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ESG Ratings Methodology

MSCI ESG Ratings provide a comprehensive assessment of how well companies manage Environmental, Social, and Governance (ESG) risks and opportunities that could affect their financial performance. These ratings consider various factors, including a company’s exposure to material ESG risks, the effectiveness of its management systems and governance structures in mitigating those risks, and its ability to capitalize on market opportunities related to environmentally or socially beneficial products and services.

Key Features of MSCI ESG Ratings:

  1. Industry-Relative Ratings:
    • MSCI ESG Ratings are industry-relative, meaning they assess a company’s ESG performance compared to its peers within the same industry. This approach allows for a fair comparison considering industry-specific challenges and opportunities.
  2. Global Rating Scale:
    • Companies are rated on a seven-band global scale, ranging from AAA (the highest rating) to CCC (the lowest rating). This scale provides a clear indication of how well a company is managing ESG risks and opportunities relative to others globally.
  3. Evaluation of Key Issues:
    • Each company is assessed on a selection of two to seven Environmental and Social Key Issues, chosen from a total of 33 possible Key Issues. These Key Issues are selected based on the company’s specific exposure to ESG risks, which vary according to industry and market context. For example, a company in the energy sector may be evaluated more heavily on carbon emissions, while a tech company might be assessed on data privacy and security.
  4. Governance Pillar:
    • All companies are evaluated on the Governance Pillar, which consists of six Key Issues under the themes of Corporate Governance and Corporate Behavior. The evaluation focuses on the gap between best practices and the company’s actual governance practices, such as board structure, executive pay, and shareholder rights.
  5. Market Demand Consideration:
    • When relevant, the ESG Rating also takes into account how well a company is positioned to meet market demand for products and services that contribute positively to the environment or society. This could include, for example, a company’s involvement in renewable energy or affordable healthcare.
  6. Assessment of Management Measures:
    • MSCI evaluates a company’s management measures in relation to its ESG risks and opportunities. This includes analyzing the company’s governance structures, policies, targets, quantitative performance metrics, and any relevant controversies. The effectiveness of these measures can significantly influence the company’s overall ESG Rating.

MSCI ESG Ratings aim to provide investors with an informed opinion on how well companies are managing financially relevant ESG risks and opportunities, helping them make better investment decisions.

source :

https://www.msci.com/esg-and-climate-methodologies

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