ESG Investing (2024)

ESG Investing

ESG Investing is the consideration of environmental, social and governance factors alongside financial factors in the investment decision–making process. ESG Investing is growing and gaining significant momentum among financial market participants as more and more asset managers and investors are incorporating ESG criteria into their investing strategies. A methodical and well-executed ESG integration strategy can reveal both corporate risks and competitive advantages that may otherwise remain invisible to investors who rely solely on traditional financial analysis.

ESG Metrics Explanation

As mentioned, ESG stands for Environmental, Social and Governance. As such, we have broken down the ESG criteria into those three buckets. There are a total of 77 ESG metrics for ETFs. We receive the raw scoring data of the 77 ESG metrics from MSCI ESG Research LLC.

The are 3 high level ESG metrics, including MSCI ESG Quality Score, ESG Score Peer Percentile and ESG Score Global Percentile. The detailed explanation of these three metrics are below:

MSCI ESG Quality Score – This is the overall ESG score. It measures the ability of underlying holdings to manage key medium to long-term risks and opportunities arising from environmental, social, and governance factors.
ESG Score Peer Percentile – A percentile rank (1-100) that measures how the ETF’s ESG Score ranks relative to other funds in the same peer group.
ESG Score Global Percentile – A percentile rank (1-100) that measures how the ETF’s ESG Score ranks relative to all funds in MSCI ESG Fund Metrics coverage.

The rest are in the three Environmental, Social and Governance buckets. Above you will find the details on each of the 42 ESG themes and 74 ESG metrics.

Environmental

The Environmental bucket of the ESG criteria can be evaluated across 9 ESG themes with 16 total metrics:

Environmentally Responsible ETFs can be evaluated across three metrics: Revenue Exposure to Environmental Impact, Severe Environmental Controversies, and Revenue Exposure to Sustainable Impact Solutions (this metric falls under the Social bucket as well). Revenue Exposure to Environmental Impact is the ETF’s exposure to Environmental Impact, and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Environmental Impact goods and services. Severe Environmental Controversies is the percentage of a ETF’s market value exposed to companies facing one or more Severe Environmental controversies related to Energy and Climate Change, Land Use & Biodiversity, Toxic Spills & Releases, Water Stress or Operational Waste. Revenue Exposure to Sustainable Impact Solutions is the ETF’s exposure to Environmental Impact, and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Environmental Impact or Social Impact goods and services. Revenue Exposure to Environmental Impact and to Sustainable Impact Solutions metrics do not contribute to the overall ESG score. However, a higher percentage on these metrics is better. Revenue Exposure to Severe Environmental Controversies sometimes contributes to the overall ESG score. When it does contribute, lower scores on this metric improve the ESG score of an ETF. When it does not contribute, a higher percentage on this metric is worse.
Carbon Intensive ETFs can be evaluated by one main metric: Weighted Average Carbon Intensity. This score, displayed as tons of C02 emissions / $M sales, measures an ETF’s exposure to carbon intensive companies, and is the sum of the ETF holding weight multiplied by the ETF holding Carbon Intensity. This carbon intensity metric does not contribute to the overall ESG score. However, a higher percentage on this metric is worse.
Fossil Fuel Reserves ETFs can be evaluated across two metrics: Fossil Fuel Reserves and High Impact Fossil Fuel Reserves. Fossil Fuel Reserves measures the percentage of a ETF’s market value exposed to companies that own fossil fuel reserves. High Impact Fossil Fuel Reserves measures the percentage of an ETF’s market value exposed to companies that own high impact fossil fuel reserves such as thermal coal, oil sands, and shale oil and shale gas. These fossil fuel reserves metrics do not contribute to the overall ESG score. However, a higher percentage on these metrics is worse.
Water Stress ETFs can be evaluated across five metrics: Water Stress High Risk Business Segment, Water Stress High Risk Geography, Water Stress Exposure High, Water Stress Exposure Moderate, and Water Stress Exposure Low.
Water Stress High Risk Business Segment measures the percentage of an ETF’s market value exposed to companies with operations in lines of high water intensity. Water Stress High Risk Geography measures the percentage of an ETF’s market value exposed to companies with assets located in water basins where water stress levels are high. Lower scores on these Water Stress High Risk Business Segment and Water Stress High Risk Geography metrics improve the ESG score of an ETF.
Water Stress Exposure measures the percentage of an ETF’s market value exposed to companies with various levels of Water Stress Exposure scores. A score greater than 6.6 is classified as High; a score greater than 3.3 but less than 6.6 is classified as Moderate; and a score less than 3.3 is classified as Low. Scores range from 0 to 10. Lower scores on High Water Stress Exposure metric improve the ESG score of an ETF, whereas higher scores on the Low and Moderate Water Stress Exposure improve the ESG score of an ETF.
Energy Efficient ETFs can be evaluated across one metric: Revenue Exposure to Energy Efficiency. This measure is the ETF’s exposure to Energy Efficiency, and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Energy Efficiency goods and services. This energy efficiency metric does not contribute to the overall ESG score. However, a higher percentage on this metric is better.
Alternative Energy ETFs can be evaluated across one metric: Revenue Exposure to Alternative Energy. This measure is the ETF’s exposure to Alternative Energy, and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Alternative Energy goods and services. Higher scores on this alternative energy metric improves the ESG score of an ETF. This alternative energy metric does not contribute to the overall ESG score. However, a higher percentage on this metric is better.
Green Building ETFs can be evaluated across one metric: Revenue Exposure to Green Building. This measure is the ETF’s exposure to Green Building, and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Green Building goods and services. This green building metric does not contribute to the overall ESG score. However, a higher percentage on this metric is better.
Pollution Prevention ETFs can be evaluated across one metric: Revenue Exposure to Pollution Prevention. This measure is the ETF’s exposure to Pollution Prevention, and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Pollution Prevention goods and services. This pollution prevention metric does not contribute to the overall ESG score. However, a higher percentage on this metric is better.
Water Sustainability ETFs can be evaluated across one metric: Revenue Exposure to Sustainable Water. This measure is the ETF’s exposure to Sustainable Water, and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Sustainable Water goods and services. This water sustainability metric does not contribute to the overall ESG score. However, a higher percentage on this metric is better.

Social

The Social bucket of the ESG criteria can be evaluated across 22 ESG themes with 32 total metrics:

Socially Responsible ETFs can be evaluated across three metrics: Revenue Exposure to Social Impact, Revenue Exposure to Sustainable Impact Solutions (this metric falls under the Environmental bucket as well) and SRI Exclusion Criteria. Revenue Exposure to Social Impact is the ETF’s exposure to Social Impact, and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Social Impact goods and services. Revenue Exposure to Sustainable Impact Solutions is the ETF’s exposure to Environmental Impact, and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Environmental Impact or Social Impact goods and services. SRI Exclusion Criteria is calculated as the percentage of the ETF’s market value exposed to companies flagged for one or more standard SRI exclusion factors such as alcohol, civilian firearms, gambling, weapons, cluster bombs, landmines, nuclear power, GMOs and tobacco. Revenue Exposure to Social Impact, Revenue Exposure to Sustainable Impact Solutions, and SRI Exclusion Criteria metrics do not contribute to the overall ESG score. However, a higher percentage on the Revenue Exposure to Social Impact and to Sustainable Impact Solutions metrics is better. Whereas, a higher percentage on the SRI Exclusion Criteria metric is worse
Affordable Real Estate ETFs can be evaluated across one metric: Revenue Exposure to Affordable Real Estate. The Revenue Exposure to Affordable Real Estate is the ETF’s exposure to Affordable Real Estate and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Affordable Real Estate goods and services. This affordable real estate metric does not contribute to the overall ESG score. However, a higher percentage on this metric is better.
Education ETFs can be evaluated across one metric: Revenue Exposure to Education. The Revenue Exposure to Education is the ETF’s exposure to Education and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Education goods and services. This education metric does not contribute to the overall ESG score. However, a higher percentage on this metric is better.
Major Disease Treatment ETFs can be evaluated across one metric: Revenue Exposure to Major Disease Treatment. The Revenue Exposure to Major Disease Treatment is the ETF’s exposure to Major Disease Treatment and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Major Disease Treatment goods and services. This major disease treatment metric does not contribute to the overall ESG score. However, a higher percentage on this metric is better.
Healthy Nutrition ETFs can be evaluated across one metric: Revenue Exposure to Nutrition. The Revenue Exposure to Nutrition is the ETF’s exposure to Nutrition and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Nutrition goods and services. This healthy nutrition metric does not contribute to the overall ESG score. However, a higher percentage on this metric is better.
Global Sanitation ETFs can be evaluated across one metric: Revenue Exposure to Sanitation. The Revenue Exposure to Sanitation is the ETF’s exposure to Sanitation and is calculated as the portfolio weighted average of each company’s percent of revenue generated by Sanitation goods and services. This sanitation metric does not contribute to the overall ESG score. However, a higher percentage on this metric is better.
SME Finance ETFs can be evaluated across one metric: Revenue Exposure to SME Finance. The Revenue Exposure to SME Finance is the ETF’s exposure to SME Finance and is calculated as the portfolio weighted average of each company’s percent of revenue generated by SME Finance goods and services. This SME finance metric does not contribute to the overall ESG score. However, a higher percentage on this metric is better.
Human Rights Violations ETFs can be evaluated across three metrics: Human Rights Norms Violations, Human Rights Norms Violation or Watch List, and Severe Human Rights Controversies. Human Rights Norms Violation is calculated as the percentage of an ETF’s market value exposed to companies in violation of international norms around human rights. Human Rights Norms Violation or Watch List is calculated as the percentage of an ETF’s market value exposed to companies that are either in violation of international norms around human rights or on MSCI’s Watch List for potential violations. Severe Human Rights Controversies is calculated as the percentage of an ETF’s market value exposed to companies facing one or more Severe or Very Severe Human Rights and Community Controversies related to impact on local communities, civil liberties or human rights. Human Rights Norms Violations and Human Rights Norms Violation or Watch List metrics do not contribute to the overall ESG score. However, a higher percentage on these metrics is worse. Severe Human Rights Controversies sometimes contributes to the overall ESG score. When it does contribute, lower scores on this metric improve the ESG score of an ETF. When it does not contribute, a higher percentage on this metric is worse.

Labor Rights Violations ETFs can be evaluated across three metrics: Labor Norms Violations, Labor Norms Violation or Watch List, and Severe Labor Controversies. Labor Norms Violation is calculated as the percentage of an ETF’s market value exposed to companies in violation of the International Labour Organization’s broader set of labor standards. Labor Norms Violation or Watch List is calculated as the percentage of an ETF’s market value exposed to companies that are either in violation of the International Labour Organization’s broader set of labor standards or on MSCI’s Watch List for potential violations. Severe Labor Controversies is calculated as the percentage of an ETF’s market value exposed to companies facing one or more Severe or Very Severe Labor Controversies related to child labor, collective bargaining, discrimination, health and safety, labor management or supply chain labor standards. Labor Norms Violations and Labor Norms Violation or Watch List metrics do not contribute to the overall ESG score. However, a higher percentage on these metrics is worse. Severe Labor Controversies sometimes contributes to the overall ESG score. When it does contribute, lower scores on this metric improve the ESG score of an ETF. When it does not contribute, a higher percentage on this metric is worse.
Customer Controversies ETFs can be evaluated across one metric: Severe Customer Controversies. Severe Customer Controversies is calculated as the percentage of an ETF’s market value exposed to companies facing one or more Severe or Very Severe Customer Controversies related to anti-competitive practices, customer relations, marketing and advertising, privacy and data security, or product safety. This customer controversies metric sometimes contributes to the overall ESG score. When it does contribute, lower scores on this metric improve the ESG score of an ETF. When it does not contribute, a higher percentage on this metric is worse.
UN Principles Violations ETFs can be evaluated across two metrics: Global Compact Compliance Violation and Global Compact Compliance Violation or Watch List. Global Compact Compliance Violation is calculated as the percentage of an ETF’s market value exposed to companies in violation of the UN Global Compact principles. Global Compact Compliance Violation or Watch List is calculated as the percentage of an ETF’s market value exposed to companies that are either in violation of the UN Global Compact principles or on MSCI’s Watch List for potential violations. These UN Principles Violations metrics do not contribute to the overall ESG score. However, a higher percentage on these metrics is worse.
Catholic Values ETFs can be evaluated across one metric: Catholic Values Fail. Catholic Values Fail is calculated as the percentage of an ETF’s market value exposed to companies that have been flagged for one or more of the underlying http://www.usccb.org/about/“United States Conference of Catholic Bishops (USCCB)”: exclusionary factors: abortion, contraceptives, stem cells, discrimination, adult entertainment, defense and weapons, landmines or predatory lending. This catholic values metric does not contribute to the overall ESG score. However, a higher percentage on this metric is worse.
Sharia Compliant ETFs can be evaluated across one metric: Islamic Non-Compliant. Islamic Non-Compliant is calculated as the percentage of an ETF’s market value exposed to companies that are non-compliant according to Sharia investment principles. Non-compliant companies are those with ownership of a prohibited business activity or total revenues greater than or equal to 5% from prohibited business activities or with financial ratios greater than or equal to 33.33%. Prohibited business activities include adult entertainment, alcohol, cinemas, conventional financial services, gambling, music, pork, tobacco and weapons. This sharia compliant metric does not contribute to the overall ESG score. However, a higher percentage on this metric is worse.
Adult Entertainment ETFs can be evaluated across one metric: Adult Entertainment Involvement. Adult Entertainment Involvement is calculated as the percentage of an ETF’s market value exposed to companies with ties to adult entertainment in the producer, distributor, retailer and ownership categories. This adult entertainment metric does not contribute to the overall ESG score. However, a higher percentage on this metric is worse.
Alcohol ETFs can be evaluated across one metric: Alcohol Involvement. Alcohol Involvement is calculated as the percentage of an ETF’s market value exposed to companies with ties to alcohol in the producer, distributor, retailer, licensor, supplier and ownership categories. This alcohol metric does not contribute to the overall ESG score. However, a higher percentage on this metric is worse.
Gambling ETFs can be evaluated across one metric: Gambling Involvement. Gambling Involvement is calculated as the percentage of an ETF’s market value exposed to companies with ties to gambling in the operation, support, licensing or ownership categories. This gambling metric does not contribute to the overall ESG score. However, a higher percentage on this metric is worse.
Nuclear Power ETFs can be evaluated across one metric: Nuclear Power Involvement. Nuclear Power Involvement is calculated as the percentage of an ETF’s market value exposed to companies with ties to the nuclear power industry. This nuclear power metric does not contribute to the overall ESG score. However, a higher percentage on this metric is worse.
Tobacco ETFs can be evaluated across one metric: Tobacco Involvement. Tobacco Involvement is calculated as the percentage of an ETF’s market value exposed to companies with ties to tobacco products in the distributor, licensor, retailer, supplier, or ownership categories. This tobacco metric does not contribute to the overall ESG score. However, a higher percentage on this metric is worse.
Weapons Involvement ETFs can be evaluated across two metrics: Weapons Involvement and Controversial Weapons Involvement. Weapons Involvement is calculated as the percentage of an ETF’s market value exposed to companies with ties to the manufacture of conventional, biological, chemical or nuclear weapons systems and components. This includes companies that provide support systems and services, as well as those with indirect ties to weapons production through ownership. Controversial Weapons Involvement is calculated as the percentage of an ETF’s market value exposed to companies with ties to landmines, cluster munitions, biological, chemical, depleted uranium, or nuclear weapons. These weapons involvement metrics do not contribute to the overall ESG score. However, a higher percentage on these metrics is worse.
Firearms Involvement ETFs can be evaluated across three metrics: Civilian Firearms Involvement, Civilian Firearms Retailer and Civilian Firearms Producer. Civilian Firearms Involvement is calculated as the percentage of an ETF’s market value exposed to companies that have an industry tie to the manufacture or retail of civilian firearms. Civilian Firearms Retailer is calculated as the percentage of an ETF’s market value exposed to companies that derive any amount of annual revenues from the distribution of firearms or small arms ammunition intended for civilian use. Civilian Firearms Producer is calculated as the percentage of an ETF’s market value exposed to companies that manufacture firearms and small arms ammunitions for civilian markets. These firearms involvement metrics do not contribute to the overall ESG score. However, a higher percentage on these metrics is worse.
Predatory Lending ETFs can be evaluated across one metric: Direct Predatory Lending Involvement. Direct Predatory Lending Involvement is calculated as the percentage of an ETF’s market value exposed to companies that provide products and services associated with certain controversial lending practices. This predatory lending metric does not contribute to the overall ESG score. However, a higher percentage on this metric is worse.
GMO Involvement ETFs can be evaluated across one metric: Genetic Engineering Involvement. Genetic Engineering Involvement is calculated as the percentage of an ETF’s market value exposed to companies with ties to the production of genetically modified organisms. This GMO involvement metric does not contribute to the overall ESG score. However, a higher percentage on this metric is worse.

Governance

The Governance bucket of the ESG criteria can be evaluated across 11 ESG themes with 27 total metrics:

Responsible Governance ETFs can be evaluated across one metric: Severe Governance Controversies. Severe Governance Controversies is the percentage of an ETF’s market value exposed to companies facing one or more Severe Governance controversies related to bribery, fraud, controversial investments and governance structures. Lower scores on this responsible governance metric improves the ESG score of an ETF.
Board Flag ETFs can be evaluated across one metric: Board Flag. This measure is the ETF’s exposure to Board Flags, and is calculated as the percentage of a portfolio’s market value exposed to companies ranking “below average” relative to global peers based on MSCI’s assessment of board structure and effectiveness. Lower scores on this board flag metric improves the ESG score of an ETF.
Board Independence ETFs can be evaluated across five metrics: Lack of Independent Board Majority, Board Independence (0-25%), Board Independence (25-50%), Board Independence (50-75%), and Board Independence (75-100%).
Lack of Independent Board Majority measures the percentage of an ETF’s market value exposed to companies lacking an independent board majority. The other four Board Independence metrics measure the percentage of an ETF’s market value exposed to companies with board independence within the designated ranges. Lower scores on the Board Independence (0-25% and 25-50%) and Lack of Independent Board Majority metrics improve the ESG score of an ETF. Whereas, higher scores on the Board Independence (50-75% and 75-100%) metric improve the ESG score of an ETF.
Board Diversity ETFs can be evaluated across three metrics: No Female Directors, Three or More Female Directors, and Females Represent 30% of Directors. No Female Directors is measured as the percentage of an ETF’s market value exposed to companies with no female directors. Three or More
Female Directors is measured as the percentage of an ETF’s market value exposed to companies with three or more female directors. Females Represent 30% of Directors is measured as the percentage of an ETF’s market value exposed to companies where women comprise at least 30% of the board of directors. Lower scores on the No Female Directors metric improve the ESG score of an ETF. Whereas, higher scores on the Three or More Female Directors and Females Represent 30% of Directors metrics improve the ESG score of an ETF.
Entrenched Board ETFs can be evaluated across one metric: Entrenched Board. This measure is calculated as the percentage of an ETF’s market value exposed to companies flagged for an entrenched board. Lower scores on this entrenched board metric improves the ESG score of an ETF.
Overboarding ETFs can be evaluated across one metric: Overboarding. This measure is calculated as the percentage of the ETF’s market value exposed to companies flagged for overboarded directors. Lower scores on this overboarding metric improves the ESG score of an ETF.
Shareholder Rights ETFs can be evaluated across six metrics: Negative Director Votes, Ownership and Control Flag, One Share One Vote, No Annual Director Elections, Does Not Use Majority Voting, and Significant Votes Against Pay Practices. Negative Director Votes is calculated as the percentage of an ETF’s market value exposed to companies facing significant negative director votes. Ownership and Control Flag is calculated as the percentage of an ETF’s market value exposed to companies ranking “below average” relative to their global peers on MSCI’s assessment of ownership structure and risks. One Share One Vote is calculated as the percentage of an ETF’s market value exposed to companies flagged for limitations on voting rights including multiple equity classes with different voting rights, or voting rights limited by shares held, residency, duration or minimum holding period. No Annual Direction Elections is calculated as the percentage of an ETF’s market value exposed to companies where not all directors stand for annual re-election. Does Not Use Majority Voting is calculated as the percentage of an ETF’s market value exposed to companies that have not adopted majority voting in the election of directors. Significant Votes Against Pay Practices is calculated as the percentage of an ETF’s market value exposed to companies facing significant votes against pay practices. Lower scores on these shareholder rights metrics improve the ESG score of an ETF.
Fund Ownership ETFs can be evaluated across three metrics: Controlling Shareholder, Controlling Shareholder Concerns, and Cross Shareholdings. Controlling Shareholder is calculated as the percentage of an ETF’s market value exposed to companies with a controlling shareholder. Controlling Shareholder Concerns is calculated as the percentage of an ETF’s market value exposed to companies with ownership structure indicating special concerns for minority shareholders. Cross Shareholdings is calculated as the percentage of an ETF’s market value exposed to companies involved in a series of cross shareholdings with other companies. Lower scores on these fund ownership metrics improve the ESG score of an ETF.
Poison Pill ETFs can be evaluated across one metric: Poison Pill. Poison Pill is calculated as the percentage of an ETF’s market value exposed to companies that have adopted shareholder rights plans. Lower scores on this poison pill metric improves the ESG score of an ETF.
Executive Compensation ETFs can be evaluated across four metrics: Pay Flag, No Pay Performance Link, Lack of Internal Pay Equity, and Executive Pay Non-Disclosure. Pay Flag is calculated as the percentage of an ETF’s market value exposed to companies ranking “below average” relative to their global peers on MSCI’s assessment of executive pay practices. No Pay Performance Link is calculated as the percentage of an ETF’s market value exposed to companies flagged for gaps between executive pay and performance. Lack of Internal Pay Equity is calculated as the percentage of an ETF’s market value exposed to companies facing a lack of internal pay equity. Executive Pay Non-Disclosure is calculated as the percentage of an ETF’s market value exposed to companies facing a lack of internal pay disclosure. Lower scores on these executive compensation metrics improve the ESG score of an ETF.
Accounting Flag ETFs can be evaluated across one metric: Accounting Flag. This measure is calculated as the percentage of an ETF’s market value exposed to companies ranked “below average” relative to their global peers on MSCI’s assessment of accounting aggressiveness. Lower scores on this accounting flag metric improves the ESG score of an ETF.

The Bottom Line

The ESG scoring metrics are intended for investors interested in investing responsibly. Read more about why ESG investing is generating so much interest here. Discover and explore our ESG themes below to find out which ETFs invest in accordance to your environmental, social and governance values.

Copyright MSCI ESG Research LLC [2018]. All Rights Reserved. MSCI ESG Research LLC’s (“MSCI ESG”) Fund Metrics products (the “Information”) provide environmental, social and governance data with respect to underlying securities within more than 23,000 multi-asset class Mutual Funds and ETFs globally. MSCI ESG is a Registered Investment Adviser under the Investment Advisers Act of 1940. MSCI ESG materials have not been submitted, to nor received approval from, the US SEC or any other regulatory body. None of the information constitutes an offer to buy or sell, or a promotion or recommendation of, any security, financial instrument or product or trading strategy, nor should it be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. None of the Information can be used to determine which securities to buy or sell or when to buy or sell them. The Information is provided “as is” and the user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. All Information is provided solely for your internal use, and may not be reproduced or redisseminated in any form without express prior written permission from MSCI. Neither MSCI ESG nor any of its affiliates or any third party involved in or related to creating any Information makes any express or implied warranties, representations or guarantees, and in no event will MSCI ESG or any such affiliate or third party have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) relating to any Information. More information on MSCI ESG Fund Metrics, provided by MSCI ESG Research LLC, can be found at https://www.msci.com/esg-fund-metrics.

Information is provided 'as is' and solely for informational purposes, not for trading purposes or advice, and is delayed. To see all exchange delays and terms of use, please see disclaimer.