Methodology Document

MSCI ESG Research LLC

ESG Ratings
Process

MSCI ESG Research LLC

April 2024

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 ESG Ratings Process | April 2024

Contents
1 Rating, score and data updates ....................................... 3
1.1 Obtaining ESG data ............................................................................3
1.1.1 Data sources .............................................................................................. 4
1.2 Entity selection & data mapping .......................................................5
1.2.1 Selection of data entities .......................................................................... 5
1.2.2 Data Mapping ............................................................................................. 7
1.3 Data and score updates ....................................................................7
1.3.1 Ongoing updates of data and scores ....................................................... 7
1.3.2 Timing of analytical review ....................................................................... 9

2 Quality of the ratings process ........................................10

2.1 Key steps in quality review process............................................... 10
3 Communication with corporate issuers ........................11
4 Coverage, corporate actions and related changes .......11
4.1 Issuer universe expansions ............................................................ 11
4.2 Issuer universe changes................................................................. 12
4.2.1 Issuer universe additions ........................................................................ 12
4.2.2 Issuer universe removals ........................................................................ 12
4.2.3 Spin-offs ................................................................................................... 12
4.2.4 Mergers and acquisitions........................................................................ 12
4.3 Changing a data entity.................................................................... 13
4.4 Global Industry Classification Standard (GICS®) sub-industry
classification change................................................................................ 13
4.5 Name change .................................................................................. 13
5 Methodology governance and methodology changes .13
5.1 Methodology governance............................................................... 13
5.2 Annual consultation ........................................................................ 14
5.3 Changes resulting from exceptional circumstances .................... 15

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 ESG Ratings Process | April 2024

1 Rating, score and data updates

1.1 Obtaining ESG data
MSCI ESG Research analytical staff assess thousands of data points across 33 ESG
Key Issues, focusing on the intersection between a company’s core business and the
industry issues that can create risks and opportunities for the company.
On each Key Issue, we collect and standardize a wide range of publicly available data
from both company-reported and alternative sources. Alternative data is not reported
by companies and is sourced from external public data sources, such as from
government agencies and nongovernmental organizations (NGOs).

Exhibit 1: ESG Rating framework and process overview

DATA
1,000+ data points on ESG policies, programs, and performance;
Data on 100,000 individual directors; over 20 years of shareholder meeting
results

EXPOSURE METRICS MANAGEMENT METRICS

How exposed is the company How is the company managing
to each material issue? each material issue?
Based on over 80 business 150 policy/program metrics, 20
and geographic segment performance metrics
metrics 100+ Governance Key Metrics

KEY ISSUE SCORES &

SOURCES WEIGHTS INSIGHT
100+ specialized datasets 33 Key Issues selected annually for Specialized ESG research
(government, NGO) each industry and weighted based on
MSCI’s materiality mapping framework team provides additional
Company disclosures (10-K, insight through:
sustainability report, proxy report)
Company reports
3,400+ media sources monitored ESG RATING (AAA-CCC) Industry reports
daily (global and local news Combine issue scores and Thematic reports
sources, government, NGO) weights for ESG rating
relative to industry peers.
Analyst calls & webinars
Also available are

MONITORING & E, S & G

scores DATA OUTPUTS
QUALITY REVIEW Access to selected underlying data
Systematic, ongoing daily monitoring of Ratings, scores and weights on
media and governance events 680,000 securities
In-depth quality review processes at all Over 20 years of history
stages of rating
Methodology committee review of ESG
Ratings in certain predefined cases

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 ESG Ratings Process | April 2024

1.1.1 Data sources

In the Environmental and Social Pillars and in the Corporate Behavior Theme, we
assess the level of risk exposure each company faces by combining company-specific
data on a company’s operations with macro-level data relevant to each Key Issue.

Data sources for exposure metrics

• Data sources used to determine characteristics of a company’s operations include
its corporate reporting (annual reports, investor presentations and financial and
regulatory filings).
• Data sources used to assign macro-level risk exposure to companies’
geographies of operation and business segments (by Standard Industrial
Classification [SIC]) include:
­ Comprehensive ­ US EPA’s Energy Star ­ International Monetary
Environmental Data ­ US EPA’s Toxics Release Fund (IMF)
Archive (CEDA) Inventory (TRI) ­ World Health
­ Eurostat ­ Risk-Screening Organization (WHO)
­ US Department of Energy Environmental Indicators ­ World Resource Institute
­ International Council on (RSEI) (WRI)
Clean Transportation ­ US Bureau of Labor ­ US Census Bureau
­ Lamont-Doherty Earth Statistics (BLS) Current Population
Observatory, Columbia ­ International Labour Survey Supplement
University Organization (ILO) ­ United Nations (UN)
­ Organisation for ­ US Occupational Safety & Population Division
Economic Co-operation Health Administration ­ US Department of
and Development (OECD) (OSHA) Agriculture (USDA)
­ World Development ­ National Highway Traffic ­ Food and Drug
Indicators (WDI) Safety Administration Administration (FDA)
­ United Nations ­ US Consumer Product ­ World Bank Governance
Development Programme Safety Commission Indicators (WGI)
(UNDP) ­ UK Reporting of Injuries, ­ Transparency
Diseases and Dangerous International (TI)
Occurrences Regulations ­ UNESCO Institute of
(RIDDOR) Statistics
­ International Chemical ­ World Bank (WB)
Secretariat (ChemSec) ­ Refinitiv
­ Danish Working
Environment Authority

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 ESG Ratings Process | April 2024

Data sources for management metrics

To assess companies’ risk management approach, we obtain information from the
following sources:
• Corporate documents: annual reports (including 10-Ks), proxy filings,
environmental and social reports, annual general meeting voting results, securities
filings, corporate websites and CDP (formerly known as the Carbon Disclosure
Project) responses.
• Government data: central bank data, U.S. Toxic Release Inventory, Comprehensive
Environmental Response and Liability Information System (CERCLIS), Resource
Conservation and Recovery Act (RCRA) Hazardous Waste Data Management
System, etc. We continue to assess the value of other similar information sources,
particularly for European companies.
• Popular, trade and academic journals: accessed through websites, subscriptions
and searches of online databases.
• News media: major news publications globally, including local-language sources
across a range of markets.
To assess companies’ governance, we also obtain information from the following:
• Regulatory sources and stock exchanges: Company-level and director-level
information from regulatory databases including company registries and national
securities-regulator databases, and from stock exchange websites. Relevant
provisions of company and securities laws (including listing-related and takeover
regulation) from government/state websites and databases.

1.2 Entity selection & data mapping

We provide ESG Ratings on corporate entities (usually companies) that raise capital
by the sale of securities. The capital raised may fund either the issuer itself or
another related entity or entities. We select the optimal entities to evaluate for ESG
Ratings, known as the data entities.

1.2.1 Selection of data entities

The data entities for ESG Ratings are determined having regard to:
• The governance and operational reference entities and proxy reference
entities,
• The ESG and financial characteristics of the issuer and related entities,
and subject to the minimum data availability criteria being met.

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 ESG Ratings Process | April 2024

ESG Ratings apply two types of data entities:

• Operational: The entity used for the evaluation of the Environment and Social
Pillars and the Corporate Behavior Theme, and
• Governance: The entity used for the evaluation of the Corporate Governance
Theme.

Reference Entities
Reference entities and proxy reference entities are identified by a set of proprietary
rules and represent the first and second choice of entity for selection as data
entities, respectively.
They are identified by considering the issuer’s entity classification and its
relationships with other entities in the financing structure. The first entity identified
by these rules is designated as the reference entity, and the second entity identified
(if any) is designated as the proxy reference entity.
Proxy reference entities may be considered for use as data entities in some
circumstances, including where:
• A reference entity fails to meet the minimum data availability criteria; or
• The proxy entity is already directly evaluated and the reference entity is
determined to have similar ESG and financial characteristics to the proxy entity.

ESG and financial characteristics

Entities may have similar ESG and financial characteristics where they have the
same geographic profile (based on where their operations are located) and where
they have the same business activity profile (based on the SIC code classifications
of their activities).

Minimum data availability criteria

The minimum financial and ESG data required for an ESG Rating to be undertaken
are as follows:
• A list of the names of the members of the board of directors or equivalent
governance body; and
• An income statement or equivalent.

Evaluation boundary
The evaluation boundary represents the entities whose activities and reporting are
within the scope of the ESG Rating.

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 ESG Ratings Process | April 2024

For an equity issuer, the evaluation boundary is all entities within the scope of the
consolidated reporting of the group.
Note that where an equity issuer has a direct evaluation for ESG Ratings (as opposed
to an evaluation based on data mapping, as detailed below) and a discrete part of its
business is also directly evaluated for ESG Ratings, the evaluation boundary for the
latter will sit inside the evaluation boundary for the former.
Certain bond issuers may finance only a discrete part of the group (e.g., a single
business line or division, a specific operating company, the captive finance activities,
etc.). In such cases, the scope of the ESG Rating for the operational data entity will
extend only to that discrete part of the group.

1.2.2 Data Mapping

Data Mapping is the process whereby ESG evaluations for a company (a data entity)
are attributed to related companies. ESG evaluations are mapped based on observed
parent-subsidiary relationships, subject to certain company and data point
requirements.
• Certain companies (such as those classified as financing companies)
included in the coverage universe may be covered by data mapping from the
relevant data entity.
• Bond issuers outside the ESG Ratings coverage universe may also have their
evaluations mapped from parent entities that are included in the ESG Ratings
coverage universe.
Note that ESG evaluations are not mapped to:
• Equity issuers, or
• Companies that have already been evaluated by MSCI ESG Research.

1.3 Data and score updates

1.3.1 Ongoing updates of data and scores

Generally, data is obtained by MSCI ESG Research on an ongoing basis. Companies
are monitored by MSCI ESG Research on a systematic and ongoing basis, including
daily monitoring of media and governance events. Updates to underlying data and
scores by MSCI ESG Research do not in all cases lead to an analytical review of the
ESG Rating. The Industry Adjusted Score and ESG Rating are only recalculated at the
time of an MSCI ESG Research rating action.

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 ESG Ratings Process | April 2024

Certain data point updates are reflected in the associated relevant scores on a weekly
basis. As noted above, updates to scores may not trigger a rating action. See Section
1.3.2 regarding ad hoc ratings updates.
The following types of scores are updated on a weekly basis if there are updates to
underlying inputs: 1
ESG Rating model scores
Possible data updates to MSCI ESG Research data that
that may be updated on a
result in a score change
weekly basis
• New corporate governance data disclosed in a proxy
filing.
• Update to peer set data that impacts the peer rankings
Corporate Governance used in certain Corporate Governance Key Metric
Key Issue Scores calculations.
• Relevant data submitted by an issuer is published by
MSCI ESG Research or disseminated through MSCI ESG
Research distribution channels.
Key Issue Controversy • New controversy is mapped to a weighted Key Issue.
Deductions • Upgrade or downgrade to the most severe controversy.
• Update to Carbon Emissions Management Score due to
new carbon emissions disclosure.
Key Issue Management
• Update to Key Issue Controversy Deduction.
Scores
• Relevant data submitted by an issuer is published by
MSCI ESG Research.
Key Issue Exposure • New business segment data disclosure.
Scores • New geographic segment data disclosure.
• Update to Key Issue Exposure Score.
Key Issue Scores
• Update to Key Issue Management Score.
Theme Scores and Pillar
• Update to any of the weighted Key Issue Scores.
Scores
Weighted Average Key
• Update to any of the weighted Key Issue Scores.
Issue Score

1
Timing may vary due to various or unexpected circumstances.

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 ESG Ratings Process | April 2024

Recent developments affecting ESG scores are detailed in a dedicated section on

ESG Ratings reports. ESG Ratings reports display last updates as follows:
• Rating action date: the date of the last ESG Rating review.
• Last report update: the date of the last update of any data point displayed in
the ESG Rating report.
• Last score change date: the date of the last update of a Key Issue Score.
The “rating action” date indicates the date of the last comprehensive review of a
company and consequent assignment of the associated ESG Rating.

1.3.2 Timing of analytical review

Companies’ ESG Ratings are reviewed by analytical staff, typically annually. The timing
of analytical review is determined solely by MSCI ESG Research. At the time of review,
analytical staff assess and incorporate relevant data updates. MSCI ESG Ratings aim
to incorporate data from all corporate disclosures published up to three calendar
months prior to the ESG Rating action date.
Ad hoc updates may occur in certain cases determined at the sole discretion of MSCI
ESG Research, such as:
• An upgrade/downgrade in controversy severity from/to Very Severe.
• Exceptional circumstances.
MSCI ESG Research may extend the rating review period beyond twelve months from
the last ESG Rating action date, including due to some of the following possible
reasons:
• To implement an imminent methodology change before a contemplated ESG
Ratings update.
• To accommodate more complex reviews.

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 ESG Ratings Process | April 2024

2 Quality of the ratings process

The ESG Ratings process includes multiple steps to review the quality of data, the
analysis and consistent application of the methodology.
Formal in-depth quality review processes take place at each stage of assessment,
including automated and manual quality checks of data, oversight of ratings and
reports by industry leads and regional team leads. Approval by the ESG Ratings
Methodology Committee is required for any exceptions to a standard company
assessment (including changes to Key Issue selections and weights), new high (AAA)
or low (CCC) company ratings, or rating changes of two letter ratings. The ESG
Assessment Committee reviews escalations from the ESG Ratings Methodology
Committee. The ESG Methodology Committee reviews and approves proposed
changes to the ESG Ratings model and methodologies.

2.1 Key steps in quality review process

The following quality assurance and oversight processes are observed:
• Data quality assurance: Data quality checks are conducted on all companies prior
to the publication of their ESG Rating. The quality assurance process for data used
in ESG Ratings includes a combination of system and manual checks, such as
system-driven validation rules, exception-based checks, and processes to identify
outliers and outdated data. Certain inputs into ESG Ratings, such as ESG
Controversies and business activity classifications, may also undergo a peer
and/or committee review.
• Analytical review: ESG Ratings are subject to review by MSCI ESG Research
analytical staff. In cases where an analyst review results in a proposal for a change
to an ESG Rating, and for defined other circumstances, the Rating is subject to
further review by a senior analyst.
• ESG Ratings Methodology Committee: This committee addresses the following
specific cases, as well as other escalations related to methodology application:
­ Proposal to add a company-specific Key Issue in a company’s assessment.
­ Ratings change of two letters or more.
­ New AAA- or CCC-rated company.
­ Requests for deviations from the weights for industry Key Issues due to
significant differences in business model from the industry peer set.
­ Requests to deviate from standard methodology for including or excluding
controversies cases in a company’s ratings analysis.

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 ESG Ratings Process | April 2024

• ESG Assessment Committee: This committee presides over methodology

application cases escalated from the ESG Ratings Methodology Committee and
other critical methodology application cases, such as cases resulting from a
significant market event.

Prior to the commencement of the Ratings assessment, certain decisions which

influence the assessment are reviewed by the following committees:
• Business Activity Classification Methodology Committee: Presides over the
review and approval of business activity and industry classifications, including
proposals to change the ESG Rating Industry assignment.
• Entity Classification Methodology Committee: Oversees the methodologies
relating to the classification of corporate entities and identification of the
reference entities (operating and governance reference entities). Approval by this
committee is required for methodological overrides and where it is proposed to
drop coverage for a fixed income issuer due to methodological or data availability
reasons.

3 Communication with corporate issuers

MSCI ESG Research is committed to transparent communication with corporate
issuers in our coverage universe. For more details, please refer to the “Procedures
for Corporate Issuer Interaction” document. Corporate rated entities may contact
MSCI ESG Issuer Communications at [email protected] with queries.

4 Coverage, corporate actions and related changes

For ESG Ratings, the issuer universe is defined based on the inclusion of equity or bond
securities in certain indexes known as “targeted indexes.” Where the issuer universe
includes 100% of the constituents of a targeted index, that index is known as a
“tracked index.”

4.1 Issuer universe expansions

The expansion of the issuer universe is considered periodically. Issuers are added to
the issuer universe from targeted indexes based on an internal prioritization process.

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 ESG Ratings Process | April 2024

4.2 Issuer universe changes

Issuer universe changes for ESG Ratings (including both additions and removals)
may be triggered by changes in the constituents of tracked equity indexes.

4.2.1 Issuer universe additions

• We aim to evaluate additions to the MSCI ACWI Index and MSCI US Investible
Market Index (IMI) within one quarter of their inclusion in the relevant index.
• We aim to evaluate additions to any other tracked indexes within two quarters of
index inclusion.
• Additions to other targeted indexes are considered as part of periodic issuer
universe expansions.

4.2.2 Issuer universe removals

When an issuer is removed from a targeted index — for example, due to turnover in
index constituents or due to corporate actions — it will be removed from the issuer
universe if:
• The issuer is no longer included in any targeted index; and
• It does not serve as a data entity for any issuer included in a targeted index.

4.2.3 Spin-offs
• If the spun-off entity is a constituent of the MSCI ACWI Index or MSCI US IMI, we
aim to evaluate it as a stand-alone entity within one quarter.
• If the spun-off entity is in the targeted issuer universe, but is not a constituent of
the MSCI ACWI Index or MSCI US IMI, we aim to evaluate it as a stand-alone entity
within two quarters.

4.2.4 Mergers and acquisitions

• If an acquiring company has an existing ESG Rating, the acquiring company’s
assessment will consider the newly acquired entity at the time of the acquiring
company’s next annual update.
• If an acquiring company does not have an existing ESG Rating, even if the acquired
entity has an ESG Rating, the company is considered a “new” entity and will be
evaluated according to the issuer universe addition approach stated above.
• If a merger creates a new entity, it will be evaluated according to the issuer
universe addition approach stated above.

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 ESG Ratings Process | April 2024

4.3 Changing a data entity

The classification as a data entity for an ESG Rating may be reviewed to assess its
continued appropriateness. Proposals for a change in data entity are approved by
the Entity Classification Methodology Committee.
The circumstances which initiate such a review include:
• A periodic review being undertaken by ESG analytical personnel for ESG Ratings;
• Following significant corporate actions; or
• Following significant changes to a financing structure.

4.4 Global Industry Classification Standard (GICS®) 2 sub-industry

classification change
• If a company’s GICS sub-industry classification changes, its rating will be reviewed
if there are any changes in its Key Issue mapping. We aim to undertake such a
review within one quarter of the GICS sub-industry classification change taking
effect.
• If a company’s GICS sub-industry change is also accompanied by a change in its
ESG Ratings Industry (the benchmark peer set), we reinitiate the company (i.e.,
with a neutral rating trend) in its new ESG Ratings Industry.

4.5 Name change

The name of the company as listed in MSCI ESG distribution platforms will reflect
the new name. However, the body of the company’s report will continue to refer to its
original name until the next annual rating update.

5 Methodology governance and methodology changes

5.1 Methodology governance
• ESG Methodology Committee: This committee reviews and approves proposals
for methodological changes across the ESG Research Group, including but not
limited to ESG Ratings. The ESG Ratings topics that are typically considered by the
ESG Methodology Committee include the following:
­ Proposed changes to the ESG Ratings methodology, including:

2
GICS, the global industry classification standard jointly developed by MSCI and Standard & Poor’s

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 ESG Ratings Process | April 2024

• Updates to the ESG Industry Materiality Map, which determines the

relevance of ESG Key Issues to sub-industries.
• Changes to data sources or calculations used in ESG Ratings.
• Methodology proposals for consultation.
­ Quarterly maintenance reviews.
• ESG Data Definitions Committee: Oversees MSCI ESG Research’s new and
existing data points and their definitions across all ESG data sets.
• Corporate Governance Methodology Committee: Analytical staff may bring
proposals to the Corporate Governance Methodology Committee for
consideration, including the following:
­ Approval of data collection guidance .
­ Approval of Key Metric definitions and scoring.
­ Approval of guidance for the assessment of governance events and
controversies.
­ Approval of changes to Home Markets.
­ Review of new data points and methodologies, the latter prior to submission
to the ESG Methodology Committee.

5.2 Annual consultation

MSCI ESG Research reviews the ESG Ratings methodology annually to ensure that it
effectively assesses companies’ management of financially relevant ESG risks and
opportunities. The results of this review may lead to proposed changes to the ESG
Ratings methodology.
Prior to implementing material changes to the ESG Ratings methodology, MSCI ESG
Research invites feedback from investor clients and rated corporate issuers through
a consultation process, and may invite feedback from other market participants, as
relevant. This process ensures that information on potential methodology changes is
transparently communicated and that feedback from investor clients and rated
corporate issuers is considered. Feedback received through consultations supports
innovation and provides MSCI ESG Research with a range of perspectives from
market participants.
In addition to consulting on material changes to the ESG Ratings methodology, which
is at the discretion of the MSCI ESG Methodology Committee, the ESG Rating
consultation may include regularly occurring topics, including proposed changes to
the MSCI ESG Industry Materiality Map and/or to industry peer sets. In certain cases,
MSCI ESG Research may solicit feedback on minor changes through consultation.

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 ESG Ratings Process | April 2024

After considering the feedback received through the consultation process, the
decision to approve a change lies solely with MSCI ESG Research, through the ESG
Methodology Committee. The results of the consultation are communicated to all
investor clients and rated corporates at the same time — typically in the first quarter
of every year.

5.3 Changes resulting from exceptional circumstances

In addition to changes resulting from the annual consultation or other ordinary-
course methodology changes and enhancements, in certain instances, such as due
to an extraordinary event or unanticipated or exceptional circumstances, MSCI ESG
Research may determine that it is necessary to change the ESG Ratings
methodology or apply score adjustments for specific markets, industries or
companies. These determinations are made by the ESG Methodology Committee or
ESG Assessment Committee, as applicable, in order to better reflect the status of an
affected market, industry or company when the methodology does not otherwise
contemplate or capture the impact of the significant event or circumstance. For
example, such events or circumstances may include, but are not limited to,
significant geopolitical conflicts, market upheaval, force majeure or similar events
that limit or reduce access to relevant or reliable input data. MSCI ESG Research will
inform clients in the event of any such change or adjustment and communicate the
planned implementation timing and method.

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 Methodology Document
MSCI ESG Research LLC

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 Methodology Document
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 Methodology Document
MSCI ESG Research LLC

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