msci esg rating methodology

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MSCI ESG Ratings Definition, Methodology, Example

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

What Are MSCI ESG Ratings?

MSCI ESG ratings are a comprehensive measure of a company’s long-term commitment to socially responsible investments (SRI) and environmental, social, and governance (ESG) investment standards. In particular, the MSCI ESG ratings focus on a company’s exposure to financially relevant ESG risks.

ESG and SRI investing prioritize a company’s positive contributions to its community, the environment, and social impact. Scoring companies along ESG dimensions allows socially conscious investors to screen potential investments to fit with their investment goals and values.

Key Takeaways

• MSCI ESG ratings measure a company’s resilience to long-term, financially relevant ESG (environment, social, governance) risks.
• ESG investing has grown to become an important and influential investment strategy, largely motivated by values of social responsibility and corporate accountability.
• MSCI’s ESG ratings score along all three dimensions of ESG and rank potential investments on a letter-scale from AAA (leaders) to CCC (laggards).

Understanding MSCI ESG Ratings

ESG investing has become increasingly popular over the past decade. The US SIF: The Forum for Sustainable and Responsible Investment reports that in 2020, more than $17 trillion of professionally managed assets were held in sustainable assets, around one-third of all assets under management. With its growing popularity, data providers have also created various scoring criteria upon which to rank and grade potential ESG investments, allowing socially responsible investors to make more informed decisions when choosing which companies, ETFs, or mutual funds to include in their portfolios.

Alongside MSCI, several other financial firms have developed their own proprietary ESG scoring models, including Russell Investments and Standard & Poors (S&P), among others.

MSCI’s ratings decompose ESG into its three thematic components: the environment, social responsibility, and corporate governance.

Under the environmental dimension, key issues include:

• contribution to climate change
• a company’s utilization of "natural capital" (such as biodiversity and raw materials sourcing)
• pollution and waste management
• use of green technologies and renewable energy

Under social:

• health, safety, and human capital development
• product and consumer safety
• community relations
• social opportunities

And, under governance:

• corporate governance fairness and accountability
• transparency and ethics

How Do MSCI ESG Ratings Work?

Analyzing metrics within each of these key issue items, MSCI scores the companies that it rates on each key issue from zero to ten, with zero indicating virtually no exposure and ten representing very high exposure to a particular ESG risk or opportunity. MSCI also evaluates companies on exposure to controversial business activities (e.g., weapons, tobacco, gambling, etc.). The data informing these scores are obtained from corporate filings, financial statements, and press releases in addition to almost half of all data coming from hundreds of third-party media, academic, NGO, regulatory, and government sources.

Scores based on individual metrics are aggregated, weighted, and scaled to the relevant industry sector to arrive at an intuitive letter-based grade, akin to lettered credit scores issued by credit rating companies.

Source: MSCI

According to MSCI, a "leader" (rated AAA & AA) indicates a company leading its industry in managing the most significant ESG risks and opportunities. "Average" (rated A, BBB, or BB) companies are described by a mixed or unexceptional track record of managing ESG risks and opportunities relative to industry peers; while a "laggard" (rated B or CCC) trails its industry based on its high exposure and failure to manage significant ESG risks.

Real-World Example of MSCI ESG Ratings: Tesla, Inc.

To illustrate how MSCI ESG ratings can be used by investors, let’s take a look at the electric vehicle producer, Tesla, Inc. ( TSLA ). The company earns an overall grade of "A," putting it on the higher end of "average" among the 41 companies in the car industry rated by MSCI. Digging into its rating, Tesla excels in corporate governance and environmental risks, maintaining a relatively small carbon footprint while both utilizing and investing in green technologies. The company scores an average grade for product quality and safety, with the company making headlines in the past for exploding batteries, undesirable crash test ratings, and accidents involving the cars’ self-driving "autopilot" feature – although CEO Elon Musk has publicly announced a commitment to improving both driver and bystander safety.

What truly drags down Tesla’s MSCI ESG rating is its below-average score for product quality and safety. The battery banks in its cars have been known to spontaneously combust and the National Transportation Safety Board (NTSB) has accused Tesla for neglecting driver safety, calling certain Autopilot features "completely inadequate" and citing Autopilot as the probable cause of several deadly crashes involving Tesla cars.

Tesla has also been criticized for its labor management practices. For instance, the company has been found to be in violation of labor laws by blocking unionization, and that it has violated the National Labor Relations Act multiple times. More recently, the company’s leadership has come under fire for keeping plants open and unsafe during the COVID-19 pandemic, leading several of its workers to come down with the illness.

Despite earning only an "average" score, it is worth noting that only one company covered in the auto industry (including both automobiles and auto parts) currently earns "leader" status on MSCI’s ESG ratings – the French auto parts maker, Valeo SE.

What Is ESG in Investing?

Environmental, social, and governance (ESG) criteria are used to screen investments based on corporate policies and to encourage companies to act responsibly. ESG also helps investors who care about these issues to screen for those companies that rank highly in social and environmental responsibility.

What Is MSCI's Implied Temperature Rise?

MSCI has recently developed an ESG screening criterion known as Implied Temperature Rise (ITR), which is an intuitive, forward-looking metric, expressed in degrees Celsius, designed to show the temperature alignment of companies, portfolios, and funds with global temperature goals. Implied Temperature Rise can help investors assess the environmental alignment of companies, portfolios, funds, and benchmarks with net-zero carbon emissions targets by the middle of this century.

How Many Companies Does MSCI's ESG Ratings Cover?

As of 2022, MSCI has ESG ratings for more than 8,500 companies worldwide.

US SIF: The Forum for Sustainable and Responsible Investment. " The US SIF Foundation’s Biennial “Trends Report” Finds That Sustainable Investing Assets Reach $17.1 Trillion ."

S&P Global Ratings. “ ESG Evaluation ,” Page 2.

Russell Investments. " Materiality Matters ,” Page 1.

MSCI. " MSCI ESG Ratings Methodology, Executive Summary ," Page 4.

MSCI. " MSCI Sustainable Select Index Methodology ," Page 7.

MSCI. " MSCI Sustainable Select Index Methodology ," Pages 11-12.

MSCI. " MSCI ESG Ratings Methodology, Executive Summary ," Page 11.

MSCI. " ESG Ratings ."

MSCI. " ESG Ratings & Climate Search Tool: Tesla ."

Washington Post. " Tesla Model S erupts in flames, prompting NHTSA to step in ."

Reuters. " US NTSB head criticizes Tesla over vehicle self-driving feature ."

U.S. Securities and Exchange Commission. “ Notice of Exempt Solicitation Pursuant to Rule 14a-103 .”

Tesla. “ Impact Report 2020 ,” Page 56.

Tesla. “ Tesla Operational Update .”

MSCI. " ESG Ratings & Climate Search Tool: Valeo SE ."

MSCI. " What is Implied Temperature Rise (ITR)? "

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Sustainable Investing & MSCI ESG Ratings

Sustainable Investing

Sustainable investing is used as an umbrella term to describe investment strategies that combine traditional security analysis with environmental, social, and governance insights.

ESG describes the Environmental (E), Social (S), and Governance (G) metrics that are evaluated to inform security selection.

ESG analysis evaluates risks and opportunities beyond the scope of traditional financial analysis.

Overview of MSCI ESG Ratings

 MSCI rates companies according to their exposure to industry specific ESG risks and opportunities and their ability to manage those risks and opportunities relative to peers.

The company level ratings are aggregated to the fund level, which are further aggregated to the portfolio level to provide the ESG rating available on the Sustainability tab of the 360 Evaluator.

The MSCI ESG Ratings model seeks to answer four key questions about companies 1 :

• What are the most significant ESG risks and opportunities facing a company and its industry?
• How exposed is the company to those key risks and/or opportunities?
• How well is the company managing key risks and opportunities?
• What is the overall assessment of how the company is managing ESG risks and opportunities and how does it compare to its global industry peers?

The key issue scores and weights are combined and normalized per industry to offer an overall ESG score (0-10) and rating (AAA-CCC) for each issuer.

MSCI ESG Fund Ratings and ESG Quality Scores

The overall MSCI ESG Fund Rating and MSCI ESG Quality Score measure the ability of a fund’s underlying holdings to manage key medium- to long-term risks and opportunities arising from environmental, social and governance issues. The MSCI ESG Quality Score is provided on a 0-10 scale, with 0 and 10 being the respective lowest and highest possible fund scores. The MSCI ESG Fund Rating is provided on a AAA-CCC scale, with AAA and CCC being the respective highest and lowest possible fund ratings.

Derivation of MSCI ESG Fund Rating from underlying company scores

The MSCI ESG Fund Rating is calculated using an enhanced holdings-based methodology that incorporates the following:

• the underlying holdings’ Weighted Average ESG Score.
• the fund’s ESG Momentum, including the fund’s exposure to holdings with an improving ESG rating trend (positive) and the fund’s exposure to holdings with a worsening ESG rating trend (negative).
• the fund’s exposure to ESG Tail Risk, specifically holdings with CCC and B ESG Ratings.

The net exposure of positive trend, negative trend and tail risk are applied as a multiplier to the weighted average score to calculate the MSCI ESG Quality Score. The MSCI ESG Quality Score is then converted to a letter rating that ranges from AAA-CCC.

Each fund has a coverage %, which represents the percent by weight of a fund’s holdings (excluding cash positions and other asset types deemed not relevant for ESG analysis by MSCI) that have ESG data. Holdings that do not have a rating are excluded from the calculation.

Funds included in MSCI ESG Fund Ratings

To be included in MSCI ESG Fund Ratings, a fund must pass the following three criteria:

• To be included in MSCI ESG Fund Ratings, 65% of the fund’s gross weight (or 50% for bond funds and money market funds) must come from securities with ESG coverage by MSCI ESG Research (certain cash positions and other asset types like securitized products, commodities, currency, and others are not currently covered by ESG analysis by MSCI are removed prior to calculating a fund’s gross weight; the absolute values of short positions are included but treated as uncovered)
• Updated Holdings Data: Fund holdings date must be less than one year old.
• Portfolio Holdings Minimum: Fund must have at least ten securities.

Calculation of portfolio level ESG metrics

The portfolio ESG Quality Score is computed by BlackRock, using the formula provided by MSCI, and based on the weighted average ESG Scores of the underlying funds & stocks within the portfolio. Security weights are adjusted for ESG coverage and normalized to 100%. The resulting weighted average ESG score is then adjusted based on portfolio exposure to issuers with positive trending ESG scores, issuers with negative trending ESG scores, and ESG Laggards (B and CCC rated issuers). The result is the ESG Quality Score, which can be mapped directly to the letter ESG Rating.

1 MSCI ESG Ratings Methodology, December 2020 - https://www.msci.com/our-solutions/esg-investing/esg-ratings 2 Source: MSCI ESG Research. Data sources: 1000+ data points on ESG policies, programs and performance, Data on 65,000 individual directors, 13 years of shareholder meeting results, 1600+ social media sources monitored daily. MSCI issues scores and weights to combine overall ESG rating relative to industry peers.

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Understanding the MSCI ESG Rating Methodology: A Comprehensive Guide

As responsible investing gains momentum, understanding the MSCI ESG Rating methodology becomes essential for investors. This guide sheds light on the assessment process and its significance in making informed investment decisions.

What are MSCI ESG Ratings?

MSCI (Morgan Stanley Capital International) ESG Ratings provide investors with a comprehensive evaluation of a company's performance concerning environmental, social, and governance (ESG) factors. These ratings help investors identify potential risks and opportunities in their portfolios, enabling them to make more informed and responsible investment decisions.

Key Components of the MSCI ESG Rating Methodology

The MSCI ESG Rating methodology comprises three primary components:

Industry-Specific Key Issues: The rating process begins by identifying industry-specific key ESG issues. These issues are weighted based on their potential impact on a company's long-term value. Perform a specific search via the Materiality Map .

Company Exposure: MSCI assesses a company's exposure to each key issue, considering both its operations and supply chain. The assessment, the Thematic Exposure Standard , considers factors such as company size, location, and business activities.

Company Management: The final component evaluates a company's ability to manage its exposure to ESG risks and opportunities. MSCI analyses policies, practices, and performance metrics to determine a company's management score.

Featured Article: Top 9 ESG Courses And Certifications For Professionals

MSCI ESG Rating Scale

MSCI assigns ESG Ratings on a scale from AAA (best) to CCC (worst). Companies with higher ratings demonstrate strong ESG management practices and lower exposure to ESG risks.

AAA and AA: Leaders

A and BBB: Average performers

BB and B: Laggards

CCC: Lowest performers

Featured: How To Calculate Your Individual ESG Score

The Importance of MSCI ESG Ratings for Investors

MSCI ESG Ratings play a crucial role in responsible investing by helping investors:

Identify ESG Risks: By understanding a company's ESG rating, investors can gauge potential risks that may impact the financial performance and long-term value of their investments.

Make Informed Decisions: MSCI ESG Ratings enable investors to compare companies within the same industry, facilitating better decision-making when allocating capital to responsible investments.

Monitor Portfolio Performance: Regularly reviewing a portfolio's ESG ratings can help investors identify areas for improvement and ensure alignment with their responsible investment objectives.

The MSCI ESG Rating methodology serves as a valuable tool for investors looking to incorporate ESG factors into their investment strategy. By understanding the methodology and its implications, investors can make more informed decisions and contribute to a sustainable future.

Compare ESG performance with KnowESG's Company ESG Profiles .

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ESG ratings: all you need to know about MSCI rating methodology

‍ MSCI Inc. is a leading global investment research firm headquartered in New York City, offering a range of services including investment indexes, portfolio analysis tools, and ratings on ESG , equity, loans, mutual funds, ETFs, and countries.

One of its most important offerings is the MSCI ESG Ratings, which evaluate a company's ESG performance against peers and provide insights into ESG risk exposure and risk management.

As ESG factors increasingly affect investment decisions, understanding MSCI's rating methodology is crucial for companies, investors, analysts, and anyone interested in ESG investing.

In this article, we'll take a deep dive into MSCI's rating methodology, and explore how MSCI ratings can impact investment decisions.

Let's get started!

How do the MSCI ESG Ratings work?

Msci rating system.

The MSCI ESG Ratings put companies in one of seven letter categories: 

• Leader—“A company leading its industry in managing the most significant ESG risks and opportunities,” categorised as AAA or AA
• Average—“A company with a mixed or unexceptional track record of managing the most significant ESG risks and opportunities relative to industry peers,” categorised as A, BBB, or BB
• Laggard—“A company lagging its industry based on its high exposure and failure to manage significant ESG risks,” categorised as B or CCC

Process and methodology

MSCI ’s ESG ratings look at 1000+ data points (KPIs, policies, targets, etc.), considering exposure metrics (how exposed is the company to industry material issues), management metrics (how is the company managing each issue), and 35 ESG key Issues.

A specialised ESG research team provides insight throughout the rating process, and MSCI conducts systematic monitoring and quality review of information, as well as a formal committee review. 

The 35 key issues, shown in the diagram below, are centered on the intersection between a company’s unique material issues and industry-specific issues, meaning that the MSCI ESG ratings assess companies on their performance relative to peers within their industry, for more accurate comparison (all companies are assessed on Corporate Governance and Corporate Behavior).

More specific details on MSCI metric calculation and a breakdown of factors considered can be found on MSCI’s ESG Metrics Calculation Methodology page. 

While key Issues are identified by looking quantitatively at each industry as a whole, individual companies’ exposure to each issue will vary based on their business mission and scope.

MSCI ESG Ratings calculate each company’s exposure to key ESG risks across different components of a business' value chain: including core product/business segments, the locations of its operations, and other relevant measures such as outsourced production or reliance on government contracts.

For instance, MSCI states in their methodology document that while their model looks at the averages for “externalised impacts such as carbon intensity, water intensity, and injury rates,” “[c]ompanies with unusual business models … may face fewer or additional key risks and opportunities [and c]ompany-specific exceptions are allowed” in some situations.

Thus, industry-specific Key Issues may not be the same for all companies within the industry (although there should at least be significant overlap).

Company-specific data also depends on exposure and management metrics, both of which MSCI scores on a scale of 0-10. 

Issues are also weighted based on impact and time horison of their risks or opportunities. MSCI determines whether the industry is a major or minor contributor overall to an issue, and identifies a risk or opportunity as:

• ‍ short-term (less than 2 years)
• medium-term
• or long-term (5+ years)

‍ and takes that information into account when delivering ESG scores. Other considerations in MSCI ESG ratings include assessment of opportunities and controversies. 

Tools and resources

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MSCI offers tools and guides to its rating system free of charge. More details on rating methodology can be found on the MSCI ESG Ratings Methodology pdf, and the list below provides some other useful links. 

• ESG Ratings & Climate Search Tool
• ESG Industry Materiality Map
• ESG Funds Rating Search Tool 
• Index Profile Search Tool 

Who uses the MSCI ESG Ratings?

How msci clients use the esg ratings.

MSCI ESG Research is used by over 1,400 investors worldwide; the MSCI web page lists asset managers, owners, banks, corporates, insurance companies, and wealth managers among their client categories.

Due to the MSCI ESG ratings’ focus on financial materiality (eg. factors that will impact a company’s bottom line), the ratings are geared towards persons or groups that are concerned with financial performance and risk assessment.

ESG Ratings are especially helpful for investors in supplementing financial analyses, for screening select risks or sustainable practices, and as additional information on companies that are currently in an investor's portfolio. 

MSCI points out that while ESG disclosures in self-reports from individual companies offer helpful information, self-reported ESG information consists of maybe “50% of the full suite of information needed to evaluate ESG performance”.

MSCI uses other independent sources of information–such as company characteristics as defined by an outside agency, and data on product risk and event data, to name a few factors–beyond corporate disclosure to provide investors with a more detailed picture.

According to MSCI surveys, common client use of MSCI ESG ratings include: fundamental and quantitative analyses, portfolio construction, risk management, ESG benchmarking, financial index-based product development, and customer engagement and thought leadership. 

Benefits for for-profit companies

ESG ratings are not something that companies necessarily request- independent ESG rating agencies such as MSCI or Sustainalytics measure company performance with publicly available information and information sourced directly from the company.

As mentioned above, ESG ratings are especially helpful for investors and asset managers; however, companies also benefit from earning a high ESG rating. 

MSCI ESG Ratings aim to measure a company's management of financially relevant ESG risks and opportunities. High ESG score indicates that best practices are being followed in all ESG areas and a company has little to no internal or external problems.

A good ESG score signifies that a company is meeting best practices in each ESG category and has a low negative impact on people or the planet.

Conversely, a low ESG rating points to areas of concern that the company likely needs to address in order to reduce risk and remain competitive.

Companies that fail to manage ESG risks have historically experienced higher costs of capital, more volatility, and accounting irregularities.

Thus, while a low or unsatisfactory ESG score is never desirable, it can still be helpful in identifying areas for improvement. 

Even before being useful for improving practices, the research methodology behind ESG ratings can also be used by companies to start their CSR strategy.

For example, MSCI's Materiality Map can be used by a company to help identify its material CSR issues. MSCI ESG Ratings is providing a public assessment of material issues per industry. 

How can companies view or change their MSCI Rating?

MSCI ESG ratings are available online on their ESG Rating & Climate Search Tool, where interested parties can search either by company name or ticker.

MSCI monitors companies on an ongoing basis and conducts annual reviews, so companies have the opportunity to raise their ESG score each year by taking positive action on materially relevant sustainability issues and publicising the results of their actions.

Note that new information may be reflected as quickly as on a weekly basis, especially if a controversy or important governance event has occurred. 

Since ESG ratings are conducted by independent agencies with public data sources—such as companies with annual financial reports, sustainability reports , proxy reports, information from various monitored media outlets, data sets from governments, regulatory organisations, and NGOs—companies generally do not need to take the initiative in the assessment process.

MSCI does reach out to companies as a part of the data review process, and will typically alert the company 6-8 weeks in advance of MSCI’s annual ESG Rating Action update. 

Some proactive action that a company can take if they want to either join an ESG rating database or improve their rating might include:

• ‍ establishing a clear ESG governance structure to oversee the management of ESG policies and systems
• reviewing relevant publicly available data that might be used in a rating analysis, compare ESG ratings across different rating agencies
• or review agency-specific rating criteria and try reaching out to the rating agency for additional details. 

Options for facilitation and aid from third-parties

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Frequently Asked Questions

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Monday Morning Memo: The Change in the ESG Rating Methodology of MSCI May Have Impacts on Capital Markets

By detlef glow ..

At the end of March 2023, MSCI announced that the company will change its ESG rating methodology by removing the so-called adjustment factors (ESG momentum and ESG tail risk) from the calculation of the ESG Quality Score. These changes were made after a consultation with clients who noticed an upward shift in ESG fund ratings.

The upward shift was at least partly driven by the momentum adjustment—this factor had positive influence on the ESG Quality Score if the underlying company had disclosed improved E, S, or G practices. An increasing number of companies are starting to report on their E, S, or G practices or improving their reporting under the current demand for ESG data by investors. As a result, more companies received an ESG rating upgrade. These upgrades were magnified at the fund level by the momentum adjustment. This means that the removal of the adjustment factors will make the requirements to receive a top rating more ambitious and rigorous, as it is to be expected that companies will witness more downgrades than upgrades under the new scoring regime. Therefore, the new practice should be in favor of investors.

That said, it is clear that this change will have effects on fund flows, as those investors who want only to invest in top rated products will sell mutual funds and ETFs which will lose the top rating and buy into products which will stay in the top segment. These flows may also have impacts on the wider markets since mutual funds and ETFs with outflows need to sell the underlying securities to meet the liquidity demand from the outflows.

From my point of view these changes to the rating methodology of MSCI will increase the quality of the ESG ratings from the company. Nevertheless, actions like this show that ESG investing is still in the childhood phase and the providers of data and ratings need to adopt the ever-changing market environments to their methodologies and processes to maintain meaningful measures and ratings. As a result, all providers of ESG-related classifications, measurements, or ratings need to practice learning by doing to fulfill the increasing demand for high quality data and ratings by investors. This means that the respective providers need to review their methodologies constantly and should not be shy to implement changes needed, as this is necessary to keep the trust of investors in their measures and ratings.

This article is for information purposes only and does not constitute any investment advice.

The views expressed are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

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• MSCI Announces Changes To Its ESG Rating Methodology, Resulting In Downgrades For Most Funds

MSCI has announced significant changes to its ESG investment fund ratings methodology that "aim to raise the requirements for a fund to be assessed as 'AA' or 'AAA' rated, improve stability in Fund ESG Ratings and add transparency through simpler attribution analysis." However, these changes will result in downgrades to 31,000 of the funds currently rated by MSCI . MSCI also announced new coverage for 8,200 fixed income funds and a "new approach in rating funds with swap-based strategies" that "will rate swap-based ETFs based on the holdings of the replicated index instead of the fund's collateral holdings." According to MSCI , the methodology changes are based on client feedback, not regulatory developments in the EU or elsewhere.

MSCI 's main methodological change is now to derive the ESG Quality Score that underlies MSCI ESG Fund Ratings "from a simple weighted average of the ESG scores of the underlying holdings. [ MSCI ] will no longer apply adjustment factors." That is because, according to MSCI , the adjustment factors by and large resulted in ratings upgrades because of how those factors were calculated. In particular, at the fund level, the adjustment factor rewards funds for holding companies that are both highly rated and improving their ESG rating. But companies across nearly every sector, "operating under a new environment of increased ESG scrutiny, have been improving and disclosing more of their E, S and G practices." As a result, "many funds, including broad-market benchmark-replicating funds, are now highly rated by MSCI , in part driven by the momentum adjustment." MSCI reports that as of December 2022 , "approximately 73% of funds in [its] coverage universe (including ETFs, mutual funds and index funds) had a positive adjustment factor, meaning that these funds had greater exposure to companies with improving ESG Ratings than worsening ESG Ratings." Accordingly, "the goal posts are shifting" in a "new era where improvement in ESG is the status quo," such that "the threshold required to receive a top 'AA' or ' AAA ' rating should be more rigorous and ambitious." However, because the adjustment factor "had a mostly upward influence on funds' ESG Ratings, removing it will lead to more downgrades than upgrades." MSCI observes that this reflects "a one-time calibration of the entire universe of funds" and is "not indicative of more downgrades to come."

Taking the Temperature: As we have reported, ESG ratings providers are being subject to scrutiny and potential regulation as a result of concerns regarding the transparency of their methodologies and the lack of consistency in ratings for the same company by different providers. The UK's Financial Conduct Authority is in the midst of a public consultation on a potential ESG ratings regulatory regime, which closes on June 30 . The consultation states that " Treasury considers there is clear benefit to be gained from improving the transparency of methodologies, governance, and processes of ESG ratings providers. These outcomes could be brought about through regulation." The European Securities and Markets Authority's (ESMA) Securities and Markets Stakeholder Group (SMSG) earlier this year observed that, with respect to ratings providers, the "methodological choices are presently not always sufficiently disclosed," and "investors may not be in a position where they can make truly informed decisions, making it necessary for them to compare several ESG ratings and conduct their own research in parallel, often using raw ESG data." As SMSG observed, the market would benefit from improved "availability, integrity, and transparency of ESG ratings." The Securities and Exchange Board of India recently sought input into potential ESG ratings regulation, a call for regulation echoed by the International Organization of Securities Commissions .

Despite increased interest from regulators, the ESG ratings industry remains largely unregulated and we expect company ratings and the underlying methodology producing those ratings to remain controversial. We recently reported on the results of the Dow Jones Sustainability Indices Annual Review, which resulted in certain additions to and deletions from the Sustainability Index that provoked comment. We anticipate that calls for regulation will continue while ratings methodologies remain unclear, the sources of information supporting scores varies, and scores diverge among different providers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Duncan Grieve Cadwalader, Wickersham & Taft LLP 200 Liberty Street New York New York NY 10281 UNITED STATES Tel: 2125046000 Fax: 2125046666 E-mail: [email protected] URL: www.cadwalader.com

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MSCI Announces Changes to Its ESG Rating Methodology, Resulting in Downgrades for Most Funds

MSCI has announced significant changes to its ESG investment fund ratings methodology that “aim to raise the requirements for a fund to be assessed as ‘AA’ or ‘AAA’ rated, improve stability in Fund ESG Ratings and add transparency through simpler attribution analysis.” However, these changes will result in downgrades to 31,000 of the funds currently rated by MSCI. MSCI also announced new coverage for 8,200 fixed income funds and a “new approach in rating funds with swap-based strategies” that “will rate swap-based ETFs based on the holdings of the replicated index instead of the fund’s collateral holdings.” According to MSCI, the methodology changes are based on client feedback, not regulatory developments in the EU or elsewhere.

MSCI’s main methodological change is now to derive the ESG Quality Score that underlies MSCI ESG Fund Ratings “from a simple weighted average of the ESG scores of the underlying holdings. [MSCI] will no longer apply adjustment factors.” That is because, according to MSCI, the adjustment factors by and large resulted in ratings upgrades because of how those factors were calculated. In particular, at the fund level, the adjustment factor rewards funds for holding companies that are both highly rated and improving their ESG rating. But companies across nearly every sector, “operating under a new environment of increased ESG scrutiny, have been improving and disclosing more of their E, S and G practices.” As a result, “many funds, including broad-market benchmark-replicating funds, are now highly rated by MSCI, in part driven by the momentum adjustment.” MSCI reports that as of December 2022, “approximately 73% of funds in [its] coverage universe (including ETFs, mutual funds and index funds) had a positive adjustment factor, meaning that these funds had greater exposure to companies with improving ESG Ratings than worsening ESG Ratings.” Accordingly, “the goal posts are shifting” in a “new era where improvement in ESG is the status quo,” such that “the threshold required to receive a top ‘AA’ or ‘AAA’ rating should be more rigorous and ambitious.” However, because the adjustment factor “had a mostly upward influence on funds’ ESG Ratings, removing it will lead to more downgrades than upgrades.” MSCI observes that this reflects “a one-time calibration of the entire universe of funds” and is “not indicative of more downgrades to come.”

Taking the Temperature: As we have reported , ESG ratings providers are being subject to scrutiny and potential regulation as a result of concerns regarding the transparency of their methodologies and the lack of consistency in ratings for the same company by different providers. The UK’s Financial Conduct Authority is in the midst of a public consultation on a potential ESG ratings regulatory regime, which closes on June 30. The consultation states that “Treasury considers there is clear benefit to be gained from improving the transparency of methodologies, governance, and processes of ESG ratings providers. These outcomes could be brought about through regulation.” The European Securities and Markets Authority’s (ESMA) Securities and Markets Stakeholder Group (SMSG) earlier this year observed that , with respect to ratings providers, the “methodological choices are presently not always sufficiently disclosed,” and “investors may not be in a position where they can make truly informed decisions, making it necessary for them to compare several ESG ratings and conduct their own research in parallel, often using raw ESG data.” As SMSG observed, the market would benefit from improved “availability, integrity, and transparency of ESG ratings.” The Securities and Exchange Board of India recently sought input into potential ESG ratings regulation, a call for regulation echoed by the International Organization of Securities Commissions .

Despite increased interest from regulators, the ESG ratings industry remains largely unregulated and we expect company ratings and the underlying methodology producing those ratings to remain controversial. We recently reported on the results of the Dow Jones Sustainability Indices Annual Review, which resulted in certain additions to and deletions from the Sustainability Index that provoked comment. We anticipate that calls for regulation will continue while ratings methodologies remain unclear, the sources of information supporting scores varies, and scores diverge among different providers.

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ESG Funds Bleed Less Money in Q2 2024

Redemptions from US sustainable funds continue but are down by half from the first quarter.

Investors pulled $4.7 billion from US sustainable funds in the second quarter of 2024, making it the seventh-consecutive quarter of outflows. These outflows, however, were half of those experienced in the first quarter, which amounted to almost $9 billion.

Meanwhile, the overall US market of funds posted organic growth of 0.3% in the past three months, after expanding by 0.7% in the first quarter of the year. (Quarterly organic growth is calculated by dividing quarterly flows by assets at the beginning of the quarter.)

US Fund Flows: Sustainable Vs. All US Funds (USD Billion)

Although the motivations behind outflows cannot be precisely quantified, several key factors contribute to this trend. These include high interest rates, which have made alternative investment options more appealing and diminish the attractiveness of sustainable funds. Additionally, the mediocre returns of sustainable funds in 2023 have led to investor dissatisfaction and subsequent withdrawals. Concerns about greenwashing have also contributed to reduced investor confidence, as skepticism grows regarding the genuine sustainability credentials of some funds. Furthermore, the increasing politicization and regulatory scrutiny of ESG investing have prompted some investors to reevaluate their positions, resulting in further outflows.

Active ESG funds experienced outflows of $3.7 billion in the second quarter, which is $1 billion less than the redemptions recorded in the previous quarter. Similarly, outflows from index-tracking products slid to $960 million from the restated $4.3 billion of outflows in the first quarter.

ESG bond funds kept positive momentum with inflows of $320 million, down from the restated $868 million in the first quarter. Meanwhile, sustainable equity funds shed $4.7 billion.

The Largest Sustainable Funds Extend Their Outflows

Topping the outflows table was Parnassus Core Equity Fund PRBLX , with redemptions of $758 million. Long known as the largest US sustainable fund, Parnassus Core Equity has been one of the 10 biggest losers in terms of redemptions for more than two years straight, shedding more than $5 billion over that period. Parnassus attributes a portion of the fund’s outflows to the launch of a less expensive collective investment trust and the subsequent conversion of investors from one vehicle to the other. Our data includes only open-end and exchange-traded funds. Parnassus Core Equity Fund focuses on large-cap US companies with sustainable competitive advantages, quality management, and positive ESG performance.

It is followed by Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF EMCR , which bled $484 million in the last quarter. The fund focuses on companies that operate in accordance with market standards on ESG controversy screens, emphasizing sustainability and climate improvement.

Bottom 10 US Sustainable Fund Flows

Meanwhile, iShares ESG Aware MSCI USA ETF ESGU suffered net withdrawals of $439 million, after bleeding $1.8 billion in the previous quarter. The fund experienced outflows for a sixth-consecutive quarter. In 2023, iShares ESG Aware MSCI USA ETF experienced outflows of more than $9 billion. The fund favors stocks with high ESG ratings.

Leaders and Laggards for Q2 Flows

The sustainable fund that collected the largest net flows for the second quarter was First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund GRID , which garnered $456 million. This fund employs a modified market-capitalization-weighting methodology, emphasizing companies engaged in significant smart-grid-related activities.

Next was Fidelity U.S. Sustainability Index Fund FITLX with $246 million in inflows, after collecting more than $430 million in the previous quarter. The fund invests in US companies with high ESG performance relative to their sector peers.

Top 10 US Sustainable Fund Flows

Vanguard continues to have two funds in the bestselling league table: Vanguard ESG US Stock ESGV and Vanguard FTSE Social Index Fund VFTNX . The duo gathered $260 million in the second quarter, after attracting $512 million in the previous quarter.

Assets in Sustainable Funds Remain Roughly Unchanged

In the past three months, assets in US-domiciled sustainable funds remained roughly unchanged at $336 billion at the end of June 2024, helped by market appreciation.

US Sustainable Fund Assets (USD Billion)

BlackRock, Parnassus, and Eaton Vance Are the Top Managers in the Space

Below, we list the top asset managers that are marketing sustainable funds in the United States. BlackRock, the world’s largest manager, tops the list, with $57 billion of assets in ESG-focused open-ended assets and ETFs, at the end of the second quarter. It is followed by Parnassus and Eaton Vance, which includes the Calvert brand, with approximately $39 billion and $36 billion, respectively.

Top Asset Managers by Sustainable Fund Assets in the US

Still Few New Sustainable Fund Launches

The second quarter of 2024 mimics the first quarter, with three new sustainable fund launches.

US Sustainable Fund Launches

Carbon Collective Short Duration Green Bond ETF CCSB focuses on sustainability by investing primarily in investment-grade green or sustainable corporate bonds with an average duration of five years or less. The fund includes bonds that are either self-labeled as green, in line with International Capital Markets Association guidelines, or certified under the Climate Bond Standard.

Invesco MSCI Global Climate 500 ETF KLMT focuses on companies that minimize exposure to physical and transition risks associated with climate change, including those achieving benchmarks for yearly reductions in greenhouse gas emissions relative to their revenue.

Meanwhile, the second quarter saw 12 US sustainable funds being liquidated, including BlackRock Global Impact Fund (BGIMX), JPMorgan Small Cap Sustainable Leaders Fund (VSSLX), and Xtrackers S&P Small Cap 600 ESG ETF (SMLE). The former focused on a wide range of SDG themes, including affordable housing, education and training, green energy, pollution remediation and prevention, as well as sustainable food. Furthermore, ClearBridge All Cap Growth ESG ETF (CACG) and Abrdn Emerging Markets Sustainable Leaders Fund (GIGSX) have been merged with other ESG strategies offered by the same managers.

Regulatory Update

There were no regulatory developments in the United States to report in the second quarter. Climate disclosure regimes (California SB 253 and 261 and the SEC) litigation is still pending. As a reminder, in September 2023, the State of California passed two bills requiring public and private companies to disclose their greenhouse gas emissions (Senate Bill 253) and climate-related financial risks (SB 261) based on a company’s size. While the requirements will not take effect until 2027, investor and regulatory groups have begun to file lawsuits seeking relief from the two bills. On Jan. 30, 2024, groups such as the US Chamber of Commerce, the California Chamber of Commerce, and the American Farm Bureau Federation filed a complaint in the Central District of California against the two bills, arguing that the laws violate the First Amendment by forcing companies to engage in costly speech on climate change. Although these lawsuits seek to challenge only SB 253 and SB 261, the impending ruling may have a broader implication for the SEC’s proposed climate disclosure rules.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies .

More in Sustainable Investing

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About the authors.

Hortense Bioy

Hortense Bioy, CFA, is head of sustainable investing research for Morningstar UK Ltd, a wholly owned subsidiary of Morningstar, Inc. Based in London, Bioy leads Morningstar's environmental, social, and governance research efforts globally, with the objective of educating investors and providing them with the tools they need to evaluate funds through an ESG lens. Prior to assuming this role in February 2021, she was responsible for Morningstar's sustainability research in EMEA for three years.

Before transitioning to a dedicated ESG focus, Bioy was European director of passive strategies research. She led an award-winning team that provides research on exchange-traded funds and index funds. Bioy joined Morningstar as an ETF analyst in 2010 from Bloomberg, where she was a financial journalist. She began her career as a mergers and acquisitions analyst at Société Générale in Hong Kong.

Bioy holds a master's degree in finance from Paris Dauphine University and a postgraduate degree in finance from Paris-Sorbonne University. She also holds the Chartered Financial Analyst® designation.

Investing in Times of Climate Change

5 asset managers earn upgraded esg commitment level ratings, global esg funds hit with outflows for first time in q4, investing in times of climate change 2023, as cop27 focuses on financing climate transition, options for climate fund investors widen, sfdr article 8 and article 9 funds: 2021 in review, global sustainable fund flows: q4 2021 in review, sfdr article 8 and article 9 funds: q3 2021 in review, how can you invest in climate funds, noemi pucci, starbucks: luring brian niccol should stimulate sagging coffee chain, can economists help investors avoid recessions, daniel peris: the case for dividend investing, where to find value in japanese stocks, 5 undervalued stocks that crushed earnings, bonds reclaim their defensive status, 3 great international value etfs, why we think disney stock is a buy, 13 of the best fund managers, 10 top stock picks of the best fund managers, sponsor center.

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• Best ESG Funds

The Best ESG Funds Of August 2024

Updated: Jul 1, 2024, 2:56pm

While some critics condemn ESG funds as “woke” investing, regular investors’ appetites remain strong for these funds, which consider the environmental, social and governance factors of a portfolio’s companies along with the companies’ financial fundamentals.

To help you find the right ESG funds for your portfolio as well as your values, Forbes Advisor has selected what we believe to be the best ESG funds available in the market today. Our picks include both mutual funds and exchange-traded funds in a range of equity and fixed-income centric options.

Why you can trust Forbes Advisor

Our editors are committed to bringing you unbiased ratings and information. Our editorial content is not influenced by advertisers. We use data-driven methodologies to evaluate financial products and companies, so all are measured equally. You can read more about our editorial guidelines and the investing methodology for the ratings below.

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Vanguard ESG U.S. Stock ETF (ESGV)

Pimco enhanced short maturity active esg etf (emnt), nuveen esg dividend etf (nudv), ishares msci global sustainable developmental goals etf (sdg), the best esg mutual funds of august 2024, fidelity u.s. sustainability index fund (fitlx), fidelity international sustainability index fund (fnidx), calvert us mid cap core responsible index fund (cmjax), blackrock sustainable advantage corealpha bond fund (biaax), methodology, what is esg investing, what are esg funds, how do esg funds work, how to choose an esg fund, advisor.com.

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The Best ESG ETFs of August 2024

Expense Ratio

Dividend Yield

Avg. Ann. Return Since Inception (September 2018)

If you had to pick just one ESG exchange-traded fund, the Vanguard ESG U.S. Stock ETF would probably be it. With nearly 1,500 holdings, almost all from the U.S., this ETF hods an extremely well diversified portfolio that meet its environmental, social and governance principles. About 70% of the holdings are large-cap stocks , but it also has exposure to mid- and small-cap names.

ESGV abstains from buying stocks that do not meet its ESG criteria. You won’t find adult entertainment, alcohol, tobacco, cannabis, gambling, weapons, coal, oil, gas, or nuclear power firms in the portfolio. The fund also excludes companies that don’t meet certain human rights and anti-corruption standards.

Note that ESGV’s energy sector weighting is nearly 0%. In contrast, the fund has roughly one-third of its shareholders’ money at work in the technology sector. It has roughly 15% in health care and slightly less in financial services and consumer cyclicals.

Avg. Ann. Return Since Inception (December 2019)

The Pimco Enhanced Short Maturity Active ESG fund aims to preserve capital while maximizing income. This actively managed ETF focuses on the securities of issuers whose ESG practices align with PIMCO’s ESG investment strategy.

EMNT seeks to boost income by investing in high-quality, short-term, dollar-denominated debt. This emphasis positions the fund to benefit from current trends. Interest rate hikes by the Fed make short-term debt increasingly attractive since it’s far less likely than long-term debt to fall in value as rates rise.

In fact, EMNT aims to provide shareholders with higher income than they’d typically expect from a money market mutual fund .

EMNT’s holdings average an effective duration of just short of four months. That’s roughly 50% less than the fund’s Morningstar category average. Effective duration shows the expected price decline of a bond or bond fund when interest rates rise by 1%. In this case, it should decline by about 0.32%.

The fund’s roughly 200 holdings are predominantly U.S. corporate debt and U.S. government agency debt. A small percentage of its portfolio consists of U.S. Treasurys and international debt. Despite being actively managed, the 0.25% management fee is less than two-thirds as much as the 0.405% average for its Morningstar ultrashort-bond-fund category.

Avg. Ann. Return Since Inception (September 2021)

With five decades of experience in ESG investing, Nuveen is a veteran in the responsible investing space. However, the Nuveen ESG Dividend ETF has earned a cautionary note: the fund’s average annual return since inception is negative 0.95%.

NUDV, which opened in September 2021, is too young to have much of a track record. Still, here’s what you should like about the fund: Its trailing 12-month dividend yield is nearly a full percentage point higher than its Morningstar large-cap value fund category average. It’s also higher than the broad overall stock market’s, as measured by the popular S&P 500 Index.

This passively managed fund selects high-dividend U.S. stocks, which have been screened for specific environmental, social and governance ESG criteria. Its top holdings include blue-chip stocks like Pfizer (PFE), Pepsico (PEP), Coca-Cola (KO), Merck (MRK), Home Depot (HD) and Cisco (CSCO). If you want a fund positioned to deliver above-average income yield with ESG investing, consider NUDV.

Avg. Ann. Return Since Inception (April 2016)

The iShares MSCI Global Sustainable Developmental Goals ETF screens for companies that get most of their revenue from products and services provided in ways that aim to alleviate major social and environmental challenges identified by the United Nations Sustainable Development Goals.

Those 17 goals call on nations to pursue policies including clean energy, environmental sustainability and the elimination of hunger. SDG also screens out companies involved in alcohol, civilian firearms, weapons, predatory lending and tobacco.

The fund currently owns about 160 stocks. The biggest subgroup is U.S. companies. The rest are stocks and other securities from outside the U.S., mainly developed markets. The second biggest subgroup is based in Japan. Next are companies in China.

The fund’s largest market sector  weightings are health care and consumer staples, followed by  industrials and real estate. Many non-U.S. companies pay relatively high dividends, which can offset share price declines.

5-Year Avg. Annual Return

The Fidelity U.S. Sustainability Index Fund is a great low-cost, core stock fund for ESG investors. This passive index fund tracks the MSCI USA ESG Index, and the portfolio includes a wide range of different-sized U.S. companies from diverse industries, with varying dividend yields, earnings growth rates and valuation metrics.

The bulk of FITLX’s 273 holdings are large-cap stocks, and the balance are mid-cap names. Most of them are growth or blend oriented. More than half of the fund’s portfolio is made up of technology stocks , health care and financial services stocks.

Over the past two, three and five years, FITLX has outperformed its large-cap blend category average. Its dividend yield is also higher. Note that the fund earns additional income by lending securities to other investors. Finally, the 0.11% annual fee is tough to beat.

The Fidelity International Sustainability Index Fund adds international diversity to your ESG portfolio. It’s a great choice for this market, as in recent months foreign stocks as a group have outperformed U.S. stocks after years of lagging. FNIDX tracks the MSCI All Country World Index (minus the U.S. components).

The fund’s portfolio includes large-caps international stocks , more than 70% of which are from developed markets. The rest are from emerging markets. Companies included in MSCI’s index are screened for environmental, social and governance factors, relative to their sector competitors.

The portfolio includes around 900 holdings. About 21% of its stocks are in financial services, while tech, industrials and consumer cyclicals account for about 12% a piece. Stocks from Japan, the U.K., France, China and Canada are the top geographies represented in FNIDX.

Founded nearly 50 years ago, Calvert is known for investing in responsible businesses across the globe. If you want a fund with hefty exposure to mid-cap stocks , kick the tires on Calvert US Mid Cap Core Responsible Index Fund. Roughly 80% of its portfolio comprises mid-caps.

CMJAX owns the shares of more than 600 companies. Fund manager Thomas Seto assesses up to 200 variables to measure how potential buys fit Calvert’s environmental, social and governance factors. In its proxy votes, the fund has been a big supporter of gender pay equality. It also favors companies with low or no exposure to fossil fuels as well as carbon and toxic emissions.

The fund’s largest segments are industrial stocks , tech, financial services, health care and consumer cyclicals. At $5,000, CMJAX has the highest minimum initial investment requirement of the funds in this list.

The three funds above are index funds, while the BlackRock Sustainable Advantage CoreAlpha Bond Fund is an actively managed option. Bond issuers are screened in part for their potential to deliver positive societal impact. And although the label on the tin is bond fund, BIAAX strives for both capital appreciation and income.

Unfortunately, rising interest rates mean that many fixed-income investments have suffered price declines. A 1% rise in interest rates would typically cause a 6.07% drop in the price of the fund—recall that bond prices move inversely to changes in interest rates. Analysts expect prices to stabilize once interest rate increases stop.

BIAAX owns around 480 bonds with an effective duration of 6.07 years. This sustainable bond fund owns intermediate-term U.S. Treasury, agency and corporate bonds of varying credit quality , mostly investment grade.

*All data is sourced from Morningstar Direct, current as of June 10, 2024, unless noted otherwise. 

Morningstar Direct tracks nearly 600 ESG-focused mutual funds and exchange-traded funds. To varying degrees, the funds decide which securities to buy based on how diligently the underlying companies rank on social, environmental and governance issues.

We began our hunt by paring Morningstar’s master list to 140 funds by excluding options that required minimum initial investments of more than $5,000. We also eliminated funds that did not lend themselves to the creation of a well-diversified mix of stock and fixed income investments.

Seeking funds with reasonable fees, we then screened out any funds with an annual expense ratio that was above 0.60%. For diversity, we selected passively managed as well as actively managed portfolios.

To meet the requirements of a very broad audience, so we deliberately excluded narrowly focused sector funds, geographically specialized funds and age group-specific target date funds. These screens left us with 18 choices.

The final list of the eight best ESG funds includes broadly diversified choices that are suitable for the widest possible group of investors. We included short and core fixed-income funds along with U.S. and international ESG equity funds. You might create an entire ESG portfolio from funds on the list, or add a few to an existing investment portfolio.

To learn more about our rating and review methodology and editorial process, check out our guide on  how Forbes Advisor rates investing products .

ESG investing is a strategy where people put their money to work in companies that have a positive net impact on the environment and society, led by a management team that achieves these goals via better corporate governance. The acronym ESG stands for environmental, social and governance, for the three core pillars of this investing philosophy:

• Environment. How does a company manage its environmental impact? How much progress has it made in utilizing renewable energy sources? Is it attempting to minimize its carbon footprint? How does it handle air or water pollution arising from its operations? What is its attitude toward climate change? What about sustainability efforts in its supply chain?
• Social. How does the company improve its social impact? Does it offer fair levels of compensation for employees? What are its policies regarding LGBTQ+ equality, racial diversity and inclusive hiring practices? How does a company advocate for social good in the wider world, beyond its limited sphere of business?
• Governance. How does management and the board of directors address the interests of the company’s employees, shareholders, and customers? Is executive compensation balanced compared to pay for other employees? How does the company’s board and management drive positive change? Does the board foster diversity in leadership? Are its interactions with shareholders positive?

This is only a sample of the kinds of questions ESG investors ask themselves when they evaluate companies. ESG relies on independent research organizations to score public companies for their performance in addressing these issues. ESG scores aim to provide objective, credible ratings of how well a company manages their environmental, social and governance policies.

ESG funds are thematic mutual funds or exchange-traded funds that consider environmental, social, and governance factors in their investment strategies.

They employ a range of different strategies to incorporate ESG criteria when building their portfolios. Some use positive screening, actively seeking out companies with strong ESG performance. Others use negative screening to exclude companies involved in controversial activities such as tobacco, weapons, or fossil fuels.

Choosing ESG funds can help align your investments with your values and support companies that prioritize sustainability, social responsibility and good governance. However, it’s important to note that ESG investing does not guarantee superior financial returns.

Like any other type of fund, ESG funds adopt one of two possible approaches to portfolio construction. They passively track an index or actively pick investments based on their own research. We’ve included both active and passive ESG funds in our listing.

Active ESG mutual funds and ETFs conduct their own research to identify funds that meet their criteria. Passive ESG funds rely on third-party indexes to screen companies for their compliance with different environmental, social and governance criteria. These indexes choose companies whose ESG scores are above set thresholds, and ESG fund managers build a portfolio of investments that track the index’s performance.

For example, take the MSCI KLD 400 Social Index , launched in 1990. It tracks 400 U.S. companies with outstanding ESG ratings, and includes a mix of small-cap, mid-cap and large-cap companies .

Our profiles of the best ESG funds include a summary of how each fund constructs its portfolio, and whether it tracks an index or uses an active strategy for its portfolio choices. Understanding the ESG methodologies used by each fund is key for investors who want to align their choices with their own views on environmental, social and governance issues.

Follow these steps to help choose an ESG fund that aligns with your investment goals and values:

• Define your ESG focus. Are you primarily focused on environmental issues? Are positive social outcomes your greatest concern? Clarifying your objectives will help you narrow your ESG focus.
• Research ESG fund strategies. Funds employ a range of strategies for accomplishing their ESG missions. Some may prioritize positive screening, actively selecting companies with strong ESG performance. Others may emphasize negative screening to exclude companies involved in controversial industries.
• Understand ESG criteria. There is no universal standard governing all ESG criteria, so it’s important to understand what metrics your target funds are employing. Look for transparency and whether managers consider robust, reliable data sources.
• Evaluate the fund’s track record. Sustained, positive investment returns are still a focus for ESG investors. Review the fund’s historical performance—just keep in mind that past performance is not indicative of future results.
• Consider fees and costs. ESG funds are known for having higher expense ratios than other types of funds. Compare the fees associated with your fund to ensure you’re minimizing your costs. Higher fees can erode your returns over time.
• Seek out independent ratings and certifications. Consider independent ratings and certifications provided by organizations such as Morningstar, MSCI, or the United Nations-supported Principles for Responsible Investment (PRI). These ratings can provide additional insights into a fund’s ESG credentials and commitment to sustainable investing.

It’s essential to conduct thorough research and due diligence to choose an ESG fund that aligns with your values, investment objectives and risk tolerance . If you’re unsure about selecting an ESG fund or need personalized guidance, talk to a financial advisor who can help you navigate the available options based on your specific needs.

The author(s) held no positions in the securities discussed in the post at the original time of publication.

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Friedberg is a former investment portfolio manager, university finance instructor and author of three books including "Personal Finance; An Encyclopedia of Modern Money Management." Her work has been featured in national investment publications such as Forbes Advisor, Investopedia, U.S.News and World Report, Yahoo Finance, GoBankingRates and InvestorPlace. She is a regular panelist on the Money Tree Investing Podcast and owns BarbaraFriedbergPersonalFinance.com.

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We are proud to be a leader in driving ESG and Climate transparency to help provide institutional investors and companies with much needed clarity as they sharpen their focus on the financial impact of climate change and raise awareness of the value of ESG data and ratings and improve disclosure standards.

Our public ESG Ratings & Climate corporate search tool allows you to search over 2,900 companies that are constituents of the MSCI All Country World Index (ACWI). You can search by company name or ticker to view the ESG and climate risks and opportunities the company might face, including: Implied Temperature Rise, Decarbonization Targets, ESG Ratings, ESG Controversies, Business Involvement Screens and SDG Net Alignment. We have made recent enhancements to the MSCI Implied Temperature Rise Model, read the summary of the enhancements here .

If the company you search for does not appear but is in our MSCI ESG Research coverage universe, this means that it is not in the MSCI ACWI Index at this time.

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This information is subject MSCI Inc’s and MSCI ESG Research LLC’s terms of use that you can find here:  https://www.msci.com/terms-of-use  and here  additional-terms-of-use-msci-esg-research-llc  

This information may not be used for corporate financing purposes (including, without limitation, ESG-linked loans, credit facilities, securities or structured products), as a basis for any financial instruments or products (including, without limitation, passively managed funds and index-linked derivative securities) or other products or services, to manage any funds or portfolios, to verify or correct data in any other compilation of data or index, to create any derivative works, nor to create any other data or index (custom or otherwise), without MSCI's prior written permission.  

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• NAV as of Aug 13, 2024 $32.55 52 WK: 28.32 - 35.03
• 1 Day NAV Change as of Aug 13, 2024 0.93 (2.94%)
• NAV Total Return as of Aug 12, 2024 YTD: -7.95%
• Fees as stated in the prospectus Expense Ratio: 0.47%

1. Exposure to artificial intelligence (AI) innovators: Gain targeted exposure to the full value chain of companies at the forefront of AI innovation in areas including generative AI, AI data & infrastructure, AI software, and AI services.

2. Harness mega forces: Seek to capture targeted long-term growth opportunities with companies that could play an essential role in the future of digital disruption and AI amid significant advances in the growth of AI capabilities.

3. Complement your portfolio: Use in a portfolio as a granular technology exposure as a replacement or complement to a broad technology sector exposure.

INVESTMENT OBJECTIVE

The Fund seeks to track the investment results of an index composed of U.S. and non-U.S.companies that provide products and services that are expected to contribute to artificial intelligence (“AI”) technologies in areas including generative AI, AI data and infrastructure, AI software, and AI services.

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Portfolio Characteristics

Sustainability characteristics.

Sustainability Characteristics provide investors with specific non-traditional metrics. Alongside other metrics and information, these enable investors to evaluate funds on certain environmental, social and governance characteristics. Sustainability Characteristics do not provide an indication of current or future performance nor do they represent the potential risk and reward profile of a fund. They are provided for transparency and for information purposes only. Sustainability Characteristics should not be considered solely or in isolation, but instead are one type of information that investors may wish to consider when assessing a fund. Learn more

This fund does not seek to follow a sustainable, impact or ESG investment strategy. The metrics do not change the fund’s investment objective or constrain the fund’s investable universe, and there is no indication that a sustainable, impact or ESG investment strategy will be adopted by the fund. For more information regarding the fund's investment strategy, please see the fund's prospectus.

Review the MSCI methodologies behind Sustainability Characteristics using the links below.

What is the Implied Temperature Rise (ITR) metric? Learn what the metric means, how it is calculated, and about the assumptions and limitations for this forward-looking climate-related metric.

To address climate change, many of the world's major countries have signed the Paris Agreement. The temperature goal of the Paris Agreement is to limit global warming to well below 2°C above pre-industrial levels, and ideally 1.5 °C, which will help us avoid the most severe impacts of climate change.

What is the ITR metric?

The ITR metric is used to provide an indication of alignment to the temperature goal of the Paris Agreement for a company or a portfolio. ITR employs open source 1.55° C decarbonization pathways derived from the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). These pathways can be regional and sector specific and set a net zero target of 2050, in line with GFANZ (Glasgow Financial Alliance for Net Zero) industry standards. We make use of this feature for all GHG scopes. This enhanced ITR model was implemented by MSCI on February 19, 2024.

How is the ITR metric calculated?

The ITR metric is calculated by looking at the current emissions intensity of companies within the fund's portfolio as well as the potential for those companies to reduce its emissions over time. If emissions in the global economy followed the same trend as the emissions of companies within the fund's portfolio, global temperatures would ultimately rise within this band.

Note, only corporate issuers are covered within the calculation. A summary explanation of MSCI’s methodology and assumptions for its ITR metric can be found here.

Because the ITR metric is calculated in part by considering the potential for a company within the fund’s portfolio to reduce its emissions over time, it is forward-looking and prone to limitations. As a result, BlackRock publishes MSCI’s ITR metric for its funds in temperature range bands. The bands help to underscore the underlying uncertainty in the calculations and the variability of the metric.

What are the key assumptions and limitations of the ITR metric?

This forward-looking metric is calculated based on a model, which is dependent upon multiple assumptions. Also, there are limitations with the data inputs to the model. Importantly, an ITR metric may vary meaningfully across data providers for a variety of reasons due to methodological choices (e.g., differences in time horizons, the scope(s) of emissions included and portfolio aggregation calculations).

There is not a universally accepted way to calculate an ITR. There is not a universally agreed upon set of inputs for the calculation. At present, availability of input data varies across asset classes and markets. To the extent that data becomes more readily available and more accurate over time, we expect that ITR metric methodologies will evolve and may result in different outputs. Funds may change bands as methodologies evolve. Where data is not available, and / or if data changes, the estimation methods vary, particularly those related to a company’s future emissions.

The ITR metric estimates a fund’s alignment with the Paris Agreement temperature goal based on a credibility assessment of stated decarbonization targets. However, there is no guarantee that these estimates will be reached. The ITR metric is not a real time estimate and may change over time, therefore it is prone to variance and may not always reflect a current estimate.

The ITR metric is not an indication or estimate of a fund’s performance or risk. Investors should not rely on this metric when making an investment decision and instead should refer to a fund’s prospectus and governing documents. This estimate and the associated information is not intended as a recommendation to invest in any fund, nor is it intended to indicate any correlation between a fund’s ITR metric and its future investment performance.

To be included in MSCI ESG Fund Ratings, 65% (or 50% for bond funds and money market funds) of the fund’s gross weight must come from securities with ESG coverage by MSCI ESG Research (certain cash positions and other asset types deemed not relevant for ESG analysis by MSCI are removed prior to calculating a fund’s gross weight; the absolute values of short positions are included but treated as uncovered), the fund’s holdings date must be less than one year old, and the fund must have at least ten securities.

Business Involvement

Business Involvement metrics can help investors gain a more comprehensive view of specific activities in which a fund may be exposed through its investments.

Business Involvement metrics are not indicative of a fund’s investment objective, and, unless otherwise stated in fund documentation and included within a fund’s investment objective, do not change a fund’s investment objective or constrain the fund’s investable universe. For more information regarding a fund's investment strategy, please see the fund's prospectus.

Review the MSCI methodology behind the Business Involvement metrics, using links below.

Business Involvement metrics are calculated by BlackRock using data from MSCI ESG Research which provides a profile of each company’s specific business involvement. BlackRock leverages this data to provide a summed up view across holdings and translates it to a fund's market value exposure to the listed Business Involvement areas above.

Business Involvement metrics are designed only to identify companies where MSCI has conducted research and identified as having involvement in the covered activity. As a result, it is possible there is additional involvement in these covered activities where MSCI does not have coverage. This information should not be used to produce comprehensive lists of companies without involvement. Business Involvement metrics are only displayed if at least 1% of the fund’s gross weight includes securities covered by MSCI ESG Research.

The amounts shown above are as of the current prospectus, but may not include extraordinary expenses incurred by the Fund over the past fiscal year. Amounts are rounded to the nearest basis point, which in some cases may be "0.00".

In general, the values shown for “market value,” “weight,” and “notional value” (the “calculated values”) are based off of a price provided by a third-party pricing vendor for the portfolio holding and do not reflect the impact of fair valuation (“the vendor price”). The vendor price is not necessarily the price at which the Fund values the portfolio holding for the purposes of determining its net asset value (the “valuation price”). Additionally, where applicable, foreign currency exchange rates with respect to the portfolio holdings denominated in non-U.S. currencies for the valuation price will be generally determined as of the close of business on the New York Stock Exchange, whereas for the vendor price will be generally determined as of 4 p.m. London. The calculated values may have been different if the valuation price were to have been used to calculate such values. The vendor price is as of the most recent date for which a price is available and may not necessarily be as of the date shown above.

For Russian equity securities, as well as American Depositary Receipts and Global Depositary Receipts evidencing ownership of Russian equity securities and for which trading has been suspended, the calculated values are based on the Fund’s valuation price.

Please see the “Determination of Net Asset Value” section of each Fund’s prospectus for additional information on the Fund’s valuation policies and procedures.

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Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares ETF and BlackRock Fund prospectus pages. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. Before engaging Fidelity or any broker-dealer, you should evaluate the overall fees and charges of the firm as well as the services provided. Free commission offer applies to online purchases of select iShares ETFs in a Fidelity account. The sale of ETFs is subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain Fidelity Brokerage Services platforms and investment programs. Please note, this security will not be marginable for 30 days from the settlement date, at which time it will automatically become eligible for margin collateral. Additional information about the sources, amounts, and terms of compensation can be found in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). ©2024 BlackRock, Inc. All rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, BUILD ON BLACKROCK, ALADDIN, iSHARES, iBONDS, iTHINKING, iSHARES CONNECT, FUND FRENZY, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, BUILT FOR THESE TIMES , the iShares Core Graphic, CoRI and the CoRI logo are registered and unregistered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners. iCRMH0424U/S-3489128

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Important Information

Review the MSCI methodology behind the Sustainability Characteristics and Business Involvement metrics: 1 ESG Fund Ratings ; 2 Index Carbon Footprint Metrics ; 3 Business Involvement Screening Research ; 4 ESG Screened Index Methodology ; 5 ESG Controversies ; 6 MSCI Implied Temperature Rise

For funds with an investment objective that include the integration of ESG criteria, there may be corporate actions or other situations that may cause the fund or index to passively hold securities that may not comply with ESG criteria. Please refer to the fund’s prospectus for more information. The screening applied by the fund's index provider may include revenue thresholds set by the index provider. The information displayed on this website may not include all of the screens that apply to the relevant index or the relevant fund. These screens are described in more detail in the fund’s prospectus, other fund documents, and the relevant index methodology document.

Certain information contained herein (the “Information”) has been provided by MSCI ESG Research LLC, a RIA under the Investment Advisers Act of 1940, and may include data from its affiliates (including MSCI Inc. and its subsidiaries (“MSCI”)), or third party suppliers (each an “Information Provider”), and it may not be reproduced or redisseminated in whole or in part without prior written permission. The Information has not been submitted to, nor received approval from, the US SEC or any other regulatory body. The Information may not be used to create any derivative works, or in connection with, nor does it constitute, 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. Some funds may be based on or linked to MSCI indexes, and MSCI may be compensated based on the fund’s assets under management or other measures. MSCI has established an information barrier between equity index research and certain Information. None of the Information in and of itself 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. Neither MSCI ESG Research nor any Information Party makes any representations or express or implied warranties (which are expressly disclaimed), nor shall they incur liability for any errors or omissions in the Information, or for any damages related thereto. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares Fund and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

If the Fund invests in any underlying fund, certain portfolio information, including sustainability characteristics and business-involvement metrics, provided for the Fund may include information (on a look-through basis) of such underlying fund, to the extent available.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets or in concentrations of single countries.

Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market.

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the fund. Any applicable brokerage commissions will reduce returns. Beginning August 10, 2020, market price returns for BlackRock and iShares ETFs are calculated using the closing price and account for distributions from the fund. Prior to August 10, 2020, market price returns for BlackRock and iShares ETFs were calculated using the midpoint price and accounted for distributions from the fund. The midpoint is the average of the bid/ask prices at 4:00 PM ET (when NAV is normally determined for most ETFs). The returns shown do not represent the returns you would receive if you traded shares at other times.

Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.

Certain sectors and markets perform exceptionally well based on current market conditions and iShares and BlackRock Funds can benefit from that performance. Achieving such exceptional returns involves the risk of volatility and investors should not expect that such results will be repeated.

Distribution Yield and 12m Trailing Yield results may have period over period volatility due to factors including tax considerations such as treatment of passive foreign investment companies (PFICs), treatment of defaulted bonds or excise tax requirements; exceptional corporate actions; seasonality of dividends from underlying holdings; significant fluctuations in fund shares outstanding; or fund capital gain distributions.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

Although BlackRock shall obtain data from sources that BlackRock considers reliable, all data contained herein is provided “as is” and BlackRock makes no representation or warranty of any kind, either express or implied, with respect to such data, the timeliness thereof, the results to be obtained by the use thereof or any other matter. BlackRock expressly disclaims any and all implied warranties, including without limitation, warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose.

BlackRock provides compensation in connection with obtaining or using third-party ratings and rankings.

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Bloomberg, BlackRock Index Services, LLC, Cboe Global Indices, LLC, Cohen & Steers, European Public Real Estate Association (“EPRA® ”), FTSE International Limited (“FTSE”), ICE Data Indices, LLC, NSE Indices Ltd, JPMorgan, JPX Group, London Stock Exchange Group (“LSEG”), MSCI Inc., Markit Indices Limited, Morningstar, Inc., Nasdaq, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), Nikkei, Inc., Russell, S&P Dow Jones Indices LLC or STOXX Ltd. None of these companies make any representation regarding the advisability of investing in the Funds. With the exception of BlackRock Index Services, LLC, who is an affiliate, BlackRock Investments, LLC is not affiliated with the companies listed above.

Neither FTSE, LSEG, nor NAREIT makes any warranty regarding the FTSE Nareit Equity REITS Index, FTSE Nareit All Residential Capped Index or FTSE Nareit All Mortgage Capped Index. Neither FTSE, EPRA, LSEG, nor NAREIT makes any warranty regarding the FTSE EPRA Nareit Developed ex-U.S. Index, FTSE EPRA Nareit Developed Green Target Index or FTSE EPRA Nareit Global REITs Index. “FTSE®” is a trademark of London Stock Exchange Group companies and is used by FTSE under license.

© 2024 BlackRock, Inc. BLACKROCK, BLACKROCK SOLUTIONS, BUILD ON BLACKROCK, ALADDIN, iSHARES, iBONDS, FACTORSELECT, iTHINKING, iSHARES CONNECT, FUND FRENZY, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, BUILT FOR THESE TIMES, the iShares Core Graphic, CoRI and the CoRI logo are trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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TeamViewer maintains AAA score in MSCI ESG Rating

• CSR Impact Article

We are pleased to announce TeamViewer has once again achieved an AAA rating in the MSCI ESG Rating for 2024 — maintaining our leading position in the rating. Our overall score has improved from 6.8 to 7.1. We remain committed to improving our performance and making a positive impact in the key areas of environmental, social and governance.

As of 2024, TeamViewer ranks in the top 13% of global companies in the Software and Services industry. The MSCI ESG Rating report evaluates business practices related to the three main ESG pillars, rating each area a score between 0 and 10. TeamViewer received the following scores:

• Environmental: 6.4
• Social: 6.9
• Governance: 7.5

Our governance score of 7.5 positions us among the highest-scoring companies in our sector and underscores our leadership in governance practices both locally and globally.

Michael Wilkens, Chief Financial Officer at TeamViewer, said, "Securing another AAA rating is a strong endorsement of our dedication to sustainable practices. It not only validates our ongoing initiatives but also motivates us to push further. Our commitment to sustainability is an integral part of our business strategy, ensuring that we deliver long-term value to our stakeholders and make a positive contribution to the global community.”

TeamViewer is deeply committed to its global sustainability framework c-a-r-e , with specific targets including achieving Net-Zero by 2040 – 10 years earlier than proposed by the Science Based Targets initiative.

In line with our sustainability goals, TeamViewer remote connectivity solutions enable customers to reduce their carbon footprint by minimizing travel. A recent study showed that TeamViewer users and customers avoided 41 million tons of CO2 emissions, primarily by reducing the need for travel through remote connections. Our Product Carbon Footprint (PCF) has also been verified to ensure transparency and allow our customers to track their environmental impact.

We look forward to continuing our journey towards sustainability and making a significant positive impact on our industry and the world.