Improving the Climate Profile of Our ESG Indexes

Lionel Ebener, Roman Kouzmenko and Juan Sampieri

In our recent consultation on MSCI ESG Indexes, investors told us they desired an improved climate profile to help them measure and manage climate risks. As a result, key ESG indexes will undergo significant change on Dec. 1: MSCI SRI Indexes will explicitly exclude fossil-fuel companies, and MSCI ESG Leaders and ESG Focus Indexes will screen out companies involved in thermal coal and unconventional oil and gas activities. For example, based on pro forma data as of Nov. 18, the weighted average carbon intensity of the MSCI World ESG Leaders Index will decline by more than 30%, and the MSCI Emerging Markets SRI Index’s 3.4% exposure to companies with fossil-fuel reserves will be fully eliminated, while the weight of companies involved in unconventional oil and gas extraction in the MSCI World ESG Focus Index will decrease by more than 40% to 1.1% from 1.9%. These changes do not affect the broad ESG profile of these indexes.

The chart compares current and pro forma indexes as of Nov. 18, where pro forma indexes reflect the methodology changes effective on Dec. 1. The top three exclusions are the largest securities by index weight to be deleted from the respective indexes on Dec. 1, due to the new climate screens. The climate-change metrics are based on data from MSCI ESG Research LLC, as of Oct. 30.