MSCI Adds ESG Ratings to 32,000 Funds and ETFs

Ratings are on a scale from AAA (leader) to CCC (laggard) and based first on the weighted average score of the holdings of the fund or ETF. Then MSCI assesses ESG momentum to determine the fund’s ESG track record, which should “indicate a fund’s exposure to holdings with a positive rating trend or worsening trend year on year,” the company said in a statement. “Finally, MSCI reviews the ESG tail risk to understand the fund’s exposure to holdings with worst-of-class ESG Fund Ratings of B and CCC.”

A study by MSCI Senior Associate of ESG Research Michael Disabato found that so-called ESG funds haven’t necessarily focused on AAA-AA rated products, although the top-rated ESG funds “tilted away from holding any companies rated below BB.”

Disabato concluded: “As ESG investing continues to grow in importance, so too will the need to understand how each fund interprets and implements ESG criteria. At present, it can be difficult to know whether and to what extent an ESG analytical process has been put into practice, even when ‘ESG’ has been used in a fund’s investment prospectus or name. Investors need the right tool to look under the hood, and better differentiate between ESG funds.”

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