ESG and Fixed Income Investing

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1

2 ESG and Fixed Income Investing

3 ESG and Fixed Income Investing Laura Nishikawa, Head of ESG Fixed Income Research CSR Investing Summit New York, NY 22 July

4 Introducing MSCI ESG Research ESG ratings and research produced 100% in-house One of the largest ESG providers with a global staff of over 160 Over 40 years experience in ESG (IRRC, KLD, Innovest; recently announced acquisition of GMI) MSCI is a signatory to the Principles for Responsible Investment (PRI) Over 70 asset owners with $2.3 trillion in assets depend on MSCI ESG Research Over 650 clients with $15 trillion globally MSCI ESG Research Locations Paris Toronto London Frankfurt San Francisco Boston New York Geneva Beijing Tokyo Ann Arbor Rockville Monterrey Mumbai Manila Cape Town Sydney 4

5 Fixed Income ESG Integration Key Trends Drivers of ESG Demand Growing acceptance of ESG as material risk factor Limit surprises from idiosyncratic event risks (e.g. operational, governance risk) Limit exposure to systemic risk factors (e.g. climate change, geo-political risk) Trends in ESG Integration OVERLAY TO FUNDAMENTAL ANALYSIS, FLAG POTENTIAL DOWNSIDE RISKS ESG FACTORS INCORPORATED INTO RISK MONITORING AND REPORTING QUANTITATIVE STRATEGIES TO MANAGE EXPOSURE TO MACRO ESG RISK FACTORS ALLOCATION TO PASSIVE ESG STRATEGIES Increase positive impact of investment Align fixed income investment with investor s values GREEN BONDS, SOCIAL IMPACT BONDS ETHICAL SCREENING OF CORPORATE AND SOVEREIGN BONDS 5

6 ESG Integration Trends by Sector Corporates Investment Grade ESG integrated into fundamental analysis to understand operational or event risks; portfolio exposure to ESG macro trends Corporates High Yield Growing appetite for ESG information higher materiality of ESG risks, greater informational value Sovereign Debt Rapidly growing interest esp. EM and EU focus on governance, human rights, natural resource constraints Municipal and Agency Bonds Emerging interest in ESG risk factors (e.g. water stress, governance); opportunities to invest for positive impact Securitized Primarily academic, interest in new structured products, governance risks, quality of collateral Green Bonds and Social Impact Bonds Value proposition: Same financial characteristics but additional environmental value-add; Strategy: Targeted allocation 6

7 % Market Value Barclays Global Aggregate Index Credit Quality vs. ESG Quality 100% 90% AAA AA 80% 70% Aaa Barclays MSCI Global Aggregate Sustainability Index 60% 50% 40% Aa A Sub-index of Barclays Global Aggregate Index, eligibility based on credit and ESG criteria 30% BBB 20% 10% 0% A Baa by credit quality BB B CCC by ESG quality Index Exposure to Elevated ESG Risk 7

8 CORP. GOVT- RELATED Dramatic Shift in Green Bond Landscape in 2014 Growing demand, increased issuance, and greater diversity across issuers, sectors, currencies since 2013: As of June 30, 2013 $0.3bn 5% $1.0bn 16% $4.9bn 79% $8.3bn 22% $2.4bn 6% As of June 30, 2014 $0.8bn 2% $3.7bn 10% $1.0bn 3% $4.4bn 12% $16.6bn 45% Supranational Agency Local Authority Utility Financial Industrial Securitized Since June 2013: Average size of green bonds increased from USD 77 million to USD 236 million Estimated value of labeled green bond market has grown more than six-fold Shift from primarily Supranational issuers to Corporates, Agencies, Local Authorities, and Securitized Proposed Barclays MSCI Green Bond Index: Joint consultation through July; seeking market feedback on index design: USE OF PROCEEDS DOES BOND ADHERE TO BASIC GREEN BOND PRINCIPLES? MINIMUM ESG QUALITY OF ISSUER FIXED INCOME CRITERIA (MINIMUM SIZE, CREDIT QUALITY, COUPON, MATURITY, ETC.) 8

9 Barclays MSCI ESG Index Family: Index Types ESG Index Family ESG Socially Responsible ESG Sustainability ESG Weighted Thematic / Environmental Credit/Corporate Credit/Corporate Aggregate Credit/Corporate Gov t-related/treasuries Aggregate Credit/Corporate Gov t-related Aggregate Applies negative screens for issues such as alcohol, tobacco, gambling, weapons, firearms, GMOs, etc. Index Families Ex Controversial Weapons Religious Screens Standard SRI Screens Best-in-class methodology includes issuers with highest ESG ratings relative to their peers Applies minimum ESG rating threshold BBB for headline index Factor tilts based on ESG letter ratings and ratings momentum over past year Overweights ESG high-rated /positive momentum issuers and underweights low-rated/negative momentum Can be combined with other screens PROPOSED: Barclays MSCI Global Green Bond Index Currently in client consultation, potential launch in Q3 Based on bond use of proceeds, issuer ESG quality, and adherence to the Green Bond Principles 9

10 Application of ESG Data: Portfolio Analytics Compare portfolio ESG performance to Index benchmarks Engage with clients or managers using an objective, standardized framework ESG statistics at the portfolio, sector, issue, and company level Draws on MSCI s ESG research suite risk ratings, controversy research, screening Note: Mock up data for illustration purpose only. 10

11 MSCI ESG Global Client Service Americas Asia Pacific Europe, Middle East and Africa

12 Notice and Disclaimer This document and all of the information contained in it, including without limitation all text, data, graphs, charts (collectively, the Information ) is the property of MSCI Inc. and/or its subsidiaries (collectively, MSCI ), Barclays Bank PLC. and/or its affiliates (collectively, Barclays ), or their licensors, direct or indirect suppliers or any third party involved in making or compiling any Information (collectively, with MSCI, the Information Providers ) and is provided for informational purposes only. The Information may not be reproduced or redisseminated in whole or in part without prior written permission from MSCI. All rights in the Barclays MSCI Environmental, Social & Governance (ESG) fixed income indices vest in MSCI and Barclays. The Information may not be used to create derivative works or to verify or correct other data or information. For example (but without limitation), the Information many not be used to create indices, databases, risk models, analytics, software, or in connection with the issuing, offering, sponsoring, managing or marketing of any securities, portfolios, financial products or other investment vehicles utilizing or based on, linked to, tracking or otherwise derived from the Information or any other MSCI data, information, products or services. The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. NONE OF THE INFORMATION PROVIDERS MAKES ANY EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION (OR THE RESULTS TO BE OBTAINED BY THE USE THEREOF), AND TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EACH INFORMATION PROVIDER EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION. Without limiting any of the foregoing and to the maximum extent permitted by applicable law, in no event shall any Information Provider have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits) or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited, including without limitation (as applicable), any liability for death or personal injury to the extent that such injury results from the negligence or willful default of itself, its servants, agents or sub-contractors. Information containing any historical information, data or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Past performance does not guarantee future results. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), any security, financial product or other investment vehicle or any trading strategy. MSCI s subsidiary MSCI ESG Research Inc. is a Registered Investment Adviser under the Investment Advisers Act of Except with respect to any applicable products or services from MSCI ESG Research Information, 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. The Barclays MSCI ESG fixed income indices use ratings and other data, analysis and information from MSCI ESG Research. MSCI ESG Research is produced by MSCI ESG Research Inc. Issuers mentioned or included in any MSCI ESG Research materials may be a client of MSCI or another MSCI subsidiary, or the parent of, or affiliated with, a client of MSCI, MSCI ESG Research Inc or another MSCI subsidiary. MSCI ESG Research materials, including materials utilized in any MSCI ESG Indices or other products, have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. Barclays MSC ESG fixed income indices are unmanaged indices that cannot be invested in directly. None of the Barclays MSC ESG Indices recommends, endorses, approves or otherwise expresses any opinion regarding any issuer, securities, financial products or instruments or trading strategies and none of the Barclays MSCI ESG fixed income indices 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. Any funds, products or other securities or investment vehicles using or based on the Barclays MSCI ESG fixed income indices are not sponsored, endorsed, or promoted by Barclays or MSCI. Any use of or access to the Barclays MSCI ESG fixed income indices requires a license from both MSCI and Barclays. Any use of or access to other index products, services or information of Barclays requires a license from Barclays. Any use of or access to products, services or information of MSCI requires a license from MSCI. MSCI, Barra, RiskMetrics, and other MSCI brands and product names are the trademarks, service marks, or registered trademarks of MSCI or its subsidiaries in the United States and other jurisdictions. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and Standard & Poor s. Global Industry Classification Standard (GICS) is a service mark of MSCI and Standard & Poor s MSCI Inc. All rights reserved. May

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