Consultation on potential
enhancements to the MSCI ESG
Indexes
February 2020
This consultation may or may not lead to the implementation of any or all of the proposedchanges in the highlighted or any other MSCI indexes. Consultation feedback will remain
confidential. MSCI may publicly disclose feedback if specifically requested by specific market
participants. In that case, the relevant feedback would be published together with the final
results of the consultation.
© 2019 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.

Proposed Enhancements to MSCI ESG Indexes
MSCI is proposing a series of methodology changes aiming toenhance the climate risk profile and bring greater consistency to its
ESG Indexes.
No.

Proposed Enhancements

Impacted Methodologies

1

Introduce a screen for companies involved in
Thermal Coal and/or Unconventional O&G
businesses with an aim to improve the climate risk
profile of the ESG Indexes.

1.
2.
3.
4.

2

Align Controversial Business Involvement Criteria
across the MSCI ESG Leaders Indexes.

1. MSCI ESG Leaders3

Cap maximum issuer weight in SRI and ESG
Leaders Indexes with an aim to bring greater
consistency in security weighting.

1. MSCI SRI
2. MSCI ESG Leaders

MSCI SRIMSCI ESG Leaders
MSCI ESG Focus
MSCI ESG Universal

MSCI invites feedback from market participants on or before February 28,2020, and will
announce the results of the consultation on or before March 31,2020.
2

The Climate Profile of ESG
IndexesThis presentation may contain analysis of historical data, which may include hypothetical, backtested or
simulated performance results. There are frequently material differences between backtested or simulated
performance results and actual results subsequently achieved by any investment strategy. The analysis andobservations in this presentation are limited solely to the period of the relevant historical data, backtest or
simulation. Past performance — whether actual, backtested or simulated — is no indication or guarantee of
future performance. None of the information or analysis herein is intended to constitute investment advice or arecommendation to make (or refrain from making) any kind of investment decision or asset allocation andshould not be relied on as such.

3

What we know: climate change risk is realFACTIMPACT ON THE PLANET• Sea level is set to continue to riseat a faster rate than over the last
40 years1• Polar ice sheets have been melting& glaciers have receded in mostparts of the world. 1• The past five years are, collectively,

IMPACT ON THE ECONOMY

FACT• Since 1950, economic damages
due to climate-related disasters
have increased by more than 10times3• In a high warming scenario, global
economic losses due to physicaldamages are projected to be morethan 7% of GDP by 21004

the warmest years in the modern
record 2
Increased frequency of physical risk events:

Source: http://edu.bankofengland.co.uk/knowledgebank/climate-change-what-are-the-risks-to-financial-stability/
1 IPPC Assessment Report Summary for Policy Makers, released Sept. 27, 2013.
2. NASA and the National Oceanic and Atmospheric Administration (NOAA).
3 http://www.wri.org/blog/2017/07/droughts-and-blackouts-how-water-shortages-cost-india-enough-energy-power-sri-lanka; http://www.wri.org/blog/2017/06/no-water-no-power;
4 Nordhaus and Boyer 2000, Warming the World: Economic Models of Global Warming

4

From climate change to climate risk
Human
Activities

GHG
Emissions

Temp.
ChangeWeather
ShiftsEconomic
Impacts

Investment
Impacts

Decades from cause to effectPhysical risk
Extreme weather events
Changing climate conditions

Transition risk
Disruptive technologies
Climate policies
Stranded assets

Source: Climate Action Tracker, Mercer, Bank of England, MSCI ESG Research

5Climate transition – potential financial impact for
institutional investors

http://www.wsj.com/articles/chinas-coal-consumption-and-output-fell-last-year-1424956878
http://www.bloomberg.com/news/articles/201401-28/rwe-writes-down-4-5-billion-as-power-plantearnings-drop

http://www.ft.com/intl/cms/s/0/1446e2ac-bffa-11dc-8052
0000779fd2ac.html#axzz3VV3Hko00
http://www.ft.com/intl/cms/s/0/6005636c-9f8c-11e3-94f3-00144feab7de.html

POSSIBLE RISKS
1. POTENTIAL SEVERITY
OF FINANCIAL IMPACT

2. FINANCIAL IMPACT MAY
OCCUR SOONER THANEXPECTED

3. MANY INDUSTRIES MAY
BE AFFECTED INDIRECTLY

4. SOME FINANCIAL
IMPACTS ARE
ALREADY VISIBLE

25 Trillion USD of assets
at risk1

Since 2010, coal demand iscontinuously declining2

The entire fossil fuel value
chain is exposed tohigh risks3

GE cut 12,000 jobs due todecreasing demand for fossil
fuel power plants4

Sources:
1. Carbon Tracker 2020 vision: why you should see peak fossil fuels coming.
2. https://www.iea.org/newsroom/energysnapshots/world-total-coal-production-1971-2016.html
3. MSCI ESG Research
4. General Electric: 10K, 20186

Incorporating Climate Risk in ESG Indexes• Carbon footprint of ESG Indexes may be significantly higher than their market capweighted parent indexes.

• This level of carbon footprint is not aligned with some recent ESG and Climate
benchmark labeling requirements.

• Climate Risk consideration is increasingly becoming a regulatory requirement andmay be a significant short-term risk for some investors.

• Climate Risk may be combined with investor’s ESG integration strategies.
• Some institutional ESG investors are seeking greater climate awareness to support
their use of ESG Indexes.

7

MSCI ESG Ratings* and Climate Risk
• Low Carbon Transition Category - groups companies in five categories that highlightthe predominant risks and opportunities they are most likely to face in the transition• ESG Leader Stocks ( AAA and AA Rated) are present in 4 out of 5 categories• ESG indexes focusing on overweight exposure to ESG Leader stocks may also be
potentially over exposed to climate-related risks through transition companies.

• ESG indexes may also be under exposed to Solutions companies which are ESG
Neutral or ESG Laggards.

MSC ACWI as of 29th June 2019

* MSCI ESG Ratings are provided by MSCI ESG Research LLC. MSCI ESG Indexes utilize information from, but are notprovided by, MSCI ESG Research LLC. MSCI Equity Indexes are products of MSCI Inc. and are administered by MSCI UK
Limited.

8

Carbon Footprint and Fossil Fuel Mix• Thermal Coal and Oil Sands/Oil Shale produce more carbon dioxide per unit of energy than otherfossil fuels.

• Extraction and refining of Thermal Coal and Oil Sands are more carbon intensive than other fossil
fuels.

• Exclusion of companies involved in Thermal Coal and Oil Sands business from an index lowered
the index’s footprints in simulated back-tests.

• Companies involved in extraction of thermal coal and oil sands/shale and also power generationfrom thermal coal are exposed to significant climate risk.

CO2 Content1 (kg per GJ)
106.7

Thermal Coal

96.4

Metallurgical Coal

94.6

Crude Oil

73.3

Natural Gas

56.1

30

57
24

20
10

9

45
10

2

2

40
20

0.4

0

0
Upto 5%5% to 30%

% of WACI

1 – https://www.msci.com/www/research-paper/fossil-fuel-divestment-a/0471389508* MSCI ACWI constituents as of 29th June 2019.

60

57

Num. of Stks.

Oil Sand and oil shale

Carbon Footprint of Thermal Coal and Oil Sands/Shale
Companies*% WACI/Index Wt.

Fuel

More than 30%

Index Wt.

Stks

9

MSCI ESG INDEXESINDEXES THAT USE THE ESG RATINGESGLEADERS

Exclusions

Exclusions

TOP
SECTOR ESGPERFORMERS

SRI

25%

A

ineligibleBB

TOP SECTOR ESGPERFORMERS

50%
POOR ESGPERFORMERS

Exclusions

ESG
FOCUS

POOR ESGPERFORMERS

AAA

ESG
UNIVERSALGOOD ESGPERFORMERSESGSCREENED

TILT

ACWI

Exclusions

CCC

10

Climate Profile of Select MSCI ESG Indexes
The climate profile1 of select MSCI ESG Indexes are assessed on the following metrics.
World SRIWorld
Leaders

Climate Metrics
Carbon Footprint –Lower than the
ParentCarbon Emission Intensity✓

Potential Emission Intensity

Risk of Stranded
assets exposure –Lower weight than
the Parent

2

World
ESG
Focus

World
ESG
Universal



✓



✓

✓



✓

Index Weight in Companies
with Fossil Fuel (FF) Reserves



✓



✓

More than 5% revenue from
Thermal Coal andUnconventional O&G

✓

✓

✓

✓

Climate Solutions –Higher than the
ParentWeighted Average Green
Revenue3

✓

✓

✓

✓

Index Weight in companies
with Green Revenue > 20%

✓

✓

✓

✓

Transition Risk –Lower than theparentIndex Weight in Transition
Companies









1 – Index constituents as of 29th May 2019, climate metric data as of 30th April 2019. Calculation details can be seen in appendix.
2 - ✓ : ESG Index is better than the market cap index by at least 20%;  : ESG Index is worse than the market cap index
3 – All revenues derived from any of the five clean tech themes including alternative energy, energy efficiency, green building,pollution prevention, or sustainable water.

11

ESG Index methodology enhancements proposal
ESG
Index

ESG
Approach

ESG Objective

Enhancement
Proposals

Rationale for Proposal

ESG SRI

Integration+ Values

Combines best in class selection
with values-based screens• Exclude companies
involved in thermal
coal andunconventional oil andgas businesses• Exclude companies
with FF Reserves.

• FF exclusion divests
from companies atrisk of stranded
assets.
• Power generationcompanies which do
not own reserves canescape FF screen.

ESG
Leaders

Integration

Simple and transparent ESG
integration through best in classapproach

ESG
Focus

Integration

Optimized exposure to positive
ESG factors while maintaining risk
and return characteristics similar
to parent index• Exclude companies
involved in thermal
coal andunconventional oil andgas businesses• Relatively fewer
exclusions• Exclusions do notinterfere with theoverall ESG profile of
the ESG index.

ESG
Universal

Integration

Dynamic ESG integration in a
broad and diversified index• Overlay Climate
Change Index
methodology• Reweighting
constituents is alignedwith the index
objective.
12

Proposed Methodology Enhancements
To propose a set of exclusions1 which –• Help reduce index carbon footprint and exposure to stranded assets.
• Are sensible and consistent with ESG objective of the index• Would likely not cause deterioration in overall ESG profile of the index• Would likely not cause significant changes in the composition of the index
Thermal Coal
(Mining and Sale) +Unconventional Oil& Gas (Extraction)2

Thermal Coal
(Power
Generation)

Ex Fossil Fuel
Reserves

Overlay
ClimateChange Index
methodology3

ESG Index

Enhancements2

ESG SRI

Proposal

5%

5%

Yes

N/A

Alternate

5%

5%

N/A

N/A

ESG
Leaders*/
ESG Focus

Proposal

5%

5%

N/A

N/A

Alternate

30%

30%

N/A

N/A

ESG
Universal

Proposal

N/A

N/A

N/A

Yes

Alternate

30%

30%

N/A

N/A

*Should ESG Leader indexes target to meet minimum standards for EU Climate Transition Benchmark4 ?
1.

Implemented as additional screens in the above methodologies. Other aspects of index methodologies like – ranking, sorting,weighting or optimization parameters, are not changed.

2.

Exact definitions of screens are provided in Appendix.

3.

Reweighting constituents of ESG Universal Index following MSCI Climate Change Index methodology

4.

https://ec.europa.eu/info/files/190930-sustainable-finance-teg-final-report-climate-benchmarks-and-disclosures_en

13Simulated Impact of Enhancements on MSCI World SRI
The proposed exclusion screens resulted in lower exposure to risk from stranded assets
while maintaining similar risk/return characteristics compared to the current indexes
1

Key Metrics3

ESG Metrics2

Total Return* (%)
Total Risk (%)
Tracking Error (%)
No of Stocks***
Turnover** (%)
Transition Turnover (%)5
Included in Transition
Deleted in Transition

MSCI
World
Index
7.47
11.62
0.00
1641
2.5

SRI Sim4 Proposal
7.27
11.75
2.11
489
16.9
10.7
37.0
50.0

7.70
11.70
2.20
465
16.6
14.7
44.0
73.0

Alternate
7.46
11.73
2.17
477
16.8
12.1
36.0
61.0

MSCI
World
Index
ESG Score
5.9
ESG Leaders (AAA-AA) (%) 26.6
ESG Laggards (B-CCC) (%)
7.8
ESG Trend Positive (%)
14.6
Environmental Score
5.4

SRI Sim

Proposal

Alternate

8.2
74.7
0.0
15.5
6.5

8.3
76.4
0.0
14.9
6.6

8.3
75.5
0.0
14.6
6.6

1. As of 29th May 2019,2 – As of 28th June 2019, 3. Period : 30th May 2014 – 28th June 2019, 4–
Simulated SRI Index as per the current SRI methodology, 5 – Transition current index to the proposals
as of 29th May 2019, * - Gross Return (USD), ** - Annualized average of rebalance dates, *** - Monthly
average

14

Simulated Impact of Enhancements on MSCI World ESG
Leaders

Both proposed and alternate exclusion screens resulted in lower exposure to climate risk
while maintaining similar risk/return characteristics compared to the current indexes
1

ESG Metrics2

Key Metrics3

Total Return* (%)
Total Risk (%)
Tracking Error (%)
No of Stocks***
Turnover** (%)
Transition Turnover (%)5
Included in Transition
Deleted in Transition

MSCI
World
Index
7.47
11.62
0.00
1641
2.5

ESG
Leaders
Sim4
7.63
11.75
1.31
1009
18.5
5.8
42.0
72.0

Proposal

Alternate

7.95
11.81
1.44
973
18.5
8.5
51.0
98.0

7.91
11.72
1.38
993
18.9
8.5
50.0
97.0

MSCI
World
Index
ESG Score
5.9
ESG Leaders (AAA-AA) (%) 26.6
ESG Laggards (B-CCC) (%)
7.8
ESG Trend Positive (%)
14.6
Environmental Score
5.4

ESG
Leaders
Sim
7.1
44.5
0.0
15.6
6.0

1. As of 29th May 2019,2. As of 28th June 2019, 3. Period : 30th May 2014 – 28th June 2019, 4 –Simulated ESG Leaders Index as per the current ESG Leaders methodology, 5 – Transition current
index to the proposals as of 29th May 2019, * - Gross Return (USD), ** - Annualized average of
rebalance dates, *** - Monthly average

Proposal

Alternate

7.1
44.4
0.0
15.1
6.1

7.2
44.7
0.0
15.8
6.1

15

Simulated Impact of Enhancements on MSCI World ESG
Focus

The proposed exclusion screens resulted in lower exposure to risk from stranded assets
while maintaining similar risk/return characteristics compared to the current indexes
1

ESG Metrics 2

Key Metrics3
MSCI
World
Index
Total Return* (%)
Total Risk (%)
Tracking Error (%)
No of Stocks***
Turnover** (%)
Included in Transition4
Deleted in Transition

7.50
11.60
0.00
1641
2.5

MSCI
World ESG
Proposal
Focus
Index
7.70
7.7
11.80
11.8
0.60
0.60
492
504
29.2
29.5
55.0
54.0
53.0
47.0

Alternate
7.80
11.80
0.60
492
29.2
53.0
57.0

MSCI
World
Index
ESG Score
5.9
ESG Leaders (AAA-AA) (%) 26.6
ESG Laggards (B-CCC) (%)
7.8
ESG Trend Positive (%)
14.6
Environmental Score
5.4

MSCI
World ESG
Proposal Alternate
Focus
Index
7.4
7.3
7.4
55.8
53.6
55.6
1.4
1.4
1.4
14.6
14.8
14.7
6.1
6.1
6.1

1. As of 29th May 2019,2. As of 28th June 2019, 3. Period : 30th May 2014 – 28th June 2019, 4 –Transition current index to the proposals as of 29th May 2019, * - Gross Return (USD), ** - Annualized
average of rebalance dates, *** - Monthly average

16Simulated Impact of Enhancements on MSCI World ESG
Universal

The proposed exclusion resulted in lower exposure to climate risk. The alternate proposal
resulted in improvement in exposure to climate opportunities. Both ‘proposal’ and ‘alternate’
indexes maintained similar risk/return and ESG profile compared to the current index.
1

Key Metrics3

ESG Metrics 2

MSCI
World
Index
Total Return* (%)
Total Risk (%)
Tracking Error (%)
No of Stocks***
Turnover** (%)
Transition Turnover (%)4
Deleted in Transition

7.47
11.62
0.00
1641
1.7

MSCI
World ESG Proposal Alternate
U Index
7.42
11.63
0.70
1597
13.6
5.2
55.0

8.08
11.73
1.29
1528
12.6
12.6
65.0

7.62
11.58
0.80
1564
12.0
5.4
88.0

MSCI
World
Index
ESG Score
5.9
ESG Leaders (AAA-AA) (%) 26.6
ESG Laggards (B-CCC) (%)
7.8
ESG Trend Positive (%)
14.6
Environmental Score
5.4

MSCI
World ESG Proposal Alternate
U Index
6.6
43.1
3.0
16.1
5.8

6.7
44.4
2.7
14.6
6.0

1. As of 29th May 2019,2. As of 28th June 2019, 3. Period : 30th May 2014 – 28th June 2019, 4 –Transition current index to the proposals as of 29th May 2019, * - Gross Return (USD), ** - Annualized
average of rebalance dates, *** - Monthly average

6.6
43.4
2.8
16.1
5.8

17

Proposed Enhancement of ESG
Leaders’ Exclusions Screens18Basis for ESG Leaders Screen Migration• Objective:
To migrate the old exclusions screens to align with the new frameworkwith the least (or most reasonable) turnover• Possible Advantages of Migration to New Framework✓Clearer focus on the intent of exclusion (primary vs. secondary

involvement – e.g., Tobacco producer vs. retailer)✓Would remove over-exclusion in certain screens to align with the primaryobjective of the index, which is focused on Integration

19

Proposed Enhancement• Main Proposal:
Use One Restriction Level below SRI1 to be in line with the Integration
objective but acknowledge screen-specific relevance and/or sensitivity.
ScreenSRI (Reference)

Proposed

TobaccoHighly Restrictive

Moderately Restrictive

Alcohol

Moderately Restrictive

Least Restrictive• Alternate Proposal:
Use Least Restrictive2 across all screens, on the bases of the following:
1) Keep the exclusions at minimum to focus on the Integration objective
2) In line with the intent of the existing criteria (focused on ≥50 primary
involvement for most screens), which is beyond Least Restrictive

1 Except for the Controversial Weapons, which is set to Zero Tolerance / Most Restrictive for MSCI ESG indexes, and Nuclear

Weapons, given its link to Controversial Weapons, and the current restriction level (excludes more than SRI)
2 Except for the Controversial Weapons, which is set to Zero Tolerance / Most Restrictive for MSCI ESG indexes

20Summary of Proposal
Main Proposal: One Restriction level below SRI (except CW & Nuclear Weapons)

Alternate Proposal: Least Restrictive across all screens (except CW)
Current ESG Leaders

SRI(Reference)

Proposal

Alternate

Alcohol≥ 50 or $ 1B Producer

Moderate

Least

Least

Gambling≥ 50 or $ 1B
Operations & Support

Moderate

Least

Least

Nuclear Power≥ 50 or 6000 MW
Utility; Key Suppliers1

Moderate

Least

Least

ScreenControversial Weapons

Most Restrictive / Zero Tolerance

Conventional Weapons≥ 50 or $ 1B Weapons& Components

Moderate

Least

Least

Nuclear Weapons

All Weapons Systems& Components

High

High2

Least

Civilian Firearms≥ 50 or $ 100M
Producer

High

Moderate

Least≥ 50 or $ 1B Producer

High

Moderate

Least

Tobacco1 Uranium Mining, Nuclear Fuel Enrichment, Nuclear Reactor Design

2 Aligned with SRI given its link to Controversial Weapons21

Simulated Impact of Proposed Screens on MSCI World
ESG Leaders

Proposal:
Relative to SRICount

WeightCount

Alcohol

15

1.18%

Gambling

18

Nuclear Power

ScreenAlternate: Least
Restrictive

Weight Count

Weight

15

1.18%

15

1.18%

0.38%

15

0.28%

15

0.28%

24

2.14%

30

2.07%

30

2.07%

Controversial
Weapons

5

0.92%

5

0.92%

5

0.92%

Conventional
Weapons

10

1.61%

12

1.22%

12

1.22%

Nuclear Weapons

25

3.17%

17

2.02%

8

0.76%

All Weapons

26

3.21%

20

2.19%

17

1.60%

Civilian Firearms

1

0.12%

0

0%

0

0%

Tobacco

6

0.94%

6

0.94%

6

0.94%

OVERALL

85

7.28%

86

6.66%

83

6.08%

Proposals
1 & 2 areidentical

Proposals
1 & 2 aredifferent

22

Simulated Impact – VBE Migration (Proposal)
Deletes (Nuclear Power)

ScreenCountry

WeightDTE Energy

USA

0.11%

Dominion Energy

USA

0.30%

Iberdrola

Spain

0.27%

DeleteAdd

Alcohol--

Gambling-

1 (0.05%)

10 (1.58%)-

Pinnacle West Capital

USA

0.05%

Controversial Weapons--

Public Service Ent Grp

USA

0.15%

Conventional Weapons--

RWE Stamm

Germany

0.07%

Nuclear Weapons--

Edison International

USA

0.10%

-

-

Southern Company

USA

0.28%

Civilian Firearms

-

-

E. ON

Germany

0.11%

Tobacco--Xcel Energy

USA

0.15%

OVERALL

10 (1.58%)

1 (0.05%)
Country

WeightAustralia

0.05%

Nuclear PowerAll Weapons

Adds (Gambling)
Aristocrat Leisure23

Simulated Impact – VBE Migration (Alternate)
Deletes (Nuclear Power)

ScreenCountry

WeightDTE Energy

USA

0.11%

Dominion Energy

USA

0.30%

Iberdrola

Spain

0.27%

DeleteAdd

Alcohol--

Gambling-

1 (0.05%)

10 (1.58%)-

Pinnacle West Capital

USA

0.05%

Controversial Weapons--

Public Service Ent Grp

USA

0.15%

Conventional Weapons-

1 (0.55%)RWE Stamm

Germany

0.07%

Nuclear Weapons-

1 (0.55%)

Edison International

USA

0.10%

-

1 (0.55%)Southern Company

USA

0.28%

Civilian Firearms

-

-

E. ON

Germany

0.11%

Tobacco--Xcel Energy

USA

0.15%

OVERALL

10 (1.58%)

2 (0.60%)
Country

WeightAustralia

0.05%

Country

WeightUSA

0.55%

Nuclear PowerAll Weapons

Adds (Gambling)
Aristocrat Leisure

Adds (Weapons)
United Technologies

24Proposed Capping ofMaximum Weight in ESG
Leader and SRI Indexes

25Maximum Constituent Weight in ESG Leader and SRI
Indexes• ESG Leaders and SRI Indexes include constituents at large weight.
• Large constituent weights exposes indexes to potentially stock specific volatility,
concentration risk, replication challenges and also excessive turnover

ESG Leaders Index

Max.
WeightSRI Index

Max.
Weight

EM

9.0

EM

16.5

North America

7.0

World

9.12

EMU

5.4

EMU

8.8

USA

7.4

USA

15.4

Switzerland

36.7

ACWI

8.2

26

Methodology Proposal to Cap Max Issuer Weight
MSCI Proposes to cap the maximum issuer weight in ESG leaders and SRI Indexes.

• In the SRI and ESG Leaders indexes, the selected constituents are weighted inproportion of the market capitalization.

• Capping Proposal – The maximum weight of an issuer would be capped as follows• Max issuer weight in ESG Leaders and SRI Index <5% , if the largest issuer weightin parent index is less than 10%• Max issuer weight in ESG Leaders and SRI Index = largest issuer weight in parent
index, if the largest issuer weight in parent index is more than to 10%• The excess weight of the largest issuer is distributed among rest of the index
constituents in proportion of their weight in the pre-capping index.
• The distribution of excess weight doesn’t take into account the sector neutralityof ESG Leaders and SRI indexes

27

Proposal – MSCI EM ESG SRI Capped (1/2)
Capping of maximum issuer weight resulted in a more diversified index, similar ESG profile ,lower turnover and lower return compared to the parent index.*
Performance (%)

Key Metrics
MSCI EM(EmergingMarkets) Index
Total Return* (%)
Total Risk (%)
Return/Risk
Sharpe Ratio
Active Return (%)
Tracking Error (%)
Information Ratio
Historical Beta
No of Stocks***
Turnover** (%)
Price To Book***Price to Earnings***
Dividend Yield*** (%)

3.36
15.68
0.21
0.15
0.00
0.00
NaN
1.00
903
6.9
1.6
13.9
2.6

MSCI EM(EmergingMarkets) SRI
Index
5.50
14.14
0.39
0.32
2.14
5.24
0.41
0.85
179
10.8
2.0
15.8
2.8

MSCI EM(EmergingMarkets) Index

EM SRI 5%
Capped
4.31
14.16
0.30
0.23
0.94
5.41
0.17
0.85
179
9.9
1.9
15.8
2.8

YTD
1 Yr
3 Yr
5 Yr
10 Yr

10.76
3.83
12.45
2.96
NaN

MSCI EM(EmergingMarkets) SRI
Index
8.23
10.33
12.01
4.91
NaN

EM SRI 5%
Capped
8.22
9.85
10.99
3.74
NaN

Gross returns in USD for the period ending 28-Jun-2019
Returns are annualized for periods longer than one year

Period: 30-May-2014 to 28-Jun-2019* Gross returns annualized in USD** Annualized one-way index turnover over index reviews*** Monthly averages
The definitions of all statistical parameters are available in the Appendix*See disclaimers at the end of this presentation regarding simulated and back-tested results. Not indicative of actual or future
performance.

28

Proposal – MSCI EM ESG SRI Capped(2/2)
Issuer above 5% in EM SRI

WeightTaiwan Semiconductor Mfg

16.4%

Concentration Metrics *MSCI EM(EmergingMarkets) Index
Concentration
Avg No of Stocks
Effective No of Stocks **Parent Index Coverage (%)
Top 10 Sec Wt (%)

903
134
100.0
21.5

MSCI EM(Emerging
EM SRI 5% Capped
Markets) SRI Index
179
32
22.4
35.3

179
72
22.4
27.7

ESG Metrics
MSCI EM(EmergingMarkets) Index
Integration
Key Integration Metrics
ESG Score
ESG Leaders (AAA-AA) (%)
ESG Laggards (B-CCC) (%)
ESG Trend Positive (%)
ESG Trend Negative (%)
ESG Pillars
Environmental Score
Social Score
Governance Score

MSCI EM(Emerging
EM SRI 5% Capped
Markets) SRI Index

4.3
10.1
23.4
11.5
6.7

6.8
43.6
0.0
5.3
4.1

6.7
36.0
0.0
6.0
4.6

4.6
4.6
3.9

5.4
5.7
5.0

5.6
5.4
4.9

*Monthly Average**Effective number of stocks (EN) is a measure of Index
concentration and ranges between 1 (for a single stock) and thenumber of stocks in the Index (for an equal-weighted index).
Generally, the lower the EN, the more concentrated an Index.

29

Proposal – MSCI EM ESG Leaders Capped(1/2)
Capping of maximum issuer weight resulted in a more diversified index, similar ESG profile ,similar turnover and slightly lower return compared to the parent index.*
Performance (%)

Key Metrics
MSCI EM(EmergingMarkets) Index
Total Return* (%)
Total Risk (%)
Return/Risk
Sharpe Ratio
Active Return (%)
Tracking Error (%)
Information Ratio
Historical Beta
No of Stocks***
Turnover** (%)
Price To Book***Price to Earnings***
Dividend Yield*** (%)

3.36
15.68
0.21
0.15
0.00
0.00
NaN
1.00
903
6.9
1.6
13.9
2.6

MSCI EM(EmergingMarkets) ESG
Leaders Index
5.77
15.19
0.38
0.31
2.41
2.60
0.93
0.96
391
12.6
1.9
15.5
2.5

MSCI EM(EmergingMarkets) Index

EM ESG Leaders
5% Capped
5.44
14.89
0.37
0.30
2.07
2.69
0.77
0.94
391
12.6
1.8
15.1
2.6

YTD
1 Yr
3 Yr
5 Yr
10 Yr

10.76
3.83
12.45
2.96
NaN

MSCI EM(EmergingMarkets) ESG
Leaders Index
10.54
5.22
12.86
5.27
NaN

EM ESG Leaders
5% Capped
10.08
6.06
12.40
4.94
NaN

Gross returns in USD for the period ending 28-Jun-2019
Returns are annualized for periods longer than one year

Period: 30-May-2014 to 28-Jun-2019* Gross returns annualized in USD** Annualized one-way index turnover over index reviews*** Monthly averages
The definitions of all statistical parameters are available in the Appendix*See disclaimers at the end of this presentation regarding simulated and back-tested results. Not indicative of actual or future
performance.

30

Proposal – MSCI EM ESG Leaders Capped(2/2)
Issuer above 5% in EM SRI

WeightTencent Holdings Li (Cn)

9.2

Alibaba Group Hldg Adr

8.6

Taiwan Semiconductor Mfg

6.8

Concentration Metrics *MSCI EM (Emerging
Markets) Index
Concentration*
Avg No of Stocks
Effective No of Stocks **Parent Index Coverage (%)
Top 10 Sec Wt (%)

903
134
100.0
21.5

MSCI EM (Emerging
EM ESG Leaders 5%
Markets) ESG
CappedLeaders Index
391
59
50.1
32.0

391
78
50.1
28.5

ESG Metrics
MSCI EM (Emerging
Markets) Index
Integration
Key Integration Metrics
ESG Score
ESG Leaders (AAA-AA) (%)
ESG Laggards (B-CCC) (%)
ESG Trend Positive (%)
ESG Trend Negative (%)
ESG Pillars
Environmental Score
Social Score
Governance Score

MSCI EM (Emerging
EM ESG Leaders 5%
Markets) ESG
CappedLeaders Index

4.3
10.1
23.4
11.5
6.7

5.5
18.5
0.1
16.9
5.2

5.6
18.1
0.2
14.5
5.9

4.6
4.6
3.9

5.1
5.2
4.3

5.1
5.2
4.5

*Monthly Average**Effective number of stocks (EN) is a measure of Index
concentration and ranges between 1 (for a single stock) and thenumber of stocks in the Index (for an equal-weighted index).
Generally, the lower the EN, the more concentrated an Index.

31

Discussion Points•

Climate Profile of ESG Indexes– Do you think climate risk is an important concern for ESG investors ?
– Do you agree with exclusion of thermal coal and unconventional oil and gas companies fromthe ESG indexes ? Are the revenue thresholds sensible ?
– Do you agree with the proposal to divest from the Fossil Fuel companies in the SRI indexes ?
– Are the enhancement proposals providing the right level of over weighting on solution
providers and under weighting on companies facing transition risks?
– Should the ESG indexes also exclude stocks based on Low Carbon Transition Score ?
– Should the proposal for SRI be more broadly applied to KLD 400 ?
– Should the proposal for ESG Leaders be more broadly applied to USA Catholic Values, USA ESG
Select and other associated custom indexes?

•

Controversial Business Involvement Criteria for MSCI ESG Leaders Indexes– Do you agree to keep the Nuclear Weapons screen at highly restrictive level (similar to SRI)
given its association with Controversial Weapons?
– Do you think it makes sense to have nuanced screens (one step below SRI) for Civilian
Firearms and Tobacco?

•

Capping maximum issuer weight in ESG Leaders and SRI Indexes– Should the maximum issuer weight be capped in SRI and ESG Leaders indexes ?
– Should the capping be relaxed to a higher level in SRI indexes ?
32

Appendix

33

Definition of Exclusion Screens•

THERMAL_COAL_MAX_REV_PCT - The maximum percentage of revenue (either reported or estimated) greater than
0% that a company derives from the mining of thermal coal (including lignite, bituminous, anthracite and steam coal)and its sale to external parties. It excludes: revenue from metallurgical coal; coal mined for internal power generation(e.g. in the case of vertically integrated power producers); intra-company sales of mined thermal coal; and revenue
from coal trading.

•

GENERAT_MAX_REV_THERMAL_COAL - The maximum percentage of revenue (either reported or estimated) that acompany derives from the thermal coal based power generation.

•

UNCONV_OIL_GAS_MAX_REV_PCT – The maximum percentage of revenue (either reported or estimated) greater than
0% that a company derives from unconventional oil and gas. It includes revenues from oil sands, oil shale (kerogenrich deposits), shale gas, shale oil, coal seam gas, and coal bed methane. It excludes all types of conventional oil andgas production including Arctic onshore/offshore, deepwater, shallow water and other onshore/offshore.

•

Ex FF (Ex Fossil Fuel) - This screen identifies companies, regardless of their industries, with evidence of owning fossil
fuel reserves used most likely for energy applications. For high-intensity industries (belonging to Energy and Utilities
GICS Sector & Diversified Metals & Mining GICS Sub-Industry), this factor flags companies with evidence of fossil fuelreserves (excluding Metallurgical Coal). For other industries, it flags companies with evidence of fossil fuel reserves(excluding Metallurgical Coal) and deriving revenue from business segments associated with energy application offossil fuels such as Thermal Coal mining, Oil & Gas exploration & production and downstream activities e.g. refining;
distribution & retail; pipeline & transportation; trading and fossil fuel- based power generation.

34

Methodology - ESG Universal Climate Change Overlay
Parameter

Methodology Proposal

Parent Index

MSCI World ESG Universal

Category Tilt
Score

• Solutions = 3x
• Neutral = 1x
• Operational Transition = 0.667x• Product Transition = 0. 333x
• Asset Stranded = 0.167x

Relative Tilt Score(𝐋𝐂𝐓1 𝐒𝐜𝐨𝐫𝐞)/(𝑴𝒂𝒙. 𝐋𝐂𝐓 𝐒𝐜𝐨𝐫𝐞2 𝐢𝐧 𝐂𝐚𝐭𝐞𝐠𝐨𝐫𝐲)

Relative Tilt Score
Floored• Relative Scores below 0.5 are floored at 0.5

Combined Score• Combined Score = Category Tilt Score x Relative Tilt Score

Weighting• Parent security weights are tilted in proportion of the “Combined Score” defined
above

Rebalance
frequency•

Semi Annual

1. LCT – Low Carbon Transition Score
2. LCT Score is winsorized at the 90th percentile to account for outliers.

35Impact of Enhancement Proposal for improvement in
Climate Risk Profile on Climate Profile of Select MSCIESG Indexes
World SRIWorld
Leaders

Climate Metrics
Carbon Footprint –Lower than the
ParentCarbon Emission Intensity✓

Potential Emission Intensity

Risk of Stranded
assets exposure –Lower weight than
the Parent

2

World
ESG
Focus

World
ESG
Universal

✓

✓

✓

✓

✓

✓

✓

Index Weight in Companies
with Fossil Fuel (FF) Tie

✓

✓

✓

✓

More than 5% revenue from
Thermal Coal andUnconventional O&G

✓

✓

✓

✓

Climate Solutions –Higher than the
ParentWeighted Average Green
Revenue2

✓

✓

✓

✓

Index Weight in companies
with Green Revenue > 20%

✓

✓

✓

✓

Transition Risk –Lower than theparentIndex Weight in Transition
Companies

✓

✓



✓

1 – Index constituents as of 29th May 2019, climate metric data as of 30th April 2019. Calculation details can be seen
in appendix.
2 - ✓ : ESG Index is better than the market cap index by at least 20%;  : ESG Index is worse than the market cap
index;– : ESG index is similar to the market cap index

36

ESG Exclusions Framework(1/2)
The standard screens are based on MSCI ESG Research’s Exclusions
framework and can be used to implement values-based exclusions inindexes in a simple and consistent manner.
Restriction
LevelsAbsolute
Tie vs.
Revenue
Threshold** Shaded cells refer to Aggregate Revenue including the relevant business activities

37

ESG Exclusions Framework(2/2)

38

Example of Revenue Screen: Alcohol
Most Restrictive/
Zero Tolerance

Revenue

Alcohol

Any Tie• Producer• Distributor• Retailer• Supplier• Licensor• Ownership

Highly Restrictive

Alcohol
Producer OR
5% Aggregate
Revenue

Absolute Tie

Moderately
Restrictive

5% Production
Revenue OR
15% Aggregate
Revenue

Least Restrictive

10% Production
Revenue

Revenue
Threshold39

Example of Non-Revenue Screen: Animal Welfare
Most Restrictive/
Zero Tolerance

Non-Revenue

Animal
WelfareNon-medical TestingOR
Non-medical
Medical Testing
TestingOR
Medical Testing
Factory Farming
Factory FarmingOR
Licensed Breeder
Licensed Breeder
Licensed Exhibitor
OR
Ownership Of
Licensed Exhibitor

Any Tie
•
•
•
•
•
•
•

Moderately
Restrictive

Highly Restrictive

Non-medical TestingOR
Medical TestingOR
Factory Farming

Least Restrictive

Non-medical Testing

Ownership By

Absolute Tie

40

Deletions1 from MSCI World SRI – Enhancement
Proposal for improvement in Climate Risk Profile
Security NameTOTALCONOCOPHILLIPSSUNCOR ENERGYWEC ENERGY GROUPPIONEER NATURAL RESWOODSIDE PETROLEUMREPSOLEQUINORFORTISHESSCMS ENERGY CORPFRANCO-NEVADA CORP
SSE
MARATHON OIL CORP
DEVON ENERGY CORPSTERIS
FACTSET RESEARCH SYSTEMSNOBLE ENERGYNISOURCE (NEW)TECK RESOURCES BEDP ENERGIAS DE PORTUGALTOKYO GAS CO
ENCANA CORPCENOVUS ENERGYGALP ENERGIA SGPS B
OMV AGOSAKA GAS CO
KEPPEL CORP
VERMILION ENERGYTOHO GAS CO
PRAIRIESKY ROYALTY LTDCountry
GICS Sector Weight (%)
FRANCE
Energy1.24%
USAEnergy0.68%
CANADA
Energy0.49%
USA
Utilities
0.25%
USA
Energy0.25%
AUSTRALIA
Energy0.23%
SPAIN
Energy0.23%
NORWAY
Energy0.19%
CANADA
Utilities
0.16%
USA
Energy0.16%
USA
Utilities
0.16%
CANADA
Materials
0.14%
UNITED KINGDOM Utilities
0.14%
USA
Energy0.12%
USAEnergy0.12%
USA
Health Care
0.11%
USA
Financials
0.11%
USA
Energy0.11%
USA
Utilities
0.10%
CANADA
Materials
0.10%
PORTUGAL
Utilities
0.09%
JAPAN
Utilities
0.09%
CANADA
Energy0.09%
CANADA
Energy0.09%
PORTUGAL
Energy0.08%
AUSTRIA
Energy0.07%
JAPAN
Utilities
0.07%
SINGAPORE
Industrials
0.06%
CANADA
Energy0.03%
JAPANUtilities
0.03%
CANADA
Energy0.03%

1 – If MSCI World SRI was transitioned to proposed methodology as of 29th May 2019.

41

Deletions1 from MSCI World ESG Leaders– Enhancement
Proposal for improvement in Climate Risk Profile
Security Name
CONOCOPHILLIPSDOMINION ENERGY
SOUTHERN COMPANY (THE)SUNCOR ENERGYOCCIDENTAL PETROLEUM
XCEL ENERGYWEC ENERGY GROUPPIONEER NATURAL RES
DTE ENERGY
CLP HOLDINGSFORTISHESSCMS ENERGY CORP
RWE STAMM
DEVON ENERGY CORP
MARATHON OIL CORP
ALLIANT ENERGY CORPAES CORP
NOBLE ENERGYPINNACLE WEST CAPITALNISOURCE (NEW)APACHE CORPEDP ENERGIAS DE PORTUGALORIGIN ENERGYCENOVUS ENERGYENCANA CORP
CIMAREX ENERGY CO
VERMILION ENERGYPRAIRIESKY ROYALTY LTD
JARDINE CYCLE & CARRIAGECountry
GICS Sector
Weight (%)
USA
Energy0.35%
USA
Utilities
0.30%
USA
Utilities
0.28%
CANADA
Energy0.25%
USAEnergy0.20%
USA
Utilities
0.15%
USA
Utilities
0.13%
USA
Energy0.12%
USA
Utilities
0.11%
HONG KONG Utilities
0.10%
CANADA
Utilities
0.08%
USA
Energy0.08%
USA
Utilities
0.08%
GERMANY
Utilities
0.07%
USA
Energy0.06%
USAEnergy0.06%
USA
Utilities
0.06%
USA
Utilities
0.05%
USA
Energy0.05%
USA
Utilities
0.05%
USA
Utilities
0.05%
USA
Energy0.05%
PORTUGAL Utilities
0.05%
AUSTRALIA Energy
0.05%
CANADA
Energy0.04%
CANADA
Energy0.04%
USAEnergy0.03%
CANADA
Energy0.02%
CANADA
Energy0.01%
SINGAPORE Consumer Discretionary
0.01%

1 - If MSCI World ESG Leaders was transitioned to proposed methodology as of 29th May 2019.

42

Deletions1 from MSCI World ESG Focus Index – Enhancement
Proposal for improvement in Climate Risk Profile
Security Name
EXXON MOBIL CORP
CONOCOPHILLIPSCMS ENERGY CORPXCEL ENERGY
SOUTHERN COMPANY (THE)SUNCOR ENERGYHESS
CLP HOLDINGSDOMINION ENERGYENELORIGIN ENERGYOCCIDENTAL PETROLEUMANGLO AMERICANCENOVUS ENERGYDEVON ENERGY CORP

Country
GICS Sector Weight (%)
USA
Energy0.72%
USAEnergy0.37%
USA
Utilities
0.24%
USA
Utilities
0.21%
USA
Utilities
0.21%
CANADA
Energy0.19%
USAEnergy0.18%
HONG KONG
Utilities
0.15%
USA
Utilities
0.12%
ITALY
Utilities
0.11%
AUSTRALIA
Energy0.10%
USAEnergy0.10%
UNITED KINGDOM Materials
0.10%
CANADA
Energy0.10%
USAEnergy0.09%

1 - If MSCI World ESG Focus was transitioned to proposed methodology as of 29th May 2019.

43

Active Sector Exposures – SRI Indexes

44Active Sector Exposures – ESG Leaders Indexes45About MSCI
About MSCI Inc.
MSCI is a leading provider of critical decision support tools andservices for the global investment community. With over 45 years ofexpertise in research, data and technology, we power better investment
decisions by enabling clients to understand and analyze key drivers ofrisk and return and confidently build more effective portfolios.
We create industry-leading research-enhanced solutions that clientsuse to gain insight into and improve transparency across theinvestment process.
To learn more, please visit www.msci.com.

46

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