Index Methodology

MSCI Plastics
Transition Index
Methodology
May 2022

May 2022

MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

Contents

1

MSCI Plastics Transition Index

3

2

MSCI ESG Research

4

3

4

2.1

MSCI Impact Solutions: SDG Alignment

4

2.2

MSCI ESG Ratings

4

2.3

MSCI ESG Controversies

5

2.4

MSCI Climate Change Metrics

5

Constructing the MSCI Plastics Transition Index

6

3.1

Selection Universe

6

3.2

ESG Filtered Universe

6

3.3“Circular Technologies” Universe

7

3.4“Circular Transition” Universe

8

3.5

Weighting Scheme

8

Maintaining the MSCI Plastics Transition Index

10

4.1

Semi-Annual Index Review

10

4.2

Quarterly Index Reviews

10

4.3

Annual Index Review

11

4.4

Ongoing Event-Related Maintenance11

Appendix 1: What is a Circular Economy?

13

Appendix 2: Plastic Alternatives and End-of-Life Relevance
Score Calculation

14

Appendix 3: Sector-Relative Management Score (SRMS)
Calculation17© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

1

MSCI Plastics Transition Index
The MSCI Plastics Transition Index (the ‘Index’) aims to represent the performance ofa set of companies from MSCI ACWI IMI that are associated with key aspects ofaddressing the plastic waste issue through their products or services, and/or throughtheir management of related issues, 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”) and/or those that help enable the transition to a circular economy(“circular transition”), as defined using the following measures:•

Plastic Alternatives•

Plastic End-of-life Solutions•

Packaging Material & Waste

The MSCI Plastics Transition Index also applies a set of exclusions criteria to screencompanies with business activities that are not considered aligned with the overall
objective of addressing the plastic waste issue or promoting circularity. Additionally,
the Index utilizes a combination of weighting strategies at both security andcomponent levels, as well as applies issuer capping.

© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

2

MSCI ESG Research
The MSCI Plastics Transition Index uses company ratings and research provided by
MSCI ESG Research LLC. In particular, the Index uses the following MSCI ESG
Research products: MSCI Impact Solutions, MSCI ESG Ratings, MSCI ESG
Controversies, 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: 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.

2.2

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.

© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

2.3

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.

2.4

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.

© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

3

Constructing the MSCI Plastics Transition Index

3.1

Selection Universe
The underlying universe for the MSCI Plastics Transition Index is defined by theconstituents of the MSCI ACWI Investable Market Indexes (IMI, the ‘Parent Index’1),
from which three separate universes of stocks are constructed (as described in
Sections 3.2 to 3.4).

3.2

ESG Filtered Universe
The MSCI Plastics Transition Index methodology applies two sets of exclusions
criteria to determine eligibility in the ESG Filtered Universe.

3.2.1 Plastics Transition-specific Exclusions
The MSCI Plastics Transition Index uses MSCI Impact Solutions’ SDG Alignment to
identify companies that have been assessed as negatively impacting the index
objective. The criteria are as follows:−

SDG 14 and 15 Net Alignment: All companies that are assessed as Strongly
Misaligned and Misaligned on their Net Alignment to SDG 14 (Life Below
Water) and SDG 15 (Life on Land).

3.2.2 Circular Economy-related Screens
The MSCI Plastics Transition Index uses MSCI ESG Research data to apply a set of
exclusions standards which either address headline risks and/or contributenegatively 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).
2. Environmental Controversies: All companies that are involved inenvironmental controversies assessed as Red, Orange, and Yellow Flags(Score of 4 and below).
3. Key Issue Management Score/s: All companies that have the lowest
applicable2 key issue management score – this is defined as being at thebottom 25%.
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.
2 The exclusion is applied by key issue, which means that an index using multiple key issues will exclude

companies with the lowest 25% score for key issue 1, lowest 25% score for key issue 2, and so forth. The© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

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.
6. Thermal Coal Mining: All companies deriving 5% 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 vertically integrated power producers),
intracompany sales of mined thermal coal, and revenue from coal trading.
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 Circular Technologies Universe is constructed by selecting companies in the
ESG Filtered Universe with relevance score of 25% or more from the plastic
alternatives and end-of-life theme, which consists of the following businessactivities:•

Plastic Alternatives•

Plastic End-of-life Solutions

The detailed selection rules for the theme are outlined in Appendix 2.
MSCI may seek input from outside market experts on the ongoing evolution of thethemes underlying the index. However, such input is only advisory in nature. MSCI
alone decides whether to use such input at all or to what extent. Receipt of suchbottom 25% per key issue management score is calculated from companies in MSCI ACWI IMI with more than
5% weight assigned to the respective key issue.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

input, like any other feedback on MSCI indexes, may or may not lead to a change tothe index or index methodology.

3.4“Circular Transition” Universe
The MSCI Plastics Transition Index uses MSCI ESG Ratings’ key issue managementscores to identify companies that have better management strategies to address theplastic waste issue relative to their sector peers.
The Circular Transition Universe is constructed by selecting stocks in the top 10% of
the Intermediate Universe (as described in Section 3.4.1) based on their SectorRelative Management Score, which is computed using the following key issue
management score/s:•

Packaging Material & Waste

Please refer to Appendix 3 detailing the computation steps.

3.4.1 Intermediate Universe
The Intermediate Universe is constructed by selecting stocks in the ESG Filtered
Universe (Section 3.2) that are not part of the Circular Technologies Universe(Section 3.3).

3.5

Weighting Scheme
The MSCI Plastics Transition Index constituents that are determined to be part of the
Circular Technologies and Circular Transition universes are weighted as follows:

3.5.1 Security Weighting•

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

•

Circular Transition
Securities that meet the selection criteria outlined in Section 3.4 are weighted
in proportion of their free float-adjusted market capitalization. The weights
are then normalized to sum to 100%.

3.5.2 Component Weighting
Each component is scaled down to the following proportion:© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

Component
Circular Technologies
Circular Transition

Component Weight
50%
50%

3.5.3 Issuer Capping
The maximum weight of any issuer in the MSCI Plastics Transition Index is thencapped at 5% in accordance with the MSCI Capped Indexes methodology3. The
excess weight of the capped issuers is distributed among the remaining constituentsin proportion of their existing weights in the Index4.

3 Please refer to the MSCI Capped Indexes methodology at www.msci.com/index-methodology
4 Issuer capping may result in a drift in the component weights.

© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

4

Maintaining the MSCI Plastics Transition Index

4.1

Semi-Annual Index Review
The MSCI Plastics Transition Index is reviewed on a semi-annual basis, as of theclose of the last business day of May and November, coinciding with the May andNovember Semi-Annual Index Reviews of the Parent Index. The pro forma index isgenerally announced nine business days before the effective date.
As a rule, MSCI uses the latest available company business segment names,business description and revenue as of rebalancing date of the Semi-Annual Index
Review.
Moreover, MSCI uses MSCI ESG Research data (including MSCI SDG Alignment,
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 Plastics Transition Index.
At each Semi-Annual Index Review, the ESG Filtered, Circular Technologies, andCircular Transition universes are updated based on the criteria outlined in Sections
3.2 to 3.4.

4.2

Quarterly Index Reviews
The MSCI Plastics Transition Index is also reviewed on a quarterly basis to coincidewith 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 Plastics
Transition Index.
At the Quarterly Index Reviews, existing constituents in the ESG Filtered Universe aredeleted from the MSCI Plastics Transition Index if they do not meet the exclusions
criteria described in Section 3.2. Existing constituents that meet the criteria areretained in the Index.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

4.3

Annual Index Review
The set of relevant words (as described in Appendix 2) are reviewed annually by
MSCI during the May Semi-Annual Index Review. In general, MSCI completes thisreview of relevant words nine business days before the effective date of the May
Semi-Annual Index Review.

4.4

Ongoing Event-Related Maintenance
The general treatment of corporate events in the MSCI Plastics Transition Index aims
to minimize turnover outside of Index Reviews. The methodology aims toappropriately represent an investor’s participation in an event based on relevant deal
terms and pre-event weighting of the index constituents that are involved. Further,changes in index market capitalization that occur as a result of corporate 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 Plastics Transition Index between Index
Reviews on account of a security becoming ineligible because of decrease in MSCIESG Controversies Score, change in SDG Alignment assessment, and/or change inbusiness 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 in© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

deal 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 andthe 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.

© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

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,5 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

5 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© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

Appendix 2: Plastic Alternatives and End-of-Life
Relevance Score Calculation
Stocks from MSCI ACWI IMI with high exposure to the identified business activities
listed in Section 3.3 are selected based on the following rules:
1. The set of relevant words and phrases6 used for constituent selection
MSCI uses a broad set of relevant words and phrases derived from the index
objective which are important to describe the products and services ofcompanies that try to solve the plastic waste problem.
2. Company level data used for assessing company exposure
The following data is used at the company level:•

Business segment information from company annual reports and vendor
data sources: business segment names, assigned SIC codes7 and related
revenue•

English language summary description of the company’s business activities
from public sources

3. Eligible Universea.

Selection on business segments
The identified business segment names are compared against the set of relevant
words. Companies which include at least one relevant word in their businesssegment names are included in the eligible universe.

b. Selection on company’s summary description
Each company’s summary business description is compared against the set of
relevant words. Companies which include at least two distinct relevant words intheir summary description are included in the eligible universe.

4. Selected business segments‘Selected business segments’ are business segments which include at least one
relevant word. These are the business segments based on which stocks are selected
in section Step 3a.

6 For more details on the steps followed to generate the set of relevant words and phrases, please refer tohttps://www.msci.com/www/research-paper/indexing-change-understanding/01647260939.
7 Companies’ business segments are assigned with a specific Standard Industry Classification (SIC) description

for products and services, used by official agencies within the US government. These descriptions provide
additional information on the nature of the segment.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

5. SIC Code selection
Company business segments are mapped to a SIC code. The SIC code selection is aset of all the SIC codes which satisfy the following criteria:•

The SIC code is mapped to at least one of the ‘selected business segments’ as
described in Step 4.

•

The SIC code is assigned to the business segments of at least two different
stocks from the eligible universe. The SIC code 9999 is not selected.

6. Calculating the stock relevance score
A relevance score for all stocks in the eligible universe is calculated. The relevance
score for a company is calculated by taking into account the portion of a company’s
revenue which is derived from the selected business segments (as described in Step4) and business segments mapped to any SIC Code selected in the SIC Codeselection step (as described in Step 5).
The relevance score is not an explicit measurement or estimate of the proportion ofrevenue that the company derives from business activities exposed to the theme.
a.

Relevance score discount factor
A stock level relevance score discount factor is calculated by normalizing the
cumulative frequency of relevant words in the company’s summary description
relative to all companies selected on summary business descriptions as
described in Step 3b.
At a company’s business segment level, the revenue discount factor is applied onrevenue from each selected SIC code as described in Step 5. The revenue
discount factor is 1 for revenue derived from ‘selected business segment’.

b. Relevance score
Relevance score for stocks in the eligible universe is calculated as follows:
Relevance score = [revenue from the selected business segments (as describedin Step 4) + relevance score discount factor * revenue from the selected SIC code
(as described in Step 5)] / Total company revenue.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

After identifying the stocks that meet the criteria detailed in Steps 1-6, the Eligible
Universe applies an additional filter, as follows:
1. GICS®8 Sector Filtering
Stocks mapped to the following GICS® sectors are excluded from the selected
universe:
35
45

GICS® Sector
Health Care
Information Technology

8 GICS, the global industry classification standard, jointly developed by MSCI Inc. and S&P Global.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

Appendix 3: Sector-Relative Management Score(SRMS) Calculation
Companies are selected based on their SRMS. The calculation steps are as follows:

1. An average management score (AMS) is calculated for companies in MSCIACWI IMI using management scores based on the identified key issue/s,
granted that they meet the following conditions:•Companies are assessed on any of the identified key issue/s listed in
Section 3.4.

•

Companies have corresponding key issue weight/s greater than 5%.

The calculation of AMS will consider the applicable number of key issues,
meaning a company with two relevant scores are divided by two, forexample.

2. The SRMS is calculated for companies that are identified in Step 1 by dividing
the AMS by the corresponding highest (maximum) AMS based on their
GICS® Sector.
Exception clause: A GICS® Sector with a maximum AMS below 5 is excluded
from scope, which in turn, results in the exclusion of all companies belonging
to the excluded sector, from the calculation of SRMS.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

The following sections have been updated as of May 2022:
Section 3.2.2: Circular Economy-related Screens•

Clarified the calculation logic for the ‘Key Issue Management Score/s’
exclusions criterion© 2022 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI PLASTICS TRANSITION INDEX METHODOLOGY | MAY 2022

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Index returns do not represent the results of actual trading of investible assets/securities. MSCI maintains and calculates indexes, but does not manage actual assets. Index returns do notreflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the index or Index Linked Investments. The imposition of these fees and charges
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The Information may contain back tested data. Back-tested performance is not actual performance, but is hypothetical. There are frequently material differences between back tested
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