MSCI ESG MSCI ESG Ratings and Indexes - Stefan Hüttermann - FAZ-Konferenzen
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Information Classification: GENERAL
MSCI ESG RATINGS | INDEXES
MSCI ESG
MSCI ESG Ratings and Indexes
Stefan Hüttermann
stefan.huettermann@msci.com
September 2020
© 2019 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.Information Classification: GENERAL
1
What is ESG?
Why ESG
Matters?
© 2019 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.Information Classification: GENERAL
ESG investing is growing dramatically…why now?
UN PRI* Has Grown to Over 1,900 Signatories 99% CAGR in ETF AUM Tracking
with $81.7 Trillion In AUM MSCI ESG Indexes since 2013
90 2500 As of Mar. 31, 2019 163
20 180
Assets Under Management (US$
80 149
2000 1.7
70
AUM (US$ billion)
15 130
N° Signatories
60
1500 89 1.5
# of ETFs
50
trillion)
71
40 10 80
1000 0.8
30 16.8
34
20 500 18 12.4
10 5 6 0.4
9.0 30
0 0 0.1 4.1
2006 2008 2010 2012 2014 2016 2018 1.7
0 0.5 1.0 -20
2013 2014 2015 2016 2017 2018 Mar'19
AO Assets under Management Total AUM
Number of Asset Owners Number of signatories Equity Fixed Income # of Funds
HERE’S WHY:
1. Investors have 3. Greater 4. Improved
2. Investors
become less tolerant of understanding of
demonstrating ESG
corporate potential financial
willingness to act ratings
ESG incidents benefit
*United Nations Principles for Responsible Investing 3Information Classification: GENERAL
Investors have become less tolerant of
Corporate ESG incidents
30 years ago, Exxon’s stock price barely moved when Exxon Valdez spilled 11mm gallons of oil on the
Alaskan shore.* Today, with social media allowing for immediate, global communication of issues,
investors are making companies accountable for their actions.
VALEANT 2015 ZHEJIANG HUAHAI 2018
EQUIFAX 2017
-71%
-25% ACCOUNTING -30%
PRODUCT
SAFETY
PRIVACY
& DATA
SECURITY CORPORATE
GOVERNANCE
VALE 2019
HEALTH & -30%
-25% SAFETY
VOLKSWAGEN 2015
*Source: https://www.fool.com/investing/general/2014/03/24/25-years-on-from-exxon-valdez-what-weve-learned-wh.aspx;
Examples only. Past performance is not indicative of future results, which may differ materially. 4Information Classification: GENERAL
Greater understanding of potential financial
benefit of ESG strategies, and longer track records
A MSCI ESG Research study1 found that companies MSCI has a broad range of ESG Indexes with
with high ESG Ratings had higher profitability, lower significant live history. More than 120 have five or
tail risk and lower systematic risk on average based more years of live history, with MSCI KLD 400 having
on 10 years of data the longest track record (28+ years).
Companies with higher MSCI ESG scores had MSCI KLD 400: 28+ years of live history
higher profitability and were more competitive
MSCI KLD 400 vs MSCI USA
1000 1000
0.3 900 900
800 800
700 700
Gross Profitability – Z-Score
0.2 600 600
500 500
0.1 400 400
0 300 300
-0.1 200 200
-0.2
100 100
-0.3 90 90
01 02 03 04 05 92 94 96 98 00 02 04 06 08 10 12 14 16
Mean Current MSCI KLD 400 Social MSCI USA
1. “Foundations of ESG Investing, Part 1: How ESG affects Equity Valuation, Risk and Performance,” MSCI, November 2017.
Giese, Lee, Melas, Nagy, Nishikawa. 5Information Classification: GENERAL
Asset owner adoption of MSCI ESG Indexes
Incorporating ESG into investment strategy or creating products typically starts with understanding client
objectives, which may combine elements of managing long-term risk, reflecting values and positive impact.
Investment Objectives Individual Objectives
“Our investments
should reflect
our clients’ values”
“Incorporating ESG
may improve our
investment results”
“We want our
investments to
make a difference
in the world”
6Information Classification: GENERAL
Asset owner adoption of MSCI ESG Indexes
Approximately $277 bn allocated to investments tracking / benchmarked to MSCI ESG equity & fixed income indexes since 20141
2014-2015 2016 2017 2018 2019 2020
GPIF Ontario PenSam
CalSTRS Commenced Willis Towers
AMF Teachers Watson adopts MSCI
MSCI ACWI Committed with 3% of Pension Fund
$2.5bn to $750M Climate
ESG domestic equity MSCI ACWI Ex Index for Shell Pension
MSCI ACWI MSCI Japan MSCI ACWI ex
Leaders Canada Ex Thermal Coal €4.8bn (SSPF)
policy Low Carbon ESG Select Tobacco
Target Index Adaptive equities Moved 22.6%
benchmark Leaders Index + policy portfolio of its €30bn
MSCI Japan Capped ESG
benchmark Universal Index portfolio to
Empowering MSCI’s custom
Women Fonds de
VBV solidarité FTQ ESG
Approximatel announced benchmark
UK EAPF y $0.9bn Migros United Nations integration of
$400m MSCI World $4.5bn Pension Fund MSCI World UC
MSCI World Low Carbon MSCI ACWI MSCI ACWI Ex Low Carbon Investments
Low Carbon Target ex China Tobacco Ex ESG Target MSCI’s ex
Target ESG Controversial Screened tobacco ex
Index Universal Weapons policy Index fossil fuel
Taiwan index
BLF Swiss Re benchmark
$2.4bn $130bn
MSCI ACWI Active listed equity
ESG Factor and credit London Swiss Federal
Mix Index MSCI ESG Leaders Borough of Tower Pension Fund
+ Bloomberg Hamlets Brunel Pension PUBLICA
Barclays MSCI MSCI World Low Partnership MSCI custom
Corporate Carbon Target MSCI low- climate efficient
Sustainability Index benchmark carbon target index for its
AP4 for its Low index for equity portfolio.
Targeting Carbon Passive passive low- Based on
100% of equity Global Equity carbon equities transition risk and
portfolio mandate physical risk
allocation Ilmarinen
by 2020 New Zealand
Super ESG London Ilmarinen
MSCI Low benchmark PostNL
Carbon indexes 40% of passive Borough of invested
equity indices $2.2 Bn in Sustainable
Hackney (custom)
portfolio based on MSCI Low ETFs linked
MSCI custom MSCI’s to MSCI ESG index -
Carbon European
Low Carbon sustainability Target index Leaders
Index ratings equity
fund holdings
1Based on publicly available information or press releases published from 2014 to date. Some of the examples listed have not publicly disclosed
allocations and are not included in this total
7Information Classification: GENERAL
Introducing ESG Ratings
8Information Classification: GENERAL
MSCI ESG Ratings methodology
1 2 3 4
EVALUATE CORPORATE IDENTIFY KEY ISSUES SCORE KEY ISSUES FINAL ESG RATINGS
GOVERNANCE BY INDUSTRY (0-10) (AAA-CCC)
Analysis begins with a Focus on most Focus on risk Identify leaders and
deep governance relevant ESG factors exposure not just laggards, not business
assessment by industry disclosure type exclusion
Quantitative Approach + Scoring Models Assess Risk Industry-Relative
Ownership, Board, Pay, Accounting,
Annual Consultation Exposure + Risk Management ESG Ratings (AAA-CCC)
Corporate Behavior
Sources: MSCI ESG Research 9Information Classification: GENERAL
Selecting economically relevant issues
QUANTITATIVE APPROACH TO OBJECTIVELY DEFINE THE ECONOMICALLY
RELEVANT E&S ISSUES FOR EACH OF THE 156 INDUSTRY MODELS
CARBON WATER HEALTH & BRIBERY &
EMISSIONS STRESS SAFETY ETHICS
t CO2e / $M m3 / $M fatalities per # of active
1m workers controversies
1853 79
Utilities
550 26 0.29 53
Energy
1270 44 0.09 42
Materials
121 46
Cons. Staples
25 0.09 96
Industrials
35
Telecom
19 61
Health Care
23 51
Cons. Disc.
23 39
Info Tech
201
Financials
10Information Classification: GENERAL
Measuring ESG risk exposure
RISK MANAGEMENT
LEVEL OF RISK CAPACITY
EXPOSURE
• Policies & commitments
• Programs & initiatives
• Type of operations • Performance indicators
• Location of operations • Controversies
• Size of operation, etc
EVALUATE MANAGEMENT STRATEGY IN THE
CONTEXT OF RISK EXPOSURE
11Information Classification: GENERAL
Index Methodologies
MSCI SRI S-Series (FEBELFIN screen)
12Information Classification: GENERAL
MSCI ESG INDEXES
INDEXES THAT USE THE ESG RATING
ESG ESG ESG ESG
ACWI SCREENED UNIVERSAL LEADERS FOCUS SRI
AAA
PERFORMERS
SECTOR ESG
PERFORMERS
TOP
GOOD ESG
TOP SECTOR ESG
PERFORMERS
25%
A
TILT
50%
BB
ineligible
PERFORMERS
POOR ESG
PERFORMERS
POOR ESG
Exclusions Exclusions Exclusions
Exclusions
CCC
13Information Classification: GENERAL
Index Methodologies: MSCI SRI
Identify companies
Index MSCI SRI 1 whose business lines or
behavior
Combines a best in class selection is contrary to your
Description approach with a set of values-based values and exclude
screens them
• Controversial weapons
• 25% target sector representation • Civilian firearms
• Nuclear weapons
• Values-based exclusions
• Tobacco
Methodology • Alcohol
New index constituents must have • Adult Entertainment
• Min ESG rating A • Conventional weapons
• Min ESG controversy score 4 • Gambling
• Genetically modified
Weighting scheme Market capitalization organisms
• Nuclear power
Rebalancing Quarterly • Thermal Coal
Identify ESG Leaders
2 able to manage their
ESG risks and
opportunities in the
medium to long term
14Information Classification: GENERAL
FEBELFIN Screen on SRI S-Series
Screen SRI SRI S-Series
% Thermal Coal Extraction ≥ 30% Revenue > 10% Revenue
% Unconventional Oil & Gas Extraction - > 10% Revenue
Conventional Oil & Gas Supply
% Natural Gas Extraction and Renewable - > 0% Revenue
ENERGY / CLIMATE
Energy
> 10% Installed Cap /
% Coal-based Power ≥ 30% Revenue > 10% Gen Output /
> 10% Revenue
> 30% Installed Cap /
% Oil & Gas-based Power - > 30% Gen Output /
> 30% Revenue
≥ 5% Installed Cap /
≥ 5% Installed Cap / ≥ 5%
≥ 5% Gen Output /
% Nuclear Power Gen Output /
> 30% Revenue /
≥ 15% Aggregate
≥ 15% Aggregate
15Information Classification: GENERAL
Key Metrics
Key Metrics
MSCI World SRI S-
MSCI World
Series 5% Capped
Total Return* (%) 8.3 9.7
Total Risk (%) 11.8 11.9
Return/Risk 0.71 0.82
Sharpe Ratio 0.58 0.70
Active Return (%) 0.0 1.4
Tracking Error (%) 0.0 2.0
Information Ratio NaN 0.69
Historical Beta 1.00 0.99
No of Stocks*** 1646 367
Turnover** (%) 2.4 15.9
Price To Book*** 2.3 2.7
Price to Earnings*** 19.7 18.9
Dividend Yield*** (%) 2.5 2.4
Period: 30-Nov-2015 to 28-Feb-2020
* Gross returns annualized in USD
** Annualized one-way index turnover over index reviews
*** Monthly averages
The definitions of all statistical parameters are available in the Appendix
Performance (%)
MSCI World SRI
MSCI World S-Series 5%
Capped
YTD -8.9 -7.5
1 Yr 5.2 9.2
3 Yr 7.8 9.9
5 Yr NaN NaN
10 Yr NaN NaN
Gross returns in USD for the period ending 28-Feb-2020
Returns are annualized for periods longer than one year
16Information Classification: GENERAL
ESG Metrics
ESG Metrics > Integration & Values
MSCI World
MSCI World SRI S-Series
5% Capped
Integration
ESG Score 6.1 8.0
ESG Leaders (AAA-AA) (%) 29.2 69.8
ESG Laggards (B-CCC) (%) 6.2 0.0
ESG Trend Positive (%) 12.4 6.2
ESG Trend Negative (%) 5.1 5.0
Index ESG Rating A AA
Environmental Pillar Score 5.6 6.4
Social Pillar Score 4.8 5.7
Governance Pillar Score 5.4 6.1
Key Governance Metrics
Board Independence (Wtd Avg %) 77.9 80.2
Female Directors (Wtd Avg %) 28.8 30.4
Deviation from One Share One Vote (%) 21.8 18.5
Values
Tobacco Involvement (%) 1.2 0.0
Civilian Firearms Producers (%) 0.2 0.0
Ties to Controversial Weapons (%) 0.8 0.0
Global Compact Compliance Violation (%) 1.9 0.0
Red Flag Controversies (%) 2.7 0.0
Orange Flag Controversies (%) 28.2 10.5
As of 28-Feb-2020
The definitions of all statistical parameters are available in the Appendix
17Information Classification: GENERAL
Climate Change Metrics
ESG Metrics > Climate Change
MSCI World
MSCI World SRI S-Series
5% Capped
Carbon Footprint
Carbon Emissions (t CO2e/$M Invested) 115 52
Carbon Intensity (t CO2e/$M Sales) 188 91
Wtd Avg Carbon Intensity (t CO2e/$M Sales) 169 94
Low Carbon Transition Risks
Low Carbon Transition Score 6.0 6.3
Solutions (%) 2.9 3.0
Product & Operational Transition (%) 15.8 10.0
Asset Stranding (%) 0.3 0.0
Exposure to Asset Stranding Risks
Potential Carbon Emissions (t CO2e/$M Invested) 2006 0
Fossil Fuel Reserves (%) 5.9 0.1
Thermal Coal Mining (%) 1.2 0.0
Thermal Coal-based Power Generation (%) 3.6 0.1
Unconventional Oil & Gas Extraction (%) 3.1 0.0
Exposure to Clean Technology Solutions
Clean Technologies Solutions (>= 20% Revenue) 4.6 8.6
Clean Technologies Solutions Revenue (Wtd Avg %) 3.5 5.5
Green Share/Brown Share Ratio (Wtd Avg % Revenue) 1.6 1332.7
Other Climate Metrics
Exposure to Carbon-related Assets (%) 7.7 1.9
Climate-related Controversies (%, ScoreInformation Classification: GENERAL
Top Constituents & Top Active Positions
Top Constituents by Index Weight in the MSCI World SRI S-Series 5% Capped
Active
Weight ESG
Country Sector Weight
(%) Rating
(%)
Microsoft Corp USA Information Technology 5.7 2.8 AAA
Procter & Gamble Co USA Consumer Staples 3.2 2.5 AA
Home Depot USA Consumer Discretionary 2.7 2.1 AA
Disney (Walt) USA Communication Services 2.4 1.8 BBB
Pepsico USA Consumer Staples 2.1 1.6 AA
Adobe USA Information Technology 1.9 1.5 AA
Nvidia USA Information Technology 1.7 1.4 AAA
Salesforce.Com USA Information Technology 1.6 1.2 AAA
Sap GERMANY Information Technology 1.3 1.0 AAA
Amgen USA Health Care 1.3 1.0 AA
Asml Hldg NETHERLANDS Information Technology 1.3 1.0 AAA
Accenture A USA Information Technology 1.3 1.0 AAA
Novo Nordisk B DENMARK Health Care 1.1 0.9 AAA
American Tower Corp USA Real Estate 1.1 0.9 A
Toronto-Dominion Bank CANADA Financials 1.0 0.8 AA
Allianz GERMANY Financials 1.0 0.8 AAA
Csl AUSTRALIA Health Care 1.0 0.8 A
Tesla USA Consumer Discretionary 1.0 0.8 A
Gilead Sciences USA Health Care 1.0 0.8 AA
Siemens GERMANY Industrials 0.9 0.7 AAA
Sony Corp JAPAN Consumer Discretionary 0.9 0.7 AAA
American Express USA Financials 0.9 0.7 AA
Caterpillar USA Industrials 0.8 0.6 A
L'oreal FRANCE Consumer Staples 0.7 0.6 AAA
Chubb USA Financials 0.7 0.6 BBB
As of 28-Feb-2020
19Information Classification: GENERAL
About MSCI
MSCI is a leading provider of critical decision support tools and
services for the global investment community. With over 45 years of
expertise in research, data and technology, we power better investment
decisions by enabling clients to understand and analyze key drivers of
risk and return and confidently build more effective portfolios. We
create industry-leading research-enhanced solutions that clients use to
gain insight into and improve transparency across the investment
process. To learn more, please visit www.msci.com.
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