METHODOLOGYMSCI ESG RESEARCH LLC

MSCI SFDR Adverse
Impact Metrics
Methodology
MSCI ESG Research
May 2024© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024

Contents
Introduction ................................................................................................................. 3
Objectives ................................................................................................................... 6
Coverage ..................................................................................................................... 6
Composition of the dataset .......................................................................................... 6
Ongoing monitoring and update cycle ........................................................................ 11
Update cycle ....................................................................................................................... 11
Corporate actions .............................................................................................................. 11
Company communication ................................................................................................. 11
Data sources ...................................................................................................................... 12
Data quality ........................................................................................................................ 12
Data processing ................................................................................................................. 13
Estimating quantitative indicators with limited data availability ................................. 13
Intensity-based models (PAI 5, 6, 9) ................................................................................ 14
Additional notes for PAI 5 and PAI 6 ............................................................................ 15
Geographical exposure-based model (for PAI 12) ......................................................... 15
Update cycle and coverage ............................................................................................... 16© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024

Introduction1
The Sustainable Finance Disclosure Regulation (SFDR) is one of the legislative streams of theEuropean Union (EU) Sustainable Finance Package.2 Through the SFDR, the EU requires financial
market participants (FMPs) and advisers with more than 500 employees to consider and disclose
adverse impacts of investment decisions on sustainability factors at entity level. All other FMPs willneed ‘clear reasons’ for not considering (and disclosing) adverse impacts including, where relevant,information as to whether and when they intend to consider such adverse impacts.3 Further
disclosure obligations relate to products with environmental or social characteristics (SFDR Article8) and products with sustainable investment objectives (SFDR Article 9).
In April 2022, the European Commission released a Delegated Regulation with regard to regulatory
technical standards (SFDR RTS), providing details of the content, methodologies and presentation of
disclosures under SFDR, including detailed reporting templates in the Annexes.4 The SFDR RTS
includes 64 adverse impact indicators, comprising 18 principal adverse impact (PAI) indicators(Table 1 of the SFDR RTS’s Annex 1) and 46 additional environmental and social indicators (Tables 2
and 3 of the SFDR RTS’s Annex 1).5
FMPs considering adverse impacts need to make disclosures at entity level of all the 18 PAI
indicators, at least two from the additional set of adverse impact indicators (one environmental andone social) and any other indicators the FMP uses to assess sustainability impacts. Furthermore,they need to describe actions taken, planned or targets set to avoid or reduce the PAIs identified(Article 6 SFDR RTS).6
For products with a sustainable investment objective (Article 9), including those products seeking aminimum share of taxonomy aligned investments, the use of PAI and any other relevant adverse
impact indicators is mandatory to demonstrate that the product does not do significant harm
(DNSH) – as outlined in SFDR Article 2(17).7 However, the reporting format is not further specified.
Adverse impact indicators are specific to three asset classes: corporate, sovereign/supranationals
and real estate. A summary of these indicators is provided in Exhibit 1 with disclosure rates provided
in Exhibits 2 to 3. For the full list of indicators and underlying data points, as well as methodology
notes, please consult the separate SFDR Adverse Impact Metrics Guidance.
In response to Article 32 and Article 45 of the SFDR RTS, notably disclosing on their website the data
sources used for Article 8 or 9 products, measures taken to ensure data quality, data processing andproportion of data estimated, MSCI ESG Research has added a dedicated section to this1 This methodology information is provided “as is” and does not constitute legal advice or any binding interpretation. Any approachto comply with legal, regulatory or policy initiatives should be discussed with your own legal counsel and/or the relevant competentauthority, as needed.
2
Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related
disclosures in the financial services sector.
3 Regulation (EU) 2019/2088, article 4.1(b).
4 Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing Regulation (EU) 2019/2088 of the European
Parliament and of the Council with regard to regulatory technical standards specifying the details of the content and presentation of
the information in relation to the principle of ‘do no significant harm’, specifying the content, methodologies and presentation of
information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of theinformation in relation to the promotion of environmental or social characteristics and sustainable investment objectives in precontractual documents, on websites and in periodic reports.
5 Annex I of the SFDR Delegated Regulation (cf footnote 4).
6
Article 6 of the SFDR Delegated Regulation (cf footnote 4).
7 The European Supervisory Authorities have clarified that this does not require any PAI consideration at entity level. Hence, FMPs
that do not consider adverse sustainability impacts can still issue article 9 products. JC 2022 23 of June 2022.

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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024

methodology document (see Ongoing Monitoring and Update Cycle – Data Sources, Data Quality
and Data Processing).
Since the adoption of the SFDR RTS, the European Supervisory Authorities (ESAs) have issued two
further clarifications to help with the technical implementation of the legislation.8 Some of theclarifications address the calculation formulas for PAI indicators aggregation, others provide further
details on the metrics themselves. The ESAs launched a consultation on the SFDR RTS in April 2023,
with a final report amending the SFDR RTS released on December 4, 2023. If adopted by theEuropean Commission, this would lead to changes in disclosure requirements including specific
PAIs.9
Exhibit 1. SFDR Principal Adverse Sustainability Impact Indicators
Principal Adverse Impact Indicators (18)ENVIRONMENTAL
1.
2.
3.
4.
5.
6.
7.
8.
9.

SOCIAL

Indicators Applicable to Corporate Issuers10 (14)Greenhouse gas (GHG) emissions
10. Violations of UN Global Compact
Carbon footprint
principles and Organisation for
GHG intensity of investee companies
Economic Cooperation andExposure to companies active in theDevelopment (OECD) Guidelines forfossil fuel sector
Multinational Enterprises
Share of non-renewable energy
11. Lack of processes and complianceconsumption and production
mechanisms to monitor compliance
Energy consumption intensity per highwith UN Global Compact principles andimpact climate sector
OECD Guidelines for Multinational
Activities negatively affectingEnterprises.
biodiversity-sensitive areas
12. Unadjusted gender pay gap
Emissions to water
13. Board gender diversity
Hazardous waste ratio
14. Exposure to controversial weapons(anti-personnel mines, cluster
munitions, chemical weapons andbiological weapons)
Indicators Applicable to Sovereigns and Supranationals (2)15. GHG intensity

16. Investee countries subject to social
violations
Indicators Applicable to Real Estate Assets (2)17. Exposure to fossil fuels through realestate assets
18. Exposure to energy-inefficient realestate assets(1) Clarifications on the ESAs’ draft RTS under SFDR. JC 2022 23 of June 2, 2022. (2) Questions and answers (Q&A) on the SFDR
Delegated Regulation (Commission Delegated Regulation (EU) 2022/1288). JC 2022 62 of November 2022.
9 Joint Consultation on the Review of the SFDR Delegated Regulation, ESAs, 12 April to 04 July 2023. Final Report amending thedraft Regulatory Technical Standards (RTS) to the Delegated Regulation supplementing the Sustainable Finance Disclosure
Regulation (SFDR), ESAs, December 4, 2023.
10 An Issuer is an entity that has issued or contemplates to issue securities. Throughout this methodology document, Issuers
typically refers to corporate, sovereign and supranational issuers. MSCI ESG Research also typically refer to corporate issuers ascompanies.
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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024
Additional Indicators: Environmental (22) and Social (24)Choose at least one Environmental and one Social
ENVIRONMENTAL
SOCIAL
Indicators Applicable to Corporate Issuers
1.
2.
3.

Emissions of inorganic pollutants
Emissions of air pollutants
Emissions of ozone depletion
substances
4. Investments in companies withoutcarbon reduction initiatives
5. Breakdown of energy consumption
by type of non-renewable sources ofenergy6. Water usage and recycling
7. Investments in companies withoutwater management policies
8. Exposure to areas of high water
stress
9. Investments in companies producing
chemicals
10. Land degradation, desertification,soil sealing
11. Investments in companies without
sustainable land/agriculture
practices
12. Investments in companies without
sustainable oceans/seas practices
13. Non-recycled waste ratio
14. Natural species and protected areas
15. Deforestation
16. Share of securities not certified as
green under a future EU legal act
setting up an EU Green Bond
Standard

1. Investments in companies without
workplace accident prevention policies
2. Rate of accidents
3. Number of days lost to injuries, accidents,
fatalities or illness
4. Lack of a supplier code of conduct
5. Lack of grievance-/complaints-handlingmechanism related to employee matters
6. Insufficient whistleblower protection
7. Incidents of discrimination
8. Excessive CEO pay ratio
9. Lack of a human rights policy
10. Lack of due diligence
11. Lack of processes and measures forpreventing trafficking in human beings
12. Operations and suppliers at significant riskof incidents of child labor
13. Operations and suppliers at significant riskof incidents of forced or compulsory labor
14. Number of identified cases of severe
human rights issues and incidents
15. Lack of anti-corruption and anti-bribery
policies
16. Cases of insufficient action taken toaddress breaches of standards of anticorruption and anti-bribery
17. Number of convictions and amount offines for violation of anti-corruption andanti-bribery laws

Indicators Applicable to Sovereigns and Supranationals
17. Share of bonds not certified as green
under a future EU legal act setting up
an EU Green Bond Standard

18. Average income inequality score
19. Average freedom-of-expression score
20. Average human rights performance
21. Average corruption score
22. Non-cooperative tax jurisdictions
23. Average political stability score
24. Average rule-of-law score

Indicators Applicable to Real Estate Assets
18. GHG emissions
19. Energy consumption intensity
20. Waste production in operations
21. Raw materials consumption for new
construction and major renovations
22. Land artificialization
Source: MSCI ESG Research, Annex 1 of Commission Delegated Regulation (EU) 2022/1288.

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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024

Objectives
The overall objective of the MSCI SFDR Adverse Impact Metrics methodology is to provide issuerlevel (reported and estimated) data points and aggregated portfolio/fund-level assessments to alignwith SFDR disclosure requirements. The approach includes the following key actions:•Collect readily available data by searching company disclosures for principal adverse
sustainability impact information as outlined in Annex 1 of the SFDR RTS.

•

Conduct outreach to companies with the findings of MSCI ESG Research’s data collectionand encourage public disclosure where information is not readily available.

•

Fill some disclosure gaps by drawing on MSCI ESG Research datasets and estimates forassessing adverse sustainability impacts. For further information on the estimation
approach, please see the respective section in this document (as of page 16).

Coverage
The SFDR Adverse Impact metrics universe is determined by issuers’ inclusion in the coverage
universes for MSCI ESG Ratings and MSCI ESG Government Ratings.11 For factors coming fromother data sets (e.g. MSCI Climate Change Metrics, MSCI Climate Targets and Commitments, MSCI
Implied Temperature Rise, MSCI Business Involvement Screening Research or MSCI ESG
Controversies), the coverage may be broader.

Composition of the dataset
MSCI SFDR Adverse Impact Metrics is a set of issuer-level data points on adverse sustainability
indicators. As of May 2024, the dataset included collected data relating to the 14 PAIs for corporate
issuers, two PAIs for sovereign issuers and 36 of the additional indicators in tables 2 and 3 of Annex
1 to the SFDR RTS. A list of these indicators and availability of data as of May 2024 is included in
Exhibits 2 and 3.
Exhibit 2. Mandatory PAIs from Table 1 of Annex 1 of the SFDR RTS supported by MSCI SFDR
Adverse Impact Metrics and availability of data12,13
Climate and Other Environment-Related Indicators
Theme

Indicator

Availability of Data

1. GHG emissions
Greenhousegas emissions

Scope 1 GHG emissions

57.5% (Scopes 1+2)

Scope 2 GHG emissions

Reported and estimated (Scopes
1, 2, and 3): 96.9%

Scope 3 GHG emissions

11 See ESG Ratings and ESG Government Ratings Process documents, available here > https://www.msci.com/esg-and-climate-methodologies
12 For indicators applicable to corporate issuers, availability of disclosure represents the percentage of MSCI ACWI IMI constituentswith available disclosures. For indicators applicable to sovereigns and supranationals, availability of disclosure represents thepercentage of sovereign issuers or countries in the MSCI ESG Government Ratings coverage universe with available data. For
indicators that address involvement, the availability of disclosures represents the percentage of MSCI ACWI IMI constituentsflagged for exposure on this indicator. As of May 6, 2024.
13 The availability of disclosure reflects MSCI ESG Research’s interpretation of the mapping from MSCI ESG Research data points to
SFDR indicators.

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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024
Total GHG emissions
2. Carbon footprint
3. GHG intensity
4. Exposure to companies active in the fossil fuelsector

92.2%
36.5%

5. Share of non-renewable energy consumption andproduction

Availability of estimated data will
be added once the data has beenreleased.
51.8%

6. Energy consumption intensity per high impact
climate sector

Availability of estimated data will
be added once the data has beenreleased.
1.7%

Biodiversity

7. Activities negatively affecting biodiversity-sensitive
areas

Assessed: 96.4%, based on MSCI
Biodiversity Screening Metrics
Methodology

Water

8. Emissions to water

0.3%
20.1%

Waste

9. Hazardous waste ratio

Availability of estimated data will
be added once the data has beenreleased

Indicators for Social and Employee, Respect for Human Rights, Anti-Corruption and Anti-Bribery Matters
Theme

Social andemployeematters

Indicator

Availability of Data

10. Violations of UN Global Compact principles andOrganization for Economic Cooperation andDevelopment (OECD) Guidelines for Multinational
Enterprises

0%

11. Lack of processes and compliance mechanisms tomonitor compliance with UN Global Compact
principles and OECD Guidelines for Multinational
Enterprises

92.5%

Assessed: 96.1%, based on MSCIESG Controversies methodology

Assessed based on MSCI SFDR
Adverse Impact Metrics
Methodology
6.3%

12. Unadjusted gender pay gap

Availability of estimated data will
be added once the data has beenreleased

13. Board gender diversity

95.8%
100%

14. Exposure to controversial weapons (anti-personnel
mines, cluster munitions, chemical weapons andbiological weapons)

Sourced from MSCI BusinessInvolvement Screening Researchmethodology based on reported
data

Indicators Applicable to Sovereigns and Supranationals
Theme

Indicator

Availability of Data

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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024
95.6%
Sourced from EDGAR. Nominal
GDP level is sourced from World
Development Indicators (WDI)

Environmental

15. GHG Intensity

Social16. Investee countries subject to social violations

0%
Assessed: 98.0%, based on the
EU Sanctions list

Source: MSCI ESG Research.

Exhibit 3. Additional PAIs from Tables 2 and 3 of Annex 1 of the SFDR RTS supported by MSCISFDR Adverse Impact Metrics and availability of data14, 15
Table 2: Additional climate and other environment-related indicators
Theme

EmissionsIndicator

Availability of Data

1. Emissions of inorganic pollutants

0.3%

2. Emissions of air pollutants

0.4%

3. Emissions of ozone-depleting substances0%

4. Investments in companies without carbon
emission reduction initiatives

94.6%
Assessed based on MSCI Implied
Temperature Rise Methodology
1.4% (Coal)
0.0% (Lignite)

Energyperformance

5. Breakdown of energy consumption by typeof non-renewable sources of energy

8.7% (Natural gas)0.2% (Oil & gas)
0% (Nuclear power)
26.9% (Other non-renewable sources)

6. Water usage and recycling

Average amount of water consumed: 3.1%
Weighted average percentage of water
recycled and reused: 31.8%

Water, waste
and material
emissions

7. Investments in companies without water
management policies

33.9%

8. Exposure to areas of high water stress

5.1%

9. Investments in companies producing
chemicals

0%

10. Land degradation, desertification, soil
sealing

2.0%

Sourced from vendor: 100%

14 For indicators applicable to corporate issuers, availability of disclosure represents the percentage of MSCI ACWI IMI constituentswith available disclosures. For indicators applicable to sovereigns and supranationals, availability of disclosure represents thepercentage of sovereign issuers or countries in the MSCI ESG Government Ratings coverage universe with available data. For
indicators that address involvement availability of disclosures represent the percentage of MSCI ACWI IMI constituents flagged for
exposure on this indicator. As of May 6, 2024.
15 The availability of disclosure reflects MSCI ESG Research’s interpretation of the mapping from MSCI ESG Research data points to
SFDR indicators.

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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024
11. Investments in companies without
sustainable land/agriculture practices

24.0%

12. Investments in companies without
sustainable oceans/seas practices

8.7%

13. Non-recycled waste ratio

17.6%
Companies whose operations affectthreatened species: 6.0%

14. Natural species and protected areas

15. Deforestation

Companies without a biodiversity
protection policy covering operationalsites owned, leased, managed in, or
adjacent to, a protected area or an area ofhigh biodiversity value outside protectedareas: 1.7%
3.7%

Table 3: Additional indicators for social and employee, respect for human rights, anti-corruption and antibribery matters
Theme

Social andemployeematters

Indicator

Availability of Data

1. Investment in investee companies without
workplace accident prevention policies

73.4%

2. Rate of accidents

17.3%

3. Number of days lost to injuries, accidents,
fatalities or illness

12.8%

4. Lack of a supplier code of conduct

22.3%

5. Lack of grievance/complaints handlingmechanism related to employee matters

45.5%

6. Insufficient whistleblower protection

78.8%
0%

Human rights

7. Incidents of discrimination

Assessed: 96.9%, based on MSCI ESG
Controversies methodology

8. Excessive CEO pay ratio

52.7%

9. Lack of a human rights policy

59.0%

10. Lack of due diligence

37.7%

11. Lack of processes and measures forpreventing trafficking in human beings

37.1%

12. Operations and suppliers at significant
risk of incidents of child labor

5.6%

13. Operations and suppliers at significant
risk of forced or compulsory labor

5.5%

14. Number of identified cases of severe
human rights issues and incidents
15. Lack of anti-corruption and anti-bribery
policies

0%
Assessed: 97.1%, based on MSCI ESG
Controversies methodology
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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024

Anticorruption andanti-bribery

16. Cases of insufficient action taken toaddress breaches of standards of anticorruption and anti-bribery

0%17. Number of convictions and amount offines for violation of anti-corruption and antibribery laws

0.5% (Number of convictions)
0.4% (Amount of fines)
0%

18. Average income inequality score

19. Average freedom-of-expression score

Sourced from US Central Intelligence
Agency; World Development Indicators(WDI); World Bank: 84.7%
0%Sourced from Freedom House: 85.7%
0%

20. Average human rights performance
Indicators
applicable tosovereigns
andsupranationals– Social andGovernanceSourced from World Justice Project (WJP)
Rule of Law Index: 70.0%0%

21. Average corruption score

Sourced from Transparency International:
89.2%
0%

22. Non-cooperative tax jurisdiction

Sourced from EU List on non-cooperative
tax jurisdictions: 98.0%
0%

23. Average political stability score

Sourced from Vision of Humanity;
Worldwide Governance Indicators (WGI);World Bank: 90.1%
0%

24. Average rule of law score

Sourced from Worldwide GovernanceIndicators (WGI), World Bank: 100.0%

Source: MSCI ESG Research.

For the data aggregation formulas for portfolio- or fund-level SFDR reporting you can consult the
separate SFDR Adverse Impact Metrics Guidance.
Gaps in corporate disclosures of specific indicators are apparent and may be driven by manyreasons, including companies not subject to disclosure requirements, lack of relevance of certain
indicators for some industries (e.g., disclosure of toxic emissions and biodiversity protection
policies may not be relevant for health insurance companies, or specialty services), and potentially alack of clear definitions (SFDR RTS sometimes refer to undefined concepts such as violations ofglobal norms16). Article 7.2 of the SFDR RTS asks FMPs for ‘best efforts’ to obtain data when notreported, either directly from investee companies or through additional research making ‘reasonableassumptions’.

16 In a Q&A released in November 2022, the ESAs refer to the annex of the draft Corporate Sustainability Due Diligence Directive as

providing ‘helpful examples of typical social violations’. The annex lists several types of violations of global norms but does notfurther define what precisely constitutes a violation. Questions and Answers on the SFDR Delegated Regulation, ESAs, JC 2022 62,
17 November 2022.

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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024

Each value in the dataset is supported by an additional factor to identify whether the value isreported, calculated (based on reported data) or estimated by MSCI based on available
methodologies.
For performance metrics with numeric output, if a company discloses a zero value for a
performance indicator, MSCI ESG Research collects and records it for that company. Therefore, zero
could be a possible and valid value.
For qualitative metrics, where no evidence of a publicly disclosed policy is found, MSCI ESG
Research displays “no disclosure”. This indicates the availability of policies, compliancemechanisms, or operations in high-impact locations. For select metrics, e.g., those based onreference lists or indicators estimated based on proprietary MSCI ESG Research methodologies,"No" is a possible value representing no notable controversies, involvement or exposure.
For numeric output values within SFDR, a blank value can mean the company does not disclose thedata, the company is not in the coverage universe, or the company has not been researched yet –which can be checked using the SFDR_COVERED and SFDR_RESEARCHED indicators. For policy
indicators, the lack of a policy is shown as “Not Disclosed”. A blank value for a policy indicator
typically means the company is not in the coverage universe or has not been researched yet.

Ongoing monitoring and update cycle
Update cycle
Updates to MSCI SFDR Adverse Impact Metrics are based on source updates.
In the case of metrics that are sourced from other MSCI ESG Research proprietary datasets, thestandard company review cycle for those datasets applies. These proprietary datasets comprise
MSCI Business Involvement Screening Research, MSCI ESG Ratings, MSCI ESG metrics, MSCI
Climate Assessments and Climate Data Products, and MSCI ESG Controversies. Datasets that havedynamic source updates outside of annual filings, such as carbon emissions, board of directors’
composition and controversies, are reviewed on a weekly basis and updated when there is a change
to the underlying inputs.
For data that is collected specifically for MSCI SFDR Adverse Impact Metrics purposes, MSCI ESG
Research follows an annual update cycle for the time being, independent of annual filings.

Corporate actions
Our ESG Data Experts and ESG Analytical Personnel review and incorporate certain corporate
actions for potential impacts to MSCI SFDR Adverse Impact data. These actions comprise:acquisitions, consolidations, mergers, name changes, public offerings, and spinoffs.
Exclusion from coverage universe: Data for issuers that fall outside of the coverage universe due toindex exclusion or corporate actions are no longer updated and excluded from the next scheduled
data feed delivery.

Company communication
MSCI ESG Research is committed to transparent communication with all issuers in the coverage
universe. This commitment includes:© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024•

Proactively reaching out to companies, as relevant, as part of MSCI ESG Research’s data review
process.

•

A data review process that allows companies to comment on the accuracy of company data for
all MSCI ESG Research reports.

•

Free access for issuers to published versions of all their MSCI ESG Research company reports.
Given the dynamic nature of the research, companies can access, review the data MSCI ESG
Research has collected to date, ask questions and provide feedback via a portal, namely MSCIESG Research’s Issuer Communications Portal (ICP), at any time.

•

A timely response to company-initiated requests to discuss their MSCI ESG Research reports.

MSCI ESG Research does not issue surveys or questionnaires or conduct general interviews withcompanies, nor does MSCI ESG Research accept or consider any data provided by issuers that is not
publicly available to other stakeholders. MSCI ESG Research evaluates and applies quality checks to
issuer-provided data prior to publication.

Data sources
The SFDR RTS calls on financial market participants to source adverse impact data in various ways,
including “either directly from companies or by carrying out additional research, cooperating withthird party data providers or external experts or making reasonable assumptions” (Article 7.2).
MSCI ESG Research uses the following sources to collect company-reported data:•

Company direct disclosure: sustainability reports, annual reports, regulatory filings, andcompany websites.

•

Company indirect disclosure: government agency published data, industry and tradeassociations data and third-party financial data providers.

•

Direct communication with companies as described above in Company Communication.

Where company disclosure is unavailable, investors may choose to use a subset of suggested
estimated metrics (where applicable) based on other MSCI ESG Research datasets. These datasets
are built based on proprietary methodologies and informed by data from companies, market andindustry peers, media, NGOs, multilateral and other credible institutions.
These proprietary datasets comprise: MSCI Business Involvement Screening Research, MSCI ESG
Ratings, MSCI ESG metrics, MSCI Climate Assessments and Climate Data Products, and MSCI ESG
Controversies.

Data quality
MSCI ESG Research looks at a broad range of dimensions when defining quality, including data
completeness, exhaustivity, timeliness, accuracy as well as traceability back to source (evidence).
The automated and manual quality checks conducted by MSCI ESG Research address the key
aspects of data consistency and data accuracy. The approach is built on query extracts frominternal databases and flag the pre-specified conditions that trigger score changes, or any suspectvalues. The data that does not meet the quality standards is subject to further review and correction.

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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024

The measures that MSCI ESG Research applies to the data feeding into MSCI's SFDR module
include, for example:•

Dual vendor validation quality assurance to validate data against alternate sources using Natural
Language Processing (NLP) or Artificial Intelligence (AI)-driven extraction.

•

Keyword scan for disclosure detection/coverage; change-based (outlier)/range-based quality
assurance on all quantitative data to check large variations and anomalies.

•

Negative disclosure checks for qualitative data points.

•

Data validation and constraints implemented on data input to ensure data consistency andcompleteness.

•

Validation for consistency on units of measurement.

Data processing
MSCI ESG Research data processing is additive and involves multiple layers of validation designed
to detect anomalies.
Data procurement is a combination of automated data extraction and manual data collection. Raw
data inputs are collected from approximately 300 public sources representing up to 2 million articles
and 1 million company documents per year. To manage this scale, MSCI ESG Research uses AIdriven tools to detect if relevant data is disclosed in specific company documents and provides aclassification of news sources and press releases detected to contain relevant data.
The quality assurance process for input data involves issuer/security-specific raw data validation
including sentiment, association, streaming, and dual vendor validation. Wherever possible, MSCIESG Research employs a dual vendor validation method, where the same data is collectedindependently by different ESG data experts from the same or comparable sources.
For derived data that are sourced from MSCI ESG Research proprietary datasets, the process may
involve simple transformations.
To provide oversight over data updates, various governance committees provide an additional layerof review in cases of significant changes to data or models. These governance committees arecomposed of senior ESG data experts and ESG analytical personnel from across MSCI ESG
Research.

Estimating quantitative indicators with limited data availability
For certain adverse impact indicators with limited data availability, MSCI ESG Research provides
estimated values. For all factors where an estimation is present, the resulting values are identified as‘reported’ or ‘estimated’ through corresponding KEY factors. The estimates for GHG emissions (PAIs
1-3) are derived using the MSCI ESG Research Carbon Emissions Estimation methodology. The
approach used for the estimates for PAI 5, 6, 9 and 12 are described below .

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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024

Intensity-based models (PAI 5, 6, 9)
The estimation methodology for PAI 5, 6 and 9 follow the same logic: When a company has reported
data on a relevant indicator, for example on hazardous waste for PAI 9, at least once within the past
five years, a Company-Specific Intensity model is applied. If the company has not reported relevant
data in the last five years, an Industry-Specific model is used.
The Company-Specific Intensity (CSI) model
For companies that have reported data on an indicator at least once in the past five years, MSCI ESG
Research calculates a company specific intensity based on their historical data using the following
steps:

1. Calculate the “indicator intensity” by using the company’s historical data for relevant indicators(e.g. hazardous waste) and dividing it by the company’s revenue. The company-specificintensity metric is determined by taking the harmonic mean of all reported “indicatorintensities” over the last five years. The harmonic mean is preferred because it minimizes theimpact of extreme outliers compared to the arithmetic mean.
2. In cases where data for a specific year is missing, estimate the company’s relevant indicator(e.g. hazardous waste) by multiplying the company’s revenue with the company-specificintensity calculated in the first step.
The use of previously reported data means these estimates reflect the specifics of the sectors andgeographies in which the company operates as well as its own production processes.17
The Industry Specific Intensity (ISI) model
For companies with no reported data on a relevant indicator in the past five years, estimates arecalculated using an Industry Specific Intensity (ISI) model:•

The ISI model uses a linear regression analysis comparing sales data with PAI data (e.g.
hazardous waste) across the company’s peer group.

•

The peer group used is the Global Industry Classification Standard (GICS®)18 framework. To
calculate an estimate, it is necessary to have data from at least five companies, and aminimum of 10% of the peer group should have reported their data. If this condition is notsatisfied, a higher GICS level is used, moving from sub-industry (most granular) to sector
level (least granular). See illustration in Exhibit 4.

•

If a peer group does not meet the data thresholds, no estimate is made for that company.

•

When a peer group meets the data thresholds, the estimated value is calculated by using the
ISI model regression approach with the company’s sales data for the respective year.

17 This model is not used for companies that have undergone corporate actions.
18 GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.

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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024

Exhibit 4. Illustration of the peer set determination for companies in the Specialty Chemicals GICS
sub-industry using the Industry Specific Intensity model

Source: MSCI ESG Research.

Materiality-based estimates
For companies without historic reported data, MSCI ESG Research assesses for which GICS subindustry a certain PAI can be considered non-material. For example, for the Research & Consulting
services GICS sub-industry, emissions to water (PAI 8) are assessed as non-material. For GICS subindustries where a PAI is considered non-material, all non-reported values are set to 0, and marked
as ‘estimated’ in the corresponding KEY factor. No reported data is overridden at any stage during
the estimation calculations.
Additional notes for PAI 5 and PAI 6
For PAI 5, the share of non-renewable energy consumption and production, two data points can be
estimated based on the approach outlined above: (i) total energy consumption and (ii) share of nonrenewable energy consumption.
PAI 5 is calculated using four production and consumption data points (estimated or reported). PAI
5 is only identified as ‘reported’ if all four underlying data points are reported, (i) total consumption,(ii) total production, (iii) non-renewable energy consumption and (iv) non-renewable energy
production.
PAI 6 estimates are calculated using data points estimated for PAI 5 (total energy consumption) andthe company’s revenues. PAI 6 is then defined as ‘estimated’ or ‘reported’ based on whether the totalenergy consumption value used for its calculation is estimated or reported.

Geographical exposure-based model (for PAI 12)
For PAI 12, MSCI ESG Research uses a country-specific estimation for companies that do not report
unadjusted gender pay gap. A company's global footprint is evaluated using MSCI ESG Research
asset geographical exposure data. Third-party gender pay gap data at the country level is applied© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI SFDR ADVERSE IMPACT METRICS METHODOLOGY | May 2024

from sources such as the European Union (EU), the International Labor Organization (ILO), and theOrganization for Economic Cooperation and Development (OECD).19
An estimate is calculated for companies that do not report gender pay gap data. The following steps
are used:••

The estimated value is calculated as a weighted average of a company’s assets in eachcountry combined with third party local gender pay gap data, delivering a global gender pay
gap estimate for this company.
Operations are excluded from this calculation for which either (i) third-party gender pay gap
data for a given country or (ii) a company’s geographical assets at the country level cannot
be identified. The global estimate is then adjusted by using a rescaling method. See
illustration in Exhibit 5.

For companies reporting gender pay gap for local operations only – e.g. as a result of jurisdictional
requirements like in the UK, the reported data is provided and labelled as reported in the supporting
KEY factor, even though the data may not be representative of the pay gap for global operations. A
factor that distinguishes data reported for local operations from data reported for global operations
is planned.
Exhibit 5. Example of calculation of gender pay gap estimate for an issuer
Geographical area

% of assets

Country gender pay gap(third party data)% of assets adjusted

Estimated Gender
pay gap

United States ofAmerica
United Kingdom
Europe

13%

17%

15%

73%
14%

14%
Not available

85%
Excluded from
calculation(17%*0.15 +14%*0.85)= 14%

Source: MSCI ESG Research.

Update cycle and coverage
The linear regression parameters used in the ISM are updated annually at the beginning of thecalendar year. For all companies researched after that date that have not reported any data in thepast five years, these parameters are used for the estimation. For example, a company researched inAugust 2024 for fiscal year 2023 that has not reported relevant data for the past five years would
receive an estimate at the beginning of year 2024 using the linear regression method.
All estimates are calculated for the entire SFDR coverage universe for companies that have notreported data.

19 MSCI ESG Research first sources EU data, where EU data is not available, sources ILO and OECD open-source and most recent

data.

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