MSCI Data & Ratings Methodology, Uses & Ways To Improve

Financial markets today are increasingly volatile. Investors expect greater accountability from businesses. The shift has led to a growing focus on sustainable and responsible investment. Morgan Stanley Capital International (MSCI) is a global leader in providing financial indices and investment decision tools. It helps investors assess risk and identify market opportunities. 

MSCI is widely known for its benchmark indices. These include the MSCI World and MSCI Emerging Markets Index. MSCI also plays an important role in promoting responsible investing through its Environmental, Social, and Governance (ESG) ratings and indices. Read this blog to understand the details of MSCI, along with its applications and implementation.

Understanding MSCI ESG Ratings and Index 

The MSCI ESG rating evaluates how well companies manage ESG risks and opportunities compared to their industry peers. The MSCI ESG data and ratings help investors identify companies that are more sustainable and resilient in the long term. 

The MSCI ESG indexes are built using these ratings, which are used to help investors align their portfolios with sustainability goals. These indices include companies with strong ESG practices. They enable responsible investment strategies without compromising financial returns. MSCI’s methodology covers factors like carbon emissions, labour management, product safety, data privacy, and corporate governance. 

The company selection or inclusion process may follow different strategies, including: 

• Rating-based selection: MSCI assigns its own rating by evaluating companies on a letter grade scale 
• Best-in-class approach: Selects companies with the highest ESG performance within each industry or sector 
• Universal screening: Integrates ESG factors across a large and diversified investment universe to meet the needs of long-term institutional investors, often referred to as ‘universal owners’ 
• Market capitalisation weighing: Weighs companies in the index based on their market capitalisation while incorporating ESG adjustments to maintain investment relevance and absence 

Why MSCI ESG Ratings Matter for Companies and Investors

These ratings give a clear, third-party view of a company’s ESG performance. They help both companies and investors in better decisions.

• Spot risks and opportunities: Ratings show where a company is strong and where it is weak. Companies can fix issues once they have a clearer idea. Investors can find long-term growth opportunities.
• Boost reputation: High ESG scores show good management. They also talk about ethical practices. This attracts investors. It also brings in customers and top talent.
• Guide strategy: Companies can use ratings to improve CSR and sustainability programmes. Investors can engage with companies on ESG issues.
• Build strong portfolios: Investors can reduce exposure to risks such as climate change or poor governance. This helps create resilient investments.

In short, MSCI ESG Ratings help companies grow responsibly. They help investors make smarter, sustainable choices.

How do the MSCI ESG Ratings Work? 

The MSCI ESG ratings involve two main components: the MSCI rating system and a comprehensive process and methodology. The first one assigns a score while the latter assesses companies through data-driven analysis, sector-specific factors, and continuous monitoring. 

MSCI Rating System  

There are seven lettered categories to differentiate the companies on the mentioned scale. Here is how it works: 

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Process and Methodology

The process of MSCI rating involves the following steps: 

1. Data Collection: MSCI analyses 1000+ data points, including KPIs, policies, and performance targets from company disclosures and external MSCI ESG data sources. 

2. Key Issue Identification: The 35 ESG key issues used in rating are based on both a company’s specific challenges and the common issues in its industry. This helps MSCI compare companies fairly with others in the same field. The companies are evaluated on corporate governance and corporate behaviour regardless of their industry. 

3. Exposure Assessment: It evaluates the level of the company’s exposure to material ESG risks across its value chain, including operations, product lines, and geographic locations. 

4. Management Evaluation: The next assessment is about how effectively the company manages each ESG issue. Both exposure and management are scored on a 0 to 10 scale. 

5. Industry Customisation: The process involves the adjustment of key issues and scores to reflect company-specific conditions. It offers room for exceptions where business models differ from industry norms. 

6. Weighting of Issues or Opportunities: Each ESG issue is assigned a weight based on its material impact and expected time horizon. The assessment considers how significantly an industry contributes to or is affected by a particular issue. MSCI then classifies each risk or opportunity according to its timeframe: 

• Short term, if less than 2 years 
• Medium term, if between 2 and 5 years 
• Long-term, if more than 5 years 

7. Integration of Opportunities and Controversies: Includes both positive sustainability opportunities and negative controversies affecting ESG performance. 

8. Expert and Committee Review: A specialised ESG research team provides insights, conducts quality checks, and performs a formal committee review of all findings. 

9. Final Scoring: Lastly, it combines weighted exposure and management scores to determine the company’s overall MSCI ESG rating against industry competitors. 

How is the MSCI India Index formed? 

The MSCI India Index is created by MSCI to track the performance of India’s large and mid-sized companies. It covers approximately 85% of India’s free-float market capitalisation. The index includes firms from sectors such as healthcare, finance, energy, and more.

Each stock’s weight is determined by its free-float adjusted market capitalisation, calculated using the following, according to MSCI’s Global Investable Market Index (GIMI) methodology:

• number of shares, 
• share price, 
• inclusion factor, and 
• price adjustment factor

The index is reviewed every quarter in February, May, August, and November. During these reviews, companies may be added or removed based on updated eligibility criteria. The MSCI India Index helps investors gauge the overall stability and growth of the Indian stock market. 

What are the Applications of MSCI ESG Rating? 

MSCI ESG ratings find uses in investment decisions. Here are the detailed insights into the same: 

• Fund managers use ratings to design sustainable investment products.
• Ratings help benchmark and compare companies within the same industry.
• Support due diligence, corporate engagement, and sustainability reporting.
• Help demonstrate the environmental and social impact of investments.

How Can Companies Improve Their MSCI Rating? 

The companies can improve their MSCI rating by taking the following measures: 

1. Focus on Weak Areas 

Start by identifying ESG laggards. These are the areas where the company has received the lowest scores. Prioritising these issues can offer maximum improvements. For instance, if the company scores low on carbon emissions management, you can track energy usage more accurately or switch to renewable energy sources. 

2. Analyse,  Benchmark and Adopt Best Practices

Understand why performance is poor by comparing your ESG report with top-rated peers. Look at what ESG leaders in your sector are doing differently. It could be transparent supply chain audits. It could even be comprehensive employee benefits or clear sustainability goals. Use these insights to plan improvements and set targets for your own organisation. 

3. Upgrade the Sustainability Reports  

Communicate the initiatives and improvements in the sustainability or annual reports. It helps reflect your efforts and thus will positively influence the future ratings. Additionally, regularly review performance, update policies, and take stakeholder feedback to maintain or enhance the ESG ratings over time. 

Conclusion 

MSCI ESG ratings serve as a standard for the assessment of how well companies manage ESG risks. They simplify complex sustainability data, help investors identify responsible businesses, and make informed investment decisions. The MSCI ESG ratings enhance credibility, attract sustainable partnerships, and support long-term growth. 

Similarly, the MSCI India Index provides a benchmark for tracking top-performing Indian companies and market trends. These tools promote transparency, accountability, and the integration of sustainability into modern investment strategies.  

Frequently Asked Questions 

How are ESG ratings calculated at MSCI?

MSCI evaluates companies based on over 1000 data points across 35 key ESG issues. Each company is assessed for its exposure to risks and how effectively it manages them compared to industry peers. 

What are ESG risk ratings?

ESG risk ratings measure how ESG factors could financially impact a company’s performance and long-term stability. 

Who determines ESG ratings and why?

Specialised ESG research teams at MSCI collect, verify, and analyse data to assign ratings. These help investors make informed and responsible investment choices. 

What is the MSCI index in India?

The MSCI India Index tracks the performance of major Indian companies across sectors. It represents about 85% of India’s equity market. It is used globally to gauge market performance and attract foreign investment.