Consultation on a Proposed Enhanced
MSCI KLD 400 Social Index Methodology
February 2012©2012. All rights reserved.

msci.com
msci.comExecutive Summary

MSCI started maintaining the MSCI KLD 400 Social Index along with the other MSCI ESG Indices post their transition in September
2010. It was then announced that MSCI would review the index methodology in the future.



MSCI now proposes an objective and transparent methodology for the MSCI KLD 400 Social Index based on MSCI’s new suite of
ESG products on ESG Manager, while keeping the philosophy underpinning the index unchanged.



MSCI proposes to use a combination of three MSCI ESG products for the purpose of index creation – IVA ratings for overall best-ofclass ESG company performance, Impact Monitor scores for identifying highly controversial company practices and ESG Screener
for excluding companies that fail the values based exclusion screens.



These proposals are similar to the enhanced methodology proposal for the MSCI Global ESG Indices, on which MSCI is currently
consulting with clients.*In addition, MSCI also proposes the following changes to the existing MSCI KLD 400 Social Index methodology, and is seeking
feedback on these proposed additional enhancements.



Results of the Index Review to be announced nine days before the effective date (currently announced only five days before theeffective date).



ESG ratings used for the Index Reviews will be taken as of the last calendar day of the month preceding the Index Review, i.e., January,
April, July and October. Securities which do not have a rating by a given cutoff date will not be considered eligible for the Index Review.



MSCI proposes to transition to the enhanced methodology along with the transition of the MSCI Global ESG Indices, over multiple
index reviews

Please note this consultation may or may not lead to the adoption, in whole or in part, of the proposed enhancements describedherein.

* The consultation document describing these proposed enhancements in detail is available on the MSCI web site at
http://www.msci.com/products/indices/consultations/©2012. All rights reserved.

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Current MSCI KLD 400 Social Index Methodology


MSCI KLD 400 Social Index is a free float-adjusted market capitalization index designed to provide exposure to
U.S. companies that have positive Environmental, Social and Governance (ESG) characteristics.



The Index excludes companies with involvement in alcohol, gambling, tobacco, firearms, weapons and nuclear
power.

The Index is composed of 400 securities with high ESG performance along with the considerations of size andsector representation.



The index is reviewed on a quarterly basis to coincide with the Semi-Annual Index Reviews in May and November
and Quarterly Index Reviews in February and August.

At each Quarterly Index Review (QIR):

Current index constituents are reviewed to determine if any of them should be removed due to ESG performance

If a constituent is removed from the MSCI USA IMI as a result of the Index Review, it is simultaneously removed from the
MSCI KLD 400 Social Index

The deleted securities are replaced with eligible securities taking into account size and sector representation



The MSCI KLD 400 Social Index is restored to 400 securities at each Index Review

The rebalancing results are announced five days before the effective date through Integrated Client File (ICF) anda Global Summary Document.

©2012. All rights reserved.

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Proposal for Enhanced Methodology
The proposed methodology for the MSCI KLD 400 Index is based on the following principles, in linewith the current index philosophy:Parent Index

Positive exposure to superior ESG rated companies


Use IVA ratings to identify companies with superior ESG performanceUse values based exclusion screens as in the current methodology with further refinements (as detailed in the Appendix)

Exclude companies having involvement in specific ESG controversies as identified by Impact Monitor

Sector representationThe selection universe for the MSCI KLD 400 Social Index will be MSCI USA IMI ESG Index. The MSCI USA IMI ESG Index isdesigned to provide exposure to companies that have high ESG performance by targeting the top 50% companies by ESG
rating within each sector

Target relative sector weights of +/- 25% with respect to MSCI USA to align sector weights

Size representation


Target a minimum count of 200 standard segment companies©2012. All rights reserved.

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Proposal for Enhanced Methodology
The composition of the MSCI KLD 400 Social Index is reviewed on a quarterly basis. The proposeddeletion and addition criteria at every QIR are as follows: Deletion criteria at QIRs
 Companies that are deleted from the MSCI USA IMI ESG Index (at that QIR) Companies that fail the values based exclusion screens Companies whose IVA rating drops to B or below
 Companies having Impact Monitor controversy assessment of very severe (Impact Monitor score of 0 or 1 ) Companies from overweight sectors (starting with lowest IVA rated company) until the relative sector
weights are within band Companies eligible for addition
 Constituents of MSCI USA IMI ESG Index
 Companies that pass the values based exclusion screens Companies with IVA rating of BBB or above
 Companies having Impact Monitor score of 3 or above©2012. All rights reserved.

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Proposal for Enhanced Methodology
At every index review, after reflecting all the deletions, additions will be made to the MSCI KLD 400
Social Index in order to restore the number of index constituents to 400. The additions to theindex will be based on ESG performance, sector alignment and size representation.
Standard segment:

Add all companies having IVA rating of AAA, irrespective of sector weight

Add companies (in order of their IVA scores) to sectors where the relative sector weights are below the lower threshold (25%). The sector weights will be recalculated after every additionOnce relative sector weights of all sectors are above the lower threshold or no further companies are available for addition inthese sectors, companies will be added sequentially based on their IVA scores. The sector weights will be recalculated after
every addition

No companies will be added to a sector if it reaches the upper threshold of +25%

A minimum count of 200 securities will be maintained to ensure appropriate size representation

While adding companies to the same sector, preference will be given to companies having higher IVA score. In case there are
multiple companies with the same IVA score, one with higher free float-adjusted market capitalization will be added first

Small Cap segment:

Add companies based on their IVA score. In case of a tie, add to the most underweight sector©2012. All rights reserved.

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Transition Proposal
 MSCI proposes to transition to the enhanced methodology, along with the transition of the MSCI
Global ESG Indices, over multiple index reviews (i.e. in two phases)Standard Segment

In the first phase, all existing constituents currently rated “B” or below will be deleted from the index,
starting with the most overweight sectors*, over multiple index reviewsIn the second phase, all constituents that are not part of the pro forma MSCI USA IMI ESG Index will bedeleted from the index, starting with the most overweight sectors, over multiple index reviewsThis will result in a total of 22 deletions with a weight of 12.6% in the current index***

Small cap segment

This will result in a total of 35 deletions with a weight of 8.7% in the current index**Will follow a transition plan along similar lines as the standard segment

At each index review, other deletions and additions will be made to the index in line with the proposed
methodology, to restore the number of securities to 400* As long as the rating remains “B” or below at the time of the deletion** Based on data as of close of November 30, 2011*** These deletions are based on the pro forma MSCI USA IMI ESG Index constructed using the enhanced methodology©2012. All rights reserved.

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Proposed Top Deletions*

Security Name
Microsoft Corp
Qualcomm
Disney (Walt)
Home Depot
Amgen
Cvs/caremark
Costco Wholesale CorpeBay
Baxter International
Lowe's Cos
Walgreen Co
Biogen Idec
Automatic Data Process
Corning
Johnson Controls
Illinois Tool Works
McKesson Corp
Thermo Fisher Scientific
Intuitive Surgical
Netapp

SectorInformation Technology
Information Technology
Consumer Discretionary
Consumer Discretionary
Health Care
Consumer Staples
Consumer Staples
Information Technology
Health Care
Consumer Discretionary
Consumer Staples
Health Care
Information Technology
Information Technology
Consumer Discretionary
Industrials
Health Care
Health Care
Health Care
Information Technology

GS Rating
BBB
BBB
BB
BB
A
BBB
BBB
BBB
A
A
BB
A
BBB
A
AA
BB
A
BBB
BBB
BBB

IVA Rating
A
A
BB
B
B
BB
A
BBB
B
B
B
BB
BBB
A
B
B
B
BB
B
B

ImpactMonitorYellow
Yellow
Yellow
Yellow
Yellow
Yellow
Yellow
Yellow
Yellow
Green
Yellow
Yellow
Green
Green
Yellow
Yellow
Yellow
Green
Green
Green

ImpactMonitor Score
2
3
2
2
3
2
2
2
2
5
2
4
10
5
3
4
2
5
10
5

Current
weight
3.8%
1.8%
1.2%
1.1%
1.0%
1.0%
0.7%
0.7%
0.6%
0.6%
0.6%
0.5%
0.5%
0.5%
0.4%
0.4%
0.4%
0.4%
0.3%
0.3%

* Includes deletions from both phases, as described in the transition proposal©2012. All rights reserved.

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Proposed Top Additions*

Security Name
Viacom B (New)Centurylink
Cognizant Tech Solutions
Time Warner Cable
Equity Residential
Marsh & Mclennan Cos
Hcp
IntuitMotorola Solutions
PaccarMacy'sKroger Co
Avalonbay Communities
Int'l Paper Co
O'reilly Automotive
Cliffs Natural Resources
Dover Corp
Conagra Foods
Fluor Corp
Bunge

SectorConsumer Discretionary
Telecommunication Services
Information Technology
Consumer Discretionary
Financials
Financials
Financials
Information Technology
Information Technology
Industrials
Consumer Discretionary
Consumer Staples
Financials
Materials
Consumer Discretionary
Materials
Industrials
Consumer Staples
Industrials
Consumer Staples

IVA Rating
BBB
BBB
BBB
A
BBB
BBB
BBB
A
AA
BBB
BBB
A
BBB
BBB
BBB
BBB
A
A
AA
A

ImpactMonitorYellow
Green
Green
Yellow
Green
Yellow
Green
Green
Yellow
Green
Yellow
Yellow
Green
Yellow
Green
Green
Green
Yellow
Yellow
Yellow

Impact Monitor
Score
4
5
5
4
5
4
10
8
3
5
3
3
5
3
5
5
8
4
3
3

Proforma weight
0.52%
0.51%
0.46%
0.43%
0.37%
0.36%
0.34%
0.34%
0.31%
0.29%
0.29%
0.28%
0.26%
0.26%
0.23%
0.23%
0.23%
0.23%
0.21%
0.20%

* Includes additions from both phases, as described in the transition proposal©2012. All rights reserved.

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9

Discussion Points

Is it helpful to move the announcement of rebalancing results from five days to nine days?

Is the selection of MSCI USA IMI ESG as the selection universe appropriate?



Are the IVA rating thresholds for the deletions (B or below) and additions (BBB or above) appropriate?

Is the application of a higher Impact Monitor controversy assessment of very severe or severe for non index
constituents appropriate?



Are the thresholds for relative sector weights (+/- 25%) appropriate?

Is the floor on the number of standard segment companies (200) adequate?

What would be the appropriate timeline for the transition?

Is the deletion of existing constituents that are “B” rated, or are not part of the MSCI USA IMI ESG Index
appropriate?

©2012. All rights reserved.

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Appendix©2012. All rights reserved.

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Proposed Enhanced Values based exclusion screensCurrent• All companies classified as “Producer” that earn 5% or more of revenue from adult entertainment
activities

Adult
Entertainment

Alcohol

Proposed• All “Producers” that earn USD $500 million in revenue from adult entertainment activities• Producers: any involvement• All companies classified as “Producers” that earn 5% or more of total revenues from alcoholrelated activities• All “Producers” that earn USD $500 million in revenue from alcohol•All companies classified as “Producers” that earn 5% or more of total revenue from firearms

Civilian Firearms•Producers: any involvement•All “Producers” that earn USD $500 million in revenue from firearms•All companies classified as “Retailers” that earn 15% or more of revenues from civilian firearms•Owner/operators of gambling facilities•All companies classified as “Operations” or “Support” that earn 5% or more of revenues fromgambling-related activities•Suppliers of key products: >50% or major player•All “Operations” and “Support” companies that earn USD $500 million in revenue from gambling•Owner/operator: any level•All companies classified as “Utility”, “Uranium Mining”, “Nuclear Reactor Construction/Design” or“Fuel Enrichment”

Gambling

Nuclear Power•Design nuclear reactors•Uranium Mining•All companies classified as “Essential Supplier” that earn 15% of more of revenues from nuclearrelated activities• All companies classified as “Producer”

Tobacco• Producers: any involvement•Controversial Weapons (NBC): any involvement

Weapons• All companies classified as “Distributor”, “Retailer”, or “Supplier” that earn 15% or more ofrevenues from tobacco products• All companies classified as “Nuclear Weapons Systems”, “Nuclear Weapons Components”,“Chemical/Biological Weapons Systems”, “Chemical/Biological Weapons Components”, “Depleted
Uranium Manufacturer”, “Cluster Bomb Manufacturer”, or “Landmine Manufacturer”•All companies that earn 5% or more of revenue from weapons-related products or services•Conventional Weapons and key component
parts: 2% or $50 million©2012. All rights reserved.

•All companies that earn USD $500 million in revenue from weapons-related products or services

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MSCI KLD 400 Social Index – Historical Turnover

MSCI KLD 400 Social Index
Index Review# Additions
Nov 2011
Aug 2011
May 2011
Feb 2011
Nov 2010
Aug 2010

6
9
14
1
8
2

©2012. All rights reserved.

# Deletions

Turnover

3
4
8
0
7
2

1.4%
1.2%
3.6%
0.5%
3.7%
2.1%

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MSCI 24 Hour Global Client Service
Americas

Europe, Middle East & Africa

Asia Pacific

Americas1.888.588.4567 (toll free)Cape Town+27.21.673.0100

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clientservice@msci.com
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Barra Knowledge Base – Online Answers to Barra Questions: www.barra.com/support©2012. All rights reserved.

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Notice and Disclaimer
This document and all of the information contained in it, including without limitation all text, data, graphs, charts (collectively, the “Information”) is the property of MSCl Inc. or its
subsidiaries (collectively, “MSCI”), or MSCI’s licensors, direct or indirect suppliers or any third party involved in making or compiling any Information (collectively, with MSCI, the“Information Providers”) and is provided for informational purposes only. The Information may not be reproduced or redisseminated in whole or in part without prior written
permission from MSCI.

The Information may not be used to create derivative works or to verify or correct other data or information. For example (but without limitation), the Information many not be used
to create indices, databases, risk models, analytics, software, or in connection with the issuing, offering, sponsoring, managing or marketing of any securities, portfolios, financial
products or other investment vehicles utilizing or based on, linked to, tracking or otherwise derived from the Information or any other MSCI data, information, products or services.



The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. NONE OF THE INFORMATION PROVDERS MAKES ANY EXPRESS OR
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

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None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), any security, financial product or other investment vehicle or any trading strategy.



MSCI’s indirect wholly-owned subsidiary Institutional Shareholder Services, Inc. (“ISS”) is a Registered Investment Adviser under the Investment Advisers Act of 1940. Except withrespect to any applicable products or services from ISS (including applicable products or services from MSCI ESG Research Information, which are provided by ISS), none of MSCI’s
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© 2012 MSCI Inc. All rights reserved.

©2012. All rights reserved.

RV Jan 2012

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