ESG Raters MSCI Sustainalytics: How They Differ

Key Takeaways

• MSCI uses a relative AAA-to-CCC scale grading companies against industry peers; Sustainalytics uses an absolute 0-to-100 unmanaged-risk score where lower is better.
• Berg, Koelbel, and Rigobon (2022) found average pairwise correlation of only 0.54 across major raters, with measurement differences driving 56% of the divergence.
• A common investor mistake is switching raters mid-strategy or directly comparing an MSCI letter grade with a Sustainalytics risk score, as the two answer fundamentally different questions.
• MSCI and Sustainalytics ratings feed benchmark indexes, SFDR fund classifications, and Morningstar Sustainability Globe ratings, making rater choice a portfolio-construction decision.

What It Is

An ESG rater is a specialist data firm that collects company disclosures and third-party data, scores environmental, social, and governance factors, and sells the output to asset managers, index providers, and corporates. The two dominant names are MSCI ESG Research (owned by MSCI Inc.) and Sustainalytics (owned by Morningstar since 2020). S&P Global, ISS ESG, Refinitiv, Moody's ESG, and FTSE Russell are also major players.

Ratings feed benchmark indexes (MSCI ESG Leaders, FTSE4Good), fund-level sustainability labels (Morningstar Globes), and regulatory classifications under SFDR in Europe.

The Intuition

Investors need a second opinion on companies the way they need credit ratings. The rater's job is to translate sprawling sustainability reports into a comparable grade so a portfolio manager can screen a thousand names at once. The problem: there is no agreed definition of "ESG performance," so each vendor builds its own.

The two leaders took fundamentally different routes. MSCI measures relative standing inside an industry. Sustainalytics measures absolute residual risk after management efforts. Those choices drive most of the disagreement.

How It Works

MSCI ESG Ratings

• Scale: Seven-band letter grade from AAA (Leader) down through AA, A, BBB, BB, B to CCC (Laggard).
• Logic: Industry-relative. MSCI identifies the "key issues" material to each Global Industry Classification Standard (GICS) sub-industry, scores the company on those issues, and ranks it against peers.
• Output categories: Leaders (AAA, AA), Average (A, BBB, BB), Laggards (B, CCC).
• Meaning: An AAA in tobacco does not mean tobacco is safe. It means that firm manages its material ESG risks better than other tobacco firms.

Sustainalytics ESG Risk Rating

• Scale: Numerical 0 to 100, lower is better. Bands are Negligible (0-10), Low (10-20), Medium (20-30), High (30-40), Severe (40+).
• Logic: Absolute unmanaged risk. Sustainalytics calculates exposure to material ESG issues, subtracts management effectiveness, and reports the residual (the "management gap").
• Meaning: A score of 25 means the company has measurable unmanaged ESG risk regardless of how it compares to peers. The rating is directly comparable across industries.

Why Ratings Diverge

Berg, Koelbel, and Rigobon (2022) showed that correlation between raters averages 0.54. They decomposed the gap into three drivers:

• Measurement (56%): different raters score the same indicator differently, because they use different data sources and judgement calls.
• Scope (38%): they pick different indicators, because they disagree on what ESG means.
• Weights (6%): they combine indicators with different weights.

Industry-relative versus absolute framing is a scope decision and a weights decision combined. That alone can push a company from top quartile on one scale to bottom quartile on another.

Worked Example

Consider an integrated oil major. On MSCI, it can receive an A rating because it runs better safety programmes, has a lower emissions intensity than peers, and publishes stronger climate disclosures than rival oil companies. The rating is peer-relative.

On Sustainalytics, the same firm might score a 35 (High Risk) because the business model still carries substantial unmanaged environmental exposure compared to firms in any industry. The two outputs do not contradict. They answer different questions. MSCI answers "Is this the best-run oil major?" Sustainalytics answers "How much unmanaged ESG risk is left in this business?"

An investor using both reads them as complementary. An investor using only MSCI may miss the absolute climate exposure. An investor using only Sustainalytics may miss that some oils manage themselves far better than others.

Common Mistakes

1. Switching raters mid-strategy. If a fund's methodology document references one rater and the portfolio is built with another, the resulting ESG profile will drift. Stick to one primary source and know its logic.

2. Reading letter grades and risk scores as the same thing. An MSCI AA and a Sustainalytics Low Risk are not equivalent; they are measured on different scales with different baselines. A direct mapping does not exist.

3. Ignoring the controversy overlay. Both raters overlay controversy screens (fines, scandals, lawsuits) that can drag a rating down mid-cycle. A rating from last quarter may already be stale if news has hit.

4. Assuming index inclusion equals a clean rating. Index providers publish thresholds, but inclusion often reflects weighted and netted scores. A component of an ESG index can still have material unmanaged risk on one or two issues.

Frequently Asked Questions

Q: What are ESG raters MSCI and Sustainalytics in simple terms? They are specialist data firms that collect company disclosures, score environmental, social, and governance factors, and sell ratings to asset managers and index providers. MSCI and Sustainalytics are the two largest, together covering thousands of public companies globally.

Q: How do ESG rater choices affect investment decisions? A fund built on MSCI ratings will hold different companies at different weights than one built on Sustainalytics, even with the same stated strategy. Index inclusion, SFDR product classification, and Morningstar Globe ratings all depend on which rater's output is used.

Q: What is a real-world example of MSCI versus Sustainalytics divergence? An integrated oil major can receive an MSCI A rating because it manages climate better than peer oil companies, while Sustainalytics simultaneously scores it High Risk (above 30) because the business model still carries large unmanaged environmental exposure regardless of peers.

Q: How can investors use MSCI and Sustainalytics together without being confused? Read them as complementary, not competing. MSCI answers "Is this company a well-managed ESG risk relative to sector peers?" Sustainalytics answers "How much unmanaged ESG risk is left in this business in absolute terms?" Using both gives a fuller picture.

Q: How is MSCI ESG rating different from Sustainalytics ESG Risk Rating? MSCI is industry-relative, an AAA oil company is only the best-run oil company, not a green company. Sustainalytics is absolute, a score of 35 means meaningful unmanaged risk regardless of sector. The scales and baselines are incompatible and should never be directly compared.

Sources

1. MSCI ESG Research. "ESG Ratings Methodology." https://www.msci.com/documents/1296102/34424357/MSCI+ESG+Ratings+Methodology.pdf
2. Morningstar Sustainalytics. "ESG Risk Ratings Methodology Abstract, Version 3.1." June 2024. https://www.sustainalytics.com/docs/knowledgehublibraries/default-document-library/sustainalytics_-esg-risk-ratings_-version-3-1_-methodology-abstract_-june-2024.pdf
3. Berg, F., Koelbel, J.F., Rigobon, R. (2022). "Aggregate Confusion: The Divergence of ESG Ratings." Review of Finance, 26(6), 1315-1344. https://academic.oup.com/rof/article/26/6/1315/6590670

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.