MSCI Toward Sustainable Impact Through Public Markets PDF

TOWARD SUSTAINABLE IMPACT
THROUGH PUBLIC MARKETS

A Framework to Align Investments with the UN Sustainable
Development Goals
Veronique Menou
Laura Nishikawa
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.
 Expanding the sample to include small-cap companies, we identified 1,593 companies

in the MSCI ACWI IMI Index with revenues tied to environmental impact themes.
APRIL 2016
TOWARD SUSTAINABLE IMPACT THROUGH PUBLIC MARKETS | APRIL 2016
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.
© 2015 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. MSCI.COM | PAGE 4 OF 28
SECTION 1: DEFINING THE PROBLEM

3
Almost 800 million people globally were chronically undernourished as of 2014, up to a third
4
of the population lacked access to medicines, and 40% of the population may be affected by
5
water scarcity. Over the past few years, we have observed growing interest from institutional
investors in aligning their investments toward changing these outcomes; however, barriers
have existed to defining impact-oriented investment strategies at scale.
Historically, investors have used a number of investment approaches to address global
environmental and social issues, including values-aligned investing, ESG integration
approaches and impact investing. By applying negative exclusions, Socially Responsible
Investment (SRI), values-based investing and various divestment campaigns have targeted
companies contributing to environmental and social problems. ESG integration approaches
typically aim to manage material risks and opportunities arising from environmental, social,
and governance factors.
In contrast, impact investing approachesaim to generate a positive impact on society or the
environment by directing capital toward companies that are providing solutions to social or
environmental challenges. Unlike ESG integration, which uses extra-financial information with
the ultimate aim of achieving long-term financial objectives, impact investing explicitly targets
extra-financial goals alongside financial return.
Exhibit 1: ESG Investment Frameworks: Values, Integration and Impact
Source: MSCI ESG Research.
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
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.
3. Investors vary in their appetite to gain exposure to sustainable impact themes:

Some investors 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.
4. Additionality, intentionality and measurability are key challenges to applying impact
investing principles in public markets.
Following feedback from clients, MSCI ESG Research has proposed a framework to allow
investors to measure their exposure to companies that provide products and services aligned
with the SDGs. This Sustainable Impact approach aims to apply some of the impact investing
principles to investments in listed equities.
We recognize that challenges and trade-offs may exist when applying these principles at scale.
Two key impact investing principles are taken into account in the proposed Sustainable Impact
framework, while a third may be more challenging to measure (see Exhibit 2):
 Intentionality: we propose addressing intentionality through the selection and

weighting of securities with high exposure to sustainable impact solutions.
 Measurability: we propose measuring issuers’ and portfolios’ estimated revenue

exposure to sustainable impact solutions, alongside other key ESG metrics, and
comparing a portfolio’s exposure against a benchmark. Measuring exposure to
impact themes can be a first step toward scalable impact measurement, while
measuring outcomes may be more challenging across diversified portfolios, given
current data availability.
 Additionality: we recognize that additionality can be difficult to achieve in public

markets. Investment impact is limited by the fact that stock is typically purchased
from existing shareholders and may not directly provide new working capital to
companies or enable new investments, unlike private equity or debt financing. Non-
monetary impact – e.g. sharing expertise or improving governance standards – can
still be possible through active ownership and engagement.
Exhibit 2: Key Impact Investment Principles
Source: MSCI ESG Research
SECTION 2: DEFINING SUSTAINABLE IMPACT THEMES

On Sept. 25, 2015, the SDGs were adopted. Building on the Millennium Development Goals,
they include 17 goals across a wide range of sustainable development issues, with targets to be
reached in the next 15 years.
The SDGs identify common goals applicable to a wide range of government, private sector and
other non-governmental stakeholders. In order to build a framework that is directly relevant to
institutional investors, MSCI ESG Research grouped the 17 SDGs into five actionable impact
themes: Basic Needs, Empowerment, Climate Change, Natural Capital and Governance.
Exhibit 3: Mapping Sustainable Development Goals (SDGs) to Actionable Impact Themes
Source: UN Sustainable Development Goals, MSCI ESG Research.
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.
Exhibit 4: MSCI ESG Research Taxonomy of Sustainable Impact Solutions
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
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)
Nutrition Basic products, as defined by Choices International11, refer Wholefood (54%)

to those products that contribute to the daily intakes of
General Mills (64%)
essential nutrients, while non-basic products are not
needed to fulfill daily nutritional requirements. Toyo Suisan Kaisha (83%)
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).
Source: MSCI ESG Research, data as of March 2016.
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
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.
SME Finance Loans to small and medium enterprises as defined Bank Rakyat Indonesia
by national standards or company disclosure. (71%)
Bank of Kyoto (48%)

Empowerment
Education Educational services, as well as products used in a Pearson (93%)
school environment (i.e. training software, Kroton (100%)
educational books and materials used by students
and teachers as part of their education programs).
Source: MSCI ESG Research, data as of March 2016.
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
climate change challenge, including through the development of technologies in alternative

energy, energy efficiency and green building.
Alternative Products, services, or infrastructure projects Vestas (99%)

Energy supporting the development or delivery of
China Longyuan (63%)
renewable energy and alternative fuels.
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.
Green Design, construction, redevelopment, retrofitting or CapitaCommercial (88%)

Building acquisition of ‘green’ certified properties – subject Unibail-Rodamco (58%)
to local green building criteria.
Source: MSCI ESG Research, data as of March 2016
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.
Sustainable Products, services and projects that attempt to Suez Environnement

Water resolve water scarcity and water quality issues, (74%)
including minimizing and monitoring current water
American Water Works
use and demand increases, improving the quality of
(97%)
water supply and improving the availability and
Natural Capital
reliability of water.
Pollution Products, services or projects that support pollution Umicore (59%)

Prevention prevention, waste minimization or recycling as a
means of alleviating the burden of unsustainable
waste generation.
Source: MSCI ESG Research. Data as of March 2016.
16
http://www.un.org/waterforlifedecade/scarcity.shtml
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.
SECTION 3: IDENTIFYING COMPANIES OFFERING SUSTAINABLE

IMPACT SOLUTIONS
Using the MSCI ESG Research Sustainable Impact Metrics database, we identified 987
companies in the MSCI ACWI Index (about 40% of the MSCI ACWI Index by number of
companies as of March 31, 2016) with any revenues tied to sustainable impact solutions, while
123 companies have at least 50% of revenues tied to them.
Exhibit 5: Breakdown of Estimated Sustainable Impact Revenues, MSCI ACWI (n=2451),

March 2016
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.
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).
Exhibit 7: Key Considerations to Measuring Net Sustainable Impact
SUSTAINABLE IMPACT SOLUTIONS – Institutional investors may choose to apply

different revenue thresholds to define a superset of companies exposed to
sustainable impact solutions, depending on their ultimate objectives.
o Some investors may require a company to derive the majority of its revenues
(>=50%) from impact themes in order to be considered as an eligible
candidate, whereas other investors may be comfortable lowering the
threshold to 20% in order to widen the opportunity set.
o Pearson, Novo Nordisk, Vestas, and Tesla are examples of companies that
had greater than 50% of revenue tied to sustainable impact solutions as of
March 2016, whereas more diversified companies such as Novartis,
Campbell and EDP would be included in a sample superset with a 20%
revenue threshold.
POSITIVE IMPACT THROUGH OPERATIONS – Although data is currently limited,

institutional investors may elect to also take into account the positive impacts
generated by companies through their operations, for instance through the provision
of sustainable jobs.
HARMFUL PRODUCTS & SERVICES – When dealing with diversified companies, as

opposed to pure play companies, it may be important to consider the potentially
offsetting negative impacts of their remaining products and services.
o For example, the provision of treatments for major diseases may be offset by
the provision of harmful products such as tobacco; the benefits of SME
financing may be offset by allegations of predatory lending.
o For example, in 2014 Bharat Heavy Electricals derived approximately 27% of
its revenue from equipment and technologies tied to alternative energy,
smart grid and sustainable water, but it also manufactured components for
nuclear weapons.
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.
SECTION 4: MEASURING SUSTAINABLE IMPACT OF PORTFOLIOS

One of the key principles of impact investing is measurability – the ability to report on the
social and environmental outcomes of investments. While there have been significant
advancements in measurement standards by organizations such as the GIIN and International
17
Financial Institutions (IFIs), it remains a challenge to develop comparable measures across
projects and companies.
When developing our framework for impact reporting, we took into account the following
considerations, which were identified in the client consultation:
- Simplicity: using simple metrics enables communication with a broader audience.
- Comparability: investors are interested in measuring outcomes at a portfolio level, making
it mportant to use metrics that are comparable across sectors.
- Relevance: the desire for comparison should not outweigh the specific aspects of each
sector and the need to use metrics that are relevant for a particular industry or region.
- Aggregation: companies tend to report performance metrics at the project level – but for
impacts to reach scale, metrics should be consolidated at company and portfolio levels.
Developing a reporting tool requires several steps to be addressed over time. Implementing
the measurement of a portfolio’s exposure to sustainable impact themes, compared to a
benchmark, is illustrated in Exhibit 8 below.
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.
Exhibit 8: Steps to Measuring Sustainable Impact at the Portfolio Level
SECTION 5: DEVELOPING A SUSTAINABLE IMPACT INDEX

Institutional investors have shown that they are keen to integrate sustainable impact
considerations into portfolio construction. In doing so, they may choose between a selection
and a reweighting approach: Some investors may decide to tilt their portfolio toward those
companies with higher net exposure to sustainable impact themes, while others may prefer to
create a thematic portfolio by selecting only sustainable impact companies.
Following a client consultation, MSCI developed the MSCI ACWI Sustainable Impact Index,
which is designed to include companies with a high net exposure to sustainable impact
themes. Constructed from the MSCI ACWI Index, the index aims to include companies that
generate 50% or more of their revenues from sustainable impact themes and to exclude
18
companies that do not maintain minimum ESG standards through their operations.
Securities are then weighted on the basis of their sustainable impact dollar revenues relative
to the ratio of their free-float adjusted market capitalization to the total market capitalization.
This enables companies with higher sustainable impact dollar sales to be given greater weight.
Sustainable impact dollar sales are computed as the product of the trailing 12-month sales and
the cumulative percentage of sales from the sustainable impact categories. For banks, net
interest income is used to calculate security weight.
𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦 𝑊𝑒𝑖𝑔ℎ𝑡 = (𝑆𝑢𝑠𝑡𝑎𝑖𝑛𝑎𝑏𝑙𝑒 𝑖𝑚𝑝𝑎𝑐𝑡 𝑠𝑎𝑙𝑒𝑠 % × 𝑇𝑟𝑎𝑖𝑙𝑖𝑛𝑔 12-𝑚𝑜𝑛𝑡ℎ 𝑠𝑎𝑙𝑒𝑠

𝐹𝑟𝑒𝑒-𝑓𝑙𝑜𝑎𝑡 𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝑚𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑦
× )
𝑇𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑖𝑠𝑠𝑢𝑒𝑟
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.
Exhibit 9: Average Revenue Exposure of Index Constituents to Sustainable Impact Solutions

Weighted average % revenue derived from sustainable impact solutions, excluding revenues of companies that fail to meet
minimum ESG standards
MSCI ACWI SUSTAINABLE IMPACT INDEX MSCI ACWI INDEX

3.4% 0.3%
2.1%
0.3%
Basic Needs
30%
76.9% 6.2% Empowerment
12% Revenue Exposure to Revenue Exposure to Climate Change
Sustainable Impact Sustainable Impact
Solutions 4% Solutions Natural Capital
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
 We estimate that an investment of USD 1 million in a sample portfolio replicating the

MSCI ACWI Sustainable Impact Index in its entirety would have translated to annual
revenue from constituent companies of USD 540,552 generated from sustainable
impact solutions (Exhibit 10). To arrive at this number, we calculated the annual
dollar revenues from sustainable impact solutions for each constituent of the index,
and apportioned those revenues based on the ownership share implied by a USD 1
million sample portfolio replicating the index in its entirety.
Exhibit 10: Estimated Annual Revenues Associated with a Hypothetical USD 1 Million Investment
Climate Change $229,015
Basic Needs $148,332 $540,552

TOTAL EST. ANNUAL REVENUES FROM
Natural Capital SUSTAINABLE IMPACT SOLUTIONS
$130,334
ASSOCIATED WITH $1M INVESTMENT
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
 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
Exhibit 12: Performance of MSCI ACWI Sustainable Impact Simulated History Index Relative
to MSCI ACWI Index
Source: MSCI
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.
APPENDIX: CALCULATIONS
REVENUE EXPOSURE TO SUSTAINABLE IMPACT SOLUTIONS

𝑖
∑ 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑤𝑒𝑖𝑔ℎ𝑡𝑖 ∗ 𝐼𝑠𝑠𝑢𝑒𝑟 ′ 𝑠 𝑬𝒙𝒑𝒐𝒔𝒖𝒓𝒆 𝒕𝒐 𝑺𝒖𝒔𝒕𝒂𝒊𝒏𝒂𝒃𝒍𝒆 𝑰𝒎𝒑𝒂𝒄𝒕 𝑺𝒐𝒍𝒖𝒕𝒊𝒐𝒏𝒔𝑖
𝑛
(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
(see Exhibit 10)
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.
CONTACT US AMERICAS ABOUT MSCI ESG RESEARCH PRODUCTS AND
SERVICES
+ 1 212 804 5299
esgclientservice@msci.com MSCI ESG Research products and services are
EUROPE, MIDDLE EAST & AFRICA provided by MSCI ESG Research Inc., and are
designed to provide in-depth research, ratings
+ 44 20 7618 2510 and analysis of environmental, social and
governance-related business practices to
ASIA PACIFIC companies worldwide. ESG ratings, data and
analysis from MSCI ESG Research Inc. are also
+ 612 9033 9339 used in the construction of the MSCI ESG
Indexes. 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 98 of the top 100 largest money
managers, according to the most recent P&I
ranking.
For more information, visit us at
www.msci.com.
APRIL 2016
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TOWARD SUSTAINABLE IMPACT

THROUGH PUBLIC MARKETS

 Expanding the sample to include small-cap companies, we identified 1,593 companies

SECTION 1: DEFINING THE PROBLEM

Exhibit 1: ESG Investment Frameworks: Values, Integration and Impact

Source: MSCI ESG Research.

3. Investors vary in their appetite to gain exposure to sustainable impact themes:

 Intentionality: we propose addressing intentionality through the selection and

 Measurability: we propose measuring issuers’ and portfolios’ estimated revenue

 Additionality: we recognize that additionality can be difficult to achieve in public

Exhibit 2: Key Impact Investment Principles

Source: MSCI ESG Research

SECTION 2: DEFINING SUSTAINABLE IMPACT THEMES

Exhibit 3: Mapping Sustainable Development Goals (SDGs) to Actionable Impact Themes

Source: UN Sustainable Development Goals, MSCI ESG Research.

Exhibit 4: MSCI ESG Research Taxonomy of Sustainable Impact Solutions

Nutrition Basic products, as defined by Choices International11, refer Wholefood (54%)

Source: MSCI ESG Research, data as of March 2016.

Bank of Kyoto (48%)

Source: MSCI ESG Research, data as of March 2016.

climate change challenge, including through the development of technologies in alternative

Alternative Products, services, or infrastructure projects Vestas (99%)

Green Design, construction, redevelopment, retrofitting or CapitaCommercial (88%)

Source: MSCI ESG Research, data as of March 2016

Sustainable Products, services and projects that attempt to Suez Environnement

Pollution Products, services or projects that support pollution Umicore (59%)

Source: MSCI ESG Research. Data as of March 2016.

SECTION 3: IDENTIFYING COMPANIES OFFERING SUSTAINABLE

Exhibit 5: Breakdown of Estimated Sustainable Impact Revenues, MSCI ACWI (n=2451),

Source: MSCI ESG Research.

Source: MSCI ESG Research.

Exhibit 7: Key Considerations to Measuring Net Sustainable Impact

Source: MSCI ESG Research

SUSTAINABLE IMPACT SOLUTIONS – Institutional investors may choose to apply

POSITIVE IMPACT THROUGH OPERATIONS – Although data is currently limited,

HARMFUL PRODUCTS & SERVICES – When dealing with diversified companies, as

SECTION 4: MEASURING SUSTAINABLE IMPACT OF PORTFOLIOS

Exhibit 8: Steps to Measuring Sustainable Impact at the Portfolio Level

Source: MSCI ESG Research

SECTION 5: DEVELOPING A SUSTAINABLE IMPACT INDEX

𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦 𝑊𝑒𝑖𝑔ℎ𝑡 = (𝑆𝑢𝑠𝑡𝑎𝑖𝑛𝑎𝑏𝑙𝑒 𝑖𝑚𝑝𝑎𝑐𝑡 𝑠𝑎𝑙𝑒𝑠 % × 𝑇𝑟𝑎𝑖𝑙𝑖𝑛𝑔 12-𝑚𝑜𝑛𝑡ℎ 𝑠𝑎𝑙𝑒𝑠

Exhibit 9: Average Revenue Exposure of Index Constituents to Sustainable Impact Solutions

MSCI ACWI SUSTAINABLE IMPACT INDEX MSCI ACWI INDEX

 We estimate that an investment of USD 1 million in a sample portfolio replicating the

Climate Change $229,015

Basic Needs $148,332 $540,552

REVENUE EXPOSURE TO SUSTAINABLE IMPACT SOLUTIONS

(see Exhibit 10)

For more than 40 years, MSCI’s research-

© 2015 MSCI Inc. All rights reserved. MSCI.COM | PAGE 28 OF 28

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