June 2024​​MSCI Transition
Aware Select Indexes​
This product insight gives an overview of the MSCI Transition Aware
Select Indexes, which are designed to support investors seeking to drive
decarbonization of the economy by financing climate transition.

Contents
Introduction: Financing the climate transition

3

Climate transition has created opportunities

4

MSCI Transition Aware Select Indexes Methodology overview

5

Exclusion criteria

6

Key index metrics

6

Index applications

7

Conclusion

8

MSCI Transition Aware Select Indexes 2

Introduction:
Financing the climate transition
Investors are increasingly recognizing the impact of climate change on the global economy,
an awareness that has begun to influence decision making in their portfolios. Transitioning
to a low-carbon global economy is essential if the goals outlined in the 2015 Paris
Agreement are to be met. As a result, assessing and managing climate-transition risks has
become an increasingly important aspect of the institutional investment process.1
Financing the climate transition is an alternative investment approach to the well-known
portfolio-decarbonization approach. The approaches are compared in Exhibit 1. Bothapproaches aim to lower a portfolio’s carbon footprint in the long run but use different
economic strategies to achieve this goal. Whereas the latter focuses on reducing thefinanced emissions of a portfolio through portfolio reweighting, the former aims tofinance companies that are climate-transition leaders in their sectors (i.e., frontrunners intransitioning their business models).
Exhibit 1: Strategic approaches to climate investing
Portfolio-ﬁnanced emissions

Portfolio-ﬁnanced emissions
Finance the transition

Reduce financed emissions+ shift toward clean tech

Target rate

Time
LowestLower

Low

MediumHigh

HigherHighestEconomic tranmission channel:
Decarbonize
portfolio

Time
LowestLower

Low

MediumHigh

HigherHighestEconomic tranmission channel:
Shift in investmentbase / cost ofcapital

Real-world
impactFinancecompanies’
transition

Incentivize andenable transition

Real-world
impactIllustration of portfolio construction approaches for low- and high-emitting companies. Source: MSCI ESG Research

Both approaches have advantages and limitations. The decarbonization approach allows
investors to meet pre-defined emissions targets but may lead to lower levels of portfolio
diversification and higher tracking error, especially if the decarbonization rate of the broader
investment universe is much slower. The financing-the-climate-transition approach allows
for diversified market representation and offers the opportunity to invest in companies
that are leading their sector counterparts in transition efforts. While this approach would
provide higher exposure to companies that have set targets or a track record in emissions
reduction, it does not guarantee meeting pre-defined decarbonization targets.
It is important to understand that the approaches have slightly different investment
objectives. In practice, investors can choose to allocate capital to both, which may allow
for combining their respective advantages.

1

Climate-transition risk refers to the potential costs faced by businesses due to the global shift
toward a more-sustainable, low-carbon economy.
MSCI Transition Aware Select Indexes 3

Climate transition has created opportunities
A global economy taking steps to decarbonize is likely to create

The approach of financing the climate transition also has a clear

opportunities for companies that are transitioning their businesseconomic rationale: from a company perspective, it addresses themodels in the face of climate change. An increasing number offinancial need of companies to transition their business models,investors are also looking for ways to seize financial opportunities

and from an investor’s perspective, it offers the opportunity tofrom the transition.

invest in companies that are leading their sector counterparts inrebuilding their business models.

The transition to low carbon requires significant investments in
new technology (e.g., installing new wind- or solar-power capacity,

This technology shift has already started to materialize in theincreasing energy efficiency, and adopting carbon-capture andform of a shift in corporate earnings in global equity markets,

storage solutions) to replace existing fossil-fuel-based technology.

as measured by the MSCI ACWI Investable Market Index (IMI)

This technology transition offers significant opportunities forand shown in Exhibit 2. In the three most-carbon-intensive Global

investing in the companies leading the way. At the same time,

Industry Classification Standard (GICS®)2 sectors (i.e., utilities,some investors may consider that investments in companies

materials and energy), companies with higher exposure to green

lagging in the technology transition pose risks.

revenues showed higher earnings-growth rates than their sector
peers with lower green revenues.

EPS growth (%), top versus bottom quintile

Exhibit 2: Faster earnings growth associated with higher green revenues
80

60

40

20

0
2016

2017

2018

2019
Utilities

2021

2020
Materials

2022

2023

EnergyGreen revenues include MSCI ESG Research’s estimates of revenues from energy efficiency, alternative energy and green buildings through the MSCI ACWI Sustainable Impact Index Methodology.
The universe is the constituents of the MSCI ACWI IMI as of April 2023. Source: Chris Cote and Guido Giese, “The Climate Transition Is Increasingly about Opportunity,”
MSCI ESG Research, May 15, 2023.

2

GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.
MSCI Transition Aware Select Indexes 4

MSCI Transition Aware Select Indexes
Methodology overview
The MSCI Transition Aware Select Indexes (the “Indexes”) aredesigned to represent the performance of companies that havebeen assessed as leaders in terms of their positioning and actions
relative to a climate transition. The Indexes follow a transparent
rules-based methodology framework that offers visibility into
security selection and weighting.3 Companies are included basedon their sector-relative greenhouse gas (GHG) emissions intensity
and measures taken to reduce emissions. The methodology reflects
the financing-the-climate-transition approach of climate investing.
The Indexes follow a bottom-up approach in which the constituentsof the underlying MSCI Indexes (the “Parent Indexes”) are selected

1.
1 One or more GHG-emissions-reduction targets approvedby the Science Based Targets initiative (SBTi).
2.
2 Revenue above a threshold from greener businesses(i.e., greater than or equal to 20%).
3.
3 Relative to sector peers based on GHG emissions (Scope
1 + 2) intensity. The Indexes use this assessment to selectthe top 50% (by market capitalization) of the securities
from each GICS sector in the Parent Indexes. This selection
is limited to the companies that disclose emissionsreduction targets.

based on an assessment of the following three dimensions:Exhibit 3: Climate-change metrics used in index construction

3

Climate metricCalculation

Rationale

SBTi-approved emissionsreduction targets

A company’s emissions-reduction
targets are independently approved as
science-based targets and are aligned withthe goal of keeping global warming at or
below 2°C.

Setting comprehensive and credible targets
is key to managing and mitigating transition
risks.

Green-business revenue

Measures a company's revenue generated
from products or services related to various
clean-tech themes.

Indicates to what extent companies havealready started to transition their businessmodels toward products and services that arealigned with the low-carbon economy.

GHG-emissions intensity

Scope 1 + 2 GHG emissions per USD 1 millionof a company’s enterprise value including
cash (EVIC).

Proxy for a company’s transition risks,particularly in the absence of the other two
climate metrics.

This document provides a high-level overview of the methodology. For full methodology details, please refer to: https://www.msci.
com/documents/10199/6870d8de-59df-ac4a-89a8-5e375afd289e

MSCI Transition Aware Select Indexes 5

Although assessing and managing climate-transition risks is an important investor
objective, institutional investors must also consider their fiduciary responsibilities.
Generally, investors need to balance the trade-offs between achieving climate objectives

Exclusion criteria
Controversial weapons

and financial objectives, such as tracking error and diversification (e.g., country and sector
allocations). The selected stocks are weighted in terms of financial metrics in proportion

ESG controversies

to their market capitalization in the Parent Index. Additionally, the index methodology
incorporates specific rules so that the active weights at the issuer, sector and country levels
do not deviate significantly from the Parent Index.
Furthermore, the Indexes exclude companies that do not disclose their emissions oremissions-reduction targets in the more-carbon-intensive sectors, namely, energy,

TobaccoThermal coal mining

materials, industrials and utilities.
More details on the calculation methodology of climate metrics and the index methodology

Thermal coal power

rules are available in the MSCI Transition Aware Select Indexes Methodology.
Unconventional oil and gas
Compliance with theUnited Nations Global
Compact Principles

Key index metrics
We compare the simulated performance and other characteristics for the MSCI World Transition Aware Select and MSCI World Climate
Paris Aligned Benchmark Select Indexes from December 2018 through March 2024 in Exhibit 4.4 Both indexes had, on average, a similar
number of constituents and similar turnover during the period.
The index methodologies contrast the two climate-investing approaches: financing the climate transition (MSCI World Transition Aware
Select Index) versus portfolio decarbonization (MSCI World Climate Paris Aligned Benchmark Select Index).
Exhibit 4: Key metrics and backtested performance
MSCI World Index

MSCI World Transition
Aware Select Index

MSCI World Climate Paris Aligned
Benchmark Select Index

Total return* (%)

12.7

13.6

12.5

Total risk (%)

18.2

17.9

18.5

Return/Risk

0.70

0.76

0.68

Active return (%)

0.0

0.9

-0.2

Tracking error (%)

0.0

1.5

1.9

0.60

-0.09

FINANCIAL METRICS

Information ratio
Number of constituents**

1,568

749

762

Turnover*** (%)

2.5

10.4

12.0

Data period for financial metrics is Nov. 30, 2018, to March 31, 2024. * Gross returns are annualized in USD. ** Calculated based on monthly average.
*** Calculated as annualized one-way index turnover divided by index reviews.

4

The analysis and observations in this report are limited solely to the period of the relevant historical data, backtest or simulation. There are frequently material
differences between backtested or simulated performance results and actual results subsequently achieved by any investment strategy. 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 recommendation to make (or refrain from making) any kind of investment decision or asset allocation and should not be relied on as such.

MSCI Transition Aware Select Indexes 6

Both climate indexes had a significantly better climate profile compared to their parent MSCI World Index across several key climate metrics.
Exhibit 5: Key climate metrics
Panel B. Exposure to clean-technologies-solutions companies, ≥ 20% revenue
30%

45%
40

25
Weighted average

35
30
25
EVIC

GHG emissions intensity (Scope 1+2)/

Panel A. GHG-emissions-intensity footprint

20
15
10

20
15
10
5

5
0

0
MSCI World Index

World Transition
Aware Select Index

MSCI World Climate
Paris Aligned Benchmark
Select Index

Panel C. Exposure to companies reporting emissions and targets

MSCI World Index

World Transition
Aware Select Index

MSCI World Climate
Paris Aligned Benchmark
Select Index

Panel D. Exposure to companies with SBTi-approved targets
70%
60

98

50

Index weight

100%

96
94

40
30

92

20

90

10
0

88
Companies reporting
Scope 1+2 emissions
MSCI World Index

Companies with
GHG-emissions-reduction targets

World Transition Aware Select Index

MSCI World Index

World Transition
Aware Select Index

MSCI World Climate Paris Aligned
Benchmrk Select Index

MSCI World Climate
Paris Aligned Benchmark
Select Index

Data as of March 29, 2024. GHG emissions intensity to EVIC is defined as the weighted average Scope 1 + 2 GHG
emissions intensity normalized by EVIC. Unit is tons of CO2/USD million EVIC.

Sector exposures of the MSCI World Transition Aware Select Index have been in line

Index
applications

with the MSCI World Index, not exceeding, on average, the sector weights by more than
1% between Nov. 30, 2018, to March 31, 2024.
Exhibit 6: Average active sector exposures
Real estate

MSCI Transition Aware Select Indexes

Utilities
Comm. serv.

can be used in the following ways:

IT

1

Financials

The basis for index-based

Health carestrategies, such as index-linked

Cons. stap.

funds or ETFs.

Cons. disc.

2

Industrials

Benchmarks for climate-aware
portfolios to assess their financial

Materials
Energyand climate characteristics
-5

-4

-3

-2

-1

0

1

2

3

compared to active managers’

4

portfolios.

MSCI World Climate Paris Aligned Benchmark Select Index
MSCI World Transition Aware Select Index

Data from Nov. 30, 2018, to March 31, 2024.

3

The underlying index for structured
products and derivatives.
MSCI Transition Aware Select Indexes 7

Conclusion
As investors adapt their investment strategies to cope with the challenges and to
capture the opportunities associated with the transition to a low-carbon economy, aholistic approach could embed transition-risk measures that reflect companies’ carbon
footprints, commitments to reduce the carbon footprint through published targets
and revenues from green businesses. Combining these datasets could provide anextensive assessment of companies’ transition profiles. The MSCI Transition Aware
Select Indexes could therefore play a crucial role for institutional investors, as both abenchmark and as the basis of indexed allocations.
Saurabh Katiyar
Executive Director, MSCI Research

Krati Gupta
Executive Director, MSCI Research

MSCI Transition Aware Select Indexes 8

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MSCI Transition Aware Select Indexes 9