Index Methodology

MSCI Renewables& Energy Efficiency
Index Methodology
December 2021

December 2021

MSCI RENEWABLES & ENERGY EFFICIENCY INDEX METHODOLOGY | DECEMBER 2021

Contents

1

MSCI Renewables & Energy Efficiency Index

3

2

MSCI ESG Research

4

2.1

MSCI Impact Solutions: Sustainable Impact Metrics

4

2.2

MSCI Impact Solutions: SDG Alignment

5

2.3

MSCI ESG Ratings

5

2.4

MSCI ESG Controversies

5

2.5

MSCI Climate Change Metrics

6

3 Constructing the MSCI Renewables & Energy Efficiency
Index

4

7

3.1

Selection Universe

7

3.2

ESG Filtered Universe7

3.3“Circular Technologies” Universe

8

3.4

Weighting Scheme

9

Maintaining the MSCI Renewables & Energy Efficiency Index
10
4.1

Semi-Annual Index Review

10

4.1

Quarterly Index Reviews

10

4.2

Ongoing Event-Related Maintenance11

Appendix 1: What is a Circular Economy?

13

Appendix 2: Renewables & Energy Efficiency-specificExclusions Criteria

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1

MSCI Renewables & Energy Efficiency Index
The MSCI Renewables & Energy Efficiency Index (the ‘Index’) aims to represent theperformance of a set of companies from MSCI ACWI IMI that are associated with thedevelopment of new products and services that promote renewable energy andenergy efficiency, all assessed within the context of potential contribution towards a
circular economy (see Appendix 1).
In particular, the Index incorporates companies that provide technologies (“circulartechnologies”), as defined using the following measures:•

Alternative Energy•

Energy Efficiency

The MSCI Renewables & Energy Efficiency Index also applies a set of exclusions
criteria to screen companies with business activities that are not considered alignedwith the overall objective of promoting renewable energy, energy efficiency, or
circularity. Additionally, the Index utilizes a weighting strategy at security level, as
well as applies issuer capping.

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2

MSCI ESG Research
The MSCI Renewables & Energy Efficiency Index uses company ratings and research
provided by MSCI ESG Research LLC. In particular, the Index uses the following MSCIESG Research products: MSCI Impact Solutions, MSCI ESG Ratings, MSCI ESG
Controversies, MSCI ESG Business Involvement Screening Research, and MSCI
Climate Change Metrics.
For details on MSCI ESG Research’s full suite of ESG products, please refer to:https://www.msci.com/esg-investing.

2.1

MSCI Impact Solutions: Sustainable Impact Metrics
MSCI Impact Solutions’ Sustainable Impact Metrics is designed to identify
companies that derive revenue from products or services with positive impact onsociety and the environment. The Sustainable Impact Metrics are comprised of six
Environmental Impact categories and seven Social Impact categories arranged bytheme.

MSCI Sustainable Impact Taxonomy
PillarEnvironmental
Impact

ThemesClimate Change

Natural capitalSocial Impact

Basic needs

Empowerment

Categories
1. Alternative energy
2. Energy efficiency
3. Green building
4. Sustainable water
5. Pollution prevention
6. Sustainable agriculture
7. Nutrition
8. Major Disease Treatment
9. Sanitation
10. Affordable Real Estate
11. SME Finance
12. Education
13. Connectivity – Digital divide

Under each of the actionable environmental and social impact themes, MSCI ESG
Research has identified specific categories of products and services that it hasdetermined companies can offer as potential solutions to environmental and social
challenges.
More detailed taxonomy for each category can be found in Section 2.4 of the MSCIACWI Sustainable Impact Index Methodology available athttps://www.msci.com/index-methodology.

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2.2

MSCI Impact Solutions: SDG Alignment
MSCI Impact Solutions’ SDG Alignment is designed to provide a holistic view ofcompanies’ net contribution – both positive and negative – towards addressing eachof the 17 UN Sustainable Development Goals (SDGs). SDG Alignment assessments
and scores include analysis of companies’ operations, products and services,
policies, and practices and their net contribution – positive and adverse – toaddressing key global challenges.
The MSCI SDG Alignment framework provides 17 SDG Net Alignment scores and 17
SDG Net Alignment assessments (including Strongly Aligned, Aligned, Neutral,
Misaligned and Strongly Misaligned) for each of the 17 global goals. In addition, themodel offers assessments and scores for two dimensions, product alignment andoperation alignment, for each company and for each of the 17 goals.
For more details on MSCI Impact Solutions including MSCI SDG Alignment, pleaserefer to https://www.msci.com/our-solutions/esg-investing/impact-solutions.

2.3

MSCI ESG Ratings
MSCI ESG Ratings provides research, data, analysis and ratings of how wellcompanies manage environmental, social and governance risks and opportunities.
MSCI ESG Ratings provides an overall company ESG rating - a seven-point scale from‘AAA’ to ‘CCC’. In addition, the product provides scores and percentiles indicating
how well a company manages each key issue relative to industry peers, as well as
underlying data and metrics used to compile the scores and ratings.
For more details on MSCI ESG Ratings, please refer to https://www.msci.com/esgratings.

2.4

MSCI ESG Controversies
MSCI ESG Controversies (formerly known as MSCI Impact Monitor) provides
assessments of controversies concerning the negative environmental, social, and/or
governance impact of company operations, products and services. The evaluation
framework used in MSCI ESG Controversies is designed to be consistent withinternational norms represented by the UN Declaration of Human Rights, the ILO
Declaration on Fundamental Principles and Rights at Work, and the UN Global
Compact. MSCI ESG Controversies Score falls on a 0-10 scale, with “0” being themost severe controversy.
For more details on MSCI ESG Controversies, please refer tohttps://www.msci.com/documents/10199/acbe7c8a-a4e4-49de-9cf85e957245b86b.

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2.5

MSCI Climate Change Metrics
MSCI Climate Change Metrics provides climate data & tools to support investors
integrating climate risk & opportunities into their investment strategy and processes.
It supports investors seeking to achieve a range of objectives, including measuring
and reporting on climate risk exposure, implementing low carbon and fossil fuel-freestrategies, align with temperature pathways and factoring climate change research
into their risk management processes, in particular through climate scenario analysis
for both transition and physical risks.
The dataset spans across the four dimensions of a climate strategy: transition risks,
green opportunities, physical risks and 1.5° alignment.
For more details on MSCI Climate Change Metrics, please refer tohttps://www.msci.com/climate-solutions.

© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI RENEWABLES & ENERGY EFFICIENCY INDEX METHODOLOGY | DECEMBER 2021

3

Constructing the MSCI Renewables & Energy
Efficiency Index

3.1

Selection Universe
The underlying universe for the MSCI Renewables & Energy Efficiency Index isdefined by the constituents of the MSCI ACWI Investable Market Indexes (IMI, the‘Parent Index’1), from which two separate universes of stocks are constructed (asdescribed in Sections 3.2 and 3.3).

3.2

ESG Filtered Universe
The MSCI Renewables & Energy Efficiency Index methodology applies two sets of
exclusions criteria to determine eligibility in the ESG Filtered Universe.

3.2.1 Renewables & Energy Efficiency-specific Exclusions
The MSCI Renewables & Energy Efficiency Index uses MSCI Climate Change Metrics
and MSCI Impact Solutions’ SDG Alignment to identify companies that have beenassessed as negatively impacting the index objective. The criteria are as follows:−

Thermal Coal Mining−

Oil & Gas-related Activities−

Fossil Fuel-based Power Generation−

SDG 7 and 13 Net Alignment

Please refer to Appendix 2 for details on these exclusions criteria.

3.2.2 Circular Economy-related Screens
The MSCI Renewables & Energy Efficiency Index, uses MSCI ESG Research data toapply a set of exclusions standards which either address headline risks and/or
contribute negatively to a circular economy. The exclusions filters are as follows:
1. ESG Controversies Score: All companies that are involved in environmental,social, and/or governance controversies assessed as Red Flags (Score of 0
or those with very severe controversies).

1 Other parent indexes, as a subset of MSCI ACWI IMI, may also be used. However, use of some indexes as

parent indexes may result in a low number of constituents, which may affect replicability.

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MSCI RENEWABLES & ENERGY EFFICIENCY INDEX METHODOLOGY | DECEMBER 2021

2. Environmental Controversies: All companies that are involved inenvironmental controversies assessed as Red, Orange, and Yellow Flags(Score of 4 and below).
3. Environmental Pillar Quartile: All companies that are assessed as belonging
to the bottom quartile relative to their relevant ESG Ratings Industry.
4. SDG 12 Net Alignment: All companies that are assessed as Strongly
Misaligned and Misaligned on their Net Alignment to SDG 12 (Responsible
Consumption and Production).
5. Controversial Weapons: All companies with any tie to Controversial Weapons(cluster munitions, landmines, depleted uranium weapons,
biological/chemical weapons, blinding lasers, non-detectable fragments andincendiary weapons), as defined by the methodology of the MSCI Global ExControversial Weapons Indexes available at https://www.msci.com/indexmethodology.

Notes on Unrated Securities or Securities with Missing Coverage:

3.3•

Companies that are not assessed on MSCI ESG Research’s ESG
Controversies (exclusion filters 1 and 2) are excluded from the final universe.

•

Companies that are not assessed on MSCI ESG Research’s ESG Ratings andSDG Alignment (exclusion filters 3 and 4) are not excluded from the final
universe.

“Circular Technologies” Universe
The MSCI Renewables & Energy Efficiency Index uses MSCI Impact Solutions’Sustainable Impact Metrics to identify companies that have exposure to products
and services that aim to promote renewable energy and energy efficiency.
Companies in the ESG Filtered Universe that have an aggregated revenue of 25% ormore from the following categories (‘ESG Revenue’) are included in the CircularTechnologies Universe:•

Alternative Energy•

Energy Efficiency© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI RENEWABLES & ENERGY EFFICIENCY INDEX METHODOLOGY | DECEMBER 2021

3.4

Weighting Scheme
The MSCI Renewables & Energy Efficiency Index constituents that are determined tobe part of the Circular Technologies Universe are weighted as follows:

3.4.1 Security Weighting•

Circular Technologies Universe
Securities that meet the selection criteria outlined in Section 3.3 are weighted
by the product of the aggregated ESG Revenue and their free float-adjusted
market capitalization. The weights are then normalized to sum to 100%.

3.4.2 Issuer Capping
The maximum weight of any issuer in the MSCI Renewables & Energy Efficiency
Index is then capped at 5% in accordance with the MSCI Capped Indexes
methodology2. The excess weight of the capped issuers is distributed among theremaining constituents in proportion of their existing weights in the Index.

2 Please refer to the MSCI Capped Indexes methodology at www.msci.com/index-methodology© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI RENEWABLES & ENERGY EFFICIENCY INDEX METHODOLOGY | DECEMBER 2021

4

Maintaining the MSCI Renewables & Energy Efficiency
Index

4.1

Semi-Annual Index Review
The MSCI Renewables & Energy Efficiency Index is reviewed on a semi-annual basis,
as of the close of the last business day of May and November, coinciding with the
May and November Semi-Annual Index Reviews of the Parent Index. The pro forma
index is generally announced nine business days before the effective date.
As a rule, MSCI uses MSCI ESG Research data (including MSCI Impact Solutions,
MSCI ESG Ratings, MSCI ESG Controversies, and MSCI Climate Change Metrics) asof the end of the month preceding the Index Reviews for the rebalancing of the Index.
For some securities, such data may not be published by MSCI ESG Research by theend of the month preceding the Index Review. For such securities, MSCI will use ESG
data published after the end of month, when available, for the rebalancing of the
MSCI Renewables & Energy Efficiency Index.
At each Semi-Annual Index Review, the ESG Filtered and Circular Technologies
universes are updated based on the criteria outlined in Sections 3.2 and 3.3.

4.1

Quarterly Index Reviews
The MSCI Renewables & Energy Efficiency Index is also reviewed on a quarterly basis
to coincide with the regular Index Reviews of the Parent Indexes. The changes are
implemented at the end of February and August. The pro forma indexes are generally
announced nine business days before the effective date.
For the Quarterly Index Reviews, MSCI ESG Ratings, MSCI ESG Controversies, MSCISDG Alignment, and MSCI Climate Change Metrics data are taken as of the end of
the month preceding the Index Reviews, i.e., January and July. For some securities,
this data may not be published by MSCI ESG Research by the end of the month
preceding the Index Review. For such securities, MSCI will use ESG data publishedafter the end of month, when available, for the rebalancing of the MSCI Renewables &Energy Efficiency Index.
At the Quarterly Index Reviews, existing constituents in the ESG Filtered Universe aredeleted from the MSCI Renewables & Energy Efficiency Index if they do not meet theexclusions criteria described in Section 3.2. Existing constituents that meet thecriteria are retained in the Index.

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4.2

Ongoing Event-Related Maintenance
The general treatment of corporate events in the MSCI Renewables & Energy
Efficiency Index aims to minimize turnover outside of Index Reviews. The
methodology aims to appropriately represent an investor’s participation in an event
based on relevant deal terms and pre-event weighting of the index constituents thatare involved. Further, changes in index market capitalization that occur as a result ofcorporate event implementation will be offset by a corresponding change in the
Variable Weighting Factor (VWF) of the constituent.
The following section briefly describes the treatment of common corporate events
within the Index.
No new securities will be added (except where noted below) to the Index between
Index Reviews. Parent Index deletions will be reflected simultaneously.
There are no deletions from the MSCI Renewables & Energy Efficiency Index between
Index Reviews on account of a security becoming ineligible because of reduced ESG
revenue falling below the threshold, decrease in MSCI ESG Controversies Score,change in SDG Alignment assessment, and/or change in business involvement.

EVENT TYPE

EVENT DETAILSNew additions to the Parent Index

A new security added to the Parent Index(such as IPO and other early inclusions) will
not be added to the index.

Spin-Offs

All securities created as a result of the spinoff of an existing Index constituent will not be
added to the Index at the time of event
implementation. Reevaluation for addition in
the Index will occur at the subsequent Index
Review.

Merger/Acquisition

For Mergers and Acquisitions, the acquirer’s
post event weight will account for the
proportionate amount of shares involved indeal consideration, while cash proceeds will
be invested across the Index.
If an existing Index constituent is acquired bya non-Index constituent, the existing
constituent will be deleted from the Index and© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI RENEWABLES & ENERGY EFFICIENCY INDEX METHODOLOGY | DECEMBER 2021

the acquiring non-constituent will not be
added to the Index.
Changes in Security Characteristics

A security will continue to be an Index
constituent if there are changes incharacteristics (country, sector, size segment,etc.). Reevaluation for continued inclusion in
the Index will occur at the subsequent Index
Review.

Further detail and illustration regarding specific treatment of corporate events
relevant to this Index can be found in the MSCI Corporate Events Methodology.
The MSCI Corporate Events methodology book is available at:https://www.msci.com/index-methodology.

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Appendix 1: What is a Circular Economy?

A circular economy is an economic system wherein resources are kept as long as
possible within the system, whether by rethinking resource-intensive products andprocesses, maximizing the use of materials, extending the life of products, and/or
recycling of waste materials. This is a structural shift from the current linear
economy, where materials are taken, converted via a manufacturing process, used,
and then disposed. Underlying to the concept of a circular economy are the 9R
strategies,3 which provide a holistic view to improving circularity at each stage of a
product’s lifecycle.

For more information, please see the Circular Economy Theme Insight written by
Rachel A. Meidl:
https://www.msci.com/documents/1296102/28401354/ThematicIndexCircularEconomy-cbr-en.pdf

3 Circular Economy: Measuring Innovation in the Product Chain, Policy Report by PBLK Netherlands

Environmental Assessment Agency, (Potting, J., Hekkert, M., Worrell, E., Hanemaaijer, A.),
https://www.pbl.nl/sites/default/files/downloads/pbl-2016-circular-economy-measuring-innovation-in-productchains-2544.pdf© 2021 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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Appendix 2: Renewables & Energy Efficiency-specificExclusions Criteria
Companies are excluded based on the following MSCI Climate Change Metrics and
MSCI Impact Solutions filters:•

Thermal Coal Miningo•

Oil & Gas-related Activitieso•

All companies deriving 10% or more revenue (either reported or
estimated) from oil and gas related activities, covering distribution /retail, equipment and services, extraction and production,
petrochemicals, pipelines and transportation, and refining. It does
not cover revenue from biofuel production and sales and trading
activities.

Fossil Fuel-based Power Generationo•

All companies deriving 1% or more revenue (either reported or
estimated) from the mining of thermal coal (including lignite,
bituminous, anthracite and steam coal) and its sale to external
parties. It does not cover revenue from metallurgical coal; coal
mined for internal power generation (e.g., in the case of verticallyintegrated power producers); intra-company sales of mined thermal
coal; and revenue from coal trading.

All companies that deriving 50% or more revenue (either reported or
estimated) from thermal coal-, liquid fuel-, and natural gas-based
power generation.

SDG 7 and 13 Net Alignmento

All companies that are assessed as Strongly Misaligned and
Misaligned on their Net Alignment to SDG 7 (Affordable and Clean
Energy) and SDG 13 (Climate Action).

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