Providing Fund-Level Transparency Over 100 ESG metrics measuring fund-level exposure to factors including carbon, water, sustainable impact, governance risks and controversies Jørgen J Mørk Vice President ESG Client Coverage, EMEA 2016 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.
INTRODUCING MSCI ESG RESEARCH 900+ clients 47 of top 50 global asset managers 1 150+ ESG analysts 2 700+ ESG equity & fixed income indexes San Francisco Toronto Portland Boston New York Rockville London Paris Frankfurt Geneva Beijing Tokyo Monterrey Hong Kong Mumbai Manila Cape Town Sydney 1 Based on P&I AUM data as of Dec 2014 and MSCI clients as of December 2015 3 Source: MSCI ESG Research as of February 2016 2
INVESTORS REQUIRE TRANSPARENCY Institutional Retail Asset Owners are committing to integrate ESG across their investment portfolios and require transparency of ESG across their investments Millennials are demanding greater transparency of the ESG characteristics of their investments from their advisors 1 https://www.msci.com/documents/10199/b3d456db-353a-4eea-8f08-c12447427940 2 http://www.theventure.com/global/en/trends/how-millennials-are-driving-impact-investing 3
How can I gain exposure to positive impact investments while maintaining a similar risk/return profile? I want more options to align my investments with my values. I m concerned about my longterm exposure to climate change risks. WEALTH HOLDERS MAY DEMAND MORE OF THEIR MANAGERS 2016 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.
INVESTORS REQUIRE TRANSPARENCY FOR ESG INTEGRATION TRANSPARENCY & REPORTING FOR GREATER CHOICE AND CONTROL MEASURE ESG CHARACTERISTICS OF THE TOTAL PORTFOLIO RANK FUNDS BASED ON ESG CHARACTERISTICS SCREEN FOR FUNDS THAT ALIGN WITH CLIENT VALUES COMPLEMENT MANAGER DUE DILIGENCE PROCESS 5
MORE THAN 100 ESG METRICS TO ALIGN WITH INVESTMENT FRAMEWORKS The metrics fall into three categories of exposure: SUSTAINABLE IMPACT Do you have exposure to sustainable impact companies? VALUES ALIGNMENT How aligned are your values and investments? RISK EXPOSURE Are you taking unintended bets? EXAMPLE How many of the fund holdings derive at least 50% or more revenue from Clean Tech themes? 40% EXAMPLE How many of the fund holdings are involved in Tobacco? 12% EXAMPLE How many of the fund holdings have exposure to fossil fuel reserves? 9.3% 6
UNDERLYING METRICS HELP TELL A MORE COMPLETE STORY OF A FUND Fund Peer Group ESG Quality Score Peer Rank Global Rank Carbon Intensity Sustainable Impact SRI Exclusion Lbpam Responsable Actions Europe Equity Europe 7.5 98.7 99.0 101.4 10.7 5.0 PARVEST Sustainable Equity Europe C C EUR Equity Europe 7.5 98.6 98.9 179.3 17.5 4.2 Candriam Fund Sustainable Equities Europe C Cap Equity Europe 7.5 98.5 98.9 71.7 13.7 7.0 MAIF Investissement Responsable Europe I Equity Europe 7.5 98.3 98.8 176.6 17.9 4.2 Candriam Sustainable Europe C Cap Equity Europe 7.5 98.2 98.8 71.6 13.5 6.9 BNP Paribas Actions Europe Responsable D Equity Europe 7.5 98.0 98.8 176.4 17.8 4.2 Share Europe-Selection Cap Equity Europe 7.5 97.9 98.8 31.7 10.7 10.3 ishares MSCI Sweden ETF Equity Europe 7.5 97.8 98.8 33.2 5.2 7.0 Pictet-European Sustainable Equities-I EUR Equity Europe 7.4 97.6 98.7 56.8 17.8 0.0 Ethique et Partage - CCFD Equity Europe 7.4 97.5 98.6 159.9 16.4 0.0 Source: MSCI ESG Research 2016 7
EXAMPLE: CARBON Some investors may want to minimize carbon exposure Fund Peer Group ESG Quality Score Peer Rank Global Rank Carbon Intensity Sustainable Impact SRI Exclusion Lbpam Responsable Actions Europe Equity Europe 7.5 98.7 99.0 101.4 10.7 5.0 PARVEST Sustainable Equity Europe C C EUR Equity Europe 7.5 98.6 98.9 179.3 17.5 4.2 Candriam Fund Sustainable Equities Europe C Cap Equity Europe 7.5 98.5 98.9 71.7 13.7 7.0 MAIF Investissement Responsable Europe I Equity Europe 7.5 98.3 98.8 176.6 17.9 4.2 Candriam Sustainable Europe C Cap Equity Europe 7.5 98.2 98.8 71.6 13.5 6.9 BNP Paribas Actions Europe Responsable D Equity Europe 7.5 98.0 98.8 176.4 17.8 4.2 Share Europe-Selection Cap Equity Europe 7.5 97.9 98.8 31.7 10.7 10.3 ishares MSCI Sweden ETF Equity Europe 7.5 97.8 98.8 33.2 5.2 7.0 Pictet-European Sustainable Equities-I EUR Equity Europe 7.4 97.6 98.7 56.8 17.8 0.0 Ethique et Partage - CCFD Equity Europe 7.4 97.5 98.6 159.9 16.4 0.0 Source: MSCI ESG Research 2016 8
EXAMPLE: SUSTAINABLE IMPACT Align their investments with the UN Sustainable Development Goals Fund Peer Group ESG Quality Score Peer Rank Global Rank Carbon Intensity Sustainable Impact SRI Exclusion Lbpam Responsable Actions Europe Equity Europe 7.5 98.7 99.0 101.4 10.7 5.0 PARVEST Sustainable Equity Europe C C EUR Equity Europe 7.5 98.6 98.9 179.3 17.5 4.2 Candriam Fund Sustainable Equities Europe C Cap Equity Europe 7.5 98.5 98.9 71.7 13.7 7.0 MAIF Investissement Responsable Europe I Equity Europe 7.5 98.3 98.8 176.6 17.9 4.2 Candriam Sustainable Europe C Cap Equity Europe 7.5 98.2 98.8 71.6 13.5 6.9 BNP Paribas Actions Europe Responsable D Equity Europe 7.5 98.0 98.8 176.4 17.8 4.2 Share Europe-Selection Cap Equity Europe 7.5 97.9 98.8 31.7 10.7 10.3 ishares MSCI Sweden ETF Equity Europe 7.5 97.8 98.8 33.2 5.2 7.0 Pictet-European Sustainable Equities-I EUR Equity Europe 7.4 97.6 98.7 56.8 17.8 0.0 Ethique et Partage - CCFD Equity Europe 7.4 97.5 98.6 159.9 16.4 0.0 Source: MSCI ESG Research 2016 9
MSCI S APPROACH High coverage thresholds: 65% To ensure a high confidence assessment in a fund s overall ESG score we require 65% or more coverage of the fund s underlying holdings. We rate over 23,000 mutual funds and ETFs Strong methodology The MSCI ESG Research works with 47 of the top 50 global asset managers. We employ a quantitatively driven methodology to consider the most material, industry-specific ESG issues Breadth of topics We provide over 100 scores and metrics to cater for a diverse set of clients needs and beliefs. One size does not fit all Broad coverage of equity and fixed income issuers We rate over 6,000 companies (11,000 total issuers) and more than 350,000 equity and fixed income securities globally 1 Based on P&I AUM data as of Dec 2014 and MSCI clients as of December 2015 2 Reference: https://www.msci.com/esg-fund-metrics 3 Reference: MSCI ESG Research Factsheet 10
ESG QUALITY OF HOLDINGS VS. ESG QUALITY OF MANAGER Transparency around the ESG Quality of a fund s holdings may complement manager evaluation and due diligence, for example, by providing the investor with objective tools and meaningful comparisons to facilitate a concrete dialogue around a manager s approach toward ESG incorporation. However, ESG Quality Scores do not convey the quality of a fund manager s ESG strategy, capabilities, process, or intentionality. MANAGER ESG QUALITY ESG capabilities, experience, processes ESG track record of manager Engagement strategy HOLDINGS ESG QUALITY ESG Quality of underlying holdings Ability of underlying holdings to manage medium- to long-term risks and opportunities related to ESG issues ESG integration strategy 11
FUND COVERAGE UNIVERSE Multi-asset class funds covered globally 23,000 Fund Portfolios 74,000 Fund Share Classes By Asset Class Equity 47,089 Bond 17,601 Mixed Assets 6,800 Money Market 1,257 Alternatives 600 Commodity 245 Real Estate 34 Other 96 By Asset Universe Mutual Funds 65,035 Insurance Funds 4,052 Exchange Traded Funds 3,054 Pension Funds 1,296 Closed End Funds 188 Investment Trust 55 Hedge Funds 37 By Region (Domicile) Luxembourg 22,781 USA 17,212 Canada 8,007 UK 5,961 Ireland 4,463 S. Korea 2,104 France 2,080 India 1,399 Japan 1,187 Switzerland 1,101 Other 7,427 Coverage Criteria MSCI ESG Fund Metrics holdings data is sourced from Lipper. To be included in MSCI ESG Fund Metrics coverage universe, a fund must pass the following three criteria: 1. 65% of the fund s gross weight must come from covered securities. 2. Fund holdings date must be less than one year old. 3. Fund must have at least ten securities. By Share Class, as of February 2016 12
MSCI ESG RATINGS What s under the hood of the ESG Quality Scores 13
ESG AS A MATERIAL RISK FACTOR UNDERSTAND EXPOSURE TO LONG-TERM SYSTEMATIC RISK FACTORS ASSESS MANAGEMENT QUALITY & LIMIT SURPRISES AND EVENT RISKS WEATHER PATTERNS WATER SCARCITY DATA SECURITY DEMOGRAPHIC SHIFTS ACCIDENTS SHUTDOWNS FRAUD STRIKES EXAMPLE: CLIMATE CHANGE RISK RECENT EXAMPLES: Volkswagen (CCC) Prior to emissions cheating scandal, flagged on Governance and accounting concerns Valeant (CCC) Downgraded in May 15 on Very Aggressive accounting, drug pricing, & product safety concerns Source: International Energy Agency, MSCI ESG Research Over 190 countries submitted carbon reduction targets in Paris in 2015 Petrobras (BB) Ranks in bottom quartile on Corruption control, governance, and accounting practices 14
MSCI ESG RATINGS METHODOLOGY Best-in-Class AAA to CCC industry relative ratings Material Issues Only 156 industry model variants, with different weighted issues Exposure Driven Analysis Operational and revenue risk exposures drive issue assessment Governance Risk Assessment Flag potential governance concerns across 96 Key Metrics 15
EVALUATE MANAGEMENT STRATEGY IN THE CONTEXT OF RISK EXPOSURE Policies & commitments Programs & initiatives Performance indicators Controversies 16
FOCUS ON OBJECTIVITY & RISK: NOT JUST DISCLOSURE COMPANY A Policy: Child Labor Policy: Wages & Hours Compliance Audits Corrective Action Plan Engagement with NGOs 200 Suppliers Production in Italy 10,000 Units $100m Revenue at Risk COMPANY B Policy: Child Labor Policy: Wages & Hours Compliance Audits Corrective Action Plan Engagement with NGOs 1,500 Suppliers Production in Bangladesh 300,000 Units $20bn Revenue at Risk 17
APPENDIX 18
Company Score COMPANY SCORES VS. COMPANY SIZE Company Market Cap 19
ESG FUND SCORES VS. FUND SIZE 10 9 8 Fund ESG Quality Score 7 6 5 4 3 2 1 0 $0.00 $5,000,000,000.00 $10,000,000,000.00 $15,000,000,000.00 $20,000,000,000.00 $25,000,000,000.00 $30,000,000,000.00 Fund Net Asset Value (USD) 20
OVER 100 METRICS, INCLUDING: SUSTAINABLE IMPACT VALUES ALIGNMENT RISK EXPOSURE Overall Sustainable Impact Themes (% ) Environmental Clean Tech Companies (%) Alternative Energy (%) Energy Efficiency (%) Green Building (%) Pollution Prevention (%) Sustainable Water (%) Social Social Impact Companies (%) Affordable Housing (%) Education Services (%) Nutritious Food (%) Health Care (%) Sanitation Products (%) Social Finance (%) Controversies Severe Env. Controversies (%) Severe Labor Controversies (%) Severe Customer Controversies (%) Severe Human Rights and Community Controversies (%) Severe Governance Controversies (%) International Norms Standards UN Global Compact Compliance Violation (%) UN Global Compact Compliance Watch List (%) Human Rights Norms Violation (%) Human Rights Norms Watch List (%) Labor Norms Violation (%) Labor Norms Watch List(%) Business Involvement Catholic Values Flag (%) Islamic Values Flag (%) SRI Exclusion Criteria (%) Adult Entertainment (%) Alcohol (%) Gambling (%) Genetic Engineering - GMO (%) Nuclear Power (%) Predatory Lending (%) Tobacco (%) Controversial Weapons (%) Weapons (%) Scores & Ranking ESG Quality Score (0-10) Peer Group Percentile Rank (1-100) Global Percentile Rank (1-100) Environmental Quality Score (0-10) Social Quality Score (0-10) Governance Quality Score (0-10) Rating Distribution & Trend Environmental Risks Carbon Footprint Fossil Fuel Reserves (%) Water Exposure (%) Governance Risks Board Flag (%) Board Independence (%) No Female Directors (%) Pay Flag (%) Ownership & Control Flag (%) Accounting Flag (%) 21
ABOUT MSCI About MSCI ESG Research Products and Services MSCI ESG Research products and services are provided by MSCI ESG Research Inc., and are designed to provide in-depth research, ratings and analysis of environmental, social and governance-related business practices to companies worldwide. ESG ratings, data and analysis from MSCI ESG Research Inc. are also used in the construction of the MSCI ESG Indexes. MSCI ESG Research Inc. works with 47 of the top 50 global asset managers, according to the most recent P&I ranking. MSCI ESG Research Inc. is a Registered Investment Adviser under the Investment Advisers Act of 1940 and a subsidiary of MSCI Inc. About MSCI For more than 40 years, MSCI s research-based indexes and analytics have helped the world s leading investors build and manage better portfolios. Clients rely on our offerings for deeper insights into the drivers of performance and risk in their portfolios, broad asset class coverage and innovative research. Our line of products and services includes indexes, analytical models, data, real estate benchmarks and ESG research. MSCI serves 97 of the top 100 largest money managers, according to the most recent P&I ranking. For more information, visit us at www.msci.com. 22
NOTICE AND DISCLAIMER This 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 for informational purposes only. The Information may not be modified, reverse-engineered, reproduced or redisseminated in whole or in part without prior written permission from MSCI. 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 vehicles utilizing 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. NONE OF THE INFORMATION PROVIDERS MAKES ANY EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION (OR THE RESULTS TO BE OBTAINED BY THE USE THEREOF), AND TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EACH INFORMATION PROVIDER EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION. Without limiting any of the foregoing and to the maximum extent permitted by applicable law, in no event shall any Information Provider have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits) or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited, including without limitation (as applicable), any liability for death or personal injury to the extent that such injury results from the negligence or willful default of itself, its servants, agents or sub-contractors. Information containing any historical information, data or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Past performance does not guarantee future results. The Information should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. All Information is impersonal and not tailored to the needs of any person, entity or group of persons. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), any security, financial product or other investment vehicle or any trading strategy. It is not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index. MSCI does not issue, sponsor, endorse, market, offer, review or otherwise express any opinion regarding any fund, ETF, derivative or other security, investment, financial product or trading strategy that is based on, linked to or seeks to provide an investment return related to the performance of any MSCI index (collectively, Index Linked Investments ). MSCI makes no assurance that any Index Linked Investments will accurately track index performance or provide positive investment returns. MSCI Inc. is not an investment adviser or fiduciary and MSCI makes no representation regarding the advisability of investing in any Index Linked Investments. 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 not reflect 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 would cause the performance of an Index Linked Investment to be different than the MSCI index performance. 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 performance results and actual results subsequently achieved by any investment strategy. Constituents of MSCI equity indexes are listed companies, which are included in or excluded from the indexes according to the application of the relevant index methodologies. Accordingly, constituents in MSCI equity indexes may include MSCI Inc., clients of MSCI or suppliers to MSCI. Inclusion of a security within an MSCI index is not a recommendation by MSCI to buy, sell, or hold such security, nor is it considered to be investment advice. Data and information produced by various affiliates of MSCI Inc., including MSCI ESG Research Inc. and Barra LLC, may be used in calculating certain MSCI indexes. More information can be found in the relevant index methodologies on www.msci.com. MSCI receives compensation in connection with licensing its indexes to third parties. MSCI Inc. s revenue includes fees based on assets in Index Linked Investments. Information can be found in MSCI Inc. s company filings on the Investor Relations section of www.msci.com. MSCI ESG Research Inc. is a Registered Investment Adviser under the Investment Advisers Act of 1940 and a subsidiary of MSCI Inc. Except with respect to any applicable products or services from MSCI ESG Research, neither MSCI nor any of its products or services recommends, endorses, approves or otherwise expresses any opinion regarding any issuer, securities, financial products or instruments or trading strategies and MSCI s products or services are not intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Issuers mentioned or included in any MSCI ESG Research materials may include MSCI Inc., clients of MSCI or suppliers to MSCI, and may also purchase research or other products or services from MSCI ESG Research. MSCI ESG Research materials, including materials utilized in any MSCI ESG Indexes or other products, have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. Any use of or access to products, services or information of MSCI requires a license from MSCI. MSCI, Barra, RiskMetrics, IPD, FEA, InvestorForce, and other MSCI brands and product names are the trademarks, service marks, or registered trademarks of MSCI or its subsidiaries in the United States and other jurisdictions. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and Standard & Poor s. Global Industry Classification Standard (GICS) is a service mark of MSCI and Standard & Poor s. 23