The ESG rating is based on a fund or ETF's exposure to long-term ESG risks and opportunities and is scored on a scale from AAA to designate leaders to CCC for laggards.

The first port of call for the MSCI rating team is the weighted average score of the holdings in a given fund or ETF, followed by an assessment of the vehicle's ESG momentum.

This allows the index provider to judge whether each fund is moving in a positive or negative direction in terms of ESG year-on-year.

The final step will see MSCI reviewing ESG tail risk so it can assess a vehicle's exposure to holdings with worst-of-class ESG ratings of B and CCC.

MSCI said additional key information will be provided for consideration throughout clients' fund research, portfolio construction, product selection and portfolio reporting processes across asset classes. 

The new ESG fund ratings can be used by fund and wealth managers seeking to screen for funds to align with client values; report on the sustainability of clients' investments; measure the positive impacts arising from investments; or complement manager due diligence.

MSCI's head of ESG Remy Briand said: "The MSCI ESG Fund Ratings is designed to provide investors with greater transparency to better understand the ESG characteristics of fund and ETF components of their portfolios.

"As the number of ESG funds proliferate and ESG-orientated investment options and ESG strategies are being adopted by wealth and fund managers, we strive to provide the tools and solutions to help these investors better understand ESG risks.

"Through the MSCI ESG fund ratings we are providing our clients with an intuitive rating to assist their risk management and investment decision processes and to power better investment decisions."

A version of this article first appeared at Investment Week