The focus on sustainability and ESG performance has led to a heightened demand for increased reporting transparency and the implementation of new regulations. Additionally, the integration of Artificial Intelligence (AI) is becoming more widespread in the ESG data market. Let's delve into how MSCI ESG Ratings adapts to these advancements.
Clients and growth trends
MSCI’s ESG Ratings are some of the most well-known in the ESG field. As of 2020, the MSCI ESG Ratings cover “more than 14,000 equity and fixed income issuers linked to over 600,000 equity and fixed income securities.”
The ratings are available for more than 8,700 companies and cover more than 85% of market value of a widely used global fixed income benchmark.
According to data from the Harvard Law School Forum on Corporate Governance, MSCI is one of the largest ESG ratings providers in both team size and coverage. It serves some of the largest ESG ETFs, such as BlackRock, Vanguard, and Credit Suisse AM.
However, one thing to note about ESG ratings and data providers is that clients (ex. asset managers) often utilise more than one, in order to have multiple sources of information.
This tendency will likely continue, given that differences in rating processes may lead to different scores, and given the need for investors to stay up to date on ESG data.
Increase in reporting transparency and ESG regulations
Firstly, investors (and other stakeholders) now expect more detailed reporting in order to stay fully informed on a company’s activities, and so that they can determine whether the company aligns with their investment strategy/portfolio, values, and worldviews.
Where once ESG information was considered additional, it is now becoming a key fixture in risk assessment and performance reporting.
Secondly, ESG regulations are on the rise. A longstanding obstacle with ESG reporting and information gathering was that there is no universal standard and no regulations governing the process of ESG reporting.
This meant that ESG reports—whether to issue them, and how to report out—could largely be determined by companies themselves, with little oversight as to whether the information is adequate.
Now, several regulations aimed at writing ESG data disclosure into law are being developed: for instance, the US SEC rule-making on climate disclosures, the EU’s CSRD, and the 2020 proposal (from French and Dutch financial authorities) for a regulatory framework for sustainability-related service providers.
The emergent use of artificial intelligence (AI) in the ESG data market is another development to keep track of.
AI in ESG involves machine learning and the automation of data screening/researching for more frequent and less labor-intensive updates.
According to Harvard’s Forum on Corporate Governance, the key distinction between traditional ratings providers and AI-driven data providers is heavier reliance on corporate disclosure (and perhaps thus direct interaction with companies) in the former type of agencies.
Some challenges with AI-driven data include less transparency in the assessment process and less interaction with (and less validation opportunities for) companies, due to a focus on external data sources like media reporting.
New MSCI ESG Research tool
MSCI introduced this February the MSCI Corporate Sustainability Insights solution to enhance the understanding of ESG and climate challenges and opportunities among corporate sustainability executives.
Executives at companies monitored by MSCI ESG Research can now compare their ESG and climate data with peers and identify potential disclosure gaps using intuitive charts, graphs, and maps.
This solution offers:
- Streamlined understanding for strategic planning and investor engagement, with visual displays of MSCI ESG Research's risk and performance information, ESG Ratings, ESG Controversies, and Sustainable Development Goals Net Alignment profiles.
- Examination of risk exposure and alignment with global temperature goals through MSCI ESG Research's Climate Value-at-Risk and Implied Temperature Rise solutions.
- Assistance in detecting carbon-related disclosure gaps through the MSCI Target Explorer tool.
- Comparison of climate-related risks and opportunities with industry peers based on recommendations from the Task Force on Climate-related Financial Disclosures (TCFD).
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