11/14/24, 10:56 AM Comparing ESG Ratings Agencies: MSCI, Morningstar, Bloomberg, LSEG and More
Featured Article
Comparing ESG Ratings Agencies: MSCI,
Morningstar, Bloomberg, LSEG and More
Published on: 13 Feb 2023
by KnowESG,
MSCI Inc.
Image of various ESG Rating providers
When it comes to ESG or sustainable investing, one burning question
that institutional investors often have is how they can actually
measure a company's ESG performance. Fortunately, the answer lies
in the form of comprehensive ratings and scores provided by various
ESG data providers and rating agencies.
Many agencies consider themselves the ultimate source for ESG
ratings, covering various ESG factors like company declarations,
media reports, controversies, climate related financial disclosures
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and investor risk. These ratings assess a company's environmental,
social, and governance performance, evaluating management
systems, policies, transparency, and controversial incidents to
determine overall effectiveness. However, it is still unclear which
provider truly captures corporate sustainability practices and offers
the best global corporate sustainability assessment.
Also, we still need to determine the best way to compare ESG rating
providers. What are the key ESG benchmarks? True, many debate
whether it is wise to seek comparisons amid different ESG rating
agencies, mainly due to their considerable variances in methodology,
asset classes, and global reach, but those comparisons can better
highlight the relative focal points of each agency ratings approach,
helping investors choose the ESG ratings that apply best to their own
needs.
The following are the leading ESG rating providers which currently
dominate the market.
Morningstar (Sustainalytics)
With over twenty years of expertise in the financial market,
Morningstar ratings came up with an ESG investor risk score with
underlying environmental, social and governance risk ratings. The
risk score ranges from 100 to 0, i.e., closer to 100 is high risk (bad
score, red zone) and closer to 0 is low risk (excellent score, green
zone). The ESG Risk Score comprises two dimensions:
Exposure: ESG-related risk factors which can cause a potential
financial risk to companies. It can also be considered as a
company's sensitivity or vulnerability to ESG risks.
Management: Considers how well a company is able to handle its
material ESG risk.
Below is the actual scale of how Sustainalytics measures company
ESG Risk:
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Read: Sustainalytics ESG Risk Rating: A Guide for Responsible
Investing
LSEG (formerly Refinitiv)
With a history going back to 2002, the company promises and claims
to provide one of the most thorough ESG datasets, encompassing
more than 80% of the worldwide market value over more than 630
different ESG metrics. A Refinitiv ESG score ranges from 0 to 100,
where closer to 100 is the better score a company can achieve. They
also include a controversy score which is generated based on
controversial ESG news events happening across the globe that relate
to the specific company.
The below table showcases how the global ESG scores are generated
from the bottom to top approach:
Morgan Stanley Capital International (MSCI ESG
Rating)
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The key focus of the MSCI ESG Ratings is to measure any given
company and how they are managing financially relevant ESG risks
and opportunities. MSCI is the first ESG provider to assess companies
based on industry materiality, dating back to 1999.
Key highlights from the MSCI methodology based on MSCI ESG
research are:
For each industry, on an annual basis, 35 key ESG issues and
associated weights are identified, based on the MSCI Materiality
Map framework which helps investment firms to access and
reorganise their ESG investing goals.
Exposure Metrics: These determine how exposed a given company
is to a material issue (based on more than 80 geographic and
business segment metrics).
Management Metrics: Determine how a given company manages
each material issue (based on 100+ governance key metrics, 20
performance metrics, and 150 policy metrics).
MSCI ESG Ratings are generated for ESG's underlying pillars of E, S,
and G, the scale going from 0 to 10 where MSCI has given a specific
category for each range, as shown below:
Featured Article: How Can An ESG Reporting & Rating Framework
Help Investors Achieve Their Financial Goals?
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Bloomberg
As one of the leading providers of business and financial
information, Bloomberg launched Proprietary ESG Scores for Oil &
Gas Industry in April 2020. The Bloomberg Terminal gives access to
Bloomberg ESG data and scores, ESG data is integrated into various
Bloomberg Professional Service applications for company research
and investment processes. Initially covering 252 companies, the
scores now cover an index of 11,800 companies, updated to ESG
Disclosure scores.
Bloomberg’s approach to scoring ESG performance is bottom-up,
model-driven using self-reported, publicly available information. This
means a fully transparent, rules-based scoring framework.
Bloomberg’s datasets are vast, including company-reported data on
thousands of companies. The Bloomberg ESG Disclosure score is E, S
and G scores, 0 to 100, 100 is the best. Bloomberg’s proprietary ESG
scores provide transparent, consistent and comparable ESG data to
clients. Investors can see the scoring methodology and the underlying
company data.
Bloomberg says the ESG data used for E & S scores is voluntary
disclosures only from direct (primary) sources to ensure accuracy and
consistency. These sources are sustainability reports, annual filings,
proxy statements, corporate governance reports, supplemental
releases and company websites. Bloomberg provides data and
analytics on greenhouse gas emissions, including carbon emissions
estimates for thousands of global public and private companies.
Bloomberg’s E & S Scores are structured into Pillars, Issues, Sub-
Issues and Fields, each collecting related data fields. Company-
reported data is key in Bloomberg’s ESG scores, to ensure high quality
and transparent information. The data behind Bloomberg’s ESG
scores is used for sustainability assessments for investors.
Bloomberg Data License provides access to ESG data to integrate
multi-vendor ESG data into investment systems. They estimate carbon
emissions for over 100,000 private companies using their proprietary
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machine learning models and evaluate sustainability data for fixed
income investors, including green bonds.
Dow Jones
Dow Jones has an innovative collection approach and has gathered
data on the Environment, Social and Governance (ESG) profile for
over 6,000 global companies. Their sustainability score dataset is
mainly sourced from the Dow Jones Factiva news universe.
Dow Jones follows the SASB framework to generate the ESG aggregate
score and five pillar scores: Environment, Social Capital, Human
Capital, Business Model & Innovation, Leadership & Governance. The
scores are generated using a bottom-up approach, where company
news and company disclosures are collected and categorised into 26
SASB category scores, then into five pillar scores, and finally an
aggregate ESG score is calculated when weighted financial materiality
is included.
The scale is 0 to 100, 100 is the best score for a company.
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The image below shows how the Dow Jones score is calculated:
ISS
Founded in 1985, the Institutional Shareholder Services group of
companies (ISS) launched their proprietary ESG score in 1993 and
recently launched their Regulatory Sustainable Investment solution.
ESG data and ratings are generated by the ISS ESG corporate rating.
According to ISS, companies are assessed against a predefined list of
general ESG themes and additional industry specific topics. They
consider material sustainability risks and negative impact on society
and environment as part of their ESG rating framework. Out of 700
indicators, ISS ESG uses around 100 social, environmental and
governance related indicators for each rating and scores for key
metrics like employee concerns, supply chain management, business
ethics, corporate governance, environmental management, eco-
efficiency and others.
ISS ESG corporate rating uses a 12-point scale and the scale goes from
A+/4.00 i.e. best in class to D-/1.00 i.e. worst in class.
The ISS ESG Rating also incorporates GRI, SASB, and TCFD standards
into their methodology, and generates disclosure scores.
The below image shows the ISS ESG Rating of a company:
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The above also answers some of the common questions that
institutional investors and portfolio managers face during their ESG
integration into their portfolios.
Frequently Asked Questions
How does LSEG generate an ESG score?
LSEG is an ESG rating agency with an independent ESG scoring
methodology to provide consistent and accurate ratings for green
bond issuers and other organisations to demonstrate their
sustainability commitment. LSEG ESG scores combine quantitative
analysis of public information with qualitative assessment from a
team of analysts who are experts in environmental, social and
governance issues. This ensures the rating reflects the latest
information on a company’s sustainability practices and the risks
associated with green investments.
What is Morningstar Ratings methodology?
Sustainalytics provides an independent ESG rating methodology that
combines quantitative analyses of publicly available data with
qualitative assessments from experienced analysts who specialise in
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environmental, social, and governance issues. This ensures that
ratings reflect up-to-date information about a company’s
sustainability practices while also taking into account any potential
risks associated with green investments.
How does MSCI ESG Ratings work?
MSCI ESG Ratings is a rating system that assesses corporate
sustainability performance using public information. The rating
covers ESG topics such as climate change, green bonds, human rights,
climate risk, gender equality and corporate governance. MSCI ESG
Ratings uses an algorithm to perform the Climate Bonds Initiative
(CBI) green bond rating, an independent assessment of green bonds
and other climate-aligned financial instruments. The rating measures
how well the green bond issuance meets CBI’s criteria for green
investments, focusing on use of proceeds and projects.
What is the S&P ESG score?
S&P Global Ratings (formerly Standard & Poor's) provides an
independent ESG score, which is designed to measure the company's
performance in ESG areas. The score takes into account over 20 ESG
criteria including green bonds, climate risk, corporate governance,
human rights, and gender equality, and is the Fitch ESG Relevance
Score.
What is the ISS rating score?
ISS ESG Rating score is an independent rating approach that assesses
a company’s sustainability performance using public information.
The ISS ESG Rating uses a 12-point scale from A+/4.00 (best in class)
to D-/1.00 (worst in class), includes GRI, SASB and TCFD in their
methodology and generates disclosure scores to provide ratings for
green bond issuers and other organisations to demonstrate their
sustainability commitment.
Conclusion on ESG Rating Agencies
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Many ESG ratings are developed and published by various esg rating
agencies, each with their own view on how to rate. They use both
voluntary and mandatory guidelines to make their criteria more
concise.
But why didn’t regulators create a standard for ESG Ratings? The
answer is simple: the rating agencies have too much control in the
market; implementing standards now would be like trying to
standardise plug types in one house.
Without a standard ESG system there’s a risk of greenwashing. To
prevent this we need more transparency on how data is collected and
how results are calculated. Transparent ESG data is essential to give
investors and companies reliable information, to make ESG
assessments honest. These safeguards are key to the integrity of the
ESG space.
Click here to find and compare the ESG reports and ratings of top
companies across three leading ESG data providers: Morningstar,
LSEG, and MSCI.
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