Before you can interpret a client's MSCI ESG Rating or advise them on how to improve it, you must understand the exact architecture of the attack surface. You need to know precisely which issues MSCI is interrogating your client on, and why.
The Architectural Hierarchy
The MSCI ESG Ratings model is rigidly built on a three-level hierarchy.
- Pillars: The top level (Environment, Social, Governance).
- Themes: The 10 specific themes dividing the pillars.
- Key Issues: The 33 brutally specific ESG issues that companies are actually scored on.
| Pillar | Theme | Key Issue |
|---|---|---|
| Environment | Climate Change | Carbon Emissions |
| Environment | Climate Change | Climate Change Vulnerability |
| Environment | Climate Change | Financing Environmental Impact |
| Environment | Climate Change | Product Carbon Footprint |
| Environment | Natural Capital | Biodiversity and Land Use |
| Environment | Natural Capital | Raw Material Sourcing |
| Environment | Natural Capital | Water Stress |
| Environment | Pollution and Waste | Electronic Waste |
| Environment | Pollution and Waste | Packaging Material and Waste |
| Environment | Pollution and Waste | Toxic Emissions and Waste |
| Environment | Environmental Opportunities | Opportunities in Clean Tech |
| Environment | Environmental Opportunities | Opportunities in Green Building |
| Environment | Environmental Opportunities | Opportunities in Renewable Energy |
| Social | Human Capital | Health and Safety |
| Social | Human Capital | Human Capital Development |
| Social | Human Capital | Labor Management |
| Social | Human Capital | Supply Chain Labor Standards |
| Social | Product Liability | Chemical Safety |
| Social | Product Liability | Consumer Financial Protection |
| Social | Product Liability | Privacy and Data Security |
| Social | Product Liability | Product Safety and Quality |
| Social | Product Liability | Responsible Investment |
| Social | Stakeholder Opposition | Community Relations |
| Social | Stakeholder Opposition | Controversial Sourcing |
| Social | Social Opportunities | Access to Finance |
| Social | Social Opportunities | Access to Health Care |
| Social | Social Opportunities | Opportunities in Nutrition and Health |
| Governance | Corporate Governance | Board |
| Governance | Corporate Governance | Pay |
| Governance | Corporate Governance | Ownership and Control |
| Governance | Corporate Governance | Accounting |
| Governance | Corporate Behavior | Business Ethics |
| Governance | Corporate Behavior | Tax Transparency |
Universal vs. Bespoke Key Issues
A company is absolutely not evaluated on all 33 issues. MSCI deploys these issues based entirely on the pillar they belong to.
Governance is Universal: Every single company on earth is forcefully evaluated on all six Governance Key Issues. MSCI's position is absolute: terrible governance will destroy any company, regardless of what industry it is in.
Environmental & Social Issues are Bespoke: Each company is forced to defend itself against a highly customized selection of two to seven E&S Key Issues. MSCI selects these issues based entirely on the company's GICS sub-industry. The selection is driven by one brutal metric: does this specific industry generate massive negative externalities (damage) in this specific area?
The Consultant's First Move: The absolute first step in an MSCI benchmarking engagement is verifying exactly which 2 to 7 E&S Key Issues have been locked onto your client's sub-industry. You ignore the other 20+ issues completely. You only fight the battles MSCI assigns you.
How MSCI Selects Industry Key Issues
MSCI does not guess what is important. They run a heavy mathematical model to assign issues to industries based on Externalities.
- MSCI maps every business segment in an industry to standard economic activities.
- They calculate the severity of the damage (the externality) that activity causes. For example, to assign the "Health and Safety" Key Issue, MSCI actively pulls fatal injury data from OSHA and the ILO for that specific industry.
- If the industry's externality score blasts past the 80th percentile globally, that Key Issue is permanently locked onto that sub-industry.
The Wildcard: Company-Specific Key Issues
Occasionally, a company is so bizarre, or behaves so outrageously, that MSCI breaks its own rules. MSCI will slap a Company-Specific Key Issue onto a single corporation, forcing them to defend an issue that none of their direct competitors have to face.
When MSCI adds a new issue, they mathematically reduce the weight of all the other issues to accommodate it.
Four Ways to Trigger a Custom Assessment:
- The Massive Side Hustle: If a company makes more than 20% of its revenue from a secondary industry, MSCI adds the biggest risk from that shadow industry. (Example: A retail chain making massive profits selling fine jewelry will suddenly have "Controversial Sourcing" bolted onto its rating).
- The Absolute Size Rule: If the secondary business is small by percentage but objectively massive in absolute dollars. (Example: A massive media conglomerate happens to manufacture millions of toys, triggering "Supply Chain Labor Standards").
- The Bizarre Business Model: If a company does something totally unique for its sector. (Example: A cosmetics brand selling ingestible diet pills triggers "Product Safety and Quality").
- The Horrific Controversy: If a company is caught in a severe, highly public scandal regarding an issue they are not normally rated on, MSCI will instantly add that issue as a direct punishment.
They are incredibly common. Over 20% of all companies rated by MSCI are currently fighting a Company-Specific Key Issue. This heavily impacts massive conglomerates, highly diversified retailers, and companies that have recently suffered brutal PR scandals.
The Controversy Defense: If your client was slapped with a Company-Specific Key Issue purely because of a past scandal, that is highly actionable. If you can prove to MSCI that the client has aggressively fixed the problem and the controversy is dead, MSCI might remove the issue entirely, reverting the company back to the standard, easier playing field.
Key Takeaways
- 1MSCI evaluates companies on 3 Pillars, 10 Themes, and 33 Key Issues - but each company only faces a tailored subset of 2-7 E&S issues based on its GICS sub-industry
- 2All six Governance Key Issues are universal and apply to every company regardless of industry
- 3MSCI assigns E&S Key Issues when an industry's externality score exceeds the global 80th percentile for that issue
- 4Over 20% of MSCI-rated companies fight a Company-Specific Key Issue triggered by revenue diversification, absolute size, bizarre business models, or severe controversies
- 5Your first move in any MSCI engagement is verifying exactly which E&S Key Issues are locked onto the client's sub-industry - ignore everything else