ESG and Fixed Income Investing

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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 esgclientservice@msci.com 11

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