MSCI ESG Presentation for Knights of Columbus Conference: ESG dS ti bl I ti O i ESG an dS us t a i na bl e I nves ti ng O verv i ew October 2011 Noel Friedman, CFA noel friedman@msci com msci.com msci.com noel. friedman@msci.com
MSCI ESG Presentation for Knights of Columbus Conference:ESG d S t i bl I ti O iESG and Sustainable Investing OverviewOctober 2011
Noel Friedman, CFA
noel friedman@msci com
msci.commsci.com
MSCI – Leading Brands Worldwide
MSCI branded products include the MSCI Global Equity Indices, MSCI ESG Indices and Research products.
Barra equity and multi-asset class portfolio analytics products helpasset managers and owners measure,
RiskMetrics multi-asset, position-based risk and wealth management products and services enable clients to
FEA energy and commodity asset valuation products offer a variety of quantitative analytics tools for
ISS governance researchand outsourced proxy voting and reporting services help institutional investors
CFRA is a global leader in forensic accounting risk research, legal/regulatory risk assessment, due-
Commonly used by institutional investors to benchmark fund performance and in their portfolio construction processes the MSCI
manage and report risk across multiple portfolios. Robust analytics are powered by the range of Barraequity fixed income
measure and quantify portfolio risk across security types, geographies and markets. RiskMetrics is well known for its Value
valuing and modeling physical assets and derivatives across anumber of market segments. They are used by institutional clients
and corporations around the world make more informed investment decisions on behalf of the owners of companies
diligence, and educational services. CFRA’s team of research analysts provide investors with timely, impactful and processes, the MSCI
Global Equity Indices are the most widely adopted benchmarks for cross border equity funds.
equity, fixed income, derivative and alternative investment risk and return attribution models.
well known for its Valueat Risk methodologies, as well as being a leading provider of credit and counterparty risk systems.
by institutional clients including energy firms, money center banks, Fortune 500 companies, trading enterprises, and leading financial firms.
companies. impactful, and independent analysis.
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MSCI ESG Research*
A new business unit established in 2010 based on the legacies of KLD (1988) and Innovest (1998)
Staff of 130+, including more than 80 research and data analysts
Personnel in New York, Boston, San Francisco, Toronto, Paris, London, Brussels, Tokyo, Sydney, Manila, Mumbai , Hong Kong & Beijing
Provides products and services to asset managers and asset owners worldwide
ESG risk ratings
Impact analysis
Screening data
Custom research
Indices
MSCI is the only major index provider with in‐house ESG research and expertise
MSCI Inc. is a signatory to the Principles for Responsible Investment (www.unpri.org)
* Certain products and services of MSCI ESG Research, including products and services utilized in MSCI ESG Indices, are provided by Institutional Shareholder Services Inc. ("ISS") and/or KLD Research & Analytics,
msci.com
Ce ta p oducts a d se ces o SC SG esea c , c ud g p oducts a d se ces ut ed SC SG d ces, a e p o ded by st tut o a S a e o de Se ces c ( SS ) a d/o esea c & a yt cs,Inc. (“KLD”), which are both indirect wholly‐owned subsidiaries of MSCI.
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About MSCI ESG Research – A client centric approach
MSCI ESG Impact Monitor
MSCI ESG Impact Monitor
MSCI ESG Intangible Value Assessment
MSCI ESG Intangible Value Assessment
MSCI ESG Business Involvement Screening Research
MSCI ESG Business Involvement Screening Research
“I want to minimize the reputational risks of my
investments”
“I want to minimize the reputational risks of my
investments”
“I want to select the best‐in‐class companies and mitigate
financial ESG risks”
“I want to select the best‐in‐class companies and mitigate
financial ESG risks”
“I want to avoid investing in companies whose activities I find unethical or where I’m legally
“I want to avoid investing in companies whose activities I find unethical or where I’m legally investmentsinvestments
Functionality: investors can research, analyze, screen and monitor controversies and
financial ESG risksfinancial ESG risks
Functionality: investors can analyze key ESG issues, select ‘best in class’ companies determine
Functionality: investors can screen and manage ESG standards and restrictions viaMSCI ESG Manager
required to divest ”required to divest ”
Identifies ESG investment risks and opportunities not always captured by conventional analysis
Analyses & monitors ‘ESG controversies’ and how the impact is managed at company level
Supports the integration of ESG screening requirements into portfolio management
screen, and monitor controversies and violations of global norms such as the UN Global Compact and ILO core conventions.
We use 31 impact indicators grouped under the following ‘five controversies scoring criteria’:• Human Rights & Community
select best‐in‐class companies, determine unmanaged ESG risk, and assess company MSCI ESG IVA Risk Ratings vs. industry peers.
We apply an in‐depth, three‐phased methodology process to generate robust Risk Ratings: • Step 1: Identify Key Issues for each industry
standards and restrictions via MSCI ESG Manager. MSCI ESG Global Sanctions screening supports investors to comply with US divestment legislation.
We offer a broad range of screening capabilities:• Screening for religious (e.g. Catholic), ethical and other social and environmental criteria (e.g. tobacco, weapons, nuclear)
• Labor Rights & Supply Chain Mgt• Governance• Environment• Customers
Analysis: ‘Red’, ‘Yellow’ or ‘Green’ flags,MSCI ESG Controversies Scores
• Step 2: Evaluate Risk Exposure vs. Risk Management • Step 3: Generate Ratings measuring unmanaged ESG risk
Analysis: ‘best‐in‐class’, ‘AAA’ – ’CCC’ Risk Ratings
• Global Sanctions screening for 7 countries with US trading/operations/investment restrictions
Analysis: Restricted lists via MSCI ESG Manager or data feeds integrated in trading/compliance systems
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Coverage: 2,000+ global DM companies (extended coverage of 1,260+ EM companies)
Coverage: • 1,800+ global companies – Profiles and Ratings • Database of 70+ MSCI ESG IVA Industry Reports
Coverage: All publicly‐traded companies
ESG Integration: Financial and Values Dimensions
Financial Dimension Values Dimension
Identify ESG issues that are material
Define institutional ESG values
Monitor corporate performance
Analyze risk managementand exposure
ESG Risk Rating ESG eligibility assessment
Portfolio Construction
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ESG investors reflect one or both dimensions in the construction
of their portfolios
Screening Categories
Available Restriction CategoriesAbortion Labor Relations
Adult Entertainment Nuclear PowerAlcohol Pork
Animal Welfare Stem Cell Contraceptives TobaccoChild Labor Usury
Consumer Product Safety BurmaDefense and Weapons Cuba
Diversity Dual‐Use Export ViolationsEmployee Safety Foreign Corrupt Practices ActEnvironment IranFair Lending Northern IrelandFirearms North KoreaGambling OFAC Cases
Genetic Engineering SudanHuman Rights Syria
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Approaches to ESG Investing
Active Ownership (Proxy Voting / Engagement)
ScreeningScreening
Stock Selection
IndexesIndexes
Integration
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Screening and Customization
Issue Selection
e.g. USCCB and Environmentg
Type of Involvement
Manufacturer, Retailer, OwnerManufacturer, Retailer, Owner
Revenue Thresholds
Zero tolerance >5% revenues etcZero tolerance, >5% revenues, etc.
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Implementation
Level of Involvement as an Institution
Own or outsource the screening process g p
Choosing an ESG vendor or Asset Manager
Screening MethodologyScreening Methodology
Refining Screening Criteria
Apply ScreensApply Screens
Screen portfolio, generate restricted lists, integrate into trading/compliance systems
Monitor Compliance
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Case Study: Knights of Columbus
Owned the development of methodology
Chose MSCI ESG as vendorChose MSCI ESG as vendor
Developed a custom set of screening criteria with MSCI
Had MSCI ESG develop a custom restricted listHad MSCI ESG develop a custom restricted list
Each Knights of Columbus asset manager licensed the list
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ESG Integration: Financial and Values Dimensions
Financial Dimension Values Dimension
Identify ESG issues that are material
Define institutional ESG values
Monitor corporate performance
Analyze risk managementand exposure
ESG Risk Rating ESG eligibility assessment
Portfolio Construction
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ESG investors reflect one or both dimensions in the construction
of their portfolios
Drivers of ESG Integration
ESG Integration is driven by Three Core Catalysts:
Catalyst 1Catalyst 1Major asset owners are redefining fiduciary responsibilities and are increasingly scrutinizing the ESG performance of external managers.Major asset owners are redefining fiduciary responsibilities and are increasingly scrutinizing the ESG performance of external managers.
With growing regularity ESG factors (externalities) represent mispricedWith growing regularity ESG factors (externalities) represent mispricedCatalyst 2Catalyst 2
Catalyst 3Catalyst 3
With growing regularity ESG factors (externalities) represent mispriced risks and opportunities. With growing regularity ESG factors (externalities) represent mispriced risks and opportunities.
In response, many asset managers are seeking a competitive edge to f
In response, many asset managers are seeking a competitive edge to f
Catalyst 3Catalyst 3integrate ESG factors into the investment process to seek mispriced alpha.integrate ESG factors into the investment process to seek mispriced alpha.
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Client Expectations
Asset owners becoming PRI signatoriesPressure from asset owners to integrate ESG into the investment process
ESG criteria increasingly included in Asset Owner RFPs
Asset owners hiring consultants, appointing risk
p
Asset owners hiring consultants, appointing risk management teams, or developing in‐house expertise to evaluate level of ESG integration of their asset managers
Requirements ESG reporting of asset managersRequirements ESG reporting of asset managers
Asset Owners creating ESG‐specific mandates or requirements
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PRI Signatories
PRI now has over 900 Signatories in 48 Countries ‐ Representing over $30 trillion in AUM
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Source: PRI Annual Report 2011, http://www.unpri.org/publications/annual_report2011.pdf
Competitive Pressure
400+ Asset Managers are now PRI signatories
Asset managers providing ESG risk assessmentAsset managers providing ESG risk assessment tools to all analysts and portfolio managers
Asset managers using ESG to differentiate themselves and win mandatesthemselves and win mandates
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ESG Factors as Long‐term Risks & Opportunities
A common motivation for integrating ESG into the investment process is to actively manage the extra‐financial factors that are believed to be important drivers of risk and returns
Climate change will impact companies’ bottom line in different ways across industries. E.g. financial costs from carbon regulations in different jurisdictions globally will hit a diverse set of high intensity industries including utilities, airlines, and steel. Volatile commodities prices stemming from changing weather patterns raise input costs in industries ranging from food to apparel. Companies with forward‐looking strategies to mitigate the financial and operational risks specific to their industry are better positioned for competitive advantage, while laggards are vulnerable to unanticipated costs
Companies are increasingly reliant on a large global workforce exposing them to heightened risks of labor disruptionsCompanies are increasingly reliant on a large, global workforce, exposing them to heightened risks of labor disruptions across their geographies of operation and throughout their supply chains. Accidents, suicides, protests, and strikes negatively impact productivity, invite litigation, and damage company reputation. On the flip side, innovative human capital management attracts talent, raises productivity, and improves operational excellence
Access to scarce resources is a common key issue affecting the mining and oil & gas industries particularly for companies y g g g p y poperating in geographies with weak regulatory and legal structures, . Mining and oil & gas companies regularly encounter corrupt practices, social and political instability, and conflicts with local community that threaten their license to operate. On the other hand, competition for access to growth market frequently leads to information technology and telecommunication companies trading off market share against regulatory and public concern over protection of privacy and civil liberties. Identifying companies with a strong governance strategy to mitigate these industry‐specific risksand civil liberties. Identifying companies with a strong governance strategy to mitigate these industry specific risks protects against the downside surprises of operating in politically uncertain markets
ESG factors are as much about opportunities as risks. Redeployment of capital to emerging industries such as solar or wind helps create new industrial leaders. Beyond the obvious green markets, however, companies across many sectors enjoy upside opportunities associated with changing environmental and social trends. For example, tightening chemicals
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regulations that favor companies with cutting‐edge green chemistry R&D; incentives in building, real estate, and transportation toward energy efficiency and etc
Approaches to ESG Investing
The various approaches to ESG investing are not incompatible with each other. Investors could adopt one or several approaches in their investment process based on their expertise (competitive advantage) and resourceprocess based on their expertise (competitive advantage) and resource constraints (governance budget)
Reflecting Constraints of Universal Owners Ensure Multi‐Period Sustainability
Mitigate impact of Portfolio externalities
Risk mitigation
g y
Introduce a capital allocation framework to
Introduce a judicious targeted allocation to public/private markets to investments that
l
Portfolio
truction
Integrated ESG/Tilting Targeted/Thematic
Develop a value
public markets with an ESG tilt to mitigate externalities that will be internalized in a diversified portfolio
represent longer term alternative to mitigate system wide externalities. E.g. clean tech
Collaborate to improve
Within
Const
Active Ownership CollaborationDevelop a value proposition from active ownership & engagements but pragmatically reflecting appropriate view of cost and benefits
psystem via network effect and scales so that investors collectively can achieve better outcomes. E.g. lobby for regulatory changes
Outside Portfolio
Construction
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You can’t sell so you ought to care
System improvement
O
Levels of Effective ESG Implementation for Asset OwnersPolicy Position Active Ownership Integrated ESG/ Tilting Targeted ESG/ Thematic Collaboration
Finance-based
Limited beliefs in ESG materiality and/ or the need or capability to influence external managers on ESG.
Delegates active ownership activities to managers.
Considers ESG as part of managers’ discretionary responsibility and expects such factors to be considered.
Would be considered as part of managers’ thematic positions but in practice would rarely be present.
Does not view collaboration as helpful.
BasicWishes to limit reputational risks. M onitoring confined to manager
reports on activities.M onitoring confined to considering manager reports on activities.
No explicit formats or goals in monitoring process.
Believes that ESG is financially material and supports this belief
Delegates active ownership responsibility to managers or proxy
Specifies the integration of ESG as a formal part of manager
Joins UN PRIWould be considered as part of managers’ thematic positions butmaterial and supports this belief
through mandates to managers.responsibility to managers or proxy service with more guidance on goals.
a formal part of manager mandates in keeping with UN PRI principles.
Wishes to limit reputational risk Specifies formats and goals for monitoring.
Requires reporting to demonstrate accordance with mandates and UN PRI.
Considers the consolidated level ESG positions in accordance with UN PRI
M ay consider the potential for collaboration in active ownership by using proxy service or governance overlay.
Intermediate
managers thematic positions but in practice would rarely be present.
UN PRI.
Believes that ESG is financially material and supports direct and indirect management.
Undertakes active ownership directly and / or supported by proxy services or managers.
Integrates ESG into mandates. M ore direct collaboration on engagement in exceptional cases.
Develops exclusions or engagement list of companies.
M ay adopt rules-based portfolios tilted to ESG factors.
Join UN PRI and other industry associations to secure knowledge transfer and public policy
Develops monitoring and reporting Detailed reporting of ESG positions
Considers the universal owner principles are contextually appropriate and financially attractive.
Advanced
Considers specific allocations to investments that specifically target the ESG and externalities themes.
p g p gfor all activities.
p g pat manager and consolidated level in accordance with UN PRI
Develops exclusions or engagement list of companies.
Specifies ESG preferences in mandates.
Undertakes active ownership using managers/proxy services.Values-based
Wishes to invest in a way that is congruent w ith certain mission specific values or to support certain mission specific goals.
Considers specialized allocations to investments in mission specific areas.
Considers collaborations that produce network effects aligned to the missionspecific goals.
Detailed reporting of ESG positions at manager and consolidated level,
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g p y
Develops monitoring and reporting for all activities.
Values-based g ,including those identified by controversies and business activity groupings.
ESG Portfolio Analytic Framework
A simple, yet effective, approach to ESG risk measurement can be built using the notion of risk exposure
PortfolioMSCI World
ESGPortfolio
MSCI World ESG
Index/Portfolio LevelPortfolio Scores +0.15 +0.32 Environment +0.14 +0.22
Risk Factors +0.09 +0.32[+] Key ESG Pillar Environmental Management Capacity +0.06 +0.25Environment +0.14 +0.22 Opportunity +0.27 +0.08Social +0 14 +0 35
Relative ESG Scores Relative ESG Scores
Social +0.14 +0.35Governance +0.22 +0.26
Human Capital +0.17 +0.31Health & Safety +0.07 +0.32
[+] ESG Scores by Sector Labor Relations +0.50 +0.42Energy +2.53 +1.06 Employee Motivation & Development ‐0.06 +0.20Materials +0.08 +0.34Industrials +0.10 +0.21C Di i 0 03 0 83 S k h ld C i l 0 11 0 38Consumer Discretionary ‐0.03 +0.83 Stakeholder Capital +0.11 +0.38Consumer Staples ‐0.23 +0.92 Product Safety +0.29 +0.31Health Care +0.17 +1.08 Supply Chain ‐0.29 +0.28Financials +0.36 +0.69 Customer/ Stakeholder Partnerships +0.12 +0.45Information Technology +0.79 +1.38 Local Communities +0.24 +0.73Telecommunication Services +0.60 +0.15 Intellectual Capital/ Product Development +0.21 +0.13Utilities +1.80 +0.85
Distribution by Rating Band Strategic Governance +0.22 +0.26[+] AAA ‐ A +10.9% ‐2.1% Traditional Governance Concerns +0.32 +0.08[+] BBB ‐ B ‐5.8% +4.9% Strategy +0.16 +0.69[+] CCC ‐2.2% ‐0.4% Strategic Capability / Adaptability +0.18 +0.01
Notes :
1. A pos itive relative ESG score indicates an above average ESG performance versus the market benchmark (MSCI World) and vice versa.
2 The MSCI World ESG Index includes companies with the bes t of class ESG performance
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2. The MSCI World ESG Index includes companies with the best‐of‐class ESG performance.
In measuring and attributing ESG risk, it is important to have relevant benchmarks as a reference. We suggest measuring the portfolio against two benchmarks: a broad market cap weighted index such as the MSCI World Index or the MSCI ACWI IMI which will reflect the state of the markets without ESG integration and an ESG benchmark such as the MSCI World ESG Index which selects companies with best‐of‐class ESG management. For investors who are reflecting certain values in their investment process a values‐based ESG benchmark such as the MSCI World Socially Responsible Index could also be considered.
Company‐level ESG Assessment
At the security level, ESG ratings and scores can also be used to highlight holdings that are contributing most to
Bottom Rated Companies by Portfolio Weight
Rank Name Weight Industry (GICS)
Rating
1 Company A 0.97% Financials CCC2 Company B 0.65% Consumer Discretionary CCC3 Company C 1.94% Health Care B4 Company D 1.41% Consumer Discretionary Bg
the risk of the portfolio 1. Companies with the lowest
ESG scores
2 Companies that are
p y y5 Company E 1.05% Information Technology B6 Company F 1.03% Utilities B7 Company G 1.01% Financials B8 Company H 0.89% Industrials B9 Company I 0.84% Materials B10 Company J 0.84% Financials B
2. Companies that are implicated by major ESG controversies
3. Companies that are involved in questionable ethical
Companies Involved in Controversies by Portfolio Weight
Rank Name Weight Environment Human Rights Labor Rights Governance
1 Company A 1.64%2 Company B 1.35%3 Company C 0.84%4 Company D 0.84%5 Company E 0.84%in questionable ethical
business behavior
Such information can serve as a communication tool to highlight potential
6 Company F 2.44%7 Company G 2.42%8 Company H 1.89%9 Company I 1.37%10 Company J 1.31%
Companies Involved in Business Activities by Portfolio Weighthighlight potential reputational risk, facilitate special monitoring and formulating active engagement strategies to address specific ESG issues
Rank Name Weight Business Activity Type1 Company A 2.42% Iran2 Company B 2.13% Stem Cell; GMO3 Company C 1.89% Iran4 Company D 1.12% Alcohol; GMO5 Company E 1.01% Iran6 Company F 0.95% Iran7 C G 0 84% S d
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address specific ESG issues
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7 Company G 0.84% Sudan8 Company H 0.84% GMO9 Company I 0.84% Nuclear Power10 Company J 0.78% Iran
ESG Business Involvement Screening Research
Identifies global publicly traded companies involved in business activities of concern
Available Restriction CategoriesAbortion and Contraceptives
Cuba
D l U E tto values investors.
Wide range of activities covered, from tobacco to weapons to
i i d
Adult EntertainmentDual‐Use Export
Violations
AlcoholForeign Corrupt Practices Act
A i l W lf Ioperations in Sudan
Identifies companies that violate legislative as well as religious screening mandates
Animal Welfare IranChild Labor Northern Ireland
Consumer Product Safety
North Koreag
Ability to customize restriction lists by level and type of involvement
Fully compatible with most trading
Defense and Weapons OFAC CasesDiversity Sudan
Environment SyriaFair Lending Labor Relations y p g
and portfolio management tools
Allows asset managers to meet asset owner mandates
Gambling Nuclear PowerGenetic Engineering Pork
Burma Stem Cell Tobacco
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ESG Impact Monitor
Identifies companies involved in major ESG controversies or violations of global norms and conventions .
Used by investors to negatively and positively screen investments and demonstrate compliance with PRI
Understand reputational risk from ESG performance of portfolio holdings
Traffic‐light rating facilitates quick understanding of overall assessmentunderstanding of overall assessment
In‐depth write‐ups for all notable controversies
Coverage of over 2,500 companiesCoverage of over 2,500 companies worldwide, including all cos on MSCI ACWI.
Research accessible through ESG Manager or via data feeds.
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ESG Impact Monitor: Methodology
Evaluate how companies are managing the most important social and/or environmental impacts of its operations, products and services.
Two part assessment focusing on companies’ management of ESG impact and involvement in major ESG controversies.
To assess management we look at policies, systems, initiatives, and reporting; reviewing each company by its industry‐specific risks or where it has significant controversiescompany by its industry specific risks or where it has significant controversies
To assess controversies performance we look at severity of impact and whether the issue is isolated or systemic
Indicator, Issue Area, and Overall flag and score
Issue Areas Include:
1. Environment
2. Customers
RED: Indicates that a company is involved in one or more very severe controversies.
YELLOW: Indicates that the company is involved in severe to
3. Human Rights & Community
4. Labor Rights & Supply Chain
5. Governance
YELLOW: Indicates that the company is involved in severe‐to‐moderate level controversies.
GREEN: Indicates that the company is not involved in any major controversies.
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IVA: Identifying ESG Risk ‐Methodology and Approach
ESG Research methodology Our methodology is based on externalities that have been recognized and pose a business risk.
Key factors of differentiationOur approach to ESG is sector specific rather than a generic template: We do not treat an
We determine relevant key ESG risks and issues for an industry.
We assess risk exposure and risk management of companies in the industry
oil company with the same metrics as a bank
We focus on the core not the periphery: A sharp focus on core business activities, rather than peripheral semi‐philanthropic initiatives
management of companies in the industry through relevant metrics.
We calculate the unmanaged risk (i.e. residual risk) for companies on each key issue.
We analyze companies not CSR reports: The metrics which accurately gauge a company’s ESG performance are rarely prominently displayed
issue.
We derive company ratings (‘AAA’‐’CCC’) based on residual risk and key issue weights.
Our rating answers the following question: Is risk management commensurate with risk
Coverage1800 Companies, 50+ industry reports
risk management commensurate with risk exposure? MSCI World (96% of the market cap)
MSCI UK IMI (~275 cos.)
MSCI EM (Top 25)
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MSCI Australia IMI (~200 cos.)
IVA: Identifying ESG Risk ‐Methodology and Approach
Based on externalities that have
Step 1: Determining Key ESG Issues for an Industry
A key ESG issue is defined as an environmental and/or socialexternality that has the potential to become internalized by thebeen recognized and pose a
business risk, determine relevant key ESG issues
Assess risk management and risk
externality that has the potential to become internalized by theindustry or the company through one of the following triggers:
Pending or proposed regulation aiming to address the externality
i l l i l di i l iliAssess risk management and risk exposure through relevant metrics
Calculate the unmanaged risk (i.e.
A potential supply constraint leading to price volatility and/or unstable supply
A notable shift in demand from a major customer or group of customers
g (residual risk) for each key issue A major strategic response by an established competitor in
the industry addressing the externality
Growing public awareness of concerns as measured by frequency of mention in top media outlets
Derive company ratings based on residual risk and key issue weights
q y p
In the case of financial institutions, a potential decrease in asset quality as a result of the externality
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IVA: Identifying ESG Risk ‐Methodology and Approach
Step 2: Identify ESG Factors & Metrics
Based on externalities that have We assess a company’s ability to reduce its contributions to anexternality and/or its ability to internalize the associated costs:been recognized and pose a
business risk, determine relevant key ESG issues
Assess risk management and risk
ESG Key Issues
Risk Exposure Risk Management
1 Water stress indicator based on1. Water management strategy
externality, and/or its ability to internalize the associated costs:
Assess risk management and risk exposure through relevant metrics
Calculate the unmanaged risk (i.e.
Water1. Water stress indicator based on
country risk scores2. Initiatives to reduce water use and
increase recycling rates3. Total water withdrawal
1. Vertical Integration and self‐sufficiency
1. Corporate energy management strategy2 Energy reduction targets
residual risk) for each key issue Energy 2. Percentage of capacity from electric arc furnaces vs. blast furnaces
2. Energy reduction targets3. Normalized energy consumption
(GJ/ton)
1. Percentage of capacity from electric arc furnaces vs. blast furnaces
1. Corporate carbon management strategy2 Climate governance
Derive company ratings based on residual risk and key issue weights
Carbonfurnaces
2. Weighted average country carbon reduction target (WACCRT)
2. Climate governance3. Carbon reduction targets4. Normalized carbon emissions
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IVA: Identifying ESG Risk‐Methodology and Approach
Step 3: Calculate unmanaged ESG Risk
Based on externalities that have We assess residual risk by calculating the distance between the idealmanagement scores and the company’s performance on each keybeen recognized and pose a
business risk, determine relevant key ESG issues
Assess risk management and risk
management scores and the company s performance on each keyESG issue:
High Risk, Strong PerformanceStrong Management
(Strong evidence that management can avoid costly
strikes)Assess risk management and risk exposure through relevant metrics
Calculate the unmanaged risk (i.e.
Delta Southwest
Deutsche Lufthansa
Air France KLM
men
t
Top Quartile
Second Quartile
Third Quartile
Bottom Quartile
strikes)
residual risk) for each key issue Virgin Blue
Cathay Pacific
Ryanair
SIA ANA
EasyJet Qantas
British Airways
Iberia
Ris
k M
anag
m
Derive company ratings based on residual risk and key issue weights
= 10,000 employees
Risk ExpsoureHigh Risk,
Poor Performance
High Risk(Powerful unions, high propensity to
strike, constrained ability to raise wages)
Low Risk(Low propensity to strike, little history of
strikes, predicted capability to raise wages)
Poor Management(History of strikes, High disparity
between union workers and executive pay)
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Overview of Key Issues
Environment Social Governance
• Carbon Management• Energy Management• Water Management • Toxic Releases• Raw Materials (Sourcing)
• Labor ‐ Supply Chain• Labor ‐ Operational• Human Capital Development• Health and Safety• Access to Medicine
• Corruption/Political Instability• Governance Risk
(in development)
Raw Materials (Sourcing)• Land Use and Biodiversity• Financing Environmental Risk• Insuring Climate Risk• Opportunities in Environmental
T h l
Access to Medicine• Access to Finance • Access to Healthcare• Product Quality• Product Safety – Financial
P d t S f t Ch i lTechnology• Opportunities in Green Building• Opportunities in Renewable
Energy
• Product Safety ‐ Chemicals• Insuring Health & Demographic Risk• Opportunities in Health & Nutrition• Privacy & Data Security• Responsible Investingp g
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MSCI ESG Global Client Service
Americas + 1.212.804.5299
Asia Pacific + 612.9033.9339
Europe, Middle East and Africa + +44.207.618.2510
www.msci.com/esg
msci.com 32msci.com
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