
other relevant measures such as outsourced production or reliance on government
contracts. Risk exposure is scored on a 0-10 scale, with 0 representing no exposure
and 10 representing very high exposure.
The analysis then takes into account the extent to which a company has developed
strategies and demonstrated a strong track record of performance in managing its
specific level of risks or opportunities. Controversies occurring within the last three
years lead to a deduction from the overall management score on each issue.
Management is scored on a 0-10 scale, where 0 represents no evidence of
management efforts and 10 represents indications of very strong management.

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Figure 3 Combining Exposure and Management – ‘Risk’ Key Issues

10

Management Score
6

0
0 1 2 3 4 5 6 7 8 9 10
Exposure Score

The Risk Exposure Score and Risk Management Score are combined such that a
higher level of exposure requires a higher level of demonstrated management
capability in order to achieve the same overall Key Issue Score. Key Issue scores are
also on a 0-10 scale, where 0 is very poor and 10 is very good. For instance, a utility
focused on conventional power generation is required to have stronger measures for
mitigating its carbon and toxic emissions compared to a utility which is largely
focused on electricity transmission and distribution which is less polluting compared
to conventional generation.
Example: Utility Company A focuses on conventional power generation,
which typically results in large carbon and toxic emissions. It has high risk
exposure in these areas. To score well on these issues, it must have strong
risk mitigation programs in place. Utility Company B is largely focused on
electricity transmission and distribution, which are less polluting activities.
Although they are in the same industry, Company A and Company B have
different levels of exposure to these risks. Company B can score as well as
Company A with more modest risk mitigation efforts. Alternatively, if
Company B has risk mitigation efforts similar to company A, it will score
higher overall because its risk management is stronger relative to its risk
exposure.

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 MSCI ESG Ratings Methodology | November 2020

Opportunities
Assessment of opportunities works similarly to risks, but the model for combining
exposure and management differs. Exposure indicates the relevance of the
opportunity to a given company based on its current business and geographic
segments. Management indicates the company’s capacity to take advantage of the
opportunity. Where exposure is limited, the key issue score is constrained toward the
middle of the 0-10 range, while high exposure allows for both higher and lower
scores.

Figure 4 Combining Exposure and Management – ‘Opportunities’ Key Issues

Controversies

MSCI ESG Ratings reviews controversies, which may indicates structural problems
with a company’s risk management capabilities. In the ESG Rating model, a
controversies case that is deemed by an analyst to indicate structural problems that
could pose future material risks for the company triggers a larger deduction from the
Key Issue score than a controversies case that is deemed to be an important
indicator of recent performance but not a clear signal of future material risk.

A controversy case is defined as an instance or ongoing situation in which company

operations and/or products allegedly have a negative environmental, social, and/or
governance impact. A case is typically a single event such as a spill, accident,
regulatory action, or a set of closely linked events or allegations such as health and
safety fines at the same facility, multiple allegations of anti-competitive behavior
related to the same product line, multiple community protests at the same company
location, or multiple individual lawsuits alleging the same type of discrimination.

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 MSCI ESG Ratings Methodology | November 2020

Each controversy case is assessed for the severity of its impact on society or the
environment and consequently rated Very Severe (reserved for ‘worst of the worst’
cases), Severe, Moderate, or Minor.

Figure 5 Assessment of Controversial Cases

Nature of Impact
Scale of Impact Egregious Serious Medium Minimal
Extremely Widespread Very Severe Very Severe Severe Moderate

Extensive Very Severe Severe Moderate Moderate

Limited Severe Moderate Minor Minor

Low Moderate Moderate Minor Minor

DETERMINING GOVERNANCE SCORES

The Governance Pillar Score is an absolute assessment of a company’s governance
that uses a universally applied 0-10 scale. Each company starts with a “perfect 10”
score and scoring deductions are applied based on the assessment of Key Metrics.

Figure 6 Governance Model Structure

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 MSCI ESG Ratings Methodology | November 2020

CONSTRUCTING THE RATING

The ESG Ratings model is industry relative and uses a weighted average approach.
Key Issue weights are set at the GICS Sub-Industry level (8-digit) based on each
industry’s relative external 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. Corporate Governance is always material and therefore always
weighted and analyzed for all companies. Where there are company-specific
exceptions, weights depart from the industry standard weights but remain in
proportion.
For each company a Weighted Average Key Issue Score is calculated based on the
underlying Key Issue scores and weights.

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 MSCI ESG Ratings Methodology | November 2020

Figure 7 Hierarchy of ESG Scores

ESG
ESGLetter
LetterRating
Rating
(AAA-CCC)
(AAA-CCC)

Pre-set score-to-letter-rating
Pre-set score-to-letter-ratingmatrix
matrix

FinalIndustry
Final Industry
AdjustedScore
Adjusted Score(0-10)
(0-10)

Adjusted
Adjustedrelative
relativeto
toIndustry
Industry Peers,
Peers,Exceptional
Exceptional truncations
truncations

WeightedAverage
Weighted AverageKey
Key
Issue Score (0-10)
Issue Score (0-10)

Weightedaverage
Weighted average of
ofunderlying
underlying Pillar
Pillar scores
scores

Environment
EnvironmentPillar
Pillar Social
Social Pillar
Pillar Score
Score(0-
(0- Governance
GovernancePillar
Pillar
Score
Score(0-10)
(0-10) 10)
10) Score
Score(0-10)
(0-10)

Each
Each
pillar
pillar
is organized
is organized
into
into
underlying
underlying
themes;
themes;
Pillar
Pillar
andand
Theme
Theme
Scores
Scores
derive
derive
fromfrom
thethe
weighted
weighted
average
average
of underlying
of underlying
Issue
Issue
scores
scores

EnvironmentalKey
Environmental Key Social
Social Key
Key Issue
Issue Scores GovernanceKey
Governance KeyIssue
Issue
IssueScores
Issue Scores(0-10)
(0-10) Scores (0-10)
(0-10) Scores
Scores (0-10)
Score (0-10)

Exposure
Exposure Mgmt
Mgmt Exposure
Exposure Mgmt
Mgmt Exposure
Key MetricMgmt
Scores
Scores Scores
Scores Scores
Scores Scores
Scores Scores Scores
Deductions

Indicators: Indicators: Indicators: Indicators: Indicator Indicators:

Indicators:
Indicators:
Business Indicators:
Strategy Indicators:
Business Indicators:
Strategy s:
Ownership Strategy
characteristics;
Segments;
Business Programs
Strategy & Segments;
Business Programs
Strategy& Business Programs &
Board and committee
Geographic
Segments; Initiatives &
Programs Geographic
Segments; Initiatives &
Programs Segments;composition;Initiatives
Geographic
Segments; Performance
Initiatives Segments;
Geographic Performance
Initiatives Geographic Performance
Pay figures;
Segments;
Co-spec Controversie
Performance Segments;
Co-spec Controversies
Performance Segments; Controversies
Accounting metrics;
Co-specific
indicators s
Controversies Co-specific
indicators Controversies Co-spec
Policies & practices;
indicators indicators indicators
Geographic segments;
Controversies

Raw Data:
Raw Data:
Company financial and sustainability disclosure, specialized government & academic data sets, media searches, etc.
Company financial and sustainability disclosure, specialized government & academic data sets, media searches, etc.

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 MSCI ESG Ratings Methodology | November 2020

Prior to November 2020, these benchmark values were based on the rolling 3-year
average of the 2.5th and 97.5th percentile scores of ESG Rating Industry peers
among constituents of the MSCI ACWI Index.
In conjunction with the methodology enhancements effective November 2020, the
following criteria in setting the industry top and bottom benchmark values will apply
starting November 2020:
• The top benchmark value (“industry maximum score”) falls between the 95th and 100th
percentile of modeled weighted average key issue scores (WAKIS) within an ESG Rating
Industry.

• The bottom benchmark value (“industry minimum score”) falls between the 0th and 5th
percentile of modeled weighted average key issue scores (WAKIS) within an ESG Rating
Industry.
Percentiles were calculated based on the full universe of companies with ESG
Ratings (~8,500 companies), which includes approximately 5,600 additional small
cap and private companies that are not constituents of the MSCI ACWI Index.
The Industry Adjusted Score corresponds to a rating 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 company’s
industry peers.
Figure 8 The Final Industry Adjusted Company Score is mapped to a Letter
Rating as follow.

Letter Rating Final Industry-Adjusted Company Score

AAA 8.571* - 10.0

AA 7.143 – 8.571

A 5.714 – 7.143

BBB 4.286 – 5.714

BB 2.857 – 4.286

B 1.429 – 2.857

CCC 0.0 – 1.429

*Appearance of overlap in the score ranges is due to rounding error. The 0 to 10 scale is divided into 7 equal
parts, each corresponding to a letter rating.

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 MSCI ESG Ratings Methodology | November 2020

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 (e.g. Transparency International, US EPA, World Bank)

• Company disclosure (10-K, sustainability report, proxy report, AGM results, etc.)
• Government databases, 1600+ media, NGO, other stakeholder sources regarding
specific companies

ISSUER COMMUNICATION AND FEEDBACK PROCESS

We proactively reach out to companies as part of our standardized and systematic
data review processes. We do not issue surveys or questionnaires or conduct
general interviews with companies, nor do we accept or consider in our analysis any
data provided by issuers that is not publicly available to other stakeholders. Typically,
companies receive an alert, roughly 6-8 weeks ahead of the expected annual ESG
Rating Action update. They will also receive an auto-notification when the update is
complete. Given the dynamic nature of our research, companies can access the data
we have collected to date via the issuer portal at any time to review. They are
welcome to ask questions and provide feedback at any time through the annual ESG
Rating review process, as well as any time throughout the year. We are committed to
updating a company profile as required in a timely manner. This process is also in
accordance with the objective of frequently updating company reports with the latest
available information as provided by companies.

MONITORING AND UPDATES

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 score changes trigger analyst review and
re-rating. Companies receive an in-depth review at least annually.

QUALITY REVIEW
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; and ESG Ratings Methodology

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 MSCI ESG Ratings Methodology | November 2020

Committee approval of any exceptions, truncations, or major (2+) rating changes.

The ESG Methodology Committee reviews contentious cases and model changes.

ANNUAL CONSULTATION
In November of each year, MSCI ESG Research reviews the Key Issues assigned to
each industry as well as their weights. This process also identifies emerging issues
and those that have become less significant. As part of this process, MSCI ESG
Research consults with clients about proposed changes to Key Issue selections for
each industry as well as any proposed new Key Issues.

1.2 COVERAGE
MSCI ESG Ratings covers 1 more than 14,000* equity and fixed income issuers linked
to over 600,000* equity and fixed income securities.

MSCI ESG Ratings are available for more than 8,700 companies included in the
following MSCI indexes:
• MSCI World Index
• MSCI Emerging Markets Index
• MSCI US Investible Market Index (IMI)
• MSCI Canada IMI+
• MSCI Europe IMI+
• MSCI UK IMI+
• MSCI Nordic IMI+
• MSCI Swiss IMI
• MSCI Australia IMI+
• MSCI South Africa IMI
• MSCI EFM Africa
• MSCI Japan IMI ~Top 750 constituents by market cap
• MSCI China A International
• MSCI Hong Kong IMI
• MSCI Malaysia IMI
• MSCI Singapore IMI
• MSCI Argentina Standard
• MSCI Saudi Arabia Standard
• MSCI Brazil IMI
• MSCI Mexico IMI
• MSCI Chile IMI
• MSCI World IMI Small Cap and Emerging Markets IMI Small Cap ~500 constituents
• MSCI Korea IMI
• MSCI Saudi Arabia IMI

1
As of 13th October 2020

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 MSCI ESG Ratings Methodology | November 2020

• MSCI Domestic Kuwait

MSCI ESG Ratings covers more than 85% of market value of a widely used global
fixed income benchmark, including:
• Approximately 96% of the corporate investment grade (listed and non-listed)
• Approximately 95% of the covered bonds
• Approximately 99% of the treasuries/Sovereign**
• Approximately 91% of the government related (ex-Sovereign)**
• Approximately 87% of global high yield

Notes:
+ Includes coverage of regional benchmarks outside of the MSCI regional index
* Includes coverage through subsidiary mapping
**The overall ESG rating for government-related bond issuers will be either in the MSCI ESG Ratings or MSCI
Government ESG Rating framework

Additions to the MSCI ACWI Index and the MSCI US Investable Market Index (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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