Index Methodology

MSCI Climate
Change Indexes
Methodology
May 2021

MAY 2021

MSCI Climate Change Indexes Methodology | May 2021

Contents

1

Introduction....................................................................... 4

2

MSCI ESG Research........................................................... 53

2.1

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

2.2

MSCI ESG Business Involvement Screening Research .................. 5

Index Construction Methodology ....................................... 6
3.1

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

3.2

Minimum Requirements................................................................... 6

3.3

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

3.4

Determination of Combined Score .................................................. 8

3.4.1

Category Tilt Score ................................................................................................. 8

3.4.2

Relative Tilt Score ................................................................................................... 8

3.4.3

Combined Score ...................................................................................................... 8

3.5

4

Weighting Scheme ........................................................................... 9

3.5.1

Intermediate Universe ........................................................................................... 9

3.5.1.1

High Climate I mpact Intermediate Universe ................................................... 9

3.5.1.2

Low Climate Impact Intermediate Universe.................................................... 9

3.5.2

Final Universe........................................................................................................... 9

3.5.3

Capping of security weight in Final Universe................................................10

3.5.4

EU CTB Check ........................................................................................................10

Maintaining the MSCI Climate Change Indexes................ 11
4.1

Semi-Annual Index Reviews ........................................................... 11

4.2

Ongoing Event Related Changes ................................................... 11

Appendix I: Companies Involved in Controversial Weapons
Business ............................................................................... 13
Appendix II: MSCI Low Carbon Transition Risk Assessment .. 15© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

Appendix III: Calculation of Target Metrics ............................ 17
Appendix IV: Iterative Process ............................................... 22
Appendix V: Minimum Requirements of EU CTB .................... 25© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

1

Introduction
The MSCI Climate Change Indexes (the ‘Indexes’) aim to represent the performanceof an investment strategy that re-weights securities based upon the opportunities
and risks associated with the transition to a lower carbon economy. The Index also
excludes companies meeting the below exclusion criteria –
•
•
•
•
•

Companies involved in manfacturering of Controversial Weapons
Companies involved in very severe ESG Controversies
Companies involved in severe Environmental Controversies
Companies involved in the Tobacco-related businesses
Companies involved in Thermal Coal extraction and mining

The methodology uses the MSCI Low Carbon Transition1 (LCT) score and category to
reweight constituents of a parent index to increase its exposure to companies
participating in opportunities associated with transition and decrease its exposure tocompanies exposed to risks associated with transition. As a final step, the MSCI
Climate Change Indexes are designed to exceed the minimum standards of the EU
Climate Transition Benchmark (CTB) 2. The index applies an heuristics-based
approach in order to meet the following objectives –••••Reduce the weighted average greenhouse gas intensity by 30% (compared tothe underlying investment universe.
Reduce the weighted average greenhouse gas (GHG) intensity by 7% on anannualized basis
Reduce the weighted average potential emissions intensity by 30%(compared to the underlying investment universe.
Have at least equivalent ratio of weighted average “Green Revenues” toweighted average “Brown Revenues” as that of the underlying investment
universe.

1

Please refer to Appendix II: MSCI Low Carbon Transition Risk Assessment andhttps://www.msci.com/climate-change-solutions for further details regarding the MSCI Low Carbon Transition
score and category
In case there are changes in the EU delegated acts (Regulation (EU) 2016/1011 as amended by Regulation (EU)2019/2089) and an update to the Index methodology is required, MSCI will issue an announcement prior to
implementing the changes in the methodology. MSCI will not conduct a formal consultation for such an update.
2© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

2

MSCI ESG Research
MSCI ESG Research provides in-depth research, ratings and analysis of theenvironmental, social and governance-related business practices of thousands ofcompanies worldwide. It consists of an integrated suite of tools and products toefficiently manage research, analysis and compliance tasks across the spectrum of
ESG factors.
The Index uses company ratings and research provided by MSCI ESG Research. In
particular, this index uses the following MSCI ESG Research products: MSCI Climate
Change Metrics and MSCI ESG Business Involvement Screening Research.
For details on MSCI ESG Research’s full suite of ESG products, please refer to:https://www.msci.com/esg-integration

2.1

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.
For more details on MSCI Climate Change Metrics, please refer tohttps://www.msci.com/climate-change-solutions

2.2

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© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

3

Index Construction Methodology

3.1

APPLICABLE UNIVERSE
The applicable universe includes all the existing constituents of the parent index(“Parent Index”). This approach aims to provide an opportunity set with sufficientliquidity and capacity.

3.2

MINIMUM REQUIREMENTS
The requirements 3 MSCI imposes for the MSCI Climate Change Indexes are detailedin Table 1.
Table 1: Requirements imposed for the MSCI Climate Change Indexes

Requirements
Minimum reduction in Weighted
Average Scope 1+2+3 Carbon
Emissions Intensity (WACI) relative toParent Index
Minimum reduction in Weighted
Average Potential Emissions Intensity
relative to Parent Index

Baseline Exclusions

Minimum average reduction (perannum) in WACI relative to WACI in
the Base Date
Minimum ratio of Green Revenue/
Brown Revenue relative to Parent
Index
3

MSCI Climate Change Indexes
30%30%• Controversial Weapons• ESG Controversy Score 4 of 0
• Tobacco Involvement• Orange Flag Environmental
Controversies• Thermal coal mining
7%

At least equivalent

the minimum requirements for EU Climate Transition Benchmarks in the EU Delegated Acts are detailed in Appendix V

4The evaluation framework used in MSCI ESG Controversies is designed to be consistent with international norms
represented by the UN Declaration of Human Rights, the ILO Declaration on Fundamental Principles and Rights at Work,and the UN Global Compact. For more details on MSCI ESG Controversies, please refer towww.msci.com/documents/esg-controversies© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

Active weight in High Climate Impact
Sector relative to Parent Index asdefined in Appendix III
Corporate Target Setting

3.3

0%
Aims to achieve higher allocation tocompanies that set carbon reduction
targets.

ELIGIBLE UNIVERSE
The eligible universe is constructed by excluding securities based on the following
criteria:•

Controversial Weapons: Companies involved in Controversial Weapons (i.e.
cluster munitions, landmines, depleted uranium weapons,
biological/chemical weapons, blinding lasers, non-detectable fragments andincendiary weapons), as defined by the methodology of the MSCI ExControversial Weapons Indexes. For more details on the controversial
weapons exclusion, please refer to Appendix I.

•

Tobacco: All companies with involvement in Tobacco as defined by themethodology of the MSCI Global ex Tobacco Involvement Indexes.

•

Environmental Harm: All companies having faced very severe and severe
controversies pertaining to Environmental issues – Defined as companies
with an Environment Controversy Score of 0 or 1.

•

Thermal Coal Mining: All companies deriving 1% 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 for internal power
generation (e.g. in the case of vertically integrated power producers), intracompany sales of mined thermal coal, and revenue from coal trading (either
reported or estimated)•

Missing LCT Category/Score: Companies not rated by MSCI ESG Researchfor Low Carbon Transition Assessment.

Additionally, companies are required to have a minimum ESG Controversy Score of 1
to be eligible in the index.

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MSCI Climate Change Indexes Methodology | May 2021

3.4

DETERMINATION OF COMBINED SCORE
Each company in the eligible universe is assigned a Combined Score, which is
calculated using a company’s LCT Category and its Low Carbon Transition Score as
outlined below.

3.4.1

CATEGORY TILT SCORE
The ‘Category Tilt Score’ is used to express relative tilt towards or away from a stock
based on the LCT Category. Based on the LCT Category of a company, a Category
Tilt Score is assigned based on the table below:
LCT Category
Solutions
NeutralOperational Transition
Product Transition
Asset Stranding

3.4.2

Category Tilt Score
3
1
0.667
0.333
0.167

RELATIVE TILT SCORE
The ‘Relative Tilt Score’ differentiates companies within an LCT Category.
Companies with higher LCT Score are determined by MSCI ESG Research to berelatively better at managing their climate related risk compared to their peers withworse LCT Score.
The Relative Tilt Score is calculated by normalizing security level LCT score relative
to the maximum5 LCT Score of the LCT Category within the Parent Index. The‘Relative Tilt Score’ is floored at 0.5 to balance its effect on the final weight of index
constituents
𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑇𝑖𝑙𝑡 𝑆𝑐𝑜𝑟𝑒 =3.4.3

𝐿𝐶𝑇 𝑆𝑐𝑜𝑟𝑒
𝑀𝑎𝑥𝑖𝑚𝑢𝑚2 𝐿𝐶𝑇 𝑆𝑐𝑜𝑟𝑒 𝑖𝑛 𝐿𝐶𝑇 𝐶𝑎𝑡𝑒𝑔𝑜𝑟𝑦

COMBINED SCOREThe Combined Score is calculated for each company as follows:
Combined Score = Category Tilt Score * Relative Tilt Score.

5

To account for potential outliers within each LCT Category, the category maximum LCT Score is calculated after
winsorizing the security level LCT Score at 90 th percentile of the LCT Category.

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MSCI Climate Change Indexes Methodology | May 2021

3.5

WEIGHTING SCHEME
At each rebalancing, all the securities from the eligible universe are weighted by the
product of their weight in the Parent Index and the Combined Score.
𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦 𝑊𝑒𝑖𝑔ℎ𝑡 = 𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝑆𝑐𝑜𝑟𝑒 ∗ 𝑊𝑒𝑖𝑔ℎ𝑡 𝑖𝑛 𝑃𝑎𝑟𝑒𝑛𝑡 𝐼𝑛𝑑𝑒𝑥
The above weights are then normalized to 100%.

3.5.1

INTERMEDIATE UNIVERSE
Each security in the Applicable Universe is classified into one of two climate impact
sectors 6 based on its NACE section code. A stock can be assigned to either a ‘ HighClimate Impact’ or ‘Low Climate Impact’ sector. The Eligible Universe is broken into
two smaller universes as described below:

3.5.1.1 HIGH CLIMATE IMPACT INTERMEDIATE UNIVERSEHigh Climate Impact Intermediate Universe is constructed in following two steps –•Select all securities in the High Climate Impact Sector from the Applicable
Universe.

•

Renormalize the weights of securities so that the aggregate weight of
securities is equal to the weight of High Climate Impact Sector in the Parent
Index.

3.5.1.2 LOW CLIMATE IMPACT INTERMEDIATE UNIVERSE
Low Climate Impact Intermediate Universe is constructed in following two steps –

3.5.2

•

Select all securities in the Low Climate Impact Sector from the Applicable
Universe.

•

Renormalize the weights of securities so that the aggregate weight of
securities is equal to the weight of Low Climate Impact Sector in the Parent
Index.

FINAL UNIVERSE
The Final Universe is constructed by combining the High Impact Intermediate
Universe and the Low Impact Intermediate Universe. The High Impact Sector and
Low Impact Sector weights are equal to their respective weights in the Parent Index.

6

For details regarding the Climate Impact Sectors, please refer to Appendix II I: Calculation of Target Metrics© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

The security weight within the High Impact and Low Impact sectors are in proportionof the security’s LCT Category7, LCT Score and Carbon Emissions Intensity.
Compared to the Parent Index, the Final Universe typically has

3.5.3

•

Lower Carbon Footprint•

Higher Green Revenue to Brown Revenue ratio•

Higher weight in companies which set emission reduction targets 8•

Equal weight in High Impact and Low Impact Sector

CAPPING OF SECURITY WEIGHT IN FINAL UNIVERSE
The weight of securities in the Final Universe is capped at 5% 9, with the excess
weight being distributed among the remaining securities in the same Climate Impact
sector as the security being capped so that the overall weight in the High Impact
Sector and Low Impact Sector is unchanged.

3.5.4

EU CTB CHECKThe Final Universe is assessed against the minimum requirements detailed in Table 1.
In case the Final Universe is found deficient on any of the minimum requirements, then
the weights of the securities in the Final Universe are determined through an iterative
process as described in Appendix IV.

7

For details regarding the LCT Category and LCT Score, please refer to Appendix II: MSCI Low Carbon Transition Risk
Assessment
8

The assessment of Low Carbon Transition Risk Management is based on policies and commitments to mitigate transition
risk, governance structures, risk management programs and initiatives, targets and performance, and involvement in any
controversies. Thus, emission reduction targets are considered in the MSCI Low Carbon Transition Assessment, which isused in the reweighting of constituents in the MSCI Climate Change Indexes methodology.
9

Securities in the Index based on narrow Parent Indexes are capped at the maximum weight in the Parent Index. Narrow
Parent Indexes are defined as those indexes for which the maximum market capitalization weight in the Parent Index ismore than 10%.

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MSCI Climate Change Indexes Methodology | May 2021

4

Maintaining the MSCI Climate Change Indexes

4.1

SEMI-ANNUAL INDEX REVIEWS
The Indexes are rebalanced on a semi-annual basis, as of the close of the lastbusiness day of May and November, coinciding with the May and November SemiAnnual Index Review of the MSCI Global Investable Market Indexes. The pro forma
Indexes are in general announced nine business days before the effective date.
In general, MSCI uses MSCI ESG Research data (including MSCI Climate Change
Metrics and MSCI Business Involvement Screening Research) as of the end of themonth preceding the Index Reviews for the rebalancing of MSCI Climate Change
indexes.

4.2

ONGOING EVENT RELATED CHANGESThe general treatment of corporate events in the MSCI Climate Change Indexes aims
to minimize turnover outside of Index Reviews. The methodology aims toappropriately 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 the constituent.
Additionally, if the frequency of Index Reviews in the Parent Index is greater than thefrequency of Index Reviews in the MSCI Climate Change Index, the changes made to
the Parent Index during intermediate Index Reviews will be neutralized in the MSCI
Climate Change Index.
The following section briefly describes the treatment of common corporate events
within the MSCI Climate Change 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 Climate Change Indexes Methodology | May 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© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

Appendix I: Companies Involved in Controversial
Weapons BusinessCompanies which meet the following Controversial Weapons criteria are excluded
from the Index•

Cluster Bombs
MSCI ESG Research’s cluster bomb research identifies public companies thatare involved in the production of cluster bombs and munitions, or the
essential components of these products.

•

Landmines
MSCI ESG Research’s landmines research identifies public companies thatare involved in the production of anti‐personnel landmines, anti‐vehicle
landmines, or the essential components of these products.

•

Depleted Uranium Weapons
MSCI ESG Research’s depleted uranium weapons research identifies publiccompanies involved in the production of depleted uranium weapons andarmor.

•

Chemical and Biological Weapons
MSCI ESG Research’s chemical and biological weapons research identifies
public companies that are involved in the production of chemical andbiological weapons, or the essential components of these products.

•

Blinding Laser Weapons
MSCI ESG Research’s blinding laser weapons research identifies publiccompanies that are involved in the production of weapons utilizing laser
technology to cause permanent blindness.

•

Non-Detectable Fragments
MSCI ESG Research’s non-detectable fragments research identifies publiccompanies that are involved in the production of weapons that use nondetectable fragments to inflict injury.

•

Incendiary Weapons (White Phosphorus)
MSCI ESG Research’s incendiary weapons research identifies companies
that are involved in the production of weapons using white phosphorus.

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MSCI Climate Change Indexes Methodology | May 2021

Involvement criteria:•

Producers of the weapons•

Producers of key components of the weapons (only applies to cluster bombs,
landmines, depleted uranium weapons as well as chemical and biologicalweapons)•

Ownership of 20% or more of a weapons or components producer•

The minimum limit is raised to 50% for financial companies having anownership in a company that manufactures controversial weapons or key
components of controversial weapons•

Owned 50% or more by a company involved in weapons or components
production

Revenue limits:
Any identifiable revenues, i.e., zero tolerance
The exclusion criteria above are reflective of the MSCI Global ex Controversial
Weapons Index Methodology as of June 201910. For details please refer to MSCI
Global ex Controversial Weapons Indexes Methodology at
https://www.msci.com/index-methodology.

10

https://www.msci.com/eqb/methodology/meth_docs/MSCI_Global_ex_Controversial_Weapons_Indexes_Methodology_
May2018.pdf© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

Appendix II: MSCI Low Carbon Transition Risk
Assessment
MSCI ESG Research’s Low Carbon Transition Risk assessment 11 is designed to
identify potential leaders and laggards by holistically measuring companies’
exposure to and management of risks and opportunities related to the low carbon
transition.
The final output of this assessment is two company-level factors as described
below:(1) Low Carbon Transition Category: This factor groups companies in fivecategories that highlight the predominant risks and opportunities they are
most likely to face in the transition (Exhibit 1).
(2) Low Carbon Transition Score: This score is based on a multi-dimensionalrisks and opportunities assessment and considers both predominant andsecondary risks a company faces. It is industry agnostic and represents anabsolute assessment of a company’s position vis-à-vis the transition.

Exhibit 1: Low Carbon Transition Categories and Scores

11 For more details on MSCI Climate Change Metrics, please refer to https://www.msci.com/climate-change-

solutions© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

Calculation methodology
The Low Carbon Transition Categories and Scores are determined by a combinationof each company’s current risk exposure and its efforts to manage the risks andopportunities presented by the low carbon transition. The 3-step process followed by
MSCI ESG Research is explained below.
Step 1: Measure Low Carbon Transition Risk Exposure
The first step towards measuring the Low Carbon Transition Risk Exposure for acompany is the computation of its Carbon Intensity profile – which is informed by its
Product Carbon Intensity, Operational Carbon Intensity and Total Carbon Intensity. In
the next step, we compute Low Carbon Transition Risk Exposure Category and Score
based on Total Carbon Intensity.
Step 2: Assess Low Carbon Transition Risk Management
In the second step, we assess a company’s management of risks and opportunities
presented by the low carbon transition. This assessment is based on policies andcommitments to mitigate transition risk, governance structures, risk management
programs and initiatives, targets and performance, and involvement in any
controversies.
Step 3: Calculate Low Carbon Transition Category and Score
In the final step, the Low Carbon Transition Risk Exposure Category and Score thatwas calculated in Step 1 are adjusted for the strength of management efforts.
Following this adjustment, Low Carbon Transition Risk Exposure Score of companies
with top or second quartile risk management improves and some top and second
quartile companies may move up one category.

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MSCI Climate Change Indexes Methodology | May 2021

Appendix III: Calculation of Target Metrics
Calculation of Weighted Average Carbon Emissions Intensity
For Parent Index constituents where the Scope 1+2+3 Emissions Intensity is notavailable, the average Scope 1+2+3 Emissions Intensity of all the constituents of the
MSCI ACWI in the same GICS Industry Group in which the constituent belongs isused.
Security Level Carbon Emissions Intensity =𝑆𝑐𝑜𝑝𝑒 1 + 2 + 3 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 ∗ (1 + 𝐸𝑉𝐼𝐴𝐹)𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 + 𝐶𝑎𝑠ℎ(𝑖𝑛 𝑀$)

Enterprise Value Inflation Adjustment Factor (EVIAF) 12 =𝐸𝑉𝐼𝐴𝐹 = (𝐴𝑣𝑒𝑟𝑎𝑔𝑒 (𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 + 𝐶𝑎𝑠ℎ)𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 (𝐴𝑣𝑒𝑟𝑎𝑔𝑒 (𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 + 𝐶𝑎𝑠ℎ))) −1Weighted Average Carbon Emissions Intensity of Parent Index =∑(𝑊𝑒𝑖𝑔ℎ𝑡 𝑖𝑛 𝑃𝑎𝑟𝑒𝑛𝑡 𝐼𝑛𝑑𝑒𝑥 ∗ 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦 𝐿𝑒𝑣𝑒𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 )Weighted Average Carbon Emissions Intensity of Derived Index =∑(𝑊𝑒𝑖𝑔ℎ𝑡 𝑖𝑛 𝐷𝑒𝑟𝑖𝑣𝑒𝑑 𝐼𝑛𝑑𝑒𝑥 ∗ 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦 𝐿𝑒𝑣𝑒𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 )Calculation of Potential Carbon Emissions Intensity
For newly added companies to the index where data is not available yet, MSCI uses
zero fossil fuel reserves.
Security Level Potential Carbon Emissions Intensity =𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 ∗ (1 + 𝐸𝑉𝐼𝐴𝐹)𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 + 𝐶𝑎𝑠ℎ(𝑖𝑛 𝑀$)
Weighted Average Potential Emissions Intensity of Parent Index =12

Average Enterprise Value + Cash is calculated for securities in the Eligible Universe© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021∑(𝑊𝑒𝑖𝑔ℎ𝑡 𝑖𝑛 𝑃𝑎𝑟𝑒𝑛𝑡 𝐼𝑛𝑑𝑒𝑥 ∗ 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦 𝐿𝑒𝑣𝑒𝑙 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 )Weighted Average Potential Emissions Intensity of Derived Index =∑(𝑊𝑒𝑖𝑔ℎ𝑡 𝑖𝑛 𝐷𝑒𝑟𝑖𝑣𝑒𝑑 𝐼𝑛𝑑𝑒𝑥∗ 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦 𝐿𝑒𝑣𝑒𝑙 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 )Calculation of Average Decarbonization
On average, the Indexes follow a 7% decarbonization trajectory since the Base Date.
The Weighted Average Carbon Intensity at the Base Date (W 1) is used to compute thetarget Weighted Average Carbon Intensity at any given Semi-Annual Index Review (W t)as per the below formula.
(𝑡−1)

𝑊𝑡 = 𝑊1 ∗ 0.93 2
Where ‘t’ is the number of Semi-Annual Index Reviews since the Base Date.
Thus, for the 3rd Semi-Annual Index Review since the Base Date (t=3), the target
Weighted Average Carbon Intensity will be W 1*0.93.
Climate Impact Sectors
NACE13 is the European Union’s classification of economic activities. As per the draft
DA, stocks in the NACE Section codes A, B, C, D, E, F, G, H, L are classified as “High
Climate Impact” sector and other stocks are classified ‘Low Climate Impact’ sector.
The GICS 14 Sub-Industry code for each security is mapped to the corresponding“Climate Impact Sector” using a mapping. This mapping is constructed in thefollowing steps:
1. MSCI has published a mapping15 between the NACE classes and GICS SubIndustry.

13

For further details regarding NACE, please refer to https://ec.europa.eu/eurostat/statisticsexplained/index.php?title=NACE_background
14

For further information regarding GICS, please refer to https://www.msci.com/gics

15

This mapping is available in the Handbook of Climate Transition Benchmarks, Paris-Aligned Benchmark andBenchmarks’ ESG Disclosures© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

2. For each GICS Sub-Industry, the number of NACE classes which fall under theHigh Climate Impact Sector (say the number of classes is N H) and Low
Climate Impact Sector (say the number of classes is N L) is identified
3. If all the NACE classes for a given GICS Sub-Industry are identified in the HighClimate Impact Sector (NL = 0), then the GICS Sub-Industry is mapped to theHigh Climate Impact Sector. Conversely, if all the NACE classes for a given
GICS Sub-Industry are identified in the Low Climate Impact Sector (N H = 0)then the GICS Sub-Industry is mapped to the Low Climate Impact Sector
4. In case a GICS Sub-Industry is mapped to some NACE classes in the HighClimate Impact Sector and the others in the Low Climate Impact Sector, theGICS Industry is mapped to the Climate Impact Sector in the following
manner:a. NH >= NL: If the number of NACE classes in the High Climate Impact
Sector is at least equivalent to the number of NACE classes in the
Low Climate Impact Sector, the GICS Sub-Industry is mapped to theHigh Climate Impact Sectorb. NH < NL: If the number of NACE classes in the High Climate Impact
Sector is less than the number of NACE classes in the Low Climate
Impact Sector, the GICS Sub-Industry is mapped to the Low Climate
Impact Sector
5. Using the GICS Sub-Industry to Climate Impact Sector mapping created in
Step 4, and the security-level GICS Sub-Industry, each security in the Parent
Index is classified in either the High Climate Impact Sector or the Low
Climate Impact Sector.
Calculation of Green Revenue to Brown Revenue Multiple
Green Revenue
For each constituent in the Parent Index, the Green Revenue% is calculated as the
cumulative revenue (%) from the six CleanTech themes which are as follows:•

Alternative Energy – products and services that support the transmission,
distribution and generation of renewable energy and alternative fuels to
reduce carbon and pollutant emissions in supporting affordable and clean
energy to combat climate change.

•

Energy Efficiency – products, and services that support the maximization of
productivity in labor, transportation, power and domestic applications withminimal energy consumption to ensure universal access to affordable,
reliable and modern energy services.

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MSCI Climate Change Indexes Methodology | May 2021•

Sustainable Water – products, services, infrastructure projects andtechnologies that resolve water scarcity and water quality issues, throughminimizing and monitoring current water demand, improving the quality andavailability of water supply to improve resource management in both
domestic and industrial use.

•

Green Building – design, construction, redevelopment, retrofitting, or
acquisition of green-certified properties to promote mechanisms for raising
capacity for effective climate change mitigation and adaptation.

•

Pollution Prevention – products, services, infrastructure projects andtechnologies that reduces volume of waste materials through recycling,
minimizes introduction of toxic substances, and offers remediation ofexisting contaminants such as heavy metals and organic pollutants invarious environmental media to significantly address pollution in all levels
and its negative effects•

Sustainable Agriculture - revenues from forest and agricultural products thatmeet environmental and organic certification requirements to addresssignificantly biodiversity loss, pollution, land disturbance, and water overuse

The Weighted Average Green Revenue% is calculated as:= ∑ (𝑊𝑒𝑖𝑔ℎ𝑡 𝑖𝑛 𝐼𝑛𝑑𝑒𝑥 ∗ 𝐺𝑟𝑒𝑒𝑛 𝑅𝑒𝑣𝑒𝑛𝑢𝑒% )Brown Revenue
For each constituent in the Parent Index, the Brown Revenue% is calculated as the
cumulative revenue (%) from the following sources:•

Revenue% (either reported or estimated) from the mining of thermal coal(including lignite, bituminous, anthracite and steam coal) and its sale toexternal 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; and revenue fromcoal trading (either reported or estimated)•

Revenue% from the extraction, production and refining of Conventional andUnconventional Oil & Gas. Conventional Oil and Gas includes Arctic
onshore/offshore, deepwater, shallow water and other onshore/offshore.
Unconventional Oil and Gas includes oil sands, oil shale (kerogen-rich
deposits), shale gas, shale oil, coal seam gas, and coal bed methane.

•

Revenue% from thermal coal based power generation, liquid fuel based
power generation and natural gas based power generation.

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MSCI Climate Change Indexes Methodology | May 2021

The Weighted Average Brown Revenue% is calculated as:= ∑ (𝑊𝑒𝑖𝑔ℎ𝑡 𝑖𝑛 𝐼𝑛𝑑𝑒𝑥 ∗ 𝐵𝑟𝑜𝑤𝑛 𝑅𝑒𝑣𝑒𝑛𝑢𝑒% )The Green Revenues to Brown Revenues multiple for either the Parent Index or theIndex is calculated as a ratio of the Weighted Average Green Revenue to theWeighted Average Brown Revenue as per the formula below:=

𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐺𝑟𝑒𝑒𝑛 𝑅𝑒𝑣𝑒𝑛𝑢𝑒%
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐵𝑟𝑜𝑤𝑛 𝑅𝑒𝑣𝑒𝑛𝑢𝑒%© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

Appendix IV: Iterative Process
The iterative down weighting process is applied on the securities of the Final
Universe with the objective of meeting all the minimum requirements 16 detailed inTable 1.
ITERATIVE DOWNWEIGHTING
Starting with the Final Universe, an iterative down weighting process is applied in order
to meet with the minimum requirements for the Indexes. The iterative down weighting
stops when all the requirements defined in above are met. The steps followed in theiterative downweighting (Exhibit 2) are outlined below:
Step 1. Check whether all targets for the Index are met. If all targets are met, then no
downweighting is required.
Step 2. Securities in the Applicable Universe are sorted in increasing order of their
Scope 1+2+3 Carbon Emissions Intensity and securities in the top half of thesorted list are identified as “Top Half” securities. Securities in the bottom halfof the sorted list are identified as "Bottom Half” securities.
Step 3. If the target based on Minimum reduction in WACI relative to Parent Index and
the Minimum average reduction in WACI (per annum) is not met, the lowest
ranked “Bottom Half” stock in ascending order of Scope 1+2+3 Carbon
Emissions Intensity is selected for downweighting 17 and the weight is reduced
by 25% of its weight in the Final Universe. If this target is met, but
a. If the target based on Weighted Average Potential Emissions Intensity
relative to Parent Index is not met, the “Bottom Half” stock with highestPotential Carbon Emissions Intensity is downweighted.
b. Otherwise if the target based on Minimum ratio of Green Revenue/
Brown Revenue relative to Parent Index is not met, the “Bottom Half”
stock with largest difference between its Brown Revenue% and its
Green Revenue% is downweighted
Step 4. If the targets are still not met, the stock is downweighted in steps of 25% of its
weight in the Final Universe till a maximum downweighting of 75%.
Step 5. Stocks of the Final Universe in the “Top Half”, belonging to the same “Climate
Impact Sector” as the stock being downweighted are proportionally16

In the steps detailed for the iterative process, “targets” refers to all the minimum requirements as detailed in Table 1.

17

Stocks with an LCT Category of Solutions are not eligible for downweighting.

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MSCI Climate Change Indexes Methodology | May 2021

upweighted to ensure that the overall allocation to the High Climate Impact
Sector is the same as that in the Parent Index and the sum of the weights of
all constituents is 1.
Step 6. While upweighting stocks, the security weights of the stocks being upweighted
is capped at 5% 18 , with the excess weight being distributed among theremaining securities that are being upweighted.
Step 7. If the targets are still not met, the iterative process continues and Steps 3-6
are repeated.
Step 8. If the targets are not met and all “Bottom Half” stocks of the Final Universe are
downweighted by 75% of the weight in the Final Universe, Steps 3-7 are
repeated, with a maximum downweighting of 90% in a single downweighting
step of 15 percentage points of the weight in the Final Universe.
Step 9. If the targets are not met after the maximum downweighting of 90% of all“Bottom Half” stocks, then stocks are iteratively excluded in the same order as
outlined in Step 3.
Step 10. If the targets are not met after excluding all the “Bottom Half” stocks, then theindex will rebalance using the constituents and weighting of stocks as afterStep 9.

18

Securities in the Index based on narrow Parent Indexes are capped at the maximum weight in the Parent Index. Narrow
Parent Indexes are defined as those indexes for which the maximum market capitalization weight in the Parent Index ismore than 10%.

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MSCI Climate Change Indexes Methodology | May 2021

Exhibit 2: Schematic Representation of the Iterative Downweighting Process# If the target based on Minimum reduction in WACI relative to Parent Index and the
Minimum average reduction in WACI (per annum) is met but the target on Weighted
Average Potential Emissions Intensity relative to Parent Index is not met, the “Bottom
Half” security with the highest Potential Carbon Emissions Intensity is selected for
downweighting. If the target on Weighted Average Potential Emissions Intensity
relative to Parent Index is also met but the target on Minimum ratio of Green
Revenue/ Brown Revenue relative to Parent Index is not met, the “Bottom Half”
security with the highest difference in its Brown Revenue% and Green Revenue% isselected for downweighting.
## If the targets are not met and all “Bottom Half” stocks of the Final Universe are
downweighted by 75% of the weight in the Final Universe, maximum downweighting
is relaxed to 90% in a single downweighting step of 15 percentage points of theweight in the Final Universe.
If the targets are not met after the maximum downweighting of 90% of all “Bottom
Half” stocks, then stocks are iteratively excluded in the same order.
If the targets are not met after excluding all the “Bottom Half” stocks then the index
will rebalance using the constituents and weighting of stocks at the final step.

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MSCI Climate Change Indexes Methodology | May 2021

Appendix V: Minimum Requirements of EU CTB
The below details the minimum requirements of EU CTBs as per the EU DelegatedActs:
Exclusions (Applicable from 2023)•

Controversial Weapons: companies involved in any activities related tocontroversial weapons;•

Tobacco: companies involved in the cultivation and production of tobacco•

Environmental Harm: companies significantly harm one or more ofenvironmental objectives•

Controversies: companies in violation of the United Nations Global Compact(UNGC) principles or the Organisation for Economic Co-operation andDevelopment (OECD) Guidelines for Multinational Enterprises;

Objectives•

Relative Reduction: 30% minimum reduction in Weighted Average Scope
1+2+3 Carbon Emissions Intensity (WACI) relative to Parent Index•

Self-Decarbonization: 7% minimum average reduction (per annum) in WACI
relative to WACI in the Base Date•

Exposure Constraint: At least equivalent exposure to the High Climate Impact
Sector relative to Parent Index© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

The following sections have been modified since May 2021•

Introduction – Updated to reflect the additional exclusions and objectives of
the index•

Section 3.2 – Added section detailing the minimum requirements imposedon the MSCI Climate Change Indexes•

Section 3.3 – Updated to reflect additional exclusions (ESG Controversies,
Environmental Controversies, Tobacco, Thermal Coal Mining)•

Sections 3.5 – Updated to reflect additional steps to meet the minimum
requirements of EU CTBs•

Appendix III – Added with calculation details of some of the target
objectives.

•

Appendix IV – Added with details regarding iterative process•

Appendix V – Added with details regarding minimum requirements of EU
Climate Transition Benchmarks© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Change Indexes Methodology | May 2021

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