Index Methodology

MSCI World Sector ES G Red uc ed Carbon Sel ect 20 35 Capped Index es Met hodology

Methodology Book for:•MSCI World Energy ESG Reduced Carbon Select 20 35 Capped Index•

MSCI World Materials ESG Reduced Carbon Select 20 35 Capped Index•

MSCI World Industrials ESG Reduced Carbon Select 20 35 Capped Index•

MSCI World Consumer Discretionary ESG Reduced Carbon Select 20 35
Capped Index•

MSCI World Consumer Staples ESG Reduced Carbon Select 20 35
Capped Index•

MSCI World Healthcare ESG Reduced Carbon Select 20 35 Capped Index•

MSCI World Financials ESG Reduced Carbon Select 20 35 Capped Index•

MSCI World Information Technology ESG Reduced Carbon Select 20 35
Capped Index•

MSCI World Communication Services ESG Reduced Carbon Select 20 35
Capped Index•

MSCI World Utilities ESG Reduced Carbon Select 20 35 Capped Index

Ka

December 2021

DECEMBER 2021

MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

Contents

1

Introduction ............................................................................ 3

2

MSCI ESG Research ............................................................... 4

3

4

2.1

MSCI ESG Ratings ............................................................................... 4

2.2

MSCI ESG Controversies .................................................................... 4

2.3

MSCI ESG Business Involvement Screening Research ................... 4

2.4

MSCI Climate Change Metrics ........................................................... 5

Constructing the Indexes ....................................................... 6
3.1

Applicable Universe ............................................................................ 6

3.2

Defining the Security Level Carbon Exposure .................................. 6

3.3

Eligible Universe .................................................................................. 7

3.4

Defining the Optimization Constraints .............................................. 8

3.5

Determining the Optimized Index ...................................................... 8

3.6

Applying the MSCI 20/35 Indexes Methodology.............................. 9

Maintaining the Indexes ....................................................... 10
4.1

Quarterly Index Reviews ................................................................... 10

4.2

Ongoing Event-Related Maintenance .............................................. 10

Appendix 1: Business Exclusion Criteria ................................... 12
Appendix 2: Optimization Constraints ....................................... 15
Appendix 3: Barra Equity Model Used in The Optimization ...... 17
Appendix 4: New release of Barra® Equity Model or Barra®
Optimizer ..................................................................................... 18© 2020 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

1

Introduction
The MSCI World Energy ESG Reduced Carbon Select 20 35 Capped, MSCI World
Materials ESG Reduced Carbon Select 20 35 Capped, MSCI World Industrials ESG
Reduced Carbon Select 20 35 Capped, MSCI World Consumer Discretionary ESG
Reduced Carbon Select 20 35 Capped, MSCI World Consumer Staples ESG Reduced
Carbon Select 20 35 Capped, MSCI World Healthcare ESG Reduced Carbon Select 20
35 Capped, MSCI World Financials ESG Reduced Carbon Select 20 35 Capped, MSCIWorld Information Technology ESG Reduced Carbon Select 20 35 Capped, MSCIWorld Communication Services ESG Reduced Carbon Select 20 35 Capped, MSCIWorld Utilities ESG Reduced Carbon Select 20 35 Capped Indexes (“The Indexes”) aredesigned to support investors seeking to increase exposure to positiveenvironmental, social and governance (ESG) factors by 20% and aim to reduce thecarbon-equivalent exposure to carbon dioxide (CO2) and other greenhouse gases(GHG) as well as their exposure to potential emissions risk of fossil fuel reserves bythirty percent (30%) relative to the Parent Indexes1.
The Indexes are constructed from their corresponding free-float adjusted market
capitalization weighted Parent Indexes by excluding securities based on ESG andClimate Change-related criteria and use an optimization-based approach. The
optimization-based approach aims to:•

Minimize ex-ante tracking error relative to the Parent Index•

Increase the weighted average ESG Score by 20%•

Reduce the Carbon Intensity and Potential Emissions per dollar of Market
Capitalization by 30%

As a final step, the Indexes are capped as per the MSCI 20/35 Indexes methodology.

1 The corresponding Parent Indexes for the Indexes are defined in Section 3.1 of this methodology document.

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

2

MSCI ESG Research
The Indexes use company ratings and research provided by MSCI ESG Research. In
particular, these indexes use the following four MSCI ESG Research products: MSCIESG Ratings, MSCI ESG Controversies, MSCI Business Involvement Screening
Research and MSCI Climate Change Metrics.
For details on MSCI ESG Research’s full suite of ESG products, please refer to:https://www.msci.com/esg-investing

2.1

MSCI ESG RATINGSMSCI ESG Ratings provides research, analysis and ratings of how well companies
manage environmental, social and governance risks and opportunities. MSCI ESG
Ratings provides an overall company ESG rating - a seven-point scale from ‘AAA’ to‘CCC’. In addition, the product provides scores and percentiles indicating how well acompany manages each key issue relative to industry peers.
For more details on MSCI ESG Ratings, please refer to: https://www.msci.com/esgratings

2.2

MSCI ESG CONTROVERSIESMSCI ESG Controversies (formerly known as MSCI Impact Monitor) provides
assessments of controversies concerning the negative environmental, social, and/or
governance impact of company operations, products and services. The evaluation
framework used in MSCI ESG Controversies is designed to be consistent withinternational norms represented by the UN Declaration of Human Rights, the ILO
Declaration on Fundamental Principles and Rights at Work, and the UN Global
Compact. MSCI ESG Controversies Score falls on a 0-10 scale, with “0” being themost severe controversy.
For more details on MSCI ESG Controversies, please refer to :https://www.msci.com/documents/10199/acbe7c8a-a4e4-49de-9cf85e957245b86b

2.3

MSCI ESG BUSINESS INVOLVEMENT SCREENING RESEARCHMSCI ESG Business Involvement Screening Research (BISR) aims to enableinstitutional investors to manage environmental, social and governance (ESG)
standards and restrictions reliably and efficiently.
For more details on MSCI ESG Business Involvement Screening Research, pleaserefer to http://www.msci.com/resources/factsheets/MSCI_ESG_BISR.pdf© 2020 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

2.4

MSCI CLIMATE CHANGE METRICS
MSCI Climate Change Metrics is designed to support investors seeking to achieve arange of objectives, including measuring and reporting on climate risk exposure,
implementing low carbon and fossil fuel-free strategies, and factoring climatechange research into their risk management processes. It provides Carbon
Emissions, Fossil Fuel exposure, environmental impact (i.e., clean technology) dataand screens, as well as climate-related risk exposure and management assessment
on companies such as Low Carbon Transition scores and categories.
For more details on MSCI Climate Change Metrics, please refer tohttps://www.msci.com/climate-solutions© 2020 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

3

Constructing the Indexes

3.1

APPLICABLE UNIVERSE
The applicable universe for the Indexes includes all the constituents of theirrespective MSCI parent index (the “Parent Index”), as shown in the table below.
Index NameMSCI World Energy ESG Reduced Carbon Select 20
35 Capped Index
MSCI World Materials ESG Reduced Carbon Select
20 35 Capped Index
MSCI World Industrials ESG Reduced Carbon
Select 20 35 Capped Index
MSCI World Consumer Discretionary ESG Reduced
Carbon Select 20 35 Capped Index
MSCI World Consumer Staples ESG Reduced
Carbon Select 20 35 Capped Index
MSCI World Healthcare ESG Reduced Carbon
Select 20 35 Capped Index
MSCI World Financials ESG Reduced Carbon
Select 20 35 Capped Index
MSCI World Information Technology ESG Reduced
Carbon Select 20 35 Capped Index
MSCI World Communication Services ESG
Reduced Carbon Select 20 35 Capped Index
MSCI World Utilities ESG Reduced Carbon Select
20 35 Capped Index

3.2

Parent Index
MSCI World Energy Index
MSCI World Materials
Index
MSCI World Industrials
Index
MSCI World Consumer
Discretionary Index
MSCI World Consumer
Staples Index
MSCI World Healthcare
Index
MSCI World Financials
Index
MSCI World Information
Technology Index
MSCI World
Communication Services
Index
MSCI World Utilities Index

DEFINING THE SECURITY LEVEL CARBON EXPOSURE
The carbon exposure of a security is measured in terms of its greenhouse gas
emissions and its potential carbon emissions from fossil fuel reserves. The Indexes
use MSCI ESG Carbon Metrics data from MSCI ESG Research.

3.2.1

GREENHOUSE GAS EMISSIONSMSCI ESG Research collects company-specific direct (Scope 1) and indirect (Scope2) greenhouse gas (GHG) emissions data from company public documents and/or
the Carbon Disclosure Project. If a company does not report GHG emissions, then
MSCI ESG Research uses its proprietary methodology to estimate Scope 1 and© 2020 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

Scope 2 GHG emissions. The data is updated on an annual basis. Since the current
carbon emissions of a company are directly influenced by its current businessactivity, MSCI normalizes for size by dividing the annual carbon emissions of thecompany by the annual sales of the company.
For newly added companies to the index which do not report emission data andwhere MSCI ESG Research has not estimated the greenhouse gas emissions yet,
MSCI uses the average emissions per dollar of issuer market capitalization for thecompanies in the same industry group, multiplied by the market capitalization of thecompany as the estimated emission for the company.
3.2.2

POTENTIAL CARBON EMISSIONS FROM FOSSIL FUELSMSCI ESG Research collects fossil fuel reserves data where relevant for companies
which have reserves, typically in the Oil & Gas, Coal Mining and Electric Utilities
industries2. Fossil fuel reserves can be used for several applications including energy
or industrial (e.g. coking coal used for steel production). For the development of theIndexes, only fossil fuel reserves used for energy are taken into account. The data is
updated on an annual basis and based on information disclosed by companies.
Sources include company publications, other public records and third party data
providers. For newly added companies to the index where data is not available yet,
MSCI uses zero fossil fuel reserves. The size of reserves of a company typically
influences its market valuation, and hence MSCI normalizes for size by dividing thepotential carbon emissions of the company by its market capitalization.
To convert reserves data to potential carbon emissions, MSCI ESG Research applies
a formula from the Potsdam Institute for Climate Impact Research3.

3.3

ELIGIBLE UNIVERSE
Securities of companies involved in Very Severe business controversies as definedby the MSCI ESG Controversies Methodology are not eligible for inclusion in the
Indexes. This is implemented by excluding constituents of the Parent Index with ESG
Controversy Score = 0 (‘Red Flag’ companies).

2 For more information on MSCI ESG Carbon Metrics, please refer to https://www.msci.com/index-carbon-

footprint-metrics
3 Malte Meinshausen, Nicolai Meinshausen, William Hare, Sarah C. B. Raper, Katja Frieler, Reto Knutti, David J.

Frame & Myles R. Allen. Greenhouse-gas emission Target for limiting global warming to 2 °C. Nature 458, 11581162 (30 April 2009) | doi: 10.1038/nature08017; Received 25 September 2008; Accepted 25 March 2009.
Supplementary Information, p. 7.

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

Companies that are involved in specific businesses which have high potential for
negative social and/or environmental impact are ineligible for inclusion in the index.
•

Controversial Weapons•

Nuclear Weapons•

Civilian Firearms•

Tobacco•Thermal Coal•

Oil Sands•

Weapons

In addition to the above, companies that fail to comply with the United Nations
Global Compact Principles are also excluded from The Indexes.
Please refer to Appendix 1 for more details on these criteria

OTHER EXCLUSION CRITERIA• Missing Controversy Score – Companies not assessed by MSCI ESG
Research’s MSCI ESG Controversy Scores are excluded from the index.
•

3.4

Missing ESG Rating or ESG Score – Companies which are not rated by MSCIESG Research for an MSCI ESG Rating are excluded from the index.

DEFINING THE OPTIMIZATION CONSTRAINTS
The optimization process aims to minimize the Index’s ex-ante tracking error relative
to the Parent Index subject to the optimization constraints detailed in Appendix 2.

3.5

DETERMINING THE OPTIMIZED INDEXThe Index is constructed using MSCI’s Barra® Open Optimizer in combination withthe relevant Barra Equity Model4. The optimization uses a universe of eligible
securities and the specified optimization objective and constraints to determine theconstituents of the Indexes.

4 Please refer to Appendix 3 and 4 for more details.

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

Infeasible Solution –During the Semi-Annual Index Review, in the event that there is no optimal solutionthat satisfies all the optimization constraints, the following constraints will be
relaxed, until an optimal solution is found:•

The one-way turnover constraint will be relaxed in 5 steps up to 30%.

•

The weighted average ESG Score constraint will be relaxed in 5 steps up to
10%.

•

The weighted average Carbon Intensity and the potential emissions per dollar
of market capitalization constraint will be relaxed in 5 steps up to 20%.

The relaxations are completed in an alternative manner – a single step of turnover
relaxation is followed by a single step of ESG score improvement relaxation, followed
by a single step of weighted average carbon intensity reduction relaxation, before theturnover constraint is relaxed further. In the event that no optimal solution is foundafter the above constraint relaxations are exhausted, the relevant Index will not berebalanced for that Index Review.
3.5.1

DETERMINING THE OPTIMIZED INDEXThe Index is constructed using the Barra Open Optimizer5 in combination with therelevant Barra Equity Model. The optimization uses the universe of eligible securities
and the specified optimization objectives and constraints to determine theconstituents of and the weights of constituents in the Indexes.

3.6

APPLYING THE MSCI 20/35 INDEXES METHODOLOGYAs a final step, the Indexes are capped6 as per the MSCI 20/35 Indexes methodology.
For details, refer to the MSCI Capped Indexes Methodology at www.msci.com/indexmethodology

5 Please refer to Appendix 3 and 4 for more details.
6 The ESG and Carbon targets are not enforced again post 20/35 capping.

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

4

Maintaining the Indexes

4.1

QUARTERLY INDEX REVIEWS
The Index is rebalanced on a quarterly basis to coincide with the regular Index Reviews(Semi-Annual Index Reviews in May and November and Quarterly Index Reviews in
February and August) of the MSCI Global Investable Market Indexes. Changes are
implemented at the end of February, May, August and November. The pro forma
indexes are in general announced nine business days before the effective date.
ESG scores used for the Quarterly Index Reviews will be taken as of the end of themonth preceding the Index Review, i.e., January, April, July, and October.
At each Index Review, the optimization process outlined in Section 3 is implemented.
In general, MSCI uses MSCI ESG Research data (including MSCI ESG Ratings, MSCIESG Controversies Scores, MSCI Business Involvement Screening Research, and
MSCI ESG Carbon Metrics) as of the end of the month preceding the Index Reviews.
For some securities, such data may not be published by MSCI ESG Research by theend of the month preceding the Index Review. For such securities, MSCI will use ESG
data published after the end of month, when available.

4.2

ONGOING EVENT-RELATED MAINTENANCE
The general treatment of corporate events in The Indexes aim to minimize turnoveroutside of Index Reviews. The methodology aims to appropriately represent an
investor’s participation in an event based on relevant deal terms and pre-event
weighting of the index constituents that are involved. Further, changes in index
market capitalization that occur as a result of corporate event implementation will be
offset by a corresponding change in the Variable Weighting Factor (VWF) of theconstituent.
The following section briefly describes the treatment of common corporate events
within The Indexes.
No new securities will be added (except where noted below) to the Index between
Index Reviews. Parent Index deletions will be reflected simultaneously.
EVENT TYPE

EVENT DETAILSNew additions to the Parent Index

A new security added to the parent
index (such as IPO and other early
inclusions) will not be added to theindex.

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

Spin-Offs

All securities created as a result of thespin-off of an existing Index
constituent will be added to the Index
at the time of event implementation.
Reevaluation for continued inclusionin the Index will occur at thesubsequent Index Review.

Merger/Acquisition

For Mergers and Acquisitions, theacquirer’s post event weight willaccount for the proportionate amountof shares involved in dealconsideration, while cash proceeds
will be invested across the Index.
If an existing Index constituent isacquired by a non-Index constituent,
the existing constituent will be deleted
from the Index and the acquiring nonconstituent will not be added to theIndex.

Changes in Security Characteristics

A security will continue to be an Index
constituent if there are changes incharacteristics (country, sector, size
segment, etc.) Reevaluation forcontinued inclusion in the Index will
occur at the subsequent Index Review.

Further detail and illustration regarding specific treatment of corporate events
relevant to this Index can be found in the MSCI Corporate Events Methodology bookunder the sections detailing the treatment of events in Capped Weighted and NonMarket Capitalization Weighted indexes.
The MSCI Corporate Events methodology book is available at:https://www.msci.com/index-methodology© 2020 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

Appendix 1: Business Exclusion Criteria
MSCI ESG Research has developed a framework designed to define significant
involvement in controversial activities. According to this framework, there are threetolerance levels: Zero Tolerance, Minimal Tolerance and Low Tolerance.
Each controversial activity screened by The Indexes (except Thermal Coal,
Conventional Weapons, Oil Sands and Global Norms) is assigned to one of thesetolerance levels:
Activities classified under “Zero Tolerance”•

Controversial WeaponsoAll companies with any tie to Controversial Weapons (cluster
munitions, landmines, depleted uranium weapons,
biological/chemical weapons, blinding lasers, non-detectable
fragments and incendiary weapons), as defined by the methodologyof the MSCI Ex-Controversial Weapons Indexes available athttps://www.msci.com/index-methodology.

Activities classified under “Minimal Tolerance”•

Nuclear WeaponsoAll companies that manufacture nuclear warheads and/or whole
nuclear missiles.

oAll companies that manufacture components that were developed orare significantly modified for exclusive use in nuclear weapons(warheads and missiles).

o

All companies that manufacture or assemble delivery platforms thatwere developed or significantly modified for the exclusive delivery of
nuclear weapons.

oAll companies that provide auxiliary services related to nuclear
weapons.

o

All companies that manufacture components that were notdeveloped or not significantly modified for exclusive use in nuclear
weapons (warheads and missiles).

o

All companies that manufacture or assemble delivery platforms thatwere not developed or not significantly modified for the exclusive
delivery of nuclear weapons.

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021o••

All companies that manufacture components for nuclear-exclusive
delivery platforms.

Civilian FirearmsoAll companies classified as “Producer” of firearms and small arms
ammunitions for civilian markets. It does not include companies thatcater to the military, government, and law enforcement markets.

oAll companies deriving 5% or more revenue from the distribution(wholesale or retail) of firearms or small arms ammunition intended
for civilian use.

Tobaccoo

All companies classified as a “Producer”oAll companies deriving 5% or more aggregate revenue from theproduction, distribution, retail and supply of tobacco-related products.

Activities not classified under any specific tolerance level•••

Thermal CoaloAll companies deriving 5% or more revenue (either reported or
estimated) 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 forinternal power generation (e.g. in the case of vertically integrated
power producers); intra-company sales of mined thermal coal; andrevenue from coal trading.

o

All companies deriving 5% or more revenue (either reported or
estimated) from the thermal coal based power generation.

Conventional WeaponsoAll companies deriving 5% or more revenue from the production of
conventional weaponsoAll companies deriving 10% or more aggregate revenue from
weapons systems, components and support systems and services

Oil Sandso

All companies deriving 5% or more revenue from oil sands extraction,
which own oil sands reserves and disclose evidence of deriving© 2020 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

revenue from oil sands extraction. Companies that derive revenue
from non-extraction activities (e.g. exploration, surveying, processing,refining) or intra-company sales are not excluded. Additionally,
companies that own oil sands reserves with no associated revenue
are also not excluded.
•

Global Norms – United Nations Global Compact Complianceo

All companies that fail to comply with the United Nations Global
Compact principles.

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Appendix 2: Optimization Constraints
At each Quarterly Index Review, the following optimization constraints are used toensure replicability and investability.
Screened Parent
The screened parent is constructed by excluding securities from the Parent Index
based on the exclusion criteria as defined in Section 3.3 (“Screened Parent”). The
security weights are then normalized to 100%.
Optimization Constraints
No.

Parameter

1

Minimum Constituent Weight2

Asset Lower Bound

3

Asset Upper Bound

ValuesMinimum constituent weight in the
Screened Parent
Maximum (Minimum constituent weightin the Screened Parent, 0.25 * Security
Weight in the Screened Parent)
Minimum (5 * Security Weight in the
Screened Parent, Security Weight in the
Screened Parent +2%)

4^ Active Country Weights*
Minimum Increase in the Weighted
5^ Average ESG Score relative to the Parent
Index
Minimum Reduction in the Weighted
6^ Average Carbon Emission Intensity
relative to the Parent Index
Minimum Reduction in the Potential
7^ Emissions per dollar of market
capitalization relative to the Parent Index
One Way Turnover during May and8
November Index Review
One Way Turnover during Feb and Aug
9Index Review+/-10%
20%

30%

30%
10%
5%

10 Specific Risk Aversion

0.075

11 Common Factor Risk Aversion

0.007512 Maximum Issuer Weight35%© 2020 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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* Active Country Weights – In case there are countries in the Parent Index whichweigh less than 2.5% in the Parent Index, then for such countries the active country
upper bound of +10% is not applicable. When a country weighs less than 2.5% in the
Parent Index then the upper bound of country weight in The Index is set at threetimes of the country’s weight in the Parent Index. The Active Weight constraint isapplied as a “Soft” constraint in The Indexes.
^ The Optimization Constraints are applied relative to the Parent Index.

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Appendix 3: Barra Equity Model Used in The
Optimization
The Indexes currently use an optimization setup using the MSCI Barra Global Equity
Model for Long-Term Investors (GEMLTL).

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MSCI WORLD SECTOR ESG REDUCED CARBON SELECT 20 35 CAPPEDINDEXES METHODOLOGY | December 2021

Appendix 4: New release of Barra® Equity Model orBarra® Optimizer
A major new release of the relevant Barra Equity Model or Barra Optimizer may
replace the former version within a suitable timeframe.

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