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MSCI Toward Sustainable Impact Through Public Markets PDF
MSCI Toward Sustainable Impact Through Public Markets PDF
April 2016
APRIL 2016
CONTENTS
Executive Summary............................................................................ 3
Section 1: Defining the Problem ........................................................ 5
Consultation Findings.......................................................................................... 6
Section 2: Defining Sustainable Impact Themes ................................. 9
Basic Needs ....................................................................................................... 11
Empowerment .................................................................................................. 12
Climate Change ................................................................................................. 12
Natural Capital .................................................................................................. 13
Governance ....................................................................................................... 14
Section 3: Identifying Companies Offering Sustainable Impact
Solutions .......................................................................................... 15
Section 4: Measuring Sustainable Impact of Portfolios .................... 19
Section 5: Developing a Sustainable Impact Index ........................... 21
Conclusion ....................................................................................... 25
Appendix: Calculations..................................................................... 26
APRIL 2016
EXECUTIVE SUMMARY
Institutional investors are increasingly looking for ways to steer capital toward companies and
projects that provide solutions to major social and environmental challenges, but achieving
impact at scale can be a challenging proposition. The United Nations Sustainable Development
Goals (SDGs) provide a useful foundation for scalable impact, representing a broad consensus
of global stakeholders around 17 ambitious development goals.
Following a market consultation with 23 of the world’s leading asset owners and managers,
MSCI ESG Research has developed a new framework to support alignment with the SDGs at
scale. This new Sustainable Impact framework and accompanying data are designed to allow
investors to measure their current exposure to exchange-listed companies that provide
sustainable impact solutions and to define actionable thematic allocations in line with the
SDGs.
Using the SDGs as a reference, we grouped the 17 goals into five actionable impact
themes: Basic Needs, Empowerment, Climate Change, Natural Capital, and
Governance. The themes have been designed for use by institutional investors looking
to measure their exposure to companies that provide potential solutions to these
challenges.
For each of the social and environmental themes, we developed a detailed taxonomy
of solutions and estimated companies’ revenue exposure to these products and
services (covering over 2,500 companies for social themes and over 8,500 companies
for environmental themes as of March 2016). We also propose a framework to
consider companies’ negative ESG impacts and establish minimum ESG standards.
Using the MSCI ESG Research Sustainable Impact Metrics database, we identified 987
companies in the MSCI ACWI Index (approximately 40% of the Index by number of
companies as of March 31, 2016) that derived revenues from sustainable impact
themes. Among these companies, 339 companies derived at least 20% of their
revenue and 123 companies derived the majority of their revenue from sustainable
impact themes.
APRIL 2016
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Investors vary in their appetite to gain exposure to sustainable impact themes: some look to
invest in a narrow set of companies whose core business is solely geared toward providing
sustainable solutions, while others may favor a less restrictive selection strategy that might be
complemented by company engagement. In relation to the former, MSCI developed the MSCI
ACWI Sustainable Impact Index in 2016, which aims to include companies with a high net
exposure to sustainable impact themes.
1
The MSCI ACWI Sustainable Impact Index showed the following characteristics :
The MSCI ACWI Sustainable Impact Index included 88 companies with an estimated 71%
higher revenue exposure to sustainable impact themes than constituents of the MSCI
ACWI Index.
An investment of USD 1 million into a sample portfolio replicating the index 100% would
have been associated with approximately USD 181,203 in annual revenues from social
impact solutions, as well as USD 359,349 in annual revenues from environmental impact
solutions.
The top five companies, by index weight, were Valeo (Pollution Prevention), Schneider
Electric (Energy Efficiency), Pearson (Education), ABB (Energy Efficiency) and Vestas
(Alternative Energy).
The MSCI ACWI Sustainable Impact Index outperformed the underlying ACWI benchmark
2
by 1.7 percentage points on an annualized basis from Nov. 2010 to Nov. 2015.
All results and index characteristics as of March 31, 2016 unless otherwise stated.
1
Past performance is not indicative of future results, which may differ materially.
2
Due to data availability issues, Sustainable Impact Metrics history is available from November 2015 onward, but a
simulated history is available using the pro forma constituents as of November 2015 index review. Past performance is
not indicative of future results, which may differ materially.
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3
http://www.undp.org/content/undp/en/home/sdgoverview/post-2015-development-agenda/goal-2.html
4
WHO, the World Medicines Situation, 2011
5
http://www.undp.org/content/undp/en/home/sdgoverview/post-2015-development-agenda/goal-6.html
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To date, we have observed that impact investing has largely been limited to small-scale,
private equity strategies. While not comprehensive, 146 respondents to a report authored by
the Global Impact Investing Network (GIIN) and J.P. Morgan in 2015 reported managing a total
of USD 60 billion in capital allocated to impact investing, of which 77% was managed through
6
investments in private debt and private equity instruments.
We have found that some institutional investors increasingly seek to apply an “impact lens”
across asset classes – aiming to activate public equity and public debt portfolios toward
sustainable solutions to social and environmental challenges.
Fixed income investors are increasingly able to achieve impact-related goals through new and
emerging financial instruments such as green bonds, which tie net proceeds to ‘green’
7
projects. Green bonds first emerged in 2008 and have grown to a USD 70 billion market, as
measured by the Barclays MSCI Green Bond Index. Although the green bond market is growing
rapidly – achieving 75% growth in market value from March 31, 2015 to March 31, 2016 – it
still represents a small slice of the global bond market, constituting less than 0.2% of the
8
market value of the Barclays Global Aggregate Bond Index.
To complement these approaches, MSCI ESG Research has developed new tools designed to
help institutional investors measure and manage their exposure to sustainable impact themes
across public equity allocations.
CONSULTATION FINDINGS
In 2015, MSCI ESG Research carried out a consultation with 23 leading asset owners and asset
managers globally. The objective was to better understand institutional investors’ motivations,
concerns and potential roadblocks toward applying sustainable impact investing principles in
public equities.
The four key areas of feedback received through the consultation were the following:
1. There was consensus on the value of viewing listed equities through the lens of
impact investing principles. Consultees agreed that a gap exists between “ESG
Integration” and “Impact Investing,” and that there is room for new impact-oriented
thematic investment approaches in public equity markets.
2. Sustainable impact frameworks would benefit from building on existing standards
and definitions. The UN Sustainable Development Goals (SDGs) emerged from the
consultation as the most credible external framework for defining impact.
6
Eyes on the Horizon – The Impact Investor Survey, J.P. Morgan and Global Impact Investing Network,
https://thegiin.org/assets/documents/pub/2015.04%20Eyes%20on%20the%20Horizon.pdf.
7
For definitions and backgrounds regarding green bonds, see the Barclays MSCI Global Green Bond Index
Methodology.
8
Based on the total market value of the Barclays MSCI Global Green Bond Index and the Barclays Global Aggregate
Bond Index, as of 31 March 2016.
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Companies can contribute to these goals through their products and services or through their
operations. Under each theme, MSCI ESG Research has determined specific categories of
products and services that listed companies can offer as potential solutions. This taxonomy of
impact solutions draws from MSCI ESG Research’s sector expertise, as well as client feedback
and discussions with stakeholders including academics, consultants, and civil society through
9
MSCI ESG Research’s Thought Leaders Council.
Efforts to quantify companies’ exposure to sustainable impact solutions are limited by the
current state of available data – sector classifications are too broad while business segments
are reported inconsistently. To help address this challenge, MSCI ESG Research has collected or
estimated the percentage of revenue that companies derive from products and services tied to
each of these themes.
9
https://www.msci.com/documents/1296102/1831405/ESG-TLC-ImpactInvesting-cin-en.pdf/4be85b9e-f342-45fd-
ae89-10ec07427f56
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As of March 2016, this new Sustainable Impact Metrics dataset covered over 8,500 companies
10
across environmental themes and over 2,500 companies across social themes .
BASIC NEEDS
Basic needs refer to the fundamental requirements for long-term wellbeing, including access
to nutrition, health, sanitation and housing. Listed companies can play a key role in addressing
these particular concerns through the provision of nutritious products, treatments for major
diseases, sanitation products and affordable real estate.
Theme Categories MSCI ESG Research Definition Company examples
(estimated share of
revenue from theme)
Major Disease Drugs that aim to treat major diseases of the world as Novo Nordisk (96%)
Treatment defined by the WHO daily adjusted life year (DALY)12, as Actelion (100%)
well as neglected tropical diseases13, and orphan drugs 14. Axelion (100%)
Basic
Needs Sanitation Basic hygiene and sanitation products including soaps, Unicharm (84%)
oral care and diapers. Toto (64%)
Affordable Low-income housing options take the form of homes for Taylor Wimpey (18%)
Real Estate reconstruction efforts, affordable residences for the Persimmon (17%)
elderly and units devoted to be managed under social rent
or purchased through shared equity or shared ownership.
Low-income commercial properties include commercial
spaces for Small and Medium Enterprises (SMEs).
10
For more information, please refer to the Sustainable Impact Metrics Methodology Document.
https://esgmanager.msci.com/esgmanager/
11
For more information on Choices International, refer to
http://www.choicesprogramme.org/public/criteria/international-product-criteria-2015-def.pdf
12
DALY represents the number of years of life lost due to poor health/disability and earlier death. The sum of these
DALYs across the population represents the burden of disease. More information on DALY can be found here:
http://www.who.int/healthinfo/global_burden_disease/metrics_daly/en
13
http://www.who.int/neglected_diseases/diseases/en/
14
Orphan drugs refer to treatments for orphan diseases, which affect about 1 in 1500 people, as defined by the FDA.
http://www.fda.gov/ForIndustry/DevelopingProductsforRareDiseasesConditions/HowtoapplyforOrphanProductDesign
ation/default.htm
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Under the Basic Needs theme, the most significant categories not currently covered by this
framework are access to energy and access to water. In our initial research, we found
insufficient data and only minimal involvement by publicly listed companies in targeting access
to water and access to electricity programs and services.
EMPOWERMENT
For underserved populations, empowerment serves to raise and improve living conditions and
access to education. Listed companies can play an active role empowering underserved
populations, in particular through the provision of loans to small and medium size enterprises,
the provision of education services and through the creation of sustainable jobs.
Theme Categories MSCI ESG Research Definition Company examples
SME Finance Loans to small and medium enterprises as defined Bank Rakyat Indonesia
by national standards or company disclosure. (71%)
Sustainable Jobs
Listed companies are essential to developing social and human capital in the labor pool. We
assess the extent to which companies are successful in implementing sound labor practices
and avoiding controversies related to labor relations, health and safety, discrimination, and
supply chain issues. However, comparable data across industries and markets regarding
sustainable job creation is not currently available, and remains an area for further research.
Under the empowerment theme, there is currently no specific focus on the underserved
populations. In our analysis, we found evidence of companies involved in bottom of the
pyramid projects, but those projects were few and their scope and scale remained limited.
Similarly, the sustainable job category is currently addressed through reducing negative
externalities on employees and does not yet include positive indicators, due to data
availability.
CLIMATE CHANGE
The International Panel on Climate Change (IPCC) estimates that the potential costs of
adaptation to climate change in developing countries will rise to between USD 70 and 100
15
billion per year by 2050. Public companies can play a role in the global response to the
15
http://www.unep.org/climatechange/adaptation/gapreport2014/portals/50270/pdf/AGR_FULL_REPORT.pdf, p 15
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Climate Change
Energy Products, services, infrastructure or technologies Tesla (100%)
Efficiency that proactively address the growing global Samsung SDI (67%)
demand for energy while minimizing effects on the
environment.
Under the Climate Change theme, we currently do not capture climate adaptation efforts, as
these projects are difficult to classify on a consistent basis and typically do not constitute a
core business for publicly listed companies.
NATURAL CAPITAL
16
By 2025, two thirds of the world’s population could be living in water stressed regions. Public
companies can play a key role in the protection of natural capital, in particular through
technologies that address the sustainable water and pollution prevention themes.
Theme Categories MSCI ESG Research Definition Company examples
16
http://www.un.org/waterforlifedecade/scarcity.shtml
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Under the Natural Capital theme, we do not currently cover the categories of sustainable
forestry and sustainable agriculture. In our initial research, we found limited data for publicly
listed companies on these categories. Direct involvement by publicly listed companies is
limited – as of March 31, 2016, there were only two and ten companies in the Forest Products
and Agricultural Products GICS sub-industries, respectively – and indirect impact such as
through supply chain engagement is difficult to measure consistently in revenue terms. We will
evaluate the potential for adding data on these themes as standard as the quality of data
evolves.
GOVERNANCE
Strong governance practices are essential to achieving long term social returns and building
trust. We are proposing to address this challenge through a negative screen looking at
companies that have faced very severe governance related controversies in the past three
years, which have not yet introduced positive indicators.
The list of categories included in our proposed approach is not exhaustive. As mentioned
above, issues such as access to energy, transport and communication infrastructure have not
yet been included. These issues are often considered the preserve of governments, and when
tackled by publicly listed companies we observed that they tended to be addressed through
small-scale initiatives rather than through companies’ core business models.
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Among the 987 companies in the MSCI ACWI Index with revenue exposure to sustainable
impact themes, approximately 30% were emerging market companies, as classified by MSCI.
Exposure was split between social and environmental themes, with 168 emerging market
companies exposed to social impact solutions and 141 exposed to environmental impact
solutions. Around 35 emerging market companies derived the majority of their revenue from
sustainable impact solutions.
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Expanding the analysis to also include small-cap companies, we identified a total of 1,593
companies with revenue exposure to environmental impact themes, with 212 generating the
majority of their revenues from climate change and natural capital themes (as of March 2016).
Exhibit 6: Estimated Environmental Impact Revenues, MSCI ACWI IMI (n=8582), March 2016
Applying impact investing principles at scale means assessing broad and diversified business
models, as few publicly listed companies are ‘pure play’ or exclusively geared toward providing
social or environmental solutions. We outline an overarching framework and the set of metrics
we used to help identify companies whose core business model is linked to sustainable impact
themes, while aiming to limit negative impacts (see Exhibit 7).
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MINIMUM ESG STANDARDS – Investors may elect to limit offsetting negative impacts
generated through companies’ operations, by requiring that they adhere to minimum
ESG standards. Again, consultees expressed varying requirements, with some
expressing a preference to apply more restrictive standards than others.
o Benesse, GlaxoSmithKline and Unilever are examples of companies that had
over 50% exposure to sustainable impact themes but faced severe
controversies in the areas of privacy and data security; product safety and
bribery; and health and safety, respectively.
o In 2014, Mylan generated more than 20% of its revenues from major disease
treatments, but ranked worst in class relative to industry peers in managing
ESG issues because of concerns around product safety, human capital
development and toxic emissions and waste.
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17
The Harmonized Framework for Impact Reporting was developed by 11 IFIs in December 2015 to foster standards in
green bond reporting. This framework includes ex ante estimation of carbon and energy efficiency gains, but does not
address impact measurements for Natural Capital or Social themed projects.
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The resulting index of 88 companies as of March 31, 2016 demonstrated the following
19
characteristics:
Compared to the MSCI ACWI Index, constituents of the MSCI ACWI Sustainable Impact
Index had 71% greater revenue exposure to sustainable impact solutions than
constituents of the parent index, ranging from 30% revenue exposure to Climate
Change to 4% revenue exposure to Empowerment (see Exhibit 9).
18
See MSCI Sustainable Impact Index methodology for more details:
https://www.msci.com/eqb/methodology/meth_docs/MSCI_Sustainable_Impact_Feb16.pdf
19
Historical results based on simulated or back tested data. Past performance is not indicative of future results, which
may differ materially. Additionally, the use of more current data may vary results.
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30%
Source: MSCI ESG Research; Index constituents and weights as of March 31, 2016. Impact data as of November 2015.See
Appendix for calculation methodology
Empowerment $32,871
Source: MSCI ESG Research; Index constituents and weights as of March 31, 2016. Impact data as of November 2015.See
appendix for calculation methodology
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The top five companies in terms of sustainable impact by index weight were Valeo
(Pollution Prevention), Schneider Electric (Energy Efficiency), Pearson (Education),
ABB (energy Efficiency) and Vestas (Alternative Energy).
Due to data availability issues, Sustainable Impact Metrics history is available from
November 2015 onwards, but a simulated history is available using the pro forma
constituents as of November 2015 index review. The simulated history outperforms
the underlying ACWI benchmark by 1.7 percentage points on an annualized basis from
November 2010 to November 2015, and has an information ratio of 0.45 (see Exhibits
11 and 12).
Exhibit 11: Performance of MSCI ACWI Sustainable Impact Simulated History Index
Source: MSCI
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Exhibit 12: Performance of MSCI ACWI Sustainable Impact Simulated History Index Relative
to MSCI ACWI Index
Source: MSCI
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CONCLUSION
Investors large and small are searching for ways to steer capital toward positive social impact.
In this paper, we outline MSCI ESG Research’s Sustainable Impact framework, describe the
current state of impact data and reporting, and illustrate a potential application of that data
through the MSCI Sustainable Impact Index. This new Sustainable Impact framework and
accompanying data are designed to allow investors to measure their exposure to companies
that provide solutions to environmental and social challenges, and to define thematic investing
strategies in line with the UN Sustainable Development Goals.
After a client consultation, we defined a framework of actionable impact themes using the
SDGs. The themes can be used by investors who want to measure their exposure to
companies that are making a positive impact on some of the largest environmental and social
challenges worldwide, including basic needs, empowerment, climate change, natural capital
and governance.
Using MSCI’s ESG Research database of Sustainable Impact Metrics, we identified 987
companies in the MSCI ACWI Index (about 40% of the index by number of companies as of
March 31, 2016) that have estimated the revenue they earn from products and services that
potentially advance the five themes outlined above. Of these companies, 123 derived at least
half their revenue from exposure to sustainable impact themes, while 339 derived at least 20%
of their revenue from such themes.
MSCI has developed the MSCI ACWI Sustainable Impact Index, which aims to include
companies that generate at least half their revenue from the five themes above, and excludes
companies that fail to meet minimum ESG standards. The MSCI ACWI Sustainable Impact Index
comprised 88 companies as of March 31, 2016. Compared to the MSCI ACWI Index, its
constituents had 71% greater revenue exposure to sustainable impact solutions than
constituents of the parent index.
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APPENDIX: CALCULATIONS
(see Exhibit 9)
REVENUE DERIVED FROM SUSTAINABLE IMPACT SOLUTIONS PER USD 1 MILLION INVESTED
$ 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑖
∑𝑖𝑛 ∗ (𝐼𝑠𝑠𝑢𝑒𝑟 ′ 𝑠 𝑬𝒙𝒑𝒐𝒔𝒖𝒓𝒆 𝒕𝒐 𝑺𝒖𝒔𝒕𝒂𝒊𝒏𝒂𝒃𝒍𝒆 𝑰𝒎𝒑𝒂𝒄𝒕 𝑺𝒐𝒍𝒖𝒕𝒊𝒐𝒏𝒔𝑖 ∗ 𝑇𝑟𝑎𝑖𝑙𝑖𝑛𝑔 12-𝑚𝑜𝑛𝑡ℎ 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠𝑖 )
𝐼𝑠𝑠𝑢𝑒𝑟 ′ 𝑠𝑓𝑢𝑙𝑙 𝑚𝑐𝑎𝑝𝑖
( )
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑚𝑘𝑡 𝑣𝑎𝑙𝑢𝑒𝑖
∗ $1,000,000
Exposure to Sustainable Impact Solutions in both cases refers to the estimated maximum percentage
of revenue derived from products and services aligned with Basic Needs, Empowerment, Climate
Change and Natural Capital themes, for companies that meet minimum ESG standards.
Minimum ESG standards in this case are defined as an ESG Rating of BB or above, no ESG controversies
with a score below 3 (very severe and severe ongoing or structural controversies), no direct
involvement in predatory lending, no involvement in controversial weapons, and no more than 10%
revenue from alcohol or tobacco production.
If a company fails to meet all of these criteria, Exposure to Sustainable Impact Solutions is considered to
be zero.
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