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What’s in an Equity Research Report?

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Even though you can easily find real equity research reports via the magical tool known as “Google,” we’ve continued to get questions on this topic.

Whenever I see the same question over and over again, you know what I do: I bash my head in repeatedly and contemplate jumping off a building…

…and then I write an article to answer the question.

To understand an equity research report, you must understand what goes into a  stock pitch first.

The idea is similar, but an ER report is a “watered-down” version of a stock pitch.

But banks have some very solid reasons for publishing equity research reports:

Why Do Equity Research Reports Matter?

You might remember from previous articles that equity research teams do not spend that much time writing these reports .

Most of their time is spent speaking with management teams and institutional investors and sharing their views on sectors and companies.

However, equity research reports are still important because:

• You do still spend some time doing the required modeling work (~15%) and writing the reports (~20%).
• You might have to write a research report as part of the interview process.

For example, if you apply to an equity research role or an equity research internship , especially in an off-cycle process, you might be asked to draft a short report on a company.

And then in roles outside of ER, you need to know how to interpret reports quickly and extract the key information.

Equity Research Reports: Myth vs. Reality

If you want to understand equity research reports, you have to understand first why banks publish them: to earn higher commissions from trading activity.

A bank wants to encourage institutional investors to buy more shares of the companies it covers.

Doing so generates more trading volume and higher commissions for the bank.

This is why you rarely, if ever, see “Sell” ratings, and why “Hold” ratings are far less common than “Buy” ratings.

Different Types of Equity Research Reports

One last point before getting into the tutorial: There are many different types of research reports.

“Initiating Coverage” reports tend to be long – 50-100 pages or more – and have tons of industry research and data.

“Sector Reports” on entire industries are also very long. And there are other types, which you can read about here .

In this tutorial, we’re focusing on the “Company Update” or “Company Note”-type reports, which are the most common ones.

The Full Tutorial, Video, and Sample Equity Research Reports

For our full walk-through of equity research reports, please see the video below:

Table of Contents:

• 1:43: Part 1: Stock Pitches vs. Equity Research Reports
• 6:00: Part 2: The 4 Main Differences in Research Reports
• 12:46: Part 3: Sample Reports and the Typical Sections
• 20:53: Recap and Summary

You can get the reports and documents referenced in the video here:

• Equity Research Report – Jazz Pharmaceuticals [JAZZ] – OUTPERFORM [BUY] Recommendation [PDF]
• Equity Research Report – Shawbrook [SHAW] – NEUTRAL [HOLD] Recommendation [PDF]
• Equity Research Reports vs. Stock Pitches – Slides [PDF]

If you want the text version instead, keep reading:

Watered-Down Stock Pitches

You should think of equity research reports as “watered-down stock pitches.”

If you’ve forgotten, a hedge fund or asset management stock pitch ( sample stock pitch here ) has the following components:

• Part 1: Recommendation
• Part 2: Company Background
• Part 3: Investment Thesis
• Part 4: Catalysts
• Part 5: Valuation
• Part 6: Investment Risks and How to Mitigate Them
• Part 7: The Worst-Case Scenario and How to Avoid It

In a stock pitch, you’ll spend most of your time and energy on the Catalysts, Valuation, and Investment Risks because you want to express a VERY different view of the company .

For example, the company’s stock price is $100, but you believe it’s worth only $50 because it’s about to report earnings 80% lower than expectations.

Therefore, you recommend shorting the stock. You also recommend purchasing call options at an exercise price of $125 to limit your losses to 25% if the stock moves in the opposite direction.

In an equity research report, you’ll still express a view of the company that’s different from the consensus, but your view won’t be dramatically different.

You’ll spend more time on the Company Background and Valuation sections, and far less time and space on the Catalysts and Risk Factors. And you won’t even write a Worst-Case Scenario section.

If a company seems overvalued by 50%, a research analyst would probably write a “Hold” recommendation, say that there’s “uncertainty around several customers,” and claim that the company’s current market value is appropriate.

Oh, and by the way, one risk factor is that the company might report lower-than-expected earnings.

The Four Main Differences in Equity Research Reports

The main differences are as follows:

1) There’s More Emphasis on Recent Results and Announcements

For example, how does a recent product announcement, clinical trial result, or earnings report impact the company?

You’ll almost always see recent news and updates on the first page of a research report:

These factors may play a role in hedge fund stock pitches as well, but more so in short recommendations since timing is more important there.

2) Far-Outside-the-Mainstream Views Are Less Common

One comical example of this trend is how all 15 equity research analysts covering Enron rated it a “buy” right before it collapsed :

Sell-side analysts are far less likely to point out that the emperor has no clothes than buy-side analysts.

3) Research Reports Give “Target Prices” Rather Than Target Price Ranges

For example, the company is trading at $50.00 right now, but we expect its price to increase to exactly $75.00 in the next twelve months.

This idea is completely ridiculous because valuation is always about the range of possible outcomes, not a specific outcome.

Despite horrendously low accuracy , this practice continues.

To be fair, many analysts do give target prices in different cases, which is an improvement:

4) The Investment Thesis, Catalysts, and Risk Factors Are “Looser”

These sections tend to be “afterthoughts” in most reports.

For example, the bank might give a few reasons why it expects the company’s share price to rise: the company will capture more market share than expected, it will be able to increase its product prices more rapidly than expected, and a competitor is about to go bankrupt.

However, the sell-side analyst will not tie these factors to specific share-price impacts as a buy-side analyst would.

Similarly, the report might mention catalysts and investment risks, but there won’t be a link to a specific valuation impact from each factor.

So the typical stock pitch logic (“We think there’s a 50% chance of gaining 80% and a 50% chance of losing 20%”) won’t be spelled out explicitly:

Your Sample Equity Research Reports

To illustrate these concepts, I’m sharing two equity research reports from our financial modeling courses :

The first one is from the valuation case study in our Advanced Financial Modeling course , and the second one is from the main case study in our Bank Modeling course .

These are comprehensive examples, backed by industry data and outside research, but if you want a shorter/simpler example you can recreate in a few hours, the Core Financial Modeling course has just that.

In each case, we started by creating traditional HF/AM stock pitches and valuations and then made our views weaker in the research reports.

The Typical Sections of an Equity Research Report

So let’s briefly go through the main sections of these reports, using the two examples above:

Page 1: Update, Rating, Price Target, and Recent Results

The first page of an “Update” report states the bank’s recommendation (Buy, Hold, or Sell, sometimes with slightly different terminology), and gives recent updates on the company.

For example, in both these reports we reference recent earnings results from the companies and expectations for the next fiscal year:

We also give a “target price,” explain where it comes from, and give our estimates for the company’s key financial metrics.

We mention catalysts in both reports, but we don’t link anything to a specific valuation impact.

One problem with providing a specific “target price” is that it must be based on specific multiples and specific assumptions in a DCF or DDM.

So with Jazz, we explain that the $170.00 target is based on 20.7x and 15.3x EV/EBITDA multiples for the comps, and a discount rate of 8.07% and Terminal FCF growth rate of 0.3% in the DCF.

Next: Operations and Financial Summary

Next, you’ll see a section with lots of graphs and charts detailing the company’s financial performance, market share, and important metrics and ratios.

For a pharmaceutical company like Jazz, you might see revenue by product, pricing and # of patients per product per year, and EBITDA margins.

For a commercial bank like Shawbrook, you might see loan growth, interest rates, interest income and net income, and regulatory capital figures such as the Common Equity Tier 1 (CET 1) and Tangible Common Equity (TCE) ratios:

This section of the report explains how the analyst or equity research associate forecast the company’s performance and came up with the numbers used in the valuation.

The valuation section is the one that’s most similar in a research report and a stock pitch.

In both fields, you explain how you arrived at the company’s implied value, which usually involves pasting in a DCF or DDM analysis and comparable companies and transactions.

The methodologies are the same, but the assumptions might differ substantially.

In research, you’re also more likely to point to specific multiples, such as the 75 th percentile EV/EBITDA multiple, and explain why they are the most meaningful ones.

For example, you might argue that since the company’s growth rates and margins exceed the medians of the set, it deserves to be valued at the 75 th percentile multiples rather than the median multiples:

Investment Thesis, Catalysts, and Risks

This section is short, and it is more of an afterthought than anything else.

We do give reasons for why these companies might be mis-priced, but the reasoning isn’t that detailed.

For example, in the Shawbrook report we state that the U.K. mortgage market might slow down and that regulatory changes might reduce the market size and the company’s market share:

Those are legitimate catalysts, but the report doesn’t explain their share-price impact in the same way that a stock pitch would.

Finally, banks present Investment Risks mostly so they can say, “Well, we warned you there were risks and that our recommendation might be wrong.”

By contrast, buy-side analysts present Investment Risks so they can say, “There is a legitimate chance we could lose 50% – let’s hedge against that risk with options or other investments so that our fund does not collapse .”

How These Reports Both Differ from the Corresponding Stock Pitches

The Jazz equity research report corresponds to a “Long” pitch that’s much stronger:

• We estimate its intrinsic value as $180 – $220 / share , up from $170 in the report.
• We estimate the per-share impact of each catalyst: price increases add 15% to the share price, more patients from marketing efforts add 10%, and later-than-expected generics competition adds 15%.
• We also estimate the per-share impact from the risk factors and conclude that in the worst case , the company’s share price might decline from $130 to $75-$80. But in all likelihood, even if we’re wrong, the company is simply valued appropriately at $130.
• And then we explain how to hedge against these risks with put options.

The same differences apply to the Shawbrook research report vs. the stock pitch, but the stock pitch there is a “Short” recommendation where we claim that the company is overvalued by 30-50%.

And that sums up the differences perfectly: A Short recommendation with 30-50% downside in a stock pitch turns into a “Hold” recommendation with roughly equal upside and downside in a sell-side research report.

I’ve been harsh on equity research here, but I don’t want to disparage it too much.

There are many positives: You do get more creativity than in IB, it might be better for hedge fund or asset management exits, and it’s more fun to follow companies than to grind through grunt work on deals.

But no matter how you slice it, most equity research reports are watered-down stock pitches.

So, make sure you understand the “strong stuff” first before you downgrade – even if your long-term goal is equity research.

You might be interested in:

• The Equity Research Analyst Career Path: The Best Escape from a Ph.D. Program, or a Pathway into the Abyss?
• Private Equity Regulation : 2023 Changes and Impact on Finance Careers
• Stock Pitch Guide: How to Pitch a Stock in Interviews and Win Offers

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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Read below or Add a comment

15 thoughts on “ What’s in an Equity Research Report? ”

Hi Brian, what softwares are available to publish Research Reports?

We use Word templates. Some large banks have specialized/custom programs, but not sure how common they are.

Is it possible if you can send me a template in word of an equity report? It will help the graduate stock management fund a lot at Umass Boston.

We only have PDF versions for these, but Word should be able to open any PDF reasonably well.

Do you also provide a pre constructed version of an ER in word?

We have editable examples of equity research reports in Word, but we generally only share PDF versions on this site.

Hey Brian Can you please help me with coverage initiated reports on oil companies. I could not find them on the net. I need to them to get equity research experience, after which only I will be able to get into the field. I searched but reports could not be found even for a price. Thanks

We have an example of an oil & gas stock pitch on this site… do a search…

https://mergersandinquisitions.com/oil-gas-stock-pitch/

Beyond that, sorry, we cannot look for reports and then share them with you or we’d be inundated with requests to do that every day.

No worries. Thanks!

Hi! Brian! Do u know how investment bankers design and layout an equity research? the software they use. like MS Word, Adobe Indesign or something…? And how to create and layout one? Thanks

where can I get free equity research report? I am a Chinese student and now study in Australia. Is the Morning Star a good resource for research report?

Get a TD Ameritrade to access free reports there for certain companies.

How do you view the ER industry since the trading commission has been down 50% since 2007. And there are new in coming regulation governing the ER reports have to explicitly priced and funds need to pay for the report explicity rather than as a service comes free with brokerage?

In addition the whole S&T environment is becoming highly automated.

People have been predicting the death of equity research for over a decade, but it’s still here. It may not be around in 100 years, but it will still be around in another 10 years, though it will be smaller and less relevant.

Yes, things are becoming more automated, but the actual job of an equity research analyst or associate hasn’t changed dramatically. A machine can’t speak with investors to assess their sentiment on a company – only humans can do that.

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Here’s How to Write an Equity Research Report: The Best Guide

October 17, 2016

Equity Research is a rewarding career.

To keep up, you need a strong foundation with the judgment to think critically, act independently, and be relentlessly analytical.

That’s why I wrote this guide — to empower you with the equity research(ER) report writing skills to stay ahead in the equity research career.

There is almost NO guide available that teaches you how to write an equity research report.

From textbooks to online video tutorials, you can check and let me know if you find one.

And, I felt that I should write a detailed and step-by-step guide— a guide that really starts at the beginning to equip already-intelligent analysts with a healthy balance of conceptual and practical advice.

The Advanced Guide to Equity Research Report Writing takes your writing to the next level.

Who Is This Guide for?

I wrote this guide for an audience of equity research analysts , investment banking professionals, industry analysts, market research professionals, business management students, and freelance writers.

Most of all, I want you to walk away from this guide feeling confident about your equity report writing skill.

What Is an Equity Research Report

This chapter explains what exactly an ER report is.

The questions like—Who makes it? Who reads and uses it? What are the different types of equity research reports?—are answered clearly and elaborately.

It briefly talks about the various key contents of an ER report.

And lastly, it explains the need to provide a disclaimer at the end of an ER report.

So before understanding how to write an ER report, let’s try to understand what exactly an equity ER is.

FINRA , the Financial Industry Regulatory Authority, defines an equity research report, in Rule 2711 (a)(8) as,

 “A written or electronic communication that includes an analysis of equity securities of individual companies or industries , and that provides information reasonably sufficient upon which to base an investment decision.

Readers of Equity Research, more so than anything else, identify trends that make investment decisions easier to justify.

In simpler words, equity research is a document written and published by a brokerage house or securities firm for its clients to help them to make better decisions regarding which stocks to choose for profitable investment.

The report should be such that it should convince the client to make a decision.

The report should be crisp; the point of view should be clearly structured and articulated concisely.

In the investment industry, equity reports usually refer to ‘sell-side’ research, or investment research created by brokerage houses.

Such research is circulated to the corporate and retail clients of the brokerage house that publishes it.

Research produced by the ‘buy-side’, which includes mutual funds, pension funds, and portfolio managers, is usually for internal use and is not distributed to outside parties.

a. Different types of equity reports

In the above paragraph, we saw terms such as ‘sell-side’ and ‘buy-side’.

Let’s quickly understand what these terms mean:

There are two main types of equity research reports:

i. Sell-Side reports

Sell-side reports are the most common type of equity research reports in circulation.

They are normally produced by investment banks , typically for their clients to guide their investment decisions.

A sell-side analyst works for a brokerage firm or bank which manages individual clients and makes investment recommendations to them.

Sell-side analysts issue the often-heard recommendations of “buy”, “hold”, “neutral”, or “sell”.

These recommendations help clients make decisions to buy or sell stocks.

This is favourable for the brokerage firm as each time a client takes a decision to trade; the brokerage firm gets a commission on the transactions.

Click here to see some examples of sell-side reports

ii. Buy-Side reports

The ‘buy-side’ reports are internal reports, produced for the bank itself, and are guided by differing perspectives and motivations.

A buy-side analyst generally works for a mutual fund or a pension fund company.

They perform research and make recommendations to the money managers of the fund that hires them.

Buy-side analysts will verify how promising an investment seems and how well it fits with the fund’s investment strategy.

These recommendations are made exclusively for the benefit of the fund that employs them and is not available to anyone outside the fund.

Within the buy/sell group, there are other types of reports like initiating coverage reports, standard reports, Issue reports, Investor notes, and sector reports.

iii. Initiating coverage reports

The initiating coverage reports are conducted on firms that the bank has begun following and are typically more comprehensive in nature.

Initiating coverage reports analyze a company’s historical financial information, order books, efficiency, SWOT, cash-flows, and future earning potential, basis which it estimates the future earnings of the company and its P/E multiples.

Click here to see some examples of initiating coverage reports

iv. Standard reports

After an initiating report is produced standard reports will follow for as long as the brokerage house continues to track the stock.

Stocks that are tracked are typically part of an index like the SENSEX or are amongst the top stocks in an industry as these are the stocks that investors care about and are traded in larger volumes.

v. Issue reports

These reports are issued when generally companies announce earnings each quarter (Quarterly earnings reports).

vi. Investor notes

These reports are published a few times in between for incremental information and news.

For example – investor conference companies hold a big M&A deal or a major new product announcement from a competitor.

These are usually short-run updates and are typically just quantitative in nature.

vii. Sector reports

A sector report is a document that evaluates a given industry and the companies involved in it.

It is often included as part of a business plan and typically seeks to establish how one company can gain an advantage in industry through detailed research on competition, products, and customers.

Click here to download the sector report

b. Contents of an equity research report

Now that we have understood the different types of equity research reports, let’s try to see the contents of an ER report.

An ER report should not be more than 10 to 15 pages long and should be very crisp and concise.

It should give the reader a clear understanding of the opinion of the analyst writing the report.

An ER report typically has the following contents:

1. Analyst opinion and summary

2. Key highlights of the company

3. A snapshot of the industry

4. Financial ratio analysis

5. Financial Modeling and Valuation analysis

6. Risk factors

7. Disclosure and rationale of rating

Usually, most of the equity research reports have this information; however, there is no hard and fast rule in which an ER report should be written.

We will study in detail (with examples) how to write each of these segments of an ER report in the forthcoming chapters.

c. Importance of Disclaimers in Analyst Reports

As every ER report is an investment document, and investors use it to make decisions for buying or selling securities based on it, it is important for the report to have certain disclaimers to show un-biases of the analyst writing the report.

Some typical disclaimers are as follows:

• Every ER report entirely reflects views and personal opinions of the analyst as on the date of publication
• The equity research analyst does not have an interest in the shares of the company
• Compensation of the analyst is not linked directly to any specific research recommendations contained in the report

Financial Analysts or equity research analysts working in brokerage firms or sell-side analysts write equity research reports.

Equity research report writing process

Equity Research Report writing

After completing the fundamental analysis, financial statement analysis, ratio analysis, and valuation, the last part of the equity research process is writing equity research reports.

As an equity research analyst, you need to analyze the industry and the company first and then write the stock research report.

This step is paramount in your equity research analysis career .

This is important to write the equity research reports in such a way that your clients understand every word of it.

It’s also important to include relevant analysis that you’ve done in the report.

How to write a report

Let’s see each step of writing an equity research report in detail.

1. Company fundamental analysis

a) Macroeconomic Analysis

b) Checking public information of the company

c) Discussion/ interviews with company management

d) Prepare a 5-year cash flow model and earnings forecast model

e) Review your operational and financial assumptions

f) Assess management and competitive environment, buyers, suppliers, substitutes, porter 5-forces model that tells you the competitive advantage of the company.

2. Company valuation analysis

1. Use intrinsic valuation—Discounted Cash Flow(DCF) method

2. Relative valuation

3. sum-of-the-parts valuation method, wherever required.

Pointers for writing equity research reports

I’ve created a list of pointers purely based on my experience and observations and a bit of research about dos and don’ts while writing an equity research report.

1. A clear view of the company

Before writing the report, have a clear view of the company in terms of—Investment rationale, risk assessment, key growth drivers, cost drivers, and revenue drivers.

2. Recommendation/Rating

Clearly write the company’s name at the top of the report and mention your recommendation—buy, sell, hold.

You can also use the words—outperform, underperform, neutral or accumulate based on your valuation.

Have an image of an equity research report in your mind, and so you won’t miss these details.

Usually, there are templates available in your company and you need to write the report using these templates.

3. Target price

You need to mention the target price based on your valuation along with the recommendation.

4. Investment rationale

Write clearly your investment rationale. Why do you think the share price will go up/down?

5. Share price chart

Include a price chart of the stock that will show the last 52-weeks’ share price movement.

6.Business model

Mention the analysis of the company’s business model and how will it perform in the next 2-3 years.

7. Key ratio analysis

Include important ratio analysis of the company and 52-week high-low share price on a stock exchange.

Include market capitalization, Enterprise Value(EV), Earnings Before Interest Tax and Depreciation (EBITDA), EV/EBITDA, and dividend yield (%)

8. Product profile and segments

Analyze the company’s product profile, its various segments, and brands. Include current sales and forecasted revenue figures, cost, market size, company’s market share, competition, the company’s performance in domestic and other markets.

9. Economy-Industry-Company (E-I-C) Analysis

Cover the company’s fundamental analysis with supportive data.

10. Intrinsic and relative valuation

Perform DCF analysis and relative valuation. Relative valuation should be done with the company’s peers on the basis of Price-Earnings ratio (P/E), Price to Book ratio (P/B), Price to Sales (P/S), Return on Equity (ROE) and Return on Capital Employed (ROCE).

11. Reasoning for recommendation

Write proper reasoning for your recommendation. For example—Why buy the stock or why not to buy the stock. So, your reasoning has to be strong.

12. Unlock the value

Write what can unlock/increase/reduce the value of the company .

13. Legal matters

If the company is battling any case, write what could be its effects on the stock price.

14. Common industry points

While writing industry reports, write the points which are common for all players in the industry, for example, regulatory limitation, excise duty, oil prices, etc.

15. Covering all the areas in an equity research report

While writing the equity research report, assume that the reader is new to the company and he doesn’t have any idea about its business.

So, your report should include precise information about—product, financials, management, market, future plans of the company, growth estimates, and the risk factors of the company.

In short, as an equity research analyst, your equity analysis report writing process should be structured and you should follow the dos and don’ts mentioned in this post.

Sample equity research reports (PDFs):

The Walt Disney Company

If you have any queries, Speak Your Mind.

Key Takeaways

• Equity research report writing is a skill . You need to build this skill to go to the next level in your career . Top-notch careers in finance–equity research, investment banking , asset management, financial research, Knowledge Process Outsourcing (KPO) units value this skill in high regard.
• There are different types of research reports–sell-side, buy-side, initiating coverage, standard, issue, investor notes, and sector reports. As an analyst, you should know all these reports.
• Contents of an equity research report include Analyst opinion and summary, Key highlights of the company,  A snapshot of the industry, Financial and ratio analysis, Valuation analysis, Risk factors, and Disclosure and rationale of rating. I’m going to cover all these sections in detail with examples in the coming chapters.

Now You Try It

I hope you can see the potential of equity research report writing skills for your career.

Yes, it takes hard work to create something great.

But with this skill, you already know ahead of time that your hard work is going to pay off.

I want you to give the skill a try and let me know how it works for you.

If you have a question or thought, leave a comment below and I’ll get right to it.

• Download BIWS Course sample videos here .
• Read Students’ Testimonials here .

Avadhut is the Founder of FinanceWalk. He enjoys writing on Finance Careers topics. Check our Financial Modeling Courses . Contact us for  Career Coaching based on Your Inner GPS.

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How To Do Equity Research: An Actionable Guide

ContentsWho Is This Guide for?What Is an Equity Research Reporta. Different types of equity reportsi. Sell-Side reportsii. Buy-Side reportsiii. Initiating coverage reportsiv. Standard reportsv. Issue reportsvi. Investor notesvii. Sector reportsb. Contents of an equity research reportc. Importance of Disclaimers in Analyst ReportsEquity research report writing processHow to write a report1. Company fundamental analysis2. Company valuation analysisPointers for writing equity research reports1. A clear view of the company2. Recommendation/Rating3. Target price4. Investment rationale5. Share price chart6.Business model7. Key ratio analysis8. Product profile ...

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An equity research report is the document prepared by an analyst which provides a recommendation on whether investors should purchase hold, or sell shares of public company. Additionally, it provides an overview of the business, the industry it operates in, the management team, its financial performance risks, and the target price. The equity research is the study of the equities or stocks for the investment purpose. You can also see more on research report in Google Docs Templates.

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Step 1: Knowing the company well

Step 2: knowing about its products and services, step 3: understanding its relation with customer, step 4: research and development capability, step 5: knowing the industry, more in report templates, real estate equity share agreement, real estate equity share agreement example, simple property equity share agreement, basic real estate equity share agreement, equity loan investment agreement template, property equity share agreement template, real estate equity share agreement template.

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MSCI ESG Ratings aim to measure a company’s management of financially relevant ESG risks and opportunities. We use a rules-based methodology to identify industry leaders and laggards according to their exposure to ESG risks and how well they manage those risks relative to peers. Our ESG Ratings range from leader (AAA, AA), average (A, BBB, BB) to laggard (B, CCC). We also rate equity and fixed income securities, loans, mutual funds, ETFs and countries.

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ESG risks and opportunities can vary by industry and company. Our MSCI ESG Ratings model identifies the ESG risks, (what we call Key Issues), that are most material to a GICS® sub-industry or sector. With over 13 years of live track history we have been able to examine and refine our model to identify the E, S, and G Key Issues which are most material to an industry.

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A growing body of client, industry and MSCI research has shown the value of integrating MSCI ESG Ratings to manage and mitigate risks and identify opportunities. We are proud to work with over 1,700 clients worldwide that help inform and improve our ESG Research, including our ESG Ratings methodology and coverage. Investor clients use MSCI ESG Ratings as follows. 

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We rate over 8,500 companies (14,000 issuers including subsidiaries) and more than 680,000 equity and fixed income securities globally (as of October 2020), collecting thousands of data points for each company.

MSCI ESG Research Experience and Leadership

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• We have over 40 years 2 of experience measuring and modelling ESG performance of companies. We are recognized as a ‘Gold Standard data provider’3 and voted 'Best Firm for SRI research' and ‘Best Firm for Corporate Governance research' for the last four years 3
• We were the first ESG provider to assess companies based on industry materiality, dating back to 1999. Only dataset with live history (13+ years) demonstrating economic relevance
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Companies with strong MSCI ESG Ratings profiles may be better positioned for future challenges and experience fewer instances of bribery, corruption and fraud. Learn how our sustainability solutions can provide insights into risks and opportunities.

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MSCI ESG Research LLC. is a Registered Investment Adviser under the Investment Adviser Act of 1940. The most recent SEC Form ADV filing, including Form ADV Part 2A, is available on the U.S. SEC’s website at www.adviserinfo.sec.gov  (opens in a new tab) .

MIFID2/MIFIR notice: MSCI ESG Research LLC does not distribute or act as an intermediary for financial instruments or structured deposits, nor does it deal on its own account, provide execution services for others or manage client accounts. No MSCI ESG Research product or service supports, promotes or is intended to support or promote any such activity. MSCI ESG Research is an independent provider of ESG data, reports and ratings based on published methodologies and available to clients on a subscription basis. 

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1  GICS®, the global industry classification standard jointly developed by MSCI Inc. and S&P Global.

2  Through our legacy companies KLD, Innovest, IRRC, and GMI Ratings.

3  Deep Data Delivery Standard http://www.deepdata.ai/

4  Through our legacy companies KLD, Innovest, IRRC, and GMI Ratings. Origins of MSCI ESG Ratings established in 1999. Produced time series data since 2007.

5  Source: MSCI ESG Research 2,434 constituents of the MSCI ACWI Index as of November 30, 2017.

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Diversity wins: How inclusion matters

Diversity wins is the third report in a McKinsey series investigating the business case for diversity, following Why diversity matters (2015) and Delivering through diversity (2018). Our latest report shows not only that the business case remains robust but also that the relationship between diversity on executive teams and the likelihood of financial outperformance has strengthened over time. These findings emerge from our largest data set so far, encompassing 15 countries and more than 1,000 large companies. By incorporating a “social listening” analysis of employee sentiment in online reviews, the report also provides new insights into how inclusion matters. It shows that companies should pay much greater attention to inclusion, even when they are relatively diverse.

In the COVID-19 crisis, inclusion and diversity matter more than ever

For business executives the world over, the COVID-19 pandemic  is proving to be one of the greatest leadership tests of their careers. Not only must they protect the health of their employees and customers, they must also navigate far-reaching disruption to their operations, plan for recovery, and prepare to reimagine their business models for the next normal.

In this challenging context, the task of fostering inclusion and diversity (I&D) could easily take a back seat—and the painstaking progress made by many firms in recent years could be reversed. As this report shows, however, I&D is a powerful enabler of business performance. Companies whose leaders welcome diverse talents and include multiple perspectives are likely to emerge from the crisis stronger. As the CEO of a European consumer-goods company told us: “I know we have to deal with COVID-19, but inclusion and diversity is a topic too important to put onto the back burner.”

On the other hand, some companies appear to be viewing I&D as a “luxury we cannot afford” during the crisis. We believe such companies risk tarnishing their license to operate in the long term and will lose out on opportunities to innovate their business models and strengthen their recovery.

If companies deprioritize I&D during the crisis, the impact will be felt not just on the bottom line but in people’s lives. Research and experience warn that diverse talent can be at risk during a downturn for several reasons—for example, downsizing can have a disproportionate impact on the roles typically held by diverse talent. As companies send staff home to work, this could reinforce existing exclusive behaviors and unconscious biases and undermine inclusion. In addition, inequality with regard to sharing childcare and homeschooling responsibilities, as well as the quality of home workspace (including broadband access), could put women and minorities at a disadvantage during this time of working remotely.

Companies need to seize this moment—both to protect the gains they have already made and to leverage I&D to position themselves to prosper in the future.

There is ample evidence that diverse and inclusive companies are more likely to make better, bolder decisions—a critical capability in the crisis. For example, diverse teams have been shown to be better able to radically innovate and anticipate shifts in consumer needs and consumption patterns. Moreover, the shift to technology-enabled remote working presents an opportunity for companies to accelerate building inclusive and agile cultures—further challenging existing management routines. Not least, a visible commitment to I&D during the crisis is likely to strengthen companies’ global image and license to operate.

By following the trajectories of hundreds of companies in our data set since 2014, we find that the overall slow growth in diversity often observed in fact masks a growing polarization among these organizations. While most have made little progress, are stalled or even slipping backward, some are making impressive gains in diversity, particularly in executive teams. We show that these diversity winners are adopting systematic, business-led approaches to inclusion and diversity (I&D) . And, with a special focus on inclusion, we highlight the areas where companies should take far bolder action to create a long-lasting inclusive culture and to promote inclusive behavior.

(Our research predates the outbreak of the global pandemic, but we believe these findings remain highly relevant. See the sidebar, “In the COVID-19 crisis, inclusion and diversity matter more than ever,” for more on why I&D must remain a priority even as the context shifts, or read “ Diversity still matters ” for an even deeper dive. You can also explore a related interactive  for another lens on the issues.)

A stronger business case for diversity, but slow progress overall

Our latest analysis reaffirms the strong business case for both gender diversity and ethnic and cultural diversity in corporate leadership—and shows that this business case continues to strengthen. The most diverse companies are now more likely than ever to outperform less diverse peers on profitability.

Our 2019 analysis finds that companies in the top quartile for gender diversity on executive teams were 25 percent more likely to have above-average profitability than companies in the fourth quartile—up from 21 percent in 2017 and 15 percent in 2014 (Exhibit 1).

Moreover, we found that the greater the representation, the higher the likelihood of outperformance. Companies with more than 30 percent women executives were more likely to outperform companies where this percentage ranged from 10 to 30, and in turn these companies were more likely to outperform those with even fewer women executives, or none at all. A substantial differential likelihood of outperformance—48 percent—separates the most from the least gender-diverse companies.

In the case of ethnic and cultural diversity, our business-case findings are equally compelling: in 2019, top-quartile companies outperformed those in the fourth one by 36 percent in profitability, slightly up from 33 percent in 2017 and 35 percent in 2014. As we have previously found, the likelihood of outperformance continues to be higher for diversity in ethnicity than for gender.

A McKinsey Live event on 'Creating an inclusive environment for transgender employees'

A McKinsey Live event on 'Women in the Workplace 2021: The state of women hangs in the balance'

Yet progress, overall, has been slow. In the companies in our original 2014 data set, based in the United States and the United Kingdom, female representation on executive teams rose from 15 percent in 2014 to 20 percent in 2019. Across our global data set, for which our data starts in 2017, gender diversity moved up just one percentage point—to 15 percent, from 14—in 2019. More than a third of the companies in our data set still have no women at all on their executive teams. This lack of material progress is evident across all industries and in most countries. Similarly, the representation of ethnic-minorities on UK and US executive teams stood at only 13 percent in 2019, up from just 7 percent in 2014. For our global data set, this proportion was 14 percent in 2019, up from 12 percent in 2017 (Exhibit 2).

The widening gap between winners and laggards

While overall progress on gender and cultural representation has been slow, this is not consistent across all organizations. Our research clearly shows that there is a widening gap between I&D leaders and companies that have yet to embrace diversity. A third of the companies we analyzed have achieved real gains in top-team diversity over the five-year period. But most have made little or no progress, and some have even gone backward.

This growing polarization between high and low performers is reflected in an increased likelihood of a performance penalty. In 2019, fourth-quartile companies for gender diversity on executive teams were 19 percent more likely than companies in the other three quartiles to underperform on profitability—up from 15 percent in 2017 and 9 percent in 2015. At companies in the fourth quartile for both gender and ethnic diversity, the penalty was even steeper in 2019: they were 27 percent more likely to underperform on profitability than all other companies in our data set.

Learn more about delivering through diversity

We sought to understand how companies in our original 2014 data set have been progressing, and in doing so we identified five cohorts. These were based on their starting points and speed of progress on executive team gender representation and, separately, ethnic-minority representation (Exhibit 3). In the first two cohorts, Diversity Leaders and Fast Movers, diverse representation improved strongly over the past five years: for example, gender Fast Movers have almost quadrupled the representation of women on executive teams, to 27 percent, in 2019; for ethnicity, companies in the equivalent cohort have increased their level of diversity from just 1 percent in 2014 to 18 percent in 2019.

At the other end of the spectrum, the already poor diversity performance of the Laggards has declined further. In 2019, an average of 8 percent of executive team members at these companies were female—and they had no ethnic-minority representation at all. The two other cohorts are Moderate Movers, which have on average experienced a slower improvement in diversity, and Resting on Laurels, which started with higher levels of diversity than Laggards did, but have similarly become less diverse since 2014.

We also found that the average likelihood of financial outperformance in these cohorts is consistent with our findings in the quartile analysis above. For example, in 2019, companies in the Resting on Laurels cohort on average had the highest likelihood of outperformance on profitability, at almost 62 percent—likely reflecting their historically high levels of diversity on executive teams. Laggards, on the other hand, are more likely to underperform their national industry median in profitability, at 40 percent.

How inclusion matters

By analyzing surveys and company research, we explored how different approaches to I&D could have shaped the trajectories of the companies in our data set. Our work suggested two critical factors: a systematic business-led approach to I&D, and bold action on inclusion. On the former we have previously advocated for an I&D approach based on a robust business case tailored to the needs of individual companies, evidenced-based targets, and core-business leadership accountability.

To further understand how inclusion matters—and which aspects of it employees regard as significant—we conducted our first analysis of inclusion-related indicators. We conducted this outside-in using “social listening,” focusing on sentiment in employee reviews of their employers posted on US-based online platforms.

While this approach is indicative, rather than conclusive, it could provide a more candid read on inclusion than internal employee-satisfaction surveys do—and makes it possible to analyze data across dozens of companies rapidly and simultaneously. We focused on three industries with the highest levels of executive-team diversity in our data set: financial services , technology , and healthcare . In these sectors, comments directly pertaining to I&D accounted for around one-third of total comments made, suggesting that this topic is high on employees’ minds.

We analyzed comments relating to five indicators. The first two—diverse representation and leadership accountability for I&D—are evidence of a systematic approach to I&D. The other three—equality, openness, and belonging—are core components of inclusion. For several of these indicators, our findings suggest “pain points” in the experience of employees:

• While overall sentiment on diversity was 52 percent positive and 31 percent negative, sentiment on inclusion was markedly worse, at only 29 percent positive and 61 percent negative. This encapsulates the challenge that even the more diverse companies still face in tackling inclusion (Exhibit 4). Hiring diverse talent isn’t enough—it’s the workplace experience that shapes whether people remain and thrive.
• Opinions about leadership and accountability in I&D accounted for the highest number of mentions and were strongly negative. On average, across industries, 51 percent of the total mentions related to leadership, and 56 percent of those were negative. This finding underscores the increasingly recognized need for companies to improve their I&D engagement with core-business managers.
• For the three indicators of inclusion—equality, openness, and belonging—we found particularly high levels of negative sentiment about equality and fairness of opportunity. Negative sentiment about equality ranged from 63 to 80 percent across the industries analyzed. The work environment’s openness, which encompasses bias and discrimination, was also a significant concern—negative sentiment across industries ranged from 38 to 56 percent. Belonging elicited overall positive sentiment, but from a relatively small number of mentions.

These findings highlight the importance not just of inclusion overall but also of specific aspects of inclusion. Even relatively diverse companies face significant challenges in creating work environments characterized by inclusive leadership and accountability among managers, equality and fairness of opportunity, and openness and freedom from bias and discrimination.

Winning through inclusion and diversity: Taking bold action

We took a close look at our data set’s more diverse companies, which as we have seen are more likely to outperform financially. The common thread for these diversity leaders is a systematic approach and bold steps to strengthen inclusion. Drawing on best practices from these companies, this report highlights five areas of action (Exhibit 5):

• Ensure the representation of diverse talent. This is still an essential driver of inclusion. Companies should focus on advancing diverse talent into executive, management, technical, and board roles. They should ensure that a robust I&D business case designed for individual companies is well accepted and think seriously about which forms of multivariate diversity to prioritize (for example, going beyond gender and ethnicity). They also need to set the right data-driven targets for the representation of diverse talent.
• Strengthen leadership accountability and capabilities for I&D. Companies should place their core-business leaders and managers at the heart of the I&D effort—beyond the HR function or employee resource-group leaders. In addition, they should not only strengthen the inclusive-leadership capabilities of their managers and executives but also more emphatically hold all leaders to account for progress on I&D.
• Enable equality of opportunity through fairness and transparency. To advance toward a true meritocracy, it is critical that companies ensure a level playing field in advancement and opportunity. They should deploy analytics tools to show that promotions, pay processes, and the criteria behind them, are transparent and fair; debias these processes ; and strive to meet diversity targets in their long-term workforce plans.
• Promote openness and tackle microaggressions. Companies should uphold a zero-tolerance policy for discriminatory behavior, such as bullying and harassment, and actively help managers and staff to identify and address microaggressions. They should also establish norms for open, welcoming behavior and ask leaders and employees to assess each other on how they are living up to that standard.
• Foster belonging through unequivocal support for multivariate diversity. Companies should build a culture where all employees feel they can bring their whole selves to work. Managers should communicate and visibly embrace their commitment to multivariate forms of diversity, building a connection to a wide range of people and supporting employee resource groups to foster a sense of community and belonging. Companies should explicitly assess belonging in internal surveys.

For deeper insights, download Diversity wins: How inclusion matters , the full report on which this article is based (PDF–10.6MB).

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