Extended ESG Focus andChoice ESG Screened Indexes
This product insight gives an overview of the MSCI Extended ESG Focus
and MSCI Choice ESG Screened Indexes. These indexes illustrate two
approaches to ESG index construction that offer investors choice whenmsci.com

integrating ESG into their portfolios

Introduction
Sustainability is reshaping both the world we live
in and the investment landscape. Companies
are increasingly aware that their clients andtheir investors view sustainability as material tothe bottom line. From tackling issues such as
climate change to gender equality, and better
corporate governance, a new era is emerging.
Environmental, Social and Governance (ESG)
considerations are galvanizing a complete rethinkof all aspects of society.
These significant changes may require new
approaches to investing. The sustainable investing
industry is growing as more investors integrate

ESG into their investment decision making process.
Between 2016 and 2018, global assets managed
using ESG investment strategies have risenby 34% from USD $22.9 trillion to over $30.7
trillion, globally.1
In the U.S., flows into sustainable mutual funds
and Exchange Traded Funds (ETFs) grew to$20.6bn in 2019, almost four times the volume
in 2018.2
As the figure shows, MSCI has seen a 120%
growth year-on-year in ETF assets undermanagement tracking MSCI ESG Indexes.3

Equity ETF assets linked to MSCI ESG Indexes
180
40.0

168

35.0

We attribute this growth to three main drivers.
1. ESG helps investors
understand how theworld is changing
Global challenges, such as
water stress, privacy anddata security and regulatory
pressures, represent newor accelerating risks forinvestors. ESG investing canhelp investors identify thecompanies with the greatest
exposure to these risks andhow they are managing them.

2. A new generationof investors
Over the next few decades,
the millennial generation is
expected to direct between$15 trillion and $20 trillion
into U.S.-domiciled ESG
investments.4 A growing
body of research suggeststhat millennials are asking
more of their investments
and are more interested insustainable products.

180

3. Better data, coverageand technology
Advances in technology,
including artificial intelligenceand machine learning,combined with better ESG
disclosure from companies,
is facilitating better ESG
data, research, indexes andanalytics enabling more
dynamic, quantitative,
objective and financiallyrelevant approaches to
ESG investing.

150

134

30.0

ESG Growth
Drivers

120

25.0
20.0

78

34.5

67

15.0

37.0

90

60

10.0
27
5.0
-

12

9.0

1.4

2.1

2014

2015

30

12.4

4.6
2016

0
2017

AUM $B

2018

2019

Q1'20

# of Equity ESG ETFs

1. The Global Sustainable Investment Alliance 2018 – April, 2019 http://www.gsi-alliance.org/
2. Morningstar 2020 https://www.morningstar.com/articles/961765/sustainable-fund-flows-in-2019-smash-previous-records
3. As of Q1 2020; defined as each share class of an exchange traded fund, as identified by a separate ticker. Only primary listings, and not cross-listings, are counted. Equity ETF values for periods prior
to April 26, 2019 were based on data from Bloomberg and MSCI, while the values for periods on or after April 26, 2019 were based on data from Refinitiv and MSCI.

2 msci.com

4. US equity market in 2016. Reference: Bank of America Corporation 2016 Environmental, Social & Governance Report.

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Greatersolutions formore choice
As ESG Investing continues to evolve, MSCI is focused onbringing transparency and clarity to the market, serving
investors’ needs for ESG standards. MSCI has been at theforefront of providing data, research, indexes and other tools
to help enable ESG integration across the entire investment
process and is committed to further advancing solutions tofacilitate and accelerate sustainable investing.5
We have invested extensively to expand and improve our ESG
solutions keeping them in step with investors’ evolving needs.
Since early 2017, MSCI ESG Research has expanded MSCIESG Ratings coverage by roughly one-third to more than 8,500
companies and we continue to evolve our offering acrossasset classes.6
With over 30 years of ESG index experience 7, MSCI calculates
more than 1,500 equity and fixed income ESG Indexes designed
to help investors more effectively benchmark ESG investment
performance and manage, measure and report on ESG mandates.
We understand that there are many approaches to integrating ESG
and that there is a greater desire for customization and choice tomeet the growing range of ESG and investment objectives. Our
aim is to deliver transparent, high quality and reliable ESG data,indexes and tools to power better investment decisions.
MSCI is pleased to offer ESG indexes that utilize a wide rangeof MSCI ESG Research’s industry leading ESG ratings, climate
metrics, controversies and screening data.
5. TMSCI ESG Ratings and data produced by MSCI ESG Research LLC. MSCI ESG Indexes and Analytics utilize information from, but are not provided by, MSCI ESG Research LLC. MSCI Indexes andAnalytics are products of MSCI Inc. MSCI Indexes are administered by MSCI Limited (UK).

Indexmethodology
review
Index applications
The MSCI Choice ESG Screened and MSCI
Extended ESG Focus Indexes can be used as›› the basis for index-based strategies, such asindex-linked funds or ETFs›› benchmarks for ESG portfolios and in order
to assess the financial and ESG performanceof managers›› underlying index for structured products
and derivatives
The MSCI Extended ESG Focus Indexes aredesigned to target companies with positive
ESG profiles while exhibiting risk and return
characteristics similar to those of the underlying
market capitalization weighted index. The Indexes
are constructed by selecting constituents of aparent index through an optimization process thataims to maximize exposure to high ESG scoresfor a target tracking error budget. The Indexes
are sector-diversified and target companies withhigh ESG Ratings. Companies with exposure to
Tobacco, Controversial Weapons, Civilian Firearms,
Oil Sands and Thermal Coal are not eligible forinclusion in the Indexes.

The MSCI Choice ESG Screened Indexes
are designed to represent the performance ofcompanies that have above average ESG ratings
relative to their sector peers. Additionally, theseindexes apply extensive exclusion criteria, which
aim to exclude companies that are involved in awide range of controversial business activities andControversies. These business activities include
values- and climate change-based screens,
including controversial weapons, tobacco, andfossil fuels (see full list below).
Constructing these ESG Indexes involves thefollowing steps:
1. Define the parent Index
2. Define the eligible universe of companies
3. Select companies
4. Weight scheme (market cap or optimized)
5. Cap issuer weights (where applicable)
Parent Indexes: The MSCI USA, EAFE, Emerging
Markets and Canada IMI indexes are the parent(market cap) indexes for the MSCI Choice ESG
Screened and MSCI Extended ESG Focus indexes.

6. Source: MSCI ESG Research as of June 2020
7. The MSCI KLD 400 Social Index was launched on May 01, 1990

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Ineligible Companies8

Key Benefits & Differences›› MSCI Business Involvement Screens
The MSCI Extended ESG Focus and MSCI
Choice ESG Screened Indexes use MSCI ESG
Business Involvement Screening Researchand MSCI Climate Change Metrics to identify
companies that are involved in the businessactivities listed in the table below. These
companies are not eligible for inclusion. Visit
msci.com/esg-investing to learn more.
›› MSCI ESG Controversies
Identify companies that are involved in very
serious environmental, social, or governancecontroversies impacting their operations and/or products and services. Companies involvedin controversies are excluded from both index
series, however the Choice ESG Screened

indexes have a stricter controversy scorethreshold than the Extended ESG Focus Indexes.
Visit msci.com/esg-investing to learn more.
›› MSCI ESG Ratings
Both indexes seek to provide exposure tocompanies that have demonstrated an ability
to manage their ESG risks and opportunities asreflected in their ESG Rating. The MSCI Choice
ESG Screed indexes require that companies
have an MSCI ESG Rating of ‘BBB’ or above inorder to be eligible for inclusion in the indexes,
while the Extended ESG Focus indexes aim to
maximize exposure to companies that have ahigh ESG Rating. Visit msci.com/esg-ratings
to learn more.

MSCI Extended ESG Focus Indexes

MSCI Choice ESG Screened Indexes

The indexes aim to achieve a high ESG
score and similar risk/return as parent
index while avoiding most common
controversial activities

The indexes are designed to target leading
ESG performers combined with extensive
climate change and values-based screens

Weighting

Optimized

Market Cap

Exclusions

Controversial Weapons, Tobacco, Civilian
Firearms, Oil Sands, Thermal Coal

Energy Sector, Adult Entertainment, Alcohol,
Civilian Firearms, Conventional Weapons,
Controversial Weapons, Gambling, Genetical
Modified Organism, Nuclear Power, Nuclear
Weapons, Predatory Lending, Palm Oil, For
Profit Prisons, Tobacco

Description(Thermal Coal, Oil Sand not applicablefor Canada IMI)

(Cannabis for Canada IMI)
Minimum Controversy
Score for Inclusion

1

Minimum ESG Rating-

3(1 for Canada IMI)BBB

Both the MSCI Choice ESG Screened & MSCI
Extended ESG Focus indexes offer the following
characteristics›› Designed to maintain diversification:
by selecting companies across various sectors›› Target leading ESG companies: the indexes
are designed to represent the performance ofcompanies that have above average MSCI ESG
Ratings relative to their sector peers›› Targeted ESG score improvement: bothindexes aim to improve the overall ESG score
relative to the parent index›› Designed to reduce headline risk: utilize MSCI
controversies data to exclude companies thatare involved in controversies or in controversial
business activities›› ESG eligibility thresholds: companies
must meet more stringent ESG Ratings andControversies thresholds to be included in the
MSCI Choice ESG Screened indexes›› Weighting of constituents: The MSCI
Extended ESG Focus indexes are built using
an optimizer that selects and re-weights
companies in order to maximize the ESG
score for the indexes, with a tracking error
target; while the Choice ESG Screened indexes
constituents are market cap weighted
The MSCI Extended ESG Focus Indexes areconstructed by selecting through an optimization
process that aims to maximize exposure to ESG
factors subject to maintaining risk and return
characteristics similar to the parent Index. The
index also seeks to remove the most common andcontroversial companies and activities.

›› Designed to mitigate climate risk: through theexclusion of fossil fuel companies›› Alignment with values: exclusion ofcompanies involved in business activities
reflecting most common Values based
concerns across the spectrum of
ESG investors
Major differences between the MSCI Choice
ESG Screened & MSCI Extended ESG Focus
indexes include›› Screens: The MSCI Choice ESG Screened
indexes have more extensive values-based
screens compared to the Extended ESG
Focus indexes

8. Data provided by MSCI ESG Research

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MSCI EAFE

MSCI EAFE Extended
ESG Focus Indexes

MSCI EAFE Choice ESG
Screened Indexes

Total Return (%)

1.6

2.1

3.9

Total Risk (%)

14.2

14.2

14.2

Return/Risk

0.11

0.15

0.27

Tracking Error (%)

0.0

0.6

1.9

Turnover (%)

1.7

15.9

8.1

Number of constituents

922

445

517

12,609,999

9,373,911

6,234,191

ESG Score

6.8

7.9

7.4

Index ESG Rating

AA

AA

AA

ESG leaders (AAA-AA) %

42.2

64.7

53.5

ESG laggards (B-CCC) (%)

2.9

0.1

0.0

Red flag controversies (%)

4.3

0.0

0.0

Fossil Fuel Reserves (%)

7.6

5.8

0.0

Weighted Avg Carbon Intensity

142

105

80

MSCI EMMSCI EM Extended ESG
Focus Indexes

MSCI EM Choice ESG
Screened Indexes

Total Return (%)

0.9

2.0

0.5

Financial Metrics

Index
Characteristics

Market Capitalization (M US$)We analyzed the historical performance of the indexes, from November 2014 through May 2020.
We compared the risk and return characteristics as well as the ESG profile of the MSCI Choice ESG
Screened Indexes relative to the MSCI Extended ESG Focus Indexes and the respective regional parent
market cap indexes. Exhibit 1 highlights the key financial and ESG characteristics.
Exhibit 1 - Key Financial and ESG Metrics – MSCI Extended ESG Focus and MSCI Choice ESG Screened Indexes
MSCI USAMSCI USA Extended
ESG Focus Indexes

MSCI USA Choice ESG
Screened Indexes

ESG Metrics

Source MSCI Inc. November 2014 - May 2020

Financial Metrics
Total Return (%)

9.6

9.9

13.5

Total Risk (%)

14.6

14.6

14.8

Return/Risk

0.66

0.68

0.92

Tracking Error (%)

0.0

0.6

2.8

Total Risk (%)

17.4

17.4

17.1

Turnover (%)

1.7

13.9

14.2

Return/Risk

0.05

0.12

0.03

Number of constituents

630

308

252

Tracking Error (%)

0.0

1.1

3.9

26,685,347

20,774,793

12,331,281

Turnover (%)

6.0

20.5

13.0

Number of constituents

980

296

289

ESG Score

5.9

6.9

7.2

Market Capitalization (M US$)5,243,171

3,030,208

2,397,181

Index ESG Rating

A

AA

AA

ESG Metrics

ESG leaders (AAA-AA) %

25.6

42.6

45.7

ESG Score

4.7

6.3

6.1

ESG laggards (B-CCC) (%)

6.6

1.9

0.1

Index ESG Rating

BB

A

A

Red flag controversies (%)

1.4

0.0

0.0

ESG leaders (AAA-AA) %

9.8

26.4

17.8

Fossil Fuel Reserves (%)

3.6

2.5

0.0

ESG laggards (B-CCC) (%)

19.9

0.8

0.0

Weighted Avg Carbon Intensity

157

101

61

Red flag controversies (%)

2.1

0.0

0.0

Fossil Fuel Reserves (%)

8.4

5.9

0.0

Weighted Avg Carbon Intensity

300

165

104

Market Capitalization (M US$)ESG Metrics

Source MSCI Inc. November 2014 - May 2020

Financial Metrics

Source MSCI Inc. November 2014 - May 2020

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MSCI USA Indexes - ESG Score

Exhibit 2 - ESG Integration versus tracking error and net returns – Choice ESG Screened & Extended
ESG Focus Indexes
8.0
Choice ESG Screened
7.5

Extended ESG Focus

7.0

13.5

9.9

6.5

9.6

5.5
5.0

-0.2

0.3

0.8

1.3

1.8

2.3

2.8

3.3

Net Returns (%)

Tracking Error

MSCI EAFE indexes - ESG Score

Period from Nov 28, 2014, to May 29, 2020. ESG Score as of May 29, 2020. Bubble sizes represent the annualizes net return of indexes.

8.5

2. MSCI ESG Research was the first ESG
provider to assess companies based on
industry financial materiality, dating back to
1999.10 We have over 13 years of live ESG
Ratings history demonstrating economic
relevance. Learn more msci.com/esg/
deconstructing-esg-performance

3. The MSCI KLD 400 Index is the longest
running ESG index with 30 years of live
history11 and above-benchmark returns
since 199412
4. Today we have over 1,500+ equity and
fixed income indexes leveraging MSCI ESG
Research data designed to support ESG
integration, screening and impact approaches

Extended ESG Focus

8.0

Choice ESG Screened

2.1

7.5

3.9

EAFE
7.0

Conclusion

1.6

6.5
6.0
5.5
5.0

-0.1

0.2

0.5

0.8

1.1

1.4

1.7

2.0

2.3

Net Returns (%)

Tracking Error

Period from Nov 28, 2014, to May 29, 2020. ESG Score as of May 29, 2020. Bubble sizes represent the annualizes net return of indexes.

MSCI Emerging Markets Indexes - ESG Score

1. MSCI ESG Research is a pioneer in measuring
forward looking ESG risk and use of alternative
data and AI technology, with deep history
and 40+ years of experience9 in objectively
measuring and modelling ESG performance

USA

6.0

MSCI ESG leadership

7.0

Extended ESG Focus

6.5

Choice ESG Screened

2.0

0.5

6.0
5.5
Emerging Markets

5.0

0.9
4.5
4.0

-0.2

0.4

1.0

1.6

2.2

Tracking Error

2.8

3.4

4.0

Institutional investors may wish to take into
account their ESG objectives and constraints
when evaluating ESG indexes. What are thedesired ESG improvements or climate mitigation
outcomes? Is there tolerance for tracking error
and deviation from market performance inexchange for higher ESG quality, lower exposure
to stranded asset risk, reduced exposure tocontroversial companies or business activities?
These considerations can help each investor
adopt and tailor an ESG approach that best meets
their needs.

4.6

Net Returns (%)

Period from Nov 28, 2014, to May 29, 2020. ESG Score as of May 29, 2020. Bubble sizes represent the annualizes net return of indexes.
10 msci.com

The MSCI Extended ESG Focus and MSCI Choice
ESG Screened indexes are both designed totarget higher ESG rated companies compared to
traditional market cap indexes. At the same time,they aim to minimize their climate-related risks
and reduce exposure to controversial companies
and business activities. We understand that whenit comes to sustainable investing, one size does
not fit all. That’s why these indexes take different
approaches to construction and exclusions toprovide investors with more choice to better alignwith their beliefs and objectives.

9. Through MSCI’s legacy companies KLD, Innovest, IRRC, and GMI Ratings
10. Origins of MSCI ESG Ratings established in 1999. Produced time series data since 2007.
11. According to KLD 2008. The MSCI KLD 400 Social Index was launched on May 01, 1990
12. MSCI KLD 400 Social Index factsheet https://www.msci.com/documents/10199/904492e6527e-4d64-9904-c710bf1533c6

msci.com 11

About MSCI ESG Research
Products and Services
MSCI ESG Research products and services are provided
by MSCI ESG Research LLC, and are designed to provide
in-depth research, ratings and analysis of environmental,social and governance-related business practices tocompanies worldwide. ESG ratings, data and analysis fromMSCI ESG Research LLC. are also used in the constructionof the MSCI ESG Indexes. MSCI ESG ResearchLLC is a
Registered Investment Adviser under the Investment
Advisers Act of 1940 and a subsidiary of MSCI Inc.

About MSCI Inc.
MSCI is a leading provider of critical decision support tools
and services for the global investment community. With
over 45 years of expertise in research, data and technology,
we power better investment decisions by enabling clientsto understand and analyze key drivers of risk and returnand confidently build more effective portfolios. We create
industry-leading research-enhanced solutions that clientsuse to gain insight into and improve transparency across theinvestment process.
To learn more, please visit www.msci.com/esg-investing.

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