RESPONSIBLEINVESTMENTBRIEFING2015

RI&FIXEDINCOMEAdamKirkman,AMPCapital

MichaelSalvaIco,MSCIESG

©2015MSCIInc.Allrightsreserved.Pleaserefertothedisclaimerattheendofthisdocument.

RESPONSIBLEINVESTINGANDFIXEDINCOME

MichaelSalvaIco

ClientCoverage

+61290339303

November2015

THEWORLDISCHANGING

LIMITSURPRISESFROMIDIOSYNCRATICEVENTRISKS

LIMITEXPOSURETOSYSTEMATICRISKFACTORS

FRAUD STRIKES ACCIDENTS SHUTDOWNS

WEATHER PATTERNS

WATER SCARCITY

DATA SECURITY

SKILLS SHORTAGES

MoredataandcontextcanleadtobeYerinvestmentdecisions

3

REPUTATIONALRISKANDMATERIALRISK

4

FinancialReturns

ValuesAlignment

FinancialReturns

ESGFactors

ExcludecompaniesexposedtoparIcularthemesorissues(e.g.,exControversial

Weapons,exFossilFuelsorHumanRights)

AchieveparIcularESGobjecIveswithrisk-returnobjecIve

ScreeningIntendedtoalignaporEoliowithasetofethicalorpoliIcalvalueswithout

regardtothefinancialimpact

IntegraIonIntendedtoincorporateESGFactorswhilealigningwiththemarketin

tradiIonalassetallocaIonapproaches

TRENDS:CLIENTDEMAND

•  AccordingtoUSSIF,clientdemandistheNumber1reasonforincorporaIngESGCriteriaintoinvestmentvehicles.AssetMangersarefocusedonbuildingESGtargetdateandotherDCinvestmentplanopIonstailoredtomeettheneedsofMillennials¹

80% 77% 76% 73% 69%62%

28%

0%

20%

40%

60%

80%

100%

ClientDemand Mission Returns RiskManagement SocialBenefit FiduciaryDuty RegulatoryCompliance

ReasonsforIncorporaIngESGCriteriaintoInvestments

1.Source:USSIFReport2014,Fig2.12 5

TRENDS:ESGINTEGRATION

ShiQingawayfromanemphasisonnegaIvescreeningtobroadESGassetallocaIonframeworks

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ESGINVESTMENTSIGNALS

7

COMPANYEXAMPLES:VOLKSWAGEN

8

Stakeholderscouldhaveiden<fiedproblemswiththecompanylongbeforethescandalbroke,accordingtoHowardSherman,headofcorporategovernancebusinessdevelopmentatMSCI.

“WehavehadconcernsaboutVWforsome4me,”MrShermansaid.“[It’sMSCI]corporategovernancescore..waslowerthan72percentofcompaniesglobally.”

...[and]hasbeenfallingsince2014dueto“managementandboardturmoil”.

BBB

2012

CCC

2013

CCC

2014

CCC

12-15%DropinProducIon

UnsafeWorkingCondiIons

HARMONYGOLD

9

BARRICKGOLD:LossofLicencetoOperate;USD3.7bnspent;USD6bnlawsuitpending

2010

A

2011

BBB

March2012

BB

March2013

B

March2014

B 10

RESEARCHCONCLUSIONS

HighercostofcapitalforpoorESGperformers,includingloandebt,bonddebt,andcostofequity.Source:Chava,2011;20+studies,bothacademicandindustry

HighervolaIlityforpoorESGperformersandakerESGeventssuchasspills,laborstrikes,andfraud.Sources:Lansilah<,2012;CreditSuisse;DeutscheBank;MSCIESGResearch,etal.

AccounIngirregulariIesandperformancelinkedtoESGandbroadgovernancefactors.Sources:Huang,2010;BhagatandBolton,2008;Cremersetal.,2005;DeutscheBank,2012;ISS,2011;etal.

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ESGEVENTCREDITRISK–HISTORICALEXAMPLES

12

100

150

200

250

300

350

400

450

500

Jan-2011 Jul-2011 Jan-2012 Jul-2012

bp Qantas

100

150

200

250

300

350

400

450

500

550

Jan-2011 Jul-2011 Jan-2012 Jul-2012

bp BofA

0

100

200

300

400

500

600

700

Jan-2010 Jul-2010 Jan-2011 Jul-2011 Jan-2012 Jul-2012

bp Transocean

May2010

BBB

May2011

BB

Dec200

8

BB

Oct2010

B

Dec201

1

CCC

Apr2008

BB

Jan2

009

CCC

§  DeepwaterHorizonexplosioninApr2010

§  SignificantliabiliIesarisingfrominsuranceclaims,lawsuits,disrupIons

§  LabordisputegroundsfleetinAug2011

§  EsImatedcostofdisputes=$194million,contributesto$244millionfull-yearloss

§  AIGandFHFAlawsuitsinAug2011forallegedmortgagesecuriIesfraud

ENVIRONMENTAL SOCIAL GOVERNANCE

§  Creditdefaultswapspreadson5yrseniorunsecureddebt;MSCIIVARaIngs;Source:MSCI,Factset

ESGRESEARCHANDTOOLS

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MSCIBARCLAYSFIXEDINCOMEINDEXES

•  OverweightsESGhigh-rated/posiIvemomentumissuersandunderweightslow-rated/negaIvemomentum

•  FactorIltsbasedonthe7ESGleYerraIngsandraIngsmomentumoverpastyear

•  CanbecombinedwithotherscreensbasedonBISRorraIngs

•  AppliesminimumESGraIngthreshold

•  ≥BBBforheadlineindex

•  Unratedissuersareexcluded

•  Sectordrikallowedwithincorporateindicesorcanbepreserved(weightsnormalizedtoparentindex)

•  AppliesnegaIvescreensforissuessuchasalcohol,tobacco,gambling,weapons,firearms,GMOs,etc.

•  UsessameSRIdefiniIonasMSCISRIequityindices

•  ExcludesImpactMonitor“Red”

•  IndexFamilies

• ExControversialWeapons

• ReligiousScreens• ExSancIonedCountries• ExPredatoryLending

ESGIndexFamily

ESGSociallyResponsible ESGSustainability ESGWeighted

Credit/Corporate Credit/Corporate

Aggregate

Credit/Corporate

Gov’t-Related/Treasuries

Aggregate

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BROADESGRATINGSCOVERAGEOFFIXEDINCOMEISSUERS

BarclaysGlobalAggregate

>85%MVApproach:IVAorGov’t

Government-Related

Approach:IVA(naIonalO&G,uIliIes,banks,infrastructure)orGov’t(others)

AgenciesApproach:IVA

NonListed

Approach:IVA(uIliIes,infrastructure)orGov’t(states,provinces)

LocalAuthoriIes

Approach:IVA(mulIlateralbanks)orGov’t(adminbodies)

SupranaIonals>90%MVApproach:IVACoveredBonds

Approach:IVACoveredBondsonlySecuriIzed

>99%MVApproach:Gov’t(>130countries)

Treasuries>90%MVglobal+USD,EUR,GBPApproach:IVA

Corporates(Investment

Grade)

Approach:IVAParent-subsidiarymapping

Listed

>99%MVApproach:Gov’t(>130countries)

Sovereign

Noplanstorate;canmaptoissuerABS

Noplanstorate;canmaptoissuerMBS

CorporateRaIngModel(IVA)

KEY:

Sovereign/GovernmentRaIng

Model

OutofScope

Mixed(CorporateorSovereign)

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KEYDIFFERENCES–ESGINFIXEDINCOMEVS.EQUITY

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•  Investmentgradecorporatebonds–sectorbreakdown:

22.0%

39.6%3.2%

7.9%

9.9%

11.9%

12.7%

8.8%

6.9%

8.0%

3.9%

7.7%

10.4%

6.9%

5.0%

4.3%

13.6%

4.0%12.7%

1.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

MSCIACWI BarclaysCorporate

HealthCare

IT

Materials

Industrials

Telecom

Energy

ConsumerDiscreIonary

ConsumerStaples

UIliIes

Financials

MSCIESGGOVERNMENTRATINGS

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NATURALRESOURCES

ENVIRONMENTALVULNERABILITY

HUMANCAPITAL

SOCIO-ECONOMICENVIRONMENT

FINANCIALGOVERNANCE

Exclusions

Indexes(EM,DM,Equity,FI)

Riskmonitoring

ESGintegraIonforsovereignandgovernmentbonds

Understandcountryrisk

MSCIESGSCREENINGTOOLS

POLITICALGOVERNANCE

ESGSOVEREIGNRESEARCH–KEYTHEMES

EnergyResourceDepleIonResourceDepleIon

as%ofEconomicGrowth

ReinvestmentinHumanCapitalandInfrastructure

MostImprovedAccesstoBasicSocialServices

PrecursorsofConflictCivilLiberIesandPoliIcalFreedom

vs.Unemployment

OilThirst&PoliIcalInstabilityEuropeanOilandGasImportsbyCountry/PoliIcalRisk

18

CONVERGENCE–ESGANDCREDITRATINGS

ESGRaIng(MSCI)

CreditRaIng(Moody’s)

EMCreditUpgrades

EMCreditDowngrades

EurozoneCreditDowngrades

19

GREENBONDS–GROWTHOFMARKET

20 Source:MSCIESGResearch,Barclays.IndexIncep<onis12/31/2013,priorvalueses<matedbyMSCIESGResearch.

0

10,000

20,000

30,000

40,000

50,000

01/2008 01/2009 01/2010 01/2011 01/2012 01/2013 01/2014 01/2015

BarclaysMSCIGlobalGreenBondIndexAmountOutstanding(USDmm)

BarclaysMSCIGreenBondIndex

Launched

FirstsizableCorporateUseofProceedsbonds

Firstlabeledgreenbondsissued(EIB,IBRD)

StateStreetlaunchesfirstindex-linked

GreenBondFund

GlobalGreenBondIndex

CorporateGreenBondIndex

MSCIESGRATINGSPROCESS,DATASOURCES,ANDOUTPUTS

UnderlyingESGdataissourcedfrom:•  100+specializeddatasets(government,NGO,andproprietarymodels,etc);•  Companydisclosure(10-K,sustainabilityreport,proxyreport,etc);•  5000+mediasources(globalandlocalnewssources,government,NGO,etc).

Dataspecialists,systema4cqualitycontrolprocesses,andcorporateverifica4onprocessensurequalityandcomparabilityofunderlyingmetrics.

KeyIssuesarescored(0-10)usingarules-basedscoringmodel.SystemaIcandongoingmonitoringofcontroversiesandevents.

Data MetricsEvaluaIon&Monitoring

KeyIssuescoresandweightscombinetoanoverallESGra4ng(AAA-CCC)relaIvetoindustrypeers;RaIngsaresubjecttoindustry-andmarket-leadrealitycheck,andformalcommiYeereview.

OurresearchteamprovidesdeeperinsighttoexplainmaterialESGrisksthrough:•  Companyreports•  Industryreports•  Thema4creports•  Analystcalls

RaIng Insight

21

IMPACTMONITORREPORTS

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ImpactMonitorControversyAssessment:measurecompanyperformancerelaIvetoglobalESG-relatednormsandconvenIonsImpact:AnalysescompanyESGControversiesandtheirimpactDetailedanalysis:reportsandscoresof31indicatorsgroupedbyfivekeyissues

§  HumanRightsandCommunity§  LabourRightsandSupplyChain§  Governance§  Environment§  Customers

EasyidenIficaIon:Red,YellowandGreenflags,supportedbywriYenanalysisandstatusofeachcontroversy

RESEARCH:BUSINESSINVOLVEMENTSCREENING(BISR)

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BISRBusinessInvolvement:assessmentofcompanyacIvityandrevenueexposureto150factors,suchastobacco,weapons,etc.Manageexposures:usingthirdpartyassessmentofESGstandardsandrestricIonsprovidingareliableandefficientmeansofidenIfyingrisks.Comply:withriskmandatesknowingMSCIbroadcoverageofcompaniesincludesalllistedequiIesandsomenon-listedinsomefactorsandcanincludecustomcoveragewhererequired

§ UnderstandandmanageaccounIngrisk

§  IdenIfypotenIalaccounIngirregulariIes

ACCOUNTINGGOVERNANCERISK(AGR)

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IdenIfyPotenIalFraudandAvoidStockDrops

•  AGRisdesignedtoidenIfyextremevaluesinaccounIngandnon-accounIngmetricsthatmaybeindicatorsofopaqueandpotenIallymisleadingfinancialreporIng

AssessRiskswithCustomizedApps

•  IdenIfycompaniesatriskforsecuriIesclassacIonliIgaIonusingAGR’sLiIgaIonRiskModelandcompaniesinseverefinancialdistressusingAGR’sFinancialDistressModel

ABOUTMSCIESGRESEARCH

Over125assetownerswith$4.4trillioninassetsdependonMSCIESGResearchOver900clientsglobally,with$15trillioninAUM

Boston

NewYork

Toronto

SanFrancisco

CapeTown

Tokyo

Beijing

Sydney

MumbaiManila

London

Paris

Geneva

Monterrey

RockvilleAnnArbor

Frankfurt

ü Over 200 Global Staff ü  140+ Full-time Research Staff ü  ESG Research Produced Entirely In-house

ü  Full Analysis on over 5,700 Global Companies

25

CONTACTUS

26

AMERICAS +12128045299

EUROPE,MIDDLEEAST&AFRICA +442076182510

ASIAPACIFIC +61290339339

msci.com/esgesgclientservice@msci.com

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