Metrics for Measuring a Company's ESG Practices

Did you know there are several third-party entities that rate and evaluate companies based on ESG criteria?

If you’re like many investors who make efforts to reduce their carbon footprint by using energy-efficient appliances or giving their patronage to companies that have ethical manufacturing operations, then chances are you’ve looked into investing in ESG companies.

But how do you know that a company has implemented environmentally friendly practices or is truly socially responsible?

In most cases it requires some research on the investor's behalf, and while many companies will provide information about their ESG practices, investors would like to see something like a third-party certification, equivalent to an Energy Star rating or a USDA Organic certification.

While there is no single entity that sets standards and measures how well a company adheres to those standards, there are several third-party entities that rate and evaluate companies based on ESG criteria.

Morningstar Sustainability Rating for Funds

One of the more popular sources for independent analysis and evaluations of a variety of investment options, Morningstar also has a variety of tools to evaluate ESG funds. The primary tool, the Morningstar Sustainability Rating, uses ESG analytics from Sustainalytics, a leading provider of ESG research, to calculate how involved a company is with ESG issues, whether they have been involved in any ESG-related controversies and more. Through a series of calculations based on several factors, a company is given a rating between one and five. How Morningstar arrives at these ratings is highly methodical. For those who are interested, they are quite transparent about their methodology, which can be found here.

MSCI ESG Ratings

MSCI ESG Fund Metrics rate mutual funds and ETFs based on over 100 fund metrics. These metrics are broken into three categories — sustainable impact, values alignment, and ESG risk. Each metric aims to provide greater transparency and helps measure the environmental, social, and governance characteristics of each investment. Overall ESG scores are then calculated using a weighted average of the underlying holdings, with 0 being the lowest score and 10 being the highest. MSCI's rating system also gives investors a clearer picture of how a company might perform relative to industry-specific risks and their ability to manage those risks.

Bloomberg’s ESG Analysis

By studying over 20,000 companies and using the ESG data disclosed from more than 9,100 companies, Bloomberg has composed an in-depth database to give the public information on ESG practices. This information can tell investors about everything from gender diversity on the board to emission standards. What’s useful is the variety of tools they have developed to give a snapshot into a company’s practices, such as the ESG Scorecard, Carbon Footprint Tool, and ratios and key performance indicators to compare companies.

It’s important to note that just because a company does not have a Morningstar or MSCI rating does not mean that it should be ruled out by ESG investors. Because not all environmentally and socially responsible companies are ranked, you should not think of the above metrics and ratings as a complete picture. Think of it as a guide to help you find and evaluate potential investment options.

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