Please upgrade your browser

We take your security very seriously. In order to protect you and our systems, we are making changes to all HSBC websites that means some of the oldest web browser versions will no longer be able to access these sites. Generally, the latest versions of a browser (like Edge, Chrome, Safari, etc.) and an operating system family (like Microsoft Windows, MacOS) have the most up-to-date security features.

If you are seeing this message, we have detected that you are using an older, unsupported browser.

See how to update your browser

ESG Scoring: It’s All Relative

Analysing ESG scoring methodologies
11 February 2021
    Download the full reportPDF, 5.52MB

    ESG Scoring: It’s All Relative

    ESG scoring is a fundamental building block in the ESG index construction process. These scores provide a means of assessing the ESG credentials of companies in a simplified, intuitive way. ESG scores can be embedded within the index construction process through either tilting towards companies with stronger ESG profiles or excluding those which have weaker ESG credentials. While many ESG indices rely on other criteria too within their index construction rules, these scores often provide a starting point for any security selection framework.

    Beyond index construction, ESG scores have other important uses including manager due diligence and risk assessments. They can also be used to inform a portfolio construction process: whether referring to equity, fixed income or multi-asset. ESG scores can be used at either the security, sector or index level to construct portfolios which have more robust ESG characteristics.

    But the use of ESG scores entails important choices which need to be understood. In this paper, we investigate how ESG scores can differ across providers and how these differences in turn may lead to biases in the index construction processes. Understanding the strengths and weaknesses of the ESG scoring system is important as the resulting portfolio will embed the inbuilt ‘ESG philosophy’ of the score provider.

    We start with an introduction to ESG scoring methodologies comparing two of the household names in the field: MSCI and FTSE Russell. We look at the differences between their respective scores at the individual security, sector and country level using a broad universe of 4,250 companies which have ESG ratings available from both index providers. The aim is to try and identify similarities and differences in the output from their scoring methodologies which may inform us of any biases.