Methodology Document
MSCI ESG Research LLC

MSCI ESG Ratings
Methodology:
Carbon Emissions
Key Issue
MSCI ESG Research LLC
October 2023

OCTOBER 2023

MSCI ESG Ratings Methodology: Carbon Emissions Key Issue | October 2023

Contents

Introduction ................................................................................... 3
Risks associated with this Key Issue ........................................... 4
Carbon Emissions Key Issue Score ............................................. 4
Carbon Emissions Management Score ....................................... 4
Management Score category: Targets Score .......................... 5
Management Score category: Mitigation Score ...................... 5
Management Score category: Performance Score.................. 6
Carbon Emissions Exposure Score .............................................. 7
Business Exposure Score.......................................................... 8
Business Segment Exposure Scores..................................... 8
Geographic Exposure Score .................................................... 10
Geographic Segment Exposure Scores............................... 10
Data Sources............................................................................ 11© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ESG Ratings Methodology: Carbon Emissions Key Issue | October 2023

Introduction
This document provides essential information on the components of the Carbon
Emissions Key Issue to enable users of ESG Ratings to understand how our outputs
are determined. Carbon Emissions is a Key Issue in the Environmental Pillar of the
MSCI ESG Ratings model. Companies are evaluated on the carbon intensity of theiroperations and their efforts to manage climate-related risks and opportunities.
For additional details on the MSCI ESG Ratings Model, refer to Section 2, Data,
ratings and scores, of “ESG Ratings Methodology.”
Exhibit 1: MSCI ESG Key Issue hierarchy
3 Pillars

10 Themes
Climate Change

Natural Capital
Environment
Pollution & Waste

Environmental Opportunities

Human CapitalSocial

Product Liability

Stakeholder Opposition
Social Opportunities

GovernanceCorporate Governance

33 ESG Key Issues
Carbon Emissions
Climate Change Vulnerability
Financing Environmental Impact
Product Carbon Footprint
Biodiversity & Land Use
Raw Material Sourcing
Water Stress
Electronic Waste
Packaging Material & Waste
Toxic Emissions & Waste
Opportunities in Clean Tech
Opportunities in Green Building
Opportunities in Renewable Energy
Health & Safety
Human Capital Development
Labor Management
Supply Chain Labor Standards
Chemical Safety
Consumer Financial Protection
Privacy & Data Security
Product Safety & Quality
Responsible Investment
Community Relations
Controversial Sourcing
Access to Finance
Access to Health Care
Opportunities in Nutrition & Health
Board
Pay
Ownership & Control© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ESG Ratings Methodology: Carbon Emissions Key Issue | October 2023

3 Pillars

10 Themes
Corporate Behavior

33 ESG Key Issues
Accounting
Business Ethics
Tax Transparency

Risks associated with this Key Issue•

Increased costs linked to carbon pricing or trading.

•

Facility retrofits or operational disruptions due to regulatory caps.

Carbon Emissions Key Issue Score
The Carbon Emissions Key Issue Score evaluates the company’s level of exposure
to, and management of risks on this Key Issue. The Key Issue Score is based on the
Exposure Score and the Management Score using the formula below. The Exposure
Score and the Management Score are combined such that a higher level of exposure
requires a higher level of demonstrated management capability in order to achieve
the same overall Key Issue Score.
Where:•••𝐾𝐾𝐾𝐾𝑖𝑖 = 7 − (max (𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖 , 2) − 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑖𝑖 )𝐾𝐾𝐾𝐾𝑖𝑖 is the Key Issue Score for company 𝑖𝑖.

𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖 is the Exposure Score for company 𝑖𝑖.

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑖𝑖 is the Management Score for company 𝑖𝑖.

Carbon Emissions Management Score
The Carbon Emissions Management Score evaluates the company’s ability to
manage its exposure to risks on this Key Issue. It is based on an average of thescores associated with each of the Management Score categories listed below.
These scores are derived from data points that are scored on a 0-10 scale, with 10
corresponding to best practice and 0 corresponding to lack of management. Refer to
Section 3.3, Analyzing risk management, of “ESG Ratings Methodology” foradditional details. Sources are company disclosures except where otherwise© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ESG Ratings Methodology: Carbon Emissions Key Issue | October 2023

indicated. The following formula is used to calculate the Carbon Emissions
Management Score:

Where:••••

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 =𝑇𝑇𝑇𝑇𝑇𝑇𝐺𝐺𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 + 𝑀𝑀𝑀𝑀𝑀𝑀𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 + 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖
3

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 is the Carbon Emissions Management Score for company 𝑖𝑖.

𝑇𝑇𝑇𝑇𝑇𝑇𝐺𝐺𝐶𝐶𝐶𝐶𝐶𝐶, 𝑖𝑖 is the Targets Score for company 𝑖𝑖.

𝑀𝑀𝑀𝑀𝑀𝑀𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 is the Mitigation Score for company 𝑖𝑖.

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 is the Performance Score for company 𝑖𝑖.

The following data points, without constituting an exhaustive list, are representativeof the inputs to the Management Score and are used in the Management Score
calculation:

Management Score category: Targets Score•

Aggressiveness of carbon emissions reduction target.
Definition: Indicates whether the company has a carbon emissions reduction
target and our assessment of how aggressive any target is. .

•Track record of achieving carbon reduction targets.
Definition: Indicates whether the company has a demonstrated track recordof achieving its carbon reduction targets.

Management Score category: Mitigation Score•

Use of cleaner sources of energy.
Definition: Assesses how aggressively the company has sought to mitigate
its carbon emissions through the use of cleaner sources of energy such as
solar, wind, geothermal, co-generation, or natural gas in place of oil or coal.

•

Efforts to capture GHG emissions.

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MSCI ESG Ratings Methodology: Carbon Emissions Key Issue | October 2023

Definition: Assesses the aggressiveness of a company’s efforts to use
greenhouse gas (GHG) capture and storage/sequestration of its operationalemissions. ’•

Other efforts to reduce carbon emissions.
Definition: Assesses how aggressively the company has sought to mitigate
its operational and/or value chain carbon emissions through other efforts(including purchasing carbon offsets, but excluding energy efficiency, clean
energy use, carbon capture or demand-side management). The assessment
is based on industry-specific criteria.

•

CDP disclosure.
Definition: Indicates whether the company reports its carbon emissions to
the CDP.

Management Score category: Performance Score
Assesses the company’s performance on carbon emissions metrics relative
to industry peers. Expressed as a 0-10 score, where 10 indicates the highest
level of performance on the relevant metrics, including GHG
emissions/million USD sales, GHG emissions/unit of production, and thetrend in GHG emissions intensities.
Representative performance metrics:•

Trend in GHG emissions intensity.

•

GHG emissions intensity relative to industry peers.
o

Scope 1 + 2 GHG emissions intensity – metric tons of CO2e/USD
million sales.

oScope 1 + 2 GHG emissions intensity – metric tons of CO2e/unitof production

Sources: Company disclosures, CDP© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ESG Ratings Methodology: Carbon Emissions Key Issue | October 2023

Carbon Emissions Exposure Score
The Carbon Emissions Exposure Score evaluates the company’s exposure to risks on
this Key Issue. It is based on the Business and Geographic Exposure Scores. The
Geographic Exposure Score functions as a multiplier on the Business Exposure
Score, with an impact ranging from -50% to +50%. The Business and Geographic
Exposure Scores are scored on a 0-10 scale, with 10 corresponding to the highest
risk and 0 corresponding to the lowest risk. Refer to Section 3.2, Analyzing risk
exposure, of “ESG Ratings Methodology” for additional details. The following formula
is used in the Exposure Score calculation:

Where:•••

𝐸𝐸𝐸𝐸𝐸𝐸𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 = 𝐵𝐵𝐵𝐵𝐵𝐵𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 (1 + 0.1�𝐺𝐺𝐺𝐺𝐺𝐺𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 − 5�)
𝐸𝐸𝐸𝐸𝐸𝐸𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 is the Carbon Emissions Exposure Score of company 𝑖𝑖.

𝐵𝐵𝐵𝐵𝐵𝐵𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 is the Business Exposure Score of company 𝑖𝑖.

𝐺𝐺𝐺𝐺𝐺𝐺𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 is the Geographic Exposure Score of company 𝑖𝑖.

Exhibit 2: Exposure Score components
Carbon Emissions
Exposure Score
Business Exposure
Score

Geographic Exposure
Score

Business Segment
Exposure Scores

Geographic Segment
Exposure Scores

GHG Emissions
Intensity

Annual Reduction in
Carbon Emissions to
Meet Emission Targets© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ESG Ratings Methodology: Carbon Emissions Key Issue | October 2023

Business Exposure Score
The Business Exposure Score is a weighted average of the Business Segment
Exposure Scores of a company’s business segments. Scores are weighted by the
proportion of a company’s total assets in each business segment,1 using thefollowing formula to calculate the Business Exposure Score:

Where:•••𝐵𝐵𝐵𝐵𝐵𝐵𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 = �

𝑛𝑛𝑖𝑖

𝑗𝑗=1

𝑤𝑤𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴,𝑖𝑖,𝑗𝑗 𝐵𝐵𝐵𝐵𝐵𝐵𝐶𝐶𝐶𝐶𝐶𝐶,𝑗𝑗

𝐵𝐵𝐵𝐵𝐵𝐵𝐶𝐶𝐶𝐶𝐶𝐶,𝑗𝑗 is the Business Segment Exposure Score for the business segment
𝑗𝑗.

𝑤𝑤𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴,𝑖𝑖,𝑗𝑗 is the weight of business segment 𝑗𝑗 for company 𝑖𝑖 based on thecontribution to total company assets.
𝑛𝑛𝑖𝑖 is the number of business segments of company 𝑖𝑖.

Business Segment Exposure Scores
The Business Segment Exposure Score of a business segment is based on a
mapping of the business segment as disclosed by the company to a corresponding
business activity. MSCI ESG Research uses the Standard Industrial Classification(SIC) system along with industry-specific adjustments to define business activities.
The score associated with a business activity is used to calculate a Business
Segment Exposure Score. Each business activity score is determined by aggregating
normalized GHG emissions intensity scores from three different sources:
1. Comprehensive Environmental Data Archive (CEDA) data - direct GHG
emissions intensity
2. Eurostat - Air Emissions intensity by activity
3. Company-level GHG emission intensities assessed by MSCI ESG Research,
and aggregated at a business activity level

1 The percentage of assets is typically calculated as the company-reported asset value of the segment divided by the total
asset value. In certain cases, industry-specific metrics are used to calculate the percentage of assets, such as power
generation, production volume or reserve value. In cases where neither segment assets nor a relevant industry-specificproxy is available, the percentage is calculated based on segment revenue.

© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ESG Ratings Methodology: Carbon Emissions Key Issue | October 2023

An average of the above three emissions intensity scores at a business activity levelgives a normalized score between 0 and 10 as the Business Segment Exposure
Score.

Where:•••𝐵𝐵𝐵𝐵𝐵𝐵𝐶𝐶𝐶𝐶𝐶𝐶,𝑗𝑗 = 𝐴𝐴𝐴𝐴𝐴𝐴(𝐸𝐸𝐸𝐸𝑗𝑗,𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 , 𝐸𝐸𝐸𝐸𝑗𝑗,𝐸𝐸𝐸𝐸 , 𝐸𝐸𝐸𝐸𝑗𝑗,𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 )𝐸𝐸𝐸𝐸𝑗𝑗,𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 is the emissions intensity for the business activity 𝑗𝑗 as per CEDA.

𝐸𝐸𝐸𝐸𝑗𝑗,𝐸𝐸𝐸𝐸 is the emissions intensity for the business activity 𝑗𝑗 as per Eurostat.

𝐸𝐸𝐸𝐸𝑗𝑗,𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 is the emissions intensity for the business activity 𝑗𝑗 aggregated fromcompany-level data assessed by MSCI ESG Research.

For business activities that involve power generation, the Business Segment
Exposure Score is determined by the life cycle emissions intensity, as shown below:

Where:•••𝐵𝐵𝐵𝐵𝐵𝐵𝐶𝐶𝐶𝐶𝐶𝐶,𝑗𝑗 =𝐿𝐿𝐿𝐿𝐿𝐿𝑗𝑗
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑗𝑗

𝐵𝐵𝐵𝐵𝐵𝐵𝐶𝐶𝐶𝐶𝐶𝐶,𝑗𝑗 is the Business Exposure Segment Score for utilities businessactivity 𝑗𝑗.

𝐿𝐿𝐿𝐿𝐿𝐿𝑗𝑗 is the life cycle emissions for the electricity supply technology adopted
by the utilities business activity 𝑗𝑗.

𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑗𝑗 is the levelized cost of electricity for the electric supply technology
adopted by the utilities business activity 𝑗𝑗.

Life cycle emissions include all the emissions occurring from a power plant during
its entire period of activity. Levelized cost of electricity is the average revenue perunit of electricity generated and needed to recover the building and operating costsof a power plant over its life cycle. ’’
For business activities related to electricity transmission and distribution (T&D) in
particular, the Business Segment Exposure Score is derived by aggregating theemissions intensities of pure-play T&D companies as assessed by MSCI ESG
research.
𝐵𝐵𝐵𝐵𝐵𝐵𝐶𝐶𝐶𝐶𝐶𝐶,𝑗𝑗 = 𝐸𝐸𝐸𝐸𝑗𝑗,𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ESG Ratings Methodology: Carbon Emissions Key Issue | October 2023

Geographic Exposure Score
The Geographic Exposure Score is a weighted average of the Geographic Segment
Exposure Scores of the countries and regions in which a company operates. Scoresare weighted by the proportion of a company’s total assets in each geographic
segment using the following equation:

Where:•••𝐺𝐺𝐺𝐺𝐺𝐺𝐶𝐶𝐶𝐶𝐶𝐶,𝑖𝑖 = �𝑛𝑛𝑖𝑖

𝑤𝑤𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴,𝑖𝑖,𝑟𝑟 𝐺𝐺𝐺𝐺𝐺𝐺𝐶𝐶𝐶𝐶𝐶𝐶,𝑟𝑟

𝑟𝑟=1

𝐺𝐺𝐺𝐺𝐸𝐸𝐶𝐶𝐶𝐶𝐶𝐶,𝑟𝑟 is the Geographic Segment Exposure Score in region 𝑟𝑟.

𝑤𝑤𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴,𝑖𝑖,𝑟𝑟 is the weight of total assets in region 𝑟𝑟 for company 𝑖𝑖.
𝑛𝑛𝑖𝑖 is the number of geographic segments for company 𝑖𝑖.

For geographic segments reported as regions (example: Asia Pacific), a nominal GDPweighted country aggregation is used to calculate region-level scores, using thefollowing equation:

Where:••𝐺𝐺𝐺𝐺𝐺𝐺𝐶𝐶𝐶𝐶𝐶𝐶,𝑟𝑟 = �𝑛𝑛𝑟𝑟

𝑤𝑤𝐺𝐺𝐺𝐺𝐺𝐺,𝑟𝑟,𝑐𝑐 𝐺𝐺𝐺𝐺𝐺𝐺𝐶𝐶𝐶𝐶𝐶𝐶,𝑐𝑐

𝑐𝑐=1

𝐺𝐺𝐺𝐺𝐺𝐺𝐶𝐶𝐶𝐶𝐶𝐶,𝑐𝑐 is the Geographic Segment Exposure Score of country 𝑐𝑐.

𝑤𝑤𝐺𝐺𝐺𝐺𝐺𝐺,𝑟𝑟,𝑐𝑐 is the specific weight of country 𝑐𝑐 within region 𝑟𝑟.

Geographic Segment Exposure Scores
The Geographic Segment Exposure score for a country is determined by looking at
the annual reduction in greenhouse gas emissions required to meet its publicly
disclosed greenhouse gas emission targets.
Where:•𝐺𝐺𝐺𝐺𝐺𝐺𝐶𝐶𝐶𝐶𝐶𝐶,𝑐𝑐 = 𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐
𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐 is the Annual Emissions Reduction Score of the country 𝑐𝑐.

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MSCI ESG Ratings Methodology: Carbon Emissions Key Issue | October 2023

Where a country’s ability to achieve its greenhouse gas emissions target iscontingent on external support, then the Annual Emissions Reduction Score is
reduced by half:

Data Sources

𝐺𝐺𝐺𝐺𝐺𝐺𝐶𝐶𝐶𝐶𝐶𝐶,𝑐𝑐 =𝐴𝐴𝐴𝐴𝐴𝐴𝑐𝑐
2

The following sources are used to determine the Carbon Emissions Exposure Score:
IERS’’ Comprehensive Environmental Data Archive (CEDA) data, direct GHG
emissions intensity; Eurostat, Air Emissions Accounts by Activity; Refinitiv;
International Energy Agency (2020), Projected Costs of Generating Electricity 2020;
The United Nations Economic Commission for Europe, Life Cycle Assessment ofElectricity Generation Options; GHG emissions intensities compiled by MSCI ESG
Research; company disclosures.

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