Consultation on Proposed
Changes to MSCI Climate
Action Indexes
PROPOSAL FOR CONSULTATIONThis consultation may or may not lead to the implementation of any or all of the proposed changes in the highlighted or any other MSCI
indexes. Consultation feedback will remain confidential. MSCI may publicly disclose feedback if specifically requested by specific market
participants. In that case, the relevant feedback would be published together with the result of the consultation.

June 2023

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Please refer to the disclaimer at the end of this document.

Consultation Timelines and Proposals•

This consultation contains proposals for the potential enhancement of the MSCI Climate Action Indexes.

•

MSCI invites feedback from market participants on or before June 30, 2023.

•

MSCI will announce the results of the consultation on or before July 31, 2023, at which time MSCI will also
communicate the implementation date of changes, if any.

•

In line with the climate transition objective of the MSCI Climate Action Indexes, and given the recent MSCI ESG
Controversy change in methodology, we put forward our core proposals for potential enhancement:
1. Companies that are assessed as "Orange Flag"* based on MSCI Environmental Controversy (MSCI
Environmental Controversy Score = 1), should not be excluded from the MSCI Climate Action Indexes.
2. The review of continued eligibility of constituents based on MSCI ESG Controversy Score Eligibility and ESG
Business Involvement Eligibility of any MSCI Climate Action Index should be performed on a quarterly
frequency.

•

To avoid additional reverse turnover MSCI has also announced that exceptionally, effective 1 st July 2023, theMonthly Index Reviews (as described in section 4.2 of the methodology document) will not be applied on any MSCI
Climate Action Index until the conclusion of this consultation.
* An Orange Flag indicates an ongoing Severe ESG controversy implicating a company directly, or a Very Severe ESG controversy that is either partially resolved or indirectly
attributed to the company’s actions, products, or operations.

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Recap: MSCI Climate Action Indexes
The MSCI Climate Action Indexes balance companies’ transition risks against their emission reduction targets and climate
risk management to select the top half companies in each GICS® sector1.
The Index range augments MSCI’s offering to help institutional investors who seek to integrate climate considerations in
global equity portfolios. The index is designed for institutional investors who look to finance the transition and drive change
in the real economy.
KEY FEATURES✓Balanced sector weights✓Forward looking view
✓Broad market coverage✓Increased weight towards companies with SBTiapproved targets2✓Includes companies navigating the energy transition✓Maintains overall characteristics of ACWI while
selecting companies on the basis of climatecharacteristics

1 GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.

2 Science Based Targets initiative :https://sciencebasedtargets.org/

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Impact of recent changes to the MSCI ESG Controversies
Methodology
1.

The recent enhancements of the MSCI ESG Controversies methodology have resulted in the downgrade ofmany companies to Orange Flag on Environmental Controversies.
― Several companies are downgraded due to the severity assessment of existing controversies under theenhanced methodology and not due to the discovery of new controversies.
― The review of cases under the enhanced methodology is pending for about 30% companies in MSCIACWI which constitute about 65% of index weight (as of 28th April 2023).

2.

In some cases, a large portion of the sector market cap has been downgraded to Orange Flag, which could
potentially distort the sector representation and their weights in Climate Action indexes.

Above chart only include ACWI constituents which have undergone a controversy update between Jan-Apr’23. An issuer’s controversy can be updated even before thecompletion of case review as per the enhanced methodology.

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Rationale for the Proposals
1. Companies that are assessed as "Orange Flag" based on MSCI Environmental
Controversy (Environmental Controversy Score = 1), should not be excluded from
the MSCI Climate Action Indexes.
••

In our assessment, the scope of Orange Flag assessment has widened under theenhanced ESG Controversies methodology. Under the new framework, large
companies, which were already generally subject to greater scrutiny and had more
controversies, are now even more prone to receive an Orange Flag assessment
because of the global scale of their operations.
A byproduct of more frequent Orange Flag assessment for several companies fromthe same sector is a potential distortion in sector and size exposures in the Climate
Action Indexes and a reduction in the transition opportunity set. The Indexes select
50% names from each sector, which means that a stock with an Orange Flag on
Environment Controversies may be replaced by a smaller cap name.

Environment
Controversy
Screening

Exclude both
Red andOrange Flag
companies

Orange Flag onanyEnvironmental
Theme

2. The review of continued eligibility of constituents based on MSCI Environmental
Controversy and ESG Business Involvement of any MSCI Climate Action Index
should be performed on a quarterly frequency.
••

Monthly review of eligibility may not be essential to the Index objective.
Monthly review may cause operational challenges for the product providers andmanagers replicating the index as they are required to deal with frequent turnover
events.

Exclude Only
Red Flagcompanies

Orange Flag on
selectEnvironmental
Theme

Frequency of
Screening
Review

Monthly

Quarterly

Semi-annual

Proposal

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Consultation Question•

Do you agree that companies assessed as Orange Flag on Environmental Controversies should not be excluded from the
Eligible Universe of Climate Action Indexes ?

•Do you agree that Monthly Index reviews are not required for Climate Action Indexes ?
― Monthly Index reviews currently result in the deletion of constituents which fail the― ESG Controversy Score Eligibility* i.e., Red Flag on ESG Controversies (including Red Flag on Environmental
Controversies) OR Orange Flag on Environmental Controversies― Certain ESG Business Involvement Eligibility*•

Do you agree that the review of ESG Controversy Score Eligibility and ESG Business Involvement Eligibility of theconstituents should be reviewed at quarterly frequency ?

*The exact eligibility criteria are mentioned in the sections 3.2.1 and 3.2.2 of the MSCI Climate Action indexes methodology document available athttps://www.msci.com/eqb/methodology/meth_docs/MSCI_Climate_Action_Indexes_Methodology_20230306.pdf

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Appendix

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What are the MSCI Environmental Controversy thematic
indicators that may be flagged as Orange?
•
•

•

•

MSCI ESG Environmental controversies are mapped to at least one of the underlying themes shown below.
The enhanced MSCI ESG Controversies methodology has resulted in the downgrade of many companies to Orange Flagbased on their involvement in Land related controversies.
― Land related controversies include involvement in natural resource-related and environmental impact-related cases. It
also covers impacts due to direct or indirect use of the firm’s products or services, resistance to improved practices
and criticism by NGOs and/or other third-party observers.
― For example, several major Consumer Staples companies were recently downgraded to Orange Flags due to their longstanding involvement in plastic pollution, which is included under the Land theme.
Biodiversity and Land Use is a relevant key issue for the calculation of the Climate Risk Management Score as described in
MSCI Climate Action Indexes methodology. However, not all land-related controversies have a direct link with Climate
Transition risks and their mitigation, which is most relevant to the Index objective.
No company is currently assessed as Orange Flags on controversies related to Climate, Waste and Other themes.

Environmental Controversy

Climate

Land

Waste

Supply

Toxic

Water

Others

Total

Number of Orange Flag*

0

23

0

2

14

1

0

38

* MSCI ESG Controversies data taken as of 17th May 2023 from ESG Manager. Numbers represent MSCI ACWI Index constituents as of 17th May 2023.

Information Classification: GENERAL

8MSCI ACWI Climate Action Index Methodology*
Parameter

MSCI ACWI Climate Action Index

Parent Index

MSCI ACWIEligible Universe

Eligible Universe is constructed by excluding companies which fail following eligibility tests• ESG CONTROVERSY SCORE ELIGIBILITY− Red Flag
− Orange Flag on Environmental Issues• ESG BUSINESS INVOLVEMENT ELIGIBILITY− Controversial Weapons Companies : Any Tie− Tobacco Producers : Producer or production/distribution Revenue >= 5%− Thermal Coal Mining : Revenue >= 1%− Oil Sands extraction : Revenue >= 5%• EMISSION ELIGIBILITY - Securities which either have higher Emission Intensity than the High Emission Threshold or higher total
potential emission than the High Potential Emission Threshold and do not yet have approved science-based targets are excluded.
• CLIMATE RISK MANAGEMENT ELIGIBILITY - Securities which are in the lowest quartile of their GICS sector based on their Climate
Risk Management Score are excluded

Security Selection••

Sort Stocks in each sector in ascending order of SECURITY-LEVEL ASSESSMENT* and descending order of float adjusted market
capitalization.
Select top 50% stocks by count from each sector.

Weighting•••Selected Stocks are Market Cap Weighted
Max Issuer Weight capped at 5%
Active Sector Weights are capped at +/-5%.

Rebalancing Frequency••

Semi-annual Index Reviews – index is fully reconstituted.
Monthly Index Reviews – ESG Controversy Eligibility and ESG Business Involvement Eligibility of existing constituents is reviewed.

*More details on Index methodology are available in the Climate Action Indexes methodology document.

Information Classification: GENERALAbout MSCIMSCI is a leading provider of critical decision support tools and services for the global
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