MSCI ESG FOCUS INDEX METHODOLOGY

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1 INDEX METHODOLOGY MSCI ESG FOCUS INDEX METHODOLOGY MSCI August 2016 AUGUST 2016

2 CONTENTS 1 Intrductin ESG Research Framewrk MSCI ESG Ratings MSCI ESG Cntrversies MSCI ESG Business Invlvement Screening Research Cnstructing the MSCI ESG Fcus Index Defining the Parent Index Defining the exclusin criteria Other exclusin criteria Defining the ptimizatin cnstraints Determining the ptimized prtfli Maintaining the MSCI ESG Fcus Index Quarterly Index Reviews Onging Event-Related Maintenance... 8 Appendix 1: Tbacc And Cntrversial Weapns Exclusin Criteria. 9 Appendix 2: Optimizatin Cnstraints Methdlgy Bk Tracked Changes MSCI Inc. All rights reserved. Please refer t the disclaimer at the end f this dcument. MSCI.COM PAGE 2 OF 14

3 1 INTRODUCTION The MSCI ESG Fcus Index (the Index ) is designed t maximize its expsure t psitive envirnmental, scial and gvernance (ESG) factrs while exhibiting risk and return characteristics similar t thse f the underlying market capitalizatin weighted index. The index is cnstructed by selecting cnstituents f a market capitalizatin weighted index (the Parent Index ) thrugh an ptimizatin prcess that aims t maximize expsure t ESG factrs fr a target tracking errr budget under certain cnstraints. The Index is sectr-diversified and targets cmpanies with high ESG ratings in each sectr. Tbacc and Cntrversial Weapns cmpanies are nt eligible fr inclusin in the Index MSCI Inc. All rights reserved. Please refer t the disclaimer at the end f this dcument. MSCI.COM PAGE 3 OF 14

4 2 ESG RESEARCH FRAMEWORK MSCI ESG Research prvides in-depth research, ratings and analysis f the envirnmental, scial and gvernance-related business practices f thusands f cmpanies wrldwide. It cnsists f an integrated suite f tls and prducts t efficiently manage research, analysis and cmpliance tasks acrss the spectrum f ESG factrs. The MSCI USA ESG Select Index uses cmpany ratings and research prvided by MSCI ESG Research. In particular, this index uses the fllwing three MSCI ESG Research prducts: MSCI ESG Ratings, MSCI ESG Cntrversies Scre, and MSCI ESG Business Invlvement Screening Research. Fr details n MSCI ESG Research s full suite f ESG prducts, please refer t: MSCI ESG RATINGS MSCI ESG Ratings prvides research, analysis and ratings f hw well cmpanies manage envirnmental, scial and gvernance risks and pprtunities. MSCI ESG Ratings prvides an verall cmpany ESG rating - a seven pint scale frm AAA t CCC. In additin, the prduct prvides scres and percentiles indicating hw well a cmpany manages each key issue relative t industry peers. Fr mre details n MSCI ESG Ratings, please refer t MSCI ESG CONTROVERSIES MSCI ESG Cntrversies (earlier knwn as MSCI Impact Mnitr) prvides assessments f cntrversies cncerning the negative envirnmental, scial, and/r gvernance impact f cmpany peratins, prducts and services. The evaluatin framewrk used in MSCI ESG Cntrversies is designed t be cnsistent with internatinal nrms represented by the UN Declaratin f Human Rights, the ILO Declaratin n Fundamental Principles and Rights at Wrk, and the UN Glbal Cmpact. MSCI ESG Cntrversies Scre falls n a 0-10 scale, with 0 being the mst severe cntrversy. Fr mre details n MSCI ESG Cntrversies Scre, please refer t MSCI Inc. All rights reserved. Please refer t the disclaimer at the end f this dcument. MSCI.COM PAGE 4 OF 14

5 2.3 MSCI ESG BUSINESS INVOLVEMENT SCREENING RESEARCH MSCI ESG Business Invlvement Screening Research (BISR) aims t enable institutinal investrs t manage envirnmental, scial and gvernance (ESG) standards and restrictins reliably and efficiently. Fr mre details n MSCI ESG Business Invlvement Screening Research, please refer t MSCI Inc. All rights reserved. Please refer t the disclaimer at the end f this dcument. MSCI.COM PAGE 5 OF 14

6 3 CONSTRUCTING THE MSCI ESG FOCUS INDEX Cnstructing the MSCI ESG Fcus Index invlves the fllwing steps: Defining the underlying Parent Index; Defining the exclusin criteria; Defining the ptimizatin cnstraints; and Determining the ptimized prtfli 3.1 DEFINING THE PARENT INDEX Frm the cnstituents f the Parent Index, securities f cmpanies invlved in fllwing businesses are excluded frm the Parent Index. ESG Fcus Index Parent Index Business Exclusins MSCI EAFE ESG Fcus Index MSCI EAFE Index Tbacc and Cntrversial Weapns Cmpanies MSCI EM (Emerging Markets) ESG Fcus Index MSCI EM (Emerging Markets) Index Tbacc and Cntrversial Weapns Cmpanies MSCI USA ESG Fcus Index MSCI USA Index Tbacc and Cntrversial Weapns Cmpanies Please refer t Appendix 1 fr mre details n exclusins. 3.2 DEFINING THE EXCLUSION CRITERIA Securities f cmpanies invlved in very severe business cntrversies are nt eligible fr inclusin in the MSCI ESG Fcus Index. This is implemented by excluding cnstituents f Parent Index with ESG Cntrversy Scre = 0 ( Red Flag cmpanies) OTHER EXCLUSION CRITERIA Missing Cntrversy Scre Cmpanies nt assessed by MSCI ESG Research n Impact Mnitr Cntrversy Scres are excluded frm the Parent Index. Missing IVA Rating r ESG Scre Cmpanies which are nt rated by MSCI ESG Research n IVA assessment MSCI Inc. All rights reserved. Please refer t the disclaimer at the end f this dcument. MSCI.COM PAGE 6 OF 14

7 3.3 DEFINING THE OPTIMIZATION CONSTRAINTS Cnstituents are selected t maximize expsure t higher ESG IVA scres, subject t maintaining risk and return characteristics similar t the Parent Index. ESG IVA scres are nrmalized and used in the ptimizatin prcess. Optimizatin maximizes the Index s expsure t ESG IVA scres fr a given predicted tracking errr. The fllwing predicted tracking errr targets are used fr the cnstructin f MSCI ESG Fcus Indexes N. ESG Fcus Index Predicted Tracking Errr 1 MSCI EAFE ESG Fcus Index 0.5% 2 MSCI EM (Emerging Markets) ESG Fcus Index 1.0% 3 MSCI USA ESG Fcus Index 0.5% Optimizatin is a quantitative prcess that cnsiders the market capitalizatin weights frm the Parent Index, ESG scres and additinal cnstraints t select and weight the cnstituents f the Index. Nrmalizatin f the ESG scres allws the ptimizatin prcess t assess each scre in the cntext f the verall distributin f the ESG scres. Please refer t Appendix 3 fr the Optimizatin cnstraints. 3.4 DETERMINING THE OPTIMIZED PORTFOLIO The Index is cnstructed using the Barra Open Optimizer in cmbinatin with the relevant Barra Equity Mdel. The ptimizatin uses universe f eligible securities and the specified ptimizatin bjective and cnstraints t determine the cnstituents f the MSCI ESG Fcus Index MSCI Inc. All rights reserved. Please refer t the disclaimer at the end f this dcument. MSCI.COM PAGE 7 OF 14

8 4 MAINTAINING THE MSCI ESG FOCUS INDEX 4.1 QUARTERLY INDEX REVIEWS The Index is rebalanced n a quarterly basis t cincide with the regular Index Reviews (Semi-Annual Index Reviews in May and Nvember and Quarterly Index Reviews in February and August) f the MSCI Glbal Investable Market Indexes. The changes are implemented at the end f February, May, August and Nvember. The pr frma indexes are in general annunced nine business days befre the effective date. ESG scres used fr the Quarterly Index Reviews will be taken as f the end f the mnth preceding the Index Review, i.e., January, April, July and Octber. At each Index Review, the ptimizatin prcess utlined in Sectin 3 is implemented. Cmpanies can nly be added t the Index nly at regular Index Reviews. 4.2 ONGOING EVENT-RELATED MAINTENANCE In general, the MSCI ESG Fcus Index fllws the event maintenance f the Parent Index. New additins t the Parent Index due t crprate events will nt be added simultaneusly t the Index, but will be cnsidered fr inclusin at the fllwing Index Review. Cmpanies deleted frm the Parent Index between Index Reviews due t crprate events maintenance are als deleted at the same time frm the Index. The technical details relating t the handling f specific crprate event types can be fund in the MSCI Crprate Events Methdlgy bk available at: MSCI Inc. All rights reserved. Please refer t the disclaimer at the end f this dcument. MSCI.COM PAGE 8 OF 14

9 APPENDIX 1: TOBACCO AND CONTROVERSIAL WEAPONS EXCLUSION CRITERIA Tbacc Invlvement Cmpanies which meet the fllwing Tbacc invlvement criteria are excluded frm the Index All cmpanies classified as Prducer r Licensr All cmpanies classified as Distributr, Retailer, r Supplier that earn 15% r mre f revenues frm tbacc prducts All cmpanies classified as Ownership by a Tbacc Cmpany r Ownership f a Tbacc Cmpany Cntrversial Weapns Invlvement Cmpanies which meet the fllwing Cntrversial Weapns criteria are excluded frm the Index Cluster Bmbs MSCI ESG Research s cluster bmb research identifies public cmpanies that are invlved in the prductin f cluster bmbs and munitins, r the essential cmpnents f these prducts. Landmines MSCI ESG Research s landmines research identifies public cmpanies that are invlved in the prductin f anti persnnel landmines, anti vehicle landmines, r the essential cmpnents f these prducts. Depleted Uranium Weapns MSCI ESG Research s depleted uranium weapns research identifies public cmpanies invlved in the prductin f depleted uranium weapns and armr. Chemical and Bilgical Weapns MSCI ESG Research s chemical and bilgical weapns research identifies public cmpanies that are invlved in the prductin f chemical and bilgical weapns, r the essential cmpnents f these prducts. Invlvement criteria: Prducers f the weapns 2015 MSCI Inc. All rights reserved. Please refer t the disclaimer at the end f this dcument. MSCI.COM PAGE 9 OF 14

10 Prducers f key cmpnents f the weapns Ownership f 20% r mre f a weapns r cmpnents prducer The minimum limit is raised t 50% fr financial cmpanies having an wnership in a cmpany that manufactures cntrversial weapns r key cmpnents f cntrversial weapns Revenue limits: Owned 50% r mre by a cmpany invlved in weapns r cmpnents prductin Any identifiable revenues, i.e., zer tlerance Fr details please refer t MSCI Glbal ex Cntrversial Weapns Indexes Methdlgy at MSCI Inc. All rights reserved. Please refer t the disclaimer at the end f this dcument. MSCI.COM PAGE 10 OF 14

11 APPENDIX 2: OPTIMIZATION CONSTRAINTS At each Quarterly Index Review, the fllwing ptimizatin cnstraints are used t ensure replicability and investability: Optimizatin Cnstraints N. Parameter EAFE EM USA 1 Predicted Tracking Errr 0.5% 1.0% 0.5% 2 Min Cnstituent Weight 0.1% 0.1% 0.1% 3 Cnstituent Active Weight +/-2% +/-2% +/-2% 4 Security Weight as a Multiple f its weight in the Parent Index Active Sectr Weights +/-5% +/-5% +/-5% 6 Active Cuntry Weights +/-5% +/-5% 7 8 One Way Turnver during May and Nvember Index Review One Way Turnver during Feb and Aug Index Review Nt Applicable 10% 10% 10% 5% 5% 5% 9 Specific Risk Aversin Cmmn Factr Risk Aversin Infeasible Slutin - During the Quarterly and Semi-Annual Index Reviews, in the event that there is n ptimal slutin that satisfies all the ptimizatin cnstraints, first the turnver cnstraint will be relaxed up t a maximum turnver f 30% in steps f 1% until an ptimal slutin is fund. If a feasible slutin is nt fund at turnver f 30%, the predicted tracking errr is relaxed up t a maximum f 5 times f the riginal predicted tracking errr in steps n 0.1%. In the event that feasible slutin is nt fund fr maximum predicted errr, the Index will nt be rebalanced fr that index review MSCI Inc. All rights reserved. Please refer t the disclaimer at the end f this dcument. MSCI.COM PAGE 11 OF 14

12 METHODOLOGY BOOK TRACKED CHANGES The fllwing sectins have been mdified since April 2016: Sectin 1: Intrductin and ther relevant sectins T implement name change Index name has been changed frm ESG Select t ESG Fcus Sectin 3.1, 3.3 and Appendix 2: Added reference t USA ESG Fcus Index MSCI Inc. All rights reserved. Please refer t the disclaimer at the end f this dcument. MSCI.COM PAGE 12 OF 14

13 INDEX METHODOLOGY CONTACT US AMERICAS Americas * Atlanta Bstn Chicag Mnterrey New Yrk San Francisc Sa Paul Trnt EUROPE, MIDDLE EAST & AFRICA Cape Twn Frankfurt Geneva Lndn Milan Paris * ABOUT MSCI Fr mre than 40 years, MSCI s researchbased indexes and analytics have helped the wrld s leading investrs build and manage better prtflis. Clients rely n ur fferings fr deeper insights int the drivers f perfrmance and risk in their prtflis, brad asset class cverage and innvative research. Our line f prducts and services includes indexes, analytical mdels, data, real estate benchmarks and ESG research. MSCI serves 98 f the tp 100 largest mney managers, accrding t the mst recent P&I ranking. Fr mre infrmatin, visit us at ASIA PACIFIC China Nrth * China Suth * Hng Kng Mumbai Seul * Singapre * Sydney Taipei * Tky * = tll free AUGUST 2016

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MSCI USA ESG SELECT INDEX METHODOLOGY

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