msci esg presentation - koc

MSCI ESG Presentation for Knights of Columbus Conference:ESG d S t i bl I ti O iESG and Sustainable Investing OverviewOctober 2011

Noel Friedman, CFA

noel friedman@msci com

msci.commsci.com

[email protected]

MSCI – Leading Brands Worldwide

MSCI branded products include the MSCI Global Equity Indices, MSCI ESG Indices and Research products.

Barra equity and multi-asset class portfolio analytics products helpasset managers and owners measure,

RiskMetrics multi-asset, position-based risk and wealth management products and services enable clients to

FEA energy and commodity asset valuation products offer a variety of quantitative analytics tools for

ISS governance researchand outsourced proxy voting and reporting services help institutional investors

CFRA is a global leader in forensic accounting risk research, legal/regulatory risk assessment, due-

Commonly used by institutional investors to benchmark fund performance and in their portfolio construction processes the MSCI

manage and report risk across multiple portfolios. Robust analytics are powered by the range of Barraequity fixed income

measure and quantify portfolio risk across security types, geographies and markets. RiskMetrics is well known for its Value

valuing and modeling physical assets and derivatives across anumber of market segments. They are used by institutional clients

and corporations around the world make more informed investment decisions on behalf of the owners of companies

diligence, and educational services. CFRA’s team of research analysts provide investors with timely, impactful and processes, the MSCI

Global Equity Indices are the most widely adopted benchmarks for cross border equity funds.

equity, fixed income, derivative and alternative investment risk and return attribution models.

well known for its Valueat Risk methodologies, as well as being a leading provider of credit and counterparty risk systems.

by institutional clients including energy firms, money center banks, Fortune 500 companies, trading enterprises, and leading financial firms.

companies. impactful, and independent analysis.

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MSCI ESG Research*

A new business unit established in 2010 based on the legacies of KLD (1988) and Innovest (1998)

Staff of 130+, including more than 80 research and data analysts

Personnel in New York, Boston, San Francisco, Toronto, Paris, London, Brussels, Tokyo, Sydney, Manila, Mumbai , Hong Kong & Beijing

Provides products and services to asset managers and asset owners worldwide

ESG risk ratings

Impact analysis

Screening data

Custom research

Indices

MSCI is the only major index provider with in‐house ESG research and expertise

MSCI Inc. is a signatory to the Principles for Responsible Investment (www.unpri.org)

* Certain products and services of MSCI ESG Research, including products and services utilized in MSCI ESG Indices, are provided by Institutional Shareholder Services Inc. ("ISS") and/or KLD Research & Analytics,

msci.com

Ce ta p oducts a d se ces o SC SG esea c , c ud g p oducts a d se ces ut ed SC SG d ces, a e p o ded by st tut o a S a e o de Se ces c ( SS ) a d/o esea c & a yt cs,Inc. (“KLD”), which are both indirect wholly‐owned subsidiaries of MSCI.

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About MSCI ESG Research – A client centric approach

MSCI ESG Impact Monitor

MSCI ESG Impact Monitor

MSCI ESG Intangible Value Assessment

MSCI ESG Intangible Value Assessment

MSCI ESG Business Involvement Screening Research

MSCI ESG Business Involvement Screening Research

“I want to minimize the reputational risks of my

investments”

“I want to minimize the reputational risks of my

investments”

“I want to select the best‐in‐class companies and mitigate

financial ESG risks”

“I want to select the best‐in‐class companies and mitigate

financial ESG risks”

“I want to avoid investing in companies whose activities I find unethical or where I’m legally

“I want to avoid investing in companies whose activities I find unethical or where I’m legally investmentsinvestments

Functionality: investors can research, analyze, screen and monitor controversies and

financial ESG risksfinancial ESG risks

Functionality: investors can analyze key ESG issues, select ‘best in class’ companies determine

Functionality: investors can screen and manage ESG standards and restrictions viaMSCI ESG Manager

required to divest ”required to divest ”

Identifies ESG investment risks and opportunities not always captured by conventional analysis

Analyses & monitors ‘ESG controversies’ and how the impact is managed at company level

Supports the integration of ESG screening requirements into portfolio management

screen, and monitor controversies and violations of global norms such as the UN Global Compact and ILO core conventions.

We use 31 impact indicators grouped under the following ‘five controversies scoring criteria’:• Human Rights & Community

select best‐in‐class companies, determine unmanaged ESG risk, and assess company MSCI ESG IVA Risk Ratings vs. industry peers.

We apply an in‐depth, three‐phased methodology process to generate robust Risk Ratings: • Step 1: Identify Key Issues for each industry

standards and restrictions via MSCI ESG Manager. MSCI ESG Global Sanctions screening supports investors to comply with US divestment legislation.

We offer a broad range of screening capabilities:• Screening for religious (e.g. Catholic), ethical and other social and environmental criteria (e.g. tobacco, weapons, nuclear)

• Labor Rights & Supply Chain Mgt• Governance• Environment• Customers

Analysis: ‘Red’, ‘Yellow’ or ‘Green’ flags,MSCI ESG Controversies Scores

• Step 2: Evaluate Risk Exposure vs. Risk Management • Step 3: Generate Ratings measuring unmanaged ESG risk

Analysis: ‘best‐in‐class’, ‘AAA’ – ’CCC’ Risk Ratings

• Global Sanctions screening for 7 countries with US trading/operations/investment restrictions

Analysis: Restricted lists via MSCI ESG Manager or data feeds integrated in trading/compliance systems

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Coverage: 2,000+ global DM companies (extended coverage of 1,260+ EM companies)

Coverage: • 1,800+ global companies – Profiles and Ratings • Database of 70+ MSCI ESG IVA Industry Reports

Coverage: All publicly‐traded companies

ESG Integration: Financial and Values Dimensions

Financial Dimension Values Dimension

Identify ESG issues that are material

Define institutional ESG values

Monitor corporate performance

Analyze risk managementand exposure

ESG Risk Rating ESG eligibility assessment

Portfolio Construction

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ESG investors reflect one or both dimensions in the construction

of their portfolios

Aligning Investments with Values:Screening

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Screening Categories

Available Restriction CategoriesAbortion Labor Relations

Adult Entertainment Nuclear PowerAlcohol Pork

Animal Welfare Stem Cell Contraceptives TobaccoChild Labor Usury

Consumer Product Safety BurmaDefense and Weapons Cuba

Diversity Dual‐Use Export ViolationsEmployee Safety Foreign Corrupt Practices ActEnvironment IranFair Lending Northern IrelandFirearms North KoreaGambling OFAC Cases

Genetic Engineering SudanHuman Rights Syria

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Approaches to ESG Investing

Active Ownership (Proxy Voting / Engagement)

ScreeningScreening

Stock Selection

IndexesIndexes

Integration

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Screening and Customization

Issue Selection

e.g. USCCB and Environmentg

Type of Involvement

Manufacturer, Retailer, OwnerManufacturer, Retailer, Owner

Revenue Thresholds

Zero tolerance >5% revenues etcZero tolerance, >5% revenues, etc.

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Implementation

Level of Involvement as an Institution

Own or outsource the screening process g p

Choosing an ESG vendor or Asset Manager

Screening MethodologyScreening Methodology

Refining Screening Criteria

Apply ScreensApply Screens

Screen portfolio, generate restricted lists, integrate into trading/compliance systems

Monitor Compliance

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Case Study: Knights of Columbus

Owned the development of methodology

Chose MSCI ESG as vendorChose MSCI ESG as vendor

Developed a custom set of screening criteria with MSCI

Had MSCI ESG develop a custom restricted listHad MSCI ESG develop a custom restricted list

Each Knights of Columbus asset manager licensed the list

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Trends in ESG and Sustainable investing

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ESG Integration: Financial and Values Dimensions

Financial Dimension Values Dimension

Identify ESG issues that are material

Define institutional ESG values

Monitor corporate performance

Analyze risk managementand exposure

ESG Risk Rating ESG eligibility assessment

Portfolio Construction

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ESG investors reflect one or both dimensions in the construction

of their portfolios

Drivers of ESG Integration

ESG Integration is driven by Three Core Catalysts:

Catalyst 1Catalyst 1Major asset owners are redefining fiduciary responsibilities and are increasingly scrutinizing the ESG performance of external managers.Major asset owners are redefining fiduciary responsibilities and are increasingly scrutinizing the ESG performance of external managers.

With growing regularity ESG factors (externalities) represent mispricedWith growing regularity ESG factors (externalities) represent mispricedCatalyst 2Catalyst 2

Catalyst 3Catalyst 3

With growing regularity ESG factors (externalities) represent mispriced risks and opportunities. With growing regularity ESG factors (externalities) represent mispriced risks and opportunities.

In response, many asset managers are seeking a competitive edge to f

In response, many asset managers are seeking a competitive edge to f

Catalyst 3Catalyst 3integrate ESG factors into the investment process to seek mispriced alpha.integrate ESG factors into the investment process to seek mispriced alpha.

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Client Expectations

Asset owners becoming PRI signatoriesPressure from asset owners to integrate ESG into the investment process

ESG criteria increasingly included in Asset Owner RFPs

Asset owners hiring consultants, appointing risk

p

Asset owners hiring consultants, appointing risk management teams, or developing in‐house expertise to evaluate level of ESG integration of their asset managers

Requirements ESG reporting of asset managersRequirements ESG reporting of asset managers

Asset Owners creating ESG‐specific mandates or requirements

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PRI Signatories

PRI now has over 900 Signatories in 48 Countries ‐ Representing over $30 trillion in AUM

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Source: PRI Annual Report 2011, http://www.unpri.org/publications/annual_report2011.pdf

Competitive Pressure

400+ Asset Managers are now PRI signatories

Asset managers providing ESG risk assessmentAsset managers providing ESG risk assessment tools to all analysts and portfolio managers

Asset managers using ESG to differentiate themselves and win mandatesthemselves and win mandates

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ESG Factors as Long‐term Risks & Opportunities

A common motivation for integrating ESG into the investment process is to actively manage the extra‐financial factors that are believed to be important drivers of risk and returns

Climate change will impact companies’ bottom line in different ways across industries. E.g. financial costs from carbon regulations in different jurisdictions globally will hit a diverse set of high intensity industries including utilities, airlines, and steel. Volatile commodities prices stemming from changing weather patterns raise input costs in industries ranging from food to apparel. Companies with forward‐looking strategies to mitigate the financial and operational risks specific to their industry are better positioned for competitive advantage, while laggards are vulnerable to unanticipated costs

Companies are increasingly reliant on a large global workforce exposing them to heightened risks of labor disruptionsCompanies are increasingly reliant on a large, global workforce, exposing them to heightened risks of labor disruptions across their geographies of operation and throughout their supply chains. Accidents, suicides, protests, and strikes negatively impact productivity, invite litigation, and damage company reputation. On the flip side, innovative human capital management attracts talent, raises productivity, and improves operational excellence

Access to scarce resources is a common key issue affecting the mining and oil & gas industries particularly for companies y g g g p y poperating in geographies with weak regulatory and legal structures, . Mining and oil & gas companies regularly encounter corrupt practices, social and political instability, and conflicts with local community that threaten their license to operate. On the other hand, competition for access to growth market frequently leads to information technology and telecommunication companies trading off market share against regulatory and public concern over protection of privacy and civil liberties. Identifying companies with a strong governance strategy to mitigate these industry‐specific risksand civil liberties. Identifying companies with a strong governance strategy to mitigate these industry specific risks protects against the downside surprises of operating in politically uncertain markets

ESG factors are as much about opportunities as risks. Redeployment of capital to emerging industries such as solar or wind helps create new industrial leaders. Beyond the obvious green markets, however, companies across many sectors enjoy upside opportunities associated with changing environmental and social trends. For example, tightening chemicals

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regulations that favor companies with cutting‐edge green chemistry R&D; incentives in building, real estate, and transportation toward energy efficiency and etc

Approaches to ESG Investing

The various approaches to ESG investing are not incompatible with each other. Investors could adopt one or several approaches in their investment process based on their expertise (competitive advantage) and resourceprocess based on their expertise (competitive advantage) and resource constraints (governance budget)

Reflecting Constraints of Universal Owners Ensure Multi‐Period Sustainability

Mitigate impact of Portfolio externalities

Risk mitigation

g y

Introduce a capital allocation framework to

Introduce a judicious targeted allocation to public/private markets to investments that

l

Portfolio

truction

Integrated ESG/Tilting Targeted/Thematic

Develop a value

public markets with an ESG tilt to mitigate externalities that will be internalized in a diversified portfolio

represent longer term alternative to mitigate system wide externalities. E.g. clean tech

Collaborate to improve

Within

Const

Active Ownership CollaborationDevelop a value proposition from active ownership & engagements but pragmatically reflecting appropriate view of cost and benefits

psystem via network effect and scales so that investors collectively can achieve better outcomes. E.g. lobby for regulatory changes

Outside Portfolio

Construction

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You can’t sell so you ought to care

System improvement

O

Levels of Effective ESG Implementation for Asset OwnersPolicy Position Active Ownership Integrated ESG/ Tilting Targeted ESG/ Thematic Collaboration

Finance-based

Limited beliefs in ESG materiality and/ or the need or capability to influence external managers on ESG.

Delegates active ownership activities to managers.

Considers ESG as part of managers’ discretionary responsibility and expects such factors to be considered.

Would be considered as part of managers’ thematic positions but in practice would rarely be present.

Does not view collaboration as helpful.

BasicWishes to limit reputational risks. M onitoring confined to manager

reports on activities.M onitoring confined to considering manager reports on activities.

No explicit formats or goals in monitoring process.

Believes that ESG is financially material and supports this belief

Delegates active ownership responsibility to managers or proxy

Specifies the integration of ESG as a formal part of manager

Joins UN PRIWould be considered as part of managers’ thematic positions butmaterial and supports this belief

through mandates to managers.responsibility to managers or proxy service with more guidance on goals.

a formal part of manager mandates in keeping with UN PRI principles.

Wishes to limit reputational risk Specifies formats and goals for monitoring.

Requires reporting to demonstrate accordance with mandates and UN PRI.

Considers the consolidated level ESG positions in accordance with UN PRI

M ay consider the potential for collaboration in active ownership by using proxy service or governance overlay.

Intermediate

managers thematic positions but in practice would rarely be present.

UN PRI.

Believes that ESG is financially material and supports direct and indirect management.

Undertakes active ownership directly and / or supported by proxy services or managers.

Integrates ESG into mandates. M ore direct collaboration on engagement in exceptional cases.

Develops exclusions or engagement list of companies.

M ay adopt rules-based portfolios tilted to ESG factors.

Join UN PRI and other industry associations to secure knowledge transfer and public policy

Develops monitoring and reporting Detailed reporting of ESG positions

Considers the universal owner principles are contextually appropriate and financially attractive.

Advanced

Considers specific allocations to investments that specifically target the ESG and externalities themes.

p g p gfor all activities.

p g pat manager and consolidated level in accordance with UN PRI

Develops exclusions or engagement list of companies.

Specifies ESG preferences in mandates.

Undertakes active ownership using managers/proxy services.Values-based

Wishes to invest in a way that is congruent w ith certain mission specific values or to support certain mission specific goals.

Considers specialized allocations to investments in mission specific areas.

Considers collaborations that produce network effects aligned to the missionspecific goals.

Detailed reporting of ESG positions at manager and consolidated level,

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g p y

Develops monitoring and reporting for all activities.

Values-based g ,including those identified by controversies and business activity groupings.

ESG Portfolio Analytic Framework

A simple, yet effective, approach to ESG risk measurement can be built using the notion of risk exposure

PortfolioMSCI World

ESGPortfolio

MSCI World ESG

Index/Portfolio LevelPortfolio Scores +0.15 +0.32 Environment +0.14 +0.22

Risk Factors +0.09 +0.32[+] Key ESG Pillar Environmental Management Capacity +0.06 +0.25Environment +0.14 +0.22 Opportunity +0.27 +0.08Social +0 14 +0 35

Relative ESG Scores Relative ESG Scores

Social +0.14 +0.35Governance +0.22 +0.26

Human Capital +0.17 +0.31Health & Safety +0.07 +0.32

[+] ESG Scores by Sector Labor Relations +0.50 +0.42Energy +2.53 +1.06 Employee Motivation & Development ‐0.06 +0.20Materials +0.08 +0.34Industrials +0.10 +0.21C Di i 0 03 0 83 S k h ld C i l 0 11 0 38Consumer Discretionary ‐0.03 +0.83 Stakeholder Capital +0.11 +0.38Consumer Staples ‐0.23 +0.92 Product Safety +0.29 +0.31Health Care +0.17 +1.08 Supply Chain ‐0.29 +0.28Financials +0.36 +0.69 Customer/ Stakeholder Partnerships +0.12 +0.45Information Technology +0.79 +1.38 Local Communities +0.24 +0.73Telecommunication Services +0.60 +0.15 Intellectual Capital/ Product Development +0.21 +0.13Utilities +1.80 +0.85

Distribution by Rating Band Strategic Governance +0.22 +0.26[+] AAA ‐ A +10.9% ‐2.1% Traditional Governance Concerns +0.32 +0.08[+] BBB ‐ B ‐5.8% +4.9% Strategy +0.16 +0.69[+] CCC ‐2.2% ‐0.4% Strategic Capability / Adaptability +0.18 +0.01

Notes :

1. A pos itive relative ESG score indicates an above average ESG performance versus the market benchmark (MSCI World) and vice versa.

2 The MSCI World ESG Index includes companies with the bes t of class ESG performance

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2. The MSCI World ESG Index includes companies with the best‐of‐class ESG performance.

In measuring and attributing ESG risk, it is important to have relevant benchmarks as a reference. We suggest measuring the portfolio against two benchmarks: a broad market cap weighted index such as the MSCI World Index or the MSCI ACWI IMI which will reflect the state of the markets without ESG integration and an ESG benchmark such as the MSCI World ESG Index which selects companies with best‐of‐class ESG management. For investors who are reflecting certain values in their investment process a values‐based ESG benchmark such as the MSCI World Socially Responsible Index could also be considered.

Company‐level ESG Assessment

At the security level, ESG ratings and scores can also be used to highlight holdings that are contributing most to

Bottom Rated Companies by Portfolio Weight

Rank Name Weight Industry (GICS)

Rating

1 Company A 0.97% Financials CCC2 Company B 0.65% Consumer Discretionary CCC3 Company C 1.94% Health Care B4 Company D 1.41% Consumer Discretionary Bg

the risk of the portfolio 1. Companies with the lowest

ESG scores

2 Companies that are

p y y5 Company E 1.05% Information Technology B6 Company F 1.03% Utilities B7 Company G 1.01% Financials B8 Company H 0.89% Industrials B9 Company I 0.84% Materials B10 Company J 0.84% Financials B

2. Companies that are implicated by major ESG controversies

3. Companies that are involved in questionable ethical

Companies Involved in Controversies by Portfolio Weight

Rank Name Weight Environment Human Rights Labor Rights Governance

1 Company A 1.64%2 Company B 1.35%3 Company C 0.84%4 Company D 0.84%5 Company E 0.84%in questionable ethical

business behavior

Such information can serve as a communication tool to highlight potential

6 Company F 2.44%7 Company G 2.42%8 Company H 1.89%9 Company I 1.37%10 Company J 1.31%

Companies Involved in Business Activities by Portfolio Weighthighlight potential reputational risk, facilitate special monitoring and formulating active engagement strategies to address specific ESG issues

Rank Name Weight Business Activity Type1 Company A 2.42% Iran2 Company B 2.13% Stem Cell; GMO3 Company C 1.89% Iran4 Company D 1.12% Alcohol; GMO5 Company E 1.01% Iran6 Company F 0.95% Iran7 C G 0 84% S d

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address specific ESG issues

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7 Company G 0.84% Sudan8 Company H 0.84% GMO9 Company I 0.84% Nuclear Power10 Company J 0.78% Iran

Appendix

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ESG Business Involvement Screening Research

Identifies global publicly traded companies involved in business activities of concern

Available Restriction CategoriesAbortion and Contraceptives

Cuba

D l U E tto values investors.

Wide range of activities covered, from tobacco to weapons to

i i d

Adult EntertainmentDual‐Use Export

Violations

AlcoholForeign Corrupt Practices Act

A i l W lf Ioperations in Sudan

Identifies companies that violate legislative as well as religious screening mandates

Animal Welfare IranChild Labor Northern Ireland

Consumer Product Safety

North Koreag

Ability to customize restriction lists by level and type of involvement

Fully compatible with most trading

Defense and Weapons OFAC CasesDiversity Sudan

Environment SyriaFair Lending Labor Relations y p g

and portfolio management tools

Allows asset managers to meet asset owner mandates

Gambling Nuclear PowerGenetic Engineering Pork

Burma Stem Cell Tobacco

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ESG Impact Monitor

Identifies companies involved in major ESG controversies or violations of global norms and conventions .

Used by investors to negatively and positively screen investments and demonstrate compliance with PRI

Understand reputational risk from ESG performance of portfolio holdings

Traffic‐light rating facilitates quick understanding of overall assessmentunderstanding of overall assessment

In‐depth write‐ups for all notable controversies

Coverage of over 2,500 companiesCoverage of over 2,500 companies worldwide, including all cos on MSCI ACWI.

Research accessible through ESG Manager or via data feeds.

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ESG Impact Monitor: Methodology

Evaluate how companies are managing the most important social and/or environmental impacts of its operations, products and services.

Two part assessment focusing on companies’ management of ESG impact and involvement in major ESG controversies.

To assess management we look at policies, systems, initiatives, and reporting; reviewing each company by its industry‐specific risks or where it has significant controversiescompany by its industry specific risks or where it has significant controversies

To assess controversies performance we look at severity of impact and whether the issue is isolated or systemic

Indicator, Issue Area, and Overall flag and score

Issue Areas Include:

1. Environment

2. Customers

RED: Indicates that a company is involved in one or more very severe controversies.

YELLOW: Indicates that the company is involved in severe to

3. Human Rights & Community

4. Labor Rights & Supply Chain

5. Governance

YELLOW: Indicates that the company is involved in severe‐to‐moderate level controversies.

GREEN: Indicates that the company is not involved in any major controversies.

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IVA: Identifying ESG Risk ‐Methodology and Approach

ESG Research methodology Our methodology is based on externalities that have been recognized and pose a business risk.

Key factors of differentiationOur approach to ESG is sector specific rather than a generic template: We do not treat an

We determine relevant key ESG risks and issues for an industry.

We assess risk exposure and risk management of companies in the industry

oil company with the same metrics as a bank

We focus on the core not the periphery: A sharp focus on core business activities, rather than peripheral semi‐philanthropic initiatives

management of companies in the industry through relevant metrics.

We calculate the unmanaged risk (i.e. residual risk) for companies on each key issue.

We analyze companies not CSR reports: The metrics which accurately gauge a company’s ESG performance are rarely prominently displayed

issue.

We derive company ratings (‘AAA’‐’CCC’) based on residual risk and key issue weights.

Our rating answers the following question: Is risk management commensurate with risk

Coverage1800 Companies, 50+ industry reports

risk management commensurate with risk exposure? MSCI World (96% of the market cap)

MSCI UK IMI (~275 cos.)

MSCI EM (Top 25)

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MSCI Australia IMI (~200 cos.)


Based on externalities that have

Step 1: Determining Key ESG Issues for an Industry

A key ESG issue is defined as an environmental and/or socialexternality that has the potential to become internalized by thebeen recognized and pose a

business risk, determine relevant key ESG issues

Assess risk management and risk

externality that has the potential to become internalized by theindustry or the company through one of the following triggers:

Pending or proposed regulation aiming to address the externality

i l l i l di i l iliAssess risk management and risk exposure through relevant metrics

Calculate the unmanaged risk (i.e.

A potential supply constraint leading to price volatility and/or unstable supply

A notable shift in demand from a major customer or group of customers

g (residual risk) for each key issue A major strategic response by an established competitor in

the industry addressing the externality

Growing public awareness of concerns as measured by frequency of mention in top media outlets

Derive company ratings based on residual risk and key issue weights

q y p

In the case of financial institutions, a potential decrease in asset quality as a result of the externality

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Step 2: Identify ESG Factors & Metrics

Based on externalities that have We assess a company’s ability to reduce its contributions to anexternality and/or its ability to internalize the associated costs:been recognized and pose a



ESG Key Issues

Risk Exposure Risk Management

1 Water stress indicator based on1. Water management strategy

externality, and/or its ability to internalize the associated costs:

Assess risk management and risk exposure through relevant metrics


Water1. Water stress indicator based on

country risk scores2. Initiatives to reduce water use and

increase recycling rates3. Total water withdrawal

1. Vertical Integration and self‐sufficiency

1. Corporate energy management strategy2 Energy reduction targets

residual risk) for each key issue Energy 2. Percentage of capacity from electric arc furnaces vs. blast furnaces

2. Energy reduction targets3. Normalized energy consumption

(GJ/ton)

1. Percentage of capacity from electric arc furnaces vs. blast furnaces

1. Corporate carbon management strategy2 Climate governance


Carbonfurnaces

2. Weighted average country carbon reduction target (WACCRT)

2. Climate governance3. Carbon reduction targets4. Normalized carbon emissions

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IVA: Identifying ESG Risk‐Methodology and Approach

Step 3: Calculate unmanaged ESG Risk

Based on externalities that have We assess residual risk by calculating the distance between the idealmanagement scores and the company’s performance on each keybeen recognized and pose a



management scores and the company s performance on each keyESG issue:

High Risk, Strong PerformanceStrong Management

(Strong evidence that management can avoid costly

strikes)Assess risk management and risk exposure through relevant metrics


Delta Southwest

Deutsche Lufthansa

Air France KLM

men

t

Top Quartile

Second Quartile

Third Quartile

Bottom Quartile

strikes)

residual risk) for each key issue Virgin Blue

Cathay Pacific

Ryanair

SIA ANA

EasyJet Qantas

British Airways

Iberia

Ris

k M

anag

m


= 10,000 employees

Risk ExpsoureHigh Risk,

Poor Performance

High Risk(Powerful unions, high propensity to

strike, constrained ability to raise wages)

Low Risk(Low propensity to strike, little history of

strikes, predicted capability to raise wages)

Poor Management(History of strikes, High disparity

between union workers and executive pay)

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Overview of Key Issues

Environment Social Governance

• Carbon Management• Energy Management• Water Management • Toxic Releases• Raw Materials (Sourcing)

• Labor ‐ Supply Chain• Labor ‐ Operational• Human Capital Development• Health and Safety• Access to Medicine

• Corruption/Political Instability• Governance Risk

(in development)

Raw Materials (Sourcing)• Land Use and Biodiversity• Financing Environmental Risk• Insuring Climate Risk• Opportunities in Environmental

T h l

Access to Medicine• Access to Finance • Access to Healthcare• Product Quality• Product Safety – Financial

P d t S f t Ch i lTechnology• Opportunities in Green Building• Opportunities in Renewable

Energy

• Product Safety ‐ Chemicals• Insuring Health & Demographic Risk• Opportunities in Health & Nutrition• Privacy & Data Security• Responsible Investingp g

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MSCI ESG Global Client Service

Americas + 1.212.804.5299

Asia Pacific + 612.9033.9339

Europe, Middle East and Africa + +44.207.618.2510

[email protected]

www.msci.com/esg

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MSCI’s indirect wholly owned subsidiary Institutional Shareholder Services Inc (“ISS”) is a Registered Investment Adviser under the Investment Advisers Act of 1940 Except withMSCI s indirect wholly‐owned subsidiary Institutional Shareholder Services, Inc. ( ISS ) is a Registered Investment Adviser under the Investment Advisers Act of 1940. Except with respect to any applicable products or services from ISS (including applicable products or services from MSCI ESG Research Information, which are provided by ISS), none of MSCI’s products or services recommends, endorses, approves or otherwise expresses any opinion regarding any issuer, securities, financial products or instruments or trading strategies and none of MSCI’s products or services is 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.

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