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ESG Ratings and Their Disagreements

MSCI ESG Ratings: Methodology, Scale, and Use in Portfolios

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How Does MSCI's ESG Rating System Work?

MSCI is the world's largest ESG rating provider by assets linked to its ratings — its ESG ratings underlie hundreds of ESG indices and ETFs with trillions of dollars of investment products benchmarked to them. Understanding how MSCI produces its ratings is practically important for any investor using MSCI ESG-screened indices or ETFs, since the index construction methodology builds directly on rating outputs. MSCI's ESG ratings use a distinctive industry-adjusted, relative-performance framework: companies are scored against their industry peers rather than against a universal absolute standard, and key ESG issues are weighted by their financial materiality for each specific industry.

Quick definition: MSCI ESG Ratings assess companies on a AAA-to-CCC scale (seven bands) based on performance on financially material ESG key issues, weighted by industry. The ratings measure how well companies manage their most relevant ESG risks and opportunities relative to sector peers, not how "good" or "bad" they are in absolute terms.

Key takeaways​

  • MSCI ESG Ratings use a 7-band scale: AAA (leader), AA, A, BBB, BB, B, CCC (laggard). Companies are categorized into Leader (AAA-AA), Average (A-BBB-BB), and Laggard (B-CCC) tiers.
  • The rating methodology identifies 35 key ESG issues across the three pillars, with each company assessed only on the key issues that are material for its specific industry — not on all 35 issues.
  • MSCI weights key ESG issues within each industry based on their estimated contribution to financial risk or opportunity — higher weight for issues where ESG performance most directly affects financial value.
  • Scores are expressed on a 0–10 scale for individual key issues and then aggregated, with industry adjustment, to produce the final letter-grade rating on a relative (within-industry) basis.
  • MSCI updates its ESG ratings on an ongoing basis — triggered by new company disclosures, controversy events, or changes to industry materiality assessments — making MSCI ratings more dynamic than annual-cycle providers.

The MSCI 35 Key Issues Framework​

MSCI has identified 35 key ESG issues across the three pillars as the potential assessment dimensions:

Environmental (14 key issues): Carbon emissions, product carbon footprint, financing environmental impact, climate change vulnerability, water stress, biodiversity and land use, toxic emissions and waste, packaging material and waste, electronic waste, opportunities in clean tech, opportunities in green building, opportunities in renewable energy.

Social (16 key issues): Labor management, health and safety, human capital development, supply chain labor standards, privacy and data security, responsible investment, insuring health and demographic risk, chemical safety, consumer financial protection, access to health care, access to communications, access to finance, product safety and quality, opportunities in nutrition and health.

Governance (5 key issues): Corporate governance, corporate behavior (which covers corruption and financial crime), ownership and control, accounting, and tax transparency.

For any given company, MSCI identifies the subset of these 35 issues that are financially material for its industry and assesses the company only on those issues. An oil company may be assessed on 10–15 key issues; a bank may be assessed on a different 10–15. The coverage is always industry-specific.

Industry Adjustment: How MSCI Weights Industries​

MSCI's industry adjustment is central to its methodology. Rather than applying a universal weight to, say, carbon emissions across all companies, MSCI weights carbon emissions heavily for energy and industrial companies and less heavily for technology and financial companies.

Industry weights reflect two factors:

  1. Contribution to risk/opportunity: How much does performance on this issue affect the company's financial value in this industry?
  2. Time horizon: Issues with nearer-term financial impact receive higher weights than issues where the financial impact is distant or uncertain.

This industry adjustment is why an oil company with strong environmental management can receive a higher overall MSCI ESG rating than a technology company with weaker governance practices — the issues matter differently, and the weighting reflects that.

The Scoring Process​

Key issue score (0–10): For each key issue assessed, MSCI scores the company on a 0–10 scale (10 = best practice). Scores reflect: the quality and robustness of the company's management approach to the issue (policies, programs, targets), and the company's actual measured performance on the issue (quantitative indicators like emissions intensity, injury rate, board composition).

Weighted key issue aggregation: Key issue scores are combined using industry-specific weights to produce pillar scores (E, S, and G separately).

Final rating: The three pillar scores are aggregated into an overall score (0–10), which is then converted to a letter grade using dynamic boundaries that ensure approximately the same distribution of ratings within each industry over time.

Controversy adjustment: MSCI applies controversy penalties that can reduce the final rating if a company has been involved in significant adverse ESG events not reflected in its disclosure-based scores.

MSCI rating construction​

How MSCI Ratings Are Used in Index Construction​

MSCI's ratings are the input for a family of ESG indices that form the basis for hundreds of ESG ETFs and structured products globally.

MSCI ESG Leaders Indices: These indices target the top 50% of companies by MSCI ESG rating within each GICS sector group, subject to controversy exclusions. They are used by some of the world's largest ESG ETFs, including iShares funds.

MSCI ESG Screened Indices: These indices exclude only companies in specific controversial sectors (tobacco, controversial weapons, civilian firearms, thermal coal, oil sands) and controversy-flagged companies, applying minimal ESG selection beyond exclusions.

MSCI Climate indexes: Multiple sub-families apply MSCI ESG data specifically for climate-related filtering — the MSCI Low Carbon Targets, MSCI Climate Paris Aligned, and MSCI Net Zero Target indices all use MSCI's climate-specific data alongside or in place of overall ESG scores.

Custom indices: Many large institutional investors use MSCI data to construct custom ESG indices tailored to their specific ESG requirements — their own exclusion lists, their own ESG score minimums, or hybrid methodologies that combine MSCI data with other ESG data sources.

Real-world examples​

Apple's AAA MSCI ESG rating: Apple has maintained one of the highest MSCI ESG ratings in the technology sector for multiple years, reflecting strong scores on data privacy, carbon management, and product safety — the key issues that are most financially material for consumer technology companies. Its governance score has been more moderate, but the technology industry weighting means governance contributes less to the overall rating than environmental and social factors.

Glencore's lower MSCI rating: Glencore, the global mining and commodity trading company, has historically received lower MSCI ESG ratings, reflecting significant controversy flags related to corruption investigations and environmental incidents at mining operations — overlaid on a sector where ESG key issues including tailings management and community impacts are weighted heavily.

Sector relative ratings: MSCI's within-industry relative scoring means the "best" ESG-rated company in a highly polluting industry (oil and gas, chemicals) may have a AAA or AA rating in absolute terms, even though its environmental performance would be poor compared to companies in low-impact sectors. This sector-neutrality is intentional — MSCI's rating is not about whether an industry is good or bad, but about which companies within it manage ESG risk most effectively.

Common mistakes​

Interpreting MSCI ESG ratings as absolute ESG quality assessments: MSCI ratings measure relative performance within industry. A BBB-rated pharmaceutical company and a BBB-rated oil company are both average for their respective industries; they are not comparable on absolute ESG terms.

Assuming MSCI ESG Leaders indices hold only high-ESG companies: MSCI ESG Leaders holds the top 50% within each sector — which includes the top half of oil and gas companies, the top half of tobacco-adjacent companies (unless separately excluded), and the top half of mining companies. "Leaders" is a within-sector designation, not a universal sustainability claim.

Not checking for controversy adjustments in ratings: A company's MSCI ESG score may look strong based on its policies and performance data, but a recent controversy overlay may reduce the actual rating. Checking both the underlying score and the controversy status provides a more complete picture.

FAQ​

How does MSCI handle companies that don't disclose ESG data?​

MSCI estimates scores for companies with limited or no ESG disclosure based on industry averages, geographic proxies, and company-level financial characteristics that correlate with ESG performance. These estimated scores are clearly flagged and are generally lower than disclosure-based scores — creating an implicit incentive for companies to disclose more.

Can a company request a review of its MSCI ESG rating?​

Yes — MSCI provides rated companies with visibility into their ratings and a formal process for submitting corrections to factual errors in data used. Companies cannot appeal methodology choices, but they can correct factual inaccuracies in underlying data. Major MSCI rating changes triggered by company disclosures are communicated to companies before publication.

What is MSCI's coverage universe?​

MSCI covers approximately 14,000 companies globally in its ESG rating universe, covering most of the investable global equity market. Coverage is most complete for MSCI index constituents (MSCI World, MSCI ACWI, MSCI Emerging Markets) and thins for small-cap and frontier market companies not in major indices.

How frequently does MSCI update ESG ratings?​

MSCI updates ratings on an ongoing basis rather than a fixed annual cycle. Ratings are reviewed when new company disclosures are published, when significant controversy events occur, and when MSCI revises its industry materiality frameworks. The dynamic update approach is designed to make ratings more responsive to current company behavior than purely annual update cycles allow.

What is the difference between MSCI ESG Ratings and MSCI ESG scores?​

MSCI ESG Ratings are the final letter grade (AAA to CCC). MSCI ESG scores are the underlying numerical outputs (0–10) at the overall, pillar, and key issue level. Institutional users typically access the full score data; retail investors and index products typically reference the final letter rating or tier classification.

Summary​

MSCI ESG Ratings assess companies on a 7-band AAA-to-CCC scale by scoring performance on the subset of 35 key ESG issues that are financially material for each company's specific industry. The methodology is industry-adjusted, with issues weighted by their estimated financial relevance to the sector — making MSCI ratings a relative performance measure within industries rather than an absolute ESG quality score. Ratings underlie hundreds of ESG indices and ETFs globally, making MSCI's methodology choices embedded in enormous amounts of institutional capital. Dynamic updates, controversy adjustments, and industry-relative scoring are the defining characteristics that distinguish MSCI's approach from other major providers.

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