MSCI ESG Investing

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MSCI ESG InvestingBetter investmentsfor a better world1Morningstar Direct (June 2020), Manager Research1

What’s driving the growth?The world is changing, creating new andemergent risksMSCI ESG InvestingPowering betterinvestment decisionsESG Investing is growing exponentially as more investors andissuers utilize ESG and Climate data and tools to support theirfinancial decision making.Over the past three years, assets in sustainable investmentfunds have grown from 496bn (Q3 2017) to over 1trillion (Q2 2020).1 As of December 2020, we have seena 208% year-on-year growth in ETFs AUM tracking MSCIESG indexes.2Climate risks, regulatory pressures, social anddemographic shifts as well as privacy anddata security concerns are examples of new orincreasing risks for investors. Companies facerising complexities and greater scrutiny if they arenot adequately managing these risks. The financialconstraints posed by the COVID-19 pandemic haveexacerbated the challenges for some industries.Today’s investors are less tolerant of ESG incidents orcontroversies and may re-evaluate their investmentapproaches if these are not managed.Over the next two to three decades, the millennialgeneration is expected to direct between 15 trillionand 20 trillion into U.S.-domiciled ESG investments,roughly doubling the size of the U.S. equitymarket.3 A growing body of research suggests thatmillennials are more conscious of the impact of theirinvestments on society and the environment and areasking more of them.Advances in technology and data extractiondriving more meaningful insightsArtificial intelligence (AI) technology and alternativedata extraction techniques help minimize our relianceon voluntary disclosure from companies. Machinelearning and natural language processing helpus increase the timeliness and precision of datacollection, validation and analysis to deliver dynamiccontent and financially relevant ESG insights.Bank of America Corporation (2016) ‘Environmental, Social & Governance Report’, pg.3ESG data, research and ratings are produced by MSCI ESG Research LLC. MSCI ESG Indexesand Analytics utilize information from, but are not provided by, MSCI ESG Research LLC. MSCIIndexes and Analytics are products of MSCI Inc. MSCI Indexes are administered by MSCILimited (UK).5Through our legacy companies KLD, Innovest, IRRC, and GMI Ratings6 The MSCI KLD 400 Social Index was launched on May 01, 1990. Learn more about our 30 yearsof ESG indexes msci.com/esg/30-years-of-esg7Origins of MSCI ESG Ratings established in 1999. Produced time series data since 2007.8MSCI ESG Research clients as of November 20204 12Morningstar Direct (June 2020), Manager ResearchData based on Refinitiv Universe as of December 2020; only primary listings, and not cross-listingsUnique insights to power betterinvestment decisionsMSCI’s ESG origins dateback to 1972.5A new generation of investors asking moreof their investments32Why work with MSCIand MSCI ESG Research?4Our first ESG index waslaunched in 1990.6We have been ratingcompanies based onindustry material ESGrisks since 1999.7We’re proud to supportthe ESG strategiesof over 1,700 clients8worldwide includingleading pension funds,asset managers,consultants, advisers,banks and insurers.3

When it comes to ESG and climate integration, weunderstand that no-one-size-fits-all, but there arecore ingredients which are important to you andthat we strive to be the global leader in:1. Transparent, consistent, robust and up-to-date data thatprovides meaningful insights beyond corporate disclosureTech-enabled human insights:our analysts are aided by AI andother technologies to increase thetimeliness and precision of datacollection and analysis, and toreview and validate the qualityof the data and sourcesAlternative data helps minimizereliance on voluntary corporatedisclosure: on average 45%9of the data to determine acompany’s ESG Rating is derivedfrom alternative sources e.g.,regulatory or government reports,reputable media sources andcustomer feedback2. I ndustry material ESG insights which may impactfinancial performanceDynamic, transparent rules-basedmodel: our model, which is publiclyavailable via our ESG industrymateriality map10, is frequentlyrecalibrated to capture new andemerging risks most relevant to acompany’s core business model.The methodology is reviewedannually as part of a formalclient consultationDedicated issuer communications:our issuer team and our issuercommunication portal ensure thereis regular dialogue with companiesto oversee data verificationand educate companies on ourmethodology, to encourage greatertransparency, disclosure andstandardized reporting practicesWe’re a pioneer in modellingcorporate ESG performance.We have rated companies basedon industry material ESG riskssince 1999.11 Our live time-seriesdata dates back to 2007 and hasbeen used in various studies toexamine the links between ESGand performanceA selection of peer reviewed journal articles andclient research: arvard Business School 2021:HStock Price Reactions to ESGNews: The Role of ESG Ratingsand Disagreement ECD 2020: ESG InvestingO- Practices, Progress andChallengesM SCI 2020: Deconstructing ESGRatings Performance: Risk andReturn for E, S and G by TimeHorizon, Sector and Weighting4MSCI ESG Research: 2,434 constituents of the MSCI ACWI Index as of November 30, 2017.MSCI ESG Industry Materiality Map11Origins of MSCI ESG Ratings established in 1999. Produced time series data since 2007.910Empirical-based research: MSCI’sFoundations of ESG Investingstudy (published in the Journalof Portfolio Management, July2019) found companies with highMSCI ESG Ratings had higherprofitability, lower tail risk andlower systematic risk, on average,based on 10 years of data. Thestudy also found companies withthe lowest MSCI ESG Ratingswere three times more likely tohave experienced drawdownsover the same period SCI 2019: Foundations ofMESG Investing Part 1: Journal ofPortfolio Management1Morningstar Direct (June 2020), Manager Research SCI 2019: Foundations of ESGMInvesting Parts 2 & 3:The Journal of Index Investing P Morgan 2019: Does an ESGJtilt improve corporate bondportfolio outcomes? arclays 2018 & 2016:BThe positive impact of ESGinvesting on bond performance P Morgan 2018: SystematicallyJinvesting in ESG themes withinthe USD high yield corporatebond market5

3. Broad coverage and timeseries data across regions,industries and asset classes124. S olutions to support allaspects of the investmentdecision making processESG Ratings coverage for over14,000 issuers (8,500 companies)linked to over 680,000 equity andfixed income securitiesClimate metrics for over 10,000corporate and sovereign issuers,which is the equivalent to over 95%of the market value of equities andfixed income markets13Impact alignment metrics forover 8,600 equity and fixedincome issuers, examining netcontributions (positive, neutral,or adverse) towards addressingeach of the 17 UN SustainableDevelopment Goals (SDGs)We’re one of the onlyproviders to offer in-houseESG data, ratings, analyticaltools, indexes and real assetssolutions to provide seamlessintegration of ESG to supportyour portfolio construction,risk management and activeand passive strategiesESG across your investmentprocess: as we elaborate onpage 10-11 our solutions aredesigned to work in sync tosupport your ESG policy andbenchmark development,portfolio construction and assetallocation, company analysis,risk management, reporting andengagement requirements5. Solutions to supportregulatory, disclosure andreporting requirementsWe have been actively involved in,and providing expertise to severalSustainable Finance initiatives,including the EU SustainableFinance package committees andworking groups14We were a pioneer in launchingESG transparency tools, makingpublic ESG and Climate metricsfor tens of thousands of funds,companies and indexes, helpingto drive awareness, educate themarket and raise ESG disclosurestandards156. D ata, technology andflexible solutions tocustomize your offeringWe are creating openarchitecture systems andmodularization so you cancustomize your MSCI ESG andClimate Solutions and combinethem with other platforms andprovidersOur ESG, Climate, SDGs andSustainable Finance DisclosureRegulation (SFDR) data can bedelivered in granular form soyou can create your own signalor combine datapoints withother sourcesOur flexible reporting solutionsallow you to choose off-the-shelfor customizable reports.We provide self-service or amanaged reporting serviceOver 1,500 equity and fixed incomeindexes covering developed andemerging markets designed torepresent the performance of themost common ESG investmentapproaches by includingre-weighting or excludingcompanies based on ESGand Climate criteria6ESG Ratings, SDGs and Climate Metrics coverage from MSCI ESG Research LLC and ESG Index coverage from MSCI Inc. as of January 2021.MSCI ESG Research as of February 2021. Coverage subject to changeLearn more msci.com/esg/sustainable-financeMSCI ESG Ratings corporate search tool launched in November 2019. Fund and index search toolslaunched in May 2020.12 141315 7

Our ESG solutionsMSCI and MSCI ESG Research16 bring transparency toESG and Climate risks and opportunities for our clientsworldwide.MSCI delivers ESG indexes, analytics and real estate solutions, and MSCIESG Research provides data, ratings, research and tools to help investorsnavigate increasing regulation, meet new client demands and assessindustry material ESG risks and opportunities.Our 34-year legacy measuring andmodelling corporate ESG performancehas helped to develop our solutions andtechnology today and shapes our researchand innovations for tomorrow.Remy Briand, Head of ESGESG solutionsto enable youto build betterportfoliosMSCI ESG Research AI-enhancedESG and Climate data and ratingsare integrated across MSCIIndexes, Analytics Systemsand Real Estate SolutionsMSCI ESG ResearchStrong integration across all MSCI ProductsMSCI ESG Research provides ratings of companies and mutualfunds to provide greater transparency and scrutiny of corporatepractices for institutional investors seeking to avoid controversiesand mitigate risk. SG and Climate metrics for over 14,000 issuers to provideEforward-looking assessment of ESG risks and opportunitiesLearn more about MSCI ESG Ratings and MSCI Climate Solutions.MSCI ESG Indexes are designed for use by investors seeking toreduce exposure to systematic and stock-specific risks, and setbenchmarks for integrating ESG into active and passive portfolios.O ver 1,500 equity and fixed income ESG and Climate Indexesdesigned to help institutional investors more effectivelybenchmark ESG and Climate investment performance andmanage, measure and report on ESG mandatesLearn more about MSCI ESG Indexes and MSCI Climate Indexes.MSCI ESG & Analytics enables investors to gain deeper insightbeyond traditional financial factors that may affect long-termvalue creation. Investors can interrogate ESG data and indexesin MSCI’s Analytics Systems to support portfolio construction,risk and performance attribution, and monitoring and reporting.Integrate ESG and Climate insights into your portfolioconstruction and risk management using industry leading multiasset class risk and performance analytics systems.Learn more about MSCI ESG & Analytics.MSCI’s Real Estate service is designed to deliver analyticalsolutions, objective indexes and benchmarks and highly relevantresearch, to help you make better decisions throughout theinvestment process. MSCI Real Estate Climate Value-at-Risk(Climate VaR) provides a forward-looking and return-basedvaluation assessment of climate risk for individual assets andportfolios across commercial and private real estate.Learn more about MSCI Climate Real Estate Solutions.816 SG data, research and ratings are produced by MSCI ESG Research LLC. MSCI ESG Indexes andEAnalytics utilize information from, but are not provided by, MSCI ESG Research LLC. MSCI Indexes andAnalytics are products of MSCI Inc. MSCI Indexes are administered by MSCI Limited (UK).9

ESG across your investment processGrowing demand for transparency is driving ESG and Climateintegration across the investment process. MSCI ESG Research aims tohelp you integrate ESG and Climate in a way that suits your investmentapproach and strategic objectives, while aligning with the demands ofyour clients.MSCI and MSCI ESG Research products and services17are designed to help you in these areas:Defining policy &benchmarksActionable solutions:integrating ESGDifferentiated ratings and data18 to help you:Flexible technology to enable you to:D efine your investment, ESG andClimate objectivesU se ESG and Climate data and ratingsto inform asset allocationSet targets and strategies to enhancethe ESG profile of your investmentsI dentify ESG and Climate leaders andlaggards for portfolio constructionpurposesDevelop your investment policyS elect ESG or Climate policy orperformance benchmarksD evelop active and index-linkedESG and Climate productsOur global client service team is available 24/5 to support you at eachstep of the investment process.CompanyanalysisI dentify stocks impacting yourportfolio’s ESG and Climate profileE valuate the ESG and Climate scoresof your portfolio by sector, region andasset classE xamine ESG and Climate performancealongside financial performance or othertraditional factorsRisk management,reporting & engagementAccess ESG and Climate factors in our analyticalsystems to:P rovide greater transparency of key ESG andClimate risks across multi-asset class portfoliosS upport stress testing, and risk andperformance attribution analysisMake forward-looking assessments toidentify ESG and reputational risksC onduct TCFD stress testing to supportClimate goalsSupport corporate dialogue and engagement10MSCI ESG Indexes and MSCI Analytics utilize information from, but are not provided by, MSCI ESG Research LLC.MSCI Equity Indexes are products of MSCI Inc. and are administered by MSCI UK Limited. ESG Indexes provided by MSCI Inc.Ratings, research and metrics provided MSCI ESG Research LLC.17 1811

Our value: working with clientsAsset owners, asset managers, wealth managers and banks integrate ourESG and Climate Solutions into their investment strategy processes andstakeholder reporting in multiple ways:Risk managerGlobal asset managerUS wealth managerClient use caseClient use caseClient use caseA multinational investment bankand financial services companyanalyzed carbon footprinting andclimate risk management acrossall portfolios to inform quantitativeportfolio construction andclient reportingIncorporated ESG criteria acrossits entire investment process withthe aim of enhancing long-termreturns and managing financialESG risks for their clientsIntegrated ESG into its onlineinvestment, brokerage andadvice platform to provide ESGtransparency to millions of itsretail clients for assessing theESG performance of their portfolioESG solutions used19MSCI ESG RatingsMSCI Fund RatingsM SCI ClimateSolutionsUsed ESG ratings, controversiesand Climate solutions to managerisks and identify opportunitiesacross its 500bn portfolio. Theparent company uses ESG Ratingsfor underwriting and due-diligenceESG solutions used19MSCI ESG RatingsMSCI Fund RatingsMSCI ClimateSolutionsEuropean insurance companyNational pension managerProduct development teamClient use caseClient use caseClient use caseClient use caseIncorporated ESG factors toadvance their manager evaluationprocesses in response to greaterasset owner demand and createda default retirement fundSwitched its actively managedglobal equity and creditportfolios to ESG benchmarksAdopted MSCI ESG Indexesto support engagement withcorporates and managers toencourage ESG best practices andraise market standardsA leading ETF provider adopteda range of MSCI ESG Indexes tocreate its ESG ETF suite and usedESG research to publish the ESGcharacteristics of its range ofETFs globallyMSCI ESG Indexes and MSCI Analytics utilize information from, but are not provided by, MSCI ESGResearch LLC. MSCI Equity Indexes are products of MSCI Inc. and are administered by MSCI UK Limited.ESG Indexes provided by MSCI Inc.19 ESG solutions used19MSCI ESG RatingsMSCI Fund RatingsM SCI SustainableImpactClient use caseConsultantESG solutions used19M SCI ESG UniversalIndexesMSCI ESG Ratings12ESG solutions used19MSCI ESG RatingsMSCI ESG LeadersIndex (as a performancebenchmark)Asset management armof an insurance firmESG solutions used19M SCI ESG Leaders IndexBloomberg BarclaysMSCI ESG CorporateSustainability IndexesESG solutions used19M SCI ESG SelectLeaders IndexM SCI EmpoweringWomen IndexESG solutions used19MSCI ESG Focus IndexesM SCI ESG ScreenedIndexesMSCI SRI IndexesMSCI ESG Fund Ratings13

Notice and disclaimerThis document and all of the information contained in it, including without limitation all text, data, graphs, charts (collectively, the “Information”) is the property of MSCI Inc. or its subsidiaries (collectively,“MSCI”), or MSCI’s licensors, direct or indirect suppliers or any third party involved in making or compiling any Information (collectively, with MSCI, the “Information Providers”) and is provided forinformational purposes only. The Information may not be modified, reverse-engineered, reproduced or redisseminated in whole or in part without prior written permission from MSCI. All rights in theInformation are reserved by MSCI and/or its Information Providers.About MSCIMSCI is a leading provider of critical decision support tools and services for theglobal investment community. With over 50 years of expertise in research, dataand technology, we power better investment decisions by enabling clients tounderstand and analyze key drivers of risk and return and confidently build moreeffective portfolios. We create industry-leading research-enhanced solutionsthat clients use to gain insight into and improve transparency across theinvestment process.About MSCI ESG Research Products and ServicesMSCI ESG Research products and services are provided by MSCI ESG ResearchLLC, and are designed to provide in-depth research, ratings and analysis ofenvironmental, social and governance-related business practices to companiesworldwide. ESG ratings, data and analysis from MSCI ESG Research LLC. arealso used in the construction of the MSCI ESG Indexes. MSCI ESG Research LLCis a Registered Investment Adviser under the Investment Advisers Act of 1940and a subsidiary of MSCI Inc.To learn more, please visit www.msci.com.The Information may not be used to create derivative works or to verify or correct other data or information. For example (but without limitation), the Information may not be used to create indexes,databases, risk models, analytics, software, or in connection with the issuing, offering, sponsoring, managing or marketing of any securities, portfolios, financial products or other investment vehiclesutilizing or based on, linked to, tracking or otherwise derived from the Information or any other MSCI data, information, products or services.The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. 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ESG Investing is growing exponentially as more investors and issuers utilize ESG and Climate data and tools to support their financial decision making. MSCI ESG Investing Powering better investment decisions The world is changing, creating new and emergent risks Climate risks, regulatory pressures, social and demographic shifts as well as .

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