ESG and Climate
Trends to Watch
for 2023

msci.com

MSCI ESG Research LLC

Welcome to MSCI’s ESG and Climate Trends to Watch for 2023.
We’re heading into the new year against a backdrop of a major war in Europe, inflation, cost-ofliving crises, energy markets in turmoil, rising interest rates, pandemic fatigue, political uncertainty
and what feels like an unending stream of climate-induced disasters.
At the same time, ESG itself is being put under the spotlight. Regulators around the world
are upping the ante on everything from greenwashed fund names to stricter climate target
disclosures, while the very idea of ESG investing is increasingly politicized.
Which is to say: There’s a lot going on around the world. And it is shaping both the investment
environment and the challenges and opportunities facing companies.
Now, if you’re a longtime fan of our annual ESG trends research, you’ll notice things look a little
different this time. The large-scale trends shaping the ESG-investing world are well-known at thispoint: climate change risk and the road to net-zero, the growing existential threat of biodiversity
loss, social inequalities, regulation and, lately, debate and controversy over what exactly ESG
should be.
So this year, we’ve gone back to basics and asked the experts on our research team: With
everything that is happening around us, what specifically will you be watching in 2023, and why?
The following pages contain a selection of the answers to that question. Not surprisingly,
many touch on climate change across a variety of angles: from carbon credit funds to insured
emissions, and from scrutiny of net-zero targets to decarbonizing industrial real estate.
Regulation is now top of mind not just in the EU, but increasingly in the U.S. and APAC markets:from requirements for financial institutions to conduct climate stress tests, to deforestation-freemarket-access rules, to investors getting ahead of potentially mandatory requirements to reporton the SFDR’s Principle Adverse Impact indicators.
Our team also has their eyes on supply chain issues, including the prospects for lab-growncommodities, tracking goods through blockchain technology and the mining of e-waste to reshapethe dynamics of controversial raw material sourcing.
And to round it off, we’ve got a host of issues affecting everyday lives in what seem to be
increasingly difficult times: striking rail workers (we’re looking at you, U.K.), poor air quality, newground rules for internet companies and more.
We hope you’ll dive in, make yourself at home and come away with some fresh, and in-depth,
perspectives. What will you be watching in 2023?

Meggin Thwing Eastman
Global ESG Editorial Director, ESG Research Director, EMEA
LondonResearch Insights
MSCI ESG Research LLC

Contents
ClimateGovernance

Workforce

Investment

Regulation

Biodiversity

Supply chain

Changing governance5

1. Market conditions could test investors’ commitment tosay-on-climate voting
2. Will climate-focused boards help improve emissions trajectories?

7

3. As Asian companies add female directors, human capital could benefit

9

4. As boards age, what’s the trade-off between experience and youth?

11

Responses to regulation
5. Regulators turn their gaze to ESG funds

13

6. Climate target disclosure standards: Regulatory

15

inconsistencies remain
7. Will banks be ready for climate stress test regulations?

17

8. ESG ratings may fill in some blanks for Principal Adverse

19

Impact indicators
9. Cutting deforestation: Market restrictions get real21

10. Beyond GDPR: New regulations could alter the global digital landscape23

Innovations in the supply chain
11. Cotton’s crunch point and the future of fiber25

12. Mining old electronics to fuel new energy tech

27

13. GMO regulatory resistance may be softening29

14. Can blockchain help supply chains move away from controversy?

31Work life
15. I’ll be working on the railroad — Not?

33

16. Choking on smoke: human capital risks from air pollution

35

17. News shifts from pandemic to climate change, but labor hangs on

37

18. Bargaining with labor: Managing worker shortages in hard times

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ClimateGovernance

Workforce

Investment

Regulation

Biodiversity

Supply chain

Turning points
19. Is the honeymoon over for green bonds?

41

20. Sovereign policy dilemma: Energy security vs. the43clean-energy transition
21. Energy crisis, Ukraine war driving fossil fuel agenda, but don’t rule45

out renewables
22. Nuclear energy contemplates a comeback

47

23. Patent activity suggests energy firms still dig fossil fuels49

New frontiers in measurement and transparency
24. Pulling back the veil on banks’ loan emissions

51

25. Insurance emissions: the actuarial revolution has begun

53

26. Emissions attribution could help keep portfolios aligned with net-zero

55

27. Net-zero: Companies are aiming high, but are their strategies practical?

57

New investments
28. Lab-grown commodities: the new frontier?

59

29. Turning steel green(er) with blast furnace upgrades

61

30. Greening industrial real estate one warehouse at a time63

31. New risks and opportunities in climate adaptation

65

32. Investing in emissions: carbon as a new asset class?

67

This document is research for informational purposes only and is intended for institutional
professionals with the analytical resources and tools necessary to interpret any performance
information. Nothing herein is intended to promote or recommend any product, tool or service.
For all references to laws, rules or regulations, please note that the information is provided “asis” and does not constitute legal advice or any binding interpretation. Any approach to comply
with regulatory or policy initiatives should be discussed with your own legal counsel and/or the
relevant competent authority, as needed.

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TABLE OF CONTENTS
ClimateGovernance

Florian Sommer

David Muirhead

LondonLondonMarket conditions could test investors’commitment to say-on-climate voting
More investors voted against corporate climate strategies in the 2022 proxy season compared to2021, according to our analysis below. We found that investors tended to vote against climate plans
in 2022 where the company’s emissions trajectory was misaligned with global temperature targets,as measured by MSCI Implied Temperature Rise (ITR).1 Recent turmoil in energy markets and afocus on energy security may change some investors’ voting behavior.2 In 2023, we will be watchingwhether investor opposition to corporate climate strategies will continue to increase, or whether
more investors will give companies the benefit of the doubt on their climate plans in challenging
market conditions.
We identified 53 constituents of the MSCI ACWI Investable Market Index (IMI) that held
management-sponsored votes on their climate plan in the last two years.3 Investors approved allthese corporate climate strategies, mostly by large majorities. However, the average proportion of
votes against went from 3.1% in 2021 to 9.6% in 2022, indicating increasing uneasiness amongsome investors. Our analysis of the limited number of votes in 2022 (43 companies) suggeststhat many dissenting investors may have opposed corporate climate strategies that they felt were
not ambitious enough. With more say-on-climate votes scheduled for 2023, we will be watchingwhether or not this dynamic will hold.

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Companies’ emissions trajectories and 2022 say-on-climate vote results

Analysis covers all 43 constituents of the MSCI ACWI IMI that held management-sponsored say-on-climate votes in
2022 to date. The percentage of votes against accounts for votes in favor and votes withheld/abstained. Data as of Nov.
9, 2022. Source: MSCI ESG Research and company disclosures

1

MSCI Implied Temperature Rise is designed to show the temperature alignment of companies, portfolios and funds with global
climate targets. It compares a company’s current and projected greenhouse-gas emissions across all emission scopes with its
share of the remaining global carbon budget for keeping global warming well below 2°C. It converts a company’s “undershoot”
or “overshoot” of its carbon budget to an implied rise in average global temperatures this century, expressed in degrees Celsius.

2

Masters, Brooke. “Shareholders back away from green petitions in US proxy voting season.” Financial Times, July 1, 2022.

3

Votes in either 2021 or 2022, data as of Nov. 9, 2022.

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TABLE OF CONTENTS
ClimateGovernance

Florian Sommer

David Muirhead

LondonLondonWill climate-focused boards help improve
emissions trajectories?
Investors are increasingly showing themselves willing to challenge board directors on theircompanies’ climate performance, including scrutinizing climate risk management disclosures or
emissions-reduction plans in some markets.4 In 2023, we will be watching whether climate-focusedboards help emissions-intensive companies stand up to that scrutiny.
A recent study found that U.K.-listed companies with better governance practices tended to achieve
higher carbon-emissions reduction compared to historic levels and to industry peers.5 If this holds
more widely, boards that spend significant time on environmental or sustainability issues and include
directors with climate experience could help firms address climate transition risk and reduce realworld emissions. Specifically, dedicated environmental or sustainability committees may focus
director attention on climate-related issues. Boards that include climate-savvy directors may bebetter able to build support for emissions targets, compared to those that do not. These factors
could help companies respond to questions from investors about their approach to climate change.
To explore these issues, we looked at board practices at a group of climate laggards: 38 constituentsof the MSCI ACWI Index in emissions-intensive industries that were strongly misaligned with global
temperature targets as of November 2022, as measured by MSCI Implied Temperature Rise (ITR).6
In the exhibit below, the seven companies highlighted in green had a board sustainability committee
and at least one director with climate-related experience, based on our analysis.7 Their future
emissions trajectories may answer whether climate-focused boards can help companies align with
global temperature targets.

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Climate board practices at select emissions-intensive companies

Analysis covers 38 constituents of the MSCI ACWI Index with an ITR above 3.2°C. Under the Global Industry
Classification Standard (GICS®), these companies were classified in these sub-industries: independent power producers
and energy traders, electric utilities and construction materials. These three sub-industries were the most emissionsintensive GICS sub-industries, based on our data for fiscal year 2020. GICS is the global industry classification standard
jointly developed by MSCI and S&P Global Market Intelligence. Source: MSCI ESG Research and company disclosures(as of November 2022)

4

Verney, Paul. “Resolution round-up: Investors to target directors at climate laggards, ISS poll suggests.” Responsible Investor,
Oct. 18, 2022.

5

Luo, Le, and Tang, Qingliang. 2021. “Corporate governance and carbon performance: role of carbon strategy and awareness ofclimate risk.” Accounting & Finance 61: 2891-2934.

6

Please see the note below the accompanying chart for more details about these companies. ITR is designed to show thetemperature alignment of companies, portfolios and funds with global climate targets. It compares a company’s current andprojected greenhouse gas emissions across all emission scopes with its share of the remaining global carbon budget forkeeping global warming well below 2°C. It converts a company’s “undershoot” or “overshoot” of its carbon budget to an impliedrise in average global temperatures this century, expressed in degrees Celsius.

7

We identified environmental or sustainability committees based on official board committee names. Our evaluation of climaterelated director experience is based on a review of disclosed director biographies.

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TABLE OF CONTENTS
Governance

Workforce

SK KimMoeko Porter

Seoul

Tokyo

As Asian companies add female directors,
human capital could benefit
When analyzing companies and their board composition, we have previously observed a correlation
between the presence of female directors and strong talent-management practices, as well as higher
growth in employee productivity. In 2023, we’ll be watching whether the APAC region’s regulatory
efforts to increase the presence of women on boards also manifests in improvement of companies’
human capital management.
Malaysia introduced a 30%-female-director recommendation in its corporate governance code in2017, and India strengthened gender-diversity requirements in 2020 to include an independent
female director at the top 1,000 companies based on market cap.8 While India had previously
mandated the appointment of one female director, there was criticism that companies were meeting
the requirement with female relatives of controlling shareholders and senior managers.9 Generally,
independent directors should help enhance management oversight and protect the interests ofnon-majority shareholders, while the requirement for an independent female director could also
help improve talent-management practices. Most recently, large Korean companies scrambled toappoint at least one female director ahead of a new board-diversity regulation that came into effect inAugust 2022.10 Given the prevalence of controlled companies and family firms11 in APAC,12 many new
female directors will likely come from connected interests, but we would also expect the number of
independent female directors to increase.
Will regulatory efforts have the desired effect? While not necessarily evidence of causality, the exhibit
below shows that, on average, companies with at least one female director had higher human-capitalmanagement performance than those without any female directors (4.3 vs. 3.7 on a 0-10 scale).13
The difference was even greater at companies that had at least three female directors or 30% womenon the board, a potential “tipping point.” We will be watching whether this relationship holds as
regulatory pressure intensifies, and whether other markets will follow India’s example to incorporate
aspects of independence in the push to increase board diversity.

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Human-capital management at companies with female directors

Among the constituents of the MSCI Emerging Markets Investable Market Index (IMI), we selected APAC companies
with labor management or human capital development as a weighted key issue in the MSCI ESG Ratings model: China(n=529), India (n=139), Indonesia (n=29), South Korea (n=328), Malaysia (n=65), Philippines (n=21), Taiwan (n=103)
and Thailand (n=45). The MSCI Emerging Markets IMI (n=3,064) captures large-, mid- and small-cap representation
across 24 emerging markets. Data reflects the distribution of management scores under our human-capitaldevelopment key issue for companies with varying levels of female-director representation. Data as of Oct. 25, 2022.
Source: MSCI ESG Research

8“Malaysian Code on Corporate Governance (As at 28 April 2021).” Securities Commission Malaysia, April 28, 2021.
“Securities and Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations, 2015.” Securities andExchange Board of India, July 25, 2022.

9

Singh, Gagandeep. 2020. “Corporate Governance: An Insight into the Imposition and Implementation of Gender Diversity on
Indian Boards.” Indian Journal of Corporate Governance 13: 99–110.

10 Korean companies listed in the KOSPI index, with total assets greater than KRW 2 trillion are required to appoint at least one
female director as of August 2022.
11 MSCI ESG Research considers a company where the largest shareholder or shareholder group holds 30% or more of the voting
rights a controlled company, and considers a company a family firm when the family holds 10% or more of the voting rights andat least one seat on the board of directors.
12 Porter, Moeko. “Keeping it in the Family.” MSCI Research Insight, Sept. 17, 2022. (Client access only.)
13 Human-capital-management performance refers to average key issue score for the labor-management and human-capitaldevelopment key issues under the MSCI ESG Ratings methodology.

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TABLE OF CONTENTS
Governance

Harlan Tufford

Tanya Matanda

TorontoTorontoAs boards age, what’s the trade-off
between experience and youth?
The average age of newly appointed directors is on track to hit a record high next year, with first-time
male directors in developed markets approaching 60. But women and emerging-market directors
are younger. Amid ongoing global demographic shifts, in 2023 we’ll be watching how nominationcommittees consider the potentially significant implications of age for director skill sets, as well as
for board continuity and diversity.
The average age of new directors for constituents of the MSCI ACWI Index has risen from 54.8 years
in 2018 to 56.3 years in 2022. Globally, significant age gaps exist between male and female directors
and between those who serve on the boards of companies in developed and emerging markets.14
When combined, these trends are amplified.
This may mean companies in emerging markets have an edge when harnessing new technologies
and pursuing business innovation: Younger directors may enhance a board’s generational diversity
and help companies chart a path forward in an increasingly complex and technology-dependent
business environment. However, boards and their nomination committees will require strong
onboarding programs to maximize the contributions of younger directors who are likely to bringfewer years of professional experience and who may be less familiar with the nuances of board
work.15 Additionally, nomination committees may need to monitor how new directors affect boardage diversity to ensure an appropriate balance. Boards seeking younger talent may also be forced toconsider these directors’ other commitments: They are more likely to be full-time employees at othercompanies, which could limit their capacity for board work.16
Meanwhile, nomination committees for developed-market boards with an abundance of older men
may need to take a fresh look at their approach to director recruiting and consider diversifying theirdirector-age demographics to bring wider perspectives to board discussions.

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Average age of new directors by market and gender

Constituents of MSCI ACWI Index, as of Oct. 18, 2022. MSCI ACWI Index constituents (n=2,625), developed-market
constituents (n=1,397) and emerging-market constituents (n=1,228). Includes directors who joined a board in the 12months prior to Oct. 18 in each year. Source: MSCI ESG Research

14 Market classifications are based on the MSCI Market Classification Framework, July 2022.
15 “Directors’ Responsibilities in Canada.” Osler, Hoskin & Harcourt LLP and the Institute of Corporate Directors, Oct. 1, 2014.
16 “Episode 58: How do we get more young people serving in the boardroom.” Future Directors Podcast, March 1, 2021.

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TABLE OF CONTENTS
Regulation

Investment

Sita Subramanian

Rumi Mahmood

New York

LondonRegulators turn their gaze to ESG funds
For much of the past decade, ESG-oriented funds have operated with limited regulatory guidance.17
But that looks to be rapidly changing. Regulatory interest in fund names and funds’ classificationand disclosure obligations are ramping up globally. Spearheaded by the EU’s Sustainable Finance
Disclosure Regulation (SFDR) , which imposes requirements on more transparent reporting for ESG
funds, other major market regulators are following suit. In 2023, we’ll be watching for changes in
ESG fund names and labels as unfolding disclosure regimes hold managers to stricter account.
Australia, Hong Kong and Singapore, for example, have provided guidance to standardize disclosureson the integration of ESG factors in the investment-selection process. Regulators in the EU and
Canada have gone further by seeking to classify sustainable funds, with more extensive ESG
integration requiring more disclosure. The U.S. has taken tentative steps with a similar but notdirectly comparable proposal, a significant move for the world’s largest fund market (representing
over 60% of global fund investments). If these collective proposals take effect, they could see USD
3.6 trillion of sustainable investments (8% of global fund assets) subject to oversight.
For investors, this could mean better-informed decisions. But it could also lead to the emergence of amultitude of disconnected regional standards for ESG-fund classifications, a challenge for investors
in pursuit of a common ESG objective across jurisdictions.

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Jurisdictions with active and proposed regulations or guidelines for ESG funds

Solid text boxes represent regulations in force, while dashed boxes represent proposed or planned regulations. Listof jurisdictions with regulations or guidelines proposed or in force for ESG funds: U.S. (proposed); Canada; EU; U.K.
(planned); Singapore; India (proposed); Hong Kong; Australia (including Section 1013DA); Malaysia; New Zealand;
Philippines (proposed); Thailand (proposed); Taiwan. Data as of Oct. 12, 2022. Source: MSCI ESG Research

17 ESG funds are defined as any fund that employs any ESG considerations in its security-selection process (values andscreening/ranking/exclusions/integration/optimization, etc., and their combinations). In simplest terms, it is the widest
possible net under which any and all funds employing any ESG considerations in security selection are captured. All fundcharacterizations based on data from Broadridge and MSCI ESG Research, as of July 2022.

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TABLE OF CONTENTS
ClimateRegulation

Zohir Uddin

Emma Zhe Wu

LondonShanghai

Climate target disclosure standards:
Regulatory inconsistencies remain
Investors need comparable, consistent and meaningful information to make decisions. A 2022 survey by
the Task Force on Climate-related Financial Disclosures (TCFD) identified consistent reporting of climate
targets as one of the biggest areas for companies to improve.18 Yet, despite the efforts to create common
reporting standards across jurisdictions, differences persist. Regulatory misalignment on climate
targets could mean critical data gaps remain, leading to continued difficulty in assessing and comparing
corporate pledges. In 2023, we will be watching to see how climate target disclosure frameworks movetoward implementation: with further convergence and consistency or added fragmentation?
In 2022, we saw the proposed drafts of the “big three” climate disclosure standards from theInternational Sustainability Standards Board (ISSB), the European Financial Reporting Advisory Group(EFRAG) and the U.S. Securities and Exchange Commission (SEC).
We assessed the extent to which the big three measured up against a set of key target factors,
which in our view represent the essential information needed for a comprehensive disclosure of acompany’s climate targets. This includes data points we assess as part of the MSCI Climate Target
Scorecard, which collects information on companies’ targets and converts it into a standardized
framework to allow for better comparison.
In our assessment, we found:•

The European Sustainability Reporting Standards (ESRS), proposed by the EFRAG, are the mostdetailed, asking companies to report fully on 11 of the 12 areas we assessed.

•

All three frameworks require the disclosure of basic target information such as target year andtype (i.e., absolute or intensity-based). However, neither the ISSB nor the SEC ask companies tofully report on more detailed measures such as whether or not their targets align with sciencebased criteria.

•

Only one of the three standards asks companies to specify the coverage of emissions subject tothe target (coverage ratio of scope).

•

When it comes to expressing the percentage change from the baseline, the regulations leave
space for companies to not disclose.

While some advances have been made toward more consistent and more comparable climate
disclosure standards, this clearly remains a work in progress.
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Gaps in alignment between the proposed ‘big three’ disclosure frameworks on climate targets

Data as of November 2022. Source: MSCI ESG Research

18 “2022 Status Report.” Task Force on Climate-related Financial Disclosures, October 2022

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TABLE OF CONTENTS
ClimateRegulation

Simone RuizVergote

Sita SubramanianAnqi Liang

New YorkFrankfurtFrankfurtWill banks be ready for climate stresstest regulations?
An increasing number of authorities across the world are requiring financial institutions to conduct
climate-risk stress tests, with more likely to follow. Yet our analysis of banks across jurisdictions
with existing or planned requirements for climate stress tests found that, while some banks were
better placed than others, none could claim to be fully prepared (see exhibit below). In 2023, we’ll
be watching which banks can rise to the challenge of developing climate-risk data and modelingcapacities to meet the demands of regulatory climate stress tests.
Understanding the exposure of a bank’s balance sheet to climate-related risks has become
increasingly important — and not just for the 117 signatories to the Net Zero Banking Alliance, witha combined USD 70 trillion in assets, that are working to transition their lending and investment
portfolios to net-zero. In at least 18 jurisdictions, banks already are or soon will be subject toregulatory climate stress tests.19
Recent climate stress tests conducted by the European Central Bank (ECB), Bank of England, Hong
Kong Monetary Authority and Bank of Canada found that:20
1. Sector-level climate-risk credit-modeling capabilities and the allocation of income and exposuresby sector/country and by emission intensity remained a major challenge, with fewer than 10% ofbanks assessed by the ECB using sufficient forward-looking and granular climate-risk informationin risk-management practices.21
2. Addressing data gaps — particularly those related to Scope 3 emissions and the climate-relatedtransition plans of customers and counterparties — will be critical for understanding the full
picture of climate-risk exposure.
3. Uncertainty around the timing of the materialization of climate-related risks and the lack ofhistorical data are hindering the development and validation of climate risk models.
With or without net-zero targets, coming regulations mean that banks need to be able to quantify the
exposure of their balance sheets to climate-related risks going forward. Remediating the climaterelated data and modeling shortfalls exposed by climate stress tests to date will be paramount.

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Banks’ performance on disclosed climate risk analysis indicators

Y-axis indicates jurisdiction (number of banks included in analysis shown in brackets). The exhibit shows the number ofbanks disclosed as having conducted climate-risk analysis in each of the four categories in each selected jurisdiction.
The EU includes multiple member states, many of which have also announced regulatory climate stress tests. Analysis
includes banking-industry constituents of the MSCI ACWI Index as of Oct. 30, 2022. The banking industry is definedaccording to the Global Industry Classification Standard (GICS®), which is the industry-classification standard jointly
developed by MSCI and S&P Global Market Intelligence. Source: MSCI ESG Research

19 “Scenarios in Action. A progress report on global supervisory and central bank climate scenario exercises.” Network forGreening the Financial System, Oct. 19, 2021.
“Federal Reserve Board announces that six of the nation’s largest banks will participate in a pilot climate scenario analysis
exercise.” Federal Reserve Board, Sept. 29, 2022.
20 “2022 climate risk stress test.” European Central Bank Banking Supervision, July 7, 2022.
“Results of the 2021 Climate Biennial Exploratory Scenario (CBES).” Bank of England, May 24, 2022.
“Pilot Banking Sector Climate Risk Stress Test.” Hong Kong Monetary Authority, Dec. 30, 2021.
“Using Scenario Analysis to Assess Climate Transition Risk. Final Report of the BoC-OSFI Climate Scenario Analysis Pilot.” Bankof Canada and Office of the Superintendent of Financial Institutions, Jan. 14, 2022.
21 “Walking the talk. Banks gearing up to manage risks from climate change and environmental degradation. Results of the 2022
thematic review on climate-related and environmental risks.” European Central Bank Banking Supervision, Nov. 1, 2022.

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TABLE OF CONTENTS
Regulation

Investment

Yuliya Ferenc
Frankfurt

Simone RuizVergote
Frankfurt

ESG ratings may fill in some blanks for
Principal Adverse Impact indicators
In the coming year, financial-market participants subject to the EU’s Sustainable Finance Disclosure
Regulation (SFDR) must begin reporting Principal Adverse Impact indicators (PAIs) — the negativeenvironmental or social impacts — associated with their portfolio holdings, and from 2024 they will
also need to report year-on-year changes. But companies themselves will not have to report PAIs
until 2024. In 2023, we will be watching how asset managers try to bridge the gap between scarce
PAI data and an urgent need to monitor and manage their exposure.
A sustainable investment, as defined by SFDR Article 2(17), should not cause significant harm under
any of the mandatory PAIs. Under the revised Markets in Financial Instruments Directive (MiFID II)
rules, consideration of PAIs in portfolio construction is one way to serve an investor’s sustainability
preferences.22 Given data issues for some PAIs and the widespread adoption of ESG ratings ininvestment processes, it is possible that asset managers will leverage them to proxy the PAIs of
their portfolios. While that is not the intended purpose of ESG ratings, could they prove to be a useful
guide while we wait for more complete corporate disclosures?
In a case study where we increased a hypothetical portfolio’s weighted average MSCI ESG Rating by
20% through portfolio optimization, we found that most weighted average PAIs decreased, and data
coverage improved.23 It may be that companies that better managed ESG issues also tended to better
manage, and disclose, a wider range of external impacts. Portfolio PAIs only scale the holdings ofconstituents with available data; and where data coverage is low, such PAIs are not purposeful forcomparing different portfolios. Still, for asset managers looking to manage PAI exposure, ESG ratings
might provide a useful starting point until more extensive corporate reporting rules come into force inthe EU and elsewhere.

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Using MSCI ESG Ratings as a proxy to improve PAI metrics

91%

The MSCI ESG Ratings coverage universe encompassed 8,198 issuers as of June 2022. The optimization was designed
to achieve a 20% improvement in the MSCI ESG Score over that of the coverage universe, from 6.3 (MSCI ESG RatingA) to 7.3 (MSCI ESG Rating AA), while retaining the same GICS® sector allocation as in the coverage universe. The
optimized hypothetical portfolio contained 1,902 stocks. Source: MSCI ESG Research

22 “Commission Delegated Regulation of 21.4.2021 amending Delegated Regulation (EU) 2017/565 as regards the integration ofsustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment
firms.” European Commission, April 21, 2021.
23 This section contains analysis of historical data, which may include hypothetical, backtested or simulated performance results.
A different set of assumptions from the one described here may produce different results. There are frequently material
differences between back tested or simulated performance results and actual results subsequently achieved by any investment
strategy. The analysis and observations in this section are an example for illustrative purposes only and are limited solely tothe 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 constituteinvestment advice or a promotion of any product or a recommendation to make (or refrain from making) any kind of investment
decision or asset allocation and should not be relied on as such.

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TABLE OF CONTENTS
ClimateBiodiversity

Regulation

Arne Klug
Frankfurt

Cutting deforestation: Market restrictions
get real
Despite COP26 commitments to halt and reverse forest loss,24 2021 saw tree-cover loss of 25.3
million hectares globally, an area larger than Great Britain. The Amazon alone lost an area equal
to the size of Northern Ireland.25 In addition, the summer of 2022 saw a wave of wildfires aroundthe globe, burning down millions of hectares more. COP1526 is scheduled to address such natural
capital losses, while the European Parliament recently voted in favor of stringent new regulationthat would require all products sold in the EU to be deforestation-free. In 2023, we’ll be watchingwhich companies with high deforestation exposure can improve their due diligence and supplychain monitoring programs as they seek to maintain access to key markets.
Under the proposed regulation, the EU will not accept products made or based on land that was
deforested after the end of 2019.27 This should reduce its deforestation footprint and would
significantly increase regulatory pressure for companies with EU market exposure. Palm oil, soy,timber and beef production are the main drivers of deforestation.28 But the regulation isn’t limited tothese obvious suspects. Leather car seats, rubber used for clothing and printed paper products areamong other goods affected — producers and distributors here may need to take action as well.
Based on our analysis, however, the level of preparedness does not appear to be high. Only 11.7%
of listed food-products companies and 18.2% of food retailers had disclosed a deforestation
policy, while the numbers for auto components (3.3%) and textiles, apparel and luxury goods (3.7%)
were even lower.29 Even at paper and forest products companies the figure was below 40%. And
policies are only a first step — eliminating products rooted in deforested land from a supply chain
is typically a major endeavor requiring extensive due diligence. Complying with the new regulation
may therefore require significant efforts on the part of companies. Firms that have been thinking of
deforestation as an issue for somebody else or someday down the road may have to get a handle
on it and in a hurry.

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Paper and forest-products companies lead, but deforestation policies remain thin on the ground

Share of companies within selected industries of the MSCI ACWI Index that have disclosed a deforestation policy;
industries included where at least 2% of the peers have disclosed a policy. Data as of Oct. 12, 2022. Source: MSCIESG Research

24 “Glasgow Leaders’ Declaration on Forests and Land Use.” UN Climate Change Conference UK 2021, Nov. 2, 2021.
25 University of Maryland and World Resources Institute. “Global Primary Forest Loss.” Accessed Oct. 12, 2022. www.
globalforestwatch.org. Tree-cover loss is defined as the removal of tree canopy through human-caused or natural events.
26 The 15th Conference of the Parties to the Convention on Biological Diversity in Montreal, Canada, commonly abbreviated as
COP15, will take place from Dec. 7 to 19, 2022.
27 “Climate change: new rules for companies to help limit global deforestation.” European Parliament, Sept. 13, 2022. Products
include: cattle, cocoa, coffee, palm oil, soya and wood; and products that contain, have been fed with or have been made using
these commodities (such as leather, chocolate and furniture). Parliament wants to also include pig meat, sheep and goats,
poultry, maize and rubber, as well as charcoal and printed paper products.
28 “The Global Assessment Report on Biodiversity and Ecosystem Services.” Intergovernmental Science-Policy Platform on
Biodiversity and Ecosystem Services, 201929 Constituents of the MSCI ACWI Index as of Oct. 12, 2022.

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TABLE OF CONTENTS
Regulation

Andrew Young

Gabriela de la Serna

LondonLondonBeyond GDPR: New regulations could
alter the global digital landscapeOver the last several years, European regulators have had Big Tech firmly in their sights. The
landmark General Data Protection Regulation (GDPR), enacted in 2016, changed the way companies
process and protect user data. Not only does it seek to safeguard consumers’ rights to privacy, but
it can lead to hefty fines for violators. GDPR’s principles have since been adopted in several otherjurisdictions.30 Now, the digital landscape may be seeing its next regulatory realignment, with thepassing in 2022 of the EU’s Digital Markets Act (DMA) and Digital Services Act (DSA). In 2023, we
will be watching which of the big internet players can adapt fastest to the new regulations and who
acts to get ahead of possible moves in other jurisdictions.
By focusing on size and reach, the DMA specifically targets big tech companies, the so-called“internet gatekeepers.” Its vast scope includes provisions that might push these companies to open
their walled-garden ecosystems (platforms that limit users’ access to competing services), facilitatecompetitive practices and ensure transparency in their advertising services. The DSA has a narrower
focus: to manage disinformation and illegal content on consumer-facing platforms.
Compliance with both acts starts in 2024. The rollout of GDPR, and subsequent adoption of similar
standards in other markets, may serve as a useful comparison. Within the EU, GDPR immediately
resulted in improvements in privacy practices, but significant enforcement actions and fines only
emerged in subsequent years, according to the CMS.Law GDPR Enforcement Tracker and MSCI ESG
Research. It remains to be seen whether regulators will repeat this exploratory and precedent-building
approach before penalties start to roll out.
Below is our interpretation of the application of the European Commission’s proposed quantitative
indicators to indicate whether a company qualifies (succeeds at becoming) an internet gatekeeper.

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Identifying the gatekeepers (though you know them already)Constituents of the MSCI ACWI Index, as of Sept. 29, 2022.
***

EEA refers to the European Economic Area. It includes EU countries as well as Iceland, Liechtenstein and Norway.
TMT refers to the combined information technology and telecommunications services sectors, as per the Global
Industry Classification Standard (GICS®). GICS is the global industry classification standard jointly developed by
MSCI and S&P Global Market Intelligence.
*** The interpretation of these criteria was made by MSCI ESG Research for illustrative purposes only and may differ
significantly from the European Commission’s ultimate determination. We assessed that the regulation may
likely include at least these five companies, which appear to surpass the monthly-active-users (MAU) threshold(sources: Alphabet: 10-K, 2019; Meta: 10-K, 2018; Apple: Q2 2020 earnings call; Microsoft: Q4 2021 earnings call;
Amazon: Annual shareholders letter, 2021).
**** Based on MSCI ESG Research’s geographic-exposure assessment and company reports.
Source: MSCI ESG Research

30 Aridor, Guy, Che, Yeon-Koo, and Salz, Tobias. 2020. “The Effect of Privacy Regulation on the Data Industry: Empirical Evidence
from GDPR.” NBER.

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TABLE OF CONTENTS
Supply chain

ClimateLiz Houston
LondonCotton’s crunch point and the futureof fiber
Cotton makes up over a quarter of all the clothes we wear, but its harmful impacts, like soil
degradation and water consumption, have spurred demand for more environmentally sustainableoptions (see exhibit below).31 Apparel retailers have responded by working with third-party certifiers
for sustainable cotton and exploring cotton alternatives. However, catastrophic flooding in Pakistan
and the withdrawal of some certifications from much of China have created supply headaches. In
2023, we’ll be watching to see which retailers can navigate near-term shortages in responsibly
sourced cotton, and which ones are prepared to back new, alternative fibers.
A short-term supply shock gives us a glimpse into how cotton’s long-term future could play out.
Water scarcity and extremes in rainfall are expected to increase production risks in cotton’s mostimportant growing regions, making life far more precarious for cotton farmers.32 At the same time,ballooning demand for sustainable cotton may make certification efforts more challenging. To
meet this demand, Better Cotton, the industry’s largest sustainability initiative, estimates that thecurrent number of farmers with which it works will need to triple to an estimated total of 7.5 million
by 2030.33
Against this backdrop, the apparel industry has been developing alternative sources of sustainablefiber, including lab-grown cotton and processes to recycle post-consumer textile waste into newmaterials. These innovations may hold solutions to some of the environmental and social challenges
facing the industry today. To benefit textile companies and investors, these new technologies will
have to show not only that they can operate at scale, but that they get there quickly (and cheaply)
enough to avoid potential shortages of responsible materials.

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Apparel retailers increasingly relied on third-party certification for responsible cotton

Data is based on apparel retail constituents of the MSCI ACWI Index, as of Oct. 21, 2022. Source: Refinitiv,
MSCI ESG Research

31 In 2021, companies in the apparel-retail sub-industry with combined revenues of over USD 100 billion were sourcing cotton
certified to a third-party standard. This reflects revenue from eight out of 12 constituents of the MSCI ACWI Index in theapparel-retail sub-industry that report sourcing third-party certified cotton. Apparel-retail sub-industry defined according to the
Global Industry Classification Standard (GICS®). GICS is the global industry classification standard jointly developed by MSCIand S&P Global Market Intelligence.
32 Robinson, Noah. “Cotton industry unprepared for climate change threat to crop and farmers.” Reuters, June 23, 2021.
33 “2021-30 Strategic Direction.” Better Cotton Initiative, December 2021.

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TABLE OF CONTENTS
Supply chain

ClimateSiyu Liu
New York

Mining old electronics to fuel newenergy tech
In the last four years, China and the EU have strengthened policies and guidelines on the circulartreatment of materials and waste, including electronic waste (e-waste). In September 2022, the U.S.
followed suit, passing a bill specifically on recycling electric-vehicle (EV) batteries. In 2023, we will bewatching which companies up their efforts to mine secondary metals from e-waste — both as a wayof keeping regulators happy and boosting access to metals critical for clean-energy technologies.
Efficiently extracting metals from e-waste could reduce dependency on mining, including in regions
prone to conflict and poor labor practices. It also means fewer emissions. For example, a modern
Midas touch that extracts gold from e-waste emits 80% less carbon dioxide than conventional
mining.34 In addition to precious metals like gold and copper, e-waste also contains critical metals
commonly found in many types of rechargeable batteries. Turning e-waste into a viable source of
secondary metals could help meet rising demand for clean-energy technology, including EVs andenergy storage solutions.
Cobalt may be a bellwether for these efforts to mine e-waste — recycling programs could reduce theprojected 2040 demand for mined cobalt by 35%.35 But there remains a sizable gap between theory
and practice. Although the total recovery rate for cobalt could theoretically reach 95% using existing
technology, current recovery rates are at just 30%.36 And more broadly, while global e-waste continues
to rise — by 9.2 million tons between 2014 and 2019, reaching a total of 53.5 million tons — thegrowth in documented collection and recycling rates has been agonizingly slow — from 16.9% to17.4% over the same period.37 This gap is particularly evident in technology-hardware and householddurable companies, which have yet to ramp up the collection and recycling capacity of critical metals
from e-waste (see exhibit). But necessity is the mother of invention. A dwindling supply of cleanenergy metals, combined with tightening regulations, may be the catalyst needed to push e-waste
recycling into the next phase.

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A long way off from a circular economy for metal

Analysis includes 68 technology-hardware and household durable constituents of the MSCI ACWI Index, as of Sept. 27,
2022. Based on the public disclosure of these companies (e.g., annual reports and 10-Ks), we analyzed the differencesin the reporting of e-waste collection and recycling metrics, as well as any targets related to these collection andrecycling efforts. Source: MSCI ESG Research

34 “A New Circular Vision for Electronics.” World Economic Forum, January 2019.
35 Dominish, Elsa, Florin, Nick, Wakefield-Rann, Rachel, “Recycling Electric Vehicle Battery Minerals Can Significantly Reduce Needfor New Mining.” Earthworks, April 2021.
36 “A New Circular Vision for Electronics.” World Economic Forum, January 2019.
37 Forti, Vanessa, Baldé, Cornelis Peter, Kuehr, Ruediger, and Bel, Garam. “The Global E-waste Monitor 2020: Quantities, flows andthe circular economy potential.” United Nations University, July 2, 2022.

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TABLE OF CONTENTS
ClimateBiodiversity

Regulation

Cole Martin
London

GMO regulatory resistance may
be softening
In 2022, both China and the EU, two of the world’s largest corn producers, continued to prevent
widespread commercialization of genetically modified organisms (GMOs) for food crops suchas corn and soybean. This has been due to real and perceived concerns about their health andenvironmental impacts, as well as the business practices of companies that sell them. In 2023, amid
signs that China and the EU may be revisiting their stances, we’ll be watching for more concrete
steps toward GMO food crops, and which food and agriculture companies are ready for any
emerging opportunities.
The EU and China, already large importers of GMO soybean and corn, respectively, have signaled
that they may look to loosen the restrictions on GMO seed products. In particular, the EU Green Deal
mentioned the development of “seed technology,” while in 2021 the European Commission launcheda (still ongoing) review of EU rules on GMOs. In China, research funding for GMO development has
increased and the government has been amending its GMO regulatory framework.38 The rising threatof droughts, demand for increasing agricultural yields in the context of national decarbonizationcommitments and softening consumer resistance,39 may all be altering the long-held policy calculus.
Meanwhile, new gene-editing techniques could allow seed makers to engineer crops with the ability
to withstand harsh environmental conditions such as droughts40 or require less insecticide compared
to non-GMO crops.41 This, combined with the increased adoption of regenerative farming, could allow
countries to embrace land-use and agrichemical policy changes that would decrease emissions
while preserving domestic food security. For food and beverage companies whose products are
sourced from crops, especially corn and soybean, additional commercialization of GMOs could leadto both reduced (or less-volatile) input costs and lower exposure to water-stress risks due to droughtresistant crops. However, questions may remain about the success of commercialization due tocontinued opposition from consumers and NGOs around biodiversity, patents, herbicide resistanceand the perceived human health effects.

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Food and beverage companies’ water dependence could drive interest in drought-resistant GMOs

Our analysis included all issuers within MSCI ESG Ratings coverage, across 68 ESG industries, as of Oct. 28, 2022. Eachdot reflects, for each ESG industry, the proportion of issuers that were operating in geographies with moderate or highexposure to water-stress risks (y-axis), and whose assets were classified in business segments with moderate to highlevels of water intensity (x-axis). Risk exposure was based on assessments from the MSCI ESG Ratings model. Source:
MSCI ESG Research

38 Byrne, Jane, “Will GM seed planting see China reduce its dependence on feed imports?” FeedNavigator, Jan. 18, 2022.
39 “Special Barometer: Food Safety in the EU.” European Commission, June 2019.
40 Nuñez-Muñoz, Leandro, Vargas-Hernández, Brenda, Hinojosa-Moya, Jesús, Ruiz-Medrano, Roberto, and Xoconostle-Cázares,
Beatriz. 2021. “Plant drought tolerance provided through genome editing of the trehalase gene.” Plant Signaling & Behavior
16(4), 1877005.
41 Greenthal, Eva, and Jaffe, Greg. “In the weeds: Understanding the impact of GE crops on pesticide use.” Center for Science in
the Public Interest, April 2021.

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TABLE OF CONTENTS
Supply chain

Aura Toader
LondonCan blockchain help supply chains moveaway from controversy?
Modern-slavery regulations that require companies to identify human-rights violations, such as
child labor, forced labor or human trafficking, in their supply chains are either in effect or pending
implementation in several jurisdictions, including the EU, Canada, U.S. and Australia. Consumers
have also been exerting increasing pressure by including ethical considerations in their purchasing
decisions.42 In 2023, we’ll be watching pilot projects that use blockchain for supply-chaintransparency and traceability, where successful experiments could herald the beginning of a seachange in supply-chain management.
Admittedly, the task ahead is considerable. As raw materials ship in bulk, certified and noncertified
materials can become comingled, making batch traceability difficult. For larger companies, thisdifficulty compounds as they look to trace materials through multiple tiers of suppliers.
Blockchain offers a potential tool for this thorny issue, through a decentralized, immutable record of
all supplier transactions. For example: Walmart Inc. has partnered with IBM to track pork products in
China in a farm-to-table approach; Unilever plc adopted SAP SE’s GreenToken blockchain technology
to source 188,000 tons of palm oil; and Ford Motor Co. used the technology to track cobalt — a key
mineral for lithium-ion batteries — from mine to end user.
So far, these pilot projects have been relatively niche. Solving traceability challenges will require
much broader adoption. That may mean a combination of factors, including greater standardizationand interoperability between systems,43 and companies willing to experiment with new technology.
We do not expect to see the challenges of supply-chain transparency solved overnight, but we will bewatching for signs of a much-needed turning point.

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Modern slavery: A global issue across all industries

The map is based on an analysis of all controversy cases (with a status of “Ongoing,” “Concluded,” “Partially Concluded,”“Historical Concern” and “Archived”). We identified the MSCI ESG Ratings industries with the highest number of modernslavery-related controversies (forced labor, child labor, bonded labor, human trafficking and migrant workers) and filtered
for those with at least 10 controversy cases. For the 15 industries identified, we conducted a deeper analysis andcategorized each controversy case based on the type of human-rights violation (e.g., child labor), country/region where
the controversy took place and respective commodity/product. We then identified the countries with the highest numberof controversies and highlighted on the map those with at least five controversies. The most prevalent types of humanrights violations were highlighted per country, along with their respective commodity/product. Data as of September
2022. Source: MSCI ESG Research

42 “How consumers are embracing sustainability.” Accessed Oct. 14, 2022. https://www2.deloitte.com/.
43 Jabbar, Sohail, Lloyd, Huw, Hammoudeh, Mohammed, Adebisi, Bamidele, and Raza, Umar. 2021. “Blockchain-enabled supply
chain: analysis, challenges, and future directions,” Multimedia Systems 27: 787-806.

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TABLE OF CONTENTS
Workforce

Bentley Kaplan
Cape Town

I’ll be working on the railroad — Not?
With COVID-19 travel restrictions beginning to lift, 2022 should have been the jump-start the rail
industry needed. Instead, the year has been fraught with disruptions. We’ve seen recurrent strikes in
the U.K.’s passenger-rail industry44 and a narrowly averted industrywide shutdown in U.S. freight rail.45
Further industrial action across several countries, including the Netherlands,46 France,47 Australia48
and South Africa49 suggests that all may not be well between rail companies and their employees. In
2023, we’ll be watching to see which railroads can build out better communication channels to theiremployees and whether those efforts can stem a rising tide of labor strikes.
While complaints differ by market, similar threads run through these agitated workforces, which havebeen hit by company downsizings, COVID-19-related reductions in pay packages and inflationarypressures. One starting point to ease this growing tension may lie in a very basic approach — efforts
by company management to listen to employee feedback or gauge morale. As the exhibit below
shows, rail companies may be falling short in this regard. Among 10 sub-industries50 where labor
disputes and controversies have been most common (including hypermarkets and airlines), rail
companies reported one of the lowest frequencies of employee surveys.
Strikes may well be a perennial risk for this highly unionized industry (averaging 60.4% of workers).51
But finding better ways to monitor workforce morale could provide an initial way to address risingdissatisfaction.

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Rail faces labor controversies but falls short in efforts to gauge workforce morale

All issuers within MSCI ESG Ratings coverage were included in the assessment. Data as of Nov. 7, 2022. Proportion andpercentage figures represent the average for issuers by GICS sub-industry. Controversies were sourced from MSCI ESG
Controversies data and includes all cases classified as “ongoing,” “partially concluded” or “concluded.” The 10 GICS subindustries shown here were those with the highest proportion of controversies per company that were also assessed in
the MSCI ESG Ratings model on the labor-management key issue. This key issue assesses a company’s management
programs in the context of its exposure to workforce-related risks. More detail is provided in the MSCI ESG Ratings
Methodology document. Source: company disclosures; MSCI ESG Research

44 Georgladis, Philip. “UK’s biggest rail union seeks mandate to continue strikes into spring.” Financial Times, Oct. 12, 2022.
45 Hunnicutt, Revot, Shepardson, David, and Holland, Steve. “US rail strike averted, but labor deal faces tough union votes.”
Reuters, Sept. 16, 2022.
46 Van Campenhout, Charlotte. “Ongoing labour dispute brings Dutch trains to a halt again.” Reuters, Sept. 9, 2022.
47 Sandford, Alasdair. “France strikes: Transport hit amid nationwide walkout over pay and cost of living.” Reuters, Oct. 19, 2022.
48 Australian Associated Press. “Sydney train strikes: NSW government and rail unions to seek conciliation next week.” Guardian,Sept. 9, 2022.
49 Banya, Nelson. “South Africa’s rail and port workers to strike this week over wages.” Reuters, Oct. 4, 2022.
50 Classified according to the Global Industry Classification Standard (GICS®). GICS is the global industry classification standard
jointly developed by MSCI and S&P Global Market Intelligence.
51 For railroad companies in MSCI’s ESG Ratings coverage that reported this data, as of Nov. 7, 2022.

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Workforce

Simon Albrecht

Jurgita Balaisyte

ZurichHong Kong

Choking on smoke: The human-capitalrisks from air pollution
The World Health Organization (WHO) has named air pollution as the number-one global
environmental health risk, causing millions of premature deaths and substantial economic
losses.52 While companies polluting the air themselves may face risks that regulators or impacted
communities might push for facilities to be shut down or overhauled,53 it may be overlooked thatcompanies generating minimal pollution can also be impacted through worsening employee
health or difficulty retaining talent in polluted regions.54 As the terms of work continue to evolve
post-pandemic, and air quality starts to look like a perk, in 2023 we’ll be watching to see which
companies work the hardest to stop their employees from choking on smoke.
Using MSCI Asset Locations, we looked at potential company exposure to pollution-related risks,
including ultrafine particulate matter PM2.5 — a particularly harmful pollutant.55 To illustrate thisexposure, we looked at the 10 constituents of the MSCI ACWI Investable Market Index (IMI) with thehighest revenues in India — a country with some of the worst air-pollution levels in the world.56 We
found that not a single company asset was located in an area where the particle level was below the
WHO-recommended threshold of 5 µg/m3;57 some were in areas where the particle level exceeded
100 µg/m3. Such pollution levels may not be surprising for an electric utility using coal to generate
power (e.g., NTPC Ltd.), but our analysis also covered banks (ICICI Bank Ltd., State Bank of India andChina Construction Bank Corp.), a retailer (Rajesh Exports Ltd.) and an electronics distributor (WT
Microelectronics Co., Ltd).

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Air pollution exposure may pose human-capital risks regardless of industry

PM2.5 exposure of the 2020 annual mean value (averaged for all locations in India) for the 10 constituents of the MSCIACWI Investable Market Index with the highest revenue generated in India, as of July 1, 2022. Red line shows the WHO
guideline of 5 µg/m3. The box represents the interquartile range/median, with significant outliers excluded (all 13 ofwhich were above 80 5 µg/m3). Source: Air Quality Life Index, MSCI ESG Research

52 “Global air quality guidelines: particulate matter (PM2.5 and PM10), ozone, nitrogen dioxide, sulfur dioxide and carbon
monoxide. Executive summary.” World Health Organization, 2021.
53 Pasricha, Anjana. “Delhi’s Air Pollution Crisis Prompts Shutdown of Thermal Plants, Schools, Colleges.” Voice of America, Nov.
17, 2021.
54 Xue, Shuyu, Zhang, Bohui, and Zhao, Xiaofeng. 2021. “Brain drain: The impact of air pollution on firm performance.” Journal ofEnvironmental Economics and Management, Volume 110.
55 Greenstone, Michael, Hasenkopf, Christa, and Lee, Ken. “Air Quality Life Index® June 2022: Annual Update.” Energy Policy
Institute at the University of Chicago, June 2022.
56 Beng, Richard Fuller, Landrigan, Philip, and Balakrishnan, Kalpana. 2022. “Pollution and health: a progress update.” Lancet
Planetary Health 6: E535-E547.
57 The concentration of an air pollutant is given in micrograms (one-millionth of a gram) per cubic meter of air [µg/m3].

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TABLE OF CONTENTS
ClimateWorkforceArun Sharvirala

Satish Shinde

Jonathan Ponder

TorontoMumbaiTorontoNews shifts from pandemic to climatechange, but labor hangs on
Since 2020 we have seen a significant shift in media attention from largely pandemic-driven news
about how companies dealt with their workforces toward a renewed momentum around climatechange. Of the markets we examined, this shift was starkest in China, while U.S. media has remained
more focused on human capital. In 2023, we’ll be watching how further shifts in media attention
may provide insights into the perception of ESG risks and issuer-engagement priorities as they
evolve in different markets.
During 2020, the glut of news pieces related to human capital was directly driven by the impact of
COVID-19, as business operations and the future of work radically shifted. At the same time, boards
and executives of companies scrambled to adjust to this sea change in worker expectations and thereality of maintaining operations.58 However, with the advent of COVID-19 vaccines and subsequent
reopenings, focus quickly shifted back to tackling climate change and attention there grew
substantially, especially in China.
In the U.S., though, human capital remained a dominant newsworthy theme, comfortably outstripping
the climate crisis, as companies contend with a tight labor market in the face of elevated worker
discontent across the country.59 Although one may contend that news is often a reactive medium,investors may wish to keep their eyes and ears open for any shifts in ESG risk sentiment and interest
as a gauge of new ESG risks at the market level.

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Trends in news mentions globally

A proprietary algorithm was used for primary topic collection, prior to manual validation to ensure proper classificationof the topics to ESG themes. We used these topics to collect the news articles from September 2019 to August 2022.
Calendar years are adjusted accordingly to reflect news articles from September to August. Source: Lexis-Nexis, MSCIESG Research

58 Ng, Matthew A., et al. 2021. “Has the COVID-19 Pandemic Accelerated the Future of Work or Changed Its Course? Implications
for Research and Practice.” International Journal of Environmental Research and Public Health.
59 Gurley, Lauren K. “Labor movement’s next big challenge: Keeping momentum as economy slows.” Washington Post,
Oct. 24, 2022.

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TABLE OF CONTENTS
Workforce

Aura Toader

SK KimLiz Houston

LondonSeoul

LondonBargaining with labor: Managing
worker shortages in hard times
After the reopening of economies following the COVID-19 pandemic, labor markets have tightened
and many companies struggled to fill vacancies. At the same time, most developed and emerging
economies saw substantially higher inflation, pushing up the cost of living. This has contributed torising hourly earnings for workers, with industries such as retail, hotels and restaurants potentiallyseeing the biggest impact on profits due to their large workforces and reliance on relatively lowpaid employees. In 2023, we will be watching for new winners and losers as the ground continues
to shift under companies tackling complex workforce relations and demands for higher wages.
Rising employee costs have become an increasingly important issue for companies in consumer
sectors, more broadly, reflected in growing mentions of wage-related terms in company filings
since June 2015 (see exhibit below). For some employers, including those in the U.K., wages havebeen growing through nationally mandated increases. Elsewhere — e.g., in the U.S. — companies
have proactively raised wages ahead of a potential increase in the legal minimum wage. Even whenoverheated labor markets have cooled down, research shows that employee satisfaction has beena persistent indicator of excess returns, particularly in times of crisis.60
Many employers have reflected on their strategies in this area. Committing to paying a living
wage could attract and retain workers in a tight labor market. Reorganizing or reducing bonuses
and benefits to fund higher basic wage rates may be tempting, but could arguably be shortsighted. Offering nonstatutory benefits, such as paid parental leave or health insurance, could
help companies make themselves more attractive. Our research shows that as of June 2022,
only 10% of hotels and travel, restaurants, food and staples retailing and consumer discretionary
retail constituents of the MSCI ACWI Index offered a broad range of nonstatutory benefits to theiremployees. If the same old strategies aren’t getting the job done, companies willing to take morecreative approaches might find a new advantage.

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A growing focus on wages for retail, restaurant and hotel companies

We looked at company filings from June 2015 to September 2022 and used natural-language processing to quantify
trends in discussions and proactive measures around potential increases in employee-related costs. Annual reports,
10-Ks, 40-Fs and 20-Fs of MSCI ACWI Investable Market Index (IMI) constituents were matched and analyzed using
keyword analysis. Results were aggregated for related keywords, which included: wage, minimum wage, minimum
hourly wage, wage increase, labor cost increase, living wage, fair wage and minimum wage increase. We compared
the performance of 146 consumer discretionary constituents of the MSCI ACWI IMI — retailing (n=66), food & staples
retailing (n=53), hotels (n=10) and restaurants (n=17) — versus the overall index constituents. Data as of Oct. 26,
2022. Source: MSCI ESG Research

60 Boustanifar, Hamid, and Kang, Young Dae. 2022. “Employee Satisfaction and Long-Run Stock Returns, 1984–2020.” Financial
Analysts Journal 78: 129-151.

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TABLE OF CONTENTS
ClimateInvestment

Yoon Young
Chung

Meghna Mehta

Vishakha Pandey

MumbaiMumbai

BostonIs the honeymoon over for green bonds?
Despite inflationary pressures, the supply of green bonds retreated by just 1% during the first half of2022, compared with the second half of 2021.61 But that could be just the first sign of things to come.
In 2023, we will be watching whether green bonds can maintain a credible growth path in the face ofrising interest rates, lower spread premiums and growing concerns about greenwashing.
Since the first major launch of green bonds in 2007,62 they have been on a rapid upward trajectory,
growing from a total issuance of USD 37 billion in 2014 to USD 578 billion in 2021.63 This growthreflects a broader enthusiasm for green, social and sustainability (GSS) bonds, which accounted
for 1.7% of the global USD 100 trillion bond market in 2020. Despite a collective interest, green
bonds specifically have continued to hold pole position, making up roughly 60% of the total
issuance value of GSS bonds each year. But the honeymoon period may be starting to wane, as
yield spreads of green bonds have remained lower (eight basis points on average) compared withconventional bonds.64
In addition to lower yield spreads, investors may also be weighing the credibility of green bonds— and specifically the “greenness” of the activities they are funding.65 Without a widely adopted,
standardized framework, issuers have had some flexibility in the labeling of their bonds. Between
January 2021 and September 2022, of the more than 600 bonds we assessed, approximately one
in five fell short of explicit green-bond criteria (see exhibit), with some even going so far as to fundfossil-fuel generation or transmission. Investor skepticism may be soothed by developments that
include the proposed EU Green Bond Standard, but until these types of standards are in place,companies may have to work harder against the perception that they are issuing “green-ish” bonds
with potentially questionable practices and reduced yields.

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One in five ‘green’ bonds falls short of Bloomberg MSCI Green Bond Index criteria

Analysis of 632 investment-grade self-labeled green bonds tracked by MSCI ESG Research from January 2021 toSeptember 2022. The universe of these bonds is restricted to all self-labelled green bonds meeting the Bloomberg
Global Aggregate Index criteria. While around 81% of these bonds are part of the Bloomberg MSCI Green Bond Index,
the remaining 19% failed to meet the MSCI green bond and green loan assessment methodology. These bonds arepotentially funding projects which are not considered green as per the methodology. Sources: Bloomberg MSCI Green
Bond Index, Bloomberg Global Aggregate Index, MSCI ESG Research

61 “Green Bond Pricing in the Primary Market: January-June 2022.” Climate Bonds Initiative, Sept. 16, 2022.
62 AAA-rated issuance from multilateral institutions European Investment Bank (EIB) and World Bank.
63 “$500bn Green Issuance 2021: social and sustainable acceleration: Annual green $1tn in sight: Market expansion forecasts for2022 and 2025.” Climate Bonds Initiative, Jan. 31, 2022.
64 Caramichael, John, and Rapp, Andreas. “The Green Corporate Bond Issuance Premium.” Federal Reserve Board, June 2022.
65 Flood, Chris. “Fears rise over ‘greenwash’ bonds.” Financial Times, March 21, 2022.

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TABLE OF CONTENTS
ClimateMagdalena Sordyl
New York

Sovereign policy dilemma: Energy security
vs. the clean-energy transition
Economic sanctions on Russia in response to its invasion of Ukraine have led to international
markets avoiding Russian energy, higher shipping costs and greater competition to secure alternative
energy supplies. National energy security has long meant possession of, or ready access to, fossilfuel reserves, but a handful of countries have managed to alter the calculus. In 2023, we’ll bewatching how continued energy-market disruptions impact the global clean-energy transition indifferent countries and what it could mean for longer-term sovereign risk exposure.
With European governments scrambling to find alternative energy options to substitute Russianhydrocarbon supplies, the move to a zero-carbon economy seems to have become a secondary
concern, at least for now. Some governments have resorted to importing coal, the most carbonintensive fossil fuel, and locked into long-term gas contracts at the expense of investment inrenewables. Yet several governments have also committed to accelerate renewable expansion.
These policy shifts could have a crucial impact on how governments adjust their plans for energy
transition. Our analysis, as detailed in the exhibit below, showed that some countries appeared tobe better positioned to manage the transition to a low-carbon economy than others. For example,
Denmark and New Zealand are among countries with some of the highest energy security andprogress toward energy transition because they diversified their energy supplies and invested inrenewable energy early enough to stay on track to meet their net-zero emission targets. These
countries could be better placed to use the global energy-market disruptions to their benefit andcapture green opportunities. Over the medium term, we would expect them to be able to mitigate
energy risks and sustain higher growth dynamics. However, countries with poor energy security andlimited transition efforts might be forced to sacrifice long-term GDP growth prospects in favor of
immediate carbon-intensive solutions, delaying the global clean-energy transition.

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A trade-off between energy security and energy transition is not inevitable

MSCI assesses the exposure of countries to ESG risks and their management of those risks in the MSCI ESG
Government Ratings. The axis titles used in the chart are a simplification of the analysis undertaken for both energy
security and low-carbon-transition preparedness. The positioning of countries along each axis reflects an aggregation ofrisk exposure and management in their energy security and readiness for a low-carbon transition, respectively. Outliers
are highlighted for illustrative purposes. Data as of October 2022. Source: MSCI ESG Research.

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TABLE OF CONTENTS
ClimateElchin Mammadov

Mathew Lee

London

New York

Energy crisis, Ukraine war driving fossilfuel agenda, but don’t rule out renewables
The ongoing war in Ukraine and high-inflationary environment may limit near-term pressure to
reduce global greenhouse-gas (GHG) emissions as governments prioritize energy security andaffordability. But for power companies, swapping coal and oil for natural gas may not be the only
practical option. In 2023, we’ll be watching which companies are keeping their eyes on longerterm decarbonization trends and expanding deployment of renewables.
The U.S. is releasing oil from its strategic petroleum reserve, which may encourage a near-term
increase in hydrocarbon production.66 Across the pond, the U.K. is launching a new oil and gas
licensing round67 and some EU member states are delaying their planned phaseout of coal-power
plants.68 And if natural-gas prices remain elevated, this may continue to boost demand for more
emission-intensive coal and oil products as cheaper alternatives for producing power and heat.
But for companies sticking with their net-zero plans, these alternatives come with complications.
Renewables face some short-term uncertainties such as supply-chain bottlenecks, windfall taxes
on low-carbon power generation and trade wars. But looking beyond 2023, long-term regulatory
tailwinds could encourage the deployment of renewables and once again put them at the forefrontof the fossil-fuel agenda.

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Networks and renewables dominate capex plans of major utilities in U.S. and Europe

Data for 26 European and U.S.-based power-generating constituents of the MSCI ACWI Index, as of Aug. 5, 2022.
Definitions of capital expenditures are based on MSCI’s ESG climate-change metrics.

66 “President Biden to Announce New Actions to Strengthen U.S. Energy Security, Encourage Production, and Bring Down Costs.”
The White House, Oct. 18, 2022.
67		Fisher, Jonah. “UK defies climate warnings with new oil and gas licences.” BBC News, Oct. 7, 2022.
68		Zachová, Aneta. “EU countries eye coal over gas supply fears.” Euractiv, March 15, 2022.

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TABLE OF CONTENTS
ClimateRegulation

Hanna Trueb

Elchin Mammadov

Mathew Lee

BostonLondon

New York

Nuclear energy contemplates a comeback
A global energy crunch and greater demand for low-carbon energy has shifted support toward
nuclear power. In 2023, we are watching whether an industry that enjoyed its last rise to prominencein the 1990s69 will be able to manage high costs, long project lead times and labor constraints torejuvenate itself.
In July 2022, the EU voted to label nuclear energy a sustainable activity under their green taxonomy,aiming to make it easier for capital to flow into nuclear assets. While this move received criticism forenabling increased radioactive waste, China, South Korea and other countries developing taxonomies
have taken the same approach.70 Further, following Russia’s invasion of Ukraine, several countries
including Germany, South Korea, Japan, Belgium, France, Netherlands and the U.S. have either
reversed nuclear phaseout plans, moved to restart idled reactors, offered subsidies to extend the lifeof existing atomic units or announced the addition of new plants.71
The near decadelong lead times needed for project development means that nuclear energy
will always be a long-term game.72 Companies that are already operating nuclear plants or havecommitted to plans to add new nuclear capacity in the coming years are therefore likely to benefit themost from more favorable regulatory conditions.
However, a nuclear renaissance is not guaranteed: Potential obstacles include construction delays,
higher levelized costs compared to other technologies (not only wind and solar,73 but dispatchablehydropower, coal and gas power with carbon capture and storage74) and an aging workforce (25%
age 55 and above75). Therefore, astute financial decisions and human capital management may
become the keys that unlock new opportunities in nuclear energy.

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Biggest earners in nuclear power show clear differences in current and planned fleet capacity

The top 10 constituents of the MSCI ACWI Investable Market Index in terms of estimated percentage of revenue from
nuclear power generation. Planned nuclear capacity refers to nuclear projects that are announced or under construction
but not yet operational. Bubble labels and size correspond to each company’s current installed nuclear capacity ingigawatts. Data as of Oct. 13, 2022. Source: S&P Capital IQ, MSCI ESG Research

69 Nuclear power generation as a percentage of total global energy generation peaked at 17% in 1996. “Statistical Review of World
Energy.” BP, Sept. 21, 2022.
70 “What the inclusions of gas and nuclear in the EU Taxonomy could mean for investors and asset managers.” S&P Global, Feb.
22, 2022.
71 Connolly, Kate. “Germany to delay phase-out of nuclear plans to shore up nuclear security.” Guardian, Sept. 5, 2022.
Lee, Heesu. “Korea pares back renewables as it taps nuclear for climate goal.” Bloomberg, Aug. 30, 2022.
Patrick, Philip. “Japan’s nuclear renaissance: The global energy crisis has shifted public opinion.” Spectator, Aug. 25, 2022.
“Belgium reaches initial deal to prolong nuclear power by 10 years.” Euractiv, Jul. 22, 2022.
Clifford, Catherine. “What the climate bill does for the nuclear industry.” CNBC, Aug. 22, 2022.
Stuart Leeson, Sofia. “Dutch cabinet to reveal plans for new nuclear power plants.” Euractiv, Jun. 27, 2022.
“Macron sets out plan for French nuclear renaissance.” World Nuclear News, Feb. 11, 2022.
72 “Median construction times for reactors since 1981.” World Nuclear Association, Sept. 25, 2020.
73 “Levelized Cost of Energy Analysis 15.0.” Lazard, Oct. 28, 2021.
74 “LCOE range for selected dispatchable low emissions electricity sources in the Sustainable Development Scenario, 2030, 2040
and 2050.” International Energy Agency, Jun. 29, 2022.
75 “Global Energy Talent Index Report 2022.” Airswift, Jan. 2022.

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TABLE OF CONTENTS
ClimateMathew Lee

Umar Ashfaq

New York

New York

Patent activity suggests energy firms
still dig fossil fuels
As oil prices are projected to stay above USD 90 a barrel in 2023,76 energy companies are likely
to continue to generate hefty profits, as in 2022. In the first quarter of 2022, they saw medianprofitability growth of 127% year-over-year.77 Historically, high energy prices have also driven
patenting activity toward renewable-energy technologies. However, examining the current patentportfolios of energy companies specifically we found that they were still firmly focused on the
traditional business of fossil fuels and petrochemicals.78 In 2023, as energy companies look tocontinue benefiting from high oil prices, we’ll be watching what they do with their cash-filledcoffers: double-down on existing business models or funnel more toward clean-tech investments.
Viewing patents as a proxy for investment in innovation can offer a glimpse into how energy
companies are likely to change (or not change) their future business strategy. Using MSCI ESG
Research’s patent database,79 including 57 types of low-carbon patents, we analyzed the patentportfolios of 1,714 energy companies to identify the 10 leading types of low-carbon patents for theenergy industries.80 Such patents cover all technologies or equipment intended to reduce emissions
from existing processes, including those that ultimately yield fossil fuels.
On aggregate, the largest concentration of patents complemented the traditional activities offossil-fuel extraction. Three of the four largest integrated oil and gas companies held a cluster ofpatents related to petrochemicals and enhanced efficiency of refining and production methods(ExxonMobil Corp., Shell plc and Chevron Corp.). An alternative concentration of patents aroundrenewables may signal more aggressive investment toward the energy transition — e.g., in solarpower technologies (TotalEnergies SE). This means analyzing patent data may offer investors
insight into how wedded energy companies are to fossil fuels and whether this matches theirstated energy-transition ambitions.

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Top 10 low-carbon patent categories for the energy industry

The four companies displayed are the largest integrated oil and gas companies within MSCI ESG Research’s coverageby low-carbon patent scores and represent almost 30% of the total low-carbon patent values within the energy sector.
MSCI ESG Research’s Low-Carbon Patent Score seeks to establish a picture of the relative level and quality of patents
held by companies. Each patent receives a score based on forward citations, backward citations, market coverage
and Cooperative Patent Classification (CPC) / International Patent Classification (IPC) coverage. MSCI ESG Research’s
model currently covers 96 million unique patents that have been granted from over 70 patent authorities worldwide. Data
as of Oct. 13, 2022. Source: MSCI ESG Research

76 “Short-term energy outlook.” U.S. Energy Information Administration, Oct. 12, 2022.
77 Milman, Oliver. “Largest oil and gas producers made close to $100bn in first quarter of 2022.” Guardian, May 13, 2022.
78 Grubb, Michael et al. “Induced innovation in energy technologies and systems: a review of evidence and potential implications
for CO2 mitigation.” Environmental Research Letters, March 29, 2021.
79 For more on MSCI’s patent database and value assessment methodology, please refer to: “MSCI Climate VaR methodology part
3: Technology opportunities,” MSCI ESG Research, June 2020. (Client access only.)
80 We defined energy companies as those within MSCI’s coverage in the following industries as of Oct. 5, 2022: energy equipment
and services, integrated oil and gas, oil and gas exploration and production, oil and gas refining, marketing, transportationand storage.

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TABLE OF CONTENTS
ClimateCody Dong

Virag Bokodi

Shanghai

Budapest

Pulling back the veil on banks’ loan
emissions
For banks, greenhouse-gas (GHG) emissions associated with their loans are fundamental toanalyzing climate transition risk. Until recently, estimations and disclosures have been limited. Somebanks in developed markets have already started to partially report GHG emissions associated with
their lending books, but banks in emerging markets like China have yet to follow suit — despite likely
being, in some cases, some of the world’s largest financers of new emissions. In 2023, we will bewatching to see if the increasing regulatory and investor pressure felt by developed-market banks
to disclose loan emissions spreads to big emerging-market lenders.
The number of companies that have committed to measure and disclose financed emissions under
the harmonized reporting standard for financial institutions developed by the Partnership for Carbon
Accounting Financials (PCAF)81 has grown rapidly.82 But they are concentrated in developed markets.
Using the MSCI Total Portfolio Footprinting solution, which follows PCAF principles and banks’publicly available loan breakdown by sector,83 we calculated a high-level loan emissions estimation
for a sample of six state-owned Chinese banks (the “big six”).84 These banks accounted for around
45% of the total loan balance in the country, as of the end of 2021.85 As of October 2022, none ofthem had reported loan emissions.
Loan sectors with high emission intensity represented nearly 30% of the total loan balance of
these banks, as of the end of 2021, but these sectors’ share of total loan GHG emissions wasapproximately 80%. Differences in emissions intensity measured by loan size between individual
banks were driven by the sector distribution of loans. More detailed inputs from banks themselves
could bring higher-quality estimations and help all stakeholders better understand the resulting risk
exposure and financed contributions to climate change.

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Breakdown of loan balance and emissions for the ‘big six’ state-owned Chinese banks

Emission data is calculated using GHG-emissions intensity (Scope 1 and 2) by loan sector using the MSCI Total Portfolio
Footprinting methodology (quality score of 5). Emissions data includes both required (known use of proceeds) andoptional (unknown use of proceeds). In this analysis, high-emission-intensity loan sectors are defined as those with >100
tons CO2 equivalent/USD 1 million, which include utilities, oil, gas & consumable fuels, metals & mining, transportationand manufacturing. Medium-emission-intensity loan sectors are defined as those with 10-100 tons CO2 equivalent/
USD 1 million, which include commercial-other, wholesale, hotels, restaurants and leisure, telecommunication services,
information technology and commercial and professional services. Low-emission-intensity loan sectors defined as
those with < 10 tons CO2 equivalent/USD 1 million, which include real estate, services, financials, credit card, consumer,
retail-other and mortgage. Data as of Oct. 13, 2022. Source: MSCI ESG Research

81“The Global GHG Accounting & Reporting Standard for the Financial Industry. First Edition.” PCAF, Nov. 18, 2020.

82“The Partnership for Carbon Accounting Financials (PCAF) welcomes 200th financial institution: Japan Post Bank Co., Ltd.”
PCAF, Jan. 31, 2022.
Special PCAF News Update: Fall 2022.” PCAF, Sept. 8, 2022.

83

MSCI Total Portfolio Footprinting maps bank-disclosed loan sectors to the Global Industry Classification Standard (GICS®).
GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.

84

As defined by the China Banking and Insurance Regulatory Commission.

85

Calculated using company reported loan balances divided by total outstanding loans in China according to People’s Bank of
China.

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TABLE OF CONTENTS
ClimateSylvain Vanston

Cody Dong

Paris

ShanghaiInsurance emissions: The actuarial
revolution has begun
Financed emissions has become a mainstream ESG concern, but “insured emissions” — theattribution of an insurance-company client’s emissions to its insurance underwriter — is an emerging
concept. In 2023, we will be watching which global insurers act first to measure their insuredemissions footprints and position themselves ahead of investor pressure or any future regulatoryreporting requirements that might emerge.
Insurers do not “own” their customers, yet they do have an “enabling” influence over their activities.
Insurers that wish to evaluate the carbon emissions of their assets and liabilities strive to connect
their role as asset owners and as risk carriers. The Net-Zero Insurance Alliance (NZIA) has partneredwith the Partnership for Carbon Accounting Financials (PCAF) to develop the first global standard
for measuring insurance-associated emissions (IAEs). The final guidance was released in November
2022, with a focus on commercial lines and retail-motor lines. The reporting and the reduction targetof IAEs may help incentivize insurers to influence low-carbon behaviors for their customers.
Insurers that support the PCAF framework are expected to report on their IAEs and, by July 2023,
NZIA members are also expected to publish decarbonization targets using this new metric for theircommercial-lines and retail-motor portfolios. Effectively, the only ways to achieve these targets are
to influence insurance clients or reorganize insurance-business exposure, neither of which may
come easy. Nonetheless, with much of the world needing insurance for one thing or another, insurers
dedicated to net-zero may have an influential role to play in driving decarbonization of the global
economy. To claim any credit for that, they will need to measure their insured emissions.

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Measuring insurance-associated emissions as the foundation for other initiatives

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TABLE OF CONTENTS
ClimateInvestment

Bhaveer ShahSingapore

Emissions attribution could help keep
portfolios aligned with net-zero
Following a volatile year for markets, investors now face the challenge of accounting for the ups
and downs in their portfolios’ associated financed emissions. To help overcome this challenge, newanalytical models inspired by traditional performance-attribution analysis are emerging. In 2023, we
will be watching how investors might adopt these models to help them understand changes to theirfinanced emissions and work toward staying aligned with long-term decarbonization pathways.
These new models may be able to decompose headline emissions into their contributing factors,
in part by segmenting changes in portfolio emissions from new, exited and existing positions — aparticularly helpful tool during erratic market periods like 2022. Furthermore, with sharp adjustments
to asset valuations sometimes affecting carbon-footprint intensity metrics, emissions-attribution
models might help identify how factors like foreign-exchange fluctuations affected emissions
intensities. Emissions-attribution models may also help isolate temporary one-off developments —such as the sudden divestments from Russian markets — from long-term trends.
Ultimately, emissions-attribution analysis has the potential to provide a framework for investors
to understand the causes behind temporary deviations in their emissions profiles, helping themwork toward staying aligned with long-term net-zero financed-emissions trajectories. Investors’
stakeholders may also benefit from additional granularity and transparency into metrics that may
currently be reported only at a headline level.

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Example attribution analysis of changes in portfolio emissions intensity

This analysis is performed on a hypothetical basket of issuers that is based on the MSCI ACWI Investable Market Index
from April 30, 2021, to April 29, 2022. The diagram is illustrative only and does not constitute any form of investment
advice or actual index performance. Source: MSCI ESG Research© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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TABLE OF CONTENTS
ClimateKenji Watanabe

Siyao HeTokyo

Beijing

Antonios
Panagiotopoulos
LondonNet-zero: Companies are aiming high, but
are their strategies practical?
Climate-target credibility is likely to become the next frontier for institutional investors aiming todecarbonize investment portfolios and reduce real-economy emissions of greenhouse gas (GHG) in
accordance with United Nations-led net-zero initiatives, such as Net-Zero Asset Owner Alliance. We
have observed an increasing number of companies setting climate targets, including net-zero emission
targets. Yet questions remain as to whether these targets are achievable. In 2023, we’ll be watchingwhich companies up their climate target game in the face of what we expect to be increasing pressure
from institutional investors who have their own portfolio net-zero targets to meet.
Of the 9,238 constituents in the MSCI ACWI Investable Market Index (IMI) as of October 2022, 36%(3,306) have set climate targets.86 Of these, 715 companies have set targets aligned with the Paris
Agreement and approved by the Science-Based Targets initiative (SBTi)87 and 45 have set net-zeroemissions targets for 2050 or earlier under the SBTi corporate net-zero standard, one of the mostrigorous net-zero standards across industries. An additional 582 companies have committed tosetting SBTi-approved net-zero targets in the next two years. Such third-party validations can boost
investor trust in the information companies disclose and improve the transparency of climate targets.
With other disclosure frameworks and regulations in the pipeline, companies and investors may havea more standardized manner of assessing climate targets.
The Glasgow Financial Alliance for Net Zero (GFANZ), for example, has proposed its own framework
to help investors assess the soundness and credibility of corporate climate targets. We foundcompanies with SBTi-approved targets typically scored better in the GFANZ framework than those
without (see exhibit). This may suggest that companies that went through a rigorous third-party
target-validation process (e.g., SBTi) were more likely to have disclosed transition planning andcapital allocation for decarbonization activities and demonstrated successful track records —increasing the transparency of emissions-reduction strategies and enhancing the feasibility ofclimate targets. With the focus on corporate climate targets likely to intensify and regulations arounddisclosure likely to tighten, investors should be able to make better informed climate-investing
decisions going forward.

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Credibility assessments of constituents of the MSCI ACWI IMI with climate targets

For the 3,306 constituents of the MSCI ACWI IMI with climate targets, as of October 2022.
* GFANZ portfolio-alignment measurements — credibility indicators and CDP data metrics.
CDP is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions
to manage their environmental impacts. Source: CDP, MSCI ESG Research

86 The MSCI ACWI IMI constituents referenced in the report are as of Oct. 17, 2022. Target-level data was downloaded from MSCIESG Manager on this date.
87 “Companies taking Action” and “SBTi Corporate Net-Zero Standard.” SBTi, October 2021. SBTi is a multinational organization
promoting the adoption of climate targets aligned with the Paris Agreement. SBTi-related target-level data was downloaded
from these reports.

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TABLE OF CONTENTS
Supply chain

Helen Marlow
LondonLab-grown commodities: The
new frontier?
Lab-grown diamonds have moved firmly into the mainstream, and leather, cotton and even fur could
be next. For companies facing controversy or criticism over the environmental or human-rights
impacts of their raw materials, this could look like a game-changer. In 2023, we will be watchingindustry investments in lab-grown commodities to see which companies are looking at potential
environmental and social benefits as reason enough to spend while consumer appetite is still, forthe most part, untested.
It is arguably much easier to monitor your full supply chain when the raw materials start in a nearby
lab than if they are coming from multiple locations across the globe, passing through many hands
before they reach you. No more worries about conflict diamonds, deforestation or animal welfare.88
It is also much easier to track and manage your environmental risks and impacts such as carbon
emissions or the use of dangerous chemicals.89 Companies may see this as an easier way tonavigate incoming supply-chain regulations such as the German Supply Chain Act (due to come into
effect in 2023) or the European Supply Chain Act (currently in consultation).90
Evidence of industry interest is already beginning to emerge with recent investments in lab-grownleather. Gucci parent company Kering, for example, has invested in VitroLabs Inc., and expects tostart pilot-level production in 2023. Additionally, LVMH Moët Hennessy Louis Vuitton invested in
the Israeli lab-grown diamond startup Lusix in June 2022 and Fendi (part of LVMH) partnered with
Imperial College London and Central Saint Martins in 2022 to experiment with lab-grown fur.91
Initial industry concerns may be more focused on questions of consumer preference and pricing— and the latter is currently a barrier to entry for many of these lab-grown alternatives. But the realworld impact of these new processes at scale is yet to be seen, as are the unintended consequences
for companies that embrace this brave, new, lab-grown world.

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Lab-grown commodities may reshape the risk and impact landscape for certain industries

The exhibit shows potential areas of overlap between the growth of lab-grown commodities and key issues within the
MSCI ESG Ratings model, as well as MSCI ESG Business Involvement Screening Research. “X” indicates the relevance ofeach commodity to either a key issue (under the MSCI ESG Ratings model, in dark blue) or business activity (in yellow).
Data as of October 2022. Source: MSCI ESG Research

88 Constable, Harriet. “The Sparkling Rise of the Lab-Grown Diamond.” BBC Future, Feb. 10, 2020.
Pitcher, Laura. “Leather is bad for animals and the planet — but what if we made it in a lab?” TED, April 7, 2022.
89 Kart, Jeff. “Galy Grows Greener Cotton In A Lab, 10 Times Faster Than The Farm Variety.” Forbes, April 14, 2020.
90 Here, and elsewhere in this analysis the information is provided “as is” and does not constitute legal advice or any binding
interpretation. Any approach to comply with legal, regulatory or policy initiatives should be discussed with your own legal
counsel and/or the relevant competent authority, as needed.
91 Mundell, Ian. “Fashion industry collaboration to create lab-grown fur.” Imperial College London, July 25, 2022.

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TABLE OF CONTENTS
ClimateSam Block
New York

Turning steel green(er) with blastfurnace upgrades
Global steel production is dominated by carbon-spewing blast-furnace technology that relies on
coking coal, a key ingredient of the manufacturing process. Yet the steel industry has gotten moreaggressive than ever in its carbon-reduction commitments. By October 2022, 17 companies (51.6% of
the steel Global Industry Classification Standard (GICS©)92 sub-industry in the MSCI ACWI Index) had
stated their commitment to reach net-zero or carbon neutrality by 2050 or before. It is an important
step for an industry that accounts for some 8% of the world’s carbon emissions, but large economic
and technological obstacles remain in meeting these targets. In 2023, we will be watching how many
steel producers tackle the significant hurdles facing them to take concrete steps toward low-carbon
steel production.
Steel is considered a hard-to-abate industry because of the conventional blast-furnace/basic-oxygenfurnace (BF/BOF) steelmaking process, which accounts for about 70% of global production. The
resultant carbon emissions are not simply from coal combustion for energy, but also an inherent
result of the chemical process to reduce iron ore to molten iron.
Low-carbon alternative methods to produce steel do exist. Some have started commercialization in
the past few years, while others are still in development. However, the cost to convert global steel
production to lower-carbon processes is estimated at around USD 4.4 trillion over the next 30 years,93
including USD 435 billion in Europe alone.94
The industry is becoming increasingly committed to improving its carbon emissions, but key questions
remain: How aggressive will the industry be in achieving its targets and how will this transition be
financed? If progress remain slow, wider efforts to limit global warming may be undermined.

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Increased carbon-reduction commitments from the steel industry

Peer set consisted of steel-producing constituents of the MSCI ACWI Index steel GICS sub-industry (n=33), as of Oct.
21, 2022. Target data refers to average annual carbon-reduction target for these companies, specifically the mostaggressive Scope 1 & 2 targets for each company, assuming linear reductions. Source: MSCI ESG Research

92 GICS is the industry-classification standard jointly developed by MSCI and S&P Global Market Intelligence.
93 “The net-zero transition: What it would cost, what it could bring.” McKinsey & Co., January 2022.
94 Butterworth, Paul. “The cost of decarbonising European steel is high.” CRU, Dec. 13, 2021.

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TABLE OF CONTENTS
ClimateMark Bessoudo
LondonGreening industrial real estate one
warehouse at a time
Industrial real estate has long been a neglected segment of the green-building market. But a
COVID-19 e-commerce boom has put warehouses front and center, with stakeholders ramping
up efforts to better manage their portfolios’ environmental and social risks. A new generation ofindustrial facilities that emit less carbon and need less energy to build and operate are beginningto emerge. In 2023, we will be watching to see which new leaders in green building emerge amid
a confluence of forces including building performance benchmarking, electrification and financial
incentives for decarbonization.
Energy demand for industrial buildings is expected to continue growing.95 In the U.S., for example,
it is projected to grow at more than twice the rate of any other sector in real estate over the coming
decade.95 This is due to a confluence of factors: an expansion of both established (warehouses,
logistics and distribution centers) and emerging (urban agriculture and advanced manufacturing)industrial sectors; advances in specialized robotics and automation systems that require more power
than traditional industrial operations; and an increased demand for fleet electrification and charging
infrastructure.
Investors in real estate investment trusts (REITs) have added substantial industrial holdings to theirportfolios in recent years.95 Although one-third of all industrial space in the U.S. is more than 50
years old,96 REITs are now eligible for new rebates and incentives afforded under the U.S. Inflation
Reduction Act (IRA) to help retrofit and refurbish these aging assets. The IRA also provides financial
incentives for brownfield redevelopment, renewable energy and electric-vehicle infrastructure —something that every warehouse will need as the freight sector shifts to electric.
Furthermore, new industrial-specific green-building programs and benchmarking tools that havebeen recently launched — including those as part of the Fitwel, WELL and NABERS rating systems —may help attract more attention to the benefits of green certification in a sector that has historicallyoverlooked them.

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Most industrial REITs had few or no green-certified buildings in their portfolio

Data reflects the proportion of green-certified buildings (e.g., LEED and BREEAM) in the portfolios of industrial REIT
constituents of the MSCI ACWI Index, as of Oct. 18, 2022. The percentage values refer to the proportion of a company’s
portfolio (by number of buildings) with a green certification. Source: MSCI ESG Research

95 “Power Play: How Evolving Energy Needs Will Shape the Industrial Market.” Newmark, April 2022.
96 Margolies, Jane. “Amid Soaring Demand for Warehouses, an Effort to Make Them Greener.” New York Times, April 12, 2022.

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TABLE OF CONTENTS
ClimatePatric Kellermann

Jascha Lehmann

Katie Towey

Potsdam

Potsdam

New York

New risks and opportunities inclimate adaptation
Even if global warming is limited to below 2°C, the world will still face rising weather extremes, suchas heat waves, heavy precipitation and intense tropical cyclones.97 It’s already happening. Yet lessthan one-quarter of firms are estimated to have adaptation plans.98 In 2023, as operational risks
rise — along with opportunities for those providing solutions — we’ll be watching companies andinvestors to spot the early movers looking to seize a climate-adaptation advantage.
The socioeconomic impacts from extreme weather will be felt differently across different sectors.
Tropical cyclones, some of the costliest disasters, are expected to have the strongest impact onutilities, real estate and consumer staples. The projected market value losses in these sectors could
rise by more than 200% if warming reaches 5°C as compared to 1.5°C (see exhibit below).
Despite its rising importance, the shortfall in funds to help reduce such weather-related disasters— the “adaptation finance gap” — is growing.99 There are, however, some large investors, like theWorld Bank and Bill Gates’ energy venture fund, committed to funding adaptation measures, such as
desalination technologies and dynamic mooring systems.100,101
Research suggests that every dollar invested in climate adaptation could result in USD 2 to USD 10
of net economic benefit.102 Effective adaptation strategies may combine structural measures (e.g.,
flood protection), nature-based solutions and risk-transfer schemes (e.g., insurance products). While
the first two may be dependent on political will and momentum, risk transfer can be a powerfulmechanism for companies to buffer against economic impacts of extreme weather and may even
incentivize companies to invest in further climate adaptation through discounted premiums.103© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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Utilities, real estate and consumer staples face the biggest risk from tropical cyclones

The exhibit shows the sector-average impact of tropical cyclones on the market value of companies in the MSCI ACWI
Investable Markets Index, expressed as MSCI Climate Value-at-Risk (Climate VaR). Sectors are defined according to the
Global Industry Classification Standard (GICS®). GICS is the global industry-classification standard jointly developed by
MSCI and S&P Global Market Intelligence. Data as of Sept. 12, 2022. Source: MSCI ESG Research

97“The Physical Science Basis.” Intergovernmental Panel on Climate Change, 2021.

98

Li, Xia. “Physical Climate Risk and Firms’ Adaptation Strategy.” SSRN, June 22, 2022.

99“Adaptation Gap Report 2021.” United Nations Environment Programme, Nov. 1, 2021.

100 “The World Bank Group’s Action Plan on Climate Change Adaptation and Resilience.” World Bank Group, Jan. 14, 2019.
101 Temple, James. “Bill Gates’ energy venture fund is expanding to climate adaptation and later-stage investments.” MIT
Technology Review, Oct. 19, 2022.
102 “Adapt now: A global call for leadership on climate resilience.” Global Commission of Adaptation Report, Sept. 13, 2019.
103 Jongman, Brenden. “Effective adaptation to rising flood risk.” Nature Communications, May 29, 2018.

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TABLE OF CONTENTS
ClimateInvestment

Rumi Mahmood
LondonInvesting in emissions: Carbon as a new
asset class?
In earlier research, we discussed the coming of age of carbon markets, which have grown to over
USD 300 billion, placing them on the radar of many investors. And, indeed, we’ve seen the emergenceof a new subset of funds that focus specifically on exposure to the price of carbon over the last year.
In 2023, we’ll be watching whether the novelty of investing in emissions gains enough momentum
to influence decarbonization or is undone by unintended side effects.
Carbon-credit funds vary in their approaches, but most enable investors to access emission credits
via futures contracts or through physical credits of various emissions-trading systems (ETS).104 The
investment thesis behind these new funds is that these exposures can act as portfolio diversifiers,
analogous to commodity exposure, allowing investors a way to price carbon risks in their portfolios.
If the world fails to drive down temperature change to below 2°C, such as in a “disorderly” or “toolittle, too late” transition scenario,105 direct exposure to carbon allowances might offer downsideprotection, as carbon prices would have to rise to compensate for the lack of policy actions. Our
research showed that carbon assets provided comparable risk-adjusted returns and exhibited low
correlations to global equity and other commodities over the long term (see exhibit).
If the interest in such funds continues to mount, investors would be withdrawing carbon allowancesfrom the market, potentially driving up the cost of the remaining allowances, which may accelerate
decarbonization efforts. However, if the supply of emissions allowances is restricted throughmass investor participation, there could be unintended social outcomes such as rising energy
prices. Companies could pass on incremental costs to their customers, further adding to inflation.
Furthermore, high carbon prices may deter high emitters from participating in a market that was
primarily intended for their use. Also, where these funds fall under various global sustainable-fundclassifications remain unclear. For example, carbon-credit funds are currently unclassified under the
EU’s Sustainable Finance Disclosure Regulation fund-labeling scheme.106
In the past 12 months, several carbon-credit ETFs have been launched, with a focus on EU and North
American allowances exposure.107 As emissions-trading systems continue to expand, so too may
the breadth of choice among this subset of funds. Additionally, as governments escalate climate
policymaking, carbon pricing and the performance of carbon-credit funds may be a gauge of thestringency and efficacy of such policies.

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Carbon (EU ETS) largely uncorrelated with other assets, offering diversification

Data from Jan. 1, 2012, to Sept. 30, 2022. One-month constant-maturity commodity future prices were used for Brent
Crude, natural gas, copper and gold. For carbon (EU ETS), 12-month constant-maturity future prices were used. Source:
MSCI ESG Research LLC

104 To incentivize firms to reduce their carbon emissions, a government may set a cap on the maximum level of emissions andcreate permits, or allowances, for each unit of emissions allowed under the cap. Emitting firms must obtain and surrender apermit for each unit of their emissions, from/to the government or through trading with other firms within an emissions trading
system. Governments may choose to give the permits away for free or to auction them. The EU Emissions Trading System (EUETS), comprised approximately 90% of the entire global carbon credits turnover in 2022, making it the world’s most liquid anddeveloped ETS. Carbon credit funds provide exposure to carbon credits such as EU allowances (or EUAs), otherwise known as
pollution permits from regulated carbon markets. EUA means the tradable unit under the European Union Emissions Trading
Scheme (EU ETS), giving the holder the right to emit one tonne of carbon dioxide (CO2).
105 A disorderly/delayed transition involves higher transition risk due to policies being delayed or divergent across countries andsectors, resulting in higher Carbon prices for a given temperature outcome. The Network of Central Banks and Supervisors forGreening the Financial System (NGFS), 2022.
106 “Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related
disclosures in the financial services sector.” Official Journal of the European Union, Dec. 9, 2019.
107 Schlesinger, Joel. “ETFs for investors looking to profit off the growing carbon credit market.” Globe and Mail, Oct. 24, 2022.

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