Index Methodology

MSCI Climate
Action Indexes
Methodology
October 2022

OCTOBER 2022

MSCI Climate Action Indexes Methodology | October 2022

Contents

1

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

2

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

3

4

2.1

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

2.2

MSCI Impact Solutions: Sustainable Impact Metrics ...................... 4

2.3

MSCI ESG Controversies .................................................................... 5

2.4

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

Index Construction Methodology .......................................... 7
3.1

Applicable Universe ............................................................................ 7

3.2

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

3.3

Selection of Eligible Securities .......................................................... 9

3.4

Weighting of Selected Securities..................................................... 10

Maintaining the Climate Action Indexes ............................. 12
4.1

Semi-Annual Index Reviews ............................................................. 12

4.2

Monthly Index Reviews ..................................................................... 12

4.3

Ongoing Event Related Changes ..................................................... 12

Appendix I: ESG Business Involvement Eligibility ..................... 15
Appendix II: Calculation of Security Level Scores ..................... 17
Appendix III: Climate Risk Management Weighted Average
Score............................................................................................ 19
Appendix IV: Calculation of Green Business Revenue .............. 20© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Action Indexes Methodology | October 2022

1

Introduction
The MSCI Climate Action Indexes (the ‘Indexes’) are designed to represent theperformance of companies that have been assessed to lead their sector peers interms of their positioning and actions relative to a climate transition.
Companies from the underlying parent index (the “Parent Index”) are assessed
relative to their sector peers based on their emissions intensity, emissions reduction
commitments, climate risk management and revenue from greener businesses. The
Indexes uses this assessment to select 50% of the companies from each GICS®1
sector in the Parent Index. Overall the Index targets a coverage of 50% of thecompanies per sector from the Parent Index.

1

GICS, the Global Industry Classification Standard jointly developed by MSCI and S&P Global.

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MSCI Climate Action Indexes Methodology | October 2022

2

MSCI ESG Research
The Index uses company ratings and research provided by MSCI ESG Research LLC.
In particular, the Index uses the following three MSCI ESG Research products: MSCI
Impact Solutions, MSCI ESG Ratings, and MSCI ESG Controversies.
For details on MSCI ESG Research’s full suite of ESG products, please refer to:https://www.msci.com/esg-investing

2.1

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

2.2

MSCI IMPACT SOLUTIONS: SUSTAINABLE IMPACT METRICS
MSCI Impact Solutions’ Sustainable Impact Metrics is designed to identify
companies that derive revenue from products or services with a positive impact onsociety and the environment. The Sustainable Impact Metrics are comprised of six
Environmental Impact categories and seven Social Impact categories arranged bytheme.
MSCI Sustainable Impact Taxonomy
PillarEnvironmental
Impact

ThemesClimate Change

Natural CapitalSocial Impact

Basic Needs

Categories
1.
2.
3.
4.
5.
6.
7.
8.

Alternative Energy
Energy Efficiency
Green Building
Sustainable Water
Pollution Prevention
Sustainable Agriculture
Nutrition
Major Disease Treatment© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Action Indexes Methodology | October 2022

Empowerment

9. Sanitation
10. Affordable Real Estate
11. SME Finance
12. Education
13. Connectivity – Digital divide

Under each of the actionable environmental and social impact themes, MSCI ESG
Research has identified specific categories of products and services that it hasdetermined companies can offer as potential solutions to environmental and social
challenges.

More detailed taxonomy for each category can be found in Section 2.4 of the MSCIACWI Sustainable Impact Index Methodology available athttps://www.msci.com/index-methodology.

2.3

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

2.4

MSCI CLIMATE CHANGE METRICS
MSCI Climate Change Metrics provides climate data & tools to support investors
integrating climate risk & opportunities into their investment strategy and processes.
It supports investors seeking to achieve a range of objectives, including measuring
and reporting on climate risk exposure, implementing low carbon and fossil fuel-freestrategies, align with temperature pathways and factoring climate change research
into their risk management processes, in particular through climate scenario analysis
for both transition and physical risks.

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MSCI Climate Action Indexes Methodology | October 2022

The dataset spans across the four dimensions of a climate strategy: transition risks,
green opportunities, physical risks and 1.5° alignment.
For more details on MSCI Climate Change Metrics, please refer tohttps://www.msci.com/climate-solutions.

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MSCI Climate Action Indexes Methodology | October 2022

3

Index Construction Methodology

3.1

APPLICABLE UNIVERSE
The Applicable Universe includes all the existing constituents of the Parent Index.
This approach aims to provide an opportunity set with sufficient liquidity andinvestment capacity.

3.2

ELIGIBLE UNIVERSE
The Eligible Universe is constructed from the Applicable Universe by excluding
securities of companies based on the exclusion criteria below:

3.2.1. ESG CONTROVERSY SCORE ELIGIBILITYESG Controversies: All securities having faced very severe controversies
pertaining to ESG issues – Defined as companies with an MSCI ESG
Controversy Score of 0. Companies not assessed by MSCI ESG Research on
ESG Controversies are also excluded.

Environmental Harm: All companies having faced very severe and severe
controversies pertaining to Environmental issues – Defined as companies
with an MSCI Environment Controversy Score of 0 or 1. Companies notassessed by MSCI ESG Research on Environment Controversy Score are also
excluded.

3.2.2. ESG BUSINESS INVOLVEMENT ELIGIBILITY
The MSCI Climate Action Indexes use MSCI ESG Business Involvement Screening
Research and MSCI Climate Change Metrics to identify companies that are involvedin the following business activities. Companies that meet the business involvement
criteria are excluded from the MSCI Climate Action Indexes. Please refer to Appendix
I for details on these criteria.
Controversial Weapons

Tobacco

Thermal Coal Mining

Oil Sands



Nuclear Weapons© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Action Indexes Methodology | October 2022

3.2.3. EMISSION ELIGIBILITY
Securities which either have higher Emission Intensity2 than the High Emission
Threshold (defined below) or higher total potential emission3 than the High Potential
Emission Threshold (defined below) and do not yet have approved science-basedtargets4 are excluded.
High Emission Threshold – Emission Intensity of the constituent(s) of the
MSCI ACWI Index at the 95th percentile based on Emission Intensity. This 95th
percentile calculation excludes securities without emissions data.

High Potential Emission Threshold – Total Potential Carbon Emissions
excluding Metallurgical Coal of the constituent(s) of the MSCI ACWI Index at
the 95th percentile based on Total Potential Carbon Emissions excluding
Metallurgical Coal. This 95th percentile calculation only includes companies
which are considered most likely to use their fossil fuel reserve for energy
applications5. Securities without Total Potential Carbon Emissions data are
not included in this calculation of 95th percentile.

Additionally, Securities without Emission Intensity data (securities for which
Emission Intensity cannot be calculated) are also excluded.

3.2.4. CLIMATE RISK MANAGEMENT ELIGIBILITY
All securities which are in the lowest quartile of their GICS sector based on their
Climate Risk Management Score are excluded. The calculation of the Climate Risk
Management Score is described in Appendix II.

2

The calculation of Emission Intensity is described in Appendix II.

Total Potential Emission is calculated as the potential carbon emissions of the fossil fuel reserves, excluding
metallurgical coal reserves, owned by a company. It is computed as the sum of the potential carbon emissions of thethermal coal, total oil and total gas reserves owned by the company.
3

Company level emission reduction targets which have been approved by Science Based Targets initiative (SBTi). Moredetails on SBT are available at https://sciencebasedtargets.org/companies-taking-action
4

5Companies with ‘Fossil Fuel Reserves – Energy Application’ set to True.

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MSCI Climate Action Indexes Methodology | October 2022

3.3

SELECTION OF ELIGIBLE SECURITIES

3.3.1. SECURITY-LEVEL ASSESSMENT

Intensity Score - Each security is assigned to a quartile based on its sector
relative Scope 1+2+3 Greenhouse Gas (GHG) Intensity6.
This quartile is labelled as the ‘Intensity Score’ and is thus an integer between 1
and 4. For example, securities which constitute the lowest 25% of their sector
based on emissions intensity would be assigned an ‘Intensity Score’ of 1.

Each security is assigned a final Assessment by adjusting the initial Intensity
Score according to the following sequenceo

The Intensity Score is lowered by two quartiles for all securities thateither have an approved science-based targets (SBTi) or are assessed tohave Credible Track Record.

o

For the remaining securities, the Intensity Score is lowered by one
quartile for any securities in the fourth quartile based on sector-relative
Climate Risk Management Weighted Average Score or Green Business
Revenue.7The Intensity Score of fourth quartile companies based on sector
relative Green Business Revenue is lowered only if the Green
Business Revenue >= 5%.

The Security-Level Assessment is floored at 1.
The calculation steps for Intensity Score, Credible Track Record, Climate Risk
Management Weighted Average Score, Green Business Score and Green
Business Revenue are described in Appendix II.

3.3.2. RANKED UNIVERSE
The Ranked Universe is constructed by sorting eligible securities of each GICS
sector, in ascending order of Security-Level Assessment and descending order offloat adjusted market capitalization.

Prior to the May 2020 Semi-Annual Index Review (SAIR) of the Indexes, the Green House Gas (GHG) Intensity has been
calculated based on Scope 1+2 Emissions. The Scope 3 Emissions used in the May 2020 Semi-Annual Index Review of theIndexes is as of Jun 30, 2020.
6

The fourth quartile here corresponds in broad terms to strong climate risk management or high sector relative green
business revenues.
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MSCI Climate Action Indexes Methodology | October 2022

3.3.3. SECURITY SELECTION
For each GICS sector in the Ranked Universe, 50% of the number of securities in the
Applicable Universe are selected in the following order -3.4



Securities are selected from the top until the number of selected stocks is lessthan or equal to 40%8 of the number of securities in the Applicable Universe.



Securities which are ranked between 40% and 60% of the number of securities in
the Applicable Universe and are also current constituents of the Index areselected.

Remaining securities which are ranked between 40% and 60% of the number of
securities in the Applicable Universe are selected until the total number of
selected securities is less than or equal to 50% of the number of securities in the
Applicable Universe. Any security which takes the number of selected securities
beyond 50% of the number of securities in the Applicable Universe is also
selected.

WEIGHTING OF SELECTED SECURITIESThe Parent Index weights of selected securities are renormalized to 100%.
Additionally, the max issuer weights are capped at 5%.

3.4.1. ACTIVE GICS SECTOR WEIGHT CAP AND FLOOR
The Active sector weights of selected securities are restricted between +/-5%. The
active sector weights are capped in the following steps –Active sector weights are calculated by aggregating the active weight of
securities in the Parent Index. The active weight is calculated as thedifference between the weight of securities calculated as per section 3.4 andtheir respective weight in the Parent Index.

Active sector weights which are greater than +5% are capped at +5% andactive sector weights which are smaller than -5% are floored at -5%.



Sector weights of remaining sectors are renormalized so that aggregate
weight of all sectors sum to 100%.

During the May 2022 Semi Annual Index review, securities are selected from the top until the number of selected stocks
is less than or equal to the 50% of the number of securities in the Applicable Universe.
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MSCI Climate Action Indexes Methodology | October 2022For each GICS sector, the sector weight as calculated above is distributed tothe selected securities within the GICS sector in proportion of their weightcalculated under section 3.4.

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MSCI Climate Action Indexes Methodology | October 2022

4

Maintaining the Climate Action Indexes

4.1

SEMI-ANNUAL INDEX REVIEWS
The Indexes are rebalanced on a semi-annual basis9, as of the close of the lastbusiness day of May and November, coinciding with the May and November SemiAnnual Index Review of the MSCI Global Investable Market Indexes. The pro forma
Indexes are in general announced nine business days before the effective date.
In general, MSCI uses MSCI ESG Research data (including MSCI Climate Change
Metrics, MSCI ESG Sustainable Impact Metrics, MSCI ESG Controversies and MSCI
Business Involvement Screening Research) as of the end of the month preceding theIndex Reviews for the rebalancing of the Indexes.

4.2

MONTHLY INDEX REVIEWS
The Indexes are rebalanced on a monthly basis, as of the close of the last business
day of the month. The pro forma Indexes are in general announced nine businessdays before the effective date.
During Monthly reviews, the ‘ESG Controversy Score Eligibility’ and ‘ESG BusinessInvolvement Eligibility’ of existing constituents are reviewed. Existing constituentsthat meet the exclusion criteria are deleted from the index and the weight ofremaining constituents are renormalized to 100%.
In general, MSCI uses MSCI ESG Controversies data and MSCI Business Involvement
Screening Research data as of the end of the month preceding the Index Reviews forthe rebalancing of the Indexes.

4.3

ONGOING EVENT RELATED CHANGESThe general treatment of corporate events in the Indexes aims to minimize turnoveroutside of Index Reviews. The methodology aims to appropriately represent an
investor’s participation in an event based on relevant deal terms and pre-event
weighting of the index constituents that are involved. Further, changes in index
market capitalization that occur as a result of corporate event implementation will be

Certain ESG datapoints required for historical index rebalancing are unavailable. In those cases, the Index used thevalues of those datapoints as of the date described below. For example, each periodic rebalancing of the Index prior to
October 31, 2019, would have applied the “Reporting Emission Reduction Targets” value as of October 31,2019 and“Approved Science Based Targets” from November 30,2021.
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MSCI Climate Action Indexes Methodology | October 2022

offset by a corresponding change in the Variable Weighting Factor (VWF) of theconstituent.
Additionally, if the frequency of Index Reviews in the Parent Index is greater than thefrequency of Index Reviews in the Index, the changes made to the Parent Indexduring intermediate Index Reviews will be neutralized in the Index.
The following section briefly describes the treatment of common corporate events
within the Index.
No new securities will be added (except where, noted below) to the Index between
Index Reviews. Parent Index deletions will be reflected simultaneously.

EVENT TYPE

EVENT DETAILSNew additions to the Parent Index

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

Spin-Offs

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

Merger/Acquisition

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

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MSCI Climate Action Indexes Methodology | October 2022

Changes in Security Characteristics

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

Further detail and illustration regarding specific treatment of corporate events
relevant to this Index can be found in the MSCI Corporate Events Methodology bookunder the sections detailing the treatment of events in Capped Weighted and NonMarket Capitalization Weighted indexes.

The MSCI Corporate Events methodology book is available at:https://www.msci.com/index-methodology.

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MSCI Climate Action Indexes Methodology | October 2022

Appendix I: ESG Business Involvement EligibilityControversial Weaponso

Tobaccoo

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

Thermal Coal MiningoAll companies deriving 1% or more revenue (either reported or
estimated) from the mining of thermal coal (including lignite,
bituminous, anthracite and steam coal) and its sale to external
parties. It excludes revenue from metallurgical coal, coal mined forinternal power generation (e.g., in the case of vertically integrated
power producers), intra-company sales of mined thermal coal, andrevenue from coal trading (either reported or estimated).

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

All companies deriving 5% or more revenue from oil sands extraction,
which own oil sands reserves and disclose evidence of deriving
revenue from oil sands extraction. Companies that derive revenue
from non-extraction activities (e.g., exploration, surveying,processing, refining) or intra-company sales are not excluded.
Additionally, companies that own oil sands reserves with noassociated revenue are also not excluded.

Nuclear WeaponsoAll companies that manufacture nuclear warheads and/or whole
nuclear missiles. It includes assembly and integration of warhead
and missile body, as well as companies with contracts to© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Action Indexes Methodology | October 2022

operate/manage government-owned facilities that manufacture
nuclear warheads and missiles.
oAll companies that manufacture components that were developed orare significantly modified for exclusive use in nuclear weapons(warheads and missiles). It includes companies with contracts tooperate/manage government-owned facilities that manufacturecomponents for nuclear warheads and missiles.

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

oAll companies that provide auxiliary services related to nuclear
weapons, such as repairing and maintaining nuclear weapons,
providing overhaul and upgrade services, stockpiling andstewardship, R&D work, testing and simulations, etc. It also includes
companies with contracts to operate/manage government-owned
facilities that conduct R&D, testing, simulations, and other essential
sciences on nuclear weapons.

oAll companies that manufacture components that were notdeveloped or not significantly modified for exclusive use in nuclear
weapons (warheads and missiles) but can be used in nuclear
weapons.

o

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

o

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

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MSCI Climate Action Indexes Methodology | October 2022

Appendix II: Calculation of Security Level Scores
Sector Relative Quartiles
For each security in the Applicable Universe, the following security level sector
relative quartiles are calculated –Table 1
Score

Ranking Metric1

Intensity Score

Emission Intensity

2

Green Business Score

Green Business Revenue

3

Climate Risk Management
Score

Climate Risk Management
Weighted Average Score

4

Track Record Score

Emission Track Record

10Emission IntensityoSecurity level Emission Intensity = Global Green House Gas (GHG)
Emission / (Enterprise Value + Cash ($))

o

GHG Emission = Emissions from Scope 1+2+310

Green Business Revenue - Security level cumulative % of revenue from a setof ‘Clean Tech’ themes described in Appendix IV.

Climate Risk Management Raw Score - Security level weighted average of aset of climate change related key issues management score which aredescribed in Appendix III.

Emission Track Record – Security level track record is calculated as followsoSecurity level yearly (YoY) change in emission is calculated for last 4
years (3 yearly changes).

oAverage Yearly Emission Change – security level ‘average yearly
emission change’ is calculated as a geometric average of last 3

Prior to June 1, 2020, security level GHG Emission = Emissions from Scope 1+2© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Action Indexes Methodology | October 2022

yearly changes. Average Yearly Emission Change is not calculated for
securities with less than 4 years of emission data.
oEmission Track Record – For securities with Average Yearly Emission
Change <= - 2%.
Emission Track Record = Average Yearly Emission Change.

oEmission Track Record is not assigned to securities with Average
Yearly Emission Change > -2%.

Calculation of Sector Relative QuartilesFor each GICS sector, securities are ranked in descending order of theirranking metric and descending order of float adjusted market capitalization.



Ranked securities are divided in four equal groups.

Securities in the top group receive a score of 4 and securities in the bottom
group receive a score of 1.

Assessment of Credible Track Record
Security is assessed to have Credible Track Record if it meets following conditions


Reports Scope 1 and 2 emissionsHas published an emission reduction target

Track Record Score = 1© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Climate Action Indexes Methodology | October 2022

Appendix III: Climate Risk Management Weighted
Average Score
Climate Risk Management Weighted Average Score is calculated for securities in the
Applicable Universe using following key issue management scores from MSCI ESG
Ratings methodology related to management of Climate Change Risk andEnvironmental Opportunities.


Carbon Emissions Management Score

Product Carbon Footprint Management Score

Climate Change Vulnerability Management Score



Biodiversity and Land use Management Score

Opportunities in Clean Tech Management Score

Opportunities in Green Building Management Score

Opportunities in Renewable Energy Management Score

Security’s Climate Risk Management Weighted Average Score by considering
security’s key issue management score and key issue weight.
If a security is only assigned a Management Score for the key issue ‘Carbon
Emissions Management Score’ then the ‘Climate Risk Management Weighted
Average Score’ is set to be equal to the ‘Carbon Emissions Management Score’.

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MSCI Climate Action Indexes Methodology | October 2022

Appendix IV: Calculation of Green Business Revenue
For each constituent in the Parent Index, the Green Revenue% is calculated as the
cumulative revenue (%) from the six Clean Tech themes which are as follows:

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

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



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

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



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

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

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