Consultation on Potential Enhancement of the
MSCI Low Carbon Leaders Indexes and MSCI Low
Carbon Target Indexes
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 final result of the consultation.
January 2022

Information Classification: GENERAL© 2020 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.

Summary
MSCI presents a consultation with proposals for the potential enhancement of
the MSCI Low Carbon Target Index and MSCI Low Carbon Leaders Index
methodologies on a range to topics including the use of Scope 3 emissions andexclusions based on ESG Criteria.

MSCI invites feedback from market participants on or
before March 31, 2022, and will announce the results of theconsultation on or before April 29, 2022.

Information Classification: GENERAL

2

Background• The MSCI Low Carbon Target Index and MSCI Low Carbon Leaders Index methodologies only consider
Scope 1+2 emissions.
– MSCI is using Scope 3 emissions estimates in several flagship indexes such as MSCI Climate Change
Indexes and MSCI Climate Paris Aligned Indexes– Low Carbon Target and Low Carbon Leaders indexes may include companies facing risks due toindirect emission – Either because they depend on carbon intensive operations, or they sell carbon
intensive products.
• The MSCI Low Carbon Target Indexes and MSCI Low Carbon Leaders Indexes may also be exposed toheadline risks (ESG Red Flags, Controversial Weapons, Thermal Coal Mining)• The MSCI Low Carbon Target Indexes and MSCI Low Carbon Leaders Indexes currently use the legacy
INDUSTRY_ENERGY_APPLICATION field to identify companies with Potential Emissions. The MSCI Global
Fossil Fuels Exclusion Indexes are now enhanced to use FOSSIL_FUEL_RESERVES_ENERGY_APPLICATION.

Information Classification: GENERAL

3

Proposed Enhancements to MSCI Low Carbon Target and
MSCI Low Carbon Leaders Indexes
Summary of proposed enhancements
Enhancement

Rationale

1

Enhance company level emission calculation byincorporating company’s indirect emission measured ascompany’s Scope 3 emission.
•
Will require increase in Tracking Error (TE)budget of Low Carbon Target Indexes.
•
Will require increase in sector market cut-off for
exclusions in Low Carbon Leaders indexes.

More comprehensive assessment of carbon footprint
and consistency with other MSCI climate indexes.

2

Incorporate minimum ESG Exclusions

Minimize headline risks from indexes by excluding
companies which are ESG Red Flag or have ties with
Controversial Weapons Business or are involved in
Thermal Coal mining.

3

Update Potential Emission Calculation by using ESG
Factor FOSSIL_FUEL_RESERVES_ENERGY_APPLICATION‘ in place of ‘INDUSTRY_ENERGY_APPLICATION’

Enhanced assessment of Potential Emissions andconsistency of definition with other climate indexes,
including the MSCI Global Fossil Fuels Exclusion
Indexes.

Information Classification: GENERAL

4

MSCI Low Carbon Target Indexes

Information Classification: GENERALCompanies with high Scope 3 emissions may be overweighted in
the Low Carbon Target methodology (Current Methodology)• The below table presents the active weight of constituents by quartiles of Scope 1+2 and Scope 3 Emission
Intensities, in a hypothetical index* constructed by applying current methodology on MSCI World as of May
28, 2021.

Quartiles based on
Scope 1+2 Emission
Intensity

Quartiles based on Scope 3 Emission
Intensity

1st

2nd

3rd

4th

Total

1st

0.71%

0.49%

0.49%

0.35%

2.03%

2nd

0.20%

0.38%

0.57%

0.37%

1.51%

3rd

0.13%

0.53%

0.51%

0.77%

1.94%

4th

-0.02% -0.47% -0.89% -4.10% -5.48%

Total

1.02%

0.93%

0.67%

Low Intensity

High Intensity-2.62%* Parent Index – MSCI World, Methodology – Current Methodology (without turnover constraint), Rebalance Date – May 28,2021. ESG
Data used is as of April 30, 2021.
Information Classification: GENERAL

6

GICS® Sub-Industries with high Scope 3 emissions may beoverweighted in the Current Methodology• Sub-Industries (highlighted in the shaded
region) like Construction Machinery & Heavy
Trucks, which carry high Scope 3 Emissions,are overweighted relative to MSCI World in
the hypothetical index.

10000

Weighted Average Scope 3 Intensity• The chart shows weighted average carbon
intensity of GICS Subindustries in the
hypothetical index* (as explained on theprevious slide).

1000

100

Overweighted Industries
Underweighted Industries
10
1

10

100

1000

10000

Weighted Average Scope 1+2 Intensity* Parent Index – MSCI World, Methodology – Current Methodology (without turnover constraint), Rebalance Date – May
28,2021. ESG Data used is as of April 30, 2021.
Information Classification: GENERAL

7

Possible effects of adding Scope 3 under the MSCI Low
Carbon Target Methodology (Current+S3 Methodology)• Current+S3 Methodology – Follows MSCI Low Carbon Target Indexes methodology, with one amendment in
Section 3.2.1 - Company greenhouse gas emissions data included emissions from Scope 1, Scope 2 andScope 3. All other rules and optimization parameters of current methodology are left unchanged.
• The below table presents the active weight of constituents by quartiles of Scope 1+2 and Scope 3 Emission
Intensities, in a hypothetical index* constructed by applying ‘Current+S3 Methodology’ on MSCI World as of
May 28,2021.

Quartiles basedon Scope 1+2
Emission
Intensity

Quartiles based on Scope 3 Emission
Intensity
1st

2nd

3rd

4th

Total

1st

0.73%

0.40%

0.25%

-0.60%

0.78%

2nd

0.32%

0.34%

0.58%

-0.82%

0.42%

3rd

0.44%

0.83%

0.60%

-1.08%

0.80%

4th

0.57%

0.39%

0.10%

-3.06%-2.00%

Total

2.06%

1.96%

1.53%

-5.56%

Low Intensity

High Intensity* Parent Index – MSCI World, Methodology – Current+S3 Methodology (without turnover constraint), Rebalance Date – May
28,2021. ESG Data used is as of April 30, 2021.
Information Classification: GENERAL

8

GICS® Sub-Industries with high Scope 3 emissions may beunderweighted under ‘Current+S3 Methodology’• GICS Sub-Industries (highlighted in theshaded region) like Construction Machinery& Heavy Trucks would be underweighted if
Scope 3 emissions were also considered

10000

Sub-Industry Weighted Average Scope 3
Intensity• The chart shows weighted average carbon
intensity of GICS Subindustries in the
hypothetical index* (as explained on theprevious slide).

1000

100

Overweighted Industries
Underweighted Industries
10

1

10

100

1000

10000

Sub-Industry Weighted Average Scope 1+2 Intensity* Parent Index – MSCI World, Methodology – Current+S3 Methodology (without turnover constraint), Rebalance Date – May
28,2021. ESG Data used is as of April 30, 2021.
.
Information Classification: GENERAL

9

However, addition of Scope 3 emissions in the ‘Current+S3
Methodology’ led to lower reduction in emissions intensity•

On a Scope 1+2+3 Intensity basis, the hypothetical index* based on ‘Current Methodology’ only
achieved ~34% reduction in Intensity, despite having ~75% reduction in Scope 1+2 Intensity.

•

The hypothetical index based on ‘Current+S3 Methodology’, would have achieved about 50%
reduction in Scope 1+2+3 Intensity, Scope 1+2 intensity and Scope 3 intensity.

MetricIntensity (tCO2/$M Sales)
Scope 1+2 Intensity
Scope 3 Intensity
Scope 1+2+3 Intensity%Reduction in Intensity(tCO2/$M Sales)
Scope 1+2 Intensity
Scope 3 Intensity
Scope 1+2+3 Intensity

MSCI World

Current Methodology*

Current+S3 Methodology*

169.32864.16
1,033.47

41.48
642.03683.5175.90
438.01513.9275.50%
25.70%
33.86%

55.17%
49.31%
50.27%To achieve a comparable level of Intensity reductions, a higher ex ante tracking error budget would be required.
* Parent Index – MSCI World, Rebalanced without turnover constraint, Rebalance Date – May 28,2021. ESG Data used is as ofApril 30, 2021.
Information Classification: GENERAL

10

Low Carbon Target Indexes:
exposure to headline ESG and climate risks
Index weight (%)

MSCI World

Current Methodology*

Current+S3 Methodology*

Controversial Weapons

0.6

0.7

0.6

ESG Red Flags

2.0

1.5

1.6

Environmental Controversy Red and Orange

2.3

0.7

0.6

Thermal Coal Mining

0.7

0.1

0.1

Unconv. Oil & Gas Exploration

1.5

0.4

0.4

Thermal Coal Power Generation

1.1

0.1

0.3

The above table presents the weight in MSCI World and in hypothetical indexes constructed under ‘Current Methodology’and ‘Current+S3 Methodology’ in select controversial businesses/activities as defined below:
•
•
•
•
•
•

Controversial Weapons: As defined by the MSCI Global ex Controversial Weapons Index Methodology
ESG Red Flags: Companies with an ESG controversy score of 0 as per MSCI ESG Controversies
Environmental Controversy Red and Orange: Companies with an Environmental controversy score of 0 or 1 as per MSCI ESG Controversies
Thermal Coal Mining: Companies deriving 1% or more revenues from Thermal Coal Mining
Unconv. Oil & Gas Exploration: Companies deriving 5% or more revenues from Unconventional Oil and Gas
Thermal Coal Power Generation: Companies deriving 5% or more revenues from Thermal Coal based Power Generation* Parent Index – MSCI World, Rebalanced without turnover constraint, Rebalance Date – May 28,2021. ESG Data used is as ofInformation Classification: GENERAL
April 30, 2021.

11

ESG Headline Risks in Low Carbon Target Indexes• The below table* presents the top 10 stocks by weight in MSCI World which are - (1) ESG Red Flag (2) Controversial
Weapons Companies (3) ESG Orange Flag on Environmental Controversies (4) Thermal Coal companies.
• Stocks flagged on Thermal Coal mining and Orange-flag Environmental Controversies, highlighted in Orange, typicallyhave high Scope 1+2+3 emissions
Security Name

Parent Index Weight

GICS Sector

EXXON MOBIL CORP

0.4%

ENERG

WALMART

0.4%

WELLS FARGO & CO

Flagged on

Scope 1+2 Intensity

Scope 1+2+3 Intensity

Env. Controversy

494.7

2,970.8

CONST

ESG Red Flag

35.6

239.8

0.3%

FINAN

ESG Red Flag

8.5

665.6

BOEING CO

0.2%

INDUS

ESG Red Flag, Controversial Weapons

17.5

374.8

BHP GROUP (AU)

0.2%

MATER

ESG Red Flag, Thermal Coal

337.2

6,163.1

LOCKHEED MARTIN CORP

0.2%

INDUS

Controversial Weapons

16.2

410.4

BP

0.2%

ENERG

Env. Controversy

179.5

2,286.0

DAIMLER

0.1%

CDISC

Env. Controversy

13.0

2,945.8

ROYAL DUTCH SHELL A

0.1%

ENERG

ESG Red Flag

231.2

1,927.7

BASF

0.1%

MATER

Env. Controversy

291.0

1,159.4*As of May 28,2021. ESG Data used is as of April 30, 2021.
Information Classification: GENERAL

12

Exclusions, if applied, would bring in ex ante tracking error• Exclusions, if applied, will likely introduce tracking error (TE) and shrink the TE budget available for carbon footprint
minimization.
• TE budget will need to be further relaxed to achieve significant carbon intensity reduction.
No.

ScreenNOC Excluded

Weight in MSCI World (%)

Ex ante TE against MSCI World (%)*

1

Controversial Weapons

5

0.6%

0.14%

2

ESG Red Flags

24

2.0%

0.26%

A

Aggregated: (1) + (2)

28

2.4%

0.28%

3

Thermal Coal Mining

10

0.7%

0.12%

B

Aggregated: (A) + (3)

36

2.8%

0.30%

4

Environmental Controversy Red and Orange

25

2.3%

0.38%

C

Aggregated: (B) + (4)

51

4.1%

0.47%

5

Oil & Gas Exploration

15

1.5%

0.41%

6

Thermal Coal Power Generation

33

1.1%

0.16%

D

Aggregated: (C) + (5,6)

96

6.2%

0.74%

*Ex ante TE is calculated for a hypothetical index which excludes stocks flagged on the corresponding screens andrenormalizes parent index weight as of May 28,2021. ESG Data as of 30 th April 2021.
Information Classification: GENERAL

13

Proposed Enhancements* to MSCI Low Carbon Target
Indexes
ProposalsCore Proposal

Alternate

Methodology Change Proposed

Rationale

Exclude stocks based on involvement with• Controversial Weapons• Very Severe ESG Controversies• Thermal Coal Mining

Exclude companies with high ESG and climate headline
risk

Phase – in Scope 3 Emissions

More comprehensive assessment of carbon footprint
and consistency with other climate indexes.

Increased ex ante TE budget (60bps)

To achieve significant carbon intensity reduction

No exclusions based on business involvement

May result in lower reduction in carbon footprint
because of low TE budget

Phase – in Scope 3 Emissions

More comprehensive assessment of carbon footprint
and consistency with other climate indexes.

Increased ex ante TE budget (50bps)

To achieve significant carbon intensity reduction

Under both proposals – higher TE budget will be required to achieve significant carbon intensity reduction*All other methodology parameters of the MSCI Low Carbon Target Index are unchanged.
Information Classification: GENERAL

14

Select Climate Metrics* (1/2) – World
CORE

ALT

Addition of S3
Current+S3
Addition of S3+Exclusions (B)Methodology+ TE of 50bps+ TE of 60bps

MSCI World

Current
Methodology

1 - Number of Stocks

1563

1267

1264

883

961

2 - Ex Ante TE

0.00

0.30

0.30

0.60

0.50

1 - Scope 1+2 Emissions

78.0%

64.2%

93.0%

81.7%

2 - Scope 3 Emissions

33.3%

59.5%

49.4%

76.0%

3 - Scope 1+2+3 Emissions

40.6%

60.3%

56.6%

77.0%

1 - Scope 1+2 Intensity

75.5%

55.2%

92.3%

73.6%

25.7%

49.3%

43.9%

65.3%

33.9%

50.3%

51.8%

66.7%

4.6

4.8

4.8

4.7

4.9

4 - Clean Technology Metrics 2 - Green Revenue >=5

20.2

19.5

19.1

19.4

18.1

3 - Green Revenue >=20

8.3

8.6

9.0

8.5

9.1

1,325.9

0.1

0.2

0.0

0.0

Category

1 - Financial Metrics

2 - Carbon Emissions
Reduction

Metric3 – Carbon Intensity Reduction 2 - Scope 3 Intensity
3 - Scope 1+2+3 Intensity
1 - Wtd Avg Green Revenue

5 - Potential Emissions

1 - Industry Energy Application* Parent Index – MSCI World, Rebalanced without turnover constraint, Rebalance Date – May 28,2021. ESG Data used is as ofApril 30, 2021.
Information Classification: GENERAL

15

Select Climate Metrics* (2/2) – World
Category

Metric

6 - Exposure Metrics

7 - Low Carbon
Transition

8 – Additional Climate
Metrics

MSCI World

ALT
CORE
Addition of S3
Current
Current+S3+Exclusions Addition of S3
Methodology Methodology(B)+ TE of 50bps+ TE of 60bps

1 - Controversial Weapons

0.6

0.7

0.6

0.0

0.6

2 - ESG Red Flags
3 - Environmental Controversy Red andOrange4 - Thermal Coal Mining

2.0

1.5

1.6

0.0

1.4

2.3

0.7

0.6

0.2

0.2

0.7

0.1

0.1

0.0

0.0

5 - Oil & Gas Exploration

1.5

0.4

0.4

0.0

0.6

6 - Thermal Coal Power Generation

1.1

0.1

0.3

0.3

0.1

7 - FF Reserves Energy Application

4.7

1.9

1.8

1.0

1.4

1 - LCT Score

6.1

6.2

6.2

6.3

6.3

2 - Solutions(%)

6.7

7.4

7.6

7.4

8.1

3 - Operational Transition(%)

6.5

3.4

5.3

0.9

3.2

4 - Product Transition(%)

7.2

6.1

3.9

4.4

2.3

5 - Asset Stranding(%)

0.3

0.1

0.2

0.0

0.0

1 - Aggregate Climate VaR - 1.5

-11.1

-6.5

-7.2

-5.5

-5.4

2 - Implied Temperature Rise
2.8
2.4
2.2
2.1
2.0
* Parent Index – MSCI World, Rebalanced without turnover constraint, Rebalance Date – May 28,2021. ESG Data used is as ofApril 30, 2021.
Information Classification: GENERAL

16

Select Climate Metrics* (1/2) – Emerging Markets
CORE

ALT

Addition of S3
Current+S3
Addition of S3+Exclusions (B)Methodology+ TE of 50bps+ TE of 60bps

MSCI EM

Current
Methodology

1 - Number of Stocks

1424

1161

1165

882

958

2 - Ex Ante TE

0.00

0.30

0.30

0.60

0.50

1 - Scope 1+2 Emissions

71.4%

57.2%

71.5%

76.6%

2 - Scope 3 Emissions

27.3%

53.7%

71.9%

72.2%

3 - Scope 1+2+3 Emissions

38.2%

54.6%

71.8%

73.3%

1 - Scope 1+2 Intensity

70.4%

50.7%

61.9%

68.0%

24.7%

46.7%

62.4%

61.9%

36.1%

47.7%

62.3%

63.4%

4.3

4.4

4.4

4.5

4.4

4 - Clean Technology Metrics 2 - Green Revenue >=5

19.8

20.2

19.9

19.9

19.7

3 - Green Revenue >=20

3.9

4.0

4.0

4.1

4.0

7,815.3

341.1

290.1

31.5

49.8

Category

1 - Financial Metrics

2 - Carbon Emissions
Reduction

Metric3 – Carbon Intensity Reduction 2 - Scope 3 Intensity
3 - Scope 1+2+3 Intensity
1 - Wtd Avg Green Revenue

5 - Potential Emissions

1 - Industry Energy Application* Parent Index – MSCI EM, Rebalanced without turnover constraint, Rebalance Date – May 28,2021. ESG Data used is as ofApril 30, 2021.
Information Classification: GENERAL

17

Select Climate Metrics* (2/2) – Emerging Markets
Category

Metric

6 - Exposure Metrics

7 - Low Carbon
Transition

8 – Additional Climate
Metrics

MSCI EM

CORE
ALT
Addition of S3
Current
Current+S3+Exclusions Addition of S3
Methodology Methodology(B)+ TE of 50bps+ TE of 60bps
0.3
0.3
0.0
0.3

1 - Controversial Weapons

0.2

2 - ESG Red Flags
3 - Environmental Controversy Red andOrange4 - Thermal Coal Mining

2.9

3.1

3.0

0.0

3.1

1.9

1.8

1.8

0.2

1.4

0.6

0.1

0.1

0.0

0.0

5 - Oil & Gas Exploration

0.1

0.0

0.0

0.0

0.0

6 - Thermal Coal Power Generation

0.9

0.3

0.4

0.4

0.4

7 - FF Reserves Energy Application

7.2

5.0

5.0

2.3

3.8

1 - LCT Score

5.9

6.0

6.0

6.1

6.0

2 - Solutions(%)

3.5

3.6

3.7

3.8

4.1

3 - Operational Transition(%)

11.9

10.0

11.7

11.6

10.5

4 - Product Transition(%)

7.8

7.7

6.7

4.1

5.0

5 - Asset Stranding(%)

1.2

0.1

0.1

0.0

0.0

1 - Aggregate Climate VaR - 1.5

-19.2

-16.5

-16.2

-14.0

-13.4

2 - Implied Temperature Rise

3.7

3.3

3.0

2.7

2.7

* Parent Index – MSCI EM, Rebalanced without turnover constraint, Rebalance Date – May 28,2021. ESG Data used is as ofApril 30, 2021.
Information Classification: GENERAL

18

MSCI Low Carbon Leaders Indexes

Information Classification: GENERAL

Intensity-based screening in MSCI Low Carbon Leaders
Methodology (Current Methodology) does not exclude all highScope 3 emitters•

As shown in the chart, companies with highScope 1+2+3 emission intensity (region shadedin orange) would not be excluded under the‘Current Methodology’*.

•

However, if the ‘Current Methodology’ isamended to consider company’s Scope 1+2+3
intensity (Current+S3 Methodology^*), thenstocks in orange shaded region would be
excluded.

•

The region shaded in blue shows that somestocks with high Scope 1+2 intensity and highScope 1+2+3 intensity are not excluded
because of the cap on maximum number ofstocks that can be excluded from a GICS Sector.

Legends : Red – Stocks which are not excluded, Blue – Stocks which are excluded
under both ‘Current Methodology’ and ‘Current+S3 Methodology’, Turquoise –Stocks only excluded under ‘Current Methodology’, Yellow – Stocks only excluded
under ‘Current+S3 Methodology’.

* Parent Index – MSCI World, Rebalance Date – May 28,2021 (without turnover constraint). ESG Data used is as of April 30,
2021^ Amend Section 3.2.1 of the MSCI Low Carbon Leaders Index methodology to consider GHG emission from Scope 1, 2 and 3.
Parent Index – MSCI World, Rebalance Date – May 28,2021(without turnover constraint). ESG Data used is as of April 30, 2021
Information Classification: GENERAL

20

Possible impact of Addition of Scope 3 emissions onscreening* ( in ‘Current+S3 Methodology’)• The “Top 10 High Intensity which would not be screened” represent stocks which fall in the bottom
quartile on Scope 1+2+3 Intensity but would not be excluded as 30% of sector market cap was
already excluded• The “Top 10 Low Intensity stocks which would be screened” represent stocks which fall in the 3 rdquartile on Scope 1+2+3 Intensity but would be excluded as higher intensity stocks were in GICS
sectors where the 30% sector market cap cutoff was reached.
Top 10 High Intensity stocks which would not be screened
Security NameCHEVRON CORP
NEXTERA ENERGYEXXON MOBIL CORP
TOTALBP
LINDE (NEW)IBERDROLA
AIR LIQUIDEROYAL DUTCH SHELL A
ENELParent Index
Weight
0.3%
0.3%
0.4%
0.2%
0.2%
0.3%
0.1%
0.1%
0.1%
0.1%

Sector
ENERG
UTILS
ENERG
ENERG
ENERG
MATER
UTILS
MATER
ENERG
UTILS

Scope 1+2 Scope 1+2+3
Intensity
Intensity
387.8
3,691.0
2,483.4
3,528.7494.7
2,970.8
254.2
2,883.6
179.5
2,286.0
1,327.5
2,084.7
701.3
2,026.7
1,131.8
2,025.4
231.2
1,927.7
867.7
1,229.9

Top 10 Low Intensity stocks which would be screened
Security Name
INFINEON TECHNOLOGIESANZ BANKING GROUPEATON CORP PLC
CP RAILWAY
MEDTRONIC PLC
MICRON TECHNOLOGYRECKITT BENCKISER GROUPBANK MONTREAL
PROCTER & GAMBLE COABBOTT LABORATORIESParent Index
Weight
0.1%
0.1%
0.1%
0.1%
0.3%
0.2%
0.1%
0.1%
0.6%
0.4%

Sector
ITECH
FINAN
INDUS
INDUS
HCARE
ITECH
CONST
FINAN
CONST
HCARE

Scope 1+2 Scope 1+2+3
Intensity
Intensity
106.1
887.5
6.5
870.6
52.4
861.6
529.1
841.1
9.7
823.4
258.5
778.3
24.3
769.6
5.0
755.6
70.2
752.6
32.9
695.4

*Parent Index – MSCI World, Rebalance Date – May 28,2021(without turnover constraint). ESG Data used is as of April 30, 2021

Information Classification: GENERAL

21

Comparison of Carbon Footprint Reduction after Intensity
screen• Below table shows the carbon footprint reduction due to intensity screening in a hypothetical index* under ‘Current
Methodology’ and ‘Current+S3 Methodology’ (corresponding to section 3.3.1 of MSCI Low Carbon Leaders
methodology).
• Under ‘Current+S3 Methodology’, only 36% reduction in Scope 1+2+3 intensity was achieved, as some of the stocks
with high emission intensity are retained due to sector market cap cut off.
• If the sector market cap cutoff was relaxed to 50%, we would have observed ~50% Scope 1+2+3 Intensity reduction
relative to MSCI World, comparable to the reduction achieved in the ‘Current Methodology’ based on Scope 1+2
emissions.
MetricMSCI World

Current Methodology*

Current+S3
Methodology*

Current+S3 Methodology (sector mcap
cutoff – 50%)*

Intensity (tCO2/$M Sales)
Scope 1+2 Intensity

169.3

81.6

116.1

85.3

Scope 3 Intensity

864.0

807.7

541.7

461.0

Scope 1+2+3 Intensity

1,033.3

889.3

657.9

546.2

51.8%
6.5%
13.9%

31.4%
37.3%
36.3%

49.6%
46.6%
47.1%

%Reduction in Intensity (tCO2/$M Sales)
Scope 1+2 Intensity
Scope 3 Intensity
Scope 1+2+3 Intensity*Parent Index – MSCI World, Rebalance Date – May 28,2021(without turnover constraint). ESG Data used is as of April 30, 2021
Information Classification: GENERAL

22

Impact of relaxing the sector market cap cutoff under‘Current+S3 Methodology’• Once the sector market cap cutoffs were relaxed, exclusions continued in carbon intensive sectors
such as Energy, Materials, Industrials and Utilities, before dipping into less carbon intensive sectors
Total Excluded in
30%

Total Excluded in 50%

313

313

22

30

22

8

MATER

29

43

29

14

INDUS

77

81

77

4

CDISC

58

49

49

9

CONST

31

25

25

6

HCARE

11

8

8

3

FINAN

37

27

27

10

ITECH

16

11

11

5

COMMS

0

0

UTILS

27

35

27

RESTA

5

4

4

GICS Sector
NOC
Excluded
ENERG

Excluded in both

Excluded only in 30%

Excluded only in 50%

81*Parent Index – MSCI World, Rebalance Date – May 28,2021(without turnover constraint). ESG Data used is as of April 30, 2021
Information Classification: GENERAL

23

Possible impact of Expanding Sector Market Cap Cutoff
under ‘Current+S3 Methodology’• The below table presents the bottom quartile stocks based on Scope 1+2+3 Intensity which were
excluded once the sector market cap cutoff was relaxed to 50%• Relaxing the sector market cap cutoffs favored the exclusion of high intensity stocks like CHEVRON
and LINDE (NEW).
• Note, GLENCORE derives ~4% revenues from Thermal Coal Mining and would be flagged as per
Exclusions (B).
HIGH EMITTERS EXCLUDED ONCE MARKET CAP CUTOFF WAS INCREASEDSecurity NameDOMINION ENERGYCHEVRON CORP
NEXTERA ENERGYMARATHON PETROLEUM
CRH
LINDE (NEW)AIR LIQUIDENUTRIENGLENCORE
CANADIAN NATL RAILWAY

Parent Index Weight
0.1%
0.3%
0.3%
0.1%
0.1%
0.3%
0.1%
0.1%
0.1%
0.1%

Sector
UTILS
ENERG
UTILS
ENERG
MATER
MATER
MATER
MATER
MATER
INDUS

Scope 1+2 Intensity^
1,934.8387.8
2,483.4
362.5
1,297.0
1,327.5
1,131.8
668.2
135.8
519.8

Scope 1+2+3 Intensity^
3,729.6
3,691.0
3,528.7
3,207.9
2,338.8
2,084.7
2,025.4
1,992.8
1,936.0
835.5*Parent Index – MSCI World, Rebalance Date – May 28,2021(without turnover constraint). ESG Data used is as of April 30, 2021

Information Classification: GENERAL

24

Proposed Enhancements* to MSCI Low Carbon Leaders
Indexes
Proposals

Methodology Change Proposed
Exclude based on involvement in• Controversial Weapons• Very Severe ESG Controversies• Thermal Coal Mining

Exclude companies with high ESG and climate headline
risk

Phase – in Scope 3 Emissions

More comprehensive assessment of carbon footprint
and consistency with other climate indexes.

Relax sector market cap cutoff to 50%

Excludes stocks with carbon headline risk with minimal
TE impact

No exclusions based on business involvement

Exclusions may build additional ex ante tracking error

Phase – in Scope 3 Emissions

More comprehensive assessment of carbon footprint
and consistency with other climate indexes.

Relax sector market cap cutoff to 50%

Excludes stocks with carbon headline risk with minimal
TE impact

Core

Alternate

Rationale*All other methodology parameters of the MSCI Low Carbon Leaders Index are unchanged.

Information Classification: GENERAL

25

Select Climate Metrics (1/2) – World

Category

Metric

1 - Number of Stocks
2 - Ex Ante TE
1 - Scope 1+2 Emissions
2 – Carbon Emission 2 - Scope 3 Emissions
Reduction
3 - Scope 1+2+3
Emissions
1 - Scope 1+2 Intensity
3 - Carbon Intensity
2 - Scope 3 Intensity
Reduction
3 - Scope 1+2+3 Intensity
1 - Wtd Avg Green
Revenue
4 - CleanTechnology Metrics 2 - Green Revenue >=5
3 - Green Revenue >=20
5 - Potential
1 - Industry Energy
EmissionsApplication
1 - Financial Metrics

MSCI World

Current
Current+S3
Methodology Methodology

1563
0.00

ALT
CORE
Addition of
Addition of S3
Scope 3+
+Exclusions
50% Excl(B)+ 50% Excl
1243
1270
0.55
0.50
50.5%
50.9%
49.5%
48.6%

1239
0.38
48.4%
3.0%

1227
0.48
47.7%
47.9%

10.5%

47.9%

49.7%

49.0%

50.0%
6.1%
13.3%

49.8%
50.0%
50.0%

50.8%
49.8%
50.0%

51.9%
49.6%
50.0%

4.6

4.6

4.7

4.8

4.8

20.2
8.3

20.4
8.2

19.7
8.8

20.1
8.8

20.0
8.7

1,325.9

567.0

525.4

389.3

445.7

*As of a hypothetical initial construction in the May 2021 Semi-Annual Index Review. ESG Data used is as of April 30, 2021.
^ As defined on Slide 18

Information Classification: GENERAL

26

Select Climate Metrics (2/2) – World
CORE
Category

6 - Exposure
Metrics

7 - Low Carbon
Transition

8 – Additional
Climate Metrics

ALT

Addition of Addition of
Current
Current+S3
Scope 3S3
MSCI World
Methodology Methodology +Exclusions+(B)+ 50% Excl 50% Excl

Metric
1 - Controversial Weapons
2 - ESG Red Flags
3 - Environmental Controversy Red andOrange4 - Thermal Coal Mining
5 - Oil & Gas Exploration
6 - Thermal Coal Power Generation
7 - FF Reserves Energy Application
1 - LCT Score
2 - Solutions(%)
3 - Operational Transition(%)
4 - Product Transition(%)
5 - Asset Stranding(%)
1 - Aggregate Climate VaR - 1.5
2 - Implied Temperature Rise

0.6
2.0

0.7
1.7

0.6
1.7

0.0
0.0

0.6
1.7

2.3

1.4

1.3

0.8

1.3

0.7
1.5
1.1
4.7
6.1
6.7
6.5
7.2
0.3
-11.1
2.8

0.4
0.9
0.6
3.2
6.2
6.8
3.6
7.4
0.0
-8.4
2.7

0.3
1.1
0.5
3.4
6.2
7.5
4.2
3.8
0.0
-9.1
2.2

0.0
0.7
0.4
2.9
6.3
7.7
3.9
3.4
0.0
-8.6
2.2

0.2
0.7
0.3
3.2
6.2
7.6
3.7
3.5
0.0
-8.7
2.2

*As of a hypothetical initial construction in the May 2021 Semi-Annual Index Review. ESG Data used is as of April 30, 2021. Implied Temperature Rise data as of October 29, 2021
^ As defined on Slide 18

Information Classification: GENERAL

27

Select Climate Metrics (1/2) – Emerging Markets

Category

Metric

1 - Number of Stocks
2 - Ex Ante TE
1 - Scope 1+2 Emissions
2 – Carbon Emission 2 - Scope 3 Emissions
Reduction
3 - Scope 1+2+3
Emissions
1 - Scope 1+2 Intensity
3 - Carbon Intensity
2 - Scope 3 Intensity
Reduction
3 - Scope 1+2+3 Intensity
1 - Wtd Avg Green
Revenue
4 - CleanTechnology Metrics 2 - Green Revenue >=5
3 - Green Revenue >=20
5 - Potential
1 - Industry Energy
EmissionsApplication

1 - Financial Metrics

MSCI World
1424
0.00

ALT
CORE
Addition of
Addition of S3
Current
Current+S3
Scope 3+
Methodology Methodology +Exclusions
50% Excl(B)+ 50% Excl
933
1036
945
1000
1.76
0.74
0.88
0.84
65.9%
55.4%
54.0%
55.3%
14.0%
44.1%
49.1%
50.0%
26.9%

46.9%

50.3%

51.3%

69.9%
24.1%
35.5%

58.0%
47.4%
50.0%

56.8%
52.2%
53.3%

57.6%
52.6%
53.8%

4.3

4.5

3.3

3.3

3.3

19.8
3.9

15.9
4.7

18.2
2.7

18.3
2.8

18.3
2.7

7,815.3

1,916.8

1,323.5

416.2

414.6

*As of a hypothetical initial construction in the May 2021 Semi-Annual Index Review. ESG Data used is as of April 30, 2021.
^ As defined on Slide 18

Information Classification: GENERAL

28

Select Climate Metrics (2/2) – Emerging Markets
CORE
Category

6 - Exposure
Metrics

7 - Low Carbon
Transition

8 – Additional
Climate Metrics

ALT

Addition of Addition of
Current
Current+S3
Scope 3S3
MSCI World
Methodology Methodology +Exclusions+(B)+ 50% Excl 50% Excl

Metric
1 - Controversial Weapons
2 - ESG Red Flags
3 - Environmental Controversy Red andOrange4 - Thermal Coal Mining
5 - Oil & Gas Exploration
6 - Thermal Coal Power Generation
7 - FF Reserves Energy Application
1 - LCT Score
2 - Solutions(%)
3 - Operational Transition(%)
4 - Product Transition(%)
5 - Asset Stranding(%)
1 - Aggregate Climate VaR - 1.5

2 - Implied Temperature Rise

0.2
2.9

0.3
3.1

0.3
3.0

0.0
0.0

0.3
1.6

1.9

1.7

1.4

0.5

0.5

0.6
0.1
0.9
7.2
5.9
3.5
11.9
7.8
1.2
-19.2

0.3
0.2
0.4
6.1
6.0
4.3
8.9
8.4
0.1
-19.2

0.1
0.0
0.4
5.4
6.0
2.4
8.7
6.2
0.0
-16.5

0.0
0.0
0.3
3.4
6.0
2.2
10.0
4.6
0.0
-16.2

0.1
0.0
0.3
3.6
6.0
2.4
9.8
4.5
0.0
-17.1

3.7

3.7

3.3

2.8

3.0

*As of a hypothetical initial construction in the May 2021 Semi-Annual Index Review. ESG Data used is as of April 30, 2021. Implied Temperature Rise data as of October 29, 2021
^ As defined on Slide 18

Information Classification: GENERAL

29

Assessment of Potential Emissions
USE OF FOSSIL_FUEL_RESERVES_ENERGY_APPLICATION

Information Classification: GENERAL

Change in assessment of Potential Emissions• The Legacy factor (INDUSTRY_ENERGY_APPLICATION) applies a GICS based filter, ignoring Potential Emissions in other GICS SubIndustries• The below table presents the securities in MSCI World which would incrementally be marked as having Potential Emissions using
the updated factor (FF_RESERVES_ENERGY_APPLICATION)• There are no securities in MSCI World, marked as having Potential Emissions based on the legacy factor, which would not bemarked as having Potential Emissions with the new factor
Security Name
BERKSHIRE HATHAWAY B
ITOCHU CORP
MITSUI & CO
MITSUBISHI CORPCK HUTCHISON HOLDINGSKEPPEL CORPEVRAZ GROUP

GICS Sector

Weight in MSCI World

Financials
Industrials
Industrials
Industrials
Industrials
Industrials
Materials

0.70%
0.06%
0.06%
0.06%
0.04%
0.01%
0.01%

Potential Emissions per
dollar of Market Cap

Contribution to Potential
Emissions of MSCI World

46.6
17,149.6
14,091.5
117,843.4
8,186.0
307.6
375,290.3

0.3
10.6
8.3
69.2
3.1
0.0
31.1

INDUSTRY_ENERGY_APPLICATION - Companies with fossil fuel reserves used for energy application. This includes companies with reserves in the following industries (GICS): Oil & Gas and Consumable Fuels; Metals and Mining; Energy
Equipment & Services and Utilities.
FF_RESERVES_ENERGY_APPLICATION - This factor identifies companies, regardless of their industries, with evidence of owning fossil fuel reserves used most likely for energy applications. For high intensity industries (Energy, Utilities,
Diversified Metals & Mining), this factor flags companies with evidence of fossil fuel reserves (excluding metallurgical coal). For other industries, it flags companies with evidence of fossil fuel reserves (excluding metallurgical coal) and
deriving revenue from business segments associated with energy application of fossil fuels such as thermal coal mining, oil & gas exploration & production and downstream activities e.g. refining; distribution & retail; pipeline & transportation;
trading and fossil fuel based power generation. Fossil fuel reserves are defined as proved and probable reserves (i.e. 2P) for coal and proved reserves (i.e. 1P) for oil and natural gas. Evidence of owning reserves includes companies providing
the exact volume of reserves, and companies making a statement about their ownership of reserves.
*As of a hypothetical initial construction in the May 2021 Semi-Annual Index Review. ESG Data used is as of April 30, 2021.

Information Classification: GENERAL

31

Consultation Questions

Information Classification: GENERAL

Consultation Questions
QUESTIONS ON METHODOLOGY PROPOSALS• Do you agree the MSCI Low Carbon Target/Leaders Indexes should incorporate Scope 3 emissions?
– Should the Low Carbon Target indexes then use a tracking error budget of 60 bps?
– Should Low Carbon Leader indexes then relax sector market cap cut off to 50%?
• Are the new exclusions (companies involved in Very Severe ESG Controversies, Controversial Weapons, Thermal Coal Mining ) for the MSCI Low
Carbon Target /Leaders Indexes consistent with their objectives?
• Does the proposal to change the factor used in assessing Potential Emissions make sense?
• Should the MSCI Low Carbon Target and MSCI Low Carbon Leaders indexes also exclude companies involved in Severe Environmental
Controversies (Orange Flag on Environmental Controversies) ?
ADDITIONAL QUESTIONS• Should the definition of intensity move to a definition based on a weighted average and a denominator based on Enterprise Value including Cash
(EVIC)?
• Should the MSCI Low Carbon Target and MSCI Low Carbon Leaders indexes also aim to increase index’s weight in companies with Green Revenues?
• Should the MSCI Low Carbon Target and MSCI Low Carbon Leaders indexes follow a decarbonization trajectory or be considered net-zero inthemselves?
• Should the MSCI Low Carbon Target/Leaders Indexes meet with the minimum requirements of the EU CTB?

Information Classification: GENERAL

33

Appendix
INTERNAL SLIDES

Information Classification: GENERAL

Summary : Current Methodology and Key Proposals
Current Methodology
Exclusions

No exclusions applied
Aggregated Scope 1 + 2 Emissions
Aggregated Sales

Carbon Intensity Definition෍Potential Emissions Definition

Potential Emissions
Issuer market capitalization

Proposed Changes
Apply exclusions to exclude companies withheadline risk
𝐀𝐠𝐠𝐫𝐞𝐠𝐚𝐭𝐞𝐝 𝐒𝐜𝐨𝐩𝐞 𝟏𝟐𝟑 𝑬𝒎𝒊𝒔𝒔𝒊𝒐𝒏𝒔
𝐀𝐠𝐠𝐫𝐞𝐠𝐚𝐭𝐞𝐝 𝑺𝒂𝒍𝒆𝒔෍

Potential Emissions
Issuer market capitalization

Only stocks marked on
INDUSTRY_ENERGY_APPLICATION consideredin above formula

Only stocks marked on
FOSSIL_FUEL_RESERVES_ENERGY_APPLICATION considered in above formula

Optimization Objective

Minimize Carbon Intensity and Potential
Emissions

Minimize Carbon Intensity and Potential
Emissions

Tracking Error Constraint

30bps

Increased TE Budget

Information Classification: GENERAL

35

Impact of ex ante TE budget on footprint reduction•

The below schematics present the impact of ex ante TE budget on the Scope 1+2 and Scope 1+2+3 Intensities•

Once Scope 3 emissions are added, ~75% reduction in Scope 1+2 Intensity is achieved with 50bps TE budget•

For a 75% reduction in Scope 1+2+3 Intensity, the ex ante TE budget would need to be raised to 80bps
Ex ante TE budget vs Scope 1+2+3 Intensity reduction

Scope 1+2 Intensity Reduction

100%
76%
75%
74%
50%

Proposal

25%

0%
0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

Scope 1+2+3 Intensity Reduction

Ex ante TE budget vs Scope 1+2 Intensity reduction
100%

74%
75%
67%

50%

25%

0%

1.00%

0.30%

0.40%

0.50%

Ex ante TE Budget
Current Index Methodology*

0.60%

0.70%

0.80%

0.90%

1.00%

Ex ante TE Budget

With Addition of Scope 3 Emissions*

Current Index Methodology**As of a hypothetical initial construction in the May 2021 Semi-Annual Index Review. ESG Data used is as of April 30, 2021.

Information Classification: GENERAL

With Addition of Scope 3 Emissions*36

Addition of Scope 3 emissions has minimal impact on NOC
Number of constituents vs ex ante TE

Effective Number of constituents vs ex ante TE

2000

400.001600

320.001200

240.00800

160.00

400

80.00

0

0.00

0.30%
MSCI World

0.40%

0.50%

0.60%

0.70%

Current Index Methodology*

0.80%

0.90%

1.00%

0.30%

Addition of Scope 3 Emissions*

MSCI World*As of a hypothetical initial construction in the May 2021 Semi-Annual Index Review. ESG Data used is as of April 30, 2021.

Information Classification: GENERAL

0.40%

0.50%

0.60%

Current Index Methodology*

0.70%

0.80%

0.90%

1.00%

Addition of Scope 3 Emissions*37Sectors with low Scope 1+2 emissions can have high Scope
3 emissions•

The below schematics represent the breakdown of the number of stocks in each GICS Sector based on Quartiles ofIntensity (Q4 denotes stocks with high intensity)•

While sectors such as Communication Services, FINAN, CONST and CDISC have very few stocks with high Scope
1+2 Intensity (Q4), the proportion of stocks in these sectors with high Scope 3 Intensity is much higher

Scope 1+2 Intensity Distribution by GICS Sector

Scope 3 Intensity Distribution by GICS Sector

RESTA
UTILS
COMMS
ITECH
FINAN
HCARE
CONST
CDISC
INDUS
MATER
ENERG

RESTA
UTILS
COMMS
ITECH
FINAN
HCARE
CONST
CDISC
INDUS
MATER
ENERG
0%

25%

50%

75%

100%

0%

%Stocks Within GICS Sector
Q1

Q2

Q3

25%

50%

75%

100%

%Stocks Within GICS Sector

Q4

Q1*As of a hypothetical initial construction in the May 2021 Semi-Annual Index Review. ESG Data used is as of April 30, 2021. Quartiles based on ACWI IMIInformation Classification: GENERAL

Q2

Q3

Q4

38

Why are some high Intensity Energy Stocks not Excluded• In the current Index Exxon is just at the margin of 30% sector market cap cutoff and gets excluded.
• When stocks are sorted by Scope 1+2+3 intensity, Exxon moves lower in the sorted list and is not excluded.
• Increasing the sector market cut off to 50% can help exclude some high intensity companies ( by Scope 1+2+3 emission
intensity) like CHEVRON.

Intensity Percentile

Intensity Percentile
Scope 1+2+3

Cumulative Sector
Mcap Coverage (%)
Scope 1+2

Cumulative Sector
Mcap Coverage (%)
Scope 1+2+3

Scope 1+2
CHEVRON CORP

50

56

56

45

EXXON MOBIL CORP

62

34

39

68

TOTAL

32

32

76

75

BP

16

20

94

84

ROYAL DUTCH SHELL A

23

17

82

88

ROYAL DUTCH SHELL B

23

17

86

92

*As of a hypothetical initial construction in the May 2021 Semi-Annual Index Review. ESG Data used is as of April 30, 2021.

Information Classification: GENERAL

39

Impact of Scope 3 on Pre-Optimization Emissions Screening
GICS Sector

Total Excluded in Scope
1+2

Total Excluded in Scope 1+2+3

NOC Excluded

313

313

ENERG

20

MATER

Excluded in both

Excluded only in Scope 1+2

Excluded only in Scope 1+2+3

22

14

6

8

30

29

14

16

15

INDUS

77

77

31

46

46

CDISC

44

58

16

28

42

CONST

36

31

19

17

12

HCARE

17

11

2

15

9

FINAN

4

37

4

37

ITECH

26

16

16

6

COMMS

9

0

UTILS

22

27

18

4

RESTA

28

5

5

23

10

9

*As of a hypothetical initial construction in the May 2021 Semi-Annual Index Review. ESG Data used is as of April 30, 2021.

Information Classification: GENERAL

940

Impact of Scope 3 on Pre-Optimization Emissions Screening
Total Excluded in Scope
1+2

Total Excluded in Scope 1+2+3

Weight Excluded

14.4%

16.8%

ENERG

1.2%

MATER

GICS Sector

Excluded in both

Excluded only in Scope 1+2

Excluded only in Scope 1+2+3

1.1%

0.7%

0.5%

0.4%

1.5%

1.5%

0.6%

0.9%

0.9%

INDUS

3.3%

3.3%

1.0%

2.3%

2.3%

CDISC

1.2%

2.6%

0.5%

0.7%

2.1%

CONST

2.2%

2.2%

1.2%

1.0%

1.0%

HCARE

0.9%

1.1%

0.2%

0.6%

0.9%

FINAN

0.8%

2.5%

0.8%

2.5%

ITECH

1.4%

1.5%

0.9%

1.0%

COMMS

0.2%

0.9%

UTILS

0.9%

0.2%

0.8%

0.1%

RESTA

0.8%

1.1%

0.2%

0.7%

0.5%

0.2%

*As of a hypothetical initial construction in the May 2021 Semi-Annual Index Review. ESG Data used is as of April 30, 2021.

Information Classification: GENERAL

0.1%

41

Impact of relaxing the sector market cap cutoff
GICS Sector

Total Excluded in 30%

Total Excluded in 50%

Excluded in both

Excluded only in 30%

Excluded only in 50%

Weight Excluded

16.8%

16.7%

ENERG

1.1%

1.6%

1.1%

0.5%

MATER

1.5%

2.4%

1.5%

0.9%

INDUS

3.3%

3.5%

3.3%

0.2%

CDISC

2.6%

2.3%

2.3%

0.2%

CONST

2.2%

1.4%

1.4%

0.8%

HCARE

1.1%

0.7%

0.7%

0.5%

FINAN

2.5%

1.9%

1.9%

0.5%

ITECH

1.5%

1.3%

1.3%

0.2%

UTILS

0.9%

1.5%

0.9%

RESTA

0.2%

0.1%

0.1%

COMMS

*As of a hypothetical initial construction in the May 2021 Semi-Annual Index Review. ESG Data used is as of April 30, 2021.

Information Classification: GENERAL

0.6%
0.0%

42

Low Carbon Leaders – Proposed Methodology summary
Current Methodology

Proposed Changes••
Exclusions•

Exclude 20% companies with high Carbon
Intensity (subject to 30% sector market cap
cutoff)Exclude Top 50% contributors to Potential
Emissions•Aggregated Scope 1 + 2 Emissions
Aggregated Sales

Carbon Intensity Definition෍Potential Emissions Definition•

Exclude 20% companies with high Carbon
Intensity (subject to 50% sector market cap
cutoff)Exclude Top 50% contributors to Potential
Emissions
Apply exclusions to exclude companies
with headline risk
𝐀𝐠𝐠𝐫𝐞𝐠𝐚𝐭𝐞𝐝 𝐒𝐜𝐨𝐩𝐞 𝟏𝟐𝟑 𝑬𝒎𝒊𝒔𝒔𝒊𝒐𝒏𝒔
𝐀𝐠𝐠𝐫𝐞𝐠𝐚𝐭𝐞𝐝 𝑺𝒂𝒍𝒆𝒔

Potential Emissions
Issuer market capitalization෍Potential Emissions
Issuer market capitalization

Only stocks marked on
INDUSTRY_ENERGY_APPLICATION consideredin above formula

Only stocks marked on
FOSSIL_FUEL_RESERVES_ENERGY_APPLICATION considered in above formula

Optimization Objective

Minimize ex-Ante Tracking Error

Minimize ex-Ante Tracking Error

Carbon Intensity/Potential Emissions
Reduction

50%

50%

Information Classification: GENERAL

43

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