Consultation on Potential
Enhancements of the MSCI Climate
Paris Aligned Indexes Methodology
This consultation may or may not lead to the implementation of any or all of the proposed changes in thehighlighted 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.

September 2022

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

Agenda1

Background2

Consultation Summary

3High Level Effect of Proposals

42

Consultation Questions

5
4
2

Appendix – Detailed Analysis of Proposals

Information Classification: GENERAL

Background on Consultation• This consultation contains proposals for the potential enhancement of the MSCI Climate Paris
Aligned Indexes (“CPAI”) methodologies, including the use of Carbon Budgets and Implied
Temperature Rise
• MSCI invites feedback from market participants on or before December 2nd, 2022 and will
announce the results of the consultation on or before January 20th, 2023.

• The proposed enhancements reflect MSCI’s latest research on the evolution of climate-aware andnet-zero strategies, as well as feedback from market participants.
• This deck is designed to facilitate− wide-ranging discussion about the evolution of the MSCI CPAI methodology and net-zero indexed
strategies− feedback on the use of the latest climate metrics within the MSCI CPAI methodology, including
Implied Temperature Rise (ITR), Global Emission Budgets and Science Based Targets (SBT).
− discussion on reconciling SFDR Article 9/MiFID II Sustainability Preferences with investor user ofthe MSCI CPAI methodology.
3
Information Classification: GENERAL

Consultation Summary (1/2):“Fundamental Enhancements” proposals• MSCI proposes the following “fundamental” enhancements to the MSCI Climate Paris Aligned Indexes (CPAI)
methodology to demonstrate following characteristics :− The MSCI CPAI methodology exceeds minimum requirements for EU PAB1 and decarbonize annually byat least 10%2. Moreover, consistent with the index objective, the current index holdings should at least bealigned with a “2-degrees” world based on the MSCI Implied Temperature Rise (ITR)3.
− A CPAI’s decarbonization pathway should be demonstrably consistent with the index’s estimated shareof the global emission budget required to keep global heating at or below a 1.5 degrees scenario.
− Remove the Climate Value-at-Risk (Climate VaR) floor of 0% as a constraint as alignment with theobjectives of the Paris Agreement is handled better via the preceding two enhancements.
− A CPAI should not hold, and/or inadvertently overweight companies involved in Nuclear Weapons andCivilian Firearms.

1 - Regulation (EU) 2016/1011 as amended by Regulation (EU) 2019/2089
2 – The weighted average a carbon intensity (WACI) of CPAI follows a trajectory of 10% annual reduction ( on compounded bases relative to the WACI on the base date).
3 – Implied Temperature Rise, https://www.msci.com/our-solutions/climate-investing/net-zero-solutions/implied-temperature-rise
Information Classification: GENERAL

4

Consultation Summary (2/2):“Technical Adjustments”, Supporting Alignment with MiFID II Sustainability
Preferences• MSCI proposes technical enhancements that reflect the increased adoption of Science Based Targets and theavailability of more physical risk scenarios for MSCI’s ‘Extreme Weather Equity Climate VaR (%)’.

− Companies with approved Science Based Target (SBT)1 should be overweighted (in aggregate) in a
CPAI.
− MSCI ESG will deprecate2 the physical risk scenario labelled ‘Extreme Weather Equity Climate VaR(%)’.
From May 2023 SAIR, the MSCI CPAI methodology will switch to the ‘aggressive outcome’ of the new‘4° C IPCC SSP 3-7.0’ Physical Climate-VaR Scenario.
• MSCI also seeks feedback from market participants on the impact of MiFID II Sustainability Preferences asmeasured for a fund tracking the CPAI according to the MSCI ESG screening guide – “Navigating Sustainability
Preferences under the New MiFID II Rules”3.
− Impact of the exclusion of all “Orange Flag” companies in terms of change in TE and exposures.
− Potential target levels for the weight of Sustainable Investments (%SI) in a CPAI across regions.
− Views on the utility of the potential climate-specificity or methodology-linkage of an %SI measure
1 – Companies with science based targets approved by Science Based Target Initiative. https://sciencebasedtargets.org/
2 - https://support.msci.com/support/esg-news/msci-esg-research-q2-2022/03338837654
3 – MSCI ESG Research Screening guide published on 4th Aug 2022
Information Classification: GENERAL

5

Rationale & High-level Impact of Proposals (1/3)
No.

Enhancement

Rationale

Impact* ( based on transition as ofMay’22 SAIR)

Enforce an index-level ITRof no more than 2 degrees• Ensure that the index based on
its current holdings and theirtargets/projections is consistent
with a 2 degrees world• Many CPAI on broad regions are
already aligned• Misaligned indexes would haverebalanced with slightly higher
forecast TE (%) and/or turnoverbudgetRemove Climate VaR(%) as
an index constraint.
• With the introduction ofan ITR target and carbon
budgets, can this be
dropped?

• At the time of index launch,
Climate VaR (%) was the only
methodology element linked toan explicit temperature scenario• The constraint refers to theimpact of low-carbon transitionand not climate impact• Dropping the constraint would
have resulted in significantly lower
forecast TE(%) in many regions.
• Across a range of regional CPAI,
the Climate VaR for theunconstrained CPAI would nothave been worse than -5%.

1A

1B

*Impact Analysis : All impact analysis shown in this document are based on a hypothetical index rebalance as per following methodology –• Hypothetical Rebalance Date – 1st June 2022
• Hypothetical Rebalance Methodology – The CAPI methodology ( available here : https://www.msci.com/eqb/methodology/meth_docs/MSCI_Climate_Paris_Aligned_Indexes.pdf) is
modified with the specific proposed enhancement. Current CPAI is rebalanced as per the ‘Hypothetical Rebalance Methodology’ on the ‘Hypothetical Rebalance Date’.
• The as of date for data provided by MSCI ESG Research is 29th April 2022, unless stated otherwise.
Information Classification: GENERAL

6

Rationale & High-level Impact of Proposals (2/3)
Enhancement
Introduce Carbon Emissions
Budget Consistency:

2

3

Cumulative projected emissionsof the index constituents should
be lower than their share of theestimated remaining carbon
budget1 consistent with global
heating remaining below 1.5
degrees.
Exclude companies involved in
Nuclear Weapons and Civilian
Firearms(proposed level of exclusion –Highly Restrictive )Rationale•

Introduces an explicit control that theindex constituents are on adecarbonization pathway consistent
with global heating below 1.5 degrees.

•

On a projected basis, the cumulativeindex emissions will not be more than
the index’s share of global emission
budget for keeping global heating
below 1.5 degrees•

The inclusion of companies involved in
Nuclear Weapons or Civilian Firearms
may limit the usability of the standard
index within funds.

Impact* ( based on transition as ofMay’22 SAIR)•The existing 10% annual ‘selfdecarbonization’ means many
CPAI are assessed that they will
emit less than their share of
global budget for keeping global
warming below 1.5 degrees until
2050.

•

Such an exclusion will haveminimal impact on the index
characteristics of the CPAI.

*Impact Analysis : All impact analysis shown in this document are based on a hypothetical index rebalance as per following methodology –• Hypothetical Rebalance Date – 1st June 2022
• Hypothetical Rebalance Methodology – The CAPI methodology ( available here : https://www.msci.com/eqb/methodology/meth_docs/MSCI_Climate_Paris_Aligned_Indexes.pdf) is modified withthe specific proposed enhancement. Current CPAI is rebalanced as per the ‘Hypothetical Rebalance Methodology’ on the ‘Hypothetical Rebalance Date’.
• The as of date for data provided by MSCI ESG Research is 29th April 2022, unless stated otherwise.
1 – Index’s share of global emission budget calculation : https://www.msci.com/our-solutions/climate-investing/net-zero-solutions/implied-temperature-rise
Information Classification: GENERAL

7

Rationale & High-level Impact of Proposals (3/3)

4A

4B

5

Enhancement

Rationale

Impact* ( based on transition as ofMay’22 SAIR)

The aggregate weight of companies
with approved Science Based Targets
should be at least 20% higher in agiven CPAI.

• Expand the scope of ‘Companies Setting
Targets’ to include companies with approved
Science-Based Targets (SBT), given theirgrowing adoption• Ensure companies with SBT are notunderweighted (in aggregate).

•

Since a larger pool of stocks is overweighted, the enhancement would haveresulted in increase in the Ex-Ante
TE(%) as more stocks are
overweighted.

The aggregate weight of ‘Companies
Setting Targets’ should only include
companies in the ‘Eligible Universe’(companies which are not screenedout of the parent index).

• In some cases, the number of ‘Companies
Setting Targets’ is smaller in Eligible Universe
compared to the number in the Parent Index.
• This is a technical adjustment to limit
potential rebalance infeasibility•

Across a range of CPAI, theenhancement would have resulted inlower Ex-Ante TE(%) and more resilient
optimization.

Update the Physical Risk scenario tothe ‘aggressive outcome’ of the new‘4° C IPCC SSP 3-7.0’ Physical ClimateVaR Scenario• MSCI ESG has indicated the deprecation of
the prior Physical Risk scenario. The proposal
is also aligned to reflect risks associated witha world where little action is taken bycompanies vs status quo•

The choice is motivated to minimize
aggregate impact. The Physical Risk
Climate VaR1 under the ‘4° C IPCC SSP
3-7.0’ scenario is equal to or slightly
lower across regions.

*Impact Analysis : All impact analysis shown in this document are based on a hypothetical index rebalance as per following methodology –• Hypothetical Rebalance Date – 1st June 2022
• Hypothetical Rebalance Methodology – The CAPI methodology ( available here : https://www.msci.com/eqb/methodology/meth_docs/MSCI_Climate_Paris_Aligned_Indexes.pdf) is modified with thespecific proposed enhancement. Current CPAI is rebalanced as per the ‘Hypothetical Rebalance Methodology’ on the ‘Hypothetical Rebalance Date’.
• The as of date for data provided by MSCI ESG Research is 29th April 2022, unless stated otherwise.
1-Calculated as the weighted average of the 4°C Aggregated Physical Risk Company Climate VaR (IPCC SSP3-7.0 Aggressive outcome) [%]. Index constituent weights as of 1 st Sep’22 and Climate VaRdata as of 15th Sep’22.
Information Classification: GENERAL

8Supporting Potential Alignment with MiFID II Sustainability
Preferences•

The MiFID II Sustainability Preferences do not apply to benchmarks/indexes and as such CPAI themselves (or other EU PAB compliant
indexes) are not required to meet the guidelines.

•

Client feedback indicates there remains a lack of clarity on certain aspects of the technical guidelines which leads to different interpretations.

Discussion Points

Rationale

Impact* ( based on transition as ofMay’22 SAIR)

Exclude all ‘Orange’ flag stocks
from a CPAI.

• Required to align with the MSCI ESG“Baseline Criteria Test” which excludes
companies failing the test on Good
Governance and/or DNSH principles.

•

Exclusion of all “Orange” flag
companies from CPAI, would havecaused an increase in ex-ante TE or
led to an emissions ‘base reset’decision across most regions.

A minimum target for index weightin constituents which pass the‘Economic Activity’ test for‘Sustainable Investment’ (SI).

• The % of Index weight in Sustainable
Investments (%SI) is relatively small
based on the current MSCI ESG metrics•

The calculated %SI is low andvaries widely across regions
The regulatory guidance for a target
for % SI remains unclear based on
feedback from institutional
investors.

1

2

•

*Impact Analysis : All impact analysis shown in this document are based on a hypothetical index rebalance as per following methodology –• Hypothetical Rebalance Date – 1st June 2022
• Hypothetical Rebalance Methodology – The CAPI methodology ( available here : https://www.msci.com/eqb/methodology/meth_docs/MSCI_Climate_Paris_Aligned_Indexes.pdf) is modified
with the specific proposed enhancement. Current CPAI is rebalanced as per the ‘Hypothetical Rebalance Methodology’ on the ‘Hypothetical Rebalance Date’.
• The as of date for data provided by MSCI ESG Research is 29th April Information
2022, unlessstated otherwise.
Classification:
GENERAL

9

Consultation Questions•

Core Enhancements - Do you agree that
1. A CPAI should have an index-level ITR of no more than 2 degrees based on the current holdings of the index?
2. A CPAI should target to limit its cumulative projected emissions to be below its share of the global emissions budget available torestrict global heating at or below 1.5 degrees?
3. The CPAI constraint that Climate-VaR >= 0% should be removed?
a. Alternatively, should the Climate-VaR target be relaxed to a small negative value: Climate-VaR >= -5%?
4. Nuclear Weapons and Civilian Firearms should be excluded from the index on a “Highly Restrictive” basis?
a. Should a “least restrictive” exclusion also be placed on conventional Weapons manufacturers?

•

Technical Adjustments – Should a CPAI seek to overweight companies with approved Science Based Targets?
1. Does the proposal to consider the weight of only such stocks if eligible as the reference weight for the target make sense?
2. Given the large and growing weight of the stocks considered as ‘Companies Setting Targets’, should the aggregate overweighting be
reduced from 20% to 10%?

••

Should the ESG screens in MSCI CPAI methodology be applied at quarterly frequency? Should some screens be applied monthly (e.g. UNGC?)
Should a CPAI index also target a minimum increase in the index-level ESG Score compared to the parent index ?

Supporting MiFID II Sustainability Preferences –Should all CPAI Indexes have a constraint to support MiFID II Sustainability Preferences?
1. Should all ‘Orange Flag’ stocks be excluded from the index?
2. Should there be a constraint on the minimum aggregate index weight in constituents flagged as Sustainable Investments?
3. How should that level be set by region (parent index characteristics)
Would an alternate series with such an SI% constraint be a useful addition to the range?
10
Information Classification: GENERAL

Appendix:
Detailed Proposal Analysis.

Information Classification: GENERAL

Proposal 1a :Target Index-level ITR <= 2 degrees

Information Classification: GENERALITR of Flagship MSCI Climate Paris Aligned Indexes (CPAI)•

CPAI have substantially lower ITR
than their respective cap-weighted
parent indexes•

CPAI aim to align with 1.5° trajectoryby imposing a self-decarbonizationof at least 10% per year.

•

The current ITR of CPAI acrossregions and countries tends to bearound 2° – with a few exceptions.

•

Proposal: Introduce an alignment
constraint in the MSCI CPAI
methodology to target an ITR of 2° or
below on rebalance dates.

4.0
2.7
2.5
2.8
2.8
2.8
2.9
2.7
2.8
3.0
3.3
2.5
2.5
2.7

Parent ITR
Alignment
Strongly Misaligned
Misaligned
Misaligned
Misaligned
Misaligned
Misaligned
Misaligned
Misaligned
Misaligned
Misaligned
Strongly Misaligned
Misaligned
Misaligned
Misaligned

3.5Strongly Misaligned

2.4

Misaligned

1.1

3.2

Misaligned

2.4

Misaligned

0.8

3.5

Strongly Misaligned

2.5

Misaligned

1.0

3.7

Strongly Misaligned

2.6

Misaligned

1.1

Parent ITR
CANADA
EAFE
EUROPE SMALL CAPNORTH AMERICA
WORLD
WORLD ex EMU
ACWIUSAWORLD ex USA
ACWI ex USA
CHINA
EMU
EUROPEJAPAN
AC ASIA PACIFIC ex
JAPAN
AC ASIA ex JAPANEM (EMERGING
MARKETS)CHINA ACPAI ITR

CPAI ITR Alignment

1.9
1.9
1.9
1.9
1.9
1.9
2.0
2.0
2.0
2.1
2.1
2.1
2.1
2.1

2° Aligned
2° Aligned
2° Aligned
2° Aligned
2° Aligned
2° Aligned
2° Aligned
2° Aligned
2° Aligned
Misaligned
Misaligned
Misaligned
Misaligned
Misaligned

Improvement in ITR
relative to Parent
2.1
0.8
0.6
0.9
0.9
0.9
0.9
0.7
0.8
0.9
0.9
0.4
0.4
0.6

Constituents as of 1st Jun’22. ESG Data as of 29th Apr’22.

13
Information Classification: GENERALITR is a function of the ratio between Cumulative Projected
Emissions and Available Budget•

The MSCI ITR is calculated with reference to a 2-degree temperature scenario.

•

Relative Overshoot = Cumulative Projected Emission / Budget•

The ‘Relative Overshoot’ consistent with an ITR of 1.5 degrees can still be imputed from the ITR calculation methodology.

•

A target ‘Relative Overshoot’ can be set as a constraint in the CPAI optimization.

7.00

Relative Overshoot

6.00

For an index-level ITR of 1.5 degrees, thecumulative emission needs to be 60% lower thanits share of the estimated 2-degrees budget.

5.73

5.00

4.55

4.00

3.37

3.00

2.18

2.00

1.59

1.00

0.41

1.00

0.00

6.0

5.0

4.0

3.0

2.5

2.0

1.5

0.17
1.3

ITR

14
Information Classification: GENERAL

Impact of Enhancement Proposal 1A (1/2)
Targeting Index-level ITR <= 2 degrees has little impact on key financial and climate metrics.
RegionITR

ActiveMcap
Companies
Ex-Ante Turnover
Share
Climate Physical
NOC Coverage
WACI
SettingTE(%)(%)
Relative to
VaR(%)
Risk(%)
Targets (%)
Current (%)

LCT
Score
Uplift (%)

Current

1.9

1.8

5

633

65

NA

184

28

0

-4

11

Proposed

1.9

1.8

5

633

65

0

184

28

0

-4

11

Current

2.5

2.7

6

469

58

NA

256

3

0

-10

14

Proposed

2.0

2.5

8

448

57

7

229

4

0

-10

13

Current

2.1

1.8

6

905

65

NA

256

20

0

-8

12

Proposed

2.0

1.8

6

907

65

0

256

20

0

-8

12

WORLD

EM

ACWI ex
USA

•
•
•
•

Current : respective CPAI constituents as of 1st June. Proposed : constituents of hypothetical index which follows hypothetical rebalance (slide 6).
ITR – Index ITR, Ex-Ante TE(%) – calculated relative to market cap weighted parent index, Turnover – turnover used to rebalance the index, NOC – Number of constituents, Mcap Coverage– Weight of index constituents in the market cap weighted parent index
WACI – Weighted average GHG Intensity, Companies Setting Targets, Climate VaR(%), Physical Risk as defined in the MSCI Climate Paris Aligned Indexes Methodology.
LCT uplift – The % change in index’s weighted average Low Carbon Transition Score relative to the market cap weighted parent index.
Information Classification: GENERAL

15

Impact of Enhancement Proposal 1A (2/2)
RegionITR

ActiveMcap
Companies
LCT
Ex-Ante Turnover
Share
Climate Physical
NOC Coverage
WACI Setting
Score
TE(%)
(%)
Relative to
VaR(%) Risk(%)
Targets (%)
Uplift (%)
Current (%)

Current

2.1

3.2

7

220

67

NA

104

0.1

0

-10

14

Proposed

2.0

3.2

9

220

68

6

104

0.1

0

-10

14

AC ASIACurrent
PACIFIC ex
Proposed
JAPAN

2.4

2.8

7

435

62

NA

235

3.9

0

-10

14

2.0

2.4

8

433

62

7

232

3.9

0

-10

13

Current

2.1

2.4

7

254

70

NA

219

35.9

0

-6

11

Proposed

2.0

2.4

7

254

70

0.8

201

35.9

0

-6

11

Current

2.0

2.1

5

298

67

NA

169

29

0.00

-3

7

Proposed

2.0

2.1

5

300

67

0.5

169

29

0.00

-3

7

China

Europe

USA

•
•
•
•

Current : respective CPAI constituents as of 1st June. Proposed : constituents of hypothetical index which follows hypothetical rebalance (slide 6).
ITR – Index ITR, Ex-Ante TE(%) – calculated relative to market cap weighted parent index, Turnover – turnover used to rebalance the index, NOC – Number of constituents, Mcap Coverage– Weight of index constituents in the market cap weighted parent index
WACI – Weighted average GHG Intensity, Companies Setting Targets, Climate VaR(%), Physical Risk as defined in the MSCI Climate Paris Aligned Indexes Methodology.
LCT uplift – The % change in index’s weighted average Low Carbon Transition Score relative to the market cap weighted parent index.

16
Information Classification: GENERAL

Proposal 1b:
Remove Climate Value At Risk as an
Optimization constraint

Information Classification: GENERALEnhancement Proposal 1B:
Drop Climate VaR (%) as an index optimization constraint•

At the time of index launch, Climate VaR (%) was added as an alignment constraint• To act as a reference for investor interest in the impact of TCFD climate stress-testing scenarios• As the only methodology element that could be explicitly linked to a specific temperature outcome• As a control on the estimated impact on the index through the low-carbon transition•

The proposed ITR constraint and projected emissions budget would directly address Index’s alignment with theParis Agreement which underlies the index objective.
• We would still retain a constraint for index-level improvement of the MSCI Low Carbon Transition Score•

Even in absence of a Climate VaR (%) constraint, the range of CPAI were calculated to have a climate VaR of noworse than -5%.

•

The removal of the Climate VaR (%) constraint would have resulted in significantly lower Ex-Ante TE (%) acrossa range of CPAI indexes.

•

Proposal - Remove Climate VaR (%) as an alignment constraint from the MSCI CPAI methodology.

18
Information Classification: GENERAL

Metrics – Proposal 1B
ClimateVaR(%)

ParentClimateVaR(%)

Current

0

-15

1.9

1.8

5

633

65

NA

184

28

-4

11

Proposed

-2

-15

2.0

1.7

5

639

65

3

184

28

-4

10

Current

0

-33

2.5

2.7

6

468

58

NA

257

3

-10

14

Proposed

-5

-33

2.0

2.2

6

465

59

8

257

3

-10

11

Current

0

-25

2.1

1.8

6

905

65

NA

256

20

-8

12

Proposed

-3

-25

2.0

1.6

6

924

66

5

256

20

-8

11

Current

0

-29

2.1

3.2

7

220

68

NA

104

0.1

-10

14

Proposed

-5

-29

2.0

2.7

6

212

67

8

104

0.1

-10

12

Current

0

-31

2.4

2.8

7

435

62

NA

235

4

-10

14

Proposed

-6

-31

2.0

1.9

6

445

65

9

219

4

-10

11

Current

0

-22

2.1

2.4

7

254

70

NA

219

36

-6

11

Proposed

-3

-22

2.0

2.2

7

267

71

5

203

36

-6

10

Current

0

-12

2.0

2.1

5

298

67

NA

169

29

-3

7

Proposed

-1

-12

2.0

2.1

5

304

68

3

169

29

-3

7

RegionWORLDEM
ACWI exUSA
China
AC ASIA
PACIFIC ex
JAPANEurope
USA

•
•
•
•

ITR

Ex-Ante Turnover
TE(%)
(%)

NOC

Companie
Mcap
Active Shares Setting Physical LCT Score
Coverage Relative to Current WACI
Targets
Risk
Uplift (%)(%)
Methodology (%)(%)

Current : respective CPAI constituents as of 1st June. Proposed : constituents of hypothetical index which follows hypothetical rebalance (slide 6).
ITR – Index ITR, Ex-Ante TE(%) – calculated relative to market cap weighted parent index, Turnover – turnover used to rebalance the index, NOC – Number of constituents, Mcap Coverage– Weight of index constituents in the market cap weighted parent index
WACI – Weighted average GHG Intensity, Companies Setting Targets, Climate VaR(%), Physical Risk as defined in the MSCI Climate Paris Aligned Indexes Methodology.
LCT uplift – The % change in index’s weighted average Low Carbon Transition Score relative to the market cap weighted parent index.
Information Classification: GENERAL

19

Proposal 2:
1.5-degree Carbon Emissions Budget
Consistency

Information Classification: GENERAL

Consistency with The MSCI Net Zero Tracker* Approach• MSCI CPAI methodology follow a ‘self-decarbonization’ target of 10% annualized reduction in index index’s emission
intensity.
• Proposal : Introduce an alignment objective in MSCI CPAI Indexes methodology to restrict the ‘cumulative projected
emission’ of CPAI below the share of total amount of GHG that can be put in atmosphere to keep global temperature rise
below 1.5 degrees.
* https://www.msci.com/documents/1296102/26195050/MSCI-Net-Zero-Tracker.pdf

21
Information Classification: GENERAL

Cumulative Future Emission of MSCI CPAI•

Emission trajectory of a CPAI is set via the YoY self-decarbonization rule1.

•

Based on this, the cumulative projected emission of a CPAI to a futureyear can be calculated (2070 as per the MSCI ITR model).

•Projected Emission = Cumulative Emissions to a future year.

•

A CPAI may be considered aligned with a 1.5 degrees trajectory if the
cumulative projected emissions of the index from today and 2070 is lessthan the budget available to keep global warming below 1.5 degrees.

Emission Intensity

ParentBase Date

CPAI

Fixed Trajectory : Intensity in any future year shows an annualized decarbonization of at least 10% since the base date.

Source :https://www.msci.com/documents/1296102/27422075/Impl
iedTemperatureRise-cfs-en.pdf
https://www.msci.com/documents/1296102/31997292/Impl
ied-Temperature-Rise-Methodology-Summary.pdf/38022da2647f-15be-d367-524f351038f2?t=1653405935387

Years
1 - As per Section 3.3 of the MSCI Climate Paris Aligned Indexes methodology, the Indexes maintain a minimum year-on-year self-decarbonization of 10%.

Information Classification: GENERAL

22

Existing MSCI Climate Paris Aligned Indexes (CPAI) are projected
to emit less than the 1.5 degrees budget between 2021 and 2070.
• Existing CPAI as of May 2022 are projected to emit less than share of global budget between 2022 and 2070.
• Proposed Enhancement would have minimal impact on the index characteristics of some CPAI.
4,500.00

BudgetCumulative Projected Emission

Current Emission (RHS)
200

MT of CO2E

3,500.00
3,000.00

150

2,500.00
2,000.00

100

1,500.00
1,000.00

50

MT of current CO2E

4,000.00

250

500.000.00

0Based on the constituents of the respective CPAI as of 1st June 2022.
Index Constituent Weights as of 1st June 2022. Stock level emission budget and cumulative emissions are as of 29 th April 2022

23
Information Classification: GENERALCalculation of Cumulative Projected Emission•

Index Cumulative Emission is an aggregate of company-level cumulative emissions between 2021 and 2070.

•

To achieve 10% year on year decarbonization, we assume that each constituent company of a CPAI will have to reduce its
emission at the rate of 10% year on year with some caveats− Companies that are projected to decarbonize at a faster “rate_1” than 10% will be expected to follow their own
decarbonization targets− Companies will not be expected to decarbonize further if its cumulative emissions are less than or equal to acompany’s share of global budget required to restrict global heating at 1.3 degrees.
− The MSCI ITR caps the company-level ITR at 10 degrees; company-level cumulative emissions are therefore capped at
a level of budget consistent with ITR of 10 degrees.

•

For our calculation, Company-Level Cumulative Emissions are calculated as follows− Calculate O1 = Cumulative Emissions published by MSCI ESG Research (as used in the calculation of ITR)
− Calculate O2 = Cumulative Emissions Cap (imputed from Max ITR = 10 degrees)− Calculate O3 = Cumulative Emissions based on committed decarbonization rate
− Calculate O4 = Cumulative Emissions Floor (imputed from Min ITR = 1.3 degrees)•Company level Cumulative Emission is calculated as : Max (Min (O1, O2, O3), O4)

24
Information Classification: GENERAL

Index-Level Calculations
Index Level Calculation ( Portfolio Aggregation )• For ith stock in the index, assume− Cumulative Emission: CEi , Budget: Bi, Company Level EVIC: EVICi , Stock’s weight in index: Wi− Stock-level Cumulative Emission calculated as per the steps explained on previous slide.
• Index ownership (share of company represented in the index): Oi =( $ Invested * Wi ) / EVICi• Index ITR Calculation :• Aggregate Cumulative Emission: CEp = ∑CEi ∗ Oi
• Aggregate Budget: Bp = ∑BEi ∗ Oi
• ITR = 2+0.545*1.551*(CEp – Bp) / Bp1• For a target ITR : ITR = 1.5 degrees, stock’s weight Wi is the only variable term in the above expression. The
expression can be set as a linear constraint in the optimization process.

1- The equation 1 is based on the relationship established by IPCC that links each additional unit of emissions emitted beyond the available remaining global 2°C carbon
budget to degrees of additional warming. The relationship is called ‘Transient Climate Response to Cumulative Carbon Emissions’. More details are available at :https://www.msci.com/documents/1296102/27422075/Implied-Temperature-Rise-Methodology-Summary.pdf

25
Information Classification: GENERAL

Metrics – Impact of Proposal 2
Ex-AnteTE(%)

Turnover (%)

NOC

Mcap
Coverage (%)

Current

1.78

5

633

65

Active Share
Relative toCurrent
Methodology (%)
0.00

Proposed

1.78

5

633

65

Current

2.67

6

468

Proposed

2.68

6

Current

1.79

Proposed

WACI

Companies
Setting Targets
(%)

CVAR

Physical Risk

LCT Score
Uplift (%)

184

28

0.00

-4

11

0.00

184

28

0.00

-4

11

58

0.00

257

3

0.00

-10

14

468

58

0.16

257

3

0.00

-10

14

6

905

65

0.00

256

20

0.00

-8

12

1.77

6

906

65

0.47

256

20

0.00

-8

12

Current

3.23

7

220

68

0.00

104

0.1

0.00

-10

14

Proposed

3.22

7

219

68

1.05

104

0.1

0.00

-10

14

Current

2.78

7

435

62

0.00

235

4

0.00

-10

14

Proposed

2.78

7

434

62

0.11

235

4

0.00

-10

14

Current

2.35

7

254

70

0.00

219

36

0.00

-6

11

Proposed

2.34

7

254

70

0.53

219

36

0.00

-6

11

Current

2.12

5

298

67

0.00

169

28

0.00

-3

7

Proposed

2.12

5

298

67

0.00

169

28

0.00

-3

7

RegionWORLDEM
ACWI ex USA
China
AC ASIA
PACIFIC ex
JAPANEurope

USA

•
•
•
•

Current : respective CPAI constituents as of 1st June. Proposed : constituents of hypothetical index which follows hypothetical rebalance (slide 6).
ITR – Index ITR, Ex-Ante TE(%) – calculated relative to market cap weighted parent index, Turnover – turnover used to rebalance the index, NOC – Number of constituents, Mcap Coverage –Weight of index constituents in the market cap weighted parent index
WACI – Weighted average GHG Intensity, Companies Setting Targets, Climate VaR(%), Physical Risk as defined in the MSCI Climate Paris Aligned Indexes Methodology.
LCT uplift – The % change in index’s weighted average Low Carbon Transition Score relative to the market cap weighted parent index.
Information Classification: GENERAL

26

Proposal 3:
Exclude companies involved in Nuclear
Weapons and Civilian Firearms(Highly Restrictive )Information Classification: GENERAL

Proposed Screens• Core Proposal: Highly restrictive
screen for Nuclear Weapons
and Civilian Firearms.
• Alternate Proposal:• Highly restrictive screen for
Nuclear Weapons andCivilian Firearms.
• AND Least restrictive
screen for Conventional
Weapons.

28
Information Classification: GENERAL

Actual Screen Implementation
Proposed Screens

Screen Implementation

Core Screen:▪ Nuclear Weapons High(#WEAP_NUC_MISSILE == TRUE ) |(#WEAP_NUC_EXCL_COMPONENT == TRUE ) |(#WEAP_NUC_EXCL_DELIVERY == TRUE ) |(#WEAP_NUC_SUPPORT == TRUE ) |(#WEAP_NUC_DUAL_COMPONENT == TRUE ) |(#WEAP_NUC_DUAL_DELIVERY == TRUE ) |(#WEAP_NUC_EXCL_DELIVERY_PART == TRUE )Core Screen:▪ Civilian Firearms High(#PROD_CIV_ARMS == TRUE) |(#FIREARM_MAX_REV_PCT >= 5)

Alternate Screen:▪ Conventional Weapons Least(#WEAP_CONV_MAX_REV_PCT >= 10)

Alternate Screen:▪ Nuclear Weapons High▪ Civilian Firearms High▪ Conventional Weapons Least

29
Information Classification: GENERAL

Top Names flagged by Proposed Screens on ACWI••There are 16 companies in ACWI that would have been excluded as of 1st June 2022 due to core screens and 7
additional companies would have been excluded via the alternate screen.
The table below shows the 8 companies that would have been excluded from ACWI CPAI due to core screens and2 additional companies that get excluded due to alternate screen.
Security NameACWI Weight1

ACWI CPAI
Weight

HONEYWELL INTERNATIONAL

0.22%

0.47%

RAYTHEON TECHNOLOGIES

0.23%

0.43%

FIN RICHEMONT NAMEN A

0.10%

0.16%

SAFRANJACOBS ENGINEERING
GROUP

0.06%

0.12%

0.03%

0.10%

AIRBUS

0.11%

0.04%

LEIDOS HOLDINGS

0.02%

0.03%

THALES

0.02%

0.02%

BHARAT ELECTRONICS

0.01%

0.05%

ASELSAN ELEKTRONIK

0.00%

0.03%

Proposed Screen

Alternate Screen:▪ Nuclear Weapons High▪ Civilian Firearms High▪ Conventional Weapons
Least

Core Screen:▪ Nuclear Weapons High▪ Civilian Firearms High▪ Conventional Weapons
Least
1 – Index constituents as of 1st June 2022,.

30
Information Classification: GENERAL

Impact of Proposal Core Exclusions on Ex-Ante Active Risk
Regional CPAI

Ex-Ante TE(%)

Current

Proposed

WORLD

1.78

1.78

EM

2.67

2.46

ACWI ex USA

1.79

1.75

China
AC ASIA PACIFIC ex
JAPAN

3.23

3.29

2.78

2.68

Europe

2.35

2.57

USA

2.12

2.19

31
Information Classification: GENERAL

Proposal 4a: Aggregate weight of companies withapproved SBT should be at least 20% higher in a CPAI.
Proposal 4b: Aggregate weight of ‘Companies Setting
Targets’ should be only based on ‘eligible’ securities

Information Classification: GENERALCompanies with Science Based Targets•

Aggregate Weight of Companies with SBT

The MSCI CPAI methodology aims to increase theaggregate weight of companies setting targets by 20%.

Proportional Change in Weight relative to
mcap parent

1.12

ACWI

•
•

-6.1%

AC Asia Pacific ex JP

1.13

Europe1.08

However, the current methodology doesn’t currently
include companies with approved Science-Based Targets(SBT) in that group− As of 1st June 2022, 403 companies in MSCI ACWI
have set approved Science Based Targets1.

0.7%

3.7%

China 0Some CPAI are currently underweight on companies withapproved SBT in aggregate
Proposal – Include companies with approved SBT in thegroup of ‘Companies Setting Targets’.

3.8%

0.39

Canada•Active Weight relative to mcap
parent

EM

1.1

USA

1.08

World
ACWI ex USA

Index constituent weights are as of 1st June 2022. Company’s SBT data is as of 29th April 2022.
Information Classification: GENERAL

-0.3%

0.5%

2.7%

1.49

3.8%

1.1
0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6

2.8%

-0.1

-0.05

0

0.05
33

‘Eligible’ Companies Setting Targets• “Companies Setting Targets” can fail one or more
screening criteria and hence may not be included in
the Eligible Universe.
• If many companies which satisfy the criteria of‘Companies Setting Targets’ are excluded from theeligible universe, then the optimization process may
be infeasible or require relaxations to satisfy theobjective of increasing the aggregate weight of‘Companies Setting Targets’ by 20%.
• Proposal – Aggregate Weight of ‘Companies Setting
Targets’ will be calculated after removing thosestocks which are screened out.

Number of Companies Setting Targets1
216
232

ACWI
Canada4927
28

AC Asia Pacific ex JP

86
89

Europe
China
EM
USA

1
2

Eligible
Parent

30
31
72
79
185
200

World
143
152

ACWI ex USA

-20

80

180

280

380

1- As per the description of current description of ‘Companies Setting Targets’ in the MSCI CPAI methodology. Index constituents as of 1st June 2022.

34
Information Classification: GENERAL

Impact of Proposals 4a and 4b (1/2)
Companie CompanieCount ofs Setting s Setting
Companie
Targets Targets
s Setting(%) In(%)
Targets
Result In Parent

RegionActiveRisk

Turnover(%)

NOC

ActiveShare
Mcap
Relative to
Coverage
Current(%)
Methodology (%)

WACI

CVAR

Physical LCT Score
Risk
Uplift (%)

Current

28

23

200

1.78

5

633

65

NA

184

0.00

-4

11

Proposed-4A

54

45

489

1.80

6

632

65

4

184

0.00

-4

10

Proposed-4B

57

42

489

1.67

10

621

65

8

184

0.00

-4

10

Current

3

3

31

2.67

6

468

58

NA

257

0.00

-10

14

Proposed-4A

8

7

62

2.76

6

461

58

2

257

0.00

-10

14

Proposed-4B

9

7

62

2.40

7

472

58

3

257

0.00

-10

13

Current

20

17

152

1.79

6

905

65

NA

256

0.00

-8

12

ACWI ex USA Proposed-4A

42

35

383

2.03

6

882

63

5

256

0.00

-8

12

Proposed-4B

44

32

383

1.82

8

881

64

6

256

0.00

-8

11

WORLD

EM

•
•
•
•

Current : respective CPAI constituents as of 1st June. Proposed : constituents of hypothetical index which follows hypothetical rebalance (slide 6).
ITR – Index ITR, Ex-Ante TE(%) – calculated relative to market cap weighted parent index, Turnover – turnover used to rebalance the index, NOC – Number of constituents, Mcap Coverage– Weight of index constituents in the market cap weighted parent index
WACI – Weighted average GHG Intensity, Companies Setting Targets, Climate VaR(%), Physical Risk as defined in the MSCI Climate Paris Aligned Indexes Methodology.
LCT uplift – The % change in index’s weighted average Low Carbon Transition Score relative to the market cap weighted parent index.
Information Classification: GENERAL

35

Impact of Proposals 4a and 4b (2/2)
Companie CompanieCount ofs Setting s Setting
Companie
Targets Targets
s Setting(%) In(%)
Targets
Result In Parent

RegionChina

AC ASIA
PACIFIC ex
JAPANEuropeUSA

ActiveRisk

Turnover(%)

NOC

ActiveShare
Mcap
Effective Relative
Coverage
NOC
to Current(%)
Methodology (%)

WACI

CVAR

Physical LCT Score
Risk
Uplift (%)

Current

0.1

0.1

2

3.23

7

220

68

27

NA

104

0.00

-9

14

Proposed-4A

0.5

0.4

3

3.20

9

228

66

28

4

104

0.00

-9

14

Proposed-4B

0.5

0.4

3

3.22

9

227

66

27

4

104

0.00

-9

14

Current

4

3

28

2.78

7

435

62

71

NA

235

0.00

-10

14

Proposed-4A

10

8

64

2.59

7

433

62

72

3

235

0.00

-10

14

Proposed-4B

11

8

64

2.62

7

428

62

69

4

235

0.00

-10

14

Current

36

30

89

2.35

7

254

70

101

NA

219

0.00

-6

11

Proposed-4A

74

61

214

2.38

9

261

71

102

7

219

0.00

-6

11

Proposed-4B

79

57

214

2.37

14

249

68

100

12

219

0.00

-6

11

Current

28

24

79

2.12

5

298

67

60

NA

169

0.00

-3

7

Proposed-4A

52

43

88

2.14

6

284

66

60

5

169

0.00

-3

7

Proposed-4B

56

42

104

2.01

10

293

69

62

8

169

0.00

-3

7

•
•
•
•

Current : respective CPAI constituents as of 1st June. Proposed : constituents of hypothetical index which follows hypothetical rebalance (slide 6).
ITR – Index ITR, Ex-Ante TE(%) – calculated relative to market cap weighted parent index, Turnover – turnover used to rebalance the index, NOC – Number of constituents, Mcap Coverage –Weight of index constituents in the market cap weighted parent index
WACI – Weighted average GHG Intensity, Companies Setting Targets, Climate VaR(%), Physical Risk as defined in the MSCI Climate Paris Aligned Indexes Methodology.
LCT uplift – The % change in index’s weighted average Low Carbon Transition Score relative to the market cap weighted parent index.
Information Classification: GENERAL

36

Proposal 5:

MSCI Climate Paris Aligned Indexes methodology willconsider company’s Climate VaR under the ‘aggressive
outcome’ of the ‘Remind 1.5 degrees Orderly’ PhysicalRisk Scenario.

Information Classification: GENERALPhysical Risk Scenarios• Current Scenarios (Legacy Scenarios)− MSCI Physical Risk is calculated under two scenarios – “aggressive” and “average”− The MSCI Climate Paris Aligned Indexes methodology currently constrains the optimization
to target 50% lower Extreme Weather Climate VaR (Aggressive Scenario) relative to theirparent indexes.
• New Scenarios− MSCI ESG will publish Physical Risk exposures under a range of NGFS and IPCC physicalclimate change risk scenarios.
− The legacy scenarios will therefore be deprecated and then phased out.
− MSCI ESG suggest consideration of the 5°C IPCC SSP5-8.5 or the 4°C IPCC SSP3-7.0
scenario as a suitable replacement for the legacy “aggressive” scenario.
• Proposal - Replace the use of the Extreme Weather Climate VaR metric in the CPAI with the“aggressive outcome” of the “4° C IPCC SSP 3-7.0” Physical Climate-VaR Scenario.
38
Information Classification: GENERALWeighted Average Physical Risk Climate VaR under“aggressive outcome”1
1.5°C REMIND Orderly
2°C IPCC SSP1-2.6
2°C REMIND Orderly
2°C REMIND Disorderly
Scenario

3°C REMIND NDC
3°C IPCC SSP2-4.5
3°C REMIND Current Policies
4°C IPCC SSP3-7.0
5°C IPCC SSP5-8.5
Legacy

-11

-9

-7

-5

-3

ACWI

-1

ACWI IMI

1 – Index constituent weights as of 1st Sep’22 and Climate VaR data as of 15th Sep’22.
Information Classification: GENERAL

39

Weighted Average Physical Risk Climate VaR under “aggressive
outcome”1 – across select regional market cap weighted indexes.
Extreme Climate VaR Scenarios Across Regions
ACWI IMI

ACWI

World

USA

EM

EuropeChina

Weighted Average Physical Risk Climate VaR

0
-2
-4
-6
-8
-10
-12
-14
-16
-18
-20

Legacy5°C IPCC SSP5-8.5

1 – Index constituent weights as of 1st Sep’22 and Climate VaR data as of 15th Sep’22.
Information Classification: GENERAL

4°C IPCC SSP3-7.0

40Analysis : Aligning CPAI with the screening guide for MiFID II
Sustainability Preferences

Information Classification: GENERALCompanies Flagged on Sustainable Investment Criteria
Sustainable Investment Criteria
Baseline Criteria Test (% Fail)•
Good Governance
•
DNSH

•
•
•
•
•
•

ESG Rating >= BB
Thermal Coal Revenue < 1%
Tobacco Revenue <= 5%
Tobacco Producer = False
Controversial Weapons = 0
ESG Controversies – Red & Orange

Economic Activities Test•

Sustainable Impact Revenue >= 20%

Sustainable Investment Test•

Company passes both Baseline Criteria Test andEconomic Activities Test

MSCI CPAI methodology doesn’t explicitly target these criteria

Information Classification: GENERALCompanies Flagged on Sustainable Investment Criteria
Sustainable
Investment Test

Baseline Criteria Test(% Fail)Economic Activities
Test

ESG
Laggards

Current

22.34%

29.49%

31.88%

2.96%

Proposal 4b21.52%

29.02%

31.35%

3.06%

Current

15.28%

25.21%

22.15%

14.97%

Proposal 4b14.95%

25.88%

21.90%

15.52%

Current

18.52%

19.07%

25.88%

3.63%

Proposal 4b

18.97%

18.05%

26.27%

3.30%

Current

23.46%

18.12%

28.58%

14.06%

Proposal 4b23.56%

19.54%

29.09%

16.23%

Current

22.32%

25.42%

28.21%

9.27%

Proposal 4b21.74%

25.11%

27.62%

8.77%

Current

21.48%

19.59%

33.72%

0.00%

Proposal 4b

21.23%

20.25%

33.86%

0.00%

Current

20.86%

32.45%

30.00%

5.15%

Proposal 4b

21.61%

31.89%

31.24%

4.80%

Regional CPAIWorldEMACWI ex USA
China
AC Asia Pacific ex
Japan
EuropeUSA

Index constituent weights are as of 1st June 2022 and ESG data is as of 29th April.

43
Information Classification: GENERAL

Impact of Exclusion of Orange Flag ESG Controversies
Regional CPAICount of Securities
Flagged on Orange
ESG Controversies

Weight (%) of
Companies Flagged Ex-Ante TE (current
on Orange ESG
methodology)
1
Controversy

Ex-Ante TE(proposed
methodology)

WORLD

69

28.14%

1.78

Infeasible2

EM

1910.80%

2.67

3.19

ACWI ex USA

58

15.61%

1.79

1.87

China

4

4.07%

3.23

3.60

AC ASIA PACIFIC ex
JAPAN

24

16.62%

2.78

Infeasible

Europe28

19.59%

2.35

Infeasible

USA

36

29.60%

2.12

Infeasible

1- Index constituents as of 1st June 2022. ESG Controversy as of 29th April 2022.
2- The hypothetical rebalance encountered optimization infeasibility after relaxing relevant constraints as per section 3.3 of the MSCI Climate Paris Aligned Indexes methodology.

44
Information Classification: GENERAL

Analysis: Cumulative Impact of Proposals 1-4 :Information Classification: GENERAL

Impact Analysis* - introducing all enhancements in the MSCICPAI methodology1

EM

ACWI ex USA
China
AC ASIA
PACIFIC ex
JAPANEuropeUSA

Companies
ClimateSetting Targets
VAR(%)

Ex AnteTE(%)

Turnover(%)2

NOC

Physical Risk

LCT Score
Uplift (%)

Current

1.78

5

633

65

NA

184

28

0.00

-4

11

Proposed

1.69

10

635

65

9

184

58

-1.60

-4

10

Current

2.67

6

468

58

NA

257

3

0.00

-10

14

Proposed

2.16

6

461

59

8

257

9

-5.21

-10

11

Current

1.79

6

905

65

NA

256

20

0.00

-8

12

Proposed

1.72

8

903

65

8

256

45

-4.31

-8

10

Current

3.23

7

220

68

NA

104

0.1

0.00

-10

14

Proposed

2.49

7

223

69

8

104

0.5

-5.72

-10

12

Current

2.78

7

435

62

NA

235

4

0.00

-10

14

Proposed

1.89

6

440

65

9

235

11

-5.66

-10

11

Current

2.35

7

254

70

NA

219

36

0.00

-6

11

Proposed

2.33

16

253

69

15

219

80

-3.09

-6

10

Current

2.12

5

298

67

NA

169

28

0.00

-3

7

Proposed

1.95

11

311

70

10

169

57

-2.73

-3

6

RegionWORLD

Active Share
Mcap
Relative to
Coverage (%)
Current
Methodology (%)

WACI*Impact Analysis : Based on a hypothetical index rebalance as per following methodology –• Hypothetical Rebalance Date – 1st June 2022
• Hypothetical Rebalance Methodology –The CAPI methodology ( available here : https://www.msci.com/eqb/methodology/meth_docs/MSCI_Climate_Paris_Aligned_Indexes.pdf) is modified withthe enhancements 1a,1b,2,3,4a and 4b – as explained on slides 6 to 8. Current CPAI is rebalanced as per the ‘Hypothetical Rebalance Methodology’ on the ‘Hypothetical Rebalance Date’.
• The as of date for data provided by MSCI ESG Research is 29th April 2022, unless stated otherwise.
Information Classification: GENERAL

46

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Information Classification: GENERAL

47

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